---



(Formerly Rockwell Ventures Inc.)

CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED FEBRUARY 28, 2010 AND 2009 AND NINE MONTHS ENDED
FEBRUARY 29, 2008 (Expressed in Canadian Dollars)

---

Managements Responsibility for Financial Reporting

To the Shareholders and Directors of Rockwell Diamonds Inc.

The accompanying consolidated financial statements, the notes
thereto and other financial information contained in the Annual Report of
Rockwell Diamonds Inc. ("the Company") have been prepared in accordance with
Canadian generally accepted accounting principles and are the responsibility of
the management of the Company. The financial information presented elsewhere in
the Annual Report is consistent with the data that is contained in the
consolidated financial statements. The consolidated financial statements, where
necessary, include amounts which are based on the best estimates and judgments
of management.

In order to discharge managements responsibility for the
integrity of the financial statements, the Company maintains a system of
internal accounting controls. These controls are designed to provide reasonable
assurance that the Companys assets are safeguarded, transactions are executed
and recorded in accordance with managements authorization, proper records are
maintained and relevant and reliable financial information is produced. These
controls include maintaining quality standards in hiring and training of
employees, policies and procedures manuals, a corporate code of conduct and
ensuring that there is proper accountability for performance within appropriate
and well-defined areas of responsibility. The system of internal controls is
further supported by a compliance function, which is designed to ensure that we
and our employees comply with securities legislation and conflict of interest
rules.

The Board of Directors is responsible for overseeing
managements performance and the fulfilment of its responsibilities for
financial reporting and internal control. The Audit Committee, which is composed
of non-executive directors, meets with management as well as the external
auditors to ensure that management is properly fulfilling its financial
reporting responsibilities to the Directors who approve the consolidated
financial statements. The Audit Committee satisfies itself that each party is
properly discharging it's responsibilities, reviews the quarterly and annual
consolidated financial statements and any reports by the external auditors and
recommends the appointment of the external auditors for review by the Board of
Directors and approval by the Shareholders. The external auditors have full and
unrestricted access to the Audit Committee to discuss the scope of their audits,
the adequacy of the system of internal controls and review financial reporting
issues.

The consolidated financial statements have been audited by KPMG
Inc, the independent registered chartered accountants, in accordance with
Canadian generally accepted auditing standards and standards of the Public
Company Accounting Oversight Board (United States).

|/s/ Dr. John Bristow              | /s/ Gerhard Jacobs     
|--------------------------------- | -----------------------
|                                  |                        
|Dr. John Bristow                  | Gerhard Jacobs         
|Director, Chief Executive Officer | Chief Financial Officer
|August 31, 2010                   | August 31, 2010        

---

Report on Independent Registered Public Accounting
Firm

The Board of Directors and Shareholders of Rockwell Diamonds
Inc

We have audited the accompanying consolidated balance sheets of
Rockwell Diamonds Inc. as of February 28, 2010 and 2009, and the related
consolidated statements of operations and comprehensive loss, accumulated
comprehensive loss and deficit, shareholders' equity and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Rockwell Diamonds Inc. as of February 28, 2010 and 2009 and the results of its
operations and its cash flows for the years then ended in conformity with
Canadian generally accepted accounting principles.

Canadian generally accepted accounting principles vary in
certain significant respects from US generally accepted accounting principles.
Information relating to the nature and effect of such material differences is
presented in note 17 to the consolidated financial statements.

As discussed in Note 4 to the financial statements, the Company
has adopted new accounting policies for recognition, measurement and disclosure
of goodwill and intangible assets, credit risk considerations with determining
the fair value of financial assets and financial liabilities, measurement of
mining exploration costs and financial instruments recognition, measurement and
disclosures as required by the Canadian Institute of Chartered Accountants.

KPMG IncRegistered Accountants and Auditors
Johannesburg, Republic of South Africa August 31, 2010

---

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

|                                                         |   | February 28, 2010 |   |   | February 28, 2009 |  
|-------------------------------------------------------- | - | ----------------- | - | - | ----------------- | -
|ASSETS                                                   |   |                   |   |   |                   |  
|                                                         |   |                   |   |   |                   |  
|Current assets                                           |   |                   |   |   |                   |  
|Cash and cash equivalents (note 5)                       | $ | 2,512,610         |   | $ | 3,997,807         |  
|Accounts receivable (note 5)                             |   | 6,260,717         |   |   | 4,572,536         |  
|Restricted cash (note 5, 18)                             |   | 4,946             |   |   | 2,698,719         |  
|Trade receivable from a related party
      (note 14)    |   | 46,108            |   |   | 49,215            |  
|Inventories (note 6)                                     |   | 2,976,058         |   |   | 3,719,919         |  
|Prepayments                                              |   | 75,275            |   |   | 61,775            |  
|                                                         |   | 11,875,714        |   |   | 15,099,971        |  
|Non-current assets                                       |   |                   |   |   |                   |  
|Property, plant and equipment (note 7)                   |   | 58,790,736        |   |   | 59,569,186        |  
|Mineral property interests (note 8)                      |   | 30,850,998        |   |   | 28,894,477        |  
|Other assets and deposits (note 11)                      |   | 827,871           |   |   | 139,140           |  
|Reclamation deposits (note 5, 10)                        |   | 2,898,067         |   |   | 2,659,642         |  
|                                                         |   | 93,367,672        |   |   | 91,262,445        |  
|                                                         |   |                   |   |   |                   |  
|                                                         |   |                   |   |   |                   |  
|                                                         |   |                   |   |   |                   |  
|                                                         | $ | 105,243,386       |   | $ | 106,362,416       |  
|                                                         |   |                   |   |   |                   |  
|LIABILITIES AND SHAREHOLDERS' EQUITY                     |   |                   |   |   |                   |  
|                                                         |   |                   |   |   |                   |  
|Current liabilities                                      |   |                   |   |   |                   |  
|Bank indebtedness (note 5, 18)                           | $ | 698,015           |   | $ | 3,540,880         |  
|Accounts payable and accrued liabilities (note 5)        |   | 6,458,751         |   |   | 4,832,038         |  
|Due to related parties (note 14)                         |   | 641,323           |   |   | 193,655           |  
|Taxes payable                                            |   | 583,194           |   |   | 456,046           |  
|Current portion of capital lease obligations (note 5, 9) |   | 3,196,189         |   |   | 5,440,181         |  
|                                                         |   | 11,577,472        |   |   | 14,462,800        |  
|                                                         |   |                   |   |   |                   |  
|Non-current liabilities                                  |   |                   |   |   |                   |  
|Capital lease obligations (note 5, 9)                    |   | 140,332           |   |   | 3,284,596         |  
|Due to related parties (note 5, 14)                      |   | 414,566           |   |   | 383,330           |  
|Future income taxes (note 15)                            |   | 11,545,000        |   |   | 12,126,000        |  
|Reclamation
      obligation (note 10)                   |   | 3,722,984         |   |   | 3,802,655         |  
|                                                         |   | 15,822,882        |   |   | 19,596,581        |  
|                                                         |   |                   |   |   |                   |  
|Non-controlling interest(note 8)                         |   | 648,941           |   |   | 1,882,009         |  
|                                                         |   |                   |   |   |                   |  
|Shareholders' equity                                     |   |                   |   |   |                   |  
|Share capital (note 12)                                  |   | 127,999,040       |   |   | 119,952,532       |  
|Warrants (note 12(c))                                    |   |                  |   |   | 1,693,197         |  
|Contributed surplus                                      |   | 6,195,051         |   |   | 4,167,304         |  
|Accumulated other comprehensive loss                     |   | (7,979,683        | ) |   | (13,409,383       | )
|Deficit                                                  |   | (49,020,317       | ) |   | (41,982,624       | )
|                                                         |   | 77,194,091        |   |   | 70,421,026        |  
|Continuance of operations and going concern (note 1)     |   |                   |   |   |                   |  
|Contingencies (note 19)                                  |   |                   |   |   |                   |  
|Subsequent
      events (note 20)                        |   |                   |   |   |                   |  
|                                                         |   |                   |   |   |                   |  
|                                                         | $ | 105,243,386       |   | $ | 106,362,416       |  

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

Approved by the Board of Directors

|/s/ Dr. John Bristow              | /s/ Dr. Mark Bristow
|--------------------------------- | --------------------
|                                  |                     
|Dr. John Bristow                  | Dr. Mark Bristow    
|Director, Chief Executive Officer | Director            

---

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

|                                                                     |   |              |   |   |              |   |   | Nine
      months |  
|-------------------------------------------------------------------- | - | ------------ | - | - | ------------ | - | - | ----------------- | -
|                                                                     |   | Year ended   |   |   | Year ended   |   |   | ended             |  
|                                                                     |   | February 28, |   |   | February 28, |   |   | February 29,      |  
|                                                                     |   | 2010         |   |   | 2009         |   |   | 2008              |  
|                                                                     |   |              |   |   |              |   |   |                   |  
|Revenue                                                              |   |              |   |   |              |   |   |                   |  
|Rough diamonds sales                                                 | $ | 29,776,933   |   | $ | 34,330,078   |   | $ | 35,863,214        |  
|Contract diamond sales                                               |   |             |   |   |             |   |   | 174,892           |  
|                                                                     |   | 29,776,933   |   |   | 34,330,078   |   |   | 36,038,106        |  
|Cost of sales                                                        |   |              |   |   |              |   |   |                   |  
|Cost of rough diamonds sales                                         |   | (22,913,999  | ) |   | (25,113,363  | ) |   | (22,581,613       | )
|Cost of contract diamond sales                                       |   |             |   |   |             |   |   | (148,658          | )
|Amortization and depletion                                           |   | (9,545,727   | ) |   | (11,287,197  | ) |   | (6,533,941        | )
|Operating (loss) profit                                              |   | (2,682,793   | ) |   | (2,070,482   | ) |   | 6,773,894         |  
|                                                                     |   |              |   |   |              |   |   |                   |  
|Expenses                                                             |   |              |   |   |              |   |   |                   |  
|Accretion of reclamation obligation (note 10)                        |   | 481,932      |   |   | 1,072,389    |   |   | 464,316           |  
|Exploration                                                          |   | 97,805       |   |   | 498,739      |   |   | 604,169           |  
|Foreign exchange loss/(gain)                                         |   | 483,902      |   |   | (350,485     | ) |   | (751,315          | )
|Interest on capital leases                                           |   | 969,530      |   |   | 1,592,001    |   |   | 1,289,385         |  
|Interest expense                                                     |   | 576,272      |   |   | 3,009,680    |   |   | 270,976           |  
|Legal, accounting and audit                                          |   | 1,389,272    |   |   | 1,863,261    |   |   | 790,725           |  
|Office and administration                                            |   | 3,411,990    |   |   | 3,489,460    |   |   | 2,697,077         |  
|Shareholder communications                                           |   | 506,482      |   |   | 453,489      |   |   | 198,985           |  
|Stock-based compensation - exploration (note
      12(b))            |   | 74,008       |   |   | 629,347      |   |   | 514,892           |  
|Stock-based compensation -
      administration (note 12(b))         |   | 261,350      |   |   | 1,205,075    |   |   | 1,311,423         |  
|Travel and conferences                                               |   | 194,544      |   |   | 605,812      |   |   | 654,705           |  
|Transfer agent                                                       |   | 246,866      |   |   | 250,878      |   |   | 544,232           |  
|                                                                     |   | 8,693,953    |   |   | 14,319,646   |   |   | 8,589,570         |  
|Other items                                                          |   |              |   |   |              |   |   |                   |  
|Write-off of accounts receivable                                     |   | 167,414      |   |   | 291,063      |   |   | 18,360            |  
|Loss on disposal of equipment                                        |   | 36,720       |   |   | 364,918      |   |   | 402,411           |  
|Write-down or loss on disposal of mineral
      property (note 8(c)) |   | 657,634      |   |   | 203,339      |   |   |                  |  
|Other income                                                         |   | (513,338     | ) |   | (303,399     | ) |   | (111,202          | )
|Interest income                                                      |   | (466,688     | ) |   | (2,672,021   | ) |   | (1,118,396        | )
|Write-down of assets (note 7)                                        |   | 23,862       |   |   | 2,590,958    |   |   |                  |  
|                                                                     |   | (94,396      | ) |   | 474,858      |   |   | (808,827          | )
|                                                                     |   |              |   |   |              |   |   |                   |  
|Loss before
      income taxes                                       |   | 11,282,350   |   |   | 16,864,986   |   |   | 1,006,849         |  
|Current income tax expense
      (note 15)                           |   | 18,946       |   |   | 7,000        |   |   | 179,290           |  
|Future income tax (recovery) expense (note 15)                       |   | (2,645,000   | ) |   | (3,347,000   | ) |   | 2,261,110         |  
|Loss before non-controlling interest                                 |   | 8,656,296    |   |   | 13,524,986   |   |   | 3,447,249         |  
|Non-controlling interest                                             |   | (1,618,603   | ) |   | (549,024     | ) |   | 5,955,779         |  
|Loss for the period                                                  |   | 7,037,693    |   |   | 12,975,962   |   |   | 9,403,028         |  
|Other
      comprehensive loss (income) (note 3(i))                  |   | (5,429,700   | ) |   | 13,409,383   |   |   |                  |  
|Total comprehensive loss (income)                                    | $ | 1,607,993    |   | $ | 26,385,345   |   | $ | 9,403,028         |  
|                                                                     |   |              |   |   |              |   |   |                   |  
|                                                                     |   |              |   |   |              |   |   |                   |  
|Basic and diluted
      loss per common share                        | $ | 0.03         |   | $ | 0.05         |   | $ | 0.05              |  
|                                                                     |   |              |   |   |              |   |   |                   |  
|Weighted
      average number of common shares outstanding           |   | 267,164,309  |   |   | 237,924,152  |   |   | 196,428,551       |  

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

---

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

|                                                                                        |   | Year
      ended |   |   | Year
      ended |   |   | Nine
      months ended |  
|--------------------------------------------------------------------------------------- | - | ---------------- | - | - | ---------------- | - | - | ----------------------- | -
|                                                                                        |   | February 28,     |   |   | February 28,     |   |   | February 29,            |  
|                                                                                        |   | 2010             |   |   | 2009             |   |   | 2008                    |  
|                                                                                        |   |                  |   |   |                  |   |   |                         |  
|                                                                                        |   |                  |   |   |                  |   |   |                         |  
|Accumulated other comprehensive loss                                                    |   |                  |   |   |                  |   |   |                         |  
|Balance at beginning of the period                                                      | $ | (13,409,383      | ) | $ |                 |   | $ |                        |  
|Comprehensive income (loss) on
      currency translation of self-sustaining operations |   | 5,429,700        |   |   | (13,409,383      | ) |   |                        |  
|Balance at end of the period                                                            | $ | (7,979,683       | ) | $ | (13,409,383      | ) | $ |                        |  
|                                                                                        |   |                  |   |   |                  |   |   |                         |  
|Deficit                                                                                 |   |                  |   |   |                  |   |   |                         |  
|Balance at beginning of the
      period                                                | $ | (41,982,624      | ) | $ | (29,006,662      | ) | $ | (19,603,634             | )
|Loss for the period                                                                     |   | (7,037,693       | ) |   | (12,975,962      | ) |   | (9,403,028              | )
|Balance at end of the period                                                            | $ | (49,020,317      | ) | $ | (41,982,624      | ) | $ | (29,006,662             | )

