Form 51-102F4 Business Acquisition Report Form 51-102F4 Business Acquisition Report STORNOWAY DIAMOND CORPORATION. (the "Company" or “Stornoway”) ITEM 1 IDENTITY OF COMPANY 1.1

Form 51-102F4 Business Acquisition Report

STORNOWAY DIAMOND CORPORATION.

(the "Company" or “Stornoway”) ITEM 1 IDENTITY OF COMPANY 1.1 Name and Address of Company Stornoway's head and registered office is located at Suite 860, 625 Howe Street, Vancouver, British Columbia, V6C 2T6.

1.2 Executive Officer For additional information regarding any information contained in this Form 51-102F4, please contact Mr. Bruce McLeod, Chief Operating Officer of Stornoway at (604) 687-7545. ITEM 2 DETAILS OF ACQUISITION 2.1 Nature of Business Acquired Contact Diamond Corporation ("Contact") is currently engaged in the acquisition, exploration and development of diamond properties in Ontario, Quebec, the Northwest Territories and Nunavut. Contact’s core project is the Timiskaming Diamond Project (“Timiskaming”) located in northeastern Ontario/northwestern Quebec. Contact currently maintains a 100% interest in over 120,000 hectares of exploration licenses at Timiskaming and has to date discovered nine kimberlite bodies in the region. Contact’s 95-2 pipe yielded a population of highly commercial diamonds at marginally sub-economic grades in a mini-bulk sample program conducted between 2003 and 2004. The discovery of additional kimberlite in the Timiskaming region at comparable or better grade than 95-2, or an increase in diamond prices, are conditions precedent for further large-tonnage sampling of 95-2. No current economic resource has yet been established at the Timiskaming Diamond Project. Contact also maintains an interest in three joint venture projects within well known diamond exploration regions of northern Canada. These are the RAM (and SHU) joint venture with Trigon Exploration Canada Inc. (“Trigon”) in the Northwest Territories, the IC/LO (and TIM) project, also with Trigon, in the Kugaaruk/Committee Bay region of Nunavut, and the MIP joint venture with Stornoway in south-central Baffin Island, Nunavut. In each case Contact is earning a 50% or greater interest in the project and each is operated by Contact’s joint venture partner. The Contact Shares are listed on the TSX under the symbol “CO”. Contact is a reporting issuer or the equivalent in all provinces of Canada and files its continuous disclosure documents with the securities regulatory authorities in such jurisdictions. Such documents are available at www.sedar.com. 2.2 Date of Acquisition The date of the acquisition used for accounting purposes is September 20, 2006.

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2.3 Consideration On September 20, 2006, Stornoway acquired 67.5% of the outstanding shares of Contact upon the initial take-up of shares deposited to an offer (the "Offer") to acquire all of the outstanding shares of Contact as more particularly set out in Stornoway's offer and circular dated August 10, 2006 (the "Circular"). Upon expiry of the Offer on October 30, 2006, Stornoway had acquired a total of 40,857,513 shares of Contact, representing approximately 93.1% of the issued and outstanding shares of Contact. Stornoway offered to purchase all of the outstanding common shares of Contact on the basis of 0.36 of a common share of Stornoway for each common share of Contact. In total, Stornoway issued 14,708,707 shares for the 93.1% of the outstanding Contact shares it has acquired to date. As Stornoway has acquired more than 90% of the outstanding Contact shares Stornoway intends to promptly exercise its statutory rights to acquire the remaining Shares for the same consideration as described above. 2.4 Effect on Financial Position The Company has no plans or proposals for material changes in its business affairs or the affairs of the acquired business which may have a significant effect on the results of operations and financial position of the company. 2.5 Prior Valuations Orion Securities Inc., the independent valuator retained by the special committee of independent directors of Contact in connection with its consideration of the Offer, prepared a valuation of the Contact Shares in accordance with the requirements of Ontario Securities Commission Rule 61-501 and the corresponding regulation in Quebec and an opinion as to the fairness of the consideration under the Offer, from a financial point of view, to the Contact shareholders (collectively, the “Valuation and Fairness Opinion”). Based upon and subject to the assumptions, qualifications and limitations set forth in the Valuation and Fairness Opinion, Orion concluded that, as of July 21, 2006, the Contact Shares have a fair market value in the range of $0.33 to $0.45 per Contact Share and that, as of July 21, 2006, the consideration pursuant to the Offer is fair, from a financial point of view, to Shareholders. For the purposes of determining a value of the common shares of the Company, Orion relied primarily upon three valuation methodologies:

• comparable company trading approach; • comparable precedent transactions approach; and • historical exploration expenditures and book value approach.

The Valuation and Fairness Opinion, among other things, sets forth the assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by Orion. The full text of the Valuation and Fairness Opinion is attached as Annex “E” to the Circular. 2.6 Parties to Transaction

None of the parties to the transaction were, prior to the Offer, informed persons, associates or affiliates of Stornoway except that at the time of making the Offer D. Bruce McLeod, a director and officer of Stornoway, owned 66,668 Contact shares, John E. Robins, a director of Stornoway, owned 90,000 Contact shares and Eira Thomas, a director and officer of Stornoway, owned 66,666 Contact shares.

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2.7 Date of Report January 11, 2007. ITEM 3 FINANCIAL STATEMENTS The following financial statements are included as schedules to this Business Acquisition Report:

1. Stornoway’s pro forma financial statements as at April 30, 2006 and October 31, 2006 and compilation reports thereon.

2. The audited consolidated balance sheets of Contact as at December 31, 2005 and 2004 and the consolidated statement of loss and deficit and cash flows for the years ended December 31, 2005, 2004 and 2003, together with the notes thereto and the auditors’ report thereon.

3. The unaudited consolidated balance sheets of Contact as at September 30, 2006 and the consolidated statement of loss and deficit and cash flows for the three months ended September 30, 2006 and 2005, together with the notes thereto.

Stornoway only has access to Contact’s publicly available information and is in no way responsible for the general disclosure of, or financial reporting by, Contact. No attempt has been made to calculate or estimate the effect of harmonization of accounting policies or practices between Stornoway and Contact. With respect to the Pro Forma Consolidated Financial Statements of Stornoway included herein, the independent chartered accountants have reported that they applied limited procedures in accordance with Canadian professional standards for preparation of a compilation report. The compilation reports are provided solely in order to comply with applicable requirements of Canadian securities laws. It should be noted that to report in accordance with Public Company Accounting Oversight Board Auditing Standards (PCAOBAS) on a compilation of pro forma financial statements an examination greater in scope than that performed under Canadian standards would be required. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the procedures applied.

The audited consolidated balance sheets of Contact as at December 31, 2005 and the consolidated statement of loss and deficit and cash flows for the two years ended December 31, 2005 and 2004 included herein contain the report of Contact’s independent auditors. Stornoway has not obtained the consent necessary for Stornoway to include the auditor’s report in this report. Because Stornoway has not obtained Contact’s auditor’s consent, shareholders may not be able to recover against Contact’s auditors under Section 11 of the U.S. Securities Act for untrue statements of a material fact contained in the financial statements audited by Contact’s auditors or any omissions to state a material fact required to be stated therein.

Currency All references to "$" are to Canadian dollars.

17Contact Diamond Corporation 2005 Annual Report

To the Shareholders of Contact Diamond Corporation:We have audited the consolidated balance sheets of Contact Diamond Corporation as at December 31, 2005and 2004 and the consolidated statements of loss and deficit and cash flows for each of the years in the three-year period ended December 31, 2005. These financial statements are the responsibility of the company’smanagement. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standardsrequire that we plan and perform an audit to obtain reasonable assurance whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financialposition of the company as at December 31, 2005 and 2004 and the results of its operations and its cash flowsfor each of the years in the three-year period ended December 31, 2005 in accordance with Canadian generallyaccepted accounting principles.

Ernst & Young LLPChartered AccountantsToronto, CanadaMarch 3, 2006

Auditors’ Report

4391_Contact_AR05_v2.qxd 3/28/06 3:54 AM Page 17

The accompanying consolidated financial statements of Contact Diamond Corporation (“Contact Diamond” or the “company”) have been prepared in accordance with Canadian generally accepted accounting principles(“GAAP”). Since a precise determination of many assets and liabilities depends on future events, the preparationof financial statements for a period necessarily involves the use of estimates and approximations. Actual results may differ from such estimates and approximations. These consolidated financial statements have, in management’s opinion, been prepared within reasonable limits of materiality and within the framework of the accounting policies referred to below.

The company’s ability to continue to meet its obligations and carry out its planned exploration activities isdependent upon its ability to obtain third party financing to fund its exploration programs. The accompanyingconsolidated financial statements have been prepared on the basis that the company will be able to continue torealize its assets and discharge its liabilities in the normal course of business and do not reflect any adjustmentsthat may be required if this assumption proves to be incorrect.

Nature of OperationsContact Diamond is actively engaged in the exploration of diamonds primarily in eastern Canada. Prior toJuly 2003, Agnico-Eagle Mines Limited (“Agnico-Eagle”) funded most of the company’s exploration andoperating activities. In July and August 2003, the company successfully completed two financings whichresulted in Agnico-Eagle no longer lending additional financial support to Contact Diamond. Contact Diamond is an exploration stage company.

