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|ROCKWELL DIAMONDS INC.              
|------------------------------------
|YEAR ENDED MAY 31, 2007             
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

T A B L E   O F   C O N T E N T S

|1.1    | DATE                                                                        | 2     
|------ | --------------------------------------------------------------------------- | ------
|       |                                                                             |       
|1.2    | OVERVIEW                                                                    | 2     
|       |                                                                             |       
|1.3    | SELECTED
      ANNUAL INFORMATION                                           | 19    
|       |                                                                             |       
|1.4    | SUMMARY
      OF QUARTERLY RESULTS                                          | 20    
|       |                                                                             |       
|1.5    | RESULTS
      OF OPERATIONS                                                 | 21    
|       |                                                                             |       
|1.6    | LIQUIDITY                                                                   | 22    
|       |                                                                             |       
|1.7    | CAPITAL
      RESOURCES                                                     | 23    
|       |                                                                             |       
|1.8    | OFF-BALANCE SHEET ARRANGEMENTS                                              | 24    
|       |                                                                             |       
|1.9    | TRANSACTIONS WITH RELATED PARTIES                                           | 24    
|       |                                                                             |       
|1.10   | FOURTH
      QUARTER                                                        | 26    
|       |                                                                             |       
|1.11   | PROPOSED
      TRANSACTIONS                                                 | 27    
|       |                                                                             |       
|1.12   | CRITICAL
      ACCOUNTING ESTIMATES                                         | 27    
|       |                                                                             |       
|1.13   | CHANGES
      IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION             | 27    
|       |                                                                             |       
|1.14   | FINANCIAL
      INSTRUMENTS AND OTHER INSTRUMENTS                           | 28    
|       |                                                                             |       
|1.15   | OTHER
      MD&A REQUIREMENTS                                               | 28    
|       |                                                                             |       
|1.15.1 | ADDITIONAL DISCLOSURE FOR VENTURE ISSUERS WITHOUT
      SIGNIFICANT REVENUE | **28**
|       |                                                                             |       
|1.15.2 | DISCLOSURE OF OUTSTANDING SHARE DATA                                        | 30    
|       |                                                                             |       
|1.15.3 | DISCLOSURE CONTROLS AND PROCEDURES                                          | 30    

1

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|ROCKWELL DIAMONDS INC.              
|------------------------------------
|YEAR ENDED MAY 31, 2007             
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

1.1          
Date

This Managements Discussion and Analysis ("MD&A") should
be read in conjunction with the unaudited consolidated financial statements of
Rockwell Diamonds Inc. ("Rockwell", or the "Company") for the year ended May 31,
2007.

This MD&A is prepared as of September 25, 2007. All dollar
figures stated herein are expressed in Canadian dollars, unless otherwise
specified.

This discussion includes certain statements that may be
      deemed "forward-looking statements". All statements in this discussion,
      other than statements of historical facts, that address future production,
      reserve potential, exploration drilling, exploitation activities and
      events or developments that the Company expects are forward-looking
      statements. Although the Company believes the expectations expressed in
      such forward-looking statements are based on reasonable assumptions, such
      statements are not guarantees of future performance and actual results or
      developments may differ materially from those in the forward-looking
      statements. Factors that could cause actual results to differ materially
      from those in forward-looking statements include market prices,
      exploitation and exploration successes, continued availability of capital
      and financing and general economic, market or business conditions.
      Investors are cautioned that any such statements are not guarantees of
      future performance and that actual results or developments may differ
      materially from those projected in the forward-looking statements.


1.2          
Overview

Rockwell Diamonds Inc. ("Rockwell" or the "Company") is engaged
in the business of alluvial diamond production. The Company is focused on
acquiring additional operating diamond properties or projects that have
near-term potential for alluvial diamond production.

1.2.1        Summary

In fiscal 2007, the Company finalized a transaction with
Durnpike Investments (Proprietary) Limited (Durnpike) to acquire four diamond
properties; the Holpan/Klipdam and Wouterspan properties currently have alluvial
diamond operations.

The Holpan/Klipdam Property and the Wouterspan Property are
located in the Vaal River and Middle Orange River areas of the Northern Cape
Province of South Africa. Rockwell has received 51% of the net proceeds from
production at these operating properties since January 31, 2007.

Total diamond production of 7,007.28 carats was derived from
1,116,323 cubic meters of gravels mined and processed at Holpan/Klipdam and
Wouterspan. The Company sold 7,145.30 carats at an average price of US$1,005.54
per carat. Diamonds in inventory at May 31, 2007 totalled 957.86 carats.

The Company received revenues from sales of $10.1 million which
is inclusive of revenue received from sub-contractors of $1.97 million. Cost of
sales and amortization totalled $11.1 million which is inclusive of fees paid to
sub-contractors of $1.76 million, resulting in a loss for the year of $945,829
or $0.11 per share.

In 2006, HC Van Wyk Diamonds Limited, now a subsidiary of
Rockwell, entered into an option with Kanonloop Delwerye cc to evaluate the
alluvial diamond potential of the Makoenskloof project. The Makoenskloof
property is located on the north bank of the Middle Orange River ("MOR"),
approximately 20 km from the town of Douglas, South Africa, and 40 km upstream
from the Wouterspan diamond operation.

2

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|ROCKWELL DIAMONDS INC.              
|------------------------------------
|YEAR ENDED MAY 31, 2007             
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

A mining contractor was engaged to conduct bulk sampling on the
Makoenskloof property. The contractor excavated trenches and pits to verify the
geological model in March and early April. Gravel processed during bulk sampling
resulted in the recovery of a parcel of diamonds for evaluation, including a 58
carat white stone that was sold in the Companys May tender sale for US$27,676
per carat. Preproduction and trial mining continues at Makoenskloof with full
production anticipated in 2008.

Some contract mining also took place on a portion of the
Wouterspan property (Okapi farm).

In March 2007, the Company announced that it had concluded a
conditional agreement to purchase the Middle Orange River Operations (MORO) of
the Trans Hex Group (Trans Hex), a South African corporation. The purchase
would include all of the diamond-related prospecting, exploration, mining,
recovery and treatment operations conducted by Trans Hex, together with Mvela
Exploration (Pty) Limited (held jointly by Trans Hex and Mvela Resources)
(Mvela). These include the Saxendrift and Niewejaarskraal Mines (currently on
care and maintenance) and certain associated prospecting projects in the same
area. The MORO are located in the Northern Cape Province of South Africa.
Currently, the Company is awaiting Ministerial Consent and should have an
indication by the end of September from the Department of Minerals and Energy
(DME) in respect of this process. Documentation required to complete the
Ministerial Consent process, and thereby conclude the transaction, has been
accepted and approved by the DME Regional Office in Kimberley and submitted to
the DME Head Office in Pretoria for final approvals.

Rockwell also holds two other alluvial diamond exploration
projects, the Galputs Minerale project in South Africa and the Kwango River
Project in the Democratic Republic of Congo (DRC). Programs for these two
properties are in the planning stages.

Rockwell also holds the Ricardo Property, a copper prospect in
the Chuquicamata district of Chile. The Company is looking for new partners to
advance exploration at the Ricardo Property.

1.2.2        Financings

$9.5 million private placement of convertible promissory
notes

In July 2006, the Company entered into agreements to complete a
$9.5 million private placement of subordinated secured convertible promissory
notes (the Notes). The Notes were to be repaid on or before March 31, 2007 and
had similar terms and conditions to the Facility described in note 6, including
conversion rights. The Notes were subordinated to the Facility, and were secured
by a charge over all of the assets of the Company. As consideration for the
Notes, the note holders received 678,572 common shares, fair valued at $522,500,
of the Company on July 7, 2006 and 1,055,555 common shares, fair valued at
$522,500, of the Company on September 30, 2006. The payment on September 30,
2006 was equal to five percent of the outstanding balance owed on the Notes
divided by the average closing price of the Company's common shares on the
Exchange for the five trading days immediately preceding such issue, less a 10%
discount.

In November 2006, the Notes, with a face value of $9.5 million,
were repaid in full.

3

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|ROCKWELL DIAMONDS INC.              
|------------------------------------
|YEAR ENDED MAY 31, 2007             
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

$21 million private placement financing

In November 2006, Rockwell completed a private placement of $21
million, consisting of units at $0.50 per unit (the Offering).

Each unit consisted of one common share (Share) in the
capital of the Company and one Share purchase warrant. Each warrant entitles the
holder to buy one common share in the capital of the Company at the exercise
price of $0.60 during the first year from completion of the financing, or at an
exercise price of $0.80 during the second year or at an exercise price of $1.00
during the third year. The third year term of the warrants is conditional upon
Rockwell achieving Tier 1 status on the TSX Venture Exchange within the first
two years.

Rockwell is using, or has used, the net proceeds from the
Offering (a) to acquire the interests and/or rights in the four alluvial diamond
properties in South Africa and the DRC, (b) to discharge the convertible
promissory notes of $9.5 million, (c) to carry out exploration and development,
and (d) for general working capital and corporate development purposes.

Loan Agreements

In January 2007, the Company entered into a $5.5 million 90 day
loan agreement (Loan) with Amarc Resources Ltd. (Amarc), a related company
by virtue of common directors and certain shareholders. The Loan bore interest
of 5% for the 90 day period. The interest could be payable in the common shares
of the Company, at Amarcs election, based upon the 10 day average closing price
of the Company immediately preceding the repayment date, less a 10% discount. In
April 2007 the Company issued 497,993 common shares, fair valued at $273,896, of
the Company to Amarc as interest payment and repaid the loan of $5.5 million in
full.

In conjunction with the Loan, the Company also entered into
separate loan agreements with two shareholders (Holders). These loan
agreements were in the amount of $1.5 million and US$5 million, and were used to
enable the Company to establish a letter of credit to facilitate the acquisition
of Saxendrift Mines (Pty) Limited (note 15(a))(Saxendrift). If the Company was
unable to complete the acquisition of Saxendrift within 180 days, the funds
would be fully refunded. In the event that the Company conducts a private
placement of equity securities before October 31, 2007, the two shareholders
would have the option to participate in the private placement on the same terms
as the other participants.

The loan agreements of $1.5 million and US$5 million were
repaid in full by the Company in May 2007.

Financing to raise up to $60 million

In April 2007, the Company announced a private placement
whereby the Company will issue up to 115.4 million units at a price of $0.52 per
unit for aggregate proceeds of up to $60 million, comprised of approximately $50
million to be issued to investors under the brokered offering and $10 million to
be issued in the non-brokered offering.

