---



CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED MAY 31, 2007 AND 2006, AND NINE MONTHS ENDED
FEBRUARY 29, 2008 (Expressed in Canadian Dollars)

---

|ROCKWELL DIAMONDS INC.         
|-------------------------------
|Consolidated Balance Sheets    
|(Expressed in Canadian Dollars)

|                                                            |   | February 29 2008 |   |   | May 31 2007 |  
|----------------------------------------------------------- | - | ---------------- | - | - | ----------- | -
|ASSETS                                                      |   |                  |   |   |             |  
|                                                            |   |                  |   |   |             |  
|Current assets                                              |   |                  |   |   |             |  
|Cash                                                        | $ | 19,623,847       |   | $ | 32,626,376  |  
|Amounts receivable                                          |   | 631,446          |   |   | 1,724,418   |  
|Restricted cash (note 15(a))                                |   | 13,335,124       |   |   | 15,642,120  |  
|Trade receivable from a related party
      (note 11)       |   | 593,434          |   |   | 839,253     |  
|Diamond inventory and supplies (note 5)                     |   | 3,465,853        |   |   | 2,604,684   |  
|Prepaids and deposits                                       |   | 946,858          |   |   | 2,705,721   |  
|                                                            |   | 38,596,562       |   |   | 56,142,572  |  
|                                                            |   |                  |   |   |             |  
|Property, plant and equipment (note 6)                      |   | 64,831,636       |   |   | 44,790,441  |  
|Mineral property interests (note 7)                         |   | 25,247,937       |   |   | 24,121,855  |  
|Other assets and deposits                                   |   | 3,200,112        |   |   | 3,513,449   |  
|Reclamation deposits (note 9)                               |   | 1,816,877        |   |   | 1,038,066   |  
|                                                            |   |                  |   |   |             |  
|                                                            | $ | 133,693,124      |   | $ | 129,606,383 |  
|                                                            |   |                  |   |   |             |  
|LIABILITIES AND SHAREHOLDERS' EQUITY                        |   |                  |   |   |             |  
|                                                            |   |                  |   |   |             |  
|Current liabilities                                         |   |                  |   |   |             |  
|Accounts payable and accrued liabilities                    | $ | 4,420,212        |   | $ | 4,460,922   |  
|Amounts owing pursuant to acquisition
      (note 7)        |   | 294,402          |   |   | 13,842,809  |  
|Due to related parties (note 11)                            |   | 49,604           |   |   | 1,609,301   |  
|Income taxes                                                |   | 890,332          |   |   | 1,677,787   |  
|Current
      portion of capital lease obligations (note 8) |   | 6,847,751        |   |   | 7,808,955   |  
|                                                            |   | 12,502,301       |   |   | 29,399,774  |  
|                                                            |   |                  |   |   |             |  
|Long-term liabilities                                       |   |                  |   |   |             |  
|Capital lease obligations (note 8)                          |   | 7,955,548        |   |   | 9,294,581   |  
|Future income taxes (note 12)                               |   | 12,430,100       |   |   | 11,978,860  |  
|Reclamation
      obligation (note 9)                       |   | 1,755,820        |   |   | 1,361,557   |  
|                                                            |   | 22,141,468       |   |   | 22,634,998  |  
|                                                            |   |                  |   |   |             |  
|Non-controlling interest (note 7)                           |   | 11,934,548       |   |   | 5,978,769   |  
|                                                            |   |                  |   |   |             |  
|Shareholders' equity                                        |   |                  |   |   |             |  
|Share capital (note 10)                                     |   | 112,095,390      |   |   | 88,903,530  |  
|Warrants (note 10(c))                                       |   | 1,693,197        |   |   | 1,693,197   |  
|Contributed surplus                                         |   | 2,332,882        |   |   | 599,749     |  
|Deficit                                                     |   | (29,006,662      | ) |   | (19,603,634 | )
|                                                            |   | 87,114,807       |   |   | 71,592,842  |  
|Nature and continuance of operations (note
      1)         |   |                  |   |   |             |  
|Subsequent events (note 15)                                 |   |                  |   |   |             |  
|Contingencies and commitments ( notes 7 and 14)             |   |                  |   |   |             |  
|                                                            |   |                  |   |   |             |  
|                                                            |   |                  |   |   |             |  
|                                                            | $ | 133,693,124      |   | $ | 129,606,383 |  

The accompanying notes are an integral part of these
consolidated financial statements.

Approved by the Board of Directors

|/s/ Dr. John Bristow              | /s/ Dominique de la Roche        
|--------------------------------- | ---------------------------------
|                                  |                                  
|Dr. John Bristow                  | Dominique de la Roche            
|Director, Chief Executive Officer | Director, Chief Financial Officer

---

|ROCKWELL DIAMONDS INC.                                            
|------------------------------------------------------------------
|Consolidated Statements of Operations and Comprehensive
      Loss
|(Expressed in Canadian Dollars)                                   

|                                                                   |   | Nine months ended |   |   |                    |   |   |            |  
|------------------------------------------------------------------ | - | ----------------- | - | - | ------------------ | - | - | ---------- | -
|                                                                   |   | February 29       |   |   | Years ended May 31 |  
|                                                                   |   | 2008              |   |   | 2007               |   |   | 2006       |  
|                                                                   |   |                   |   |   |                    |   |   |            |  
|Revenue                                                            |   |                   |   |   |                    |   |   |            |  
|Rough diamonds sales (note 11(h))                                  | $ | 35,863,214        |   | $ | 8,117,647          |   | $ |           |  
|Contract diamond sales (note
      11(h))                          |   | 174,892           |   |   | 1,967,889          |   |   |           |  
|Other
      sales                                                  |   | 111,202           |   |   | 17,792             |   |   |           |  
|                                                                   |   | 36,149,308        |   |   | 10,103,328         |   |   |           |  
|Cost of sales                                                      |   |                   |   |   |                    |   |   |            |  
|Cost of rough diamonds sales                                       |   | (22,581,613       | ) |   | (7,206,389         | ) |   |           |  
|Cost of contract diamond sales                                     |   | (148,658          | ) |   | (1,768,353         | ) |   |           |  
|Amortization and depletion                                         |   | (6,533,941        | ) |   | (2,074,415         | ) |   |           |  
|Operating
      profit                                             |   | 6,885,096         |   |   | (945,829           | ) |   |           |  
|                                                                   |   |                   |   |   |                    |   |   |            |  
|Expenses                                                           |   |                   |   |   |                    |   |   |            |  
|Accretion of reclamation
      obligation (note 9)                 |   | 464,316           |   |   | 55,471             |   |   |           |  
|Exploration                                                        |   | 604,169           |   |   | 1,371,351          |   |   | 307,390    |  
|Foreign exchange gain                                              |   | (751,315          | ) |   | (3,580,364         | ) |   | (46,881    | )
|Interest on capital leases                                         |   | 1,289,385         |   |   | 433,125            |   |   |           |  
|Interest expense                                                   |   | 270,976           |   |   | 103,031            |   |   |           |  
|Legal, accounting and audit                                        |   | 790,725           |   |   | 691,759            |   |   | 175,782    |  
|Office and administration                                          |   | 2,697,077         |   |   | 2,993,453          |   |   | 489,014    |  
|Property investigations                                            |   |                  |   |   |                   |   |   | 399,006    |  
|Shareholder communications                                         |   | 198,985           |   |   | 200,574            |   |   | 32,129     |  
|Stock-based compensation - exploration (note
      10(b))          |   | 514,892           |   |   | 41,372             |   |   | 36,415     |  
|Stock-based compensation -
      administration (note 10(b))       |   | 1,311,423         |   |   | 38,251             |   |   | 47,101     |  
|Travel and conferences                                             |   | 654,705           |   |   | 666,194            |   |   | 132,647    |  
|Transfer agent                                                     |   | 544,232           |   |   | 176,530            |   |   | 20,843     |  
|                                                                   |   | 8,589,570         |   |   | 3,190,747          |   |   | 1,593,446  |  
|Other items                                                        |   |                   |   |   |                    |   |   |            |  
|Gain on sale of marketable securities                              |   |                  |   |   |                   |   |   | (56,585    | )
|Write-off of amounts receivable                                    |   | 18,360            |   |   | 224,942            |   |   |           |  
|Loss on disposal of equipment                                      |   | 402,411           |   |   | 94,621             |   |   |           |  
|Interest income                                                    |   | (1,118,396        | ) |   | (372,149           | ) |   | (2,172     | )
|Convertible note accretion expense                                 |   |                  |   |   | 2,363,808          |   |   |           |  
|Loss on early extinguishment
      of convertible promissory notes |   |                  |   |   | 137,957            |   |   |           |  
|Write-down of mineral property interests                           |   |                  |   |   |                   |   |   | 46,856     |  
|Write-down of marketable securities                                |   |                  |   |   | 1                  |   |   | 19,128     |  
|                                                                   |   | (697,625          | ) |   | 2,449,180          |   |   | 7,227      |  
|                                                                   |   |                   |   |   |                    |   |   |            |  
|Loss before income taxes                                           |   | 1,006,849         |   |   | 6,585,756          |   |   | 1,600,673  |  
|Income tax expense (note 12)                                       |   | 179,290           |   |   |                   |   |   |           |  
|Future income tax (recovery) expense (note 12)                     |   | 2,261,110         |   |   | (635,773           | ) |   |           |  
|Loss before non-controlling interest                               |   | 3,447,249         |   |   | 5,949,983          |   |   | 1,600,673  |  
|Non-controlling interest                                           |   | 5,955,779         |   |   | 415,159            |   |   |           |  
|Loss for the period                                                |   | 9,403,028         |   |   | 6,365,142          |   |   | 1,600,673  |  
|                                                                   |   |                   |   |   |                    |   |   |            |  
|Other comprehensive loss                                           |   |                  |   |   |                   |   |   |           |  
|Total
      Comprehensive Loss                                     | $ | 9,403,028         |   | $ | 6,365,142          |   | $ | 1,600,673  |  
|                                                                   |   |                   |   |   |                    |   |   |            |  
|                                                                   |   |                   |   |   |                    |   |   |            |  
|Basic and diluted loss per common share                            | $ | 0.05              |   | $ | 0.11               |   | $ | 0.07       |  
|                                                                   |   |                   |   |   |                    |   |   |            |  
|Weighted average number of                                         |   |                   |   |   |                    |   |   |            |  
|common shares outstanding                                          |   | 196,428,551       |   |   | 55,418,242         |   |   | 23,640,123 |  

The accompanying notes are an integral part of these
consolidated financial statements.

---

|ROCKWELL DIAMONDS INC.                         
|-----------------------------------------------
|Consolidated Statements of Shareholders' Equity
|(Expressed in Canadian Dollars)                

|                                                                                              |  | Nine months ended February 29 |  |   | Year ended May 31 |   |  | Year ended May 31 | 
|--------------------------------------------------------------------------------------------- |  | ----------------------------- |  | - | ----------------- | - |  | ----------------- | 
|                                                                                              |  |                               |  |   | 2008              |   |  |                   | 
|                                                                                              |  |                               |  |   |                   |   |  |                   | 
|                                                                                              |  |                               |  |   |                   |   |  |                   | 
|                                                                                              |  | Number of                     |  |   |                   |   |  | Number of         | 
|Share capital                                                                                 |  | shares                        |  |   |                   |   |  | shares            | 
|Balance at beginning of the period                                                            |  | 186,976,219                   |  | $ | 88,903,530        |   |  | 23,694,776        | 
|Share purchase options
      exercised at $0.32 per share                                     |  |                              |  |   |                  |   |  |                  | 
|Share purchase options exercised at
      $0.40 per share                                     |  | 107,917                       |  |   | 43,167            |   |  | 9,167             | 
|Share purchase options
      exercised at $0.42 per share                                     |  | 145,000                       |  |   | 60,900            |   |  |                  | 
|Private placement November 2006, net of
      issue costs at $0.47 per share                  |  |                              |  |   | 4,160             |   |  | 42,000,000        | 
|Private placement May
      2007, net of issue costs at $0.47 per share                       |  |                              |  |   |                  |   |  | 116,007,154       | 
|Private placement January 2008, net of
      issue costs at $0.60 per share                   |  | 24,101,526                    |  |   | 13,860,916        |   |  |                  | 
|Interest consideration
      for convertible promissory at $0.60 per share notes              |  |                              |  |   |                  |   |  | 1,734,127         | 
|Interest consideration for credit
      facility at $0.61 per share                           |  |                              |  |   |                  |   |  | 1,939,562         | 
|Interest consideration
      for loan at $0.55 per share                                      |  |                              |  |   |                  |   |  | 497,993           | 
|Commission consideration for private
      placement at $0.52 per share                       |  |                              |  |   |                  |   |  | 1,093,440         | 
|Commission
      consideration for private placement at $0.60 per share                       |  | 500,000                       |  |   | 300,000           |   |  |                  | 
|Warrants exercised at $0.40 per share                                                         |  |                              |  |   |                  |   |  |                  | 
|Warrants exercised at
      $0.60 per share                                                   |  | 2,400,000                     |  |   | 1,440,000         |   |  |                  | 
|Consideration for acquisition of
      property net of issue cost at $0.78 per share (note 7) |  | 7,848,663                     |  |   | 6,081,842         |   |  |                  | 
|Consideration for
      property finders fees at $0.78 per share (note 7)                     |  | 1,676,529                     |  |   | 1,307,693         |   |  |                  | 
|Fair value of stock options allocated to shares issued on exercise                            |  |                              |  |   | 93,182            |   |  |                  | 
|Balance at end of the period                                                                  |  | 223,755,854                   |  | $ | 112,095,390       |   |  | 186,976,219       | 
|                                                                                              |  |                               |  |   |                   |   |  |                   | 
|Warrants                                                                                      |  |                               |  |   |                   |   |  |                   | 
|Broker warrants issued as consideration for private placement                                 |  |                               |  |   | 1,693,197         |   |  |                   | 
|                                                                                              |  |                               |  | $ | 1,693,197         |   |  |                   | 
|                                                                                              |  |                               |  |   |                   |   |  |                   | 
|Contibuted surplus                                                                            |  |                               |  |   |                   |   |  |                   | 
|Balance at beginning of the period                                                            |  |                               |  |   | 599,749           |   |  |                   | 
|Stock-based
      compensation (note 10(b))                                                   |  |                               |  |   | 1,826,315         |   |  |                   | 
|Fair value of stock options allocated to shares issued on exercise                            |  |                               |  |   | (93,182           | ) |  |                   | 
|Balance at end of the period                                                                  |  |                               |  | $ | 2,332,882         |   |  |                   | 
|                                                                                              |  |                               |  |   |                   |   |  |                   | 
|Deficit                                                                                       |  |                               |  |   |                   |   |  |                   | 
|Balance at beginning of the period                                                            |  |                               |  |   | (19,603,634       | ) |  |                   | 
|Loss for the period                                                                           |  |                               |  |   | (9,403,028        | ) |  |                   | 
|Balance at
      end of the period                                                            |  |                               |  | $ | (29,006,662       | ) |  |                   | 
|                                                                                              |  |                               |  |   |                   |   |  |                   | 
|                                                                                              |  |                               |  |   |                   |   |  |                   | 
|TOTAL SHAREHOLDERS' EQUITY                                                                    |  |                               |  | $ | 87,114,807        |   |  |                   | 

The accompanying notes are an integral part of these
consolidated financial statements.