Shareholders approved the change of the company’s name from Sudbury Contact Mines Limited to ContactDiamond Corporation at a special meeting of the shareholders held September 30, 2004. The name changereflects the company’s decision to focus its operations on its diamond exploration properties.

Basis of ConsolidationPrior to September 30, 2004, the consolidated financial statements included the accounts of the company and its wholly owned subsidiary, Nevada Contact Inc.

As of September 30, 2004, the company’s sole subsidiary was sold to Agnico-Eagle (note 5).

Exploration ExpendituresAcquired exploration properties are recorded at cost at the date of acquisition. Mineral exploration expendituresare charged to income in the year in which they are incurred. When it is determined that a mining property can beeconomically developed as a result of established proven and probable reserves, the costs of further explorationand development to further delineate the orebody on such a property are capitalized. Determination as to theestablishment of proven and probable reserves is based on results of feasibility studies, which indicate whether aproperty is economically feasible. If no mineable orebody is discovered, property acquisition costs are expensedin the period in which it is determined the property has no future economic value.

Cash and Cash EquivalentsCash and cash equivalents include cash on hand and short-term investments in money market instruments withremaining maturities of three months or less at the date of purchase. Short-term investments are carried at cost,which approximates market value.

Summary of Significant Accounting Policies18 Contact Diamond Corporation 2005 Annual Report



Capital AssetsContact Diamond records depreciation on its capital assets as follows:

Building 20 years straight-lineOffice Furniture 5 years straight-line

It is Contact Diamond’s policy to periodically review the carrying value of capital assets, when impairment factorsexist, for possible impairment. If it is determined that the estimated net recoverable amount is less than the carryingvalue, then a writedown to the estimated fair value amount is made with a charge to income.

Flow-through SharesThe company has issued flow-through shares to finance some of its exploration activities. Shares were issued for cash at market prices in exchange for the company giving up the tax benefits arising from exploration expenditures.

On March 19, 2004, the Emerging Issues Committee (“EIC”) issued EIC Abstract No. 146 amending the accounting for flow-through shares. For flow-through share transactions initiated after March 19, 2004, thecompany records the cost of the foregone tax benefits as a cost of issuing the flow-through shares to the investors when the flow-through share expenditures are renounced. When the company has losscarry-forwards and/or deductible temporary differences that it has not recognized in previous years, thecompany reverses the valuation allowance against that portion of its unrecognized future tax assets as a recovery of income taxes in the consolidated statements of loss and deficit. For flow-through sharetransactions initiated prior to March 20, 2004, the company did not record the reversal of a portion of thevaluation allowance through the consolidated statements of loss and deficit; rather, it recorded the reversalas a direct offset to the share issuance costs.

Income TaxesThe company follows the liability method of tax allocation for accounting for income taxes. Under this basis of tax allocation, future income and mining tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the substantivelyenacted tax rates and laws expected to be in effect when the differences are expected to reverse.

Employee Stock OptionsPrior to January 1, 2004, the company accounted for its stock option grants based on the recognition andmeasurement principles of Section 3870. The application of Section 3870 resulted in no compensation expensebeing recorded in Contact Diamond’s circumstances as all options granted had an exercise price equal to themarket value of the underlying stock on the date of grant. Effective January 1, 2004, the company retroactivelyadopted, without restatement of prior periods, Canadian Institute of Chartered Accountants Handbook Section3870 “Stock-Based Compensation and Other Stock-Based Payments.” This accounting standard recommendsthe expensing of stock option grants after January 1, 2002. This standard recommends that the fair value ofstock options be recognized in income over the applicable vesting period as compensation expense. Anyconsideration paid by employees on exercise of stock options or purchase of stock is credited to share capital.The adoption of this standard resulted in a charge to deficit of $2,705,750 on January 1, 2004.


20 Contact Diamond Corporation 2005 Annual Report

As at December 31, (Canadian dollars) 2005 2004

AssetsCurrent

Cash and cash equivalents $ 2,461,194 $ 1,582,600Restricted cash (note 4(c)) – 3,904,432Prepaid expenses and sundry receivables 54,263 239,936

Total current assets 2,515,457 5,726,968

Investment (note 2) 380,000 380,000Capital assets, net (note 3) 91,509 87,408

$ 2,986,966 $ 6,194,376

LiabilitiesCurrent

Accounts payable and accrued liabilities (note 7) $ 1,262,688 $ 31,967Income and capital taxes payable – 12,324

Total current liabilities 1,262,688 44,291

Loans payable to shareholder (note 1) 3,902,111 3,902,111

Shareholders’ Equity (Deficiency)Common shares (note 4)

Authorized – unlimited shares, without par valueIssued – 35,106,125 shares (2004 – 31,226,125 shares) 80,010,916 77,885,196

Stock options 2,812,697 2,747,165Warrants (note 4(d)) – 27,600Contributed surplus 19,366,111 19,338,511Deficit (104,367,557) (97,750,498)

(2,177,833) 2,247,974$ 2,986,966 $ 6,194,376

See accompanying notes

On behalf of the Board

John G. Jakolev James D. NassoDirector Director

Consolidated Balance SheetsContact Diamond Corporation (Incorporated under the laws of Ontario)



For the years ended December 31, (Canadian dollars) 2005 2004 2003

RevenuesGain on sale of exploration properties (note 5) $ – $ 3,296,000 $ 118,653Interest and sundry 105,916 94,078 108,301

105,916 3,390,078 226,954

ExpensesExploration $ 5,817,874 $ 5,119,426 $ 8,325,820Management salaries and benefits 280,670 – –Shareholders’ information 186,061 104,712 50,858Legal and audit fees 185,706 104,064 45,003Office and miscellaneous 66,366 (17,604) 10,907Stock-based compensation 65,532 41,415 –Directors’ fees 49,050 13,800 12,900Transfer agent fees 22,410 36,366 27,228Insurance 9,936 10,300 –Depreciation 5,322 366 –Loss before tax recovery and large corporations tax 6,583,011 2,022,767 8,245,762

Tax recovery (1,791,300) – (148,903)Large corporations tax – 12,324 –Net loss for the year 4,791,711 2,035,091 8,096,859

Deficit, beginning of year 97,750,498 92,663,749 83,409,471Adoption of accounting standard issued by the

Canadian Institute of Chartered Accountants relating to stock-based compensation – 2,705,750 –

Share and warrant issue costs 1,825,348 345,908 1,157,419

Deficit, end of year $ 104,367,557 $ 97,750,498 $ 92,663,749

Net loss per share – basic and diluted (note 4(g)) $ 0.14 $ 0.07 $ 0.33See accompanying notes

Consolidated Statements of Loss and DeficitContact Diamond Corporation



For the years ended December 31, (Canadian dollars) 2005 2004 2003

Operating ActivitiesNet loss for the year $ (4,791,711) $ (2,035,091) $ (8,096,859)Add (deduct) items not affecting cash:

Tax recovery (1,791,300) – –Gain on sale of exploration properties – (3,296,000) (118,653)Stock-based compensation 65,532 41,415 –Depreciation 5,322 366 –Exploration expenditures funded through shares issuance 90,720 110,100 –

Changes in non-cash working capital balances:Prepaid expenses and sundry receivables 185,673 (200,861) 96,761Accounts payable and accrued liabilities 1,230,721 (42,755) 32,878Income and capital taxes payable (12,324) 12,324 (75,771)

Cash used in operating activities (5,017,367) (5,410,502) (8,161,644)

Investing ActivitiesPurchase of capital assets (9,423) (87,774) –Proceeds from sale of exploration properties (note 5) – 3,296,000 118,653Increase in investment (note 2) – (380,000) –Decrease (increase) in restricted cash (note 4(c)) 3,904,432 (2,447,325) (1,457,107)Cash provided by (used in) investing activities 3,895,009 380,901 (1,338,454)

Financing ActivitiesDecrease in loans payable to shareholder (note 1) – – (329,915)Common shares issued 2,035,000 5,250,000 10,168,900Warrants issued – – 27,600Share and warrant issue costs (34,048) (345,908) (1,157,419)Cash provided by financing activities 2,000,952 4,904,092 8,709,166Net increase (decrease) in cash and cash equivalents during the year 878,594 (125,509) (790,932)Cash and cash equivalents, beginning of year 1,582,600 1,708,109 2,499,041Cash and cash equivalents, end of year $ 2,461,194 $ 1,582,600 $ 1,708,109See accompanying notes

Consolidated Statements of Cash FlowsContact Diamond Corporation



1Loans Payable to Shareholder

2005 2004

Agnico-Eagle Mines LimitedOutstanding principal $ 3,902,111 $ 3,902,111

The loan was originally advanced for the purpose of funding ongoing exploration and operating activities. The loanis due on demand, unsecured and bears interest at 8% (2004 – 8%) per annum. Agnico-Eagle has waivedinterest on the loan commencing May 13, 2002 and will not charge interest or demand repayment of the loan andany outstanding interest within the next year. Accordingly, the outstanding principal and accrued interest on theloan has been classified as a long-term liability. Interest expense relating to the loan for 2005 was nil (2004 – nil).

