---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of
  Rockwell Diamonds Inc. (formerly Rockwell Ventures Inc.)

We have audited the consolidated balance sheets of Rockwell Diamonds
  Inc. (formerly Rockwell Ventures Inc.) as at May 31, 2007 and 2006 and the consolidated
  statements of operations and shareholders equity and deficit and cash
  flows for the years ended May 31, 2007, 2006 and 2005. These financial statements
  are the responsibility of the Company's management. Our responsibility is to
  express an opinion on these financial statements based on our audits.

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

In our opinion, these consolidated financial statements present
  fairly, in all material respects, the financial position of the Company as at
  May 31, 2007 and 2006 and the results of its operations and cash flows for the
  years ended May 31, 2007, 2006 and 2005 in accordance with Canadian generally
  accepted accounting principles.

"DAVIDSON & COMPANY LLP"

|Vancouver, Canada | Chartered Accountants
|----------------- | ---------------------
|                  |                      
|August 8, 2007    |                      

A Member of SCINTERNATIONAL

1200 - 609 Granville Street, P.O. Box 10372, Pacific Centre, Vancouver,
  BC, Canada, V7Y 1G6 
  Telephone (604) 687-0947 Fax (604) 687-6172

---



CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDEDMAY 31, 2007, 2006 and 2005 (Expressed in
Canadian Dollars)

---

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

|                                                            |   | As at May 31 |  
|----------------------------------------------------------- | - | ------------ | -
|                                                            |   | 2007         |  
|ASSETS                                                      |   |              |  
|                                                            |   |              |  
|Current assets                                              |   |              |  
|Cash and equivalents                                        | $ | 32,626,376   |  
|Accounts receivable                                         |   | 1,724,418    |  
|Restricted cash (note 16 (a))                               |   | 15,642,120   |  
|Trade receivable from a related party
      (note 12)       |   | 839,253      |  
|Diamond inventory and supplies (note 3)                     |   | 2,604,684    |  
|Prepaids and deposits                                       |   | 2,705,721    |  
|                                                            |   | 56,142,572   |  
|                                                            |   |              |  
|Property, plant and equipment (note 4)                      |   | 44,790,441   |  
|Mineral property interests (note 5)                         |   | 24,121,855   |  
|Other assets and deposits                                   |   | 3,513,449    |  
|Reclamation deposits (note 10)                              |   | 1,038,066    |  
|                                                            |   |              |  
|                                                            | $ | 129,606,383  |  
|                                                            |   |              |  
|LIABILITIES AND SHAREHOLDERS' EQUITY
      (DEFICIT)        |   |              |  
|                                                            |   |              |  
|Current liabilities                                         |   |              |  
|Accounts payable and accrued liabilities                    | $ | 4,460,922    |  
|Amounts owing pursuant to acquisition
      (note 5)        |   | 13,842,809   |  
|Due to related parties (note 12)                            |   | 1,609,301    |  
|Income taxes                                                |   | 1,677,787    |  
|Current
      portion of capital lease obligations (note 9) |   | 7,808,955    |  
|                                                            |   | 29,399,774   |  
|                                                            |   |              |  
|Long-term liabilities                                       |   |              |  
|Capital lease obligations (note 9)                          |   | 9,294,581    |  
|Future income taxes (note 13)                               |   | 11,978,860   |  
|Reclamation
      obligation (note 10)                      |   | 1,361,557    |  
|                                                            |   | 22,634,998   |  
|                                                            |   |              |  
|Non-controlling interest(note 5)                            |   | 5,978,769    |  
|                                                            |   |              |  
|Shareholders' equity (deficit)                              |   |              |  
|Share capital (note 11)                                     |   | 88,903,530   |  
|Warrants (note 11)                                          |   | 1,693,197    |  
|Contributed surplus (note 11)                               |   | 599,749      |  
|Deficit                                                     |   | (19,603,634  | )
|                                                            |   | 71,592,842   |  
|Nature and continuance of operations (note
      1)         |   |              |  
|Subsequent events (notes 15)                                |   |              |  
|Contingencies and commitments ( note 5, 15 and 16)          |   |              |  
|                                                            |   |              |  
|                                                            |   |              |  
|                                                            | $ | 129,606,383  |  