Each unit is comprised of one common share and one share
purchase warrant exercisable at $0.70 for a 24 month period from completion.
Units issued under the brokered offering are being offered by a syndicate of
agents. Closing of the offering occurred on the May 9, 2007.

4

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|ROCKWELL DIAMONDS INC.              
|------------------------------------
|YEAR ENDED MAY 31, 2007             
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

The net proceeds from the offerings will be used to fund
Rockwells acquisition of the MORO from Trans Hex, expand production capacity at
its Wouterspan operation across the river from the MORO, implement improvements
at its other operations, and for general corporate purposes.

$11 million credit facility

On August 21, 2006, the Company reached an agreement with Quest
Capital Corp. (Quest) for a $6 million credit facility (the Facility). The
Facility was to be paid out of the proceeds of any future debt or equity
financing or disposition of any of the assets of the Company, other than in the
ordinary course of business, and bore interest from March 1, 2007 at the rate of
18% per annum, calculated daily and compounded monthly, payable on the last
business day of each month. The Facility, if not earlier converted, was to be
repaid on or before May 31, 2007. The Facility was secured by a first charge
over all of the assets of the Company. In consideration for the Facility, the
Company issued to Quest 385,714 common shares of the Company on August 31, 2006,
and 490,909 common shares of the Company on November 30, 2006, each fair valued
at $297,000. The Facility could be repaid at any time, without penalty. Quest
had the right to convert the facility to common shares if the Company completed
an equity financing for $5 million or greater, at the greater of the price at
which the financing is conducted (less a 3% discount), subject to a minimum
conversion price of $0.65 per share.

On September 1, 2006, the Company borrowed $6 million under the
Facility to facilitate the funding of Durnpikes obligations (note 4) in
connection with the acquisition of 51% of the outstanding shares of Klipdam
Diamond Mining Company Limited and HC Van Wyk Diamonds (Proprietary)
Limited.

In January 2007, the Company renewed and extended the Facility
(Revised Facility) to $11 million. Under the Revised Facility, Quest had the
right to convert the facility to common shares if the Company completed an
equity financing for $5 million or greater, at the greater of the price at which
the financing is conducted (less a 3% discount), subject to a minimum conversion
price of $0.60 per share.

The Revised Facility, if not earlier converted, was to be
repaid on or before December 21, 2007, and bore interest from March 21, 2007 at
a rate of 19% per annum payable as follows: (a) on March 21, 2007, by the
issuance 1,062,939 common shares of the Company at an issue price of $0.4986 per
share to pay the first three months of interest of $529,981; (b) on June 21,
2007, by the issuance of such number of common shares of the Company at a price
equal to the five day average closing price of the Company prior to June 21,
2007, less a 10% discount for the second three months of interest; and (c) to
December 21, 2007, the Company shall pay interest, in arrears, on the last
business day of each month. The Company issued to Quest 1,062,939 common shares,
fair valued at $588,688, of the Company on March 21, 2007 and the Revised
Facility of $11 million was repaid in full in May 2007 without incurring any
penalties.

1.2.3        Agreements

Durnpike Agreement

On June 30, 2006, the Company entered into an
Agreement-in-Principle to acquire interests and/or rights in four alluvial
diamond properties in South Africa and the DRC. These four properties include
the Holpan/Klipdam Property in South Africa, Wouterspan Property in South
Africa, Kwango River Project in the DRC and Galputs Minerale Project in South
Africa.

5

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|ROCKWELL DIAMONDS INC.              
|------------------------------------
|YEAR ENDED MAY 31, 2007             
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

Subsequently, pursuant to the terms of the Definitive
Agreement, the Company acquired all of the shares and loans in Durnpike, a
private South African company, from eight vendors (the Vendors) for
consideration set forth below, payable in common shares of the Company (Common
Shares) related to the closing price of the Common Shares on the TSX Venture
Exchange on the specified dates described below. Durnpike holds an interest in
respect of and/or rights in the four alluvial diamond properties.

The Holpan/Klipdam Property and the Wouterspan Property were
indirectly owned by the H.C. Van Wyk Diamante Trust (Van Wyk Trust), a
business trust registered in South Africa. The Van Wyk Trust held 99% of HC Van
Wyk Diamonds Ltd (HCVW), a private South African company, and 99% of Klipdam
Mining Company Limited (Klipdam), a private South African company. The
remaining 1% of HCVW and Klipdam was owned by nominees of the Van Wyk Trust.
HCVW and Klipdam, and were collectively referred to as The Van Wyk Diamond Group
of companies (VWDG).

On July 7, 2006, Durnpike completed the acquisition of an
initial 49% of the issued and outstanding shares of HCVW and 51% of the issued
and outstanding shares of Klipdam (the Acquisition Interest) for South African
Rand (ZAR) 50 million ($7.8 million) and agreed to pay an additional ZAR30
million ($4.5 million) to the Van Wyk Trust on July 7, 2007. The payment of
ZAR30 million was made to the Van Wyk Trust in June 2007 subsequent to the May
31, 2007 year end. Durnpike had the option to increase its shareholding in HCVW
to a 51% controlling interest by (a) subscribing for additional shares in HCVW
for the amount of ZAR1 million ($160,000) and (b) introducing a ZAR24 million
($3.9 million) working capital loan into VWDG. These conditions were met in
January 2007.

The Company also entered into an Exchange Agreement with the
Van Wyk Trust pursuant to which it holds a call option, and has granted a
corresponding put option to the Van Wyk Trust, to acquire an additional 23% of
VWDG for ZAR60 million ($9 million), payable in Common Shares. The Exchange
Agreement shall become effective upon Rockwell having completed a listing of the
Companys Common Shares on the Johannesburg Stock Exchange (JSE). The Company
is currently in discussions with a black economic empowerment (BEE) group to
increase the BEE current shareholding from 15% to 26% by subscribing for an
additional 11% shares in the VWDG. This additional 11% will be at a subscription
price of ZAR17.5 million and the BEE group will also need to inject ZAR10.5
million working capital into the VWDG. During the year ended May 31, 2007, a BEE
group purchased 15% of the VWDG from the Van Wyk Trust for an amount of ZAR 22.5
million ($3.4 million). To facilitate Durnpikes payment of ZAR50 million to the
Van Wyk Trust on July 7, 2006, the Company advanced a non-interest bearing loan
to Durnpike of ZAR50 million ($7.8 million). This loan is secured by a pledge of
Durnpikes Acquisition Interest.

Pursuant to the Definitive Agreement, the Company:

- acquired from the Vendors all of their shares and loans in Durnpike for
  consideration of ZAR 43 million ($6.4 million), payable in common shares of
  the Company on the earlier of (i) the date of the JSE listing; and (ii) within
  approximately 12 months from signature of the Definitive Agreement. By virtue
  of such acquisition, the Company acquired Durnpikes interests in the four
  alluvial diamond properties in South Africa and the DRC. The ZAR consideration
  does not include payment in respect of the Kwango River Project, which payment
  stands to be made by the Company only when (and if) the feasibility study
  referred to below has been completed and approved by the board of directors of
  the Company;
- will spend US$7 million on a feasibility study on the Kwango River Project
  by August 31, 2007. This deadline may be extended to February 29, 2008 at no
  cost and be further extended to December 31, 2008 by payment of US$1 million
  in Common Shares. As it seems highly

6

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|ROCKWELL DIAMONDS INC.              
|------------------------------------
|YEAR ENDED MAY 31, 2007             
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

unlikely that the deadline of February
29, 2008 will be met, the Company is currently negotiating an extension to such
deadline. If the Company wishes to retain the Kwango River Project following
completion of the feasibility study, the Company must (i) pay to the Vendors an
amount equal to 60% of the net present value of the Kwango River Project
Valuation (as determined in terms of the feasibility study and subject to a
minimum acquisition cost of US$13 million and a maximum acquisition cost of
US$26 million), which payment shall be effected by the issuance of Common Shares
and (ii) commit to incur an additional amount of up to US$6 million in
expenditures for development of the Kwango River Project within 16 months from
the date of completion of the feasibility study. If the Company does not wish to
retain the Kwango River Project following completion of the feasibility study,
the Definitive Agreement provides for Durnpike being divested of such project on
certain terms, with the Company nevertheless retaining 100% of the shares in
Durnpike (and therefore the indirect interests in the Holpan/Klipdam, Wouterspan
and Galputs properties). In such event, the full and final purchase
consideration for Durnpike will be limited to the ZAR Consideration.

Durnpikes interest in the Kwango River
Project is constituted by an agreement (Midamines Agreement) with Midamines
SPRL (Midamines), the holder of the exploration permit on the Kwango River
Project, to act as contractor on behalf of Midamines to manage and carry out
exploration and mining. Durnpike will be entitled to an 80% share of the net
revenue from the sale of any diamonds produced from the contract area.

Under the Midamines Agreement, Durnpike
agreed to certain minimum royalty payments being made to Midamines. These
royalties take the form of a series of recurring annual minimum royalty payments
of US$1,200,000 per annum (commencing on December 31, 2007). (As to the
enforceability of this commitment in light of developments pertaining to the
Midamines Agreement, see note 16(b) to the audited financial statements for the
year ending May 31, 2007,).

All of the Common Shares issued to the Vendors pursuant to the
acquisition, other than the Common Shares issued to extend the feasibility study
deadline, will be held in escrow for at least nine months from the date of
issuance, provided that a limited portion of those escrowed Common Shares may be
released to enable the Vendors to meet certain specified obligations.

On January 31, 2007, all the conditions precedent to
implementation of the Acquisition as per the Definitive Agreement were
fulfilled. The Company also received the necessary regulatory approvals in
Canada and South Africa. As provided for in the Definitive Agreement, the
Company executed an agreement in relation to the acquisition of control of the
mineral rights relating to the Galputs Minerale Project and appointed three of
the Vendors to the Companys Board of Directors.

In conjunction with the acquisition of Durnpike, HCVW had an
option agreement to acquire the Makoenskloof alluvial diamond project. As a
result of the acquisition of HCVW by Durnpike, and concurrent acquisition of
Durnpike by Rockwell, the Company assumed the option to purchase the
Makoenskloof property.

