Stornoway continues to assess its extensive property portfolio and pursue its principal goal of discovering and developing a commercial diamond deposit.

Form 51-102F1
Annual Management Discussion and Analysis
For
Stornoway Diamond Corporation
(“Stornoway” or the “Company”)
Containing Information up to and including July 6, 2006

OVERALL PERFORMANCE

Stornoway continues to assess its extensive property portfolio and pursue its principal goal of discovering and developing a commercial diamond deposit.

During the year, Stornoway and its partners discovered 29 new kimberlites on three separate projects in eastern Nunavut. This brings the total number of kimberlites discovered to 61. Three new diamondiferous kimberlites were discovered on the Aviat Project, located on the Melville Peninsula, while 17 new kimberlites, seven diamond bearing, were added on the Churchill Project, located near the community of Rankin Inlet. The final eight new kimberlites were discovered from drilling at Wales Island in Committee Bay, two of which were diamondiferous.

While diamond exploration in Canada remains a top priority for the Company, Stornoway is committed to identifying the best opportunities for its shareholders worldwide and recently completed its first exploration program on a prospective 2 million acre land package in Botswana, which was optioned from Motapa Diamonds Inc. in 2005.

The Company’s net loss for the year ended April 30, 2006 (the “Current Year”) of $1.78 million (a loss of $0.02 per share) was significantly less than the loss of $4.18 million ($0.06 loss per share) for the year ended April 30, 2005 (the “Comparative Year”) primarily due to a future income tax recovery of $2.87 million in the Current Year (Comparative Year - $nil). Assets increased from $61.8 million at the end of the Comparative Year to $64.8 million at April 30, 2006. Capitalized resource property costs increased from $29.7 million to $37.6 million at April 30, 2006. The Company’s cash and short-term investments decreased during the Current Year, from $30.4 million to $23.0 million as at April 30, 2006.

Administrative expenses for the Current Year totaled $1.8 million, an overall decrease of $690,000 from the Comparative Year ($2.49 million). Stock-based compensation expense, a non cash item, accounted for approximately 29% (Comparative Year – 42%) of the Company’s total administrative expenses. Resource property write-offs increased in the Current Year to $3.9 million from $2.4 million during the Comparative Year and accounted for about 85% (2005 – 58%) of the Company’s loss before income taxes.

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