---

|ROCKWELL DIAMONDS INC.               
|-------------------------------------
|Consolidated Statements of Cash Flows
|(Expressed in Canadian Dollars)      

|                                                                                           |   | Nine
      months ended |   |   |                    |   |   |            |  
|------------------------------------------------------------------------------------------ | - | ----------------------- | - | - | ------------------ | - | - | ---------- | -
|                                                                                           |   | February 29             |   |   | Years ended May 31 |  
|Cash provided
      by (applied to):                                                       |   | 2008                    |   |   | 2007               |   |   | 2006       |  
|                                                                                           |   |                         |   |   |                    |   |   |            |  
|Operating activities                                                                       |   |                         |   |   |                    |   |   |            |  
|Loss for the period                                                                        | $ | (9,403,028              | ) | $ | (6,365,142         | ) | $ | (1,600,673 | )
|Items not affecting cash                                                                   |   |                         |   |   |                    |   |   |            |  
|Accretion of reclamation obligation                                                        |   | 464,316                 |   |   | 55,471             |   |   |           |  
|Amortization and
      depletion                                                           |   | 4,460,323               |   |   | 1,196,682          |   |   |           |  
|Amortization of capital lease equipment                                                    |   | 2,073,618               |   |   | 877,733            |   |   |           |  
|Gain on sale of
      marketable securities                                                |   |                        |   |   |                   |   |   | (56,585    | )
|Write-off of amounts receivable                                                            |   | 18,360                  |   |   | 224,942            |   |   |           |  
|Write-down of
      marketable securities                                                  |   |                        |   |   | 1                  |   |   | 19,128     |  
|Write-down of mineral property
      interests                                             |   |                        |   |   |                   |   |   | 46,856     |  
|Loss on early
      extinguishment of convertible promissory note                          |   |                        |   |   | 137,957            |   |   |           |  
|Non cash convertible note accretion and
      interest expense                             |   |                        |   |   | 2,363,808          |   |   |           |  
|Stock-based
      compensation (note 10(b))                                                |   | 1,826,315               |   |   | 79,623             |   |   | 83,516     |  
|Unrealized foreign exchange gain                                                           |   | (2,967,105              | ) |   | (3,320,085         | ) |   |           |  
|Loss on disposal of
      equipment                                                        |   | 402,411                 |   |   | 94,621             |   |   |           |  
|Future income tax (recovery) expense
      (note 12)                                       |   | 2,261,110               |   |   | (635,773           | ) |   |           |  
|Provision for site
      reclamation                                                       |   | 230,622                 |   |   | (474,024           | ) |   |           |  
|Non-controlling interest                                                                   |   | 5,955,779               |   |   | 415,159            |   |   |           |  
|Changes in non-cash working capital
      items                                            |   |                         |   |   |                    |   |   |            |  
|Accounts receivable                                                                        |   | 1,074,612               |   |   | (920,522           | ) |   | (23,244    | )
|Amounts due to and from
      related parties                                              |   | 245,819                 |   |   | 6,074,609          |   |   |           |  
|Inventory                                                                                  |   | (861,169                | ) |   | (508,110           | ) |   |           |  
|Prepaids and deposits                                                                      |   | 1,758,863               |   |   | (2,672,073         | ) |   |           |  
|Accounts payable and accrued
      liabilities                                             |   | (40,710                 | ) |   | (3,485,300         | ) |   | 137,624    |  
|Income taxes                                                                               |   | (787,455                | ) |   | (872,950           | ) |   |           |  
|Cash provided by
      (used in) operating activities                                      |   | 6,712,681               |   |   | (7,733,373         | ) |   | (1,393,378 | )
|                                                                                           |   |                         |   |   |                    |   |   |            |  
|Investing activities                                                                       |   |                         |   |   |                    |   |   |            |  
|Acquisition of Durnpike Investments
      (Pty) Limited, net of cash acquired (note 7 (a)) |   |                        |   |   | (8,293,413         | ) |   |           |  
|Overdraft assumed on acquisition of Durnpike
      Investments, net                        |   |                        |   |   | (1,201,297         | ) |   |           |  
|Restricted cash (note 15(a))                                                               |   |                        |   |   | (15,642,120        | ) |   |           |  
|Proceeds received on sale of marketable securities                                         |   |                        |   |   |                   |   |   | 146,970    |  
|Mineral property acquisitions                                                              |   | 600,661                 |   |   | (527,328           | ) |   |           |  
|Purchase of equipment                                                                      |   | (21,603,785             | ) |   | (6,453,942         | ) |   |           |  
|Proceeds received on disposal of
      equipment                                           |   | 1,034,620               |   |   | 263,010            |   |   |           |  
|Other assets and deposits                                                                  |   | 313,337                 |   |   | (3,481,259         | ) |   |           |  
|Reclamation deposits                                                                       |   | (778,811                | ) |   | (63,760            | ) |   |           |  
|Cash provided by
      (used in) investing activities                                      |   | (20,433,978             | ) |   | (35,400,109        | ) |   | 146,970    |  
|                                                                                           |   |                         |   |   |                    |   |   |            |  
|                                                                                           |   |                         |   |   |                    |   |   |            |  
|Financing activities                                                                       |   |                         |   |   |                    |   |   |            |  
|Principal repayments under capital lease obligations                                       |   | (5,964,113              | ) |   | (2,678,965         | ) |   |           |  
|Common shares and warrants issued for
      cash, net of issue costs                       |   | 15,709,143              |   |   | 76,234,018         |   |   | 30,133     |  
|Amounts received (paid) to related parties                                                 |   | (1,559,697              | ) |   | (872,735           | ) |   | 1,055,629  |  
|Amounts paid pursuant to property
      acquisition                                        |   | (7,466,565              | ) |   | 2,885,509          |   |   |           |  
|Repayment of credit facility                                                               |   |                        |   |   | (11,000,000        | ) |   |           |  
|Credit facility                                                                            |   |                        |   |   | 11,000,000         |   |   |           |  
|Repayment of convertible promissory notes                                                  |   |                        |   |   | (9,500,000         | ) |   |           |  
|Issuance of convertible promissory
      notes                                             |   |                        |   |   | 9,500,000          |   |   |           |  
|Repayment of loans payable to related parties                                              |   |                        |   |   | (12,474,500        | ) |   |           |  
|Loans payable to related parties                                                           |   |                        |   |   | 12,474,500         |   |   |           |  
|Cash provided by
      financing activities                                                |   | 718,768                 |   |   | 75,567,827         |   |   | 1,085,762  |  
|                                                                                           |   |                         |   |   |                    |   |   |            |  
|                                                                                           |   |                         |   |   |                    |   |   |            |  
|Increase (decrease) in cash during the
      period                                        |   | (13,002,529             | ) |   | 32,434,345         |   |   | (160,646   | )
|                                                                                           |   |                         |   |   |                    |   |   |            |  
|Cash, beginning of period                                                                  |   | 32,626,376              |   |   | 192,031            |   |   | 352,677    |  
|                                                                                           |   |                         |   |   |                    |   |   |            |  
|Cash, end of period                                                                        | $ | 19,623,847              |   | $ | 32,626,376         |   | $ | 192,031    |  
|                                                                                           |   |                         |   |   |                    |   |   |            |  
|                                                                                           |   |                         |   |   |                    |   |   |            |  
|Interest paid during the period                                                            | $ |                        |   | $ | 103,031            |   | $ |           |  
|Interest received                                                                          | $ | 1,118,396               |   | $ | 372,149            |   | $ |           |  
|Income taxes paid during the period                                                        | $ | 787,455                 |   | $ | 872,950            |   | $ |           |  
|                                                                                           |   |                         |   |   |                    |   |   |            |  
|Supplemental disclosure of non-cash investing and
      financing activities:              |   |                         |   |   |                    |   |   |            |  
|Issuance of warrants - consideration
      for private placement                           | $ |                        |   | $ | 1,693,197          |   | $ |           |  
|Issuance of common shares - consideration for private
      placement                      | $ | 300,000                 |   | $ | 568,588            |   | $ |           |  
|Issuance of common shares - interest
      on convertible promissory notes                 | $ |                        |   | $ | 1,045,000          |   | $ |           |  
|Issuance of common shares - interest on credit
      facility                              | $ |                        |   | $ | 1,456,764          |   | $ |           |  
|Issuance of commons shares as
      consideration for acquisition of property (note 7)     | $ | 6,081,842               |   | $ |                   |   | $ |           |  
|Issuance of common shares as consideration for
      property finders fees (note 7)        | $ | 1,307,693               |   | $ |                   |   | $ |           |  
|Fair value of stock options allocated
      to shares issued upon exercise                 | $ | 93,182                  |   | $ | 3,295              |   | $ | 11,724     |  
|Equipment
      acquired under capital lease (note 6)                                      | $ | 6,408,382               |   | $ | 7,316,459          |   | $ |           |  

The accompanying notes are an integral part of these
consolidated financial statements.

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

|1.  | NATURE AND CONTINUANCE OF OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Rockwell Diamonds Inc. (the Company)
        is incorporated under the British Columbia BusinessCorporations
        Act(formerly the Company Actof British Columbia), and is
        engaged in the business of diamond production, and the acquiring and exploring
        natural resource properties. The Companys principal mineral property
        interests are located in South Africa.                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | These consolidated financial
        statements are prepared in accordance with Canadian generally accepted
        accounting principles. In December 2007, the Companys Board of Directors
        approved a resolution to change the Companys year end from May 31,
        2008 to February 29, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | During the year, the Company
        listed with the Toronto Stock Exchange (TSX) and also had
        a listing on the Johannesburg Stock Exchange (JSE).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The Company has estimated that
        it will have adequate funds from existing working capital to meet its
        corporate, operational, development, administrative and property obligations
        for the coming year. The Company will periodically need to obtain additional
        financing, and while it has been successful in the past, there can be
        no assurance that it will be able to do so in the future.                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The recoverability of the amounts
        shown for the Companys mineral property interests, property, plant
        and equipment and inventory is dependent upon the existence of economically
        recoverable mineral resources and future profitable production or proceeds
        from the disposition of the mine. The Companys continuing operations
        are also dependent upon the discovery and existence of economically recoverable
        mineral reserves, the ability of the Company to obtain the necessary financing
        to complete the exploration and development of its mineral property interests,
        and upon future profitable production or proceeds from the disposition
        of its mineral property interests.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | These consolidated financial
        statements do not include adjustments to amounts and classifications of
        assets and liabilities that might be necessary should the Company be unable
        to continue operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|2.  | BASIS OF PRESENTATION AND
        PRINCIPLES OF CONSOLIDATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | These consolidated financial
        statements have been prepared in accordance with Canadian generally accepted
        accounting principles. These consolidated financial statements include
        the accounts of the Company and its wholly-owned subsidiaries. All significant
        intercompany balances and transactions have been eliminated upon consolidation.
        Certain comparative information has been reclassified to conform to the
        presentation adopted in the current period.                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|3.  | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(a) | Cash and equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Cash and equivalents consist
        of cash and highly liquid investments, having maturity dates of three
        months or less from the date of purchase, that are readily convertible
        to known amounts of cash and which are subject to an insignificant risk
        of change in value. At February 29, 2008, of the                                                                                                                                                                                                                                                                                                                                                                                                                                