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

---

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

|                                                                                                    | Year ended February 28, |  | Year ended February 28, |             | Nine months ended February 29, |                 
|--------------------------------------------------------------------------------------------------- | ----------------------- |  | ----------------------- | ----------- | ------------------------------ | ----------------
|                                                                                                    |                         |  |                         | 2010        |                                |                 
|                                                                                                    |                         |  |                         |             |                                |                 
|                                                                                                    |                         |  |                         |             |                                |                 
|                                                                                                    |                         |  |                         |             |                                |                 
|Share capital                                                                                       | Number of shares        |  |                         |             |                                | Number of shares
|Balance at beginning of the period                                                                  | 238,041,569             |  | $                       | 119,952,532 |                                | 223,755,854     
|Share purchase options exercised at
      $0.40 per share                                           |                        |  |                         |            |                                |                
|Share purchase options
      exercised at $0.42 per share                                           |                        |  |                         |            |                                |                
|Private placement November 2006, net of
      issue costs at $0.47 per share                        |                        |  |                         |            |                                |                
|Private placement
      January 2008, net of issue costs at $0.60 per share                         |                        |  |                         |            |                                |                
|Commission consideration for private
      placement at $0.60 per share                             |                        |  |                         |            |                                |                
|Warrants exercised at
      $0.60 per share                                                         |                        |  |                         |            |                                |                
|Consideration for acquisition of
      property net of issue cost at $0.78 per share                |                        |  |                         |            |                                |                
|                                                                                                    |                         |  |                         |             |                                |                 
|Consideration for additional interest
      of operating mines net of issue cost at $0.55 per share |                        |  |                         |            |                                | 14,285,715      
|Consideration for
      property finders fees at $0.78 per share                                    |                        |  |                         |            |                                |                
|Fair value of stock options allocated
      to shares issued on exercise                            |                        |  |                         |            |                                |                
|Share purchase options
      exercised at $0.62 per share                                           | 1,500                   |  |                         | 929         |                                |                
|Fair value of stock options allocated
      to shares issued on exercise                            |                        |  |                         | 808         |                                |                
|Private placement fourth quarter, net of
      issues cost at $0.065 per share (note 12(f))         | 132,800,000             |  |                         | 8,044,771   |                                |                
|                                                                                                    |                         |  |                         |             |                                |                 
|Balance at end of the period                                                                        | 370,843,069             |  | $                       | 127,999,040 |                                | 238,041,569     
|                                                                                                    |                         |  |                         |             |                                |                 
|Warrants                                                                                            |                         |  |                         |             |                                |                 
|Balance at beginning of the period                                                                  |                         |  | $                       | 1,693,197   |                                |                 
|Expired broker warrants                                                                             |                         |  |                         | (1,693,197  | )                              |                 
|Balance at
      end of the period                                                                  |                         |  | $                       |            |                                |                 
|                                                                                                    |                         |  |                         |             |                                |                 
|Contibuted surplus                                                                                  |                         |  |                         |             |                                |                 
|Balance at beginning of the period                                                                  |                         |  | $                       | 4,167,304   |                                |                 
|Stock-based compensation (note 12(b))                                                               |                         |  |                         | 335,358     |                                |                 
|Expired broker warrants                                                                             |                         |  |                         | 1,693,197   |                                |                 
|Fair value of stock options allocated to shares issued on exercise                                  |                         |  |                         | (808        | )                              |                 
|Balance at end of the period                                                                        |                         |  | $                       | 6,195,051   |                                |                 
|                                                                                                    |                         |  |                         |             |                                |                 
|Accumulated other comprehensive loss                                                                |                         |  |                         |             |                                |                 
|Balance at beginning of the period                                                                  |                         |  | $                       | (13,409,383 | )                              |                 
|Comprehensive income (loss) on currency
      translation of self-sustaining operations             |                         |  |                         | 5,429,700   |                                |                 
|Balance at
      end of the period                                                                  |                         |  | $                       | (7,979,683  | )                              |                 
|                                                                                                    |                         |  |                         |             |                                |                 
|Deficit                                                                                             |                         |  |                         |             |                                |                 
|Balance at beginning of the period                                                                  |                         |  | $                       | (41,982,624 | )                              |                 
|Loss for the period                                                                                 |                         |  |                         | (7,037,693  | )                              |                 
|Balance at end of the period                                                                        |                         |  | $                       | (49,020,317 | )                              |                 
|                                                                                                    |                         |  |                         |             |                                |                 
|                                                                                                    |                         |  |                         |             |                                |                 
|TOTAL
      SHAREHOLDERS' EQUITY                                                                    |                         |  | $                       | 77,194,091  |                                |                 

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 |  
|----------------------------------------------------------------------------------------- | - | ------------ | - | - | ------------ | - | - | ----------------- | -
|                                                                                          |   | Year ended   |   |   | Year ended   |   |   | ended             |  
|                                                                                          |   | February 28, |   |   | February 28, |   |   | February 29       |  
|Cash provided
      by (used in):                                                         |   | 2010         |   |   | 2009         |   |   | 2008              |  
|                                                                                          |   |              |   |   |              |   |   |                   |  
|Operating activities                                                                      |   |              |   |   |              |   |   |                   |  
|Loss for the period                                                                       | $ | (7,037,693   | ) | $ | (12,975,962  | ) | $ | (9,403,028        | )
|Items not affecting cash                                                                  |   |              |   |   |              |   |   |                   |  
|Accretion of reclamation
      obligation                                                 |   | 481,932      |   |   | 1,072,389    |   |   | 464,316           |  
|Amortization and
      depletion                                                          |   | 6,235,261    |   |   | 8,347,837    |   |   | 4,460,323         |  
|Amortization of capital lease
      equipment                                             |   | 3,310,466    |   |   | 2,939,360    |   |   | 2,073,618         |  
|Write-down of
      rough diamond inventories and mine supplies (note 6)                  |   | 1,380,538    |   |   |             |   |   |                  |  
|Write-down of assets                                                                      |   | 23,862       |   |   | 2,590,958    |   |   |                  |  
|Diamond sale
      price adjustment                                                       |   | 1,515,099    |   |   |             |   |   |                  |  
|Write-off of accounts receivable                                                          |   | 167,414      |   |   | 291,063      |   |   | 18,360            |  
|Stock-based
      compensation (note 12(b))                                               |   | 335,358      |   |   | 1,834,422    |   |   | 1,826,315         |  
|Write-down or loss on disposal
      of equipment and mineral properties                  |   | 694,354      |   |   | 364,918      |   |   | 402,411           |  
|Future income
      tax (recovery) expense                                                |   | (2,645,000   | ) |   | (3,347,000   | ) |   | 2,261,110         |  
|Asset retirement obligation
      change of estimates                                     |   | (876,341     | ) |   |             |   |   | 230,622           |  
|Unrealized
      foreign exchange loss (gain)                                             |   | 198,448      |   |   | (768,117     | ) |   | (2,967,105        | )
|Non-controlling interest                                                                  |   | (1,618,603   | ) |   | (549,024     | ) |   | 5,955,779         |  
|Changes in non-cash working capital
      items                                           |   |              |   |   |              |   |   |                   |  
|Accounts receivable                                                                       |   | (3,762,497   | ) |   | (790,642     | ) |   | 1,074,612         |  
|Amounts due to
      and from related parties                                             |   | 3,107        |   |   | (2,369,910   | ) |   | 245,819           |  
|Inventories                                                                               |   | (320,530     | ) |   | (123,266     | ) |   | (861,169          | )
|Prepayments                                                                               |   | (8,571       | ) |   | 885,083      |   |   | 1,758,863         |  
|Accounts payable and accrued
      liabilities                                            |   | 1,685,554    |   |   | 411,826      |   |   | (40,710           | )
|Taxes payable                                                                             |   | 127,148      |   |   | (434,286     | ) |   | (787,455          | )
|Cash provided by
      (used in) operating activities                                     |   | (110,694     | ) |   | (2,620,351   | ) |   | 6,712,681         |  
|                                                                                          |   |              |   |   |              |   |   |                   |  
|Investing activities                                                                      |   |              |   |   |              |   |   |                   |  
|Acquisition of Saxendrift Mines (Pty)
      Limited                                       |   |             |   |   | (10,652,026  | ) |   |                  |  
|Amounts paid pursuant to acquisition                                                      |   |             |   |   | (294,402     | ) |   |                  |  
|Restricted cash                                                                           |   | 2,949,919    |   |   | 10,636,405   |   |   |                  |  
|Purchase of equipment and mineral properties                                              |   | (2,696,965   | ) |   | (12,687,176  | ) |   | (21,003,124       | )
|Proceeds received on disposal of
      equipment                                          |   | 380,037      |   |   | 310,944      |   |   | 1,034,620         |  
|Other assets and deposits                                                                 |   | (685,817     | ) |   | 3,060,972    |   |   | 313,337           |  
|Reclamation deposits                                                                      |   | (21,968      | ) |   | (842,765     | ) |   | (778,811          | )
|Cash used in
      investing activities                                                   |   | (74,794      | ) |   | (10,468,048  | ) |   | (20,433,978       | )
|                                                                                          |   |              |   |   |              |   |   |                   |  
|Financing activities                                                                      |   |              |   |   |              |   |   |                   |  
|Principal repayments under capital
      lease obligations                                |   | (6,175,065   | ) |   | (6,078,521   | ) |   | (5,964,113        | )
|Common shares and warrants issued for cash, net of
      issue costs                      |   | 8,045,700    |   |   |             |   |   | 15,709,143        |  
|Amounts received (paid) to related
      parties                                          |   |             |   |   |             |   |   | (1,559,697        | )
|Amounts paid pursuant to property acquisition                                             |   |             |   |   |             |   |   | (7,466,565        | )
|Repayment of credit facility                                                              |   | (3,170,344   | ) |   |             |   |   |                  |  
|Drawdown of
      credit facility                                                         |   |             |   |   | 3,540,880    |   |   |                  |  
|Cash provided by (used in) financing activities                                           |   | (1,299,709   | ) |   | (2,537,641   | ) |   | 718,768           |  
|                                                                                          |   |              |   |   |              |   |   |                   |  
|                                                                                          |   |              |   |   |              |   |   |                   |  
|Increase (decrease) in cash and cash equivalents during
      the period                  |   | (1,485,197   | ) |   | (15,626,040  | ) |   | (13,002,529       | )
|                                                                                          |   |              |   |   |              |   |   |                   |  
|Cash and cash
      equivalents, beginning of period                                      |   | 3,997,807    |   |   | 19,623,847   |   |   | 32,626,376        |  
|                                                                                          |   |              |   |   |              |   |   |                   |  
|Cash and cash
      equivalents, end of period                                            | $ | 2,512,610    |   | $ | 3,997,807    |   | $ | 19,623,847        |  
|                                                                                          |   |              |   |   |              |   |   |                   |  
|Interest paid on facilities during the period                                             | $ | 576,272      |   | $ | 3,009,680    |   | $ | 270,976           |  
|Interest paid on capital leases                                                           |   | 969,530      |   |   | 1,592,001    |   |   | 1,289,385         |  
|Interest received                                                                         |   | 466,688      |   |   | 2,672,021    |   |   | 1,118,396         |  
|Income taxes paid during the period                                                       |   |             |   |   | 434,511      |   |   | 787,455           |  
|                                                                                          |   |              |   |   |              |   |   |                   |  
|Supplemental disclosure of non-cash
      investing and financing activities:             |   |              |   |   |              |   |   |                   |  
|Issuance of common shares - consideration for private
      placement                     |   |             |   |   |             |   |   | 300,000           |  
|Issuance of commons shares as
      consideration for acquisition of property (note 8(b)) |   |             |   |   | 7,857,143    |   |   | 6,081,842         |  
|Issuance of common shares as consideration for
      property finders fees                |   |             |   |   |             |   |   | 1,307,693         |  
|Fair value of stock options allocated
      to shares issued upon exercize                |   | 808          |   |   |             |   |   | 93,182            |  

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 February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

|1. | CONTINUANCE OF OPERATIONS AND GOING CONCERN
|-- | -------------------------------------------

Rockwell Diamonds Inc. (Rockwell
  or the Company) is incorporated under the British Columbia Business
  Corporations Act (formerly the Company Act of British Columbia),
  and is engaged in the business of diamond production and the acquisition and
  exploration of natural resource properties. The Companys principal mineral
  property interests are located in South Africa.

The accompanying consolidated financial
  statements have been prepared on a going concern basis in accordance with Canadian
  generally accepted accounting principles (''Canadian GAAP''). The going concern
  basis of presentation assumes that Rockwell will continue in operation for the
  foreseeable future and will be able to realise its assets and discharge its
  liabilities and commitments in the normal course of business.

For the year ended February 28, 2010
  the Company incurred consolidated losses of $7.0 million and has incurred accumulated
  losses to date of $49.1 million. In response to the economic crisis that started
  in 2009, the Company reduced costs in order to respond to reduced demand and
  prices for the Companys diamonds. In fiscal 2010, diamond prices have
  increased gradually from US$585 at the beginning of the year to US$1,269 at
  February 28, 2010. Analyst forecasts as of March 1, 2010 project prices of US$1,143
  per carat in the next twelve months and US$1,425 in the following twelve months.
  The Company expects to pass breakeven point in September 2010.

At year end, the Companys current
  assets exceeded its current liabilities by $0.3 million and the Companys
  total assets exceeded its total liabilities by $77.8 million. The Company has
  forecasted its cash flows for the fiscal years 2011 and 2012 and these forecasts
  indicate that the Company will continue as a going concern. The forecasts assume
  the plant operating at 85% of capacity, prices remain at current levels, which
  are 33% below pre-crisis levels and the South African Rand remains at current
  levels relative to the United States and Canadian dollar.

In order to increase cash resources and
  fund current year losses, the Company raised equity of $8.6 million in a private
  placement at the end of the current year and a further $8.0 million subsequent
  to the year end.

Based on the Companys cash resources
  and the above forecasts, the Company has sufficient working capital and reserves
  to maintain operations through breakeven point and sufficient cash and working
  capital to fund the continuing losses until then. Accordingly, the financial
  statements have been prepared on the basis of accounting policies applicable
  to a going concern. Future events beyond the Companys control may change
  the Companys ability to continue as a going concern. If the going concern
  concept was no longer appropriate, significant adjustments would be required
  to the carrying value of assets and liabilities and would be recorded at that
  time.

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

|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, its subsidiaries and its variable interest entities where the Company
  has been determined to be the primary beneficiary. All significant intercompany
  balances and transactions have been eliminated upon consolidation. 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 are set out in note 17.

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

|3. | SIGNIFICANT ACCOUNTING POLICIES
|-- | -------------------------------

(a) Revenue recognition

Revenue from rough diamond sales is recognized
  when persuasive evidence of an arrangement exists, the significant risks and
  rewards of ownership of the diamonds have been transferred to the customer,
  the Companys price to the customer is fixed or determinable and collection
  of the resulting receivable is reasonably assured. Significant risks and rewards
  of ownership of the diamonds normally transfer at the moment the sales tender
  has been awarded and finalized.

(b) Inventories

Rough diamond inventories are valued
  at the lower of average production cost and net realizable value. Production
  costs include the cost of consumable materials, direct labour, mine-site overhead
  expenses and amortization.

Supplies are valued at the lower of cost,
  at the average purchase cost basis, and net realizable value. Appropriate provisions
  are made for redundant and slow-moving items. Cost of items that are not ordinarily
  interchangeable, and goods and services produced and segregated for specific
  projects, are assigned by using a specific identification of their individual
  costs.

Consistent use of either first-in first-out
  or weighted average cost formula to measure the cost of other inventories is
  applied.

Previous write-downs are reversed to
  the lower of cost and net realizable value when there is a subsequent increase
  in the value of inventories.