In November 2006, HCVW exercised its option to purchase the
property and the company that held the mineral rights of the Makoenskloof
property. HCVW paid ZAR5.4 million ($880,000) in January 2007 for the property
and mining permits. Pursuant to this option exercise, HCVW also entered into a
subcontracting agreement with Folmink Delwery CC to perform bulk sampling
commencing in March 2007. In April 2007 HCVW entered into an agreement to
purchase ZAR21.3 million (approximately $3.2

7

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|ROCKWELL DIAMONDS INC.              
|------------------------------------
|YEAR ENDED MAY 31, 2007             
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

million) in plant and equipment from the sub-contractor and to
terminate the sub-contracting arrangement. The Company has paid a total
consideration ZAR1.5 million ($225,000) in during the year and is committed to
pay the remaining consideration in the following manner:

- ZAR3 million ($450,300) shall be payable by way of Common Shares of the
  Company. The shares cannot be exchanged, or traded, or sold in any manner, by
  the seller for a period of one year after date a listing on the JSE. In the
  event a listing is not concluded or is not finalized on or before February 28,
  2008, the outstanding balance (including the ZAR3 million) shall be payable by
  way of monthly cash payments of ZAR1 million ($150,100) and shall incur
  interest calculated at the prime rate of the Standard Bank of South Africa.
- During August 2007, subsequent to the year end, an amount of ZAR10.6
  million ($1.6 million) was paid to settle the outstanding balances owing on
  certain equipment that was purchased. The remaining balance payable of ZAR$6.2
  ($920,000) shall be paid in monthly payments of ZAR500,000 ($75,050). The
  monthly payments shall incur interest calculated at the prime rate of the
  Standard Bank of South Africa.

Middle Orange River Operations

On March 6, 2007,Rockwell and Trans Hex announced that
the companies had entered into an agreement whereby Rockwells wholly owned
South African subsidiary, Rockwell Resources RSA, may acquire two open pit
alluvial diamond mines and three alluvial diamond exploration projects from
Trans Hex (the Transaction).

Trans Hex, through its wholly-owned subsidiary, Trans Hex
Operations (Pty) Ltd. (THO), is the owner of two open pit alluvial diamond
mines and three alluvial diamond exploration projects located along the southern
bank of the Middle Orange River between Douglas and Prieska in the Northern Cape
Province of South Africa, collectively called the Middle Orange River Operations
and Projects or MORO. Rockwells Wouterspan alluvial diamond operation is
located on the north bank of the Middle Orange River immediately adjacent to the
Saxendrift and Niewejaarskraal diamond mines.

The MORO includes (but are not limited to):

- the rights to prospect and explore for 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 Province of South Africa (see MORO
  Mineral Rights table below);
- a series of large remnant alluvial diamond terraces comprising
  approximately 8.7 million cubic meters of indicated resource and 30.4 million
  cubic meters of inferred resources;
- the material plant, machinery, equipment and other movable assets owned
  and/or used by THO - These operating assets were independently valued by
  Manhattan Mining Equipment (Pty) Limited in April 2005 at ZAR53 million ($8.5
  million);
- the employees of THO in terms of Section 197 of South Africas Labour
  Relations Act of 1995; and
- a rehabilitation liability which will be taken over by Rockwell on the
  basis that the tailings and other heaps of unprocessed diamond bearing
  middlings gravel and Rooikoppie gravels will be reprocessed by Rockwell to
  recover contained diamonds. The plan is to process the material and
  simultaneously rehabilitate these areas.

8

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|ROCKWELL DIAMONDS INC.              
|------------------------------------
|YEAR ENDED MAY 31, 2007             
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

It is proposed that Rockwell will pay a cash purchase
consideration to Trans Hex of approximately ZAR100.4 million ($15.1 million) and
will assume potential liabilities for staff layoffs (capped at ZAR5 million
[$0.8 million]) and rehabilitation bonds (capped at ZAR4.25 million [$0.7
million]) (All such purchase payments and liabilities are expected to total
approximately $17.7 million, subject to adjustment depending on the final
combination of assets acquired.) As noted above, Trans Hex will transfer all its
relevant mineral rights and associated assets into a new special purpose vehicle
(Saxendrift SPV), which Rockwell will acquire via Rockwell RSA for the
consideration indicated above.

The implementation of the Transaction is subject to fulfillment
of certain conditions precedent including:

- The unconditional approval of South Africas Competition Commission;
- All requisite consents by South Africas Minister of Minerals and Energy
  to the cession and transfer of the underlying mining and prospecting rights
  pertaining to the MORO to the Saxendrift special purpose vehicle (Saxendrift
  SPV) and the acquisition by Rockwell of the shares in Saxendrift SPV;
- Satisfactory provision by Rockwell of certain financial undertakings to
  THO;
- The approval by the TSX Venture Exchange;
- Completion by Rockwell to its satisfaction of a mineral title due
  diligence investigation; and
- The audited balance sheet of Saxendrift SPV as at the effective date
  meeting specified criteria.

Fulfillment of some of the conditions precedent may be waived,
or the date specified for their fulfillment extended, in certain limited
circumstances. The MORO will be placed on care and maintenance with effect from
date of signature of the relevant transaction agreements pending fulfillment of
the conditions precedent.

These conditions have now been satisfied and the Company is
awaiting requisite Ministerial consent.

1.2.4Production Properties

Production and Sales

A summary of Rockwells share of diamond production and sales
for fiscal 2007 (during the four month period of February 1 to May 31) is
provided in the tables below:

Rockwells Share of Production
      for the four month period in the year ended May 31, 2007Operation
    Production Volume (cubic
      meters)
    Production (carats)
    Average grade (carats per 100
      cubic meters)Holpan
    487,535
    2,850.57
    0.58Klipdam
    257,900
    1,883.85
    0.73Wouterspan
    370,888
    2,272.86
    0.61Total
    1,116,323
    7,007.28
    0.63


9

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|ROCKWELL DIAMONDS INC.              
|------------------------------------
|YEAR ENDED MAY 31, 2007             
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

Rockwells Share of Sales and Inventory
      four month period in the year ended May 31, 2007Operation
    Sales (carats)
    Value of Sales (US$)
    Value of Sales (C$)
    Average dollar value (US$) per
      carat
    Inventory (carats)Holpan
    2,947.27
    2,936,597
    3,329,223
    996.38
    405.78Klipdam
    1,762.04
    1,388,938
    1,588,261
    788.26
    402.55Wouterspan
    2,435.99
    2,859,328
    3,200,163
    1,173,78
    149.53Total
    7,145.30
    7,184,863
    8,117,647
    1,005.53
    957.86


The above table does not include contract diamond revenue sales
  from the Makoenskloof and other properties.

Holpan/Klipdam

The Holpan/Klipdam Property is located 45 km from Kimberley,
South Africa. It consists of the contiguous Holpan 161 farm and Klipdam 157
farm, covering an area of 3,836 hectares. The production from Holpan and Klipdam
is accounted for separately because they are separate operating entities.

Production from February 1 to May 31 at Holpan at was 2,850.57
carats from 487,535 cubic meters (975,270 tonnes) of gravels and at Klipdam was
1,883.85 carats from 257,900 cubic meters (515,800 tonnes) 4,734.42 from 745,435
cubic meters of gravels (1,490,870 tonnes) at an average cost of $3.00 per
tonne.

Sales from Holpan were 2,947.27 carats at an average value per
carat of US$996.38. The inventory at Holpan is 405.78 carats.

Sales from Klipdam were 1,762.04 carats at an average value per
carat of US$788.26. There is an inventory of 402.55 carats for Klipdam.

Mineral Resources

Dr Tania R. Marshall, Pr.Sci.Nat., an independent qualified
person, updated the mineral resource estimates at Holpan/Klipdam in March 2007.
According to her May 2007 report, production between January 2006 and March 2007
mining at the Holpan and Klipdam properties focused on the Rooikoppie gravels,
and a volume of 1,889,308 cubic meters was mined and processed during the
period. In addition, based on the sale of 15,953 carats during the period, a
mean value of U$876 per carat had been identified on the property. A technical
report will be filed on www.sedar.com.

The inferred mineral resource at March 31, 2007 is:

Area
    Volume (cubic meters)
    Sampled Grade (carats per 100
      cubic meters)Holpan Primary Gravel
    1,660,000
    1.16Klipdam Primary Gravel
    3,036,000
    1.16Holpan and Klipdam Rooikoppie Gravel
    5,754,000
    0.81Total
    10,450,000
    0.95


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|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

Wouterspan

The Wouterspan Property is located near Douglas, South Africa.
It comprises portions, totalling 969.4 hectares, of the Lanyon Vale 376 farm.
Operations are taking place on two portions of the property called the Farhom
and Okapi farms, exploiting the Rooikoppie and Primary gravel units.

From February 1 to May 31, 2007, the property produced 2,272.86
carats from 370,888 cubic meters (741,776 tonnes) of gravels at an average cost
of $3.00 per tonne.

Mineral Resources

The thickness and distribution of the alluvial gravel deposits
have been investigated through systematic percussion circulation drilling
programs. Geological logging and surveying of all boreholes have been undertaken
and used in the construction of a 3D geological model, which has itself been
used as a guide to the bulk sampling program. Bulk sampling is only way to
establish diamond presence and grade of these deposits.

A percussion drilling program conducted in 2005 and 2006
comprising 469 bore holes and 5,589 m of drilling identified 4,481,000 cubic
meters of Rooikoppie gravel and 43,259,000 cubic meters of Primary gravel on the
Wouterspan property. From March 2005 to January 2006, a total of 513,892 cubic
meters of Primary gravel and 24,013 cubic meters of Rooikoppie from eleven
locations on the Wouterspan property were tested by bulk sampling. For the
period March 2005 to March 31, 2007 some 12,000 carats of diamonds were produced
from Wouterspan. In the bulk sampling operations conducted between January 2006
and March 2007, 8,940 carats of diamonds were recovered from a total feed of
1,420,699 cubic meters of diamond bearing gravel for an average global grade of
0.63 carats per 100 cubic meters. The average diamond value for this period was
US$2,250 per carat.

Independent qualified persons AN Clay, FAusIMM, Pr.Sci.Nat.,
and N McKenna, Pr.Sci.Nat., of Venmyn Rand (Pty) Ltd, estimated the mineral
resources at Wouterspan as of March 31 2007. The results of the estimate are
tabulated below:

Classification
    Area
    Volume (cubic meters)
    Grade (carats per 100 cubic
      meters)Indicated
    Farhom
    6,144,000
    0.63Okapi
    9,670,000
    0.63Total
    
    15,814,000
    0.63Inferred
    Farhom
    2,895,000
    0.63Okapi
    17,853,000
    0.63Total
    
    20,748,000
    0.63


Studies of the MOR deposits have indicated an average density
or specific gravity of 2.1 would be used to convert cubic meters to tonnes,
which would be the norm for resources reported under NI 43-101. Hence, the total
indicated mineral resources would equate to about 33.2 million tonnes and the
total inferred mineral resources would be about 43.6 million tonnes.