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

|    | $19,623,847 (May 31, 2007 - $32,626,376) cash and equivalents
        held by the Company, $15,698,068 (ZAR 124,095,041) were held in South
        African Rand (ZAR), $35,772 ($16,553,541) were held in Chilean
        Pesos and $9,974 ($10,036) in US Dollars.                                                                                                     
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                            
|(b) | Revenue recognition                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                            
|    | Revenue from rough diamond sales is recognized when
        persuasive evidence of an arrangement exists, delivery has occurred, the
        Companys price to the customer is fixed or determinable and collection
        of the resulting receivable is reasonably assured.                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                            
|(c) | Trade accounts receivables                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                            
|    | Trade accounts receivables are recorded at the invoiced
        amount less an estimate made for doubtful accounts based on a review of
        all outstanding amounts on a quarterly basis. Account balances are charged
        off against the allowance after all means of collection have been exhausted
        and the potential for recovery is considered remote.
|    |                                                                                                                                                                                                                                                                                                                                                                            
|(d) | Inventory                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                            
|    | Rough diamond inventory is recorded at the lower of
        production cost and net realizable value. Production costs include the
        cost of consumable materials, direct labour, mine-site overhead expenses
        and amortization.                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                            
|    | Supplies inventory is valued at the lower of average
        cost and replacement cost.                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                            
|(e) | Plant and equipment                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                            
|    | Plant and equipment are stated at cost less accumulated
        amortization. Assets are amortized on a straight-line method over the
        estimated useful lives of the related assets, which are as follows:                                                                                                                                                          

| | Processing plant and equipment | 4  10 years
| | ------------------------------ | ------------
| | Office equipment               | 6 years     
| | Vehicles and light equipment   | 5 years     

Repairs and maintenance expenditures
  are charged to operations as incurred. Significant improvements and major replacements
  which extend the useful life of the asset are capitalized as incurred.

|(f) | Reclamation and security deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | Reclamation and security deposits are recorded at cost.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(g) | Mineral property interests                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | The acquisition costs of mineral properties are capitalized
        until the property is placed into production, sold, or abandoned, or when
        management has determined that there has been an impairment in value.
        Such acquisition costs are amortized over the estimated life of the property,
        based on the unit of production method, or written off to operations if
        the property is abandoned, allowed to lapse, or if there is little prospect
        of further work being carried out by the Company.

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

|    | Mineral property acquisition costs include the cash
        consideration and the fair market value of common shares, based on the
        trading price of the shares, on the date of issue or as otherwise provided
        under the agreed terms for the mineral property interest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Exploration costs and option payments are expensed in
        the period incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Administrative expenditures are expensed in the period
        incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The amount presented for mineral property interests
        represents costs incurred to date and accumulated acquisition costs, less
        write-downs, and does not necessarily reflect present or future values.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(h) | Financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The Company's financial instruments consist of cash,
        restricted cash, amounts receivable, trade receivables from a related
        party, reclamation deposit, accounts payable and accrued liabilities,
        capital lease obligations, amounts owing pursuant to acquisition and balances
        payable to related parties. It is management's opinion the Company is
        not exposed to significant interest, currency or credit risk arising from
        these financial instruments. The fair values of these financial instruments
        approximate their carrying values, unless otherwise noted.                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(i) | Site closure and reclamation obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The Company accounts for site closure and reclamation
        costs in accordance with Canadian Institute of Chartered Accountants (CICA)
        Handbook Section 3110, Asset Retirement Obligations(HB
        3110). HB 3110 requires the recognition of any statutory, contractual
        or other legal obligation related to the retirement of tangible long-lived
        assets when such obligations are incurred, if a reasonable estimate of
        fair value can be made.                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | These obligations are measured initially at fair value
        and the resulting costs are capitalized to the carrying value of the related
        asset. In subsequent periods, the liability is adjusted for the accretion
        of the discount and any changes in the amount or timing of the underlying
        future cash flows. The asset retirement cost is amortized to operations
        over the life of the asset. Changes resulting from revisions to the timing
        or the amount of the original estimate of undiscounted cash flows are
        recognized as an increase or a decrease in the carrying amount of the
        liability, and the related asset retirement cost is capitalized as part
        of the carrying amount of the related long-lived asset.                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(j) | Impairment of long-lived assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Long-lived assets, including mineral properties, plant
        and equipment, are reviewed for impairment whenever events or changes
        in circumstances indicate that the carrying value of an asset may not
        be recoverable. Recoverability of assets to be held and used is measured
        by a comparison of the carrying amount of an asset to estimated undiscounted
        future cash flows expected to be generated by the asset. If the carrying
        amount of an asset exceeds its estimated future cash flows, an impairment
        charge is recognized by the amount by which the carrying amount of the
        asset exceeds the fair value of the asset. Assets to be disposed of would
        be separately presented in the balance sheet and reported at the lower
        of the carrying amount and the fair value less costs to sell, and are
        no longer amortized.

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

|(k) | Foreign currency translation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | All of the Companys foreign operations are considered
        integrated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | Monetary assets and liabilities of the Company and its
        integrated foreign operations are translated into Canadian dollars at
        exchange rates in effect at the balance sheet date. Non-monetary assets
        and liabilities are translated at historical exchange rates unless such
        items are carried at market, in which case they are translated at the
        exchange rates in effect on the balance sheet date. Revenues, cost of
        sales and expenses, except amortization, are translated at the average
        exchange rates for the period. Amortization is translated at the same
        exchange rate as the assets to which it relates. Gains or losses on translation
        are recorded in the statement of operations.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(l) | Share capital                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | Common shares issued for mineral property interests
        are recorded at their fair market value based upon the trading price of
        the shares on the Toronto Stock Exchange (TSX) on the date
        of issue or as otherwise provided under the terms of the agreement to
        issue the shares. Share issue costs are deducted from share capital.                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(m) | Stock-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | The Company has a share option plan which is described
        in note 10(b). The Company records all stock-based payments granted using
        the fair value method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | Under the fair value method, stock-based payments are
        measured at the fair value of the consideration received or the fair value
        of the equity instruments issued, whichever is more reliably measurable,
        and are charged to operations over the vesting period, with an offsetting
        amount to contributed surplus. Consideration received on the exercise
        of stock options is recorded as share capital and the related contributed
        surplus is transferred to share capital.                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(n) | Income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | The Company uses the asset and liability method of accounting
        for income taxes. Under this method, future income tax assets and liabilities
        are computed based on differences between the carrying amount of assets
        and liabilities on the balance sheet and their corresponding tax values,
        generally using the enacted or substantively enacted income tax rates
        expected to apply to taxable income in the years in which those temporary
        differences are expected to be recovered or settled.                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | Future tax assets are recognized to the extent that
        they are considered more likely than not to be realized. The valuation
        of future income tax assets is adjusted, if necessary, by the use of a
        valuation allowance to reflect the estimated realizable amount.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(o) | Loss per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | Basic income (loss) per share is calculated by dividing
        the loss for the period by the weighted average number of common shares
        outstanding during the period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | Diluted income (loss) per share is calculated using
        the treasury stock method. Under the treasury stock method, the weighted
        average number of common shares outstanding used for the calculation of
        diluted income (loss) per share assumes that the proceeds receivable upon
        exercise                                                                                                                                                                                                                                                                                                                                                                                                                                                   

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

|    | of dilutive share purchase options and warrants are
        used to repurchase common shares at the average market price during the
        period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Diluted loss per share has not been presented separately
        as the effect of outstanding options and warrants would be anti-dilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(p) | Use of estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The preparation of consolidated financial statements
        in conformity with Canadian generally accepted accounting principles requires
        management to make estimates and assumptions that affect the reported
        amounts of assets and liabilities and the disclosure of contingent assets
        and liabilities as at the balance sheet date, and the reported amounts
        of revenues and expenses during the reporting period. Significant areas
        requiring the use of management estimates relate to the impairment of
        mineral property interests, determination of reclamation obligations and
        the assumptions used in determining stock-based compensation expense.
        Actual results could differ from those estimates.

|4.  | CHANGES IN ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                         
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                        
|(a) | Newly Adopted Accounting
      Policies                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                        
|    | Effective June 1, 2007,
      the Company adopted the following new accounting standards issued by the
      Canadian Institute of Chartered Accountants (CICA) relating
      to financial instruments. These new standards have been adopted on a prospective
      basis with no restatement to prior period financial statements.
|    |                                                                                                                                                                                                                                                                                                                                        
|    | (i)                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                        

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

| | o                                                                                                                                                                                                                                                                                                                                                                             | Held-to-maturity investments, loans and receivables, and
        other financial liabilities are initially measured at fair value and subsequently
        measured at amortized cost. Amortization of premiums or discounts and
        losses due to impairment are included in current period net earnings.                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | o                                                                                                                                                                                                                                                                                                                                                                             | Available-for-sale financial assets are measured at fair
        value. Changes in fair value are included in other comprehensive income
        until the gain or loss is recognized in income.                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | o                                                                                                                                                                                                                                                                                                                                                                             | Held for trading financial instruments are measured at
        fair value. All gains and losses are included in net earnings in the period
        in which they arise.                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | o                                                                                                                                                                                                                                                                                                                                                                             | All derivative financial instruments are measured at fair
        value, even when they are part of a hedging relationship. Changes in fair
        value are included in net earnings in the period in which they arise,
        except for hedge transactions which qualify for hedge accounting treatment
        in which case gains and closes are recognized in other comprehensive income.                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | On adoption of the standards on June 1, 2007, the Companys
        outstanding financial assets and liabilities were recognized and measured
        in accordance with the new requirements as if these requirements had always
        been in effect. However, no adjustments to opening deficit or opening
        accumulated other comprehensive income were required.
| |                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | In accordance with this new standard, the Company has classified
        its financial instruments as follows:                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | o                                                                                                                                                                                                                                                                                                                                                                             | Cash and restricted cash are classified as held for trading
        financial; instruments and are measured at fair value due to their short
        term nature and availability for prompt liquidation.                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | o                                                                                                                                                                                                                                                                                                                                                                             | Amounts receivables and trades receivable from a related
        party are classified as loans and receivables and are measured initially
        at fair value and subsequently measured at amortized cost.                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | o                                                                                                                                                                                                                                                                                                                                                                             | Accounts payable and accrued liabilities, amounts owing
        pursuant to acquisition and balances payable to related parties are classified
        as other financial liabilities and are measured initially at fair value
        and subsequently measured at amortized cost.                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | o                                                                                                                                                                                                                                                                                                                                                                             | Reclamation deposits invested in interest bearing money
        market linked investments are classified as available-for-sale securities
        and are carried at fair market value, with the unrealized gain or loss
        recorded in shareholders equity as a component of other comprehensive
        income. During the period there were no unrealized gains or losses relating
        the reclamation deposits as the carrying amounts approximate the fair
        value. Previously, reclamation deposits were carried at cost, less provision
        for other than a temporary decline in value.

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

|    | (ii)                                | Section 3865  Hedges.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ----------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                     | This new standard specifies the circumstances under
        which hedge accounting is permissible and how hedge accounting may be
        performed. The Company currently does not have any financial instruments
        which qualify for hedge accounting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | (iii)                               | Section 1530  Comprehensive Income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                     | Comprehensive income is the change in the Companys
        shareholder equity that results from transactions and other events from
        other than the Companys shareholders and includes items that would
        not normally be included in net earnings, such as unrealized gains or
        losses on available-for-sale investments. This standard requires certain
        gains and losses that would otherwise be recorded as part of net earnings
        to be presented in other comprehensive income until it is
        considered appropriate to recognize into net earnings. This standard requires
        the presentation of comprehensive income, and its components in a separate
        financial statement that is displayed with the same prominence as the
        other financial statements. Accumulated other comprehensive income is
        presented as a new category in shareholders equity. As at February
        29, 2008, the Company had no accumulated other comprehensive income and
        for the period, comprehensive income (loss) equals net loss.
|    |                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | (iv)                                | Section 1506 - Accounting Changes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                     | This standard establishes criteria for changing accounting
        policies, together with the accounting treatment and disclosure of changes
        in accounting policies, changes in accounting estimates and correction
        of errors. As a result, changes in accounting policies are only permitted
        when required by a primary source of generally accepted accounting principles
        or when the change will result in more reliable and more relevant information.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(b) | Accounting Policies Not Yet Adopted
|    |                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | (i)                                 | Section 1535  Capital Disclosures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                     | This standard requires disclosure of an entity's objectives,
        policies and processes for managing capital, quantitative data about what
        the entity regards as capital and whether the entity has complied with
        any capital requirements and, if it has not complied, the consequences
        of such non-compliance. This standard is effective for the Company for
        interim and annual periods relating to fiscal years beginning on or after
        January 1, 2008, The Company is currently evaluating the effects of adopting
        this standard.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | (ii)                                | Financial Instruments  Disclosure (Section
        3862) and Presentation (Section 3863)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                     | These standards replace CICA 3861, Financial Instruments
         Disclosure and Presentation. They increase the disclosures currently
        required, which will enable users to evaluate the significance of financial
        instruments for an entity's financial position and performance, including
        disclosures about fair value. In addition, disclosure is required of qualitative
        and quantitative information about exposure to risks arising from financial
        instruments, including specified minimum disclosures about credit risk,
        liquidity risk and market risk. The quantitative disclosures must provide
        information about the extent to which the entity is exposed to risk, based
        on information provided internally to the entitys key                                                                                                                                                                                                                                                                                            