(c) Property, plant and equipment

Property, plant and equipment are stated
  at cost less accumulated amortization and accumulated impairment losses. Assets
  are amortized on a straight-line method over the estimated useful lives of the
  related assets, which are as follows:

Buildings
      12 yearsProcessing plant and equipment
      4  10 yearsProcessing plant and equipment under capital
        lease obligation
      5  8 yearsOffice equipment
      6 yearsVehicles and light equipment
      5 years


Land is not amortized.

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.

(d) Mineral property interests

The amount presented for mineral property
  interests represents costs incurred to date and accumulated acquisition costs,
  less accumulated depletion and accumulated impairment losses. This does not
  necessarily reflect present or future values.

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

The acquisition costs of a mineral property
  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. Under the unit of production method,
  the periodic depreciation charge is calculated by dividing the actual resources  mined into the estimated resources at the beginning of the period and then multiplying
  the resulting fraction by the net carrying value of the related assets. Mineral
  resources are estimated by professional geologists and engineers in accordance
  with recognized industry, professional and regulatory standards. These estimates
  require inputs such as future diamond prices, future operating costs, and various
  technical geological, engineering, and construction parameters. Changes in any
  of these inputs could cause a significant change in the estimated resources
  which, in turn, could have a material effect on the carrying value of mineral
  properties. The unit of production method results in a systematic and rational
  allocation of the cost of the mineral property interests over the period the
  resources are utilized.

Mineral property acquisition costs are
  measured at the cash consideration paid and the fair market value of common
  shares issued for acquiring the mineral property interest. The fair value of
  the consideration paid through shares is determined based on the trading price
  of these shares on the effective date of the acquisition transaction.

Exploration expenditures and option payments
  incurred prior to the determination of the feasibility of mining operations
  are charged to operations as incurred. Exploration expenditures incurred subsequent
  to the mining operations which do not increase production or extend the life
  of operations are expensed in the period incurred. All administrative expenditures
  that do not directly relate to specific exploration and development activities
  on mineral properties are expensed in the period incurred.

An impairment review of mineral property
  interests is carried out when there is an indication that these may be impaired
  by comparing the carrying amount of the interest to its estimated recoverable
  amount. Where the recoverable amount is less than the carrying amount an impairment
  charge is included in expenses in order to reduce the carrying amount of mineral
  property interest to its fair value.

(e) Financial instruments

All financial instruments, including
  derivatives, are included on the Companys balance sheet and measured either
  at fair value or amortized cost. Changes in fair value are recognized in the
  statements of operations or accumulated other comprehensive income, depending
  on the classification of the related instruments.

All financial assets and liabilities
  are recognized when the entity becomes a party to the contract creating the
  asset or liability. All financial instruments are classified into one of the
  following categories: held for trading, held-to-maturity, loans and receivables,
  available-for-sale financial assets, or other financial liabilities. Initial
  and subsequent measurement and recognition of changes in the value of financial
  instruments depends on their initial classification:

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

- 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
      (loss).
- Available-for-sale financial assets are measured
      at fair value. Changes in fair value are included in other comprehensive
      income (loss) until the gain or loss is recognized in net earnings (loss)
      or if an impairment is determined to be other than temporary.
- Held for trading financial instruments are measured
      at fair value. All gains and losses are included in net earnings (loss)
      in the period in which they arise.
- 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 unrealized gains and losses are recognized in other comprehensive
      income (loss) until realized.

In accordance with these policies, the
  Company has classified its financial instruments as follows:

- Cash and cash equivalents, restricted cash and
      bank indebtedness are classified as held for trading financial instruments
      and are measured at fair value. Cash and cash 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.
- Accounts receivable and trade receivable from a
      related party are classified as loans and receivables and are measured at
      fair value and subsequently measured at amortized cost.
- Accounts payable and accrued liabilities, capital
      lease obligations, 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.
- Reclamation deposits invested in interest bearing
      money market linked investments are classified as available-for-sale assets
      and are carried at fair market value, with the unrealized gain or loss recorded
      in shareholders equity as a component of other comprehensive income
      (loss).

The Company also discloses quantitative
  and qualitative information that enable users to evaluate the significance of
  financial instruments on the Companys financial performance, and the nature
  and extent of risks arising from financial instruments to which the Company
  is exposed during the year and at the balance sheet date. In addition, the Company
  discloses managements objectives, policies and procedures for managing
  these risks. These disclosures are presented in note 5.

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

(f) Site closure and reclamation obligations

The Company recognizes 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. In the event the required decrease in the asset retirement
  cost is in excess of the carrying value, the excess amount is recorded as a
  change in estimate in the statement of operations.

Where the obligation is operational of
  nature and does not give rise to future economic benefit, the capitalized cost
  is amortized in the period incurred. Upon settlement of the liability, a gain
  or loss will be recorded if the actual cost incurred is different from the liability
  recorded.

Adjustments to environmental and ongoing
  site reclamation expenditure at operating mines are charged to operations in
  the period in which they occur.

(g) Impairment of long-lived assets

Long-lived assets, including mineral
  properties, property, plant and equipment, are reviewed for impairment periodically
  or whenever events or changes in circumstances indicate that the carrying value
  of an asset may not be recoverable. An impairment loss must be recognized if
  the carrying amount of a long-lived asset exceeds the sum of the undiscounted
  cash flows expected to result from its use and eventual disposition. In that
  event, the asset must be written down to its fair value (present value of future
  cash flows) and an impairment loss is recorded in earnings. Net estimated future
  cash flows from each long-lived asset are calculated based on anticipated future
  production, estimated diamond prices, operating costs, capital expenditures
  and site restoration expenses. The Company will determine fair value from recent
  transactions involving sales of similar long-lived assets, if deemed more appropriate
  in the circumstances. Managements estimate of future cash flows is subject
  to risk and uncertainties and it is reasonably possible that changes could occur
  with evolving economic conditions, which may affect the recoverability of the
  Companys long-lived assets and may have a material effect on the Companys
  results of operations and financial position.

Previously recognized impairment losses
  are not reversed if the recoverable amount subsequently increases.

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 February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

(h) Variable interest entities

Variable interest entities (VIEs)
  are entities in which equity investors do not have a controlling financial interest
  or the equity investment at risk is not sufficient to permit the entity to finance
  its activities without additional subordinated financial support provided by
  other parties. The Company consolidates the accounts of VIEs where it
  has been determined that the Company is the primary beneficiary, defined as
  the party that receives the majority of the expected residual returns and/or
  absorbs the majority of the entitys expected losses.

(i) Foreign currency translation

The company classifies its foreign operations
  as self-sustaining operations. Self-sustaining operations are foreign operations
  that are financially and operationally independent of the reporting enterprise
  such that the exposure to exchange rate changes is limited to the reporting
  enterprise's net investment in the foreign operation and which have a functional
  currency different from the entity. Assets and liabilities of self-sustaining
  operations are translated into the reporting currency at the exchange rate in
  effect at the balance sheet date. Revenue and expense items (including depreciation
  and amortization) are translated into the reporting currency at the exchange
  rate in effect on the dates on which such items are recognized in income during
  the period or appropriate average rates.

For self-sustaining operations exchange
  gains or losses arising on the translation from its functional currency to the
  reporting currency are presumed not to have a direct effect on the activities
  of the reporting enterprise and are incorporated in the financial statements
  of the reporting enterprise as a separate component of shareholders equity.
  The companys reporting currency is the Canadian dollar.

(j) Share capital

The Company records proceeds from share
  issuances net of issue costs. 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.

(k) Stock-based compensation

The Company has a share option plan which
  is described in note 12. The Company accounts for all stock-based payments under
  the fair value based method.

Under the fair value based method, equity
  settled stock-based payments are measured at the fair value of the option on
  grant date. Compensation costs are charged to operations on a straight line
  basis over the relevant vesting period. The counterpart is recognized in contributed
  surplus. Consideration received on the exercise of stock options is recorded
  as share capital and the related amount of contributed surplus is transferred
  to share capital.

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

(l) 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, 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 income tax assets also result
  from unused loss carry forwards, resource-related pools, and other deductions.
  A valuation allowance is recorded against any future income tax assets if it
  is more likely that the asset will not be realized.

(m) 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 of
  dilutive Stock based compensation 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
  for all periods presented.

(n) 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 long lived assets, rates
  for depletion and amortization, determination of reclamation obligations and
  the assumptions used in determining stock-based compensation expense. Actual
  results could differ from those estimates.

(o) Comparative figures

Prior years comparative figures
  have been reclassified to conform to the financial statement presentation in
  the current year.

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

|4. | CHANGES IN ACCOUNTING POLICIES
|-- | ------------------------------

Effective March 1, 2009, the Company
  adopted the following accounting standards issued by the Canadian Institute
  of Chartered Accountants (CICA). These new standards have been adopted
  with no restatement to prior period financial statements.

(a) Section 3064  Goodwill and
  Intangibles

The Canadian Accounting Standards Board
  ("AcSB") issued CICA Handbook Section 3064 which replaces Section 3062, Goodwill
  and Other Intangible Assets, and Section 3450, Research and Development
  Costs. This new section establishes revised standards for the recognition,
  measurement, presentation and disclosure of goodwill and intangible assets.
  The Company evaluated the impact of this new standard and concluded that this
  standard did not have a significant impact on the Companys consolidated
  financial statements.

(b) EIC 173  Credit Risk and
  the Fair Value of Financial Assets and Financial Liabilities

The AcSB issued EIC-173, Credit Risk
  and the Fair Value of Financial Assets and Financial Liabilities, which
  requires the Company to consider its own credit risk as well as the credit risk
  of its counterparties when determining the fair value of financial assets and
  liabilities, including derivative financial instruments. The standard was effective
  for the first quarter of fiscal 2010 and is required to be applied retrospectively
  without restatement of prior periods. The adoption of this standard did not
  have an impact on the valuation of financial assets or liabilities of the Company.

(c) EIC 174  Mining Exploration
  Costs

The AcSB issued EIC-174, Mining Exploration
  Costs, which provides guidance to mining enterprises related to the measurement
  of exploration costs and the conditions that a mining enterprise should consider
  when determining the need to perform an impairment review of such costs. The
  accounting treatments provided in EIC-174 have been applied in the preparation
  of these financial statements and did not have an impact on the valuation of
  the Companys mineral properties.

(d) Section 3862 - Financial Instruments
  - Disclosures

During the year, CICA Handbook Section
  3862, Financial Instruments  Disclosureswas amended to require
  enhanced disclosures about the relative reliability of the data, or inputs,
  that an entity uses to measure the fair values of its financial instruments.
  It requires financial instruments measured at fair value to be classified into
  one of three levels in the fair value hierarchy according to the
  relative reliability of the inputs used to estimate the fair values. Refer note
  5.

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

(e) Section 3855  Financial
  Instruments  Recognition and Measurement

The CICA amended Handbook Section 3855,
  Financial Instruments  Recognition and Measurementto provide additional
  guidance concerning the assessment of embedded derivatives upon reclassification
  of a financial asset out of the held-for-trading category, amend the definition
  of loans and receivables, amend the categories of financial assets into which
  debt instruments are required or permitted to be classified, amend the impairment
  guidance for held-to-maturity debt instruments and require reversal of impairment
  losses on available-for sale debt instruments when conditions have changed.
  These amendments were effective for fiscal years beginning on or after November
  1, 2008. These amendments did not have a material impact on the Companys
  consolidated financial statements.

(f) Accounting Policies Not Yet Adopted

| | (i) | International Financial Reporting Standards ("IFRS")                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | The AcSB has announced its decision to replace Canadian
        generally accepted accounting principles (Canadian GAAP) with
        IFRS for all Canadian publicly-listed companies. The AcSB announced that
        the changeover date will commence for interim and annual financial statements
        relating to fiscal years beginning on or after January 1, 2011. The transition
        date for the Company to changeover to IFRS will be January 1, 2011. Therefore,
        the IFRS adoption will require the restatement for comparative purposes
        of amounts reported by the Company for the year ending February 28, 2011.
        During the year, the Company has established a formal project plan, allocated
        internal resources and engaged expert consultants, monitored by a steering
        committee to manage the transition from Canadian GAAP to IFRS reporting.                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | ii) Business Combinations/Consolidated Financial
        Statements/Non- Controlling Interests                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | The AcSB issued CICA Sections 1582, Business Combinations,
        1601, Consolidated Financial Statements, and 1602, Non-Controlling
        Interests, which superseded current Sections 1581, Business Combinationsand 1600 Consolidated Financial Statements. These new Sections
        replace existing guidance on business combinations and consolidated financial
        statements to harmonize Canadian accounting for business combinations
        with IFRS. These Sections will be applied prospectively to business combinations
        for which the acquisition date is on or after the beginning of the first
        annual reporting period beginning on or after January 1, 2011. Earlier
        adoption is permitted. If an entity applies these Sections before January
        1, 2011, it is required to disclose that fact and apply each of the new
        sections concurrently. The Company is currently evaluating the impact
        of the adoption of these changes on its consolidated financial statements.

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

|5. | CAPITAL MANAGEMENT AND FINANCIAL INSTRUMENTS
|-- | --------------------------------------------

(a) Capital Management

As at February 28, 2010, the Company
  is not subject to externally imposed capital requirements other than its restricted
  cash and its overdraft facility. Refer to note 18.

At February 28, 2010, of the $2,512,610
  (2009  $3,997,807) cash and cash equivalents held by the Company, $1,376,073
  (ZAR10,066,386) ((2009  $3,626,750 (ZAR28,689,082)) were held in South
  African Rand (ZAR), and $1,136,537 (2009  $371,057) in Canadian
  Dollars. Cash and cash equivalents exclude cash subject to restrictions. Refer
  to note 18.

The Company's primary objectives when
  managing capital are to safeguard the Company's ability to continue as a going
  concern, so that it can continue to provide returns for shareholders, and to
  have sufficient funds on hand for business opportunities as they arise. The
  Company considers the components of shareholders equity, as well as its
  cash and cash equivalents, and bank indebtedness as capital. The Companys
  investment policy is to invest its cash in highly liquid short-term interest-bearing
  investments, having maturity dates of three months or less from the date of
  acquisition, that are readily convertible to known amounts of cash.

The Company manages the capital structure
  and makes adjustments to it in the light of changes in economic conditions and
  the risk characteristics of the underlying assets. The Company may issue new
  shares through private placements, issue debt, or return capital to shareholders,
  in order to maintain or adjust the capital structure.

In order to facilitate the management
  of its capital requirements, the Company prepares annual expenditure budgets
  that are updated as necessary depending on various factors, including successful
  capital deployment and general industry conditions.

There were no changes to the Companys
  approach to capital management during the year ended February 28, 2010 and the
  Company expects it will be able to raise sufficient capital resources to carry
  out its plans of operations for fiscal 2011 as disclosed in note 1.

(b) Carrying Amounts and Fair Values
  of Financial Instruments

The fair value of a financial instrument
  is the price at which a party would accept the rights and/or obligations of
  the financial instrument from an independent third party. Given the varying
  influencing factors, the reported fair values are only indicators of the prices
  that may actually be realized for these financial instruments.

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

Financial instruments measured at fair
  value are classified into one of three levels in the fair value hierarchy according
  to the relative reliability of the inputs used to estimate the fair values.
  The three levels of the fair value hierarchy are:

Level 1  Unadjusted quoted prices
  in active markets for identical assets or liabilities; 
  Level 2  Inputs other than quoted prices that are observable for the asset
  or liability either directly or indirectly; and 
  Level 3  Inputs that are not based on observable market data.