2InvestmentIn 2004, the company entered into a letter of agreement with Trigon Exploration Canada Ltd. (“Trigon”) to earn up to a 60% interest in Trigon’s IC/LO property in Nunavut. Pursuant to the agreement, the companypurchased 690,909 units in the initial public offering of Trigon on November 1, 2004. Each unit consisted of one common share and one half of one share purchase warrant. Each whole warrant is exercisable intocommon shares at a strike price of $0.75 and expires May 2006. The market value of the common shares at December 31, 2005 was $131,273. The warrants are not listed on a stock exchange.

3Capital Assets

2005 2004Cost Accumulated Net Book Cost Accumulated Net Book

Amortization Value Amortization Value

Building $ 91,031 $ 4,917 $ 86,114 $ 87,774 $ 366 $ 87,408Furniture 6,166 771 5,395 – – –

$ 97,197 $ 5,688 $ 91,509 $ 87,774 $ 366 $ 87,408

Notes to Consolidated Financial StatementsDecember 31, 2005 (Canadian dollars)



4Capital Stock

(a) Summary of Common Share Transactions:

2005 2004 2003Shares Amount Shares Amount Shares Amount

Common shares issued,beginning of year 31,226,125 $ 77,885,196 27,651,125 $ 72,525,096 21,656,025 $ 62,356,196

Shares issued under a flow-through share private placement (note 4(c)) 3,700,000 2,035,000 3,500,000 5,250,000 3,197,100 5,328,500

Shares issued by public offering (note 4(d)) – – – – 2,760,000 4,802,400

Shares issued under stock option plan – – – – 38,000 38,000

Shares issued for acquisition of Trigon (note 4(e)) – – 75,000 110,100 – –

Shares issued to fund exploration expenditures (note 4(f )) 180,000 90,720 – – – –

Common shares issued,end of year 35,106,125 $ 80,010,916 31,226,125 $ 77,885,196 27,651,125 $ 72,525,096

Weighted average number of common shares 33,122,792 29,171,958 24,399,067

(b) Employee Stock Option Plan (“ESOP”)The company’s ESOP provides for the granting of options to directors, officers, employees and service providersto purchase common shares. Under this plan, options are granted at the fair market value of the underlyingshares on the date of grant. The number of shares subject to option for any one person may not exceed 5% ofthe company’s common shares issued and outstanding at the date of grant. Up to September 30, 2004, the totalnumber of common shares subject to option under the ESOP was limited to 3,000,000 and all shares grantedunder the ESOP vested immediately with a maximum term of 10 years.

In 2004, the Compensation Committee of the Board of Directors adopted a policy pursuant to which optionsgranted after that date shall have a maximum term of five years. On September 30, 2004, the shareholdersapproved resolutions to amend the ESOP accordingly and to increase the number of common shares reservedfor issuance under the ESOP by 1,000,000 to 4,000,000.

Of the 342,000 options granted under the ESOP in 2005, 85,500 options granted vest immediately and expire in the year 2010. The remaining options expire in 2010 and vest in equal instalments, on eachanniversary date of the grant, over a three-year term. Of the 293,000 options granted under the ESOP in 2004, 80,750 options granted vest immediately and expire in the year 2009. The remaining options expire in 2009 and vest in equal instalments, on each anniversary date of the grant, over a three-year term.



The following tables summarize information about Contact Diamond’s outstanding stock options:

2005 2004 2003Weighted Weighted Weighted

Average Average AverageExercise Exercise Exercise

Options Price Options Price Options Price

Outstanding, beginning of year 2,690,000 $ 1.70 2,407,000 $ 1.82 1,889,000 $ 1.54Granted 342,000 0.76 293,000 0.67 568,000 2.67Exercised – – – – (38,000) 1.00Expired – – – – – –Cancelled (255,000) 1.64 (10,000) 1.00 (12,000) 1.00Outstanding, end of year 2,777,000 $ 1.59 2,690,000 $ 1.70 2,407,000 $ 1.82

Options exercisable at end of year 2,550,500 2,477,750 2,407,000

Options Outstanding Options Exercisable

Weighted Average

Remaining Weighted WeightedContractual Average Average

Number Life Exercise Number Exercise Range of Exercise Prices Outstanding (in years) Price Exercisable Price

$0.00–$0.99 585,000 4.13 $ 0.69 358,500 $ 0.66$1.00–$1.99 1,049,000 3.53 $ 1.01 1,049,000 $ 1.01$2.00–$3.00 1,143,000 6.72 $ 2.57 1,143,000 $ 2.57

2,777,000 4.97 $ 1.59 2,550,500 $ 1.66

The company has reserved for issuance 2,777,000 common shares in the event these options are exercised.The number of unoptioned shares available for granting as at December 31, 2005 was 846,500 (2004 – 933,500;2003 – 216,500).



The following table illustrates the effect on net loss for 2003 and net loss per share as if the company hadapplied the fair value recognition provisions of Section 3870 to account for its stock option grants.

2003

Net loss for the year, as reported $ 8,096,859Deduct: Total stock-based employee compensation determined

under fair value based method for all awards 1,278,000Pro forma net loss $ 9,374,859Net loss per share:

Basic and diluted, as reported $ 0.33Basic and diluted, pro forma $ 0.38

Contact Diamond estimated the fair value of options under the Black-Scholes option-pricing model and thefollowing weighted average assumptions:

2005 2004 2003

Risk-free interest rate 3.00% 3.00% 4.25%Expected life of options (in years) 2.5 2.5 5Expected volatility of Contact Diamond’s share price 50.3% 120.0% 121.6%Expected dividend yield 0% 0% 0%

The weighted average fair value of options granted during 2005 was $0.25.

(c) Flow-through Share Private PlacementsOn July 27, 2005, the company entered into flow-through share private placement agreements with variousinvestors, whereby the company issued an aggregate of 3,700,000 (2004 – 3,500,000; 2003 – 3,197,100)common shares to the investors for aggregate cash proceeds of $2.0 million (2004 – $5.3 million; 2003 –$5.3 million). In 2005, the company used all restricted cash funded by the 2004 and 2005 private placementsthrough exploration expenditures. Therefore, the company’s restricted cash balance at the end of 2005 is nil.

(d) Public OfferingIn 2003, Contact Diamond issued 2,760,000 units, each consisting of one common share and one-half warrant,at $1.75 per unit for net proceeds of $3.7 million, after deducting share issue costs of $1.1 million (no relatedincome tax effect). Each whole warrant entitled the holder to purchase one common share at a price of $2.50,subject to certain adjustments summarized in the prospectus document. The warrants expired on July 28, 2005.



(e) Issuance of Shares to Trigon Exploration Canada Ltd.In 2003, Contact Diamond entered into an option agreement with Trigon Exploration Canada Ltd. whereby the company can earn up to a 61% interest in Trigon’s RAM Diamond property in the Northwest Territories. The issuance of 75,000 shares in 2004 to Trigon to satisfy the requirements of the option agreement is recorded by the company as part of exploration expenditures. The shares were recorded at the market price at the time of issuance.

(f) Issuance of Shares to Fund Exploration ExpendituresIn the fourth quarter of 2005, Contact Diamond entered into seven separate option agreements relating to the Timiskaming Diamond Project to obtain the rights to conduct exploration activities on various properties. 180,000 common shares were issued in association with the agreements and seven tranches of 200,000 five-year warrants totalling 1,400,000 warrants were registered to seven option signatories. Each tranche of warrants is exercisable into an equivalent number of common shares at an exercise price pershare equal to $1.50 in the event that a production decision amongst other criteria is made on a commercialdeposit discovered within the boundaries of each specific option agreement. Certificates representing suchwarrants were issued to the option signatories but have been physically retained by Contact Diamond until the date of the commencement of commercial production.

(g) Equity Instruments and Loss per ShareThe following table presents the maximum number of common shares that would be outstanding if all equityinstruments outstanding at December 31, 2005 were exercised:

Common shares outstanding at December 31, 2005 35,106,125Employees’ stock options 2,777,000

37,883,125

For 2005, 2004 and 2003, the warrants and employees’ stock options were anti-dilutive, resulting in nodifferences between basic and diluted loss per share for each of these years.

5Gain on Sale of Exploration PropertiesIn the third quarter of 2004, the company sold its interests in all of its gold and precious metals explorationproperties in the United States and Canada to Agnico-Eagle for cash consideration of $3,290,000. Agnico-Eagleis a public company listed on the Toronto and New York Stock Exchanges, and which directly owns 39.4% of the common shares of the company. The company recorded the transaction at the exchange amount of$3,290,000, which represents the fair value of the properties sold. The fair value was determined based on a valuation prepared by Watts, Griffis and McQuat Limited, consulting geologists and engineers.