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

| |       | management personnel. This standard is effective for
        the Company for interim and annual periods beginning on or after January
        1, 2008. The Company expects that its disclosures will be expanded to
        incorporate the additional requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | (iii) | Amendments to Section 1400  Going Concern                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |       | CICA 1400, General Standards of Financial Statement
        Presentation, was amended to include requirements to assess and disclose
        an entity's ability to continue as a going concern. The new requirements
        are effective for interim and annual financial statements relating to
        fiscal years beginning on or after January 1, 2008. The Company is currently
        evaluating the impact of this new standard.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | (iv)  | International Financial Reporting Standards ("IFRS")                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |       | In 2006, the Canadian Accounting Standards Board ("AcSB")
        published a new strategic plan that will significantly affect financial
        reporting requirements for Canadian companies. The AcSB strategic plan
        outlines the convergence of Canadian GAAP with IFRS over an expected five
        year transitional period. In February 2008, the AcSB announced that 2011
        is the changeover date for publicly-listed companies to use IFRS, replacing
        Canada's own GAAP. The date is for interim and annual financial statements
        relating to fiscal years beginning on or after January 1, 2011. The transition
        date of January 1, 2011 will require the restatement for comparative purposes
        of amounts reported by the Company for the year ended December 31, 2010.
        While the Company has begun assessing the adoption of IFRS for 2011, the
        financial reporting impact of the transition to IFRS cannot be reasonably
        estimated at this time.

|5. | DIAMOND INVENTORY AND SUPPLIES
|-- | ------------------------------

| |                              |   | As at             |  |   | As at        | 
| | ---------------------------- | - | ----------------- |  | - | ------------ | 
| |                              |   | February 29, 2008 |  |   | May 31, 2007 | 
| | Rough diamond inventory      | $ | 830,780           |  | $ | 644,459      | 
| | Work in progress             |   | 433,074           |  |   |             | 
| | Mine supplies                |   | 1,990,699         |  |   | 1,741,412    | 
| | Fuel, oil and grease         |   | 211,300           |  |   | 218,813      | 
| | Total inventory and supplies | $ | 3,465,853         |  | $ | 2,604,684    | 

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

|6. | PROPERTY, PLANT AND EQUIPMENT
|-- | -----------------------------

| |                                                          |   | As at February 29, 2008 | 
| | -------------------------------------------------------- | - | ----------------------- | 
| |                                                          |   |                         | 
| |                                                          |   | Cost                    | 
| | Land                                                     | $ | 3,936,092               | 
| | Processing plant and equipment                           |   | 35,421,362              | 
| | Processing plant and equipment under capital
      lease |   | 27,850,217              | 
| | Office equipment                                         |   | 815,209                 | 
| | Vehicles and light equipment                             |   | 1,389,566               | 
| | Vehicles and light
      equipment under capital lease   |   | 154,323                 | 
| |                                                          | $ | 69,566,769              | 

| |                                                          |   | As at May 31, 2007 | 
| | -------------------------------------------------------- | - | ------------------ | 
| |                                                          |   |                    | 
| |                                                          |   | Cost               | 
| | Land                                                     | $ | 3,086,948          | 
| | Processing plant and equipment                           |   | 17,044,142         | 
| | Processing plant and equipment under capital
      lease |   | 24,686,561         | 
| | Office equipment                                         |   | 299,072            | 
| | Vehicles and light equipment                             |   | 1,065,396          | 
| | Vehicles and light
      equipment under capital lease   |   | 158,795            | 
| |                                                          | $ | 46,340,914         | 

|7. | MINERAL PROPERTY INTERESTS
|-- | --------------------------

| |                                                          |   | Nine
      months ended |   |   | Year
      ended |  
| | -------------------------------------------------------- | - | ----------------------- | - | - | ---------------- | -
| | Acquisition Costs                                        |   | February 29, 2008       |   |   | May 31, 2007     |  
| | Durnpike Investments (Pty) Limited                       |   |                         |   |   |                  |  
| | Balance, beginning of period                             | $ | 24,121,854              |   | $ |                 |  
| | Acquisition costs                                        |   | 1,822,138               |   |   | 18,696,487       |  
| | Financial, legal, advisory, and other fees               |   | 4,216                   |   |   | 527,328          |  
| | Site closure and reclamation
      obligation recognized |   | 230,622                 |   |   |                 |  
| | Future income tax liability                              |   | 419,050                 |   |   | 5,421,981        |  
| | Depletion of mineral properties during
      the period  |   | (1,349,944              | ) |   | (523,942         | )
| | Durnpike Investments (Pty) Limited, end of period        |   | 25,247,936              |   |   | 24,121,854       |  
| | Ricardo Property                                         |   | 1                       |   |   | 1                |  
| | Balance, end of
      period                             | $ | 25,247,937              |   | $ | 24,121,855       |  

Title to mining properties involves certain
  inherent risks due to the difficulties in determining the validity of certain
  claims as well as the potential for problems arising from the often complicated
  conveyancing history characteristic of many mining properties. The Company does
  not have title insurance but has investigated title to its Ricardo mineral property
  and, to the best of its knowledge and belief, title to its property is in good
  standing.

|(a) | Acquisition of Durnpike Investments (Pty) Limited                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                           
|    | On June 30, 2006, the Company entered into an Agreement-in-Principle
        to acquire interests and/or rights in four alluvial diamond properties
        in South Africa and the Democratic Republic of

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

| | Congo. These four
        properties include the Holpan/Klipdam Property in South Africa, Wouterspan
        Property in South Africa, Kwango River Project in the Democratic Republic
        of Congo and Galputs Minerale Project in South Africa.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Subsequently, pursuant
        to the terms of the Definitive Agreement, the Company acquired all of
        the shares and loans in Durnpike, a private South African company, from
        eight vendors (the Vendors) for consideration set forth below,
        payable in common shares of the Company (Common Shares) related
        to the closing price of the Common Shares on the TSX Venture Exchange
        on the specified dates described below. Durnpike holds an interest in
        respect of and/or rights in the four alluvial diamond properties.                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | The Holpan/Klipdam
        Property and the Wouterspan Property were indirectly owned by the H.C.
        Van Wyk Diamante Trust (Van Wyk Trust), a business trust registered
        in South Africa. The Van Wyk Trust held 99% of HC Van Wyk Diamonds Ltd
        (HCVW), a private South African company, and 99% of Klipdam
        Mining Company Limited (Klipdam), a private South African
        company. The remaining 1% of HCVW and Klipdam was owned by nominees of
        the Van Wyk Trust. HCVW and Klipdam, and were collectively referred to
        as The Van Wyk Diamond Group of companies (VWDG).                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | On July 7, 2006, Durnpike
        completed the acquisition of an initial 49% of the issued and outstanding
        shares of HCVW and 51% of the issued and outstanding shares of Klipdam
        (the Acquisition Interest) for South African Rand (ZAR)
        50 million ($7.8 million) and agreed to pay an additional ZAR30 million
        ($4.5 million) to the Van Wyk Trust on July 7, 2007. To facilitate Durnpikes
        payment of ZAR50 million to the Van Wyk Trust on July 7, 2006, the Company
        advanced a non-interest bearing loan to Durnpike of ZAR50 million (Cdn$7.8
        million). This loan is secured by a pledge of Durnpikes Acquisition
        Interest. The payment of ZAR30 million was made to the Van Wyk Trust in
        June 2007.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Durnpike had the option
        to increase its shareholding in HCVW to a 51% controlling interest by
        (a) subscribing for additional shares in HCVW for the amount of ZAR1 million
        ($160,000) and (b) introducing a ZAR24 million ($3.9 million) working
        capital loan into VWDG. These conditions were met in January 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | The Company also entered
        into an Exchange Agreement with the Van Wyk Trust to acquire the remaining
        shareholding of VWDG for ZAR60 million ($7.6 million), payable in Common
        Shares. The Exchange Agreement became effective upon Rockwell completing
        its listing of the Companys Common Shares on the JSE. In March 2008,
        subsequent to the nine months ending February 29, 2008, pursuant to the
        Exchange Agreement the Company issued Common Shares to the Van Wyk Trust
        and increased its ownership by 23% to a total of 74% of the VWDG assets.                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Pursuant to the Definitive
        Agreement, the Company:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | o                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

| |                                                                                                                                                                                                                                                                                                                                                                                                                           | the Company only when (and if)
        the feasibility study referred to below has been completed and approved
        by the board of directors of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                           | On November 30, 2007, the Company
        began trading on the Johannesburg Stock Exchange and hence completed its
        JSE listing condition. Consequently, the Company issued 7,848,663 Common
        Shares as settlement of its commitment of ZAR 39.8 million ($6.1 million)
        and also 1,676,529 Common Shares as finder fees relating to the Durnpike
        acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | o                                                                                                                                                                                                                                                                                                                                                                                                                         | will spend US$7 million on a
        feasibility study on the Kwango River Project by August 31, 2007. This
        deadline may be extended to February 29, 2008 at no cost and be further
        extended to December 31, 2008 by payment of US$1 million in Common Shares.
        As it seems highly unlikely that the deadline of February 29, 2008 will
        be met, the Company is currently negotiating an extension to such deadline.If the Company wishes to retain the Kwango River Project following
        completion of the feasibility study, the Company must (i) pay to the Vendors
        an amount equal to 60% of the net present value of the Kwango River Project
        Valuation (as determined in terms of the feasibility study and subject
        to a minimum acquisition cost of US$13 million and a maximum acquisition
        cost of US$26 million), which payment shall be effected by the issuance
        of Common Shares and (ii) commit to incur an additional amount of up to
        US$6 million in expenditures for development of the Kwango River Project
        within 16 months from the date of completion of the feasibility study.
        If the Company does not wish to retain the Kwango River Project following
        completion of the feasibility study, the Definitive Agreement provides
        for
| |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                           | Durnpike being divested of such
        project on certain terms, with the Company nevertheless retaining 100%
        of the shares in Durnpike (and therefore the indirect interests in the
        Holpan/Klipdam, Wouterspan and Galputs properties). In such event, the
        full and final purchase consideration for Durnpike will be limited to
        the ZAR Consideration. Durnpikes interest in the Kwango River Project
        is constituted by an agreement (Midamines Agreement) with
        Midamines SPRL (Midamines), the holder of the exploration
        permit on the Kwango River Project, to act as contractor on behalf of
        Midamines to manage and carry out exploration and mining. Durnpike will
        be entitled to an 80% share of the net revenue from the sale of any diamonds
        produced from the contract area.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                           | Under the Midamines Agreement,
        Durnpike agreed to certain minimum royalty payments being made to Midamines.
        These royalties take the form of a series or recurring annual minimum
        royalty payments of US$1,200,000 per annum (commencing on December 31,
        2007). (As to the enforceability of this commitment in light of developments
        pertaining to the Midamines Agreement, see note 14 (a)). During the third
        quarter of fiscal 2008 the Company paid consideration of $600k to Midamines
        in order to increase the size of the concession.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | All of the Common
        Shares issued to the Vendors pursuant to the acquisition, other than the
        Common Shares issued to extend the feasibility study deadline, will be
        held in escrow for at least nine months from the date of issuance, provided
        that a limited portion of those escrowed Common Shares may be released
        to enable the Vendors to meet certain specified obligations.
| |                                                                                                                                                                                                                                                                                                                                                                                                                          
| | On January 31, 2007,
        all the conditions precedent to implementation of the Acquisition as per
        the Definitive Agreement were fulfilled. The Company also received the
        necessary regulatory approvals in Canada and South Africa. As provided
        for in the Definitive Agreement, the Company executed an agreement in
        relation to the acquisition of control of the mineral rights   

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

relating to the Galputs Minerale Project.
  To date the Company is still awaiting the Department of Minerals and Energys
  (DME) final approval relating to the transfer of the shares of Galputs
  Minerale Project from Virgilia Investments Inc. to the Company.

During the year ended May 31, 2007, a
  black economic empowerment (BEE) group purchased 15% of the VWDG
  from the Van Wyk Trust for an amount of ZAR 22.5 million (Cdn$3.4 million).
  Subsequent to the nine months ending February 29, 2008, the BEE group is in
  the process of increasing its shareholding from 15% to 26% by subscribing for
  an additional 11% shares in the VWDG. This additional 11% will be at a subscription
  price of ZAR17.5 million and the BEE group will also inject ZAR10.5 million
  working capital into the VWDG. The BEE company is African Vanguard Resources
  (Pty) Ltd., the holding company of Richtrau No 136 (Pty) Ltd

The results of acquired operations have
  been included in the consolidated financial statements since January 31, 2007,
  the date of acquisition. The following table summarizes the total purchase consideration
  of the acquired assets:

| |                                                                    |  | Amount      |  |  | Amount     | 
| | ------------------------------------------------------------------ |  | ----------- |  |  | ---------- | 
| |                                                                    |  | (ZAR)       |  |  | ($)        | 
| | Cash advanced to fund Durnpikes acquisition
      of 51% of VWDG  |  | 51,005,000  |  |  | 8,293,413  | 
| | Cash committed to fund Durnpikes acquisition of 51% of
      VWDG |  | 30,000,000  |  |  | 4,878,000  | 
| | Common shares issuable(1)                                          |  | 43,000,000  |  |  | 6,991,800  | 
| | Total purchase consideration                                       |  | 124,005,000 |  |  | 20,163,213 | 

(1)The Company has issued
  consideration in common shares amounting to ZAR39.8 million and the remaining
  ZAR3.2 million consideration will be issuable upon receiving the DMEs
  final approval of the Galputs Minerale Project transfer of shares.

