MD&A

Form 51-102F1
Annual Management Discussion and Analysis¹
For
Stornoway Diamond Corporation
(“Stornoway” or the “Company”)

Containing Information up to and including July 20, 2009

Overall Performance

Stornoway has a well diversified and highly prospective diamond property portfolio, focused in Canada, that includes Renard, a development track diamond project with the potential to become Quebec’s first diamond mine, three advanced projects in eastern Nunavut at the minibulk sampling stage and several early stage grass roots projects throughout Canada in geologically prospective, underexplored regions. Stornoway’s strategy is to capitalize on near-term, small to medium sized diamond mining opportunities to build a growth oriented company that succeeds in the practical business of mining and selling rough diamonds, while at the same time, remains exposed to significant upside through exploration. Although the rough diamond market has been affected by the deepening global economic crisis, in taking a longer-term view, the rough diamond market is expected to strengthen in the face of tightening supply and Stornoway is well positioned to add diamond resources from existing projects and further acquisitions as new opportunities are identified. In addition, the Company has a management team with experience at each stage of the diamond pipeline, from exploration through development and marketing.

As of July 20, 2009, the Company holds interests, directly or through joint ventures, in approximately 20 separate project areas in Alberta, Ontario, Québec, Nunavut and the Northwest Territories covering more than 5 million acres. This property portfolio can be roughly subdivided into 168,000 acres of ‘development’ stage projects (the Foxtrot Property), 1.8 million acres of ‘advanced’ exploration properties (Aviat, Churchill, Qilalugaq and Timiskaming) and 3.0 million acres of ‘early stage’ projects (Blackstone, Itza and others) that collectively contain some 170 kimberlite bodies.

Forward-Looking Statements

This document may contain “forward-looking statements” within the meaning of Canadian securities legislation and the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements are made as of the date of this document and the Company does not intend, and does not assume any obligation, to update these forward-looking statements, except as required by law.

Forward-looking statements relate to future events or future performance and reflect management’s expectations or beliefs regarding future events and include, but are not limited to, statements with respect to the estimation of mineral reserves and resources, the realization of mineral reserve estimates, the timing and amount of estimated future production, costs of production, capital expenditures, success of mining operations, environmental risks, unanticipated reclamation expenses, title disputes or claims and limitations on insurance coverage.

These forward-looking statements include, among others, statements with respect to Stornoway’s objectives for the ensuing year, our medium and long-term goals, and strategies to achieve those objectives and goals, as well as statements with respect to our beliefs, plans, objectives, expectations, anticipations, estimates and intentions. The words “may,” “could,” “should,” “would,” “suspect,” “outlook,” “believe,” “plan,” “anticipate,” “estimate,” “expect,” “intend,” and words and expressions of similar import are intended to identify forward-looking statements. In particular, statements regarding Stornoway’s future operations, future exploration and development activities or other development plans contain forward-looking statements.

All forward-looking statements and information are based on Stornoway’s current beliefs as well as assumptions made by and information currently available to Stornoway concerning anticipated financial performance, business prospects, strategies, regulatory developments, development plans, exploration, development and mining activities and commitments. Although management considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect.

By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations, anticipations, estimates and intentions expressed in such forward-looking statements.

These factors include, but are not limited to, developments in world diamond markets, changes in diamond valuations, risks relating to fluctuations in the Canadian dollar and other currencies relative to the US dollar, changes in exploration, development or mining plans due to exploration results and changing budget priorities of Stornoway or its joint venture partners, changes in project parameters as plans continue to be refined; possible variations in ore reserves, grade or recovery rates; accidents, labour disputes and other risks of the mining industry; delays in obtaining governmental approvals or financing or in the completion of development or construction activities, the effects of competition in the markets in which Stornoway operates, the impact of changes in the laws and regulations regulating mining exploration and development, judicial or regulatory judgments and legal proceedings, operational and infrastructure risks and the additional risks described in Stornoway’s most recently filed Annual Information Form, and Stornoway’s anticipation of and success in managing the foregoing risks. Stornoway cautions that the foregoing list of factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to Stornoway, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Stornoway does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by Stornoway or on our behalf, except as required by law.

Highlights for the Year Ended April 30, 2009 and to July 20, 2009

Stornoway operates exploration programs on its development stage projects, three of the four advanced projects and the majority of the early stage projects. Highlights of the year ended April 30, 2009 and the period ended July 20, 2009 include:

Exploration Highlights

• The receipt of a positive economic study for the Renard Diamond Project, located at the Foxtrot Property in North Central Québec. An independent Technical Report summarizing the results of the Preliminary Assessment was filed on December 12, 2008.
• In March 2009, the completion of three deep delineation drill holes on the Renard 2 kimberlite pipe successfully extended the dimensions of the Renard 2 kimberlite pipe at depth, in comparison to the geological model used in the recent NI 43-101 compliant mineral resource statement (Stornoway Press Release dated December 12, 2008). One hole in particular, R2-55, has returned an intersection of kimberlite 176 meters longer than expected from previous geological modeling. The implied true horizontal width of this newly discovered zone of kimberlite almost triples the north-south dimension of the Renard 2 pipe to 150 meters at a depth of 500 meters below surface.
• Diamond recovery results from a 544 tonne trench sample extracted from the Hibou Dyke, located at the Foxtrot Property. In total, 781.41 carats of diamonds were recovered from 543.86 tonnes (dry weight) of kimberlite, representing an overall diamond recovery of 144 carats per hundred tonnes (cpht) for stones retained on a +1 DTC screen. This represents the highest diamond content yet observed at Hibou.
• Completion of a conceptual study by SRK Consulting (“SRK”) for the Eastern Sheet Complex (”ESC”) of the Aviat Project, Nunavut.
• Initial results, in January 2009, from processing of the first 43 tonnes of an approximately 200t bulk sample of kimberlite collected in 2008 from the Aviat Project. These first results include the recovery of 89.55 3 carats of diamonds from 42.67 tonnes (dry weight) kimberlite, representing an overall diamond recovery of 210 carats per hundred tonnes (cpht) for stones retained on a +1 DTC screen.
• Results from the second tranche of material collected at the “AV2″ outcrop at the Aviat Project, announced in May 2009, returned 213.2 carats of diamonds from 148.3 tonnes (dry weight) of kimberlite, representing a diamond recovery of 144 carats per hundred tonnes (cpht) for stones retained on a +1 DTC screen. The three largest diamonds recovered from this sample are 3.99, 1.72 and 1.22 carats, described as an off white clivage, grey clivage and a white octahedron, respectively. The 3.99 carat stone represents the largest diamond recovered to date from the Aviat project.
• Exploration activities at the Aviat Project during 2008 targeted drilling and the collection of a 200t bulk sample from the AV267 sheet in support of the conceptual resource study, drilling at the AV9 kimberlite pipe (discovered at the end of the 2007 program) and drilling within the adjacent horizontally stacked kimberlite sheets (Eastern Sheet Complex). At the Qilalugaq Property, the discovery of a new kimberlite, named Naujaat 7, and the collection of additional till samples from the property.
• Discovery of nine new kimberlites from prospecting and drilling at the Churchill Diamond Project, Nunavut by the Company’s joint venture partner Shear Minerals Ltd., and the receipt of caustic fusion results from the Killiq and Kahuna Breccia kimberlites.

Corporate Highlights

• In May 2009, the Company completed a brokered private placement, with Sandfire Securities Inc. as lead agent, which consisted of 8,421,276 “flow-through” common shares of the Company for gross proceeds of $1,431,617.
• The appointments of Dr. Serge Vezina and Dr. Matthew Manson, the Company’s President and CEO, to the Board of Directors effective March 2009.
• Completion of a brokered and a non-brokered private placement of 26,188,334 “flow-through” common shares for gross proceeds of $3,928,250 in November 2008. The gross proceeds from these private placements are expected to be used to further exploration on the Renard Diamond Project in Quebec and certain other Canadian mineral properties.
• Completion of a $22.0 million private placement of 24,444,444 common shares at $0.90 per share with Agnico-Eagle Mines Limited (“Agnico-Eagle”) and Lorito Holdings Limited (“Lorito”) in July 2008, the proceeds of which were used to redeem the $10.0 million principal convertible debentures held by each of Agnico-Eagle and Lorito and to make a $1.0 million payment to each company in respect of their agreement to redeem the convertible debentures prior to the March 16, 2009 maturity date. For accounting purposes, this transaction was viewed as an extinguishment for shares and was measured at the fair value of the shares at the date of issuance.

The Company’s net loss for the year ended April 30, 2009 (the “Current Year”) of $4.7 million (a loss of $0.02 per share) was significantly less than the loss of $27.5 million ($0.14 loss per share) for the year ended April 30, 2008 (the “Comparative Year”). A $14.5 million resource property write-off during the Current Year (Comparative Year – $26.3 million) and a gain of $13.3 million (Comparative Year – $Nil) on the early extinguishment of the convertible debentures had the most significant impact on the Company’s net losses. Also included in the Current Year’s loss is a $1.1 million write-down on an investment where the decline in its fair value was deemed to be permanent (Comparative Year – $0.5 million impairment loss). In the Comparative Year, the Company’s net loss was also affected by a $5.5 million loss on the sale of a property interest. This loss did not re-occur in the Current Year.

Assets decreased from $193.7 million at the end of the Comparative Year to $180.5 million at April 30, 2009 with capitalized resource property costs decreasing from $173.7 million to $171.2 million at April 30, 2009. The Company’s cash and cash equivalents decreased during the Current Year, from $9.5 million to $1.6 million as at April 30, 2009. The Company had a further $1.3 million classified as short-term deposits as of April 30, 2009. The Company’s primary focus during the Current Year continued to be the advancement of its exploration projects, and in particular the Renard Diamond Project in Quebec, with expenditures totaling $8.6 million in the Current Year, as compared to expenditures of $23.5 million in the Comparative Year.

The Company’s administrative expenses decreased significantly in the Current Year, from $4.2 million in the Comparative Year to $2.8 million in the Current Year. All administrative expense categories, with the exception of administration fees and rent, declined for the Current Year. Salary expense also further declined, as compared to the Comparative Year, if severance costs of $495,000 related to a reduction in the Company’s North Vancouver laboratory operations are excluded.