6Income Taxes

2005 2004 2003

Canadian federal and provincial tax rates (38.12)% (39.12)% (42.12)%Increase (decrease) in income taxes resulting from:

Tax effect of flow-through share expenditure renunciation (27.21)% – –Temporary differences not benefited 32.26% 38.28% 38.86%Non-capital losses not benefited 5.86% 9.19% 1.46%Permanent differences – (7.74)% –

(27.21)% 0.61% (1.8)%

In 2005, the company recovered cash income taxes of nil (2004 – nil; 2003 – recovered $73,167).In addition, the company has approximately $2.8 million (2004 – $8.1 million) of cumulative Canadian

exploration and development expenses available to reduce future years’ taxable income. As at December 31, 2005 and 2004, the company’s future income tax assets were as follows:

2005 2004

Non-current future income taxes:Deferred expenditures $ 750,749 $ 2,542,049Net operating loss carry-forwards 604,458 259,209Capital loss carry-forwards 1,256,604 1,256,604Other temporary differences 243,186 341,004Valuation allowance (2,854,997) (4,398,866)

Non-current future income tax assets $ – $ –

7Accounts Payable and Accrued LiabilitiesAs at December 31, 2005 Contact Diamond had $1.0 million payable to Agnico-Eagle for expenditures incurredon behalf of Contact Diamond Limited during the year. The full amount owing was paid to Agnico-Eagle inJanuary 2006.

8Financial InstrumentsThe company does not currently engage in any derivative financial instrument activities.

The fair values of the company’s liabilities are not readily determinable due to the company’s current financialcondition. The company’s cash, restricted cash and receivables are carried at cost, which approximates fair value.

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AUDITORS� REPORT

To the Shareholders of Contact Diamond Corporation: We have audited the consolidated balance sheets of Contact Diamond Corporation (formerly �Sudbury Contact Mines Limited�) as at December 31, 2004 and 2003 and the consolidated statements of loss and deficit and cash flows for each of the years in the three-year period ended December 31, 2004. These financial statements are the responsibility of the Company�s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2004 and 2003 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2004 in accordance with Canadian generally accepted accounting principles.

Ernst & Young LLP Chartered Accountants Toronto, Canada, March 11, 2005

CONTACT DIAMOND CORPORATION (formerly �Sudbury Contact Mines Limited�)

Summary of Significant Accounting Policies

2

The accompanying consolidated financial statements of Contact Diamond Corporation (�Contact Diamond� or the �Company�) have been prepared in accordance with Canadian generally accepted accounting principles. Since a precise determination of many assets and liabilities depends on future events, the preparation of financial statements for a period necessarily involves the use of estimates and approximations. Actual results may differ from such estimates and approximations. These consolidated financial statements have, in management�s opinion, been prepared within reasonable limits of materiality and within the framework of the accounting policies referred to below. The Company�s ability to continue to meet its obligations and carry out its planned exploration activities is dependent upon its ability to obtain third party financing to fund its exploration programs. The accompanying consolidated financial statements have been prepared on the basis that the Company will be able to continue to realize its assets and discharge its liabilities in the normal course of business and do not reflect any adjustments that may be required if this assumption proves to be incorrect. Nature of operations Contact Diamond is actively engaged in the exploration of diamonds primarily in eastern Canada. Prior to July 2003, Agnico-Eagle Mines Limited (�Agnico-Eagle�) funded most of the Company�s exploration and operating activities. In July and August 2003, the Company successfully completed two financings which resulted in Agnico-Eagle no longer lending additional financial support to Contact Diamond. Contact Diamond is a development stage company. Shareholders approved the change of the Corporation's name from Sudbury Contact Mines Limited to Contact Diamond Corporation at a special meeting of the shareholders held September 30, 2004. The name change reflects the Corporation's decision to focus its operations on its diamond exploration properties. Basis of consolidation Prior to September 30, 2004, the consolidated financial statements included the accounts of the Company and its wholly -owned subsidiary, Nevada Contact. As of September 30, 2004, the Company�s sole subsidiary was sold to Agnico-Eagle. Exploration expenditures Acquired exploration properties are recorded at cost at the date of acquisition. Mineral exploration expenditures are charged to income in the year in which they are incurred. When it is determined that a mining property can be economically developed as a result of established proven and probable reserves, the costs of further exploration and development to further delineate the orebody on such a property are capitalized. Determination as to the establishment of proven and probable reserves is based on results of feasibility studies, which indicate whether a property is economically feasible. If no mineable orebody is discovered, property acquisition costs are expensed in the period in which it is determined the property has no future economic value. Cash and cash equivalents Cash and cash equivalents include cash on hand and short-term investments in money market instruments with remaining maturities of three months or less at the date of purchase. Short-term investments are carried at cost, which approximates market value. Capital assets


Summary of Significant Accounting Policies

3

Contact Diamond records depreciation on its sole capital asset (building) based on a 20 year straight-line amortization schedule. It is Contact Diamond�s policy to periodically review the carrying value of capital assets, when impairment factors exist, for possible impairment. If it is determined that the estimated net recoverable amount is less than the carrying value, then a write down to the estimated fair value amount is made with a charge to income. Flow-through shares The Company has issued flow-through shares to finance some of its exploration activities. Shares were issued for cash at market prices in exchange for the Company giving up the tax benefits arising from exploration expenditures. On March 19, 2004, the Emerging Issues Committee ("EIC") issued EIC Abstract No. 146 amending the accounting for flow-through shares. For flow-through share transactions initiated after March 19, 2004, the Company records the cost of the foregone tax benefits as a cost of issuing the flow-through shares to the investors when the flow-through share expenditures are renounced. When the Company has loss carryforwards and/or deductible temporary differences that it has not recognized in previous years, the Company reverses the valuation allowance against that portion of its unrecognized future tax assets as a recovery of income taxes in the consolidated statements of loss and deficit. For flow-through share transactions initiated prior to March 20, 2004, the Company did not record the reversal of a portion of the valuation allowance through the consolidated statements of loss and deficit, rather it recorded the reversal as a direct offset to the share issuance costs. Income taxes The Company follows the liability method of tax allocation for accounting for income taxes. Under this basis of tax allocation, future income and mining tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the substantively enacted tax rates and laws expected to be in effect when the differences are expected to reverse. Employee stock options Prior to January 1, 2004, the Company accounted for its stock option grants based on the recognition and measurement principles of Section 3870. The application of Section 3870 resulted in no compensation expense being recorded in Contact Diamond�s circumstances as all options granted had an exercise price equal to the market value of the underlying stock on the date of grant. Effective January 1, 2004, the Company retroactively adopted, without restatement of prior periods, Canadian Institute of Chartered Accountants Handbook Section 3870 �Stock-Based Compensation and Other Stock-Based Payments.� This accounting standard recommends the expensing of stock option grants after January 1, 2002. This standard recommends that the fair value of stock options be recognized in income over the applicable vesting period as compensation expense. Any consideration paid by employees on exercise of stock options or purchase of stock is credited to share capital. The adoption of this standard resulted in a charge to deficit of $2,705,750 on January 1, 2004. Comparative figures Certain items in the comparative financial statements have been reclassified from statements previously presented to conform to the presentation of the 2004 financial statements.

4

Consolidated Balance Sheets Contact Diamond Corporation (formerly �Sudbury Contact Mines Limited,� Incorporated under the laws of Ontario) As at December 31, (Canadian dollars) 2004 2003 ASSETS Current Cash and cash equivalents $ 1,582,600 $ 1,708,109 Restricted cash (note 4(c)) 3,904,432 1,457,107 Prepaid expenses and sundry receivables 239,936 39,075 Total current assets $ 5,726,968 $ 3,204,291 Investment (note 2) $ 380,000 - Capital asset � building, net (note 3) 87,408 - $ 6,194,376 $ 3,204,291 LIABILITIES Current Accounts payable and accrued liabilities $ 31,967 $ 74,643 Income and capital taxes payable 12,324 79 Total current liabilities $ 44,291 74,722 Loans payable to shareholder (note 1) 3,902,111 3,902,111 SHAREHOLDERS� EQUITY (DEFICIENCY) Common shares (note 4) Authorized � unlimited shares, without par value Issued � 31,226,125 shares (2003 � 27,651,125 shares) 77,885,196 72,525,096 Stock options 2,747,165 - Warrants (note 4(d)) 27,600 44,646 Contributed surplus (note 1) 19,338,511 19,321,465 Deficit (97,750,498) (92,663,749) 2,247,974 (772,542) $ 6,194,376 $ 3,204,291 See accompanying notes ON BEHALF OF THE BOARD