The total acquisition price has been
  allocated to the net assets acquired and liabilities as follows:

| |                                          |  | Amount      |   |  | Amount      |  
| | ---------------------------------------- |  | ----------- | - |  | ----------- | -
| |                                          |  | (ZAR)       |   |  | ($)         |  
| | Cash                                     |  | 593,238     |   |  | 96,460      |  
| | Receivable and current assets            |  | 48,658,813  |   |  | 7,911,923   |  
| | Inventory                                |  | 12,894,060  |   |  | 2,096,574   |  
| | Plant and equipment                      |  | 202,510,108 |   |  | 32,928,144  |  
| | Other assets                             |  | 5,992,042   |   |  | 974,306     |  
| | Mineral property interests               |  | 148,330,065 |   |  | 24,118,469  |  
| | Bank overdraft                           |  | (7,981,287  | ) |  | (1,297,757  | )
| | Accounts payable and accrued liabilities |  | (72,773,215 | ) |  | (11,832,925 | )
| | Capital lease obligations                |  | (84,854,165 | ) |  | (13,797,287 | )
| | Reclamation obligation                   |  | (10,947,787 | ) |  | (1,780,110  | )
| | Future income taxes                      |  | (84,200,330 | ) |  | (13,690,974 | )
| | Non controlling interests                |  | (34,216,542 | ) |  | (5,563,610  | )
| |                                          |  | 124,005,000 |   |  | 20,163,213  |  

The allocation of purchase price is based
  on managements estimates of the fair value of the assets acquired and
  liabilities assumed at the date of acquisition, January 31, 2007.

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

|(b) | Acquisition of Makoenskloof property                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | In conjunction with the acquisition of Durnpike, HCVW
        had an option agreement to acquire the Makoenskloof alluvial diamond project.
        The Makoenskloof property is located on the north bank of the Middle Orange
        River ("MOR"). As a result of the acquisition of HCVW by Durnpike, and
        concurrent acquisition of Durnpike by Rockwell, the Company assumed the
        option to purchase the Makoenskloof property.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | In November 2006, HCVW exercised its option to purchase
        the property and the company that held the mineral rights of the Makoenskloof
        property. HCVW paid ZAR5.4 million ($880,000) in January 2007 for the
        property and mining permits. Pursuant to this option exercise, HCVW also
        entered into a sub-contracting agreement with Folmink Delwery CC to perform
        bulk sampling commencing in March 2007. In April 2007 HCVW entered into
        an agreement to purchase ZAR21.3 million (approximately $3 million) in
        plant and equipment from the sub-contractor and to terminate the sub-contracting
        arrangement. The Company has paid a total consideration of ZAR19 million
        ($2.7 million) and is committed to pay the remaining consideration in
        monthly payments of ZAR500,000 ($63,000). The monthly payments shall incur
        interest calculated at the prime rate of the Standard Bank of South Africa.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | In December 2007, Makoenskloof property was placed on
        care and maintenance in order for management to evaluate the results of
        the bulk sampling activities which had taken place up until the end of
        November 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(c) | Ricardo Property, Chile                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The Company holds a 100% interest in certain mineral
        exploration and exploitation concessions in the Calama Mining District
        in Chile. The Company continues to maintain the Ricardo Property in good
        standing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(d) | Farhom Property, South Africa                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | On July 30, 2007 H.C. Van Wyk Diamonds acquired 100%
        of the shares and shareholder loans of Farhom Mining & Construction
        (Pty) Ltd. for ZAR10 million ($1.5 million). This company holds the mineral
        rights over the Farhom farm property. This transaction was concluded in
        terms of an option granted to HCVW on February 24, 2005 and later amended
        on July 10, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

|8. | CAPITAL LEASE OBLIGATIONS                                                                                                                                        
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                  
|   | Included in property, plant and equipment are mining
        equipment that the Company acquired pursuant to three to four year capital
        lease agreements.
|   |                                                                                                                                                                  
|   | The Companys capital lease obligations are with
        the following financial institutions:                                                                   

| |                  |   | As at             |  |   | As at        | 
| | ---------------- | - | ----------------- |  | - | ------------ | 
| |                  |   | February 29, 2008 |  |   | May 31, 2007 | 
| | Liebherr Finance | $ |                  |  | $ | 131,572      | 
| | ELB Finance      |   | 105,418           |  |   | 175,180      | 
| | Stannic          |   | 2,093,869         |  |   | 3,452,954    | 
| | Wesbank          |   | 319,236           |  |   | 557,153      | 
| | Nedbank          |   | 1,842,519         |  |   | 4,383,372    | 
| | Komatfin         |   | 10,442,257        |  |   | 8,403,305    | 
| |                  | $ | 14,803,299        |  | $ | 17,103,536   | 

Capital lease obligations as detailed
  above are secured over plant and equipment and are repayable in monthly installments.
  Interest is charged at rates linked to the prevailing prime rate of the relative
  financial institution mentioned above.

Future minimum lease payments are as
  follows:

| |                                            |   | As at             |  
| | ------------------------------------------ | - | ----------------- | -
| |                                            |   | February 29, 2008 |  
| | 2009                                       | $ | 8,385,013         |  
| | 2010                                       |   | 6,087,834         |  
| | 2011                                       |   | 2,389,611         |  
| | Total minimum lease payments               |   | 16,862,458        |  
| | Less interest portion                      |   | (2,059,159        | )
| | Present value of capital lease obligations |   | 14,803,299        |  
| | Current portion                            |   | (6,847,751        | )
| | Non-current portion                        | $ | 7,955,548         |  

|9. | RECLAMATION OBLIGATION                                                                                                                                        
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                               
|   | The continuity of the provision for site closure and
        reclamation costs related to the Holpan, Wouterspan and the Klipdam mines
        are as follows:

| |                                                             |   | As at             |   |   | As at              | 
| | ----------------------------------------------------------- | - | ----------------- | - | - | ------------------ | 
| |                                                             |   | February 29, 2008 |   |   | May 31,
      2007 | 
| | Balance, beginning of period                                | $ | 1,361,557         |   | $ |                   | 
| | Changes during the period:                                  |   |                   |   |   |                    | 
| | Site closure and reclamation obligation
      recognized    |   | 230,622           |   |   | 1,306,086          | 
| | Foreign exchange on reclamation                             |   | (300,675          | ) |   |                   | 
| | Accretion expense                                           |   | 464,316           |   |   | 55,471             | 
| |                                                             |   |                   |   |   |                    | 
| | Site closure and reclamation obligations, February 29, 2008 | $ | 1,755,820         |   | $ | 1,361,557          | 

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

The estimated amount of the reclamation
  costs, adjusted for estimated inflation at 9% per year, is $732,688 for the
  Klipdam mine in the year 2011, $1.3 million for the Holpan mine in the year
  2013 and $3.8 million for the Wouterspan mine in the year 2027 and is expected
  to be spent over periods of approximately three years beginning in 2011, 2013
  and 2027. The credit-adjusted risk free rate at which the estimated future cash
  flows have been discounted is 13%, to arrive at a net present value of $1,755,820.
  The accretion of $464,316 (2007  $55,471) is charged to the statement
  of operations. During the period the Company revised the site closure and reclamation
  obligation.

As required by regulatory authorities,
  at February 29, 2008, the Company had cash reclamation deposits totaling $1,816,877
  (2007  $ 1,038,066) comprised of $1,657,489 (2007  $ 878,678) for
  the Holpan and Wouterspan mines and $159,388 (2007  $159,388) for the
  Klipdam mine. These deposits are invested in interest bearing money market linked
  investments at rates ranging from 8% to 9.5% .

|10. | SHARE CAPITAL
|--- | -------------

(a) Authorized share capital

The Companys authorized share capital
  consists of an unlimited number of common shares, without par value, and an
  unlimited number of preferred shares without par value, of which none have been
  issued.

(b) Share purchase options

The Company has a share purchase option
  compensation plan approved by the shareholders that allows the Company to grant
  options for up to 10% of the issued and outstanding shares of the Company at
  any one time, typically vesting over two years, to its directors, employees,
  officers, and consultants. The exercise price of each option is set by the Board
  of Directors at the time of grant and cannot be less than the market price (less
  permissible discounts) on the Toronto Stock Exchange. Options have a maximum
  term of five years and typically terminate 30 days following the termination
  of the optionees employment, except in the case of retirement or death.

The continuity of share purchase options
  for the nine months ended February 29, 2008 is as follows:

| |                                                                        |   | Exercise |      |  | May 31  |      |  |           |      |  |           |      |  | Expired/  |      |  | February 29 | 
| | ---------------------------------------------------------------------- | - | -------- | ---- |  | ------- | ---- |  | --------- | ---- |  | --------- | ---- |  | --------- | ---- |  | ----------- | 
| | Expiry date                                                            |   | price    |      |  | 2007    |      |  | Granted   |      |  | Exercised |      |  | cancelled |      |  | 2008        | 
| | September 28, 2007                                                     | $ | 0.40     |      |  | 107,917 |      |  |          |      |  | 107,917   |      |  |          |      |  |            | 
| | February 29, 2008                                                      | $ | 0.42     |      |  | 190,000 |      |  |          |      |  | 145,000   |      |  | 45,000    |      |  |            | 
| | March 28, 2008                                                         | $ | 0.50     |      |  | 150,000 |      |  |          |      |  |          |      |  |          |      |  | 150,000     | 
| | July 10, 2010                                                          | $ | 0.68     |      |  |        |      |  | 300,000   |      |  |          |      |  |          |      |  | 300,000     | 
| | September 24, 2012                                                     | $ | 0.62     |      |  |        |      |  | 5,905,500 |      |  |          |      |  | 2,500     |      |  | 5,903,000   | 
| | November 14, 2012                                                      | $ | 0.63     |      |  |        |      |  | 1,114,500 |      |  |          |      |  | 5,500     |      |  | 1,109,000   | 
| |                                                                        |   |          |      |  | 447,917 |      |  | 7,320,000 |      |  | 252,917   |      |  | 53,000    |      |  | 7,462,000   | 
| |                                                                        |   |          |      |  |         |      |  |           |      |  |           |      |  |           |      |  |             | 
| | Weighted average exercise price                                        |   | $        | 0.44 |  | $       | 0.62 |  | $         | 0.41 |  | $         | 0.45 |  | $         | 0.62 | 
| | Weighted
      average fair value of options granted during the period |   |          |      |  |         |      |  | $         | 0.62 | 

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

As at February 29, 2008, 250,000 of the
  options outstanding with a weighted average exercise price of $0.57 per share
  had vested with grantees.

The continuity of share purchase options
  for the year ended May 31, 2007 is as follows:

| |                                                                      |   | Exercise |      |  | May 31  |   |  |         |      |  |           |      |  | Expired/  |      |  | May 31  | 
| | -------------------------------------------------------------------- | - | -------- | ---- |  | ------- | - |  | ------- | ---- |  | --------- | ---- |  | --------- | ---- |  | ------- | 
| | Expiry date                                                          |   | price    |      |  | 2006    |   |  | Granted |      |  | Exercised |      |  | cancelled |      |  | 2007    | 
| | September 28, 2007                                                   | $ | 0.40     |      |  | 115,417 |   |  |        |      |  | 5,833     |      |  | 1,667     |      |  | 107,917 | 
| | February 29, 2008                                                    | $ | 0.42     |      |  | 210,000 |   |  |        |      |  | 3,334     |      |  | 16,666    |      |  | 190,000 | 
| | March 28, 2008                                                       | $ | 0.50     |      |  | 150,000 |   |  |        |      |  |          |      |  |          |      |  | 150,000 | 
| |                                                                      |   |          |      |  | 475,417 |   |  |        |      |  | 9,167     |      |  | 18,333    |      |  | 447,917 | 
| |                                                                      |   |          |      |  |         |   |  |         |      |  |           |      |  |           |      |  |         | 
| | Weighted average exercise price                                      |   | $        | 0.44 |  | $       |  |  | $       | 0.41 |  | $         | 0.42 |  | $         | 0.44 | 
| |                                                                      |   |          |      |  |         |   |  |         |      |  |           |      |  |           |      |  |         | 
| | Weighted
      average fair value of options granted during the year |   |          |      |  |         |   |  | $       | Nil  | 

As at May 31, 2007, 327,917 of the options
  outstanding with a weighted average exercise price of $0.40 per share had vested
  with grantees.

The continuity of share purchase options
  for the year ended May 31, 2006 is as follows:

| |                                                                      |   | Exercise |      |  | May 31 |      |  |         |      |  |           |      |  | Expired/  |      |  | May 31  | 
| | -------------------------------------------------------------------- | - | -------- | ---- |  | ------ | ---- |  | ------- | ---- |  | --------- | ---- |  | --------- | ---- |  | ------- | 
| | Expiry date                                                          |   | price    |      |  | 2005   |      |  | Granted |      |  | Exercised |      |  | cancelled |      |  | 2006    | 
| | May 19, 2006                                                         | $ | 0.32     |      |  | 27,500 |      |  |        |      |  | 27,500    |      |  |          |      |  |        | 
| | September 28, 2007                                                   | $ | 0.40     |      |  |       |      |  | 126,250 |      |  | 3,333     |      |  | 7,500     |      |  | 115,417 | 
| | February 29, 2008                                                    | $ | 0.42     |      |  |       |      |  | 210,000 |      |  |          |      |  |          |      |  | 210,000 | 
| | March 28, 2008                                                       | $ | 0.50     |      |  |       |      |  | 150,000 |      |  |          |      |  |          |      |  | 150,000 | 
| |                                                                      |   |          |      |  |        |      |  |         |      |  |           |      |  |           |      |  |         | 
| |                                                                      |   |          |      |  | 27,500 |      |  | 486,250 |      |  | 30,833    |      |  | 7,500     |      |  | 475,417 | 
| |                                                                      |   |          |      |  |        |      |  |         |      |  |           |      |  |           |      |  |         | 
| | Weighted average exercise price                                      |   | $        | 0.32 |  | $      | 0.44 |  | $       | 0.33 |  | $         | 0.40 |  | $         | 0.44 | 
| |                                                                      |   |          |      |  |        |      |  |         |      |  |           |      |  |           |      |  |         | 
| | Weighted
      average fair value of options granted during the year |   |          |      |  |        |      |  | $       | 0.50 | 

As at May 31, 2006, 38,750 of the options
  outstanding with a weighted average exercise price of $0.40 per share had vested
  with grantees.