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

Approved by the Board of Directors

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

---

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

|                                                                   |   | Years ended May 31 |  
|------------------------------------------------------------------ | - | ------------------ | -
|                                                                   |   | 2007               |  
|                                                                   |   |                    |  
|Revenue                                                            |   |                    |  
|Rough diamonds sales (note 12(h))                                  | $ | 8,117,647          |  
|Contract diamond sales (note
      12(h))                          |   | 1,967,889          |  
|Other
      sales                                                  |   | 17,792             |  
|                                                                   |   | 10,103,328         |  
|Cost of sales                                                      |   |                    |  
|Cost of rough diamonds sales                                       |   | (7,206,389         | )
|Cost of contract diamond sales                                     |   | (1,768,353         | )
|Amortization and depletion                                         |   | (2,074,415         | )
|Operating
      profit (loss)                                      |   | (945,829           | )
|                                                                   |   |                    |  
|Expenses                                                           |   |                    |  
|Accretion of reclamation
      obligation                          |   | 55,471             |  
|Exploration (schedule)                                             |   | 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 - exploration (note
      11(b))          |   | 41,372             |  
|Stock-based compensation -
      administration (note 11(b))       |   | 38,251             |  
|Travel and conferences                                             |   | 666,194            |  
|Transfer agent                                                     |   | 176,530            |  
|                                                                   |   | 2,654,591          |  
|Other items                                                        |   |                    |  
|Gain on sale of marketable securities                              |   |                   |  
|Write-off of amounts receivable (note
      12(k))                 |   | 224,942            |  
|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-down of mineral property
      interests                     |   |                   |  
|Write-down of marketable securities                                |   | 1                  |  
|                                                                   |   | 2,985,336          |  
|                                                                   |   |                    |  
|Loss before income taxes                                           |   | (6,585,756         | )
|Future income tax recovery (note 13)                               |   | 635,773            |  
|Loss before non-controlling interest                               |   | (5,949,983         | )
|Non-controlling interest                                           |   | (415,159           | )
|Loss for the year                                                  | $ | (6,365,142         | )
|                                                                   |   |                    |  
|Basic and diluted loss per common share                            | $ | (0.11              | )
|                                                                   |   |                    |  
|Weighted average number of                                         |   |                    |  
|common shares outstanding                                          |   | 55,418,242         |  

