---









(Formerly Rockwell Ventures Inc.)

CONSOLIDATED FINANCIAL STATEMENTS



YEARS ENDED FEBRUARY 28, 2010 AND 2009AND 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.

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 Inc
  Registered Accountants and AuditorsJohannesburg,
Republic of South AfricaAugust 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 ofcommon 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 endedFebruary 28,
    
    
    February 28,
    
    
      February 29,2010
    
    
    2009
    
    
      2008Accumulated other
      comprehensive lossBalance 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
    )
    $
      DeficitBalance 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
      
      
      
      
      
      2009
      
      
      
      
      
      2008Share capital
      Number of shares
      
      
      
      
      
      Number of shares
      
      
      
      
      
      Number of sharesBalance at beginning of the period
      238,041,569
      
      $
      119,952,532
      
      
      223,755,854
      
      $
      112,095,390
      
      
      186,976,219
      
      $
      88,903,530Share purchase options exercised at
        $0.40 per share
      
      
      
      
      
      
      
      
      
      
      
      
      107,917
      
      
      43,167Share purchase options
        exercised at $0.42 per share
      
      
      
      
      
      
      
      
      
      
      
      
      145,000
      
      
      60,900Private placement November 2006, net
        of issue costs at $0.47 per share
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      4,160Private placement January
        2008, net of issue costs at $0.60 per share
      
      
      
      
      
      
      
      
      
      
      
      
      24,101,526
      
      
      13,860,916Commission consideration for private
        placement at $0.60 per share
      
      
      
      
      
      
      
      
      
      
      
      
      500,000
      
      
      300,000Warrants exercised at
        $0.60 per share
      
      
      
      
      
      
      
      
      
      
      
      
      2,400,000
      
      
      1,440,000Consideration for acquisition of property
        net of issue cost at $0.78 per share
      
      
      
      
      
      
      
      
      
      
      
      
      7,848,663
      
      
      6,081,842Consideration for additional interest
        of operating mines net of issue cost at $0.55 per share
      
      
      
      
      
      
      14,285,715
      
      
      7,857,142
      
      
      
      
      
      Consideration for property
        finders fees at $0.78 per share
      
      
      
      
      
      
      
      
      
      
      
      
      1,676,529
      
      
      1,307,693Fair value of stock options allocated
        to shares issued on exercise
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      93,182Share 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
      
      $
      119,952,532
      
      
      223,755,854
      
      $
      112,095,390WarrantsBalance at beginning of the period
      
      
      $
      1,693,197
      
      
      
      
      $
      1,693,197
      
      
      
      
      $
      1,693,197Expired broker warrants
      
      
      
      (1,693,197
      )
      
      
      
      
      
      
      
      
      
      
      Balance at end of the period
      
      
      $
      
      
      
      
      
      $
      1,693,197
      
      
      
      
      $
      1,693,197Contibuted surplusBalance at beginning of the period
      
      
      $
      4,167,304
      
      
      
      
      $
      2,332,882
      
      
      
      
      $
      599,749Stock-based compensation (note 12(b))
      
      
      
      335,358
      
      
      
      
      
      1,834,422
      
      
      
      
      
      1,826,315Expired broker warrants
      
      
      
      1,693,197
      
      
      
      
      
      
      
      
      
      
      
      Fair value of stock options allocated to shares issued
        on exercise
      
      
      
      (808
      )
      
      
      
      
      
      
      
      
      
      
      (93,182
      )Balance at end of the period
      
      
      $
      6,195,051
      
      
      
      
      $
      4,167,304
      
      
      
      
      $
      2,332,882Accumulated other comprehensive lossBalance 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
      )
      
      
      
      $
      DeficitBalance 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
      )TOTAL SHAREHOLDERS' EQUITY
      
      
      $
      77,194,091
      
      
      
      
      $
      70,421,026
      
      
      
      
      $
      87,114,807


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

---

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

|                                                                                          |   |              |   |   |              |   |   | Nine
      months |  
|----------------------------------------------------------------------------------------- | - | ------------ | - | - | ------------ | - | - | ----------------- | -
|                                                                                          |   | 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 Actof 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 years    
| | ------------------------------------------------------------------- | ------------
| | Processing plant and equipment                                      | 4  10 years
| | Processing plant and equipment under
      capital lease obligation | 5  8 years 
| | Office equipment                                                    | 6 years     
| | Vehicles 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
reserves mined into the estimated reserves at the beginning of the period and
then multiplying the resulting fraction by the net carrying value of the related
assets. Mineral resources and reserves 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 and reserves 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 reserves 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 Measurement to 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 |  |   | Gross     |  |   | Impairment | 
| | -------------------- | - | --------- |  | - | ---------- |  | - | --------- |  | - | ---------- | 
| |                      |   | 2010      |  |   | **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 accrued liabilities | $ | 6,458,751 |  | $ | 6,458,751   |  | $ | 6,458,751 |  | $ |        |  | $ |     | 
| | 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 accrued liabilities | $ | 4,832,038 |  | $ | 4,832,038   |  | $ | 4,832,038 |  | $ |          |  | $ |        | 
| | 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 liabilities |   | 5,811,039         |  |   | 4,204,699         | 
| | 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 rateFebruary 28,
      