Using a Black-Scholes option pricing
  model with the assumptions noted below, the fair values of stock options granted
  have been reflected in the statement of operations as follows:

| |                                                       |   | Nine Months ended |  |   | Year ended |  |   | Year ended | 
| | ----------------------------------------------------- | - | ----------------- |  | - | ---------- |  | - | ---------- | 
| |                                                       |   | February 29       |  |   | May 31     |  |   | May 31     | 
| |                                                       |   | 2008              |  |   | 2007       |  |   | 2006       | 
| | Exploration and engineering                           | $ | 514,892           |  | $ | 41,372     |  | $ | 36,415     | 
| | Operations and administration                         |   | 1,311,425         |  |   | 38,251     |  |   | 47,101     | 
| | Total compensation cost expensed to operations,       |   |                   |  |   |            |  |   |            | 
| | with the offset credited to contributed
      surplus | $ | 1,826,317         |  | $ | 79,623     |  | $ | 83,516     | 

The weighted-average assumptions used
  to estimate the fair value of options granted are as follows:

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

| |                         |  | 2008      |  |  | 2007    |  |  | 2006    | 
| | ----------------------- |  | --------- |  |  | ------- |  |  | ------- | 
| | Risk free interest rate |  | 4%        |  |  | 4%      |  |  | 4%      | 
| | Expected life           |  | 4.8 years |  |  | 2 years |  |  | 2 years | 
| | Expected volatility     |  | 111%      |  |  | 97%     |  |  | 124%    | 
| | Expected dividends      |  | nil       |  |  | nil     |  |  | nil     | 

(c) Share purchase warrants

The continuity of share purchase warrants
  (each warrant exercisable into one common share) for the period ended February
  29, 2008 is:

| | Expiry date                      |   | November 22, 2008(i) |  |   | May 09, 2009(ii) |  |   | May 09, 2009(iii) | 
| | -------------------------------- | - | -------------------- |  | - | ---------------- |  | - | ----------------- | 
| | Exercise price                   | $ | 0.80                 |  | $ | 0.70             |  | $ | 0.70              | 
| | Balance, May 31, 2007            |   | 42,000,000           |  |   | 116,007,154      |  |   | 5,772,000         | 
| | Issued                           |   |                     |  |   |                 |  |   |                  | 
| | Exercised                        |   | 2,400,000            |  |   |                 |  |   |                  | 
| | Expired                          |   |                     |  |   |                 |  |   |                  | 
| | Balance, February
      29, 2008 |   | 39,600,000           |  |   | 116,007,154      |  |   | 5,772,000         | 

| | (i)   | The share purchase warrants are exercisable over three
        years with the option to exercise at $0.60 expiring on November 22, 2007,
        the option to exercise at $0.80 expiring on November 22, 2008 and the
        option to exercise at $1.00 expiring on November 22, 2009.                                                                                                                                                                                                                                                                           
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (ii)  | In May 2007, Rockwell completed a $60 million private
        placement financing of 116,007,154 million equity Units at $0.52 each
        with each Unit consisting of one common share and one share purchase warrant
        exercisable over two years at $0.70. All securities are subject to a four
        month hold period in Canada which expired on September 10, 2007.                                                                                                                                                                                 
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (iii) | In May 2007, the Company issued 5,772,000 broker warrants
        exercisable over two years at $0.70 expiring on May 9, 2009. Using a Black-Scholes
        option pricing model, the fair value of the 5,772,000 broker warrants
        granted in the amount of $1,693,197 have been reflected in the consolidated
        balance sheet. The weighted-average assumptions used to estimate the fair
        value of warrants granted were an expected volatility of 97%, expected
        dividends of nil, expected life of 2 years and risk free rate of 4%.

The continuity of share purchase warrants
  (each warrant exercisable into one common share) for the year ended May 31,
  2007 is:

| |                                   |   | November 22, |  |   |                    |  |   |                    | 
| | --------------------------------- | - | ------------ |  | - | ------------------ |  | - | ------------------ | 
| | Expiry date                       |   | 2007(i)      |  |   | May 09,
      2009 |  |   | May 09,
      2009 | 
| | Exercise price (note 10(d and e)) | $ | 0.60         |  | $ | 0.70               |  | $ | 0.70               | 
| |                                   |   |              |  |   |                    |  |   |                    | 
| | Balance, May 31, 2006             |   |             |  |   |                   |  |   |                   | 
| | Issued (note 10(d and e))         |   | 42,000,000   |  |   | 116,007,154        |  |   | 5,772,000          | 
| | Exercised                         |   |             |  |   |                   |  |   |                   | 
| | Expired                           |   |             |  |   |                   |  |   |                   | 
| |                                   |   |              |  |   |                    |  |   |                    | 
| | Balance, May 31,
      2007       |   | 42,000,000   |  |   | 116,007,154        |  |   | 5,772,000          | 

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

| | (i) | The share purchase warrants are exercisable over three
        years with the option to exercise at $0.60 expiring on November 22, 2007,
        the option to exercise at $0.80 expiring on November 22, 2008 and the
        option to exercise at $1.00 expiring on November 22, 2009.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The continuity of share purchase warrants
  (each warrant exercisable into one common share) for the year ended May 31,
  2006 is:

| |                                 |   | Exercise |  |   | May 31    |  |   |        |  |   |           |  |   |           |  |   | May 31 | 
| | ------------------------------- | - | -------- |  | - | --------- |  | - | ------ |  | - | --------- |  | - | --------- |  | - | ------ | 
| | Expiry date                     |   | price    |  |   | 2005      |  |   | Issued |  |   | Exercised |  |   | Expired   |  |   | 2006   | 
| | December 31, 2005               | $ | 0.40     |  |   | 8,975,000 |  |   |       |  |   | 50,000    |  |   | 8,925,000 |  |   |       | 
| |                                 |   |          |  |   |           |  |   |        |  |   |           |  |   |           |  |   |        | 
| | Weighted average exercise price |   |          |  | $ | 0.40      |  | $ |       |  | $ | 0.40      |  | $ |          |  | $ |       | 

| | (d) | Private placement, November 2006                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | In November 2006, Rockwell completed a $21 million private
        placement of 42 million units at $0.50 per unit, with each unit consisting
        of one common share and one share purchase warrant exercisable over three
        years at $0.60 in the first year, $0.80 in the second year and $1.00 in
        the third year. The third year term of the warrants is subject to the
        Company achieving Tier 1 status on the TSX Venture Exchange within the
        first two years. All securities are subject to a four month holding period
        in Canada expiring on March 23, 2007, and a portion will be subject to
        additional US resale restrictions in the United States. The Company paid
        cash commissions of $1,215,770.                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (e) | Private placement, May 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | In May 2007, Rockwell completed a $60 million financing
        of 116,007,154 million equity Units at $0.52 each with each Unit consisting
        of one common share and one share purchase warrant exercisable over two
        years at $0.70. All securities are subject to a four month hold period
        in Canada expiring September 10, 2007. In addition, the securities have
        not been, and will not be, registered under the United States Securities
        Act of 1933, as amended, and may not be offered or sold in the United
        States absent registration or an applicable exemption from registration
        requirements. The Company paid cash commissions of $3,877,665, issued
        1,093,440 common shares fair valued at $568,588 as compensation to agents
        as well as 5,772,000 broker warrants fair valued at $1,693,197 to the
        agents, bringing the total issued common shares to 117,100,594 and total
        commissions to $6,139,450.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (f) | Private Placement, January 2008                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | In January 2008 the Company completed a brokered private
        placement of 24,101,526 Common Shares at a price of $0.60 per share for
        total proceeds of $13,860,916, net of issue costs. The Company issued
        500,000 Common Shares and paid a cash fee of $300,000 as finders
        fees relating to the private placement. All shares issued pursuant to
        the private placement are subject to a hold period expiring on March 31,
        2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | Proceeds from the financing will be used to fund Rockwells
        diamond operations and new project evaluation and development.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

|11. | RELATED PARTY BALANCES AND TRANSACTIONS
|--- | ---------------------------------------

| | Balances payable                          |   | As at             |  |   | As at        | 
| | ----------------------------------------- | - | ----------------- |  | - | ------------ | 
| |                                           |   | February 29, 2008 |  |   | May 31, 2007 | 
| | Hunter Dickinson Inc. (a)                 | $ |                  |  | $ | 37,571       | 
| | Euro-American Capital Corporation (b)     |   |                  |  |   | 2,879        | 
| | CEC Engineering (c)                       |   |                  |  |   | 5,558        | 
| | Durnpike shareholder loans (i)            |   |                  |  |   | 1,503,566    | 
| | Banzi Trading (k)                         |   |                  |  |   | 2,191        | 
| | Jakes Tyres (i)                           |   | 49,604            |  |   | 10,993       | 
| | Cashmere Trading (g)                      |   |                  |  |   | 46,543       | 
| |                                           | $ | 49,604            |  | $ | 1,609,301    | 
| | Balances receivable                       |   |                   |  |   |              | 
| | Hunter Dickinson Inc. (a)                 | $ | 78,504            |  | $ |             | 
| | Flawless Diamonds Trading House
      (h) |   | 477,298           |  |   | 781,928      | 
| | Banzi Trading (k)                         |   | 33,744            |  |   |             | 
| | Diacor CC (n)                             |   | 3,888             |  |   |             | 
| | AA Van
      Wyk (m)                      |   |                  |  |   | 57,325       | 
| |                                           | $ | 593,434           |  | $ | 839,253      | 

| |                                                   |   | Nine
      Months |  |   |                   |  |   |         | 
| | ------------------------------------------------- | - | ----------------- |  | - | ----------------- |  | - | ------- | 
| |                                                   |   | ended             |  |   |                   |  |   |         | 
| |                                                   |   | February 29       |  |   | Year ended May 31 | 
| | Transactions                                      |   | 2008              |  |   | 2007              |  |   | 2006    | 
| | Services rendered and expenses reimbursed:        |   |                   |  |   |                   |  |   |         | 
| | Hunter Dickinson Inc. (a)                         | $ | 863,861           |  | $ | 1,988,027         |  | $ | 578,134 | 
| | Euro-American Capital Corporation
      (b)       |   | 14,393            |  |   | 18,765            |  |   | 18,630  | 
| | CEC Engineering (c)                               |   | 39,766            |  |   | 187,225           |  |   |        | 
| | John Bristow (d)                                  |   |                  |  |   | 115,320           |  |   |        | 
| | Jeffrey B Traders CC (e)                          |   | 52,740            |  |   | 141,318           |  |   |        | 
| | Seven Bridges Trading (f)                         |   | 57,952            |  |   | 55,534            |  |   |        | 
| | Plateau Resources (Proprietary) Limited
      (j) |   |                  |  |   |                  |  |   | 124,737 | 
| | Cashmere Trading (g)                              |   | 353,736           |  |   | 43,357            |  |   |        | 
| | Banzi Trade 26 (Pty) Ltd (k)                      |   | 47,575            |  |   | 251,942           |  |   |        | 
| | Jakes Tyres (l)                                   |   | 1,141,454         |  |   | 267,361           |  |   |        | 
| | AA Van Wyk (m)                                    |   | 148,658           |  |   | 173,977           |  |   |        | 
| | Diacor CC (n)                                     |   | 3,888             |  |   |                  |  |   |        | 
| |                                                   |   |                   |  |   |                   |  |   |         | 
| | Sales rendered to:                                |   |                   |  |   |                   |  |   |         | 
| | Flawless
      Diamonds Trading House (h)         | $ | 36,038,106        |  | $ | 10,085,536        |  | $ |        | 

| | (a) | Hunter Dickinson Inc. (HDI) is a private
        company equally owned by several public companies, one of which is Rockwell,
        and has certain directors in common with the Company. HDI provides geological,
        technical, corporate development, administrative and management services
        to, and incurs third party costs on behalf of, the Company on a full cost
        recovery basis pursuant to an agreement dated January 1, 2001. There are
        no specific terms of repayment.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