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

---

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

|                                                                                          | Year ended   |  | Year ended   |             | Year ended   |           
|----------------------------------------------------------------------------------------- | ------------ |  | ------------ | ----------- | ------------ | ----------
|                                                                                          | May 31, 2007 |  | May 31, 2006 |             | May 31, 2005 |           
|                                                                                          |              |  |              |             |              |           
|                                                                                          |              |  |              |             |              |           
|                                                                                          | Number of    |  |              |             |              | Number of 
|Share capital                                                                             | shares       |  |              |             |              | shares    
|Balance at beginning of the year                                                          | 23,694,776   |  | $            | 11,857,649  |              | 23,613,943
|Share purchase options
      exercised at $0.40 per share                                 | 9,167        |  |              | 3,734       |              | 3,333     
|Share purchase options exercised at $0.32
      per share                                 |             |  |              |            |              | 27,500    
|Private placement November
      2006, net of issue costs at $0.47 per share (note 11(d)) | 42,000,000   |  |              | 19,784,230  |              |          
|Private placement May 2007, net of issue
      costs at $0.47 per share (note 11(e))      | 116,007,154  |  |              | 54,184,270  |              |          
|Interest consideration
      for convertible promissory at $0.60 per share notes (note 7) | 1,734,127    |  |              | 1,045,000   |              |          
|Interest consideration for credit facility
      at $0.61 per share (note 6)              | 1,939,562    |  |              | 1,182,869   |              |          
|Interest consideration
      for loan at $0.55 per share (note 8)                         | 497,993      |  |              | 273,896     |              |          
|Commission consideration for private placement
      at $0.52 per share (note 11(e))      | 1,093,440    |  |              | 568,588     |              |          
|Warrants exercised at $0.40
      per share                                               |             |  |              |            |              | 50,000    
|Fair
      value of stock options allocated to shares issued on exercise                  |             |  |              | 3,294       |              |          
|Balance at end of the year                                                                | 186,976,219  |  |              | 88,903,530  |              | 23,694,776
|                                                                                          |              |  |              |             |              |           
|Contributed surplus - warrants                                                            |              |  |              |             |              |           
|Broker
      warrants issued as consideration for private placement (note 11(e))          |              |  |              | 1,693,197   |              |           
|                                                                                          |              |  |              | 1,693,197   |              |           
|                                                                                          |              |  |              |             |              |           
|Contibuted surplus - stock based compensation                                             |              |  |              |             |              |           
|Balance at beginning of the year                                                          |              |  |              | 523,420     |              |           
|Stock-based compensation
      (note 11(b))                                               |              |  |              | 79,623      |              |           
|Fair
      value of stock options allocated to shares issued on exercise                  |              |  |              | (3,294      | )            |           
|Balance at end of the year                                                                |              |  |              | 599,749     |              |           
|                                                                                          |              |  |              |             |              |           
|Deficit                                                                                   |              |  |              |             |              |           
|Balance at beginning of the year                                                          |              |  |              | (13,238,492 | )            |           
|Loss for the year                                                                         |              |  |              | (6,365,142  | )            |           
|Balance at end
      of the year                                                          |              |  |              | (19,603,634 | )            |           
|                                                                                          |              |  |              |             |              |           
|                                                                                          |              |  |              |             |              |           
|TOTAL SHAREHOLDERS' EQUITY (DEFICIT)                                                      |              |  | $            | 71,592,842  |              |           