Sean Boyd, C.A. James D. Nasso Director Director

5

Consolidated Statements of Loss and Deficit Contact Diamond Corporation (formerly �Sudbury Contact Mines Limited�) For the years ended December 31, (Canadian dollars) 2004 2003 2002 REVENUES Gain on sale of exploration properties (note 5) $ 3,296,000 $ 118,653 $ - Interest and sundry 94,078 108,301 - 3,390,078 226,954 - EXPENSES Exploration $ 5,119,426 $ 8,325,820 $ 3,644,474 Interest and bank charges - - 606,577 Shareholders� information 104,712 50,858 19,343 Capital and other taxes - - 5,000 Transfer agent fees 36,366 27,228 26,529 Legal and audit fees 104,064 45,003 167,067 Directors� fees 13,800 12,900 6,400 Insurance 10,300 - - Depreciation 366 - - Stock-based compensation 41,415 - - Miscellaneous (17,604) 10,907 9,784 Loss before Large Corporations Tax and tax recovery 2,022,767 8,245,762 4,485,174 Tax recovery - (148,903) - Large Corporations Tax 12,324 - 5,000 Net loss for the year 2,035,091 8,096,859 4,490,174 DEFICIT, beginning of year 92,663,749 83,409,471 78,845,201 Adoption of accounting standard issued by the Canadian Institute of Chartered Accountants relating to stock-based Compensation (note 4(b)) 2,705,750 - - Share and warrant issue costs 345,908 1,157,419 74,094 DEFICIT, end of year $ 97,750,498 $ 92,663,749 $ 83,409,469 Net loss per share � basic and diluted (note 4(g)) $ 0.07 $ 0.33 $ 0.22 See accompanying notes

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Consolidated Statements of Cash Flows Contact Diamond Corporation (formerly �Sudbury Contact Mines Limited�) For the years ended December 31, (Canadian dollars) 2004 2003 2002 OPERATING ACTIVITIES Net loss for the year $ (2,035,091) $(8,096,859) $ (4,490,174) Add items not affecting cash: Interest on loans payable to shareholder - - 606,577 Gain on sale of exploration properties (3,296,000) (118,653) - Stock-based compensation 41,415 - - Depreciation 366 - - Exploration expenditures funded through shares issuance 110,100 - - Changes in non cash working capital balances: Prepaid expenses and sundry receivables (200,861) 96,761 (135,475) Accounts payable and accrued liabilities (42,755) 32,878 (1,516) Income and capital taxes payable 12,324 (75,771) 15 Cash used in operating activities (5,410,502) (8,161,644) (4,020,573) INVESTING ACTIVITIES Purchase of building (note 3) (87,774) - - Proceeds from sale of exploration properties (note 5) 3,296,000 118,653 - Increase in investment (note 2) (380,000) - - Increase in restricted cash (note 4(c)) (2,447,325) (1,457,107) - Cash provided by (used in) investing activities 380,901 (1,338,454) - FINANCING ACTIVITIES Increase (decrease) in loans payable to shareholder (note 1) - (329,915) 4,034,406 Common shares issued 5,250,000 10,168,900 2,542,256 Warrants issued - 27,600 17,046 Share and warrant issue costs (345,908) (1,157,419) (74,094) Cash provided by financing activities 4,904,092 8,709,166 6,519,614 Net increase (decrease) in cash and cash equivalents during the year (125,509) (790,932) 2,499,041 Cash and cash equivalents, beginning of year 1,708,109 2,499,041 - Cash and cash equivalents, end of year $ 1,582,600 $ 1,708,109 $ 2,499,041 See accompanying notes


Notes to Financial Statements (Canadian dollars)

December 31, 2004

7

1. LOANS PAYABLE TO SHAREHOLDER

2004 2003 Agnico-Eagle Mines Limited Outstanding principal��.. $ 3,902,111 $ 3,902,111

The loan was originally advanced for the purpose of funding ongoing exploration and operating activities.

The loan is due on demand, unsecured and bears interest at 8% (2003 � 8%) per annum. Agnico-Eagle has waived interest on the loan commencing May 13, 2002 and will not charge interest or demand repayment of the loan and any outstanding interest within the next year. Accordingly, the outstanding principal and accrued interest on the loan has been classified as a long-term liability. Interest expense relating to the loan for 2004 was nil (2003 � nil). On May 13, 2002, Agnico-Eagle forgave $12,000,000 of the total indebtedness incurred by Contact Diamond to that date which resulted in an increase in the Company�s contributed surplus. Also on May 13, 2002, through a series of steps, Agnico-Eagle converted an additional $13,640,922 of indebtedness into 44 common shares of Contact Diamond. Common shares issued have been recorded at their legal stated capital of $13,640,922.

2. INVESTMENT

In 2004, the Company entered into a letter of agreement with Trigon Exploration Canada Ltd. (�Trigon�) to earn up to a 60% interest in Trigon�s IC/LO property in Nunavut. Pursuant to the agreement, the Company purchased 690,909 units in the initial public offering of Trigon on November 1, 2004. Each unit consisted of one common share and one half of one share purchase warrant. Each whole warrant is exercisable into common shares at a strike price of $0.75 and expires May 2006. The market value of the common shares at December 31, 2004 was $297,091. The warrants are not listed on a stock exchange.

3. CAPITAL ASSET

During the year, Contact Diamond purchased a building at a cost of $87,774. Depreciation for the year was $366.

4. CAPITAL STOCK

(a) Summary of common share transactions:

2004 2003 2002 Shares Amount Shares Amount Shares Amount Common shares issued, beginning of year��. 27,651,125 $72,525,096 21,656,025 $62,356,196 20,460,316 $46,173,018

Shares issued under a flow-through share private placement (note 4(c))��..

3,500,000

5,250,000

3,197,100

5,328,500

909,091

2,000,000

Shares issued by public offering (note 4(b))��... - - 2,760,000 4,802,400 - -

Shares issued under a private placement with SIDEX, Limited Partnership (note 4(d))��.

-

-

-

-

227,274

482,956

Shares issued under stock option plan�� - - 38,000 38,000 59,300 59,300

Shares issued to Agnico-Eagle pursuant to debt elimination transaction (note1)��...

-

-

-

-

44

13,640,922

Shares issued for acquisition of Trigon (note 4(f)). 75,000 110,100 - - - -

Common shares issued, end of year��.. 31,226,125 $77,885,196 27,651,125 $72,525,096 21,656,025 $62,356,196

Weighted average number of common shares�... 29,171,958 24,399,067 20,580,665

CONTACT DIAMOND CORPORATION Notes to Financial Statements

(Canadian dollars)

December 31, 2004

8

(b) Employee Stock Option Plan (�ESOP�)

The Company�s ESOP provides for the granting of options to directors, officers, employees and service providers to purchase common shares. Under this plan, options are granted at the fair market value of the underlying shares on the date of grant. The number of shares subject to option for any one person may not exceed 5% of the Company's common shares issued and outstanding at the date of grant. Up to September 30, 2004, the total number of common shares subject to option under the ESOP was limited to 3,000,000 and all shares granted under the ESOP vested immediately with a maximum term of ten years. In 2004, the Compensation Committee of the Board of Directors adopted a policy pursuant to which options granted after that date shall have a maximum term of five years. On September 30, 2004, the shareholders approved resolutions to amend the Stock Option Plan accordingly and to increase the number of common shares reserved for issuance under the ESOP by 1,000,000 to 4,000,000. Of the 293,000 options granted under the ESOP in 2004, 80,750 options granted vest immediately and expire in the year 2009. The remaining options expire in 2009 and vest in equal instalments, on each anniversary date of the grant, over a three-year term. The following tables summarize information about Contact Diamond�s outstanding stock options:

2004 2003 2002 Weighted Weighted Weighted Average average average exercise exercise exercise Options Price Options price Options price

Outstanding, beginning of year�� 2,407,000 $1.82 1,889,000 $1.54 1,530,800 $1.32 Granted ��... 293,000 0.67 568,000 2.67 685,000 2.49

Exercised��. - - (38,000) 1.00 (59,300) 1.00 Expired��.� - - - - (247,500) 2.89 Cancelled��. (10,000) 1.00 (12,000) 1.00 (20,000) 2.23 Outstanding, end of year��. 2,690,000 $1.70 2,407,000 $1.82 1,889,000 $1.54

Options exercisable at end of year.. 2,477,750 2,407,000 1,889,000

Options outstanding Options exercisable

Range of exercise prices Number Outstanding

Weighted average remaining

contractual life (in years)

Weighted average

exercise price

Number exercisable

Weighted average exercise price

$0.00 - $0.99�� 283,000 4.95 $0.63 70,750 $0.63 $1.00 - $1.99�� 1,154,000 4.53 $1.01 1,154,000 $1.01 $2.00 - $3.00�� 1,253,000 7.72 $2.57 1,253,000 $2.57 2,690,000 6.06 $1.70 2,477,750 $1.79

The Company has reserved for issuance 2,690,000 common shares in the event these options are exercised. The number of unoptioned shares available for granting as at December 31, 2004 was 933,500 (2003 � 216,500 and 2002 � 772,500).


(Canadian dollars)

December 31, 2004

9

The following table illustrates the effect on net loss for 2003 and 2002 and net loss per share as if the Company had applied the fair value recognition provisions of Section 3870 to account for its stock option grants. 2003 2002

Net loss for the year, as reported��.. $ 8,096,859 $ 4,490,174 Deduct: Total stock-based employee compensation determined under fair value based method for all awards��. 1,278,000 1,427,750 Pro forma net loss 9,374,859 $ 5,917,924 Net loss per share: Basic and diluted, as reported��... . $ 0.33 $ 0.22 Basic and diluted, pro-forma��.��......... $ 0.38 $ 0.29 Contact Diamond estimated the fair value of options under the Black-Scholes option-pricing model and the following weighted average assumptions: 2004 2003 2002

Risk free interest rate��...� 3.00% 4.25% 5.5% Expected life of options (in years)��...� 2.5 5 5 Expected volatility of Contact Diamond�s share price� 120.0% 121.6% 117.9% Expected dividend yield��...�� 0% 0% 0%

The weighted average fair value of options granted during 2004 was $0.67.