| | (b) | Euro-American Capital Corporation is a private company
        controlled by Rene Carrier, a director of the Company, which provides
        management services to the Company at market rates for those services.                                                                                                                                                                            
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                
| | (c) | CEC Engineering Ltd. is a private company owned by David
        Copeland, Chairman and a director of the Company, which provides engineering
        and project management services at market rates.                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                
| | (d) | John Bristow, President, Chief Executive Officer and
        a director of the Company, provided engineering consulting services at
        market rates to the Company.                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                
| | (e) | Jeffrey B Traders CC is a private company controlled
        by Jeffrey Brenner, a former director and employee of the Company, which
        provides management and marketing services to the Company at market rates.                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                
| | (f) | Seven Bridges Trading is a wholly owned subsidiary of
        Randgold Resources, a public company where Mark Bristow, a director of
        the Company, serves in an executive capacity. Seven Bridges Trading provides
        administrative and management services at market rates to the Companys
        South African subsidiaries.                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                
| | (g) | Cashmere Trading is a private company owned by Hennie
        Van Wyk, an officer of the Company, which provides helicopter services
        at market rates.                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                
| | (h) | Flawless Diamonds Trading House (Flawless)
        is a private company where certain directors, former directors and officers
        of the Company, namely, Messr. Brenner, Bristow and Van Wyk, are shareholders
        of. Flawless is a registered diamond broker and purchases diamonds from
        the Company at market prices.                                                   
| |     |                                                                                                                                                                                                                                                                                                                                                                                                
| | (i) | Pursuant to the Company agreement to acquire all
        of the shares and loans in Durnpike Investments (Pty) Limited from eight
        individuals (the Vendors), of which three individuals from
        the Vendors were subsequently appointed to the Companys Board of
        Directors (Messr. Brenner, M.Bristow, J.Bristow).                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                
| | (j) | Plateau Resources (Proprietary) Limited (Plateau)
        is a wholly-owned subsidiary of Anooraq Resources Corporation, a Canadian
        company which has certain directors in common with the Company. Plateau
        shares certain premises and other facilities with the Company pursuant
        to a cost-sharing arrangement with no profit element involved.                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                
| | (k) | Banzi Trade 26 (Pty) Ltd (Banzi) is 50%
        owned by Hennie Van Wyk Family Trust, 30% by Ronnie Visagie, a member
        of the van Wyk family and 20% by Bokomoso Trust. Banzi is a private company
        focused on providing self sustaining programs to local communities. During
        the period, Banzi provided the Company with buildings materials at market
        rates.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                
| | (l) | Jakes Tyres is a private company with certain directors
        and officers in common with the Company that provides consumable materials
        at market rates.                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                
| | (m) | AA Van Wyk is a private company owned by a party related
        to the directors and officers of the Company, which provides contract
        mining services at market rates.                                                                                                                                                                                                                

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

| | (n) | Diacor CC is a private company with certain directors
        and officers in common with the Company that purchases consumable materials
        at market rates.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12. | INCOME TAXES                                                                                                                                                                                                                                                                                  
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                               
|    | Income tax expense (recovery differs from the amount
        which would result from applying the statutory Canadian income tax rates
        in 2008 of 33.55% (2007 - 34.1%, 2006 - 36.6%). A reconciliation of income
        taxes calculated at applicable statutory rates is as follows:

| |                                         |   |                |   |   |                    |   |   |            |  
| | --------------------------------------- | - | -------------- | - | - | ------------------ | - | - | ---------- | -
| |                                         |   | Nine months    |   |   |                    |   |   |            |  
| |                                         |   | ended February |   |   | Years ended May 31 |  
| |                                         |   | 2008           |   |   | 2007               |   |   | 2006       |  
| |                                         |   |                |   |   |                    |   |   |            |  
| | Loss before income taxes                | $ | (1,006,849     | ) | $ | (6,585,756         | ) | $ | (1,600,673 | )
| |                                         |   |                |   |   |                    |   |   |            |  
| | Expected income tax recovery            | $ | (338,000       | ) | $ | (2,324,000         | ) | $ | (555,000   | )
| | Difference in foreign tax rates         |   | 298,000        |   |   | 101,000            |   |   | 7,000      |  
| | Permanent differences                   |   | 1,200,000      |   |   | 309,000            |   |   | 375,000    |  
| | Change in tax rate                      |   | 440,000        |   |   |                   |   |   | (35,000    | )
| | Change in valuation allowance           |   | (477,000       | ) |   | 1,409,433          |   |   | 208,000    |  
| | Other non-deductible
      items        |   | 1,317,400      |   |   | (131,206           | ) |   |           |  
| |                                         |   |                |   |   |                    |   |   |            |  
| | Net income tax
      expense (recovery) | $ | 2,440,400      |   | $ | (635,773           | ) | $ |           |  

As at February 29, 2008 and May 31, 2007,
  the estimated tax effect of the significant components within the Companys
  future tax assets and liabilities were as follows:

| |                                        |   | As at February 29 |   |   | As at May 31 |  
| | -------------------------------------- | - | ----------------- | - | - | ------------ | -
| |                                        |   | 2008              |   |   | 2007         |  
| |                                        |   |                   |   |   |              |  
| | Future income tax asset (liability)    |   |                   |   |   |              |  
| | Resource allowances                    | $ | 1,938,000         |   | $ | 2,133,000    |  
| | Loss carry forwards                    |   | 3,559,000         |   |   | 3,824,000    |  
| | Other                                  |   | 1,460,000         |   |   | 1,835,000    |  
| | Total                                  |   | 6,957,000         |   |   | 7,792,000    |  
| | Less: valuation allowance              |   | (6,957,000        | ) |   | (7,434,860   | )
| |                                        |   |                  |   |   | 357,140      |  
| | Mineral properties                     |   | (3,937,000        | ) |   | (5,005,000   | )
| | Equipment                              |   | (8,493,100        | ) |   | (7,331,000   | )
| | Net future tax
      asset (liability) | $ | (12,430,100       | ) | $ | (11,978,860  | )

At February 29, 2008, the Company had
  available for deduction against future taxable income non-capital losses of
  approximately $12,587,000 (2007 - $10,711,00; 2006  $3,290,000). These
  losses, if not utilized, will expire in various years ranging from 2008 to 2027.
  Subject to certain restrictions, the Company also had Canadian resource expenditures
  of approximately $5,635,000 (2007  $5,635,000; 2006  $5,635,000),
  which are available to reduce taxable income in future years.

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

|13. | SEGMENTED INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Operating segments are defined as components of an enterprise
        about which separate financial information is available that is evaluated
        regularly by the chief operation decision maker, or decision-making group,
        in deciding how to allocate resources and in assessing performance. All
        of the Company's operations are within the mineral exploration and diamond
        mining sector. The Company's resource properties are located in South
        Africa, Democratic Republic of Congo, Canada and in Chile.

| | For the nine months           |   |            |   |   |         |   |   |                    |   |   |             |  
| | ----------------------------- | - | ---------- | - | - | ------- | - | - | ------------------ | - | - | ----------- | -
| | ended February 29,
      2008 |   | Canada     |   |   | Chile   |   |   | South
      Africa |   |   | Total       |  
| | Revenue                       | $ |           |   | $ |        |   | $ | 36,149,308         |   | $ | 36,149,308  |  
| | Loss for the year             |   | (3,393,226 | ) |   | (92,767 | ) |   | (5,917,035         | ) |   | (9,403,028  | )
| | Total assets                  |   | 4,002,546  |   |   | 70,133. |   |   | 129,620,445        |   |   | 133,693,124 |  
| | Mineral property interests    |   |           |   |   | 1       |   |   | 25,247,936         |   |   | 25,247,937  |  
| | Property, plant and           |   |           |   |   |        |   |   | 64,831,636         |   |   | 64,831,636  |  
| | equipment                     |   |            |   |   |         |   |   |                    |   |   |             |  

| | For the year ended         |   |            |   |   |          |   |   |                    |   |   |             |  
| | -------------------------- | - | ---------- | - | - | -------- | - | - | ------------------ | - | - | ----------- | -
| | May 31, 2007               |   | Canada     |   |   | Chile    |   |   | South
      Africa |   |   | Total       |  
| | Revenue                    | $ |           |   | $ |         |   | $ | 10,103,328         |   | $ | 10,103,328  |  
| | Loss for the year          |   | (5,342,557 | ) |   | (191,800 | ) |   | (830,785           | ) |   | (6,365,142  | )
| | Total assets               |   | 38,281,401 |   |   | 62,857.  |   |   | 91,262,125         |   |   | 129,606,383 |  
| | Mineral property interests |   |           |   |   | 1        |   |   | 24,121,854         |   |   | 24,121,855  |  
| | Property, plant and        |   |           |   |   |         |   |   | 44,790,441         |   |   | 44,790,441  |  
| | equipment                  |   |            |   |   |          |   |   |                    |   |   |             |  

| | For the year ended         |   |            |   |   |          |   |   |                    |  |   |            |  
| | -------------------------- | - | ---------- | - | - | -------- | - | - | ------------------ |  | - | ---------- | -
| | May 31, 2006               |   | Canada     |   |   | Chile    |   |   | South
      Africa |  |   | Total      |  
| | Loss for the year          | $ | (1,340,385 | ) | $ | (260,288 | ) | $ |                   |  | $ | (1,600,673 | )
| | Total assets               |   | 228,560    |   |   | 60,087.  |   |   |                   |  |   | 288,647    |  
| | Mineral property interests |   |           |   |   | 1        |   |   |                   |  |   | 1          |  
| | Property, plant and        |   |           |   |   |         |   |   |                   |  |   |           |  
| | equipment                  |   |            |   |   |          |   |   |                    |  |   |            |  

|14. | CONTINGENCIES AND COMMITMENTS
|--- | -----------------------------
|    |                              
|    | (a)                          
|    |                              
|    |                              

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

|    | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | In April 2007 the Company, entered into an agreement in relation to its
      Makoenskloof property to purchase plant and equipment in the amount of ZAR21.3
      million (approximately $3.2 million) from Folmink Delwery CC. As at February
      29, 2008 the Company is committed to pay the remaining consideration of
      ZAR2.3 million ($294,402) in the following manner:
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                       
|    | o                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | The balance shall be paid in monthly payments of ZAR500,000
        ($63,000). The monthly payments shall incur interest calculated at the
        prime rate of the Standard Bank of South Africa.                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                       
|15. | SUBSEQUENT EVENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                       
|    | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Acquisition of Saxendrift Mine (Pty) Ltd.                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                       
|    | On March 6, 2007, the Company and Trans Hex
        Group Limited (Trans Hex) entered into a conditional agreement
        whereby the Companys wholly owned South African subsidiary, Rockwell
        Resources RSA (Pty) Ltd. (Rockwell RSA), would acquire two
        open pit alluvial diamond mines and three alluvial diamond exploration
        projects from Trans Hex (the Transaction). Trans Hex, through
        its wholly-owned subsidiary, Trans Hex Operations (Pty) Ltd. (THO),
        is the owner of two open pit alluvial diamond mines, namely Saxendrift
        and Niewejaarskraal, and three alluvial diamond exploration projects,
        namely Kwartelspan, Zwemkuil-Mooidraai and Remhoogte-Holsloot, which are
        located along the southern bank of the Middle Orange River in the Northern
        Cape Province of South Africa (Northern Cape) and which are
        collectively referred to as the Middle Orange River Operations and Projects
        (or MORO). The MORO includes:
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                       
|    | o                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | the rights to prospect, explore and/or mine precious
        stones and/or other minerals and/or metals held directly or indirectly
        by THO in the Saxendrift area of the Northern Cape;                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                       
|    | o                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | a series of large remnant alluvial diamond terraces;                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                       
|    | o                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | the material plant, machinery, equipment and other
        movable assets owned and/or used by THO;                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                       
|    | o                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | certain employees of THO; and                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                       
|    | o                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | a rehabilitation liability which will be taken
        over by the Company.                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                       
|    | The Company has paid cash consideration to
        Trans Hex of ZAR100.4 million ($14.8 million) and will assume potential
        liabilities for staff layoffs of ZAR4.7 million (capped at ZAR5 million
        ($0.8 million)) and rehabilitation bonds (capped at ZAR4.25 million ($0.6
        million)). An independent consultant has been appointed to determine the
        value of the rehabilitation bonds. All payments and liabilities are expected
        to total $16.2 million, subject to certain final adjustments. Trans Hex
        will transfer all its relevant mineral rights and associated assets into
        a new special purpose entity (Saxendrift Mine Pty (Ltd)),
        to be acquired by Rockwell RSA. The implementation of the Transaction
        is subject to fulfillment of certain conditions precedent including:                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                       
|    | o                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | The unconditional approval of South Africas
        Competition Commission; which has already taken place;                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                       
|    | o                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | All requisite consents by South Africas
        Minister of Minerals and Energy to the cession and transfer of the underlying
        mining and prospecting rights pertaining to the MORO to                                                                                                                                                                                        