It is not practicable to determine the
  fair value of amounts due to and from related parties because of the related
  party nature of such amounts and the absence of a secondary market for such
  instruments.

|                                         |   | As at        |  |   | As at        |  |   | As at        |  |   | As at        | 
|---------------------------------------- | - | ------------ |  | - | ------------ |  | - | ------------ |  | - | ------------ | 
|                                         |   | February 28, |  |   | February 28, |  |   | February 28, |  |   | February 28, | 
|                                         |   | 2010         |  |   | 2010         |  |   | 2009         |  |   | 2009         | 
|Assets carried at fair value             |   | Carrying     |  |   | Fair value   |  |   | Carrying     |  |   | Fair value   | 
|                                         |   | amount       |  |   |              |  |   | amount       |  |   |              | 
|Cash and equivalents                     | $ | 2,512,610    |  | $ | 2,512,610    |  | $ | 3,997,807    |  | $ | 3,997,807    | 
|Restricted cash                          |   | 4,946        |  |   | 4,946        |  |   | 2,698,719    |  |   | 2,698,719    | 
|Reclamation deposits                     |   | 2,898,067    |  |   | 2,898,067    |  |   | 2,659,642    |  |   | 2,659,642    | 
|                                         | $ | 5,415,623    |  | $ | 5,415,623    |  | $ | 9,356,168    |  | $ | 9,356,168    | 
|                                         |   |              |  |   |              |  |   |              |  |   |              | 
|Assets carried at amortized cost         |   |              |  |   |              |  |   |              |  |   |              | 
|Accounts receivable                      | $ | 6,260,717    |  | $ | 6,260,717    |  | $ | 4,572,536    |  | $ | 4,572,536    | 
|                                         |   |              |  |   |              |  |   |              |  |   |              | 
|Liabilities carried at fair value        |   |              |  |   |              |  |   |              |  |   |              | 
|Bank indebtedness                        | $ | 698,015      |  | $ | 698,015      |  | $ | 3,540,880    |  | $ | 3,540,880    | 
|Liabilities carried at amortized cost    |   |              |  |   |              |  |   |              |  |   |              | 
|Accounts payable and accrued liabilities | $ | 6,458,751    |  | $ | 6,458,751    |  | $ | 4,832,038    |  | $ | 4,832,038    | 
|Capital lease obligations                |   | 3,336,521    |  |   | 3,336,521    |  |   | 8,724,777    |  |   | 8,724,777    | 
|                                         | $ | 9,795,272    |  | $ | 9,795,272    |  | $ | 13,556,815   |  | $ | 13,556,815   | 

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

The following table illustrates the classification
  of the Companys financial instruments recorded at fair value within the
  fair value hierarchy as at February 28, 2010:

|                     |   | Financial assets at fair value | 
|-------------------- | - | ------------------------------ | 
|                     |   |                                | 
|                     |   | Level 1                        | 
|                     |   |                                | 
|Cash and equivalents | $ | 2,512,610                      | 
|Restricted cash      |   | 4,946                          | 
|Reclamation deposits |   | 2,898,067                      | 
|                     | $ | 5,415,623                      | 

The carrying amounts of the Company's
  other financial instruments approximate their fair values. The following tables
  show the estimated fair values of the financial instruments:

|                  |   | Financial liabilities at fair value | 
|----------------- | - | ----------------------------------- | 
|                  |   |                                     | 
|                  |   | Level 1                             | 
|                  |   |                                     | 
|Bank Indebtedness | $ | 698,015                             | 

(c) Financial Instrument Risk Exposure
  and Risk Management

The Company is exposed in varying degrees
  to a variety of financial instrument related risks. The Board approves and monitors
  the risk management processes, including treasury policies, counterparty limits,
  controlling and reporting structures, credit risk, liquidity risk, currency
  risk, interest risk and diamond price risk. The types of risk exposure and the
  way in which such exposure is managed are provided as follows:

Credit Risk

Credit risk is the risk of potential
  loss to the Company if a counterparty to a financial instrument fails to meet
  its contractual obligations. The Companys credit risk is primarily attributable
  to its liquid financial assets including cash and equivalents, restricted cash,
  accounts receivable and trade receivable from a related party. The carrying
  values of the Companys cash and cash equivalents, accounts receivable
  and trade receivable from a related party represents the maximum exposure to
  credit risk.

The Company limits exposure to credit
  risk on liquid financial assets through maintaining its cash and equivalents
  with high-credit quality financial institutions. The Company does not have financial
  assets that are invested in asset backed commercial paper.

The Company minimizes its credit risk
  by reducing credit terms to 30 days on its sales.

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

The aging of receivables at the reporting
  date was:

|                     |   | Gross     |  |   | Impairment 2010 |  |   | Gross     |  |   | Impairment | 
|-------------------- | - | --------- |  | - | --------------- |  | - | --------- |  | - | ---------- | 
|                     |   | 2010      |  |   |                 |  |   | 2009      |  |   | 2009       | 
|Not past due         | $ | 6,428,131 |  | $ | 167,414         |  | $ | 4,863,599 |  | $ | 291,063    | 
|                     |   |           |  |   |                 |  |   |           |  |   |            | 
|Past due 0-30 days   |   |          |  |   |                |  |   |          |  |   |           | 
|Past due 31-120 days |   |          |  |   |                |  |   |          |  |   |           | 
|More than one year   |   |          |  |   |                |  |   |          |  |   |           | 
|                     |   |           |  |   |                 |  |   |           |  |   |            | 
|                     | $ | 6,428,131 |  | $ | 167,414         |  | $ | 4,863,599 |  | $ | 291,063    | 

Based on history the Company believes
  that, apart from the above, no other impairment allowance is necessary in respect
  of trade receivables.

During the current period a diamond sale
  price adjustment of $1,515,098 (2009 - $ nil) was made against diamond revenue
  recognized. This diamond sale price adjustment relates to the retainer debtor
  balance with respect to an agreement between the Company and a client purchasing
  large diamonds. The diamond sale price adjustment was attributable to the decline
  in diamond prices subsequent to the original sale. During the current period
  an impairment of $167 414 (2009 - $291,063) was made against debtors. The impairment
  in the current year is due to care and maintenance cost of $167,414 in relation
  to Entruscan, refer to note 20 (a).

Liquidity Risk

Liquidity risk is the risk that the Company
  will not be able to meet its financial obligations as they fall due. The Company
  raised $8.6 million in a private placement at the end of the current year and
  a further $8.0 million subsequent to the year end. After taking into account
  cash flows from operations and the Companys holdings of cash and cash
  equivalents, the Company believes that these sources will be sufficient to cover
  the likely requirements for the foreseeable future. The Companys cash
  and equivalents are invested in business accounts which are available on demand
  for the Companys programs, and which are not invested in any asset backed
  deposits/investments.

The Company operates in South Africa.
  Like other foreign entities operating there, the Company is subject to currency
  exchange controls administered by the South African Reserve Bank, that country's
  central bank. A significant portion of the Company's funding structure for its
  South African operations consists of advancing loans to its South Africa incorporated
  subsidiaries and it is possible the Company may not be able to acceptably repatriate
  such funds once those subsidiaries are able to repay the loans or repatriate
  other funds such as operating profits should any develop. The repatriation of
  cash held in South Africa is permitted upon the approval of the South African
  Reserve Bank. Cash balances in South Africa are disclosed below.

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

The following are the contractual maturities
  of financial liabilities at carrying values (excluding interest payments):

| | February 28, 2010                    |   | Carrying  |  |   | Contractual |  |   | 2011      |  |   | 2012    |  |   | 2013 | 
| | ------------------------------------ | - | --------- |  | - | ----------- |  | - | --------- |  | - | ------- |  | - | ---- | 
| |                                      |   | amount    |  |   | cash flow   |  |   |           |  |   |         |  |   |      | 
| |                                      |   |           |  |   |             |  |   |           |  |   |         |  |   |      | 
| | Non-derivative financial liabilities |   |           |  |   |             |  |   |           |  |   |         |  |   |      | 
| | Accounts payable and                 | $ | 6,458,751 |  | $ | 6,458,751   |  | $ | 6,458,751 |  | $ |        |  | $ |     | 
| | accrued liabilities                  |   |           |  |   |             |  |   |           |  |   |         |  |   |      | 
| | Due to related parties               |   | 1,055,889 |  |   | 1,055,889   |  |   | 641,323   |  |   | 414,566 |  |   |     | 
| | Bank indebtedness                    |   | 698,015   |  |   | 698,015     |  |   | 698,015   |  |   |        |  |   |     | 
| | Capital lease obligations            |   | 3,336,521 |  |   | 3,336,521   |  |   | 3,196,189 |  |   | 140,332 |  |   |     | 

| | February 28, 2009                    |   | Carrying  |  |   | Contractual |  |   | 2010      |  |   | 2011      |  |   | 2012    | 
| | ------------------------------------ | - | --------- |  | - | ----------- |  | - | --------- |  | - | --------- |  | - | ------- | 
| |                                      |   | amount    |  |   | cash flow   |  |   |           |  |   |           |  |   |         | 
| |                                      |   |           |  |   |             |  |   |           |  |   |           |  |   |         | 
| | Non-derivative financial liabilities |   |           |  |   |             |  |   |           |  |   |           |  |   |         | 
| | Accounts payable and                 | $ | 4,832,038 |  | $ | 4,832,038   |  | $ | 4,832,038 |  | $ |          |  | $ |        | 
| | accrued liabilities                  |   |           |  |   |             |  |   |           |  |   |           |  |   |         | 
| | Due to related parties               |   | 576,985   |  |   | 576,985     |  |   | 193,655   |  |   | 383,330   |  |   |        | 
| | Bank indebtedness                    |   | 3,540,880 |  |   | 3,540,880   |  |   | 3,540,880 |  |   |          |  |   |        | 
| | Capital lease obligations            |   | 8,724,777 |  |   | 9,537,062   |  |   | 6,570,081 |  |   | 2,860,859 |  |   | 106,122 | 

Currency Risk

In the normal course of business, the
  Company enters into transactions for the purchase of supplies and services denominated
  in South African Rand (ZAR). In addition, the Company has cash and
  ertain liabilities denominated in ZAR. As a result, the Company is subject to
  currency risk from fluctuations in foreign exchange rates. The Company has not
  entered into any derivative or other financial instruments to mitigate this
  foreign exchange risk.

The exposure of the Companys financial
  assets to currency risk is as follows:

| | Currency                            |   | February 28, 2010 |  |   | February 28, 2009 | 
| | ----------------------------------- | - | ----------------- |  | - | ----------------- | 
| | South African Rand                  |   |                   |  |   |                   | 
| | Cash and cash equivalents           | $ | 1,376,073         |  | $ | 3,626,750         | 
| | Restricted cash                     |   | 4,946             |  |   | 2,698,719         | 
| | Accounts receivable                 |   | 6,260,717         |  |   | 4,572,536         | 
| | Trade receivable from related party |   | 46,108            |  |   | 49,215            | 
| | Reclamation deposits                |   | 2,898,067         |  |   | 2,659,642         | 
| | United States Dollar                |   |                   |  |   |                   | 
| | Cash and cash equivalents           |   | 10,632            |  |   | 19,649            | 
| | Total Financial
      Assets        | $ | 10,596,543        |  | $ | 13,626,511        | 

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

The exposure of the Companys financial
  liabilities to currency risk is as follows:

| | Currency                          |   | February 28, 2010 |  |   | February 29, 2009 | 
| | --------------------------------- | - | ----------------- |  | - | ----------------- | 
| | South African Rand                |   |                   |  |   |                   | 
| | Bank indebtedness                 | $ | 698,015           |  | $ | 3,540,880         | 
| | Accounts payable and accrued      |   | 5,811,039         |  |   | 4,204,699         | 
| | liabilities                       |   |                   |  |   |                   | 
| | Due to related parties            |   | 414,566           |  |   | 383,330           | 
| | Capital lease obligations         |   | 3,336,521         |  |   | 8,724,777         | 
| | Total Financial
      Liabilities | $ | 10,260,141        |  | $ | 16,853,686        | 

The following exchange rates applied
  during the fiscal years ended February 28, 2010 and 2009:

| |            |  | Annual Average rate |  |  | Year end spot rate | 
| | ---------- |  | ------------------- |  |  | ------------------ | 
| |            |  | February 28,        |  |  | February 28,       | 
| |            |  | 2010                |  |  | 2009               | 
| | CAD vs ZAR |  | 0.1386              |  |  | 0.1276             | 

Sensitivity analysis:

A 10 percent increase/decrease of the
  Canadian dollar against the ZAR at February 28, 2010 would have a net loss gain/loss
  effect of $391,238 (2009  $ 659,120). This analysis assumes that all other
  variables, in particular interest rates, remain constant.

Interest Rate Risk

The Company is subject to interest rate
  risk with respect to its investments in cash and cash equivalents. The Companys
  policy is to invest cash at floating rates of interest and cash reserves are
  to be maintained in cash equivalents in order to maintain liquidity, while achieving
  a satisfactory return for shareholders. Fluctuations in interest rates when
  the cash equivalents mature impact interest income earned.

The Company has capital lease obligations
  with several financial institutions as detailed in note 9. The capital leases
  bear interest at rates linked to the prevailing prime rate of the relative financial
  institution, and are subject to interest rate change risk.

Sensitivity analysis:

A 10 percent increase/decrease of the
  prime rate for the year ended February 28, 2010 would have a net loss/gain effect
  of $154,580 (2009  $159,200). This analysis assumes that all other variables,
  in particular foreign exchange rates, remain constant.

Diamond price risk

The value of the Company's mineral resource
  properties is dependent on the price and the outlook of diamonds. Diamond demand
  and prices fluctuate and are affected by numerous factors beyond the control
  of the Company, including worldwide economic trends, worldwide levels of diamond
  discovery and production and the level of demand for, and discretionary spending
  on, luxury goods such as diamonds and jewellery. Low or negative growth in the
  worldwide economy, prolonged credit market disruptions or activities creating
  disruptions in economic growth could result in decreased demand for diamonds,
  thereby negatively affecting the price of diamonds. Similarly, a substantial

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

increase in the worldwide level of diamond
  production could also negatively affect the price of diamonds. In each case,
  such developments could materially adversely affect the Companys results
  of operations.

The profitability of the Company's operations
  is highly correlated to the market price of diamonds. If diamond prices decline
  for a prolonged period below the cost of production of the Company's operating
  mines, it may not be economically feasible to continue production.

|6. | INVENTORIES
|-- | -----------

| |                           |   | As at             |  |   | As at             | 
| | ------------------------- | - | ----------------- |  | - | ----------------- | 
| |                           |   | February 28, 2010 |  |   | February 28, 2009 | 
| | Rough diamond inventories | $ | 1,283,604         |  | $ | 1,845,986         | 
| | Mine supplies             |   | 1,692,454         |  |   | 1,873,933         | 
| | Total inventories         | $ | 2,976,058         |  | $ | 3,719,919         | 

As at February 28, 2010, rough diamond
  inventories were valued at net realizable value and mine supplies at cost less
  accumulative impairment charges. Obsolete mine supplies were written down by
  $588,927 (2009  $ nil) to $1,692,454 during the year.

The net realizable value of diamond inventories
  are estimated at the average price per carat achieved for the most recent diamond
  tender taking into account the variable factors of clarity, carat, shape and
  color. As at February 28, 2010, rough diamond inventories were written down
  by $791,611 from cost to net realizable value.