      
      February 28,
      
      
      February 28,
      
      
      February 28,2010
      
      
      2009
      
      
      2010
      
      
      2009CAD vs ZAR
      
      0.1386
      
      
      0.1276
      
      
      0.1367
      
      
      0.1264


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
  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.

---

|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 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
      atFebruary 28, 2010
    
    
    February 28, 2009Rough diamond inventories
    $
    1,283,604
    
    $
    1,845,986Mine
      supplies
    
    1,692,454
    
    
    1,873,933Total 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 obligation |   | 13,553,529              | 
| | 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 obligation |   | 21,374,971              | 
| | 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. | MINERALPROPERTYINTERESTS                                                                                                                                                                                                                                                      

| |                                                                             |   | 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 Company Ltd, end of year |   | 22,128,231        |   |   | 22,373,983        |  
| |                                                                             |   |                   |   |   |                   |  
| |                                                                             |   |                   |   |   |                   |  
| | 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 and reserves 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 and reserves
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.                                                                                                                                                                                                      



---

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

| |                                                                              | 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:

| |                                                                                                                   |   | 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. | RELATEDPARTYBALANCESANDTRANSACTIONS
|--- | -----------------------------------

| |                                          |   | As
      at  |  |   | As
      at  | 
| | ---------------------------------------- | - | ------------ |  | - | ------------ | 
| | Balances payable                         |   | February 28, |  |   | February 28, | 
| |                                          |   | 2010         |  |   | 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. | INCOMETAXES
|--- | -----------

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:

| |                                   |   | Year
      ended |   |   | Year
      ended |   |   | Nine
      months |  
| | --------------------------------- | - | ---------------- | - | - | ---------------- | - | - | ----------------- | -
| |                                   |   | February 28      |   |   | February 28      |   |   | ended             |  
| |                                   |   |                  |   |   |                  |   |   | 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
      atFebruary 28
    
    
    February 282010
    
    
    2009Future income tax asset (liability)Resource allowances
    $
    1,173,000
    
    $
    1,409,000Loss carry forwards
    
    7,332,000
    
    
    4,767,000Other
    
    2,057,000
    
    
    2,005,000Total
    
    10,562,000
    
    
    8,181,000Less: valuation allowance
    
    (6,380,000
    )
    
    (6,567,000
    )4,182,000
    
    
    1,614,000Mineral 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 equipment |   |           |   |   |      |  |   | 58,790,736   |   |   | 58,790,736  |  

| | 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 equipment |   |           |   |   |         |   |   | 59,569,186   |   |   | 59,569,186  |  

| | 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 equipment |   |           |   |   |        |   |   | 64,831,636   |   |   | 64,831,636  |  

---

|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 reserves mined into the estimated reserves at the beginning of the
      period and then multiplying the resulting fraction by the net carrying
      value of the related assets. Mineral resources and reserves 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 and reserves 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 reserves 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  |   |   | 237,924,152  |   |   | 196,428,551  |  

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
      Adjustment | $ | 77,194,091   |  | $ | 70,421,026   |  | $ | 87,114,807   | 
| | 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) | In June 2009, the Financial Accounting Standards Board
      (FASB) issued Statement of Financial Accounting Standards (SFAS) No.
      167, Amendments to FASB Interpretation No. 46(R). SFAS No. 167, which
      amends ASC 810-10, Consolidation, prescribes a qualitative model for
      identifying whether a company has a controlling financial interest in a
      variable interest entity (VIE) and eliminates the quantitative model.
      The new model identifies two primary characteristics of a controlling
      financial interest: (1) provides a company with the power to direct
      significant activities of the VIE, and (2) obligates a company to absorb
      losses of and/or provides rights to receive benefits from the VIE. SFAS
      167 requires a company to reassess on an ongoing basis whether it holds a
      controlling financial interest in a VIE. A company that holds a
      controlling financial interest is deemed to be the primary beneficiary of
      the VIE and is required to consolidate the VIE. SFAS No. 167, which is
      referenced in ASC 105-10-65, has not yet been adopted into the
      Codification and remains authoritative. SFAS No. 167 is effective for
      fiscal years beginning after November 15, 2009. The Company does not
      expect that the adoption of SFAS No. 167 will have a material impact on
      its 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)                                    

| | (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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

---

|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.                                                                                                                                                                                                                                                                                                                                                                                               

---