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|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | the Saxendrift Mine
        Pty (Ltd) and the acquisition by the Company of the shares in Saxendrift
        Mine Pty (Ltd);
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                             
| | o                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Satisfactory provision
        by the Company of certain financial undertakings to THO;                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                             
| | o                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Approval by the TSX
        Exchange;                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                             
| | o                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Completion by the
        Company of a mineral title due diligence investigation; and                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                             
| | o                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | The audited balance
        sheet of Saxendrift Mine Pty (Ltd) as at the effective date.                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                             
| | Fulfillment of some
        of the conditions precedent may be waived, or the date specified for their
        fulfillment extended, in certain limited circumstances. The MORO will
        be placed in care and maintenance with effect from date of signature of
        the relevant transaction agreements pending fulfillment of the conditions
        precedent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | In January 2007, the
        Company entered into a credit facility with the Canadian Imperial Bank
        of Commerce (CIBC) for a standby letter of credit of $16.5
        million for the acquisition of Saxendrift Mine. The Company secured this
        facility by providing sufficient funds on deposit equal to the amount
        of the outstanding letter of credit, being $15.6 million as of May 31,
        2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The facility was not
        utilized and expired on July 31, 2007. On July 31, 2007 the funds, previously
        utilized to secure the facility, were transferred to an account held in
        trust for the Company for acquisition of the Saxendrift Mine. Subsequent
        to the nine months ended February 29, 2008 the Company completed the MORO
        acquisition. The substantive conditions to the Transaction have been fulfilled
        and the Transaction was completed on April 11, 2008. Registration of transfer
        to Saxendrift Mine Pty (Ltd) of the Saxendrift mining right, as well as
        prospecting rights in respect of the Kwartelspan, Zwemkuil- Mooidraai
        and part of the Remhoogte-Holsloot projects has already been obtained.
        Cession of the Niewejaarskraal mining right is still awaited at this time
        from the DME, and the Remhoogte prospecting right is in the process of
        being renewed.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                             
| | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Shares issued and share options granted subsequent to
        February 29, 2008.                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                             
| | Subsequent to February
        29, 2008, the Company issued 14,285,715 common shares at $0.55 per share
        and 152,500 share options were cancelled or expired. No additional share
        options have been granted subsequent to year end.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                             
| | (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Assumption of 74% ownership of HCVW and Klipdam                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                             
| | Effective March 1,
        2008, the Company took ownership of 74% of HCVW and Klipdam from 51% to
        74% as per the agreement announced in June 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                             
| | (d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Acquisition of an additional 11% by the BEE Group                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                             
| | Subsequent to the
        nine months ending February 29, 2008, the BEE group is in the process
        of increasing its shareholding from 15% to 26% by subscribing for an additional
        11% of the shares in the VWDG at a subscription price of ZAR17.5 million
        and injecting ZAR10.5 million working capital into the VWDG.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

|16. | DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY
        ACCEPTED ACCOUNTING PRINCIPLES                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | These consolidated financial statements have been prepared
        in accordance with Canadian generally accepted accounting principles ("Canadian
        GAAP"). Material variations in the accounting measurement principles,
        practices and methods used in preparing these financial statements from
        measurement principles, practices and methods accepted in the United States
        (US GAAP) are described and quantified below.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | Mineral properties and deferred exploration costs                                                                                                                                                                                                                                                                                                                                                                                                           

Under Canadian GAAP, the Company accounts
  for mineral properties as described in note 3(e).

In March 2004, the Emerging Issues Task
  Forces (EITF) reached a consensus that mineral interests covered
  by leases should be considered tangible assets. On April 30, 2004, the FASB
  issued a FASB Staff Position (FSP) amending SFAS 141 and SFAS 142,
  Goodwill and Other Intangible Assets, to provide that certain mineral
  use rights are considered tangible assets and that mineral use rights should
  be accounted based on their substance. The FSP is effective for the first reporting
  period beginning after April 29, 2005, with early adoption permitted.

In March 2004, in its report on Mining
  Assets: Impairment and Business Combinations the EITF reached a consensus
  that an entity should include the cash flows associated with value beyond proven
  and probable reserves in estimates of future cash flows (both undiscounted and
  discounted) used for determining whether a mining asset is impaired under Statement
  No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

Under U.S. GAAP, the recoverability of
  capitalized mineral properties exploration expenditures are generally considered
  insupportable until a commercially mineable deposit is determined; therefore,
  all mineral properties exploration expenditures are expenses as incurred. As
  the Company does not have reports on proven and probable reserves on any of
  its mineral properties, all exploration expenditures incurred, other than its
  acquisition costs, and its other mineral properties have been expensed as incurred.

Marketable securities

During the prior fiscal years, short-term
  marketable securities are carried at the lower of aggregate cost or current
  market value, with any unrealized loss included in the statements of operations
  for Canadian GAAP purposes.

Under US GAAP, Statement of Financial
  Accounting Standard No. 115, Accounting for Certain Investments in
  Debt and Equity Securities (SFAS 115) requires that certain
  equity investments must be classified into available-for-sale or trading securities
  and carried at fair market value. Any unrealized holding gains or losses are
  reported as a separate component of shareholders equity until realized
  for available-for-sale securities, and included in earnings for trading securities.

During the current fiscal year, this
  difference in accounting treatment has been eliminated due to the Companys
  adoption of the new accounting standards pertaining to financial instruments
  (note 4).

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

The impact of the differences between
  Canadian GAAP and US GAAP on the consolidated balance sheets would be as follows:

| |                     |   | 2008        |  |   | 2007        |  
| | ------------------- | - | ----------- |  | - | ----------- | -
| |                     |   | Balance,    |  |   |             |  
| |                     |   | Canadian    |  |   |             |  
| |                     |   | GAAP        |  |   | Adjustments |  
| |                     |   |             |  |   |             |  
| | Current assets      | $ | 38,596,562  |  | $ |            |  
| | Property, plant     |   |             |  |   |             |  
| | and equipment       |   | 64,831,636  |  |   |            |  
| | Other assets and    |   |             |  |   |             |  
| | deposits            |   | 3,200,112   |  |   |            |  
| |                     |   |             |  |   |             |  
| | Reclamation         |   |             |  |   |             |  
| | deposits            |   | 1,816,877   |  |   |            |  
| |                     |   |             |  |   |             |  
| | Mineral property    |   | 25,247,937  |  |   | (1          | )
| |                     | $ | 133,693,124 |  | $ | (1          | )
| |                     |   |             |  |   |             |  
| | Current liabilities | $ | 12,502,301  |  | $ |            |  
| | Long-term           |   |             |  |   |             |  
| | liabilities         |   | 22,141,468  |  |   |            |  
| | Non-controlling     |   |             |  |   |             |  
| | interest            |   | 11,934,548  |  |   |            |  
| | Stockholders'       |   |             |  |   |             |  
| | equity              |   | 87,114,807  |  |   | (1          | )
| |                     | $ | 133,693,124 |  | $ | (1          | )

The impact of the differences between
  Canadian GAAP and US GAAP on the statements of operations and deficit would
  be as follows:

| |                                                       |   | 2008        |   |   | 2007       |   |   | 2006       |  
| | ----------------------------------------------------- | - | ----------- | - | - | ---------- | - | - | ---------- | -
| | Loss for the year, Canadian GAAP                      | $ | (9,403,028  | ) | $ | (6,365,142 | ) | $ | (1,600,673 | )
| | Write-down of mineral property interests              |   |            |   |   |           |   |   | 46,856     |  
| | Unrealized gain in marketable securities              |   |            |   |   |           |   |   |           |  
| | Loss for the year, US GAAP                            | $ | (9,403,028  | ) | $ | (6,365,142 | ) | $ | (1,553,817 | )
| | Basic and diluted loss per share, US GAAP             | $ | (0.05       | ) | $ | (0.11      | ) | $ | (0.07      | )
| | Weighted average number of common shares outstanding, |   |             |   |   |            |   |   |            |  
| | US GAAP                                               |   | 196,428,551 |   |   | 55,418,242 |   |   | 23,640,123 |  

---

|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

The impact of the differences between
  Canadian GAAP and US GAAP on the consolidated statements of cash flows would
  be as follows:

| |                                                                   |   | 2008        |   |   | 2007        |   |   | 2006       |  
| | ----------------------------------------------------------------- | - | ----------- | - | - | ----------- | - | - | ---------- | -
| | Cash used in operating activities, Canadian
      GAAP            | $ | 6,712,681   |   | $ | (7,733,373  | ) | $ | (1,393,378 | )
| | Proceeds from sale of marketable securities                       |   |            |   |   |            |   |   | 146,970    |  
| | Cash used in operating activities, US GAAP                        |   | 6,712,681   |   |   | (7,733,373  | ) |   | (1,246,408 | )
| |                                                                   |   |             |   |   |             |   |   |            |  
| | Cash provided by (used in) investing activities,
      Canadian   |   |             |   |   |             |   |   |            |  
| | GAAP                                                              |   | (20,433,978 | ) |   | (35,400,108 | ) |   | 146,970    |  
| | Purchase of marketable securities                                 |   |            |   |   |            |   |   |           |  
| | Proceeds from sale of marketable securities                       |   |            |   |   |            |   |   | (146,970   | )
| | Cash provided by investing activities, US GAAP                    |   | (20,433,978 | ) |   | (35,400,108 | ) |   |           |  
| |                                                                   |   |             |   |   |             |   |   |            |  
| | Cash provided by financing activities, Canadian
      GAAP and US |   |             |   |   |             |   |   |            |  
| | GAAP                                                              |   | 718,768     |   |   | 75,567,827  |   |   | 1,085,762  |  
| | Reclassification of bank advances                                 |   |            |   |   | 529,308     |   |   |           |  
| | Cash provided by financing activities, US GAAP                    |   | 718,768     |   |   | 76,097,135  |   |   | 1,085,762  |  
| |                                                                   |   |             |   |   |             |   |   |            |  
| | Increase (decrease) in cash and equivalents during the year       |   | (13,002,529 | ) |   | 32,963,654  |   |   | (160,646   | )
| | Cash and equivalents, beginning of year                           |   | 32,626,376  |   |   | 192,031     |   |   | 352,677    |  
| |                                                                   |   | 19,623,847  |   |   | 33,155,685  |   |   | 192,031    |  

Canadian GAAP permits bank advances to
  be included in the determination of cash and cash equivalents in the consolidated
  statements of cash flows. US GAAP requires that bank advances be reported as
  financing cash flows. As a result, under US GAAP, the total increase in cash
  and cash equivalents in 2007 in the amount of $32,434,345 reflected in the consolidated
  statements of cash flows would be increased by $529,308 and financing activities
  cash flows would increase by $529,308.

Impact of recent United States accounting
  pronouncements:

| | i)   | Statement of Financial Accounting Standards (SFAS)
        No. 157: Fair Value Measurements,defines fair value, establishes
        a framework for measuring fair value in generally accepted accounting
        principles (GAAP), and expands disclosures about fair value measurements.
        SFAS No. 157 applies under other accounting pronouncements that require
        or permit fair value measurements. SFAS No. 157 is effective for financial
        statements issued for fiscal years beginning after November 15, 2007,
        and interim periods within those fiscal years. Management is analyzing
        the requirements of this new standard and believes that its adoption will
        not have any significant impact on the Companys financial statements.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ii)  | SFAS No. 159, The Fair Value Option for Financial
        Assets and Financial Liabilities Included an amendment of SFAS
        No. 115.This Statement permits entities to choose to measure many
        financial instruments and certain other items at fair value. This Statement
        applies to all entities, including not-for-profit organizations. Most
        of the provisions of this Statement apply only to entities that elect
        the fair value option. SFAS No. 159 is effective for fiscal years beginning
        after November 15, 2007. Management is analyzing the requirements of this
        new standard and believes that its adoption will not have any significant
        impact on the Company's financial statements.                             
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | iii) | FASB Staff Position (FSP) No. FIN 46 (R)-7,
        The Application of FASB Interpretation No. 46 (R) to Investment Companies,amends interpretation 46 (R) to provide an exception to the scope                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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|ROCKWELL DIAMONDS INC.                                                                     
|-------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                             
|For the years ended May 31, 2007 and 2006 and the nine months
      ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                              

| |     | of the Interpretation for companies within the scope
        of the AICPA Audit and Accounting Guide (Guide). This FSP
        concludes that no additional consolidation guidance is necessary to the
        Guide. The Companys preliminary assessment does not indicate that
        this FSP will have a significant impact on the financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | iv) | FASB Interpretation (FIN) No. 48: Accounting
        for Uncertainty in Income Taxes, an interpretation of FASB Statement
        No.109, was adopted by the Company on June 1, 2007. FIN 48 prescribes
        a recognition threshold and measurement attribute for the financial statement
        recognition and measurement of a tax position taken or expected to be
        taken in a tax return. The interpretation requires that the Company recognize
        the impact of a tax position in the financial statements if the position
        is more likely than not of being sustained on audit, based on the technical
        merits of the position. FIN 48 also provides guidance on de-recognition,
        classification, interest and penalties, accounting in interim periods
        and disclosure. In accordance with the provisions of FIN 48, any cumulative
        effect resulting from the change in accounting principle is to be recorded
        as an adjustment to the opening balance of deficit. The adoption of FIN
        48 did not result in a material impact on the Companys consolidated
        financial position or results of operations.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | v)  | In December 2007, the FASB issued SFAS No. 141R, Business
        Combinations,which requires recognition of the assets acquired, liabilities
        assumed and non-controlling interest arising in a business combination
        at their fair value as of the acquisition date. In addition, the costs
        of acquisition must be recognized separately from the business combination.
        This statement will be effective for the Companys 2009 fiscal year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | vi) | In March 2008, the FASB issued FAS No. 161, Disclosure
        about Derivative Instruments and Hedging Activities (FAS 161).
        FAS 161 changes the disclosure requirements for derivative instruments
        and hedging activities by requiring enhanced disclosures about how and
        why an entity uses derivatives instruments, how derivative instruments
        and related hedged items affect an entitys operating results, financial
        position, and cash flows. FAS 161 is effective for fiscal years beginning
        after November 15, 2008. Early adoption is permitted. The Company is currently
        reviewing the provisions of FAS 161 and has not yet adopted the statement.
        However, as the provisions of FAS 161 are only related to disclosure of
        derivative and hedging activities, the Company does not believe the adoption
        of FAS 161 will have a material impact on its consolidated operating results,
        financial position or cash flows.                                                                                                                                                                

---