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

---

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

|                                                                                           |   | Years ended May 31 |  
|------------------------------------------------------------------------------------------ | - | ------------------ | -
|Cash provided
      by (applied to):                                                       |   | 2007               |  
|                                                                                           |   |                    |  
|Operating activities                                                                       |   |                    |  
|Loss for the year                                                                          | $ | (6,365,142         | )
|Items not affecting cash                                                                   |   |                    |  
|Accretion of reclamation obligation                                                        |   | 55,471             |  
|Amortization and
      depletion                                                           |   | 1,196,682          |  
|Amortization of capital lease equipment                                                    |   | 877,733            |  
|Gain on sale of
      marketable securities                                                |   |                   |  
|Write-off (recovery) of amounts
      receivable                                           |   | 224,942            |  
|Write-down of
      marketable securities                                                  |   | 1                  |  
|Write-down of mineral property
      interests                                             |   |                   |  
|Loss on early
      extinguishment of convertible promissory note                          |   | 137,957            |  
|Non cash convertible note accretion and
      interest expense                             |   | 2,363,808          |  
|Stock-based
      compensation (note 11(b))                                                |   | 79,623             |  
|Unrealized foreign exchange gain                                                           |   | (3,320,085         | )
|Loss on disposal of
      equipment                                                        |   | 94,621             |  
|Future income tax recovery (note 13)                                                       |   | (635,773           | )
|Provision for site
      reclamation                                                       |   | (474,024           | )
|Non-controlling interest                                                                   |   | 415,159            |  
|Changes in non-cash working capital
      items                                            |   |                    |  
|Accounts receivable                                                                        |   | (920,522           | )
|Amounts due to and from
      related parties                                              |   | 6,074,609          |  
|Inventory                                                                                  |   | (508,110           | )
|Prepaids and deposits                                                                      |   | (2,672,073         | )
|Accounts payable and accrued
      liabilities                                             |   | (3,485,300         | )
|Income taxes                                                                               |   | (872,950           | )
|Cash used in
      operating activities                                                    |   | (7,733,373         | )
|                                                                                           |   |                    |  
|Investing activities                                                                       |   |                    |  
|Acquisition of Durnpike Investments
      (Pty) Limited, net of cash acquired (note 5 (a)) |   | (8,293,413         | )
|Overdraft assumed on acquisition of Durnpike
      Investments, net                        |   | (1,201,297         | )
|Restricted cash (note 16 (a))                                                              |   | (15,642,120        | )
|Proceeds received on sale of marketable securities                                         |   |                   |  
|Mineral property acquisitions                                                              |   | (527,328           | )
|Purchase of equipment                                                                      |   | (6,453,942         | )
|Proceeds received on disposal of
      equipment                                           |   | 263,010            |  
|Other assets and deposits                                                                  |   | (3,481,259         | )
|Reclamation deposits                                                                       |   | (63,760            | )
|Cash provided by
      (used in) investing activities                                      |   | (35,400,108        | )
|                                                                                           |   |                    |  
|                                                                                           |   |                    |  
|Financing activities                                                                       |   |                    |  
|Principal repayments under capital lease obligations                                       |   | (2,678,965         | )
|Common shares and warrants issued for
      cash, net of issue costs                       |   | 76,234,018         |  
|Amounts received (paid) to related parties                                                 |   | (872,735           | )
|Loans payable pursuant to property
      acquisition                                       |   | 2,885,509          |  
|Repayment of credit facility (note 6)                                                      |   | (11,000,000        | )
|Credit facility (note 6)                                                                   |   | 11,000,000         |  
|Repayment of convertible promissory notes (note 7)                                         |   | (9,500,000         | )
|Issuance of convertible promissory
      notes (note 7)                                    |   | 9,500,000          |  
|Repayment of loans payable to related parties (note
      8)                               |   | (12,474,500        | )
|Loans payable to related parties (note 8)                                                  |   | 12,474,500         |  
|Cash provided by
      financing activities                                                |   | 75,567,827         |  
|                                                                                           |   |                    |  
|Increase (decrease) in cash and equivalents during the
      year                          |   | 32,434,345         |  
|                                                                                           |   |                    |  
|Cash and
      equivalents, beginning of year                                              |   | 192,031            |  
|                                                                                           |   |                    |  
|Cash and
      equivalents, end of year                                                    | $ | 32,626,376         |  
|                                                                                           |   |                    |  
|Cash and equivalents is comprised of:                                                      |   |                    |  
|Cash                                                                                       | $ | 32,626,376         |  
|Cash equivalent                                                                            | $ |                   |  
|                                                                                           |   |                    |  
|Interest paid during the year                                                              | $ | 103,031            |  
|Interest received                                                                          | $ | 372,149            |  
|Income taxes paid during the period                                                        | $ | 872,950            |  
|                                                                                           |   |                    |  
|Supplemental disclosure of non-cash investing and financing
      activities:              |   |                    |  
|Farmout agreement with Taseko Mines
      Limited                                          | $ |                   |  
|Issuance of warrants - consideration for private
      placement                           | $ | 1,693,197          |  
|Issuance of common shares -
      consideration for private placement                      | $ | 568,588            |  
|Issuance of common shares - interest on convertible
      promissory notes                 | $ | 1,045,000          |  
|Issuance of common shares - interest
      on credit facility                              | $ | 1,456,764          |  
|Fair value of stock options allocated to shares
      issued upon exercise                 | $ | 3,295              |  
|Equipment acquired under capital lease (note 4)                                            | $ | 7,316,459          |  