(c) Flow-through share private placement On August 19, 2004, the Company entered into flow-through share private placement agreements with various investors, whereby the Company issued an aggregate of 3,500,000 (2003 � 3,197,100, 2002 � 909,091) common shares to the investors for aggregate cash proceeds of $5.3 million (2003 � $5.3 million, 2002 � $2.0 million). In 2004, the Company renounced the income tax deductions for Canadian exploration expenses to the investors in connection with its exploration activities funded by the 2003 flow-through share issuance. In 2005, the Company must incur an additional $3.9 million of exploration expenditures in connection with the 2004 private placement. As such, part of the Company�s cash balance at the end of 2004 is restricted for this purpose. (d) Private placement with SIDEX, Limited Partnership (�SIDEX�) On December 30, 2002, the Company entered into a private placement agreement with SIDEX whereby the Company issued 227,274 units each consisting of one common share and one-half of a common share purchase warrant for aggregate proceeds of $0.5 million. Each warrant entitled SIDEX to acquire one common share of Contact Diamond for $3.00. During the year, none of these warrants were exercised. The full 227,274 warrants expired on December 30, 2004. (e) Public offering In 2003, Contact Diamond issued 2,760,000 units, each consisting of one common share and one-half warrant, at $1.75 per unit for net proceeds of $3.7 million, after deducting share issue costs of $1.1 million (no related income tax effect). Each whole warrant entitles the holder to purchase one common share at a price of $2.50, subject to certain adjustments summarized in the prospectus document.


(Canadian dollars)

December 31, 2004

10

Warrants are exercisable at any time prior to July 28, 2005, after which the warrants will expire and be of no value. If all outstanding warrants were exercised, the Company would issue an additional 1,380,000 common shares. (f) Issuance of shares to Trigon Exploration Canada Ltd.

In 2003, Contact Diamond entered into an option agreement with Trigon Exploration Canada Ltd. whereby the Company can earn up to a 61% interest in Trigon�s RAM Diamond property in the Northwest Territories. The issuance of 75,000 shares in 2004 to Trigon to satisfy the requirements of the option agreement is recorded by the Company as part of exploration expenditures. The shares were recorded at the market price at the time of issuance.

(g) Equity instruments and loss per share

The following table presents the maximum number of common shares that would be outstanding if all equity instruments outstanding at December 31, 2004 were exercised:

Common shares outstanding at December 31, 2004�� 31,226,125 Warrants��.. 1,380,000 Employees� stock options�� 2,690,000 35,296,125

For 2004, 2003 and 2002, the warrants and employees� stock options were anti-dilutive resulting in no

differences between basic and diluted loss per share for each of these years.

5. GAIN ON SALE OF EXPLORATION PROPERTIES In the third quarter of 2004, the Company sold its interests in all of its gold and precious metals exploration properties in the United States and Canada to Agnico-Eagle for cash consideration of $3,290,000. Agnico-Eagle is a public company listed on the Toronto and New York Stock Exchanges which owns directly 44.2% of the common shares of the Company. The Company recorded the transaction at the exchange amount of $3,290,000 which represents the fair value of the properties sold. The fair value was determined based on a valuation prepared by Watts, Griffis and McQuat Limited, consulting geologists and engineers.

6. INCOME TAXES

2004 2003 2002

Canadian federal and provincial tax rates�� (39.12)% (42.12)% (44.0)% Increase (decrease) in income taxes resulting from: Temporary differences not benefited��... 38.28% 38.86 44.0 Non-capital losses not benefited��.�...�.. 9.19% 1.46 - Permanent differences��...��.�...�.. (7.74)% - - 0.61% (1.8)% 0.1% In 2004, the Company recovered income and capital taxes of $nil (2003 � recovered $73,167; 2002 � paid $6,546). In addition, the Company has approximately $8.1 million (2003 � $4.2 million) of cumulative Canadian exploration and development expenses available to reduce future years� taxable income.


(Canadian dollars)

December 31, 2004

11

As at December 31, 2004 and 2003, the Company�s future income tax assets were as follows: 2004 2003 Non-current future income taxes: Deferred expenditures�� $ 2,542,049 $ 1,512,600 Net operating loss carry-forwards��. 259,209 102,905 Capital loss carryforwards��. 1,256,604 - Other temporary differences��.. 341,004 350,505 Valuation allowance��.. (4,398,866) (1,966,010) Non-current future income tax assets $ $

7. FINANCIAL INSTRUMENTS

The Company does not currently engage in any derivative financial instrument activities. The fair values of the Company�s current liabilities are not readily determinable due to the Company�s current financial condition.

Third Quarter Report September 30, 2006

QUARTERLY MANAGEMENT DISCUSSION AND ANALYSIS Results of Operations

Contact Diamond Corporation (“Contact Diamond” or the “Company”) reported a net loss of $1,514,268, or $0.03 per share, in the third quarter of 2006 compared to a net loss of $1,499,251, or $0.04 per share, in the third quarter of 2005. For the year-to-date, Contact Diamond incurred a net loss of $2,699,450 or $0.07 per share, compared to a net loss of $3,625,573, or $0.11 per share, in the first nine months of 2005. Contact Diamond does not have any revenue generating activities and its largest expenses are exploration expenditures. The table below summarizes exploration expenditures by project for the three and nine month period ended September 30, 2006 and 2005:

2006 2005 2006 2005Diamond ExplorationTimiskaming Diamond Project 275,123$ 431,800$ 630,562$ 2,808,017$ RAM Diamond Project 133,075 69,876 149,869 755,567 IC (and TIM) Diamond Project 283,447 189,616 701,401 522,052 MIP Diamond Project 368,637 500,000 398,063 500,000 Other 5,550 115,169 32,143 230,963

1,065,832$ 1,306,461$ 1,912,038$ 4,816,599$

Three months ended September 30, Nine months ended September 30,

Timiskaming Diamond Project The Company’s 100%-owned Timiskaming Diamond Project straddles the Ontario-Quebec border in the region of Timiskaming Shores, approximately 500 kilometers north of Toronto. Timiskaming is the Company’s lead project, and currently comprises over 135,000 hectares of staked claims or optioned mining patents. During the third quarter of 2006, field exploration charges decreased to $275,123 from $431,800 in the third quarter of 2005. Charges incurred were related to the mobilization and commencement of the summer 2006 exploration program at Timiskaming, including programs of integrated till sampling, prospecting and claim staking. This work is ongoing, and the Company expects to renew drill testing of several kimberlite targets identified, or confirmed, during this program in the late fall and early winter. The Company has authorized a $2 million program of work for the Timiskaming Diamond Project in 2006, with a focus being the new 49,000 hectare Elk Lake claim package. IC (and TIM) Diamond Project The IC project is a joint venture with Trigon Exploration Canada Ltd. (“Trigon”) in the Kugaaruk/Committee Bay region of Nunavut. Trigon is the project operator. The adjacent TIM property is subject to a letter of intent dated September 21, 2004 between Trigon and a joint venture comprising of Committee Bay Resources and Indicator Minerals Inc. Trigon has a 51% interest in the diamond rights to the TIM property, which lies within the area of interest defined by the Trigon-Contact IC joint venture agreement, giving Contact the right to earn its commensurate share of Trigon’s interest.

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Contact Diamond currently holds a 51% interest in the IC project, and has the right to earn up to 60% by funding a further $3 million of exploration expenditure. During the third quarter of 2006, IC (and TIM) field exploration charges amounted to $283,447 compared to $189,616 in the third quarter of 2005. 2006 charges related to costs associated with two concurrent summer 2006 exploration programs designed to follow up both the kimberlitic indicator mineral (“KIM”) anomalies discovered during the 2005 exploration program, and the IC polymetallic showing discovered at the same time. Activities included prospecting and close infill sampling on 50m centers designed to test for the presence of multiple kimberlite sources associated with the IC KIM anomalies, and geophysics and geochemical sampling on the IC polymetallic showing. In addition, an additional 16,685 hectares of claims were acquired by the joint venture. To date, only modest results have been obtained from sampling of the polymetallic zone. Results on the kimberlite exploration program are outstanding. The Committee Bay/Kugaaruk region of Nunavut has emerged as one of Canada’s premier diamond exploration districts, and Contact Diamond and Trigon consider the discovery of the source of the IC KIM anomalies to be a high priority. RAM (and SHU) Diamond Project RAM is a joint venture project with Trigon, in the southeastern Slave region of the Northwest Territories. Contact Diamond has earned a 53.23% interest in RAM. The SHU project lies to the south of RAM within the area of interest defined by the Contact Diamond-Trigon joint venture agreement. Funding of the RAM (and SHU) project is proportionate with each participant’s interest. Trigon is the project operator. Field exploration charges amounted to $133,075 during the third quarter of 2006 compared to $69,876 during the third quarter of 2005. Exploration at RAM in 2005 was successful in confining the likely source of high-interest KIM anomalies previously observed at RAM to a narrow search area of approximately six square kilometers. During February of this year, the project operator acquired an additional 6,896 hectares of staked claims, recently lapsed, adjoining the eastern margin of this search area to complete its enclosure on all sides and provide a definitive cut-off to the KIM anomalies. In addition to the $133,075 spent on field exploration, Contact provided Trigon with an advance of $116,925, which represents Trigon’s proportionate share of third quarter exploration. In accordance with the joint venture agreement, Trigon repaid the advance on November 2, 2006 and the amount is recorded as an accounts receivable in the accompanying financial statements. Exploration charges incurred during the third quarter were associated with the renewal of prospecting and close spaced sampling within the six square kilometer target area. Joint venture approval to conduct drill testing on kimberlite targets on the RAM project will be considered following receipt of the results of this work. Also within the third quarter, the project operator conducted a limited two hole drill program on two high priority geophysical targets at the head of a KIM train on the adjacent SHU property. No kimberlite was intersected. MIP Diamond Project The MIP Diamond Project is a generative diamond exploration project conducted in joint venture with Stornoway Diamond Corporation (“Stornoway”) and located in south-central Baffin Island. Stornoway and Contact Diamond co-fund MIP equally for respective 50% interests, and Stornoway is the project operator. During the third quarter of 2006, MIP field exploration charges amounted to $368,637 compared to $500,000 in the third quarter of 2005. During the third quarter the project operator mobilized a drill