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

|7. | PROPERTY, PLANT AND EQUIPMENT
|-- | -----------------------------

| |                                                          |   | As at February 28, 2010 | 
| | -------------------------------------------------------- | - | ----------------------- | 
| |                                                          |   |                         | 
| |                                                          |   |                         | 
| |                                                          |   |                         | 
| |                                                          |   | Cost                    | 
| | Land and buildings                                       | $ | 7,226,428               | 
| | Processing plant and equipment                           |   | 66,230,352              | 
| | Processing plant and equipment under capital
      lease |   | 13,553,529              | 
| | obligation                                               |   |                         | 
| | Office equipment                                         |   | 946,759                 | 
| | Vehicles and light
      equipment                       |   | 1,675,705               | 
| |                                                          | $ | 89,632,773              | 

| |                                                          |   | As at February 29, 2009 | 
| | -------------------------------------------------------- | - | ----------------------- | 
| |                                                          |   |                         | 
| |                                                          |   |                         | 
| |                                                          |   | Cost                    | 
| |                                                          |   |                         | 
| | Land and buildings                                       | $ | 5,822,677               | 
| | Processing plant and equipment                           |   | 52,090,193              | 
| | Processing plant and equipment under capital
      lease |   | 21,374,971              | 
| | obligation                                               |   |                         | 
| | Office equipment                                         |   | 859,678                 | 
| | Vehicles and light
      equipment                       |   | 1,579,592               | 
| |                                                          | $ | 81,727,111              | 

Components of property, plant and equipment
  are amortized over their estimated useful life. The amortization charge for
  the current year was $7,018,998 (2009  $8,903,261).

The groups bankers have registered
  two notarial general covering bonds of ZAR10.0 million each ($1,366,998) over
  all moveable assets on the property of the farm Holpan, Barkley West, Northern
  Cape. In 2009 one notarial general covering bond of ZAR10.0 million ($1,366,998)
  was registered over moveable assets.

As at February 28, 2010, the Company
  completed an impairment analysis which considered the indicators of impairment
  in accordance with Section 3063, Impairment of Long-lived Assets
  as well as EIC-126, Accounting by Exploration Companies for Exploration
  Costs and AcG-11, Enterprises in the Development Stage. The
  Company prepared cash flow forecasts for the mine and development projects using
  price assumptions reflecting prevailing diamond prices and analysts consensus
  forecasts, current life-of-mine plans and forecast operating cost profiles.
  The analysis was based on the life of mining properties, using long-term price
  assumptions of US$1,800, US$500 and US$800 per carat for the Saxendrift, Klipdam
  and Holpan mines respectively as well as a foreign exchange of US$1 to ZAR 7.67
  in the next twelve months, reducing to US$1 to ZAR 7.00 in the following year.
  Sales are assumed to remain constant over the year, even though the BMO (Bank
  of Montreal) scale indicates increasing demand and prices. Production volumes
  were set at 85% of operation production capacity with increased efficiencies
  on diesel in a revised production method. Other assumptions used in determining
  whether impairment existed include: (a) Inflation rate of 5%, (b) Prime lending
  rate of 10%, (c) Standard finance lease periods of 36 months, (d) 8% increase
  in salaries and wages, (e) Royalty payments average of 1.7%, and (f) Electricity
  increases of 35%.

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

The undiscounted cash flows were greater
  than the carrying value of the long lived assets and thus, a comparison to fair
  value was not required.

The Company identified items of property,
  plant and equipment for which the carrying amount at year end was higher than
  its undiscounted cash flows. These items, still in use at year end, were impaired
  by $23,862 (2009 - $2,590, 958) to its fair value.

|8. | MINERAL PROPERTY INTERESTS
|-- | --------------------------

| |                                                                |   | As at             |   |   | As at             |  
| | -------------------------------------------------------------- | - | ----------------- | - | - | ----------------- | -
| |                                                                |   | February 28, 2010 |   |   | February 28, 2009 |  
| |                                                                |   |                   |   |   |                   |  
| | H.C. Van Wyk Diamonds Ltd and Klipdam Mining
      Company Ltd |   |                   |   |   |                   |  
| |                                                                |   |                   |   |   |                   |  
| | Balance, beginning of year                                     | $ | 22,373,983        |   | $ | 25,247,936        |  
| | Acquisition costs                                              |   |                  |   |   | 55,746            |  
| | Foreign exchange adjustments                                   |   | 2,042,252         |   |   | (7,321,972        | )
| | Future income tax liability                                    |   |                  |   |   | 6,390,327         |  
| | Change in future income
      tax rate                         |   |                  |   |   | (201,415          | )
| | Depletion of mineral properties during
      the year          |   | (1,630,370        | ) |   | (1,796,639        | )
| | Write down of mineral property                                 |   | (657,634          | ) |   |                  |  
| | H.C. Van Wyk Diamonds Ltd and Klipdam Mining                   |   | 22,128,231        |   |   | 22,373,983        |  
| | Company Ltd, end of year                                       |   |                   |   |   |                   |  
| |                                                                |   |                   |   |   |                   |  
| |                                                                |   |                   |   |   |                   |  
| | Saxendrift Mine (Pty) Ltd                                      |   |                   |   |   |                   |  
| |                                                                |   |                   |   |   |                   |  
| | Balance, beginning of year                                     |   | 6,520,494         |   |   |                  |  
| | Acquisition costs                                              |   | 1,703,195         |   |   | 5,295,754         |  
| | Foreign exchange adjustments                                   |   | 733,083           |   |   | (178,144          | )
| | Future income tax liability                                    |   | 662,354           |   |   | 1,990,181         |  
| | Depletion
      of mineral properties during the year          |   | (896,359          | ) |   | (587,297          | )
| | Saxendrift Mine (Pty) Ltd, end of year                         |   | 8,722,767         |   |   | 6,520,494         |  
| |                                                                |   |                   |   |   |                   |  
| | Balance, end of year                                           | $ | 30,850,998        |   | $ | 28,894,477        |  

Mineral resources are estimated by professional
  geologists and engineers in accordance with recognized industry, professional
  and regulatory standards. These estimates require inputs such as future diamond
  prices, future operating costs, and various technical geological, engineering,
  and construction parameters. Changes in any of these inputs could cause a significant
  change in the estimated resources which, in turn, could have a material effect
  on the carrying value of mineral properties.

The carrying value of mineral properties
  is also dependant on the valuation used for the common shares and warrants of
  the Company issued for the acquisition of mineral properties. The value of the
  common shares issued is the price of the common shares of the Company at the
  date of issuance to effect the acquisition. The Company uses the Black-Scholes
  pricing model to estimate a value for the warrants issued upon the acquisition
  of a property. This model, and other models which are used to value options
  and warrants, require inputs such as expected volatility, expected life to exercise,
  and interest rates. Changes in any of these inputs could cause a significant
  change in the carrying value initially recorded for mineral properties at acquisition
  dates.

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

(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), was 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 between Douglas and Prieska 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:

- 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;
- a series of large remnant alluvial diamond terraces;
- the plant, machinery, equipment and other movable
      assets owned and/or used by THO;
- certain employees of THO; and
- a rehabilitation liability which will be taken
      over by the Company.

On April 11, 2008 the Company completed
  the MORO acquisition. Registration and transfer of Saxendrift Mine (Pty) Ltd
  and the Saxendrift mining right, as well as prospecting rights in respect of
  the Kwartelspan, Zwemkuil-Mooidraai and part of the Remhoogte-Holsloot projects
  were obtained. In March 2009, the Niewejaarskraal mining rights were acquired.

On April 11, 2009 all the conditions
  precedent were met and the Company paid ZAR17.9 million ($2.4 million) in cash
  to Trans Hex for the remaining Niewejaarskraal mining rights of which ZAR12.4
  million ($1.7 million) was capitalized. This action completed the Saxendrift/Remhoogte-Holsloot
  transaction negotiated during April 2008. The Company has no further commitments
  in relation to more acquisitions.

The results of the operations of Saxendrift
  Mine (Pty) Ltd have been included in the consolidated financial statements since
  the date of acquisition.

Effective July 1, 2008, a Black Economic
  Empowerment (BEE) group, Liberty Lane Investments (Pty) Ltd (Liberty
  Lane) acquired a shareholding of 26% by subscribing for shares in Saxendrift
  Mine (Pty) Ltd. The acquisition by Liberty Lane was financed via loans provided
  by Rockwell RSA to Liberty Lane. The Company has determined that its 74% interest
  in Saxendrift Mine (Pty) Ltd qualifies as a variable interest entity (VIE)
  due to certain voting arrangements required under the Saxendrift Mine (Pty)
  Ltd shareholders agreement. The Company has also determined the Company is the
  primary beneficiary of the VIE as it is most closely related to the activities
  and has primary exposure to the expected losses of the VIE. Consequently, the
  Company has consolidated 100% of the results of operations of Saxendrift Mine
  (Pty) Ltd since the date of acquisition. Upon full repayment of the outstanding
  loans by Liberty Lane, the Company will increase the non-controlling interest
  to 26% and consolidate 74% of Saxendrift Mine (Pty) Ltds results of operations.
  As at February 28, 2010, the status in relation this transaction and the accounting
  treatment remain unchanged.

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

(b) Acquisition of Durnpike Investments
  (Pty) Limited

On January 31, 2007, the Company completed
  the acquisition of Durnpike Investments (Pty) Limited (Durnpike),
  a private South African company (Acquisition). Durnpike held interest
  in the Holpan, Klipdam and Wouterspan properties in South Africa.

On March 1, 2008, the Company ratified
  an exchange agreement and increased its ownership of H.C. Van Wyk Diamonds Ltd
  (HCVW) and Klipdam Mining Company Limited (Klipdam)
  by 34%, resulting in an 85% interest, by issuing 14,285,715 common shares of
  the Company pursuant to the Definitive Agreement and thereby reducing the non-controlling
  interest to 15%. On June 1, 2008, the empowerment (BEE) group, African
  Vanguard Resources (Pty) Ltd increased its shareholding from 15% to 26% by subscribing
  for an additional 11% shares in HCVW and Klipdam, thereby reducing the Companys
  interest to 74%. This additional 11% is at a subscription price of ZAR17.5 million
  and is funded by Rockwell Resources RSA (Pty) Ltd. Consequently, the Company
  has consolidated 85% of the results of operations of HCVW and Klipdam until
  the outstanding loans by the BEE group are fully repaid, at which time the Company
  will increase the non-controlling interest to 26% and consolidate 74% HCVW and
  Klipdams results of operations. As at February 28, 2010, the status in
  relation this transaction and the accounting treatment remain unchanged.

(c) Galputs Minerale Project

As provided for in the Durnpike Acquisition
  Definitive Agreement, the Company executed an agreement in relation to the acquisition
  of control of the mineral rights relating to the Galputs Minerale Project (Galputs).
  In order for the Company to fully control the Galputs minerals rights, the South
  African Department of Minerals and Energy (DME) had to give its
  final written approval to transfer of the shares of Galputs from Virgilia Investments
  Inc. to the Company on or before May 31, 2008. Since no written approval had
  been received from the DME by May 31, 2008, the provisions of the agreement
  shall not be enforced and as a result all parties have been restored to a position
  prior to entering the agreement.

(d) Makoenskloof Property, South Africa

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 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.

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 was committed to pay
  the remaining consideration of ZAR2.3 million ($294,402) and completed the payment
  of the final consideration in August 2008. The transaction was completed in
  fiscal 2009.

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

(e) Kwango River Project  Democratic
  Republic of Congo

The Company had planned to incur US$7.0
  million on a feasibility study on the Kwango River Project with Midamines SPRL
  (Midamines), the holder of an exploration permit in the Democratic
  Repulic of Congo.

During the first quarter of 2008, pursuant
  to an amending agreement to the Midamines Agreement, the Company paid consideration
  of $600,000 to Midamines in order to increase the size of the concession (Permit
  331). As part of such amending agreement, Midamines waived its right to payment
  of the abovementioned US$1,200,000 royalty payment on December 31, 2007. Subsequently,
  and pursuant to Midamines persistent breach of material provisions of
  the Midamines Agreement (coupled with its failure to remedy such instances of
  breach notwithstanding notice to do so), Durnpike cancelled the Midamines Agreement
  and wrote down mineral properties to the value of $657,634 (2009  $203,339)
  as well as claimed damages.

Midamines has subsequently disputed Durnpikes
  entitlement to cancel the Midamines Agreement and has demanded payment of US$1,200,000
  as well as other amounts which have not yet been determined. Refer to note 19.

(f) Disposal of Minera Ricardo

During the period ended August 31, 2008,
  the Company sold its 100% interest in certain mineral exploration and exploitation
  concessions in the Calama Mining District in Chile known as the Ricardo Property
  through the sale of all its shares in Minera Ricardo Resources Inc. S.A. (Minera
  Ricardo) to Hunter Dickinson Acquisitions Inc.,a company with
  a director and officer in common, for a nominal price of $1, resulting in a
  loss of $203,339.

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

|9. | CAPITAL LEASE OBLIGATIONS                                                                                                                                
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                          
|   | Included in property, plant and equipment are mining
        equipment that the Company acquired pursuant to three year capital lease
        agreements.
|   |                                                                                                                                                          
|   | The Companys capital lease obligations are with
        the following financial institutions:                                                           

As
        at
      
      
      As
        atFebruary 28, 2010
      
      
      February 28, 2009Stannic
      $
      
      
      $
      883,409Wesbank
      
      48,792
      
      
      81,779Nedbank
      
      
      
      
      178,092Komatfin
      
      3,287,729
      
      
      7,581,497$
      3,336,521
      
      $
      8,724,777


Capital lease obligations as detailed
  above are secured over plant and equipment and are repayable, on average, in
  36 monthly installments with the final payment being on June 30, 2011. Interest
  is charged at rates of between 8.00% to 12.00% per annum linked to the prevailing
  prime rate of the relative financial institution mentioned above. There are
  no significant restrictions imposed on the lessee as a result of the lease agreements.

Future minimum lease payments are as
  follows:

As
        at
      
      
      As
        atFebruary 28, 2010
      
      
      February 28, 20092010
      $
      
      
      $
      6,570,0812011
      
      3,301,394
      
      
      2,860,8592012
      
      141,544
      
      
      106,122Total minimum lease payments
      
      3,442,938
      
      
      9,537,062Less: interest portion
      
      (106,417
      )
      
      (812,285
      )Present value of
        capital lease obligations
      
      3,336,521
      
      
      8,724,777Current portion
      
      3,196,189
      
      
      5,440,181Non-current portion
      $
      140,332
      
      $
      3,284,596


---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

|10. | RECLAMATION OBLIGATION
|--- | ----------------------

The continuity of the provision for reclamation
  costs related to the Holpan, Wouterspan, Klipdam and Saxendrift mines, are as
  follows:

| |                                                                |   | As at             |   |   | As at             |  
| | -------------------------------------------------------------- | - | ----------------- | - | - | ----------------- | -
| |                                                                |   | February 28, 2010 |   |   | February 28, 2009 |  
| |                                                                |   |                   |   |   |                   |  
| | Holpan, Wouterspan and Klipdam Mines                           |   |                   |   |   |                   |  
| |                                                                |   |                   |   |   |                   |  
| | Balance, beginning of year                                     | $ | 2,690,335         |   | $ | 1,755,820         |  
| | Changes during the period:                                     |   |                   |   |   |                   |  
| | Reclamation (expenditure incurred)/obligation
      recognized |   | (473,278          | ) |   | (10,274           | )
| | Foreign exchange on reclamation                                |   | 219,113           |   |   |                  |  
| | Accretion expense                                              |   | 481,932           |   |   | 944,789           |  
| | Balance, end of year                                           | $ | 2,918,102         |   | $ | 2,690,335         |  
| |                                                                |   |                   |   |   |                   |  
| |                                                                |   |                   |   |   |                   |  
| | Saxendrift Mine                                                |   |                   |   |   |                   |  
| |                                                                |   |                   |   |   |                   |  
| | Balance, beginning of year                                     | $ | 1,112,320         |   | $ |                  |  
| | Changes during the year:                                       |   |                   |   |   |                   |  
| | Reclamation (expenditure incurred)/obligation
      recognized |   | (403,063          | ) |   | 984,720           |  
| | Foreign exchange on reclamation                                |   | 95,625            |   |   |                  |  
| | Accretion expense                                              |   |                  |   |   | 127,600           |  
| | Balance, end of year                                           | $ | 804,882           |   | $ | 1,112,320         |  
| |                                                                |   |                   |   |   |                   |  
| | Total reclamation
      obligation, end of year                | $ | 3,722,984         |   | $ | 3,802,655         |  

The liability is based on the disturbance
  of the natural physical environment due to the alluvial mining methods that
  the company engages in. The volume of disturbance is quantified on a monthly
  basis by a professional surveyor through physical observation and technical
  quantification in cubic meters and is therefore not discounted.