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

---

|ROCKWELL DIAMONDS INC.                        
|----------------------------------------------
|Consolidated Schedules of Exploration Expenses
|(Expressed in Canadian Dollars)               

|                                       |   | African    |  |   |           |  |   |            |  |   |           |  |   | Year
      ended | 
|-------------------------------------- | - | ---------- |  | - | --------- |  | - | ---------- |  | - | --------- |  | - | ---------------- | 
|                                       |   | Diamond    |  |   | Ricardo   |  |   | Canadian   |  |   |           |  |   | May 31,          | 
|Exploration
      expenses             |   | Properties |  |   | Property  |  |   | Properties |  |   | Other     |  |   | 2007             | 
|                                       |   |            |  |   |           |  |   |            |  |   |           |  |   |                  | 
|Assay and analysis                     | $ | 18,280     |  | $ |          |  | $ |           |  | $ |          |  | $ | 18,280           | 
|Engineering                            |   | 217,197    |  |   |          |  |   |           |  |   |          |  |   | 217,197          | 
|Geological                             |   | 463,416    |  |   | 4,992     |  |   |           |  |   |          |  |   | 468,408          | 
|Graphics                               |   | 18,192     |  |   |          |  |   |           |  |   |          |  |   | 18,192           | 
|Property fees and assessments          |   | 31,103     |  |   | 123,484   |  |   |           |  |   |          |  |   | 154,587          | 
|Site activities                        |   | 202,136    |  |   | 113,046   |  |   |           |  |   |          |  |   | 315,182          | 
|Travel and accommodation               |   | 179,315    |  |   | 190       |  |   |           |  |   |          |  |   | 179,505          | 
|Subtotal                               |   | 1,129,639  |  |   | 241,712   |  |   |           |  |   |          |  |   | 1,371,351        | 
|Stock-based compensation (note 11 (b)) |   |           |  |   |          |  |   |           |  |   | 41,372    |  |   | 41,372           | 
|Incurred during the year               |   | 1,129,639  |  |   | 241,712   |  |   |           |  |   | 41,372    |  |   | 1,412,723        | 
|Cumulative expenses, beginning of year |   |           |  |   | 2,387,848 |  |   | 1,481,784  |  |   | 4,027,864 |  |   | 7,897,496        | 
|Cumulative
      expenses, end of year | $ | 1,129,639  |  | $ | 2,629,560 |  | $ | 1,481,784  |  | $ | 4,069,236 |  | $ | 9,310,219        | 

|                                             |   | African    |  |   |           |  |   |            |  |   |           |  |   | Year
      ended | 
|-------------------------------------------- | - | ---------- |  | - | --------- |  | - | ---------- |  | - | --------- |  | - | ---------------- | 
|                                             |   | Diamond    |  |   | Ricardo   |  |   | Canadian   |  |   |           |  |   | May 31,          | 
|                                             |   | Properties |  |   | Property  |  |   | Properties |  |   | Other     |  |   | 2006             | 
|                                             |   |            |  |   |           |  |   |            |  |   |           |  |   |                  | 
|Geological                                   | $ |           |  | $ | 6,675     |  | $ |           |  | $ |          |  | $ | 6,675            | 
|Property fees and assessments                |   |           |  |   | 138,520   |  |   |           |  |   |          |  |   | 138,520          | 
|Site activities                              |   |           |  |   | 161,692   |  |   |           |  |   |          |  |   | 161,692          | 
|Travel and
      accommodation               |   |           |  |   | 503       |  |   |           |  |   |          |  |   | 503              | 
|Subtotal                                     |   |           |  |   | 307,390   |  |   |           |  |   |          |  |   | 307,390          | 
|Stock-based
      compensation (note 11 (b)) |   |           |  |   |          |  |   |           |  |   | 36,415    |  |   | 36,415           | 
|Incurred during the year                     |   |           |  |   | 307,390   |  |   |           |  |   | 36,415    |  |   | 343,805          | 
|Cumulative
      expenses, beginning of year |   |           |  |   | 2,080,458 |  |   | 1,481,784  |  |   | 3,991,449 |  |   | 7,553,691        | 
|Cumulative expenses, end of year             | $ |           |  | $ | 2,387,848 |  | $ | 1,481,784  |  | $ | 4,027,864 |  | $ | 7,897,496        | 