Indicated and inferred resources have been defined by combining
geological observations, drill results, and bulk sampling information on a
sectional basis for those areas lying within the drilled and sampled portion of
the Wouterspan project. Indicated resources have been estimated for Farhom for
areas with a drill grid of 50 meter x 100 meter spacing and for Okapi as 100
meter x 200 meter grid spacing for which

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|MANAGEMENT'S DISCUSSION AND ANALYSIS
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grade, diamond size and diamond value (calculated on a weighted
average from fourteen months production) has been extrapolated and interpolated
to a maximum of 250 meters from the blocks that were bulk sampled. Inferred
resources have been designated for those areas which the same drill grid spacing
applies, but where distances from the bulk sampled blocks are greater than 250
meters; such areas, although showing the same geological consistency in drill
samples and pits, are considered to be of lower confidence level in respect of
grade and diamond characteristics.

The estimate was announced on September 28, 2007. A technical
report describing the estimate will be filed on www.sedar.com.

1.2.5        Exploration
and Development Properties

Makoenskloof Property

The Makoenskloof property is located on the north bank of the
Middle Orange River, approximately 20 km from the town of Douglas, South Africa,
and 40 km upstream from the Wouterspan diamond operation.

A sub-contractor was engaged to do bulk sampling until the
beginning of April 2007. In April it was decided that the sub-contractor would
be given notice and that the Company would develop and expand Makoenskloof into
a similar alluvial operation as Rockwell currently has at Wouterspan. In April
2007, a purchase agreement was entered into with the sub-contractor to acquire
the earth moving equipment and processing plant, including two new Flowsort
X-ray machines, for ZAR21.3 million. The earth moving equipment comprises Bell
articulated dump trucks and Komatsu wheel loaders and excavators, which are
similar to those utilized by the Company at its other operations.

Bulk sampling recovered stones that were included in the May
2007 tender sale. The Makoenskloof parcel included a range of good quality
stones including those between 5 and 10 carats, and a 58 carat white stone that
received an excellent price of US$27,676 per carat.

As from July 2007 Makoenskloof is a trial mining operation with
the intention to confirm the grade and diamond values for the deposit and to
drill out the extent and volume of the diamond bearing gravel deposit. Subject
to all of this work producing adequate results the Company would ramp up to full
production early 2008.

Galputs Minerale Project, Northern Cape Province, South
Africa

The Galputs Minerale Project consists of the mining rights to
the Galputs 104 farm on which diamondiferous gravels have been identified. The
project is indirectly owned by Virgilia Investments Inc, a British Virgin
Islands corporation. Virgilias wholly-owned subsidiary, Galputs Minerale (Pty)
Limited, a private South African company, holds mining rights to the Galputs
Project.

A program was proposed in 2006 for further exploration and bulk
sampling operations. No work was done in 2007, or is immediately planned for
2008, as attention is focused on completion of definitive agreements, production
at Holpan/Klipdam, Wouterspan and Makoenskloof and acquisition of the Saxendrift
properties.

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|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

Kwango River Project, Democratic Republic of
Congo

The Kwango River Project comprises approximately 109 square km
within Exploitation Permit Number 331 (PPE331) held by Midamines SPRL
(Midamines), a DRC company. Durnpike has an option agreement with Midamines
(Midamines Agreement) to manage and carry out exploration and mining on a
portion of PPE331, as contractor for and on behalf of Midamines, and is entitled
to an 80% share of the net revenue from the sale of any diamonds produced from
the contract area. PPE 331, issued in December 2003, is valid until January 2017
(and is renewable for a second term) and allows the holder to conduct
exploration, develop and exploit the deposit as well as market the diamonds
produced from the deposit according to local government requirements and the
Kimberley process.

The Project encompasses over 75 km of river frontage and also
extends across elevated, palaeo-river terraces. Alluvial diamond deposits occur
as gravel assemblages within the modern Kwango River, underlying its banks and
in the adjacent terraces, which are being mined by small scale operations.

Over the past few months, the Company has been advancing the
logistical activities for its planned exploration and bulk sampling initiative
with Midamines. Rockwell has established a working base in Kinshasa and
conducted geophysical and other investigations on site.

One of the 50% shareholders of Midamines has, subsequent to the
conclusion of the Midamines Agreement in accordance with a mandate granted by
such shareholder, denied the validity of the Midamines Agreement. The remaining
50% shareholder disputes this view and remains committed to the Midamines
Agreement. Due to this dispute, Midamines has not afforded Durnpike access to
the site, and assistance as regards its proposed operations on the site, in the
manner contemplated in the Midamines Agreement. This failure has significantly
delayed the Companys proposed operations on the site, and it is consequently
the Companys position that the required royalty payments have become suspended
for the duration of Midamines internal dispute.

The Company remains committed to the Kwango River Project and
is confident that the ongoing dispute between the shareholders of Midamines will
be resolved. The Company will obtain formal legal advice from both Belgian and
DRC legal counsel as soon as possible as the Midamines Agreement is governed by
Belgian law and the obligations under the Midamines Agreement are to be
implemented, where required, in accordance with the laws of the DRC.
Concurrently, the Company will also monitor the resolution of the internal
dispute between the Midamines shareholders. If the issue of minimum royalty
payments is not settled on or before December 31, 2007, the Company will seek
formal legal advice and may consider formally terminating the Midamines
Agreement.

Ricardo Property, Chile

The Company holds a 100% interest in the Ricardo Property, a
copper prospect located within the Calama Mining District, Chile. The property
is situated on the West Fissure Fault, a structural trend that hosts a number of
porphyry copper deposits, including Corporación Nacional del Cobre de Chiles
(Codelco, Chiles national mining company) Chuquicamata Mine. There are
targets on the Ricardo property that have yet to be tested and the Company is
seeking partners to continue exploration or a potential divestiture of the
property.

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|MANAGEMENT'S DISCUSSION AND ANALYSIS
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1.2.6        Acquisitions

The Middle Orange River Operations

The Saxendrift area has had a long history of diamond
production dating back to the mid 1920s. An estimated 96,000 carats of diamonds
were extracted from the area between 1928 and 1964. Trans Hex commenced
exploration and mining in the area in 2000 through a merger with GEM Diamond
Mining Limited, which held the mineral rights to Saxendrift at that time.

The Saxendrift Mine comprises three mining areas: Brakfontein,
Saxendrift Terrace A and Saxendrift Terrace B. From commissioning to the end of
2005, the Saxendrift Mine produced a total of 76,803 carats. The largest gem
quality stone ever produced by Trans Hex  a 216 carat octahedron  was from the
Saxendrift operation in 2001. Saxendrift also held the Trans Hex record for the
highest dollar per ct price with a 9.22 -carat blue stone that was sold in 2003
for in excess of US$45,000/carat. Production on Saxendrift was achieved by open
cast mining methods with processing and recovery being achieved by a combination
of rotary pan plants, dense media separation (DMS), and Flow-sort X-ray
recovery.

THO began its development of the Niewejaarskraal Mine with a
bulk sampling program in mid-2001. A DMS plant was erected on site and
full-scale production commenced in April 2002. This operation was suspended in
late 2006.

During its tenure of the MORO, THO also conducted exploration
and evaluation work on several large alluvial gravel terraces to the north east
of Saxendrift, namely Kwartelspan, and to the south west of Niewejaarskraal,
namely Vieglandsput, Zwemkuil-Mooidraai and Remhoogte-Holsloot. Exploration work
conducted on the adjacent properties included reverse circulation drilling,
trenching and bulk sampling. Resource information obtained from these
activities, including gravel volumes, grades, diamond resources, and diamond
value estimates are included in the MORO Diamond Resources table.

The mineral rights holding of the properties which would be
acquired by Rockwell on successful completion of the Transaction are indicated
in the table below. The majority of the mineral rights listed below have already
been converted by Trans Hex to new order rights under South Africas Mineral and
Petroleum Development Act, 2002. Saxendrift mine rights are currently the
subject of a conversion process by Trans Hex. Trans Hex Group will transfer all
its relevant mineral rights and associated assets into Saxendrift SPV, which
Rockwell will acquire via Rockwell RSA.

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|MANAGEMENT'S DISCUSSION AND ANALYSIS
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MORO Mineral Rights

PART 1  SAXENDRIFT
        MINING OPERATIONSFARM NAME
      PORTION
      SIZE (Ha)
      HOLDER AT SIGNATURE
        DATETRANS HEX RIGHTS
      Saxendrift 20
      Ptn of Rem
      1368.2940
      Trans Hex OperationsSaxendrift 21
      RemainderSaxendrift 21
      Ptn of Ptn 1MVELA RIGHTS
      Saxendrift 20
      Ptn of Rem
      359.0000
      Mvela ExplorationPART 2  NIEWEJAARSKRAAL MINING OPERATIONSTRANS HEX RIGHTS
      Niewejaarskraal 40
      Ptn of Ptn 6
      1766.3900
      Trans Hex OperationsNiewejaarskraal 40
      Ptn of Ptn 4Niewejaarskraal 40
      Ptn of Ptn 2Viegulands Put 39
      Ptn of RemMVELA RIGHTS
      Viegulands Put 39
      Ptn of Rem
      324.1050
      Mvela ExplorationNiewejaarskraal 40
      Ptn of Ptn 6
      995.2000
      Mvela ExplorationPART 3 - PROSPECTING PROJECTSKWARTELSPAN PROJECT
      Kransfontein 19
      Ptn 1
      903.6500
      Mvela ExplorationKwartelspan 25
      RemainderREMHOOGTE-HOLSLOOT PROJECT
      Remhoogte 152
      Ptn of Ptn 1
      2798.5110
      Pioneer MineralsHolsloot 47
      Ptn of RemPtn of Ptn 3
      1049.5900
      Trans Hex OperationsZWEMKUIL-MOOIDRAAI PROJECT
      Zwemkuil 37
      Ptn of Rem
      2488.1240
      Mvela ExplorationMooidraai 36
      Ptn of Rem
      2901.0000


Ptn - portion; Rem - remainder

In 2006, Trans Hex commissioned an Independent Techno-Economic
Valuation Report (the Venmyn Report) by Venmyn Rand (Pty) Ltd (Venmyn)
authored by C.A. Telfer, Pr.Sci.Nat., G.D. Stacey, B.Sc.Eng., M.C. Ecklund,
AMSAIMM, and A.G. Bloomer, Pr.Sci.Nat. The Venmyn Report was prepared to assess
and characterize the technical and economic potential of the MORO in respect of
a decision made by Trans Hex to dispose of MORO diamond bearing resources and
assets. An updated technical report was completed for Rockwell based on
additional field work by G. D. Stacy and C. A. Telfer.