The Company does not make use of a mining
  contractor and applies an internal costing rate per cubic meter which is based
  on applying its own resources and equipment in doing such rehabilitation. This
  costing rate represents the operating cost, including fuel, applying specific
  mining fleet units to the rehabilitation process and labour usage.

The physical disturbance in the cubic
  meters multiplied by the costing rate represent the rehabilitation liability
  at any one stage.

As required by regulatory authorities,
  at February 28, 2010, the Company had cash reclamation deposits totaling $2,898,067
  (2009  $2,659,642) comprised of $1,238,104 (2009  $1,654,589) for
  the Holpan, Wouterspan and Klipdam mine and $1,659,963 (2009  $1,005,053)
  for the Saxendrift mine. These deposits are invested in interest bearing money
  market linked investments at rates ranging from 9.5% to 11.0% per annum. These
  investments have been ceded as security in favour of the guarantees the bank
  issued on behalf of the group. Refer to note 18.

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

|11. | OTHER ASSETS AND DEPOSITS
|--- | -------------------------

| |                                 |   | As at             |  |   | As at             | 
| | ------------------------------- | - | ----------------- |  | - | ----------------- | 
| |                                 |   | February 28, 2010 |  |   | February 28, 2009 | 
| |                                 |   |                   |  |   |                   | 
| | Refundable security deposits    |   | 152,259           |  |   | 136,072           | 
| | Investments(a)                  |   | 574,086           |  |   |                  | 
| | Deposits on future assets(b)    |   | 101,526           |  |   |                  | 
| | Other
      assets              |   |                  |  |   | 3,068             | 
| | Total other assets and deposits | $ | 827,871           |  | $ | 139,140           | 

(a)The Company invests in
  investment policies with endowment benefits on maturity of the policies. Premiums
  are invested on an initial lump sum and/or monthly annuity premium basis with
  the Insurers and invested in specific investment plans. Policy investment value
  at any one time represents the value of premiums and growth after deduction
  of administration and investment fees. Withdrawals could be made against the
  policies before endowment against the deduction of penalties, which is lower
  than the investment value. To surrender the policy prior to maturity date will
  similarly attract penalties at a lower rate, and represents the value accessible
  at any one stage. Fair value at any one stage represents the surrender value
  of the investments. The fair value of the policies at February 28, 2010 amounted
  to $3,472,153 (2009 - $2,659,642) of which $2,898,067 (2009 - $2,659,642) has
  been disclosed as reclamation deposits (refer note 10).

(b) This deposit relates to
  deposits on motor vehicles only delivered after year end.

|12. | 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 no preferred
  shares have been issued.

(b) Stockbased compensation

The Company has a stockbased 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 stock option is set by the board of
  directors at the time of the grant and cannot be less than the market price
  (less permissible discounts) on the Toronto Stock Exchange. Stock 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.

From time to time, the Company may grant
  stock options to employees, directors, and service providers. The Company uses
  the Black-Scholes option pricing model to estimate a value for these options.
  This model, and other models which are used to fair value stock options, require
  inputs such as expected volatility, expected life to exercise, and interest
  rates. Changes in any of these inputs could cause a significant change in the
  stock-based compensation expense charged in a period.

The continuity of stock options for the
  year ended February 28, 2010 is as follows:

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

| |                                                                              |   | Exercise |      |  | Feb 28,   |      |  | Granted/   |      |  |           |      |  | Expired/  |      |  | Feb 28,    | 
| | ---------------------------------------------------------------------------- | - | -------- | ---- |  | --------- | ---- |  | ---------- | ---- |  | --------- | ---- |  | --------- | ---- |  | ---------- | 
| | Expiry date                                                                  |   | Price    |      |  | 2009      |      |  | Issued     |      |  | Exercised |      |  | cancelled |      |  | 2010       | 
| | September 24, 2012                                                           | $ | 0.62     |      |  | 5,901,334 |      |  |           |      |  | (1,500    | )    |  | (3,334    | )    |  | 5,896,500  | 
| | November 14, 2012                                                            | $ | 0.63     |      |  | 1,104,834 |      |  |           |      |  |          |      |  | (3,334    | )    |  | 1,101,500  | 
| | June 20, 2011                                                                | $ | 0.45     |      |  | 950,000   |      |  |           |      |  |          |      |  |          |      |  | 950,000    | 
| | December 7, 2014                                                             | $ | 0.06     |      |  |          |      |  | 14,330,890 |      |  |          |      |  | (60,000   | )    |  | 14,270,890 | 
| | January 18, 2015                                                             | $ | 0.07     |      |  |          |      |  | 600,000    |      |  |          |      |  |          |      |  | 600,000    | 
| |                                                                              |   |          |      |  | 7,956,168 |      |  | 14,930,890 |      |  | (1,500    | )    |  | (66,668   | )    |  | 22,818,890 | 
| |                                                                              |   |          |      |  |           |      |  |            |      |  |           |      |  |           |      |  |            | 
| | Weighted average exercise price                                              |   | $        | 0.60 |  | $         | 0.06 |  | $          | 0.62 |  | $         | 0.12 |  | $         | 0.25 | 
| | Weighted average fair value of stock options granted during the
      period |   |          |      |  | $         | 0.06 | 

As at February 28, 2010, 12,620,980 of
  the stock options outstanding with a weighted average exercise price of $0.39
  per share have vested with grantees.

The continuity of stock options for the
  year ended February 28, 2009 is as follows:

| |                                                                              |   | Exercise |      |  | Feb 29,   |      |  |           |   |  |           |      |  | Expired/  |      |  | Feb 28,   | 
| | ---------------------------------------------------------------------------- | - | -------- | ---- |  | --------- | ---- |  | --------- | - |  | --------- | ---- |  | --------- | ---- |  | --------- | 
| | Expiry date                                                                  |   | Price    |      |  | 2008      |      |  | Granted   |   |  | Exercised |      |  | cancelled |      |  | 2009      | 
| | March 28, 2008                                                               | $ | 0.50     |      |  | 150,000   |      |  |          |   |  |          |      |  | (150,000  | )    |  |          | 
| | July 10, 2010                                                                | $ | 0.68     |      |  | 300,000   |      |  |          |   |  |          |      |  | (300,000  | )    |  | _         | 
| | September 24, 2012                                                           | $ | 0.62     |      |  | 5,903,000 |      |  |          |   |  |          |      |  | (1,666    | )    |  | 5,901,334 | 
| | November 14, 2012                                                            | $ | 0.63     |      |  | 1,109,000 |      |  |          |   |  |          |      |  | (4,166    | )    |  | 1,104,834 | 
| |                                                                              |   |          |      |  |           |      |  |           |   |  |           |      |  |           |      |  |           | 
| | June 20, 2011                                                                | $ | 0.45     |      |  |          |      |  | 1,150,000 |   |  |          |      |  | (200,000  | )    |  | 950,000   | 
| |                                                                              |   |          |      |  | 7,462,000 |      |  | 1,150,000 |   |  |          |      |  | (655,832  | )    |  | 7,956,168 | 
| |                                                                              |   |          |      |  |           |      |  |           |   |  |           |      |  |           |      |  |           | 
| | Weighted average exercise price                                              |   | $        | 0.62 |  | $         | 0.45 |  | $         |  |  | $         | 0.57 |  | $         | 0.60 | 
| | Weighted average fair value of stock options granted during the
      period |   |          |      |  | $         | 0.45 | 

As at February 28, 2009, 4,987,445 of
  the stock options outstanding with a weighted average exercise price of $0.60
  per share had vested with grantees.

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

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

| |                                                                              |   | Exercise |      |  | May 31, |      |  |           |      |  |           |      |  | Expired/  |      |  | Feb 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 stock options granted during the
      period |   | $        | 0.62 | 

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

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

| |                                                                               |   |              |  |   |              |  |   | Nine Months  | 
| | ----------------------------------------------------------------------------- | - | ------------ |  | - | ------------ |  | - | ------------ | 
| |                                                                               |   | Year ended   |  |   | Year ended   |  |   | ended        | 
| |                                                                               |   | February 28, |  |   | February 28, |  |   | February 29, | 
| |                                                                               |   | 2010         |  |   | 2009         |  |   | 2008         | 
| | Exploration and engineering                                                   | $ | 74,008       |  | $ | 629,347      |  | $ | 514,892      | 
| | Operations and administration                                                 |   | 261,350      |  |   | 1,205,075    |  |   | 1,311,423    | 
| | Total stock-based compensation cost                                           |   |              |  |   |              |  |   |              | 
| |                                                                               |   |              |  |   |              |  |   |              | 
| | expensed to operations, with the offset credited to
      contributed surplus | $ | 335,358      |  | $ | 1,834,422    |  | $ | 1,826,315    | 

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

2010
      
      
      2009
      
      
      2008Risk free interest rate
      
      2.5%
      
      
      4.0%
      
      
      4.0%Expected life
      
      4.8 years
      
      
      3 years
      
      
      4.8 yearsExpected volatility
      
      140.2%
      
      
      122%
      
      
      111%Expected dividends
      
      Nil
      
      
      nil
      
      
      nil


---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

(c) Share purchase warrants

The continuity of share purchase warrants
  (each warrant exercisable into one common share) for the period ended February
  28, 2010 is as follows:

| | Expiry date                      |  | **November 22, 2009(i)** **** |   |  | **May 09, 2009(ii)** **** |   |  | May 09, 2009(iii) |  
| | -------------------------------- |  | ----------------------------- | - |  | ------------------------- | - |  | ----------------- | -
| | Balance, February 29, 2008       |  | 39,600,000                    |   |  | 116,007,154               |   |  | 5,772,000         |  
| | Issued                           |  |                              |   |  |                          |   |  |                  |  
| | Exercised                        |  |                              |   |  |                          |   |  |                  |  
| | Expired                          |  |                              |   |  |                          |   |  |                  |  
| | Balance, February 28, 2009       |  | 39,600,000                    |   |  | 116,007,154               |   |  | 5,772,000         |  
| | Issued                           |  |                              |   |  |                          |   |  |                  |  
| | Exercised                        |  |                              |   |  |                          |   |  |                  |  
| | Expired                          |  | (39,600,000                   | ) |  | (116,007,154              | ) |  | (5,772,000        | )
| | Balance, February
      28, 2010 |  |                              |   |  |                          |   |  |                  |  

| | (i)   | The share purchase warrants were 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. These warrants
        expired unexercised 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. These warrants expired unexercised
        on May 9, 2009.                                                                                                                                                                                                                                                                                                                                             
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | (iii) | In May 2007, the Company issued 5,772,000 broker warrants
        exercisable over two years at $0.70 that expired on May 9, 2009. Using
        a Black-Scholes option pricing model, the fair value of the 5,772,000
        broker warrants granted to the amount of $1,693,197 (2008 - $1,693,197)
        had been reflected in the consolidated balance sheet in fiscal 2009. 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%. These warrants expired
        unexercised on May 9, 2009.

(d) 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 were 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 February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

(e) Shares issued, March 2008

On March 1, 2008, the Company issued
  14,285,715 common shares at a price of $0.55 per share for a total of $7,857,143
  to increase its ownership of HCVW and Klipdam by 34%, resulting in a total interest
  holding of 85%, and thereby reducing the non-controlling interest of HCVW and
  Klipdam to 15%. Refer to note 8(b).

(f) Private Placements between December
  2009 to February 2010

During February 2010, the Company completed
  private placements of 132,800,000 common shares at $0.065 per share for a total
  of $8,632,000. The company paid a cash fee of $587,229 finders fees relating
  to the private placements.

Proceeds from the financing were used
  to repay short term debt, finance lease obligations and fund diamond operations.

|13. | LOSS PER SHARE
|--- | --------------

| |                                                              |  |              |  |  |              |  |  | Nine months  | 
| | ------------------------------------------------------------ |  | ------------ |  |  | ------------ |  |  | ------------ | 
| |                                                              |  | Year ended   |  |  | Year ended   |  |  | ended        | 
| |                                                              |  | February 28, |  |  | February 28, |  |  | February 29, | 
| | Number of common
      shares                                |  | 2010         |  |  | 2009         |  |  | 2008         | 
| |                                                              |  |              |  |  |              |  |  |              | 
| | Basic weighted average shares outstanding:                   |  | 267,164,309  |  |  | 237,924,152  |  |  | 196,428,551  | 
| | Weighted average shares dilution adjustments:                |  |              |  |  |              |  |  |              | 
| | Dilutive stock options                                       |  |             |  |  |             |  |  |             | 
| | Common share
      purchase warrants                         |  |             |  |  |             |  |  |             | 
| |                                                              |  |              |  |  |              |  |  |              | 
| | Diluted weighted average
      shares outstanding            |  | 267,164,309  |  |  | 237,924,152  |  |  | 196,428,551  | 
| |                                                              |  |              |  |  |              |  |  |              | 
| | Weighted average shares dilution adjustments  exclusions(a) |  |              |  |  |              |  |  |              | 
| |                                                              |  |              |  |  |              |  |  |              | 
| | Stock options                                                |  | 22,818,890   |  |  | 7,956,168    |  |  | 7,462,000    | 
| | Common share purchase warrants                               |  |             |  |  | 161,379,154  |  |  | 161,379,154  | 

(a) These adjustments were excluded,
  as they were anti-dilutive. Diluted loss per share has not been presented separately
  on the Statements of Operations as the effect of outstanding options and warrants
  would be anti-dilutive.