3

program to test several of the 14 geophysical targets identified in a 2005 airborne magnetic survey. No kimberlite was intersected and no further work is planned. General and Administrative Total general and administrative expenditures (i.e. all other non-exploration expenses) in the third quarter of 2006 increased significantly to $480,558 from $209,478 in the third quarter of 2005. The majority of the increase relates to costs of $285,239 incurred by the Company as a result of its acquisition by Stornoway Diamond Corporation. The remaining difference is mainly attributable to a decrease in miscellaneous costs in the third quarter of 2006 as compared to the same quarter in 2005. Acquisition by Stornoway Diamond Corporation

On July 24, 2006, the Company announced that it had entered into a support agreement with Stornoway Diamond Corporation (“Stornoway’) pursuant to a bid by Stornoway for any and all outstanding shares of the Company (the “Offer”). Under the terms of the Offer, each Contact shareholder who tendered their shares under the Offer, received 0.36 of a Stornoway share per Contact share representing $0.45 per Contact share or a 16% premium to Contact’s 20 day volume weighted average share price as at July 21, 2006. Agnico-Eagle Mines Limited (‘‘Agnico-Eagle’’), which held approximately 31% of the outstanding Contact Shares, and all of the directors and officers of Contact, who collectively held approximately 2% of the outstanding Contact Shares, entered into lock-up agreements pursuant to which each agreed to validly and irrevocably tender its Contact Shares in acceptance of the Offer.

As of October 31, 2006, approximately 93% of outstanding Contact Diamond shares were tendered to Stornoway under the Offer.

Liquidity and Capital Resources

At September 30, 2006, Contact Diamond’s cash and cash equivalents and restricted cash were $1,641,714, compared to $2,461,194 at December 31, 2005. As of September 30, 2006, Contact Diamond was required to spend an amount of $2,062,906 on eligible Canadian exploration expenditures (2005 – nil) as a result of the 2006 flow-through share private placement. The Company used all of its restricted cash funded by the 2004 and 2005 flow-through share private placements on exploration expenditures by December 31, 2005. Currently, the Company does not have enough cash on hand to meet its flow-through share commitments. In association with the proposed acquisition of the outstanding shares of the Company by Stornoway Diamond Corporation and the associated support agreement between Contact and Stornoway, the Company expects to enter into a short term inter company loan with Stornoway to ensure the Company meets its obligations to its flow-through unit holders.

On April 26, 2006, Contact Diamond entered into flow-through share private placement agreements with various investors, whereby the Company issued an aggregate of 8,750,000 common shares to the investors for aggregate cash proceeds of $3.9 million. The proceeds of the private placement, combined with the Company’s current cash balance, are sufficient to fund currently planned 2006 expenditures. Any further expenditures will be results driven and will require additional financing. Although Contact Diamond enters into agreements that require work commitment payments in order to earn ownership interests in certain properties, Contact Diamond has full discretion in deciding which payments it will make and bases such decisions on, among other things, drilling and other geological results. Accordingly, Contact Diamond has no contractual commitments relating to its exploration expenditures.

4

Transactions with Related Parties Prior to completion of the Offer, Contact Diamond’s largest shareholder was Agnico-Eagle Mines Limited (“Agnico-Eagle”); a public company listed on the Toronto and New York Stock Exchanges, which, prior to tendering its shares to the Offer, owned directly, approximately 31% of the shares of the Company. In the past, Agnico-Eagle has funded Contact Diamond’s exploration activities and as a result, the Company has had $3,902,111 in loans outstanding to Agnico-Eagle. During the third quarter, the loan balance increased by $1,000,000 to $4,902,111 to allow the Company to provide 50% of a $2 million deposit (the “Offer Deposit”) placed in trust in connection with Stornoway’s offer to purchase the outstanding shares of Ashton Mining of Canada Ltd. dated August 10, 2006, as amended, and an associated lock-up agreement with two subsidiaries of Rio Tinto plc. dated July 21, 2006. The Offer Deposit was ultimately used to pay for Ashton shares acquired by Stornoway under the Ashton Offer and the $1,000,000 advanced by the Company then became a debt owing from Stornoway to Contact. The $1,000,000 owing from Stornoway is recorded as a receivable in the accompanying financial statements. Subsequent to quarter-end, Stornoway repaid the $1,000,000 amount owing to Contact and Contact repaid a portion of its debt to Agnico-Eagle with the proceeds of the repayment. Agnico-Eagle has previously waived interest on its loans to Contact however, subsequent to tendering its shares to the Offer, Agnico-Eagle informed the Company that it would begin accruing interest on the outstanding loan at 8% per annum. Critical Accounting Estimates Stock-Based Compensation The Company’s existing stock-based compensation plan provides for the granting of options to directors, officers, employees and service providers to purchase common shares. Share options have exercise prices equal to the market price at the grant date. The fair value of these stock options is recorded as an expense and is recognized in income over the life of the applicable vesting period depending on the terms of the option agreements. Fair value is determined using the Black-Scholes option valuation model which requires the Company to estimate the expected volatility of the Company’s share price and the expected life of the stock options. Limitations with existing option valuation models and the inherent difficulties associated with estimating these variables creates difficulties in determining a reliable single measure of the fair value of stock option grants. Outstanding Securities The following table presents the maximum number of common shares that would be outstanding if all dilutive instruments outstanding at October 31, 2006 were exercised:

Common shares outstanding at October 31, 2006 43,873,365 Employees’ stock options 3,802,000

47,675,365

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Summary of Quarterly Results

September 30, 2006 June 30, 2006 March 31, 2006 December 31, 2005

(1,514,268)$ (1,216,251)$ 31,069$ (1,166,138)$

$ (0.03) $ (0.03) $ - $ (0.05)

September 30, 2005 June 30, 2005 March 31, 2005 December 31, 2004

(1,499,251)$ (1,676,444)$ (449,878)$ (1,253,111)$

$ (0.04) $ (0.05) $ (0.01) $ (0.03)

Net income (loss) per share (basic & diluted)

Net income (loss) for the period

Net income (loss) per share (basic & diluted)

Net income (loss) for the period

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145 King Street East, Suite 500Toronto ON, M5C 2Y7Phone: 416-947-1212Fax: 416-367-4681

CONTACT DIAMOND CORPORATIONCONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Canadian dollars) September 30, 2006 December 31, 2005

AssetsCurrent

Cash and cash equivalents -$ 2,461,194$ Restricted cash (note 3) 1,641,714 - Accounts receivable (notes 5) 1,116,925 - Prepaid expenses and sundry receivables 49,192 54,263 Total current assets 2,807,831 2,515,457

Investment 165,818 380,000 Capital asset - furniture, net 4,655 5,395 Capital asset - building, net 82,700 86,114

3,061,004$ 2,986,966$

LiabilitiesCurrent

Accounts payable and accrued liabilities 32,836$ 1,262,688$ Loans payable to shareholder 4,902,111 3,902,111

Total current liabilities 4,934,947 5,164,799

Shareholders' DeficiencyCapital stock (note 4)

Authorized - Unlimited common shares, without par valueIssued - Common shares - 43,873,365 (2005 - 35,106,125) 83,948,416 80,010,916

Stock options 2,931,312 2,812,697 Contributed surplus 19,366,111 19,366,111 Deficit (108,119,782) (104,367,557)

(1,873,943) (2,177,833)3,061,004$ 2,986,966$

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CONTACT DIAMOND CORPORATIONINTERIM CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT (UNAUDITED)

(Canadian dollars) 2006 2005 2006 2005(Restated - Note 7) (Restated - Note 7)