The MORO operations and exploration projects have indicated and
inferred diamond resources. These are summarized in the MORO Diamond Resources
table. All resources were independently audited by Venmyn and prepared in
accordance with the South African Mineral Resource Code (SAMREC) and the JSE
Listings Requirements.

The Venmyn Report describes in detail the various technical
activities undertaken as they relate to the resource estimations. The volumetric
measurements were determined by geologic stratigraphic mapping, drilling, and
bulk sampling. In addition, density measurements were undertaken on bulk samples
and production samples. The bulk sample methodology is described in the Venmyn
Report.

Resource evaluation programs have been undertaken in a number
of campaigns as early as 1982 and include 1996 through 1997. Trans Hex has
undertaken drill programs from 2000 to 2001 comprised of 30,184 meters drilling
on grids of 50 meters by 50 meters and 25 meters by 25 meters. Diamond grades
were estimated from bulk samples and production records.

The Venmyn Report confirms that the mineral tenure is a mix of
old order rights and new converted rights. Those leases that currently have
old order rights have had the new order rights applied for and it is
anticipated that they will be issued in the normal course. Surface rights over
Saxendrift are owned outright and there are land use agreements on the remaining
properties.

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|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

In addition there are Environmental Management Program reports
for all the additional mining and exploration operations. There is also a
registered environmental trust fund which is utilized for the various
operations; this trust fund will be assumed by Rockwell.

The operations require water use licenses (WUL), for mining and
bulk sample operations. The various operations have the respective WUL. There
has also been a Social and Labour Plan" filed with the Department of Minerals
and Energy which is required as part of mining activities.

MORO Diamond Resources

MINE/PROJECT
      MINING AREA
      RESOURCE CLASSIFICATION
      VOLUME cubic meters
        (m3)
      GRADE (carat/100m3)
      CARATSSaxendrift
        Mine
      Saxendrift Terrace
        A
      Indicated
      1,838,000
      0.83
      15,207Inferred
      5,723,000
      0.48
      27,344Saxendrift Terrace
        B
      Indicated
      422,000
      1.15
      4,850Inferred
      1,821,000
      0.68
      12,334Stockpiles
      Indicated
      415,000
      0.47
      1,947Inferred
      263,000
      0.29
      763Total/Average
        Saxendrift Mine Indicated
      2,675,000
      0.82
      22,004Total/Average
        Saxendrift Inferred
      7,807,000
      0.52
      40,441Niewejaarskraal
        Mine
      Niewejaarskraal
      Indicated
      4,174,000
      0.80
      33,376Inferred
      1,696,000
      0.48
      8,132Viegulandsput
      Indicated
      1,864,000
      1.16
      21,703Inferred
      1,465,000
      0.47
      6,911Nieweskraal TB2
      Inferred
      4,919,000
      0.90
      44,066Total/Average
        Niewejaarskraal Mine Indicated
      6,038,000
      0.91
      55,079Total /Average
        Niewejaarskraal Mine Inferred
      8,080,000
      0.73
      59,109Zwemkuil- Mooidraai
      N/A
      Inferred
      1,640,000
      0.95
      15,643Remhoogte- Holsloot
      N/A
      Inferred
      11,503,000
      1.15
      131,781Kwartelspan
      N/A
      Inferred
      1,385,000
      1.50
      20,838Total/Average
        of Exploration Projects Inferred
      14,528,000
      1.16
      168,262Grand Total
         Indicated Resources
      8,713,000
      0.88
      77,083Grand Total
         Inferred Resources
      30,415,000
      0.88
      267,812


Studies by THO indicated densities or specific gravities at the
Saxendrift operations: 2.2 for Basal gravels, and 1.90 for Middlings gravels.
The deposits are similar at all the mines and projects described above and an
average density or specific gravity of 2.1 is be used to convert cubic meters to
tonnes. The total indicated mineral resources would be 18.3 million tonnes and
the total inferred mineral resources would be 63.9 million tonnes.

Average diamond prices realized by THO through Trans Hex tender
sales for Saxendrift during the period May 2001 to the end of 2005 were US$1400
per carat, and an average price of US$1375 per carat was achieved for
Niewejaarskraal for the period September 2001 to the end of 2005.

Rockwells Wouterspan alluvial operation is located on the
north bank of the Middle Orange River across from the Saxendrift -
Niewejaarskraal mines of THO. The Wouterspan diamond bearing gravel sequence
constitutes a large alluvial diamond deposit, which is a remnant of an extensive
braided river system

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|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

represented by coarse gravel deposits, sand rich lenses, an
upper calcrete layer and surface deflation layer typically referred to as the
Rooikoppies. Deposits found at Wouterspan are contiguous with the Saxendrift
and Niewejaarskraal deposits located on the south bank of the river. At
Rockwells Wouterspan operation, an average price of about US$2508 per carat was
achieved by means of tender sales in the 11 month period from March 1, 2006 to
January 31, 2007. This high average value was strongly influenced by the
recovery of a number of large diamonds in this period, including three stones of
over 100 carats.

It is expected that the value of the MORO will be realized
better by Rockwell as a consequence of its ability to exploit the deposits on a
high volume, low cost basis. This approach at Saxendrift and Niewejaarskraal
will emulate the volume-based development and mining strategy as applied at its
Wouterspan operation, and Rockwells other operations at Holpan-Klipdam
operations, north of Kimberley, thereby achieving economies of scale, lower unit
costs, and realizing latent value in the ground.

Merits of the MORO include:

- the scarcity of well developed and well understood diamond projects in
  South Africa, and prevailing market conditions of high demand and high stone
  prices;
- the high stone prices for which the Saxendrift Mine is renowned, which
  have been achieved on a regular basis - the Niewejaarskraal Mine has also
  produced diamonds of similar values;
- the rights to additional exploration projects adjacent to the current
  operations; these projects represent future upside potential which could be
  developed using the established mining infrastructure;
- the existing processing and final recovery plant on Saxendrift and
  Niewejaarskraal including pan plants, DMS plants, and X-ray recovery units, as
  well as a limited amount of serviceable earth moving equipment,
- the well established infrastructure that is in place on the Saxendrift and
  Niewejaarskraal mines including offices, service bays, accommodation and
  catering facilities, electrical power, and water reticulation which will
  support simultaneous operation on all properties; and
- Security infrastructure implemented by Trans Hex and the ability to link
  these into systems run by Rockwell.

Acquiring the MORO properties will allow Rockwell to combine
its Wouterspan operation with that of the Saxendrift and Niewejaarskraal mines
and thereby optimize the utilization of its management and operating teams and
infrastructure at Wouterspan, which is located directly across the Middle Orange
River from Saxendrift and Niewejaarskraal.

1.2.7        Market
Trends

The rough diamond market showed steady growth in demand in
2005. Prices for polished stones increased, including large stones (>2 carats
with better colour and quality) and smaller diamond segments.

In 2006, diamond prices increased 4-5% in the first three
quarters, but softened in the latter part of the year as a consequence of
increased debt levels in manufacturing centers and high energy prices,
depressing discretionary spending in key markets such as the United States of
America. Prices of larger solid diamonds continued to show solid gains on a
year-over-year basis.

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|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

During 2007 the international diamond market showed continued
strong demand and concomitant increases in diamond prices. Worldwide diamond
supply showed a flat or downward trend in terms of carats. As a consequence of
demand effectively starting to outstrip supply, prices of rough goods greater
than 2carats in size showed strong increases in the first part of the year which
was also reflected in polished prices for large goods. For example round
polished diamonds, 4 carats and 5 carats in size, and representing about 1% of
the market by value, continue to post solid price gains, year-over-year.

The continued price appreciation of large stones is significant
in respect to the production mix from the projects being acquired by Rockwell in
the Kimberley area of South Africa, which comprises a significant component of
large (greater than 2 carats, including 10 carat) stones. Demand for large high
quality diamonds such as those produced by Rockwell remains particularly strong
and for the first 6months of 2007 the Company has achieved an average price of
US$1500 per carat.

Interestingly there has also been appreciation in the price of
small diamonds typically referred to as Indian goods. This reflects growing
shortages in these qualities and sizes due to declining world production as long
standing mines in Russia, South Africa and West Australia reach the end of their
lives and either have to go underground with reduced production, or close down
as has been in the case for the Kimberley (South Africa) underground mines.

Rockwell is confident that given the growing world wide
shortage in diamonds, particularly in large diamonds (+2 carats), that it will
continue to benefit from price appreciation in the large and high value goods
that it produces from its alluvial mining operations in South Africa.