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

|14. | RELATED PARTY BALANCES AND TRANSACTIONS
|--- | ---------------------------------------

| |                                    |   | As at             |  |   | As at             | 
| | ---------------------------------- | - | ----------------- |  | - | ----------------- | 
| | Balances payable                   |   | February 28, 2010 |  |   | February 28, 2009 | 
| | Jeffrey B Traders CC (d)           | $ |                  |  | $ | 7,890             | 
| | Jakes Tyres (i)                    |   |                  |  |   | 5,498             | 
| | Banzi Trade 26 (Pty) Ltd
      (h) |   | 603               |  |   | -                 | 
| | Hunter Dickinson Services Inc. (a) |   | 627,435           |  |   | 180,267           | 
| | Seven Bridges Trading (e)          |   | 13,285            |  |   | -                 | 
| | Current
      balances payable     | $ | 641,323           |  | $ | 193,655           | 
| |                                    |   |                   |  |   |                   | 
| |                                    |   |                   |  |   |                   | 
| | Liberty Lane (l)                   | $ | 414,566           |  | $ | 383,330           | 
| |                                    |   |                   |  |   |                   | 
| | Longterm balances payable         | $ | 414,566           |  | $ | 383,330           | 
| |                                    |   |                   |  |   |                   | 
| |                                    |   |                   |  |   |                   | 
| | Balances receivable                |   |                   |  |   |                   | 
| | Banzi Trade 26 (Pty) Ltd (h)       | $ | 46,108            |  | $ | 19,547            | 
| | Diacor
      CC (k)                |   |                  |  |   | 29,668            | 
| |                                    | $ | 46,108            |  | $ | 49,215            | 

| |                                             |   | Year
      ended |  |   | Year
      ended |  |   | Nine
      Months | 
| | ------------------------------------------- | - | ---------------- |  | - | ---------------- |  | - | ----------------- | 
| | Transactions                                |   | February 28      |  |   | February 28      |  |   | February 29       | 
| |                                             |   | 2010             |  |   | 2009             |  |   | 2008              | 
| |                                             |   |                  |  |   |                  |  |   |                   | 
| | Services rendered and expenses reimbursed:  |   |                  |  |   |                  |  |   |                   | 
| | Hunter Dickinson Services Inc. (a)          | $ | 961,042          |  | $ | 1,280,316        |  | $ | 863,861           | 
| | Euro-American Capital Corporation
      (b) |   |                 |  |   |                 |  |   | 14,393            | 
| | CEC Engineering (c)                         |   | 17,818           |  |   | 26,904           |  |   | 39,766            | 
| | Jeffrey B Traders CC (d)                    |   |                 |  |   |                 |  |   | 52,740            | 
| | Seven Bridges Trading (e)                   |   | 139,789          |  |   |                 |  |   | 57,952            | 
| | Cashmere Trading (f)                        |   |                 |  |   | 18,808           |  |   | 353,736           | 
| | Banzi Trade 26 (Pty) Ltd (h)                |   | 17,688           |  |   | 29,768           |  |   | 47,575            | 
| | Jakes Tyres (i)                             |   |                 |  |   | 440,283          |  |   | 1,141,454         | 
| | AA Van Wyk (j)                              |   |                 |  |   |                 |  |   | 148,658           | 
| | Diacor CC (k)                               |   |                 |  |   | 39,510           |  |   | 3,888             | 
| | Flawless Diamonds Trading House (g)         | $ | 316,081          |  | $ | 346,768          |  | $ | 362,255           | 
| |                                             |   |                  |  |   |                  |  |   |                   | 
| | Sales rendered to:                          |   |                  |  |   |                  |  |   |                   | 
| | Banzi Trade 26 (Pty) Ltd (h)                |   | 1,989            |  |   | 884              |  |   |                  | 

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

All related party transactions are arms
  length transaction in the normal course of business.

| | (a) | Hunter Dickinson Services Inc. (HDSI) is
        a private company with a director in common with the Company. HDSI 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 market related basis pursuant to an agreement dated
        November 21, 2008.                                                                                                                                     
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (b) | Euro-American Capital Corporation is a private company
        controlled by Rene Carrier, a former director of the Company, which provided
        management services to the Company at market rates for those services.
        Rene Carrier resigned as a director in November 2008.                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (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) | Jeffrey B Traders CC is a private company controlled
        by Jeffrey Brenner, a former director and employee of the Company, which
        provided management and specialized diamond marketing services to the
        Company at market rates.                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (e) | Seven Bridges Trading 14 (Pty) Ltd (Seven Bridges Trading)
        is a wholly owned subsidiary of Randgold Resources Ltd, a public company
        where Mark Bristow, a director of the Company, serves in an executive
        capacity. Seven Bridges Trading provides office, conferencing, information
        technology, and other administrative and management services at market
        rates to the Companys South African subsidiaries.                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (f) | Cashmere Trade 19 (Pty) Ltd (Cashmere Trade) is a private
        company owned by Hennie Van Wyk, a former officer of the Company, which
        provides helicopter services for the movement of product on an ad-hoc
        basis at competitive market rates thereby providing benefits to the Company
        and its employees in respect of secure transport of high value product
        and reduced insurance premiums.                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (g) | Flawless Diamonds Trading House (Pty) Ltd (Flawless
        Diamonds Trading House) is a private company where certain directors,
        former directors and officers of the Company, namely, Messr. Brenner,
        J W and D M Bristow and Van Wyk, are shareholders of. Flawless is a registered
        diamond broker which provides specialist diamond valuation, marketing
        and tender sales services to the Company for a fixed fee of 1% of turnover
        which is below the market rate charged by similar tender houses.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (h) | Banzi Trade 26 (Pty) Ltd (Banzi) is 49%
        owned by HC van Wyk Diamonds Ltd and 51% by Bokomoso Trust. Banzi is an
        empowered private company established to provide self sustaining job creation
        programs to local communities as part of the companys Social and
        Labour Plan which is required in terms of the Minerals and Petroleum Resources
        Development Act (MPRDA). Banzi provides the Company with buildings
        materials at market rates.                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (i) | Jakes Tyres is a private company with former directors
        and officers (H C van Wyk) in common with the Company that provides tyres,
        tyre repair services and consumables at market rates to Rockwells
        remote Middle Orange River operations.                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (j) | AA Van Wyk is a private company owned by a party related
        to a former directors and officer of the Company, which provided contract
        mining services at market rates.                                                                                                                                                                                                                                                                                                                                                               

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

| | (k) | Diacor CC is a private company of which H C van Wyk,
        a former director and officer of the Company, is a director from which
        the Company has purchased consumable materials at market rates.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                            
| | (l) | Liberty Lane is the BEE partner of the Saxendrift property
        and has certain directors in common with the Company.                                                                                   

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

|15. | INCOME TAXES
|--- | ------------

Income tax expense (recovery) differs
  from the amount which would result from applying the statutory income tax rates
  in 2010 of 29.76% (2009  30.75%, 2008  33.55%) for the following
  reasons:

| |                                                       |   |             |   |   |             |   |   | Nine months |  
| | ----------------------------------------------------- | - | ----------- | - | - | ----------- | - | - | ----------- | -
| |                                                       |   | Year ended  |   |   | Year ended  |   |   | ended       |  
| |                                                       |   | February 28 |   |   | February 28 |   |   | February 29 |  
| |                                                       |   | 2010        |   |   | 2009        |   |   | 2008        |  
| |                                                       |   |             |   |   |             |   |   |             |  
| | Loss before income taxes and non-controlling interest | $ | (11,282,350 | ) | $ | (16,864,986 | ) | $ | (1,006,849  | )
| |                                                       |   |             |   |   |             |   |   |             |  
| | Expected income tax recovery                          | $ | (3,357,000  | ) | $ | (5,186,000  | ) | $ | (338,000    | )
| | Difference in foreign tax rates                       |   | 156,000     |   |   | (253,000    | ) |   | 298,000     |  
| | Permanent differences                                 |   | 912,000     |   |   | 1,232,000   |   |   | 1,200,000   |  
| | Change in tax rate                                    |   | (195,946    | ) |   | 671,000     |   |   | 440,000     |  
| | Change in valuation allowance                         |   | (185,000    | ) |   | (390,000    | ) |   | (477,000    | )
| | Other non-deductible
      items                      |   | 6,000       |   |   | 586,000     |   |   | 1,317,400   |  
| |                                                       |   |             |   |   |             |   |   |             |  
| | Net income tax
      expense (recovery)               | $ | (2,626,054  | ) | $ | (3,340,000  | ) | $ | 2,440,400   |  

As at February 28, 2010 and 2009, the
  estimated tax effect of the significant components within the Companys
  future tax assets and liabilities are as follows:

| |                                        |   | As at       |   |   | As at       |  
| | -------------------------------------- | - | ----------- | - | - | ----------- | -
| |                                        |   | February 28 |   |   | February 28 |  
| |                                        |   | 2010        |   |   | 2009        |  
| |                                        |   |             |   |   |             |  
| | Future income tax asset (liability)    |   |             |   |   |             |  
| | Resource allowances                    | $ | 1,173,000   |   | $ | 1,409,000   |  
| | Loss carry forwards                    |   | 7,332,000   |   |   | 4,767,000   |  
| | Other                                  |   | 2,057,000   |   |   | 2,005,000   |  
| | Total                                  |   | 10,562,000  |   |   | 8,181,000   |  
| | Less: valuation allowance              |   | (6,380,000  | ) |   | (6,567,000  | )
| |                                        |   | 4,182,000   |   |   | 1,614,000   |  
| | Mineral properties                     |   | (8,638,000  | ) |   | (8,090,000  | )
| | Equipment                              |   | (7,089,000  | ) |   | (5,650,000  | )
| | Net future tax
      asset (liability) | $ | (11,545,000 | ) | $ | (12,126,000 | )

At February 28, 2010, the Company had
  available for deduction against future taxable income non-capital losses in
  Canada of approximately $18,380,000 (2009  $16,394,000). These losses,
  if not utilized, will expire in various years ranging from 2014 to 2030. Subject
  to certain restrictions, the Company also had Canadian resource expenditures
  of approximately $4,691,000 (2009 $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 February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

The Company has losses in South Africa
  of $9,773,000 (2009 - $2,000,000) which are available for deduction against
  future taxable income.

The valuation allowance is a full valuation
  allowance against the net Future Income Tax Allowance (FITA) under
  Canadian Tax Law. The FITA in primarily arises from the resource pools carried
  forward and the losses carried forward.

The rationale for placing a full valuation
  allowance against these FITAs is as follows:

- The Company has cumulative losses in
  recent years;
  - The Company has a history of tax losses expiring unused; and
  - The Companys resource pools are not likely to be utilized as the Company
  would only be able to use its resource pools to offset income from the mine
  from which the expenses were incurred.

|16. | 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 currently only located in the
  Northern Cape region of the Republic of South Africa.

| | For the year ended         |   |            |   |   |       |  |   |              |   |   |             |  
| | -------------------------- | - | ---------- | - | - | ----- |  | - | ------------ | - | - | ----------- | -
| | February 28, 2010          |   | Canada     |   |   | Chile |  |   | South Africa |   |   | Total       |  
| | External revenue           | $ |           |   | $ |      |  | $ | 29,776,933   |   | $ | 29,776,933  |  
| | Loss for the year          |   | (2,767,485 | ) |   |      |  |   | (4,270,208   | ) |   | (7,037,693  | )
| | Total assets               |   | 1,232,734  |   |   |      |  |   | 104,010,652  |   |   | 105,243,386 |  
| | Mineral property interests |   |           |   |   |      |  |   | 30,850,998   |   |   | 30,850,998  |  
| | Property, plant and        |   |           |   |   |      |  |   | 58,790,736   |   |   | 58,790,736  |  
| | equipment                  |   |            |   |   |       |  |   |              |   |   |             |  

| | For the year ended         |   |            |   |   |          |   |   |              |   |   |             |  
| | -------------------------- | - | ---------- | - | - | -------- | - | - | ------------ | - | - | ----------- | -
| | February 28, 2009          |   | Canada     |   |   | Chile    |   |   | South Africa |   |   | Total       |  
| | External revenue           | $ |           |   | $ |         |   | $ | 34,330,078   |   | $ | 34,330,078  |  
| | Loss for the year          |   | (5,590,213 | ) |   | (135,528 | ) |   | (7,250,221   | ) |   | (12,975,962 | )
| | Total assets               |   | 575,275    |   |   |         |   |   | 105,787,141  |   |   | 106,362,416 |  
| | Mineral property interests |   |           |   |   |         |   |   | 28,894,477   |   |   | 28,894,477  |  
| | Property, plant and        |   |           |   |   |         |   |   | 59,569,186   |   |   | 59,569,186  |  
| | equipment                  |   |            |   |   |          |   |   |              |   |   |             |  

| | For the nine months           |   |            |   |   |         |   |   |              |   |   |             |  
| | ----------------------------- | - | ---------- | - | - | ------- | - | - | ------------ | - | - | ----------- | -
| | ended February
      29, 2008 |   | Canada     |   |   | Chile   |   |   | South Africa |   |   | Total       |  
| | External revenue              | $ |           |   | $ |        |   | $ | 36,038,106   |   | $ | 36,038,106  |  
| | Loss for the period           |   | (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                     |   |            |   |   |         |   |   |              |   |   |             |  

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

17.
      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 and US GAAP, the
  Company accounts for mineral properties as described in note 3(d). As it indicates,
  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. Under the unit of production method, the periodic
  depreciation charge is calculated by dividing the actual resources
  mined into the estimated resources at the beginning of the period and then multiplying
  the resulting fraction by the net carrying value of the related assets. Mineral
  resources are estimated by professional geologists and engineers in accordance
  with recognized industry, professional and regulatory standards. These estimates
  require inputs such as future diamond prices, future operating costs, and various
  technical geological, engineering, and construction parameters. Changes in any
  of these inputs could cause a significant change in the estimated resources
  which, in turn, could have a material effect on the carrying value of mineral
  properties. The unit of production method results in a systematic and rational
  allocation of the cost of the mineral property interests over the period the
  resources are utilized.

The initial carrying value of mineral
  properties is also dependant on the valuation used for the common shares and
  warrants of the Company issued for the acquisition of mineral properties. The
  value of the common shares issued is the price of the common shares of the Company
  at the date of issuance to effect the acquisition. The Company uses the Black-Scholes
  pricing model to estimate a value for the warrants issued upon the acquisition
  of a property. This model, and other models which are used to value options
  and warrants, require inputs such as expected volatility, expected life to exercise,
  and interest rates. Changes in any of these inputs could cause a significant
  change in the carrying value initially recorded for mineral properties at acquisition
  dates.

In March 2004, the Emerging Issues Task
  Forces (EITF) reached a consensus in EITF 04-2 that mineral interests
  should be considered tangible assets. On April 30, 2004, the Financial Accounting
  Standards Board (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.

In March 2004, in EITF 04-3 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.

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

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.