IncomeInterest and other income 32,122$ 16,688$ 80,955$ 65,203$

32,122 16,688 80,955 65,203 Expenses

Exploration expense 1,065,832 1,306,461 1,912,038 4,816,599 Shareholders’ information 29,227 26,427 212,256 159,618 Transfer agent fees 9,415 5,546 23,503 19,200 Legal and audit fees 31,298 18,628 90,437 124,767 Directors’ fees 15,013 23,250 81,063 33,300 Management salaries and benefits 88,478 98,241 283,286 204,696 Stock-based compensation 23,178 12,547 118,615 52,684 Depreciation 1,385 2,087 4,154 3,876 Office and other (2,675) 22,752 198,979 67,336

Other expensesStornoway transaction costs 285,239 - 417,634 - Investment write-down - - 214,182 -

Net loss before tax recovery (1,514,268) (1,499,251) (3,475,192) (5,416,873)

Other incomeIncome tax recovery - - 775,742 1,791,300

Net loss for the period (1,514,268)$ (1,499,251)$ (2,699,450)$ (3,625,573)$

Deficit, beginning of period (106,605,514) (101,668,120) (104,367,557) (97,750,498)

Share and warrant issue costs - (28,960) (1,052,775) (1,820,260)

Deficit, end of period (108,119,782)$ (103,196,331)$ (108,119,782)$ (103,196,331)$

Net loss per share (note 3) (0.03)$ (0.04)$ (0.07)$ (0.11)$


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CONTACT DIAMOND CORPORATIONINTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Canadian dollars) 2006 2005 2006 2005(Restated - Note 7) (Restated - Note 7)

Operating ActivitiesNet loss for the period (1,514,268)$ (1,499,251)$ (2,699,450)$ (3,625,573)$ Add (deduct) items not affecting cash:

Tax recovery - - (775,742) (1,791,300) Stock based compensation 23,178 12,547 118,615 52,684 Depreciation 1,385 2,087 4,154 3,876 Investment write-down - - 214,182 -

Changes in non-cash working capital balances:Prepaid expenses and sundry receivables (20,932) (23,901) 5,071 (13,966) Accounts receivable (1,116,925) - (1,116,925) - Accounts payable and accrued liabilities (612,360) 507,727 (1,229,852) 483,957

Income and capital taxes payable - 854 - 969

Cash used in operating activities (3,239,922) (999,937) (5,479,947) (4,889,353)

Investing ActivityPurchase of capital assets - - - (9,422) Decrease (increase) in restricted cash 1,849,012 (1,641,714) Increase in loan payable to shareholder (note 5) 1,000,000 - 1,000,000 -

Cash provided by (used in) investing activities 2,849,012 - (641,714) (9,422)

Financing ActivitiesCommon shares issued - 2,035,000 3,937,500 2,035,000 Share and warrant issue costs - (28,960) (277,033) (28,960) Cash provided by financing activities - 2,006,040 3,660,467 2,006,040

Net increase (decrease) in cash and cash equivalents (390,910) 1,006,103 (2,461,194) (2,892,735)

Cash and cash equivalents, beginning of period 390,910 1,588,194 2,461,194 5,487,032 Cash and equivalents, end of period -$ 2,594,297$ -$ 2,594,297$


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CONTACT DIAMOND CORPORATION Notes to Interim Consolidated Financial Statements

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1. Basis of Presentation The unaudited interim consolidated financial statements have been prepared in Canadian dollars following the accounting policies as set out in the fiscal 2005 annual consolidated financial statements. The unaudited interim consolidated financial statements do not conform in all material respects to the requirements of generally accepted accounting principles for annual financial statements. Accordingly, these unaudited interim financial statements should be read in conjunction with the fiscal 2005 annual consolidated financial statements. In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments, which consist only of normal and recurring adjustments, necessary to present fairly the financial position at September 30, 2006 and the results of operations and cash flows for the three and nine month periods ended September 30, 2006. The Company’s ability to continue to meet its obligations and carry out its planned exploration activities is dependent upon the financial support from its parent company and/or its ability to obtain third party financing. The accompanying consolidated financial statements have been prepared on the basis that the Company will be able to continue to realize its assets and discharge its liabilities in the normal course of business and do not reflect any adjustments that may be required if this assumption proves to be incorrect.

2. Use of Estimates

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that the estimates used in the preparation of the consolidated financial statements are reasonable and prudent; however, actual results could differ from these estimates.

3. Capital Stock

On April 26, 2006, the Company entered into flow-through share private placement agreements with various investors, whereby the Company issued an aggregate of 8,750,000 (2005 – 3,700,000) common shares to the investors for aggregate cash proceeds of $3.9 million (2005 – $2.0 million). Under the terms of the flow-through share agreements, the Company is required to spend the proceeds of the offering on eligible Canadian exploration expenses and renounce the tax deductions associated with those exploration expenses to the initial purchasers of the flow-through shares. In 2005, the Company used all restricted cash funded by the 2004 and 2005 private placements through exploration expenditures. Therefore, the Company used all restricted cash funded by the 2004 and 2005 private placements through exploration expenditures. Therefore, the Company’s restricted cash balance as of September 30, 2006 relates fully to the current-year private placement. Weighted average number of shares for purposes of calculating basic and diluted net loss per share is 39,481,125 for the nine-month period ended September 30, 2006 (2005 - 32,048,347) and 43,856,125 for the three-month period ended September 30, 2006 (2005 - 33,692,792). The Company’s employee stock options are anti-dilutive and thus have not been included in the determination of net loss per share. The following table presents the maximum number of common shares that would be outstanding if all equity instruments outstanding at September 30, 2006 were exercised:

Common shares outstanding at September 30, 2006 43,873,365 Employees’ stock options 3,802,000 47,675,365


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4. Acquisition of Outstanding Shares by Stornoway Diamond Corporation

On July 24th, 2006 the Company announced that it had entered into a support agreement with Stornoway Diamond Corporation (“Stornoway’) pursuant to a bid by Stornoway for any and all outstanding shares of the Company (the “Offer”). Under the terms of the Offer, each Contact shareholder who tendered their shares under the Offer, received 0.36 of a Stornoway share per Contact share representing $0.45 per Contact share or a 16% premium to Contact’s 20 day volume weighted average share price as at July 21, 2006. Agnico-Eagle Mines Limited (‘‘Agnico-Eagle’’), which held approximately 31% of the outstanding Contact Shares, and all of the directors and officers of Contact, who collectively held approximately 2% of the outstanding Contact Shares, entered into lock-up agreements pursuant to which each agreed to validly and irrevocably tender its Contact Shares in acceptance of the Offer.

As of October 31, 2006, approximately 93% of outstanding Contact Diamond shares were tendered to Stornoway under the Offer.

5. Related Party Transactions

During the third quarter, the loan due to shareholder increased by $1,000,000 to $4,902,111 to allow the Company to provide 50% of the “Offer Deposit” under the terms of Stornoway’s offer to purchase the outstanding shares of Ashton dated August 10, 2006 and an associated lock-up agreement with two subsidiaries of Rio Tinto plc. dated July 21, 2006 (as subsequently amended on September 1st 2006) (the “Ashton Offer”). The Offer Deposit was ultimately used to pay for Ashton shares acquired by Stornoway under the Ashton Offer and the $1,000,000 advanced by the Company then became a debt owing from Stornoway to the Company. The $1,000,000 owing from Stornoway as at September 30, 2006 is included in accounts receivable. Subsequent to quarter-end, Stornoway repaid the $1,000,000 amount owing to Contact and Contact repaid a portion of its debt to Agnico-Eagle with the proceeds of the repayment. Agnico-Eagle has previously waived interest on its loans to Contact however, subsequent to tendering its shares to the Offer, Agnico-Eagle informed the Company that it would begin accruing interest on the outstanding loan at 8% per annum.

6. Income Taxes

The Company has financed a portion of its exploration activities through the issuance of flow-through shares pursuant to which the Company renounces the right to claim the exploration expenditures for tax purposes in an amount equal to the gross proceeds of the flow-through share issue and the tax deductibility of the exploration expenditures is effectively transferred to the investors. The Company is required to use the proceeds of the flow-through issues to incur eligible Canadian exploration expenditures. Proceeds received from such issuance have been credited to capital stock and the related exploration expenditures are expensed as incurred. The Company is required to record future income tax liabilities relating to the expenses renounced pursuant to the flow-through shares issue as such expenses are renounced in favour of the shareholders. When the Company has loss carry-forwards and/or deductible temporary differences that it has not recognized in previous years, the Company reverses the valuation allowance against that portion of its unrecognized future tax assets as a recovery of income taxes in the consolidated statements of loss and deficit.


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7. Restatement of Interim Consolidated Financial Statements

The Company has restated the comparative interim consolidated statements of loss and deficit to conform to the accounting policy for the issuance of flow through shares described in note 3. This resulted in an increase in income tax recovery and share and warrant issue costs of $1,791,300 for the nine months ended September 30, 2005.

Form 51-102F4 Business Acquisition Report Form 51-102F4 Business Acquisition Report STORNOWAY DIAMOND CORPORATION. (the "Company" or “Stornoway”) ITEM 1 IDENTITY OF COMPANY 1.1

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