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|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

1.3          
Selected Annual Information

The consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles, and are
expressed in Canadian dollars except common shares outstanding.

|                                                                   |   | As
      at May 31 |  
|------------------------------------------------------------------ | - | ------------------ | -
|Balance Sheets                                                     |   | 2007               |  
|Current assets                                                     | $ | 56,142,572         |  
|Mineral properties                                                 |   | 24,121,855         |  
|Other assets                                                       |   | 49,341,956         |  
|Total assets                                                       |   | 129,606,383        |  
|                                                                   |   |                    |  
|Current liabilities                                                |   | 29,399,774         |  
|Other liabilities                                                  |   | 28,613,767         |  
|Shareholders
      equity (deficiency)                            |   | 71,592,842         |  
|Total liabilities and shareholders equity                         | $ | 129,606,383        |  
|                                                                   |   | Years ended May 31 |  
|Statement of Operations                                            |   | 2007               |  
|Revenue                                                            | $ | 10,103,328         |  
|Mine site operating costs                                          |   | (8,974,742         | )
|Amortization and depletion                                         |   | (2,074,415         | )
|Operating profit (loss)                                            |   | (945,829           | )
|Expenses                                                           |   |                    |  
|Accretion of reclamation obligation                                |   | 55,471             |  
|Exploration                                                        |   | 1,371,351          |  
|Foreign exchange loss (gain)                                       |   | (3,580,364         | )
|Legal, accounting and audit                                        |   | 691,759            |  
|Office and administration                                          |   | 2,993,453          |  
|Property Investigations                                            |   |                   |  
|Shareholder communications                                         |   | 200,574            |  
|Stock-based compensation                                           |   | 79,623             |  
|Travel and conference                                              |   | 666,194            |  
|Transfer agent filings                                             |   | 176,530            |  
|Subtotal                                                           |   | 2,654,591          |  
|Gain on sale of marketable securities                              |   |                   |  
|Loss on disposal of equipment                                      |   | 94,621             |  
|Interest income                                                    |   | (372,149           | )
|Interest on capital leases                                         |   | 433,125            |  
|Convertible note accretion and interest expense                    |   | 2,466,839          |  
|Loss on early extinguishment of convertible
      promissory notes |   | 137,957            |  
|Write-off of amounts receivable                                    |   | 224,942            |  
|Write-down of marketable securities                                |   | 1                  |  
|Write-down of mineral property interests                           |   |                   |  
|                                                                   |   | 2,985,336          |  
|Loss before income taxes                                           |   | 6,585,756          |  
|Future income tax recovery                                         |   | (635,773           | )
|Loss before non-controlling interest                               |   | 5,949,983          |  
|Non-controlling interest                                           |   | 415,159            |  
|Loss for the year ended                                            | $ | 6,365,142          |  
|Basic and diluted loss per common share                            | $ | (0.11              | )
|Weighted average number of common shares outstanding               |   | 55,418,242         |  

19

---

|ROCKWELL DIAMONDS INC.              
|------------------------------------
|YEAR ENDED MAY 31, 2007             
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

1.4          
Summary of Quarterly Results

Expressed in thousands of Canadian dollars, except per-share
amounts. Minor differences are due to rounding.

|                                            |   | May 31  |   |   | Feb 28  |   |   | Nov 30 |   |   | Aug 31 |   |   | May 31 |   |   | Feb 28 |   |   | Nov 30 |   |   | Aug 31 |  
|------------------------------------------- | - | ------- | - | - | ------- | - | - | ------ | - | - | ------ | - | - | ------ | - | - | ------ | - | - | ------ | - | - | ------ | -
|                                            |   | 2007    |   |   | 2007    |   |   | 2006   |   |   | 2006   |   |   | 2006   |   |   | 2006   |   |   | 2005   |   |   | 2005   |  
|Current assets                              | $ | 56,143  |   | $ | 25,751  |   | $ | 23,063 |   | $ | 8,397  |   | $ | 257    |   | $ | 197    |   | $ | 205    |   | $ | 429    |  
|Mineral properties                          |   | 24,122  |   |   | 18,788  |   |   |       |   |   |       |   |   |       |   |   | 47     |   |   | 47     |   |   | 47     |  
|Other assets                                |   | 49,342  |   |   | 36,884  |   |   | 42     |   |   | 32     |   |   | 32     |   |   | 32     |   |   | 32     |   |   | 32     |  
|Total assets                                |   | 129,606 |   |   | 81,423  |   |   | 23,105 |   |   | 8,429  |   |   | 289    |   |   | 276    |   |   | 284    |   |   | 508    |  
|                                            |   |         |   |   |         |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |  
|Current liabilities                         |   | 29,400  |   |   | 43,261  |   |   | 6,149  |   |   | 9,599  |   |   | 1,146  |   |   | 446    |   |   | 128    |   |   | 33     |  
|Other liabilities                           |   | 28,613  |   |   | 21,966  |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |  
|Shareholders equity (deficiency)           |   | 71,593  |   |   | 16,196  |   |   | 16,956 |   |   | (1,169 | ) |   | (857   | ) |   | (170   | ) |   | 156    |   |   | 475    |  
|Total liabilities and                       |   |         |   |   |         |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |  
|shareholders equity                        |   | 129,606 |   |   | 81,423  |   |   | 23,105 |   |   | 8,429  |   |   | 289    |   |   | 276    |   |   | 284    |   |   | 508    |  
|                                            |   |         |   |   |         |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |  
|Working capital (deficit)                   |   | 26,743  |   |   | (17,510 | ) |   | 16,914 |   |   | (1,202 | ) |   | (890   | ) |   | (250   | ) |   | 77     |   |   | 396    |  
|                                            |   |         |   |   |         |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |  
|                                            |   |         |   |   |         |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |  
|Revenue                                     |   | 7,684   |   |   | 2,419   |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |  
|Mine site operating costs                   |   | (7,100  | ) |   | (1,874  | ) |   |       |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |  
|Amortization                                |   | (1,680  | ) |   | (395    | ) |   |       |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |  
|Operating profit (loss)                     |   | (1,096  | ) |   | 150     |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |  
|                                            |   |         |   |   |         |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |  
|Expenses                                    |   |         |   |   |         |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |  
|Accretion of reclamation
      obligation   |   | 55      |   |   |        |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |  
|Exploration                                 |   | 162     |   |   | 508     |   |   | 526    |   |   | 175    |   |   | 120    |   |   | 134    |   |   | 16     |   |   | 37     |  
|Foreign exchange                            |   | (2,856  | ) |   | (336    | ) |   | (394   | ) |   | 6      |   |   | 3      |   |   | (54    | ) |   | 4      |   |   | 1      |  
|Legal, accounting and audit                 |   | 403     |   |   | (252    | ) |   | 326    |   |   | 215    |   |   | 118    |   |   | 32     |   |   | 19     |   |   | 6      |  
|Office and administration                   |   | 1,651   |   |   | 621     |   |   | 409    |   |   | 313    |   |   | 227    |   |   | 134    |   |   | 62     |   |   | 66     |  
|Property investigation                      |   |        |   |   |        |   |   |       |   |   |       |   |   | 139    |   |   | 87     |   |   | 147    |   |   | 26     |  
|Shareholder communications                  |   | 57      |   |   | 53      |   |   | 51     |   |   | 40     |   |   | 11     |   |   | 9      |   |   | 11     |   |   | 1      |  
|Stock-based compensation                    |   | 8       |   |   | 16      |   |   | 18     |   |   | 38     |   |   | 63     |   |   | 15     |   |   | 6      |   |   |       |  
|Travel and conference                       |   | 285     |   |   | 120     |   |   | 125    |   |   | 136    |   |   | 30     |   |   | 49     |   |   | 54     |   |   | 1      |  
|Transfer agent filings                      |   | 56      |   |   | 23      |   |   | 52     |   |   | 45     |   |   | 3      |   |   | 12     |   |   | 5      |   |   | 1      |  
|Subtotal                                    |   | (179    | ) |   | 754     |   |   | 1,113  |   |   |        |   |   | 714    |   |   | 418    |   |   | 324    |   |   | 139    |  
|                                            |   |         |   |   |         |   |   |        |   |   | 968    |   |   |        |   |   |        |   |   |        |   |   |        |  
|Gain on sale of marketable
      securities |   |        |   |   |        |   |   |       |   |   |       |   |   |       |   |   | (57    | ) |   |       |   |   |       |  
|Gain on investments                         |   | 16      |   |   | (16     | ) |   |       |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |  
|Write-off of amounts
      receivable       |   | 225     |   |   |        |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |  
|Loss on disposal of equipment               |   | 82      |   |   | 12      |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |  
|Interest income                             |   | (222    | ) |   | (97     | ) |   | (51    | ) |   | (2     | ) |   | (1     | ) |   |       |   |   | (1     | ) |   | (1     | )
|Interest on capital leases                  |   | 433     |   |   |        |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |  
|Accretion and interest
      expense        |   | 610     |   |   | 356     |   |   | 1,156  |   |   | 345    |   |   |       |   |   |       |   |   |       |   |   |       |  
|Loss on early retirement of                 |   |         |   |   |         |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |  
|convertible note                            |   |        |   |   |        |   |   | 138    |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |  
|Write-down of marketable securities         |   |        |   |   |        |   |   |       |   |   |       |   |   |       |   |   |       |   |   | 2      |   |   | 17     |  
|Write-down of mineral
      property        |   |         |   |   |         |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |  
|interests                                   |   |        |   |   |        |   |   |       |   |   |       |   |   | 47     |   |   |       |   |   |       |   |   |       |  
|Loss before income taxes                    |   | 2,061   |   |   | 859     |   |   | 2,356  |   |   | 1,311  |   |   | 760    |   |   | 361    |   |   | 325    |   |   | 155    |  
|Future income tax recovery                  |   | (646    | ) |   | 10      |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |  
|Loss before non-controlling
      interest  |   | 1,415   |   |   | 868     |   |   | 2,356  |   |   | 1,311  |   |   | 760    |   |   | 361    |   |   | 325    |   |   | 155    |  
|Non-controlling interest                    |   | (506    | ) |   | 91      |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |   |   |       |  
|Loss for the period                         | $ | 1,921   |   | $ | 777     |   | $ | 2,356  |   | $ | 1,311  |   | $ | 760    |   | $ | 361    |   | $ | 325    |   | $ | 155    |  
|                                            |   |         |   |   |         |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |  
|Basic and diluted loss per share            | $ | 0.03    |   | $ | 0.01    |   | $ | 0.08   |   | $ | 0.05   |   | $ | 0.03   |   | $ | 0.02   |   | $ | 0.01   |   | $ | 0.01   |  
|                                            |   |         |   |   |         |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |  
|Weighted average number of                  |   |         |   |   |         |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |  
|common shares outstanding                   |   |         |   |   |         |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |  
|(thousands)                                 |   | 99,614  |   |   | 68,307  |   |   | 30,322 |   |   | 24,191 |   |   | 23,675 |   |   | 23,658 |   |   | 23,614 |   |   | 23,614 |  

20

---

|ROCKWELL DIAMONDS INC.              
|------------------------------------
|YEAR ENDED MAY 31, 2007             
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

1.5          
Results of Operations

The Company had a net loss of $6,365,142 for the year ended May
31, 2007 compared to a net loss of $1,600,673 for the prior year ended May 31,
2006. The increase in net loss during the year is primarily due to expenses
related to exploration and acquisition related activities, and interest expense
on the Companys convertible promissory notes, capital leases related to the
acquisition of Durnpike and credit facility.

In January 2007, the Company completed all the conditions under
the Definitive Agreement to acquire Durnpike. Commencing January 31, 2007 (Date
of Acquisition), the results of operations from the acquisition of the
Companys rights and/or interest in the following properties have been included
in the consolidated statement of operations: Holpan/Klipdam Property in South
Africa, Wouterspan Property in South Africa, Galputs in South Africa and Kwango
River Project in the DRC.

During the year ended May 31, 2007, the Company realized rough
diamond sales of $10.1 million, representing four months of revenue from the
Date of Acquisition. This amount is inclusive of contractor income to the value
of $1.96 million mine site operating costs were $9.0 million, inclusive of
contractor expenses of $1.76 million, and amortization charges were $2,074,415.
As this represents the first four months of commercial production, attributable
to Rockwells account since the Date of Acquisition there were no similar
revenues and expenditures in previous periods. February and April had been below
average production months. In April, specifically, this was because of all of
the public holidays in South Africa, including Easter, and so almost one weeks
production was lost. February was also impacted due to the abnormally high
rainfall experienced in the area. The average selling price achieved over this
period was only $1,005 per carat which is 33% less than the current year to date
average selling price of just over $1,500 to the end of August 2007. There were
also expenses of around $0.2 million relating to Makoenskloof for which there is
no related revenue or stockholding.

Exploration expenses for fiscal 2007 amounted to $1,371,351
compared to $307,390 for fiscal 2006. The increase is mainly due to increased
engineering activities (2007  $217,197, 2006  $nil), geological activities
(2007  $468,408, 2006  $6,675), site activities (2007  $315,182, 2006 
$161,692) and property assessment fees (2007  $154,587, 2006  $138,520). A
significant portion of the Companys exploration activities during the year were
performed on the Holpan/Klipdam property in South Africa, Kwango River Project
in the DRC and the Ricardo property in Chile.

Foreign exchange gain increased to $3,580,365 for the year
ended May 31, 2007 compared to a foreign exchange gain of $46,881 for the year
ending May 31, 2006 due to a higher amount of South African denominated
liabilities and the strengthening of the Canadian dollar.

Administrative costs for the fiscal 2007 increased to
$2,993,453 compared to $489,014 incurred in fiscal 2006, primarily due to
increased consulting and salary expenses required to support the increase in
corporate financing, acquisition, operational management and property
investigation activities. Travel and conference expenses increased to $666,194
for the year ended May 31, 2007 compared to $132,647 for the prior year ended
May 31, 2006 due to increased travel by the Companys expanded personnel base
and to more properties in South Africa and the DRC. Legal, accounting and audit
expenses for fiscal 2007 was $691,759 compared to $175,782 in the prior year.
The increase was due to additional legal services and accounting services
rendered for the Companys acquisition activities.

21

---

|ROCKWELL DIAMONDS INC.              
|------------------------------------
|YEAR ENDED MAY 31, 2007             
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

Stock-based compensation amounted to $79,623 for the year
ending May 31, 2007 in comparison to $83,516 for the prior year ended May 31,
2006, no additional share options were granted during fiscal 2007.

Convertible note interest accretion and interest expenses
increased to $2,466,839 for fiscal 2007 as a result of the Companys issuance of
the $9.5 million convertible promissory notes, the utilization of a $11m
bridging loan and credit facility, the shareholders loans of $1.5 million and
US$5 million used to facilitate the acquisition of Saxendrift Mines (Pty)
Limited and a $5.5 million 90 day loan agreement with Amarc Resources Ltd.

1.6          
Liquidity

Historically, the Company's sole source of funding has been the
issuance of equity securities for cash, primarily through private placements to
sophisticated investors and institutions. The Company has issued common share
capital in each of the past few years, pursuant to private placement financings
and the exercise of warrants and options. The Company's access to exploration
financing, when the financing is not transaction specific, is always uncertain.
There can be no assurance of continued access to significant equity funding.

At May 31 2007, the Company had a working capital of
$26,742,798 compared to a working capital deficit of $889,614 at May 31,
2006.

As described in 1.2.2 Financings, during the year ended
May 31, 2007, the Company arranged various financings including: a $9.5 million
private placement of convertible promissory notes, a $21 million private
placement equity financing, various loan agreements, a $11 million credit
facility, and a $60 million equity financing. Please refer to Section 1.2.2 for
the detailed description of each financing activity.

At May 31, 2007, the Company had the following payment
commitments relating to the acquisition of Durnpike remaining: (a) Payment of
ZAR43 million ($6.5 million) in common shares of the Company to the Vendors and
(b) payment of ZAR30 million ($4.5 million) in cash to the Van Wyk Trust.

The Company has the following payment commitments: (a) payment
of ZAR19.2 million ($2.88 million) in cash to Folmink Delwery CC (Makoenskloof)
for plant and equipment (b) minimum lease payments of ZAR128 million ($19.2
million) in installments up to the year 2010 to various financial institutions
for plant and equipment.

Other than described above the Company has no "Purchase
Obligations" defined as any agreement to purchase goods or services that is
enforceable and legally binding on the Company that specifies all significant
terms, including: fixed or minimum quantities to be purchased; fixed, minimum or
variable price provisions; and the approximate timing of the transaction.

22

---

|ROCKWELL DIAMONDS INC.              
|------------------------------------
|YEAR ENDED MAY 31, 2007             
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

1.7          
Capital Resources

As described in 1.2.2 Financings, the Company was able
to finance its capital expenditure during the year through raising funds from
private placements, issuing convertible promissory notes, entering into
short-term loan agreements and using the credit facility from Quest.

In January 2007, the Company entered into a credit facility
with Canadian Imperial Bank of Commerce (CIBC) for a standby letter of credit
of $16.5 million for the acquisition of Saxendrift Mine. The Company secured
this facility by providing sufficient funds on deposit equal the amount of the
outstanding letter of credit, being $15.6 million as of May 31, 2007. The
facility was not utilized and expired on July 31, 2007 subsequent to the year
end May 31, 2007.

As at May 31, 2007, the Company has the following capital
expenditure commitments:

| | a) | Pursuant to the Definitive Agreement, the
        Company should spend US$7 million on a feasibility study on the Kwango
        River Project by August 31, 2007. This deadline may be extended to February
        29, 2008 at no cost and be further extended to December 31, 2008 by payment
        of US$1 million in Common Shares. In addition, Under the Midamines Agreement,
        Durnpike agreed to certain minimum royalty payments being made to Midamines.
        These royalties take the form of a series or recurring annual minimum
        royalty payments of US$1,200,000 per annum (commencing on December 31,
        2007). (As to the enforceability of this commitment in light of developments
        pertaining to the Midamines Agreement, see Kwango River Discussion at
        1.2.5 Exploration and Development Properties  Kwango River Project);
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | b) | In April 2007 the Company, entered into an
        agreement in relation to Makoenskloof property to purchase plant and equipment
        in the amount of ZAR21.3 million (approximately $3.2 million) from Folmink
        Delwery CC. During the year ended May 31, 2007, the Company paid a total
        consideration ZAR1.5 million ($225,000) and in August 2007, subsequent
        to year end, the Company paid an amount of ZAR10.6 million ($1.6 million)
        and is committed to pay the remaining consideration in the following manner:                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | c) | In relation to the acquisition of Saxendrift
        Mine (Pty) Ltd., the Company will pay cash consideration of approximately
        ZAR100.4 million ($15.1 million) and will assume potential liabilities
        for staff layoffs (capped at ZAR5 million ($0.8 million)) and rehabilitation
        bonds (capped at ZAR4.25 million ($0.6 million)). All payments and liabilities
        are expected to total approximately $17.7 million, subject to certain
        final adjustments.                                                                                                                                                                                                                                                                                                                                                                                       

23

---

|ROCKWELL DIAMONDS INC.              
|------------------------------------
|YEAR ENDED MAY 31, 2007             
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

In May 2007, the Company completed a $60 million private
placement which will be used to fund above acquisitions and capital expenditure
commitments (described in item1.2.2 Financings).

Other than already described, the Company had no commitments
for capital expenditures and no lines of credit or other sources of financing
which have been arranged but as yet unused as at May 31, 2007.

1.8          
Off-Balance Sheet Arrangements

None.

1.9          
  Transactions with Related Parties

|                                                  |   | As at        |  |   | As at        | 
|------------------------------------------------- | - | ------------ |  | - | ------------ | 
|Balances payable                                  |   |              |  |   |              | 
|                                                  |   | May 31, 2007 |  |   | May 31, 2006 | 
|Hunter Dickinson Inc. (a)                         | $ | 37,571       |  | $ | 853,733      | 
|Plateau Resources (Proprietary) Limited
      (j) |   |             |  |   | 124,737      | 
|CEC Engineering (c)                               |   | 5,558        |  |   |             | 
|Euro-American Capital Corporation (b)             |   | 2,879        |  |   |              | 
|Durnpike shareholder
      loans (i)              |   | 1,503,566    |  |   |             | 
|Banzi Trading (k)                                 |   | 2,191        |  |   |             | 
|Jakes Tyres (l)                                   |   | 10,993       |  |   |             | 
|Cashmere Trading (g)                              |   | 46,543       |  |   |             | 
|                                                  | $ | 1,609,301    |  | $ | 978,470      | 
|                                                  |   |              |  |   |              | 
|Balances receivable                               |   |              |  |   |              | 
|                                                  |   |              |  |   |              | 
|Flawless Diamonds Trading
      House (h)         |   | 781,928      |  |   |             | 
|AA
      Van Wyk (m)                              |   | 57,325       |  |   |             | 
|                                                  |   |              |  |   |              | 
|                                                  | $ | 839,253      |  | $ |             | 

|                                            |   | Year ended May 31 | 
|------------------------------------------- | - | ----------------- | 
|Transactions                                |   | 2007              | 
|Services rendered and expenses reimbursed:  |   |                   | 
|Hunter Dickinson Inc. (a)                   | $ | 1,988,027         | 
|Euro-American Capital Corporation
      (b) |   | 18,765            | 
|CEC Engineering (c)                         |   | 187,225           | 
|John Bristow (d)                            |   | 115,320           | 
|Jeffrey B Traders CC (e)                    |   | 141,318           | 
|Seven Bridges Trading (f)                   |   | 55,534            | 

24

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|ROCKWELL DIAMONDS INC.              
|------------------------------------
|YEAR ENDED MAY 31, 2007             
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

|Plateau Resources (Proprietary) Limited
      (j) |   |           |  |   | 124,737 | 
|------------------------------------------------- | - | ---------- |  | - | ------- | 
|Cashmere
      Trade-Helicopters (g)              |   | 43,357     |  |   |        | 
|Banzi Trade 26 (Pty) Ltd (k)                      |   | 251,942    |  |   |        | 
|Jakes Tyres (l)                                   |   | 267,361    |  |   |        | 
|AA Van Wyk (m)                                    |   | 173,977    |  |   |        | 
|                                                  |   |            |  |   |         | 
|Sales rendered to:                                |   |            |  |   |         | 
|Flawless Diamonds Trading House (h)               | $ | 10,085,536 |  | $ |        | 

| | (a) | Hunter Dickinson Inc. (HDI) is private company owned
      equally by nine public companies, one of which is Rockwell, and has
      certain directors in common with the Company. HDI provides geological,
      technical, corporate development, administrative and management services
      to, and incurs third party costs on behalf of, the Company on a full cost
      recovery basis pursuant to an agreement dated January 1, 2001. Exploration
      advances to and from HDI have arisen in the normal course, due to
      in-progress and near- term planned exploration work, primarily on the
      Companys exploration properties and for other operating expenses. There
      are no specific terms of repayment.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (b) | Euro-American Capital Corporation is a private company
      controlled by Rene Carrier, a director of the Company, which provides
      management services to the Company at market rates for those
    services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (c) | CEC Engineering Ltd. is a private company owned by David
      Copeland, Chief Executive Officer and a director of the Company, which
      provides engineering and project management services at market
    rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (d) | The Company paid $115,320 to John Bristow, President,
      Chief Operating Officer and a director of the Company, for engineering
      consulting services at market rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (e) | Jeffrey B Traders CC is a private company controlled by
      Jeffrey Brenner, a director of the Company, which provides management and
      marketing services to the Company at market rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (f) | Seven Bridges Trading is a wholly owned subsidiary of
      Randgold Resources, a public company where Mark Bristow, a director of the
      Company, serves in an executive capacity. Seven Bridges Trading provides
      administrative and management services at market rates to the Companys
      South African subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (g) | Cashmere Trading is a private company owned by Hennie Van
      Wyk, an officer of the Company, which provides helicopter services at
      market rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (h) | Flawless Diamonds Trading House (Flawless) is a private
      company where certain directors and officers of the Company, namely,
      Messr. Brenner, Bristow and Van Wyk, are shareholders of. Flawless is a
      registered diamond broker and purchases diamonds from the Company at
      market prices.                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (i) | In conjunction with the Companys Definitive Agreement to
      acquire all of the shares and loans in Durnpike Investments (Pty) Limited
      (note 5) from eight individuals (the Vendors), of which three
      individuals from the Vendors were appointed to the Companys Board of
      Directors (Messr. Brenner, M.Bristow, J.Bristow).                                                                                                                                                                                                                                                                                                                                                                                       

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|ROCKWELL DIAMONDS INC.              
|------------------------------------
|YEAR ENDED MAY 31, 2007             
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

| | (j) | Plateau Resources (Proprietary) Limited (Plateau)
        is a wholly-owned subsidiary of Anooraq Resources Corporation, a Canadian
        company which has certain directors in common with the Company. Plateau
        shares certain premises and other facilities with the Company pursuant
        to a cost-sharing arrangement with no profit element involved.                                                                                                                                                                                                                
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (k) | Banzi Trade 26 (Pty) Ltd (Banzi) is 50%
        owned by Hennie Van Wyk Family Trust, 30% by Ronnie Visagie a member of
        the van Wyk family and 20% by Bokomoso Trust. Banzi is a private company
        focused on providing self sustaining programs to local communities. During
        the year Banzi provided the Company with buildings materials amounting
        to $27,000 at market rates. Rockwell also wrote off an amount receivable
        from Banzi amounting to $224,942 due to the local development projects
        not being able to repay these amounts.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (l) | Jakes Tyres is a private company with certain directors
        and officers in common with the Company that provides consumable materials
        at market rates.                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (m) | AA Van Wyk is a private company owned by a party related
        to the directors and officers of the Company, which provides contract
        mining services at market rates.                                                                                                                                                                                                                                                                                                                                                                                                            

1.10         Fourth
Quarter

The Company had a net loss of $1,921,445 for the quarter ended
May 31, 2007 compared to a net loss of $759,602 for the same period in the prior
year. The increase in net loss during the period is primarily due to expenses
related to exploration and acquisition related activities, and interest expense
on the Companys convertible promissory notes and credit facility.

During the quarter ended May 31, 2007, the Company realized
rough diamond sales of $7.7 million. Mine site operating costs were $7.1
million, and amortization and depletion charges were $1,679,556. As this was the
first full quarter of commercial production, attributable to Rockwells account
since the Date of Acquisition there were no similar revenues and expenditures in
previous periods.

Exploration expenses for the fourth quarter ended May 31, 2007
amounted to $162,523 compared to $120,025 for the same period in the prior year.
The increase is mainly due to increased engineering activities, geological
activities, site activities and property assessment fees.

Foreign exchange gain increased to $2,856,110 for the fourth
quarter of fiscal 2007 compared to a foreign exchange gain of $2,762 for the
same period in the previous year due to a higher amount of South African
denominated liabilities and the strengthening of the Canadian dollar.

Administrative costs for the quarter ended May 31, 2007
increased to $1,651,984 compared to $227,267 incurred in the same period in the
previous year, primarily due to increased consulting and salary expenses
required to support the increase in corporate financing, acquisition and
property investigation activities. Travel and conference expenses increased to
$285,222 for the quarter ended May 31, 2007 compared to $29,333 for the same
period in the previous year due to more travel by the Companys expanded
personnel base and to more properties in South Africa and the DRC.

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|ROCKWELL DIAMONDS INC.              
|------------------------------------
|YEAR ENDED MAY 31, 2007             
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

Legal, accounting and audit expenses for the quarter ended May
31, 2007 was $402,402 compared to $118,440 in the same quarter in the prior
year. The increase was due to increased legal services rendered for the
Companys acquisition activities.

Stock-based compensation decreased to $7,578 for the quarter
ending May 31, 2007 in comparison to $62,504 for the same period in the previous
year due to no additional share options being granted during fiscal 2007.

Convertible note interest accretion and interest expenses
increased to $657,331 for the fourth quarter of fiscal 2007 as a result of the
Companys utilization of a $11million bridging loan and credit facility,
shareholders loans of $1.5 million and US$5 million used to facilitate the
acquisition of Saxendrift Mines (Pty) Limited and a $5.5 million 90 day loan
agreement with Amarc Resources Ltd.

1.11         Proposed
Transactions

Please refer to the discussion of the proposed transaction in
Section 1.2.4 Acquisitions, The Middle Orange River Operations.

1.12         Critical
Accounting Estimates

Not applicable. The Company is a venture issuer.

1.13         Changes in
Accounting Policies including Initial Adoption

In conjunction with the Companys acquisition of Durnpike
Investments (Pty) Limited in January 2007 described in Section 1.2.3
Agreements, Durnpike Agreement, the Company has adopted the following
accounting policies:

Revenue recognition

Revenue from rough diamond sales is recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the Companys price to
the customer is fixed or determinable and collection of the resulting receivable
is reasonably assured.

Trade accounts receivables

Trade accounts receivables are recorded at the invoiced amount
less an estimate made for doubtful accounts based on a review of all outstanding
amounts on a quarterly basis. Account balances are charged off against the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote.

27

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|ROCKWELL DIAMONDS INC.              
|------------------------------------
|YEAR ENDED MAY 31, 2007             
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

Inventory

Rough diamond inventory is recorded at the lower of cost and
net realizable value. Production costs include the cost of consumable materials,
direct labour, mine-site overhead expenses and amortization.

Supplies inventory is valued at the lower of average cost and
replacement cost.

Plant and equipment

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

Processing plant and equipment
    4  10 yearsOffice equipment
    6 yearsVehicles and light equipment
    5 years


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

Deferred financing charges

Deferred financing charges consist of expenses related to debt
financing transactions and are amortized over the life of such debt facilities.

1.14         Financial
Instruments and Other Instruments

The Company's financial instruments consist of cash and
equivalents, restricted cash, amounts receivable, security deposit, reclamation
deposit, accounts payable and accrued liabilities, reclamation obligation,
capital leases, amounts owing pursuant to acquisition and balances receivable
from or due to related parties. It is management's opinion the Company is not
exposed to significant interest, currency or credit risk arising from these
financial instruments. The fair values of these financial instruments
approximate their carrying values, unless otherwise noted.

1.15         Other
MD&A Requirements

Additional information relating to the Company is available on
SEDAR at www.sedar.com.

1.15.1     
Additional Disclosure for Venture Issuers Without Significant Revenue

(a) capitalized or expensed exploration and development costs;

The required disclosure is presented in
the consolidated schedules of exploration expenses of the accompanying financial
statements.

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|ROCKWELL DIAMONDS INC.              
|------------------------------------
|YEAR ENDED MAY 31, 2007             
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

(b) expensed research and development costs;

Not applicable.

(c) deferred development costs;

Not applicable.

(d) general and administration expenses;

The required disclosure is presented in
the consolidated statements of operations.

(e) any material costs, whether capitalized, deferred or
expensed, not referred to in (a) through (d);

None.

29

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|ROCKWELL DIAMONDS INC.              
|------------------------------------
|YEAR ENDED MAY 31, 2007             
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

1.15.2    
 Disclosure of Outstanding Share Data

The following details the share capital structure as at September
  25, 2007, which is the date of this MD&A. These figures may be subject to
  minor accounting adjustments prior to presentation in future consolidated financial
  statements.

ExerciseExpiry
      date
    price
    Number
    NumberCommon shares
    
    
    
    187,377,886Share purchase options
    September 28, 2007
    $ 0.40
    16,250February 29, 2008
    $ 0.42
    175,000March 28, 2008
    $ 0.50
    150,000July 10, 2010
    $ 0.68
    300,000September 24, 2012
    $ 0.62
    5,905,500
    6,546,750


1.15.3     
Disclosure Controls and Procedures

The Companys management is responsible for establishing and
maintaining adequate internal control over financial reporting. Any system of
internal control over financial reporting, no matter how well designed, has
inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.

There have been no changes in the Companys internal control
over financial reporting during the year ended May 31, 2007 that have materially
affected, or are reasonably likely to materially affect, internal control over
financial reporting.

The Company has disclosure controls and procedures in place to
provide reasonable assurance that any information required to be disclosed by
the Company under securities legislation is recorded, processed, summarized and
reported within the applicable time periods and to ensure that required
information is gathered and communicated to the Companys management so that
decisions can be made about timely disclosure of that information.

There have been no significant changes in the Company's
disclosure controls during the year ended May 31, 2007 that could significantly
affect disclosure controls subsequent to the date the Company carried out its
evaluation.

30

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