|                                       |   | African    |  |   |           |  |   |            |  |   |           |  |   | Year
      ended | 
|-------------------------------------- | - | ---------- |  | - | --------- |  | - | ---------- |  | - | --------- |  | - | ---------------- | 
|                                       |   | Diamond    |  |   | Ricardo   |  |   | Canadian   |  |   |           |  |   | May 31,          | 
|                                       |   | Properties |  |   | Property  |  |   | Properties |  |   | Other     |  |   | 2005             | 
|                                       |   |            |  |   |           |  |   |            |  |   |           |  |   |                  | 
|Drilling                               | $ |           |  | $ |          |  | $ | 205,922    |  | $ |          |  | $ | 205,922          | 
|Freight                                |   |           |  |   |          |  |   | 2,859      |  |   |          |  |   | 2,859            | 
|Geological                             |   |           |  |   | 7,065     |  |   | 269,717    |  |   | 1,886     |  |   | 278,668          | 
|Graphics                               |   |           |  |   |          |  |   | 3,186      |  |   |          |  |   | 3,186            | 
|Helicopter                             |   |           |  |   |          |  |   | 16,125     |  |   |          |  |   | 16,125           | 
|Property fees and assessments          |   |           |  |   | 115,705   |  |   | 210        |  |   |          |  |   | 115,915          | 
|Site activities                        |   |           |  |   | 154,892   |  |   | 109,161    |  |   |          |  |   | 264,053          | 
|Staking                                |   |           |  |   |          |  |   | 14,931     |  |   |          |  |   | 14,931           | 
|Travel and accommodation               |   |           |  |   | 1,638     |  |   | 17,605     |  |   |          |  |   | 19,243           | 
|Subtotal                               |   |           |  |   | 279,300   |  |   | 639,716    |  |   | 1,886     |  |   | 920,902          | 
|Stock-based compensation (note 11 (b)) |   |           |  |   | 4,359     |  |   | 620        |  |   |          |  |   | 4,979            | 
|Incurred during the year               |   |           |  |   | 283,659   |  |   | 640,336    |  |   | 1,886     |  |   | 925,881          | 
|Cumulative expenses, beginning of year |   |           |  |   | 1,796,799 |  |   | 841,448    |  |   | 3,989,563 |  |   | 6,627,810        | 
|Cumulative
      expenses, end of year | $ |           |  | $ | 2,080,458 |  | $ | 1,481,784  |  | $ | 3,991,449 |  | $ | 7,553,691        | 

---

|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

|1. | NATURE AND CONTINUANCE OF OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Rockwell Diamonds Inc., previously Rockwell
        Ventures Inc., (the Company) is incorporated under the British
        Columbia Business Corporations Act(formerly the Company Actof British Columbia), and is engaged in the business of diamond production,
        acquiring and exploring natural resource properties. The Companys
        principal mineral property interests are located in South Africa and Chile.                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | In January 2007, Rockwell completed a Definitive
        Agreement (Definitive Agreement) with Durnpike Investments
        (Pty) Limited (Durnpike) to acquire the interests and/or rights
        in four alluvial diamond properties in South Africa and the Democratic
        Republic of Congo. Under the Definitive Agreement, Rockwell would hold
        the rights and/or interests in the following properties:                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | These consolidated financial statements are
        prepared in accordance with Canadian generally accepted accounting principles
        on a going concern basis, which presume the realization of assets and
        discharge of liabilities in the normal course of business for the foreseeable
        future. There are conditions and risks that could cast substantial doubt
        on the validity of this assumption.                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The Company has estimated that it will have
        adequate funds from existing working capital to meet our corporate, operational,
        development, administrative and property obligations for the coming year.
        The Company will periodically need to obtain additional financing, and
        while it has been successful in the past, there can be no assurance that
        it will be able to do so in the future.                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The recoverability of the amounts shown for
        the Companys mineral property interests, property, plant and equipment
        and inventory is dependent upon the existence of economically recoverable
        mineral resources and future profitable production or proceeds from the
        disposition of the mine. The Companys continuing operations are
        also dependent upon the discovery and existence of economically recoverable
        mineral reserves, the ability of the Company to obtain the necessary financing
        to complete the exploration and development of its mineral property interests,
        and upon future profitable production or proceeds from the disposition
        of its mineral property interests.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | These consolidated financial statements do
        not include adjustments to amounts and classifications of assets and liabilities
        that might be necessary should the Company be unable to continue operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

---

|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

|2. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
      POLICIES
|-- | ---------------------------------------------------------------

|    | These consolidated financial statements have been prepared
        in accordance with Canadian generally accepted accounting principles.
        These consolidated financial statements include the accounts of the Company
        and its wholly-owned subsidiaries. All significant intercompany balances
        and transactions have been eliminated upon consolidation.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                
|    | In conjunction with the Companys acquisition of
        Durnpike (note 5), the Company has adopted the following accounting policies:                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                
|(a) | Cash and equivalents                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                
|    | Cash and equivalents consist of cash and highly liquid
        investments, having maturity dates of three months or less from the date
        of purchase, that are readily convertible to known amounts of cash and
        which are subject to an insignificant risk of change in value.                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                
|(b) | Revenue recognition                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                
|    | Revenue from rough diamond sales is recognized when
        persuasive evidence of an arrangement exists, delivery has occurred, the
        Companys price to the customer is fixed or determinable and collection
        of the resulting receivable is reasonably assured.                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                
|(c) | Trade accounts receivables                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                
|    | Trade accounts receivables are recorded at the invoiced
        amount less an estimate made for doubtful accounts based on a review of
        all outstanding amounts on a quarterly basis. Account balances are charged
        off against the allowance after all means of collection have been exhausted
        and the potential for recovery is considered remote.    
|    |                                                                                                                                                                                                                                                                                                                                                                                
|(d) | Inventory                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                
|    | Rough diamond inventory is recorded at the lower of
        production cost and net realizable value. Production costs include the
        cost of consumable materials, direct labour, mine-site overhead expenses
        and amortization.                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                
|    | Supplies inventory is valued at the lower of average
        cost and replacement cost.                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                
|(e) | Plant and equipment                                                                                                                                                                                                                                                                                                                                                            

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

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

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

---

|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

|(f) | Reclamation and security deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Reclamation and security deposits are recorded at cost.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(g) | Mineral property interests                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The acquisition costs of mineral properties are capitalized
        until the property is placed into production, sold, or abandoned, or when
        management has determined that there has been an impairment in value.
        Such acquisition costs are amortized over the estimated life of the property,
        or written off to operations if the property is abandoned, allowed to
        lapse, or if there is little prospect of further work being carried out
        by the Company.                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Mineral property acquisition costs include the cash
        consideration and the fair market value of common shares, based on the
        trading price of the shares, on the date of issue or as otherwise provided
        under the agreed terms for the mineral property interest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Exploration costs and option payments are expensed in
        the period incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Administrative expenditures are expensed in the period
        incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The amount presented for mineral property interests
        represents costs incurred to date and accumulated acquisition costs, less
        write-downs, and does not necessarily reflect present or future values.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(h) | Financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The Company's financial instruments consist of cash
        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.                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(i) | Site closure and reclamation obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The Company accounts for site closure and reclamation
        costs in accordance with Canadian Institute of Chartered Accountants (CICA)
        Handbook Section 3110, Asset Retirement Obligations(HB
        3110). HB 3110 requires the recognition of any statutory, contractual
        or other legal obligation related to the retirement of tangible long-lived
        assets when such obligations are incurred, if a reasonable estimate of
        fair value can be made.                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | These obligations are measured initially at fair value
        and the resulting costs are capitalized to the carrying value of the related
        asset. In subsequent periods, the liability is adjusted for the accretion
        of the discount and any changes in the amount or timing of the underlying
        future cash flows. The asset retirement cost is amortized to operations
        over the life of the asset. Changes resulting from revisions to the timing
        or the amount of the original estimate of undiscounted cash flows are
        recognized as an increase or a decrease in the carrying amount of the
        liability, and the related asset retirement cost is capitalized as part
        of the carrying amount of the related long-lived asset.

---

|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

|(j) | Impairment of long-lived assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Long-lived assets, including mineral properties, plant
        and equipment, are reviewed for impairment whenever events or changes
        in circumstances indicate that the carrying value of an asset may not
        be recoverable. Recoverability of assets to be held and used is measured
        by a comparison of the carrying amount of an asset to estimated undiscounted
        future cash flows expected to be generated by the asset. If the carrying
        amount of an asset exceeds its estimated future cash flows, an impairment
        charge is recognized by the amount by which the carrying amount of the
        asset exceeds the fair value of the asset. Assets to be disposed of would
        be separately presented in the balance sheet and reported at the lower
        of the carrying amount and the fair value less costs to sell, and are
        no longer amortized.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(k) | Foreign currency translation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | All of the Companys foreign operations are considered
        integrated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Monetary assets and liabilities of the Company and its
        integrated foreign operations are translated into Canadian dollars at
        exchange rates in effect at the balance sheet date. Non-monetary assets
        and liabilities are translated at historical exchange rates unless such
        items are carried at market, in which case they are translated at the
        exchange rates in effect on the balance sheet date. Revenues, cost of
        sales and expenses, except amortization, are translated at the average
        exchange rates for the period. Amortization is translated at the same
        exchange rate as the assets to which it relates. Gains or losses on translation
        are recorded in the statement of operations.                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(l) | Share capital                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Common shares issued for mineral property interests
        are recorded at their fair market value based upon the trading price of
        the shares on the TSX Venture Exchange (TSX-V) on the date
        of issue or as otherwise provided under the terms of the agreement to
        issue the shares. Share issue costs are deducted from share capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(m) | Stock-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The Company has a share option plan which is described
        in note 11(b). The Company records all stock-based payments granted using
        the fair value method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Under the fair value method, stock-based payments are
        measured at the fair value of the consideration received or the fair value
        of the equity instruments issued, whichever is more reliably measurable,
        and are charged to operations over the vesting period, with an offsetting
        amount to contributed surplus. Consideration received on the exercise
        of stock options is recorded as share capital and the related contributed
        surplus is transferred to share capital.                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(n) | Income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The Company uses the asset and liability method of accounting
        for income taxes. Under this method, future income tax assets and liabilities
        are computed based on differences between the carrying amount of assets
        and liabilities on the balance sheet and their corresponding tax values,
        generally using the enacted or substantively enacted income tax rates
        expected to apply to taxable income in the years in which those temporary
        differences are expected to be recovered or settled.                                                                                                                                                                                                                                                                                                                                                                     

---

|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

|    | Future tax assets are recognized to the extent that
        they are considered more likely than not to be realized. The valuation
        of future income tax assets is adjusted, if necessary, by the use of a
        valuation allowance to reflect the estimated realizable amount.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(o) | Loss per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Basic loss per share is calculated by dividing the loss
        for the period by the weighted average number of common shares outstanding
        during the period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Diluted loss per share is calculated using the treasury
        stock method. Under the treasury stock method, the weighted average number
        of common shares outstanding used for