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

| |                               |   | February 28, 2010 |  |   | February 28, 2009 |  
| | ----------------------------- | - | ----------------- |  | - | ----------------- | -
| |                               |   | Balance,          |  |   |                   |  
| |                               |   | Canadian          |  |   |                   |  
| |                               |   | GAAP              |  |   | Adjustments       |  
| |                               |   |                   |  |   |                   |  
| | Current assets                | $ | 11,875,714        |  | $ |                  |  
| |                               |   |                   |  |   |                   |  
| | Property, plant and equipment |   | 58,790,736        |  |   |                  |  
| | Other assets and deposits     |   | 827,871           |  |   |                  |  
| |                               |   |                   |  |   |                   |  
| | Reclamation deposits          |   | 2,898,067         |  |   |                  |  
| |                               |   |                   |  |   |                   |  
| | Mineral property              |   | 30,850,998        |  |   |                  |  
| |                               | $ | 105,243,386       |  | $ |                  |  
| |                               |   |                   |  |   |                   |  
| | Current liabilities           | $ | 11,577,472        |  | $ |                  |  
| | Long-term liabilities         |   | 15,822,882        |  |   |                  |  
| | Non-controlling interest      |   | 648,941           |  |   | (648,941          | )
| | Shareholders' Equity          |   | 77,194,091        |  |   | 648,941           |  
| |                               | $ | 105,243,386       |  | $ |                  |  

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 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 statements of operations and comprehensive
  loss would be as follows:

| |                                                                     |   |               |   |   |               |   |   | Nine months   |  
| | ------------------------------------------------------------------- | - | ------------- | - | - | ------------- | - | - | ------------- | -
| |                                                                     |   | Year ended    |   |   | Year ended    |   |   | ended         |  
| |                                                                     |   | February 28,  |   |   | February 28,  |   |   | February 29,  |  
| |                                                                     |   | 2010          |   |   | 2009          |   |   | 2008          |  
| | Loss for the period, Canadian GAAP                                  | $ | 7,037,693     |   | $ | 12,975,962    |   | $ | 9,403,028     |  
| |                                                                     |   |               |   |   |               |   |   |               |  
| | Adjustment                                                          |   |              |   |   |              |   |   |              |  
| | Non-controlling interest                                            |   | 1,618,603     |   |   | 549,024       |   |   | (5,955,779    | )
| |                                                                     |   |               |   |   |               |   |   |               |  
| | Net loss for the period, US GAAP                                    | $ | 8,656,296     |   | $ | 13,524,986    |   | $ | 3,447,249     |  
| |                                                                     |   |               |   |   |               |   |   |               |  
| | Attributable to non-controlling interest                            |   | (1,618,603    | ) |   | (549,024      | ) |   | 5,955,779     |  
| |                                                                     |   |               |   |   |               |   |   |               |  
| | Attributable to common shareholders                                 | $ | 7,037,693     |   | $ | 12,975,962    |   | $ | 9,403,028     |  
| |                                                                     |   |               |   |   |               |   |   |               |  
| | Other comprehensive loss (income), Canadian GAAP and US GAAP        |   | (5,429,700    | ) |   | 13,409,383    |   |   |              |  
| |                                                                     |   |               |   |   |               |   |   |               |  
| | Total comprehensive loss (income), US GAAP                          | $ | 1,607,993     |   | $ | 26,385,345    |   | $ | 9,403,028     |  
| |                                                                     |   |               |   |   |               |   |   |               |  
| |                                                                     |   |               |   |   |               |   |   |               |  
| | Basic and diluted loss per share, US GAAP                           | $ | 0.03          |   | $ | 0.05          |   | $ | 0.05          |  
| |                                                                     |   |               |   |   |               |   |   |               |  
| | Weighted average number of common shares outstanding,
      US GAAP |   | 267,164,309 3 |   |   | 237,924,152 3 |   |   | 196,428,551 3 |  

The impact of the differences between
  Canadian GAAP and US GAAP on the statements of shareholders equity would
  be as follows:

| |                                     |   |              |  |   |              |  |   | Nine         | 
| | ----------------------------------- | - | ------------ |  | - | ------------ |  | - | ------------ | 
| |                                     |   | Year ended   |  |   | Year ended   |  |   | months       | 
| |                                     |   | February 28, |  |   | February 28, |  |   | ended        | 
| |                                     |   | 2010         |  |   | 2009         |  |   | February 29, | 
| |                                     |   |              |  |   |              |  |   | 2008         | 
| | Shareholders equity, Canadian GAAP | $ | 77,194,091   |  | $ | 70,421,026   |  | $ | 87,114,807   | 
| | Adjustment                          |   |              |  |   |              |  |   |              | 
| | Non-controlling interest            |   | 648,941      |  |   | 1,882,009    |  |   | 11,934,548   | 
| | Shareholders equity, US GAAP       | $ | 77,843,032   |  | $ | 72,303,035   |  | $ | 99,049,355   | 

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

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

| |                                                                      |   |              |   |   |              |   |   | Nine months  |  
| | -------------------------------------------------------------------- | - | ------------ | - | - | ------------ | - | - | ------------ | -
| |                                                                      |   | Year ended   |   |   | Year ended   |   |   | ended        |  
| |                                                                      |   | February 28, |   |   | February 28, |   |   | February 29, |  
| |                                                                      |   | 2010         |   |   | 2009         |   |   | 2008         |  
| | Cash provided by(used in) operating activities,
      Canadian GAAP  | $ | (110,694     | ) | $ | (2,620,351   | ) | $ | 6,712,681    |  
| | Adjustment                                                           |   |             |   |   |             |   |   |             |  
| | Cash provided by(used in) operating activities,
      US GAAP        |   | (110,694     | ) |   | (2,620,351   | ) |   | 6,712,681    |  
| |                                                                      |   |              |   |   |              |   |   |              |  
| | Cash used in investing activities, Canadian
      GAAP               |   | (74,794      | ) |   | (10,468,048  | ) |   | (20,433,978  | )
| | Adjustment                                                           |   |             |   |   |             |   |   |             |  
| | Cash used in investing activities, US GAAP                           |   | (74,794      | ) |   | (10,468,048  | ) |   | (20,433,978  | )
| |                                                                      |   |              |   |   |              |   |   |              |  
| | Cash provided by (used in) financing activities,
      Canadian GAAP |   | (1,299,709   | ) |   | (2,537,641   | ) |   | 718,768      |  
| | Adjustment                                                           |   | -            |   |   | -            |   |   |             |  
| | Cash provided by (used in) financing activities,
      US GAAP       |   | (1,299,709   | ) |   | (2,537,641   | ) |   | 718,768      |  
| |                                                                      |   |              |   |   |              |   |   |              |  
| | Increase (decrease) in cash and equivalents
      during the period  |   | (1,485,197   | ) |   | (15,626,040  | ) |   | (13,002,529  | )
| | Cash and cash equivalents, beginning of period                       |   | 3,997,807    |   |   | 19,623,847   |   |   | 32,626,376   |  
| | Cash and cash equivalents, end of period                             |   | 2,512,610    |   |   | 3,997,807    |   |   | 19,623,847   |  

|(a) | Accounting differences and recently adopted Accounting
      pronouncements
|--- | ---------------------------------------------------------------------------

(i) Non-controlling interest

Under Canadian GAAP the Company classifies
  the non-controlling interest as a separate caption on the balance sheet. In
  December 2007, the FASB updated the Accounting Standards Codification (ASC)
  guidance for non-controlling interests in consolidated financial statements
  to establish accounting and reporting standards for the non-controlling interest
  in a subsidiary and for the deconsolidation of a subsidiary. The guidance clarifies
  that a non-controlling interest in a subsidiary is an ownership interest in
  the consolidated entity that should be reported as equity in the consolidated
  financial statements. The Company adopted the provisions on March 1, 2009. Except
  for presentation changes, the adoption had no impact on the Company's financial
  statements.

(ii) Stock based compensation

In calculating stock-based compensation
  to be recognized, US GAAP requires the Company to estimate future forfeitures.
  For Canadian GAAP purposes, the Company uses the fair value method to account
  for all stock option grants but accounts for forfeitures as they occur, as permitted
  by Canadian GAAP.

Based on the Company's historical stock
  option forfeiture rates, the expense that would be recognized for US GAAP purposes
  under ASC topic Stock Compensation is not materially different from
  that recorded for Canadian GAAP purposes.

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

(iii) Income taxes

Under Canadian GAAP, future tax assets
  and liabilities may be recorded at substantively enacted tax rates. Under US
  GAAP, deferred tax assets and liabilities are recorded at enacted tax rates.
  There were no significant differences between enacted and substantively enacted
  tax rates for the periods presented.

Under US GAAP the company applies ASC
  Topic 740 Income taxes (ASC 740). US GAAP 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. US GAAP also provides guidance on de-recognition, classification,
  interest and penalties, accounting in interim periods and disclosure. In accordance
  with the provisions of US GAAP, any cumulative effect resulting from the change
  in accounting principle is to be recorded as an adjustment to the opening balance
  of deficit. The application of ASC 740 does not result in a material impact
  on the Companys consolidated financial position or results of operations.

(iv) Subsequent events

In May 2009, the FASB issued new guidance
  for accounting for subsequent events. The new guidance, which is now part of
  ASC 855, Subsequent Events is intended to establish general standards
  of accounting for and disclosure of events that occur after the balance sheet
  date, but before financial statements are issued or are available to be issued.
  It requires the disclosure of the date through which an entity has evaluated
  subsequent events and the basis for that date. This disclosure should alert
  all users of financial statements that an entity has not evaluated subsequent
  events after that date in the set of financial statements being presented. The
  new guidance was effective on a prospective basis for interim or annual reporting
  periods ending after June 15, 2009. The adoption of this guidance did not have
  a material impact on the Companys consolidated financial statements.

|(b) | Recent Accounting Pronouncements:
|--- | ---------------------------------
|    |                                  
|    | (i)                              

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

| | (ii)  | In January 2010, the FASB issued ASU 2010-06, Improving
        Disclosures about Fair Value Measurements. This update requires
        additional disclosure within the roll forward of activity for assets and
        liabilities measured at fair value on a recurring basis, including transfers
        of assets and liabilities between Level 1 and Level 2 of the fair value
        hierarchy and the separate presentation of purchases, sales, issuances
        and settlements of assets and liabilities within Level 3 of the fair value
        hierarchy. In addition, the update requires enhanced disclosures of the
        valuation techniques and inputs used in the fair value measurements within
        Levels 2 and 3. The new disclosure requirements are effective for interim
        and annual periods beginning after December 15, 2009 except for the disclosure
        of purchases, sales, issuances and settlements of Level 3 measurements.
        Those disclosures are effective for fiscal years beginning after December
        15, 2010. As ASU 2010-06 only requires enhanced disclosures, the Company
        does not expect that the adoption of this update will have a material
        effect on its consolidated financial statements.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | (iii) | In June 2009, the FASB issued SFAS No. 168, The
        FASB Accounting Standards Codification and the Hierarchy of Generally
        Accepted Accounting Principle  a replacement of FASB Statement No.
        162. The Codification reorganized existing U.S. accounting and reporting
        standards issued by the FASB and other related private sector setter into
        a single source of authoritative accounting principles arranged by topic.
        The Codification supersedes all existing U.S. accounting standards; all
        other accounting literature not included in the Codification (other than
        SEC guidance for publicly-traded companies) is considered non- authoritative.
        The Codification was effective on a prospective basis for interim and
        annual reporting periods ending after September 15, 2009. The adoption
        of the Codification changed the Companys references to GAAP accounting
        standards                                                                                                                                                                                                                                                                                                         
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | (iv)  | In December 2009, FASB issued ASU 2009-17, Consolidation
        (Topic 810), Improvements to Financial Reporting by Enterprises Involved
        with Variable Interest entities (formerly SFAS 167, Amendments to
        FASB Interpretation No. 46(R)), which amends the consolidation
        guidance for variable interest entities (VIE). The changes
        include the elimination of the exemption for qualifying special purposes
        entities and a new approach for determining who should consolidate a VIE.
        In addition, changes to when it is necessary to reassess who should consolidate
        a VIE have also been made.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |       | This guidance requires an entity to perform a qualitative
        analysis to determine whether the enterprises variable interest
        gives it a controlling financial interest in a VIE. This analysis identifies
        a primary beneficiary of a VIE as the entity that has both of the power
        to direct the activities of a VIE that most significantly impact the entitys
        economic performance and the obligation to absorb losses or receive benefits
        from the entity that could potentially be significant to the VIE.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |       | This new guidance is effective for the Companys
        fiscal year beginning April 1, 2010. The Company currently is evaluating
        the potential impact of the adopting this statement on the Companys
        consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

---

|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

|18. | BANK INDEBTEDNESS AND RESTRICTED CASH                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Consistent with the prior financial year, the Company
        has an overdraft facility in the amount of ZAR28.0 million ($3.8 million)
        available for its operations (current balance $698,015). This facility
        has an interest cost of prime (currently 10% per annum) plus 0.6% and
        has a notarial bond over assets of ZAR10.0 million ($1.3 million). The
        security for the ZAR28.0 million consists of 2 notorial bonds of ZAR10.0
        million each over moveable assets and property of the farm Holpan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | HC van Wyk Diamonds Ltd, Klipdam Mining Company Ltd,
        Saxendrift Mine (Pty) Ltd holds guarantees by the bank towards Eskom (Electricity
        Provider) of ZAR1,419,660 ($194,059) and the Department of Minerals and
        Energy (DME) of ZAR21,200,228 ($2,898,067) towards rehabilitation expenses.
        In fiscal 2009 HC van Wyk Diamonds Ltd, Klipdam Mining Company Ltd and
        Saxendrift Mine (Pty) Ltd held guarantees by the bank towards Eskom (Electricity
        Provider) of ZAR1,225,300 ($154,886) and the Department of Minerals and
        Energy (DME) of ZAR11,576,104 ($1,463,292) towards rehabilitation expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Restricted cash of $4,946 (2009 - $2,698,719) relates
        to monies held in trust by the Companys lawyers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|19. | CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | During the first quarter of 2008, pursuant to an amendment
        to the Midamines Agreement, Durnpike paid consideration of US$600,000
        to Midamines as compensation for access to the entire concession area
        (Permit 331), as opposed to the limited contract area. As part of such
        amendment, Midamines waived its right to payment of the abovementioned
        US$1.2 million royalty payment due on December 31, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Subsequently, and pursuant to Midamines persistent
        breach of material provisions of the Midamines Agreement (coupled with
        its failure to remedy such instances of breach notwithstanding notice
        to do so), Durnpike and/or Rockwell cancelled the Midamines Agreement.
        Midamines thereafter disputed the entitlement of Durnpike and/or Rockwell
        to cancel the Midamines Agreement. It has referred to arbitration a dispute
        against Durnpike and Rockwell, in which it claims payment of an estimated
        and provisional amount of $41.8 million. Durnpike and/or Rockwell have,
        in turn, instituted a counter- claim in the estimated and provisional
        amounts of approximately ZAR25.4 million for equipment purchased by Rockwell
        to undertake exploration and feasibility work, $1.6 million for start-up
        and acquisition costs in the DRC, and US$20.0 million (while reserving
        the right to increase the counter- claim to at least $164.9 million) as
        an initial estimate of possible lost earnings.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Comprehensive documentation has been filed by the parties
        and arbitration proceedings are pending in Belgium. The Company remains
        of the view that the claim against it is without merit and will vigorously
        defend against it.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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|ROCKWELL DIAMONDS INC.                                                                           
|-------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                   
|For the years ended February 28, 2010, and 2009 and the nine
      months ended February 29, 2008
|(Expressed in Canadian
      Dollars unless otherwise stated)                                    

|20. | SUBSEQUENT EVENTS
|--- | -----------------

The following event occurred during the
  period from the year ended February 28, 2010 to the date the consolidated financial
  statements were available to be issued on August 31, 2010. No events subsequent
  to August 31, 2010 have been incorporated in the financial statement disclosures.

(a) Etruscan Diamonds Limited

The Company has signed a term sheet with
  Etruscan diamonds Limited whereby the Company proposes to purchase Etruscans
  Blue Gum diamond operation in the Ventersdorp region, South Africa. The acquisition
  is for 74% of the operation with the balance owned pursuant to South Africas
  Black Economic Empowerment regime. The price to be paid to Etruscan is an amount
  not exceeding ZAR33.5 million (approximately $4.7 million) payable in Rockwell
  shares valued at $0.068 each. The Company will also assume certain non-material
  property maintenance obligations effective immediately and other financial obligations
  upon completion of the acquisition.

(b) Rights Offering

On March 19, 2010 the Company completed
  a rights offering whereby each registered holder of the Company's common shares
  on the record date received one right for each common share held. The rights
  offering was 100% subscribed and applications for additional shares were received
  but could not be fulfilled because they exceeded the maximum. Pursuant to the
  rights offering, Rockwell issued 92.7 million common shares at a subscription
  price of $0.05 per common share yielding gross proceeds of approximately $4.6
  million (ZAR33.2 million).

The Company plans to use the funds to
  modernize and re-commission the Wouterspan operation which was placed on care
  and maintenance in January 2009, and identify value add merger and acquisition
  targets such as the recently announced Etruscan acquisition.

(c) Private placement

In March 2010, the company completed
  a private placement of 53.0 million common shares at a price of $0.065 per share
  for total proceeds of $3.4 million. The company paid a cash fee of $0.1 million
  finders fees relating to the private placement.

Proceeds from the financing will be used
  to fund working capital on the mining operations.

(d) Flawless Diamonds Trading House
  (Pty) Limited

On April 21, 2010 the Company acquired
  a 20% shareholding in Flawless Diamonds Trading House (Pty) Limited from Hennie
  van Wyk for the amount of $95,686. Flawless is a registered diamond broker which
  provides specialist diamond valuation, marketing and tender sales services to
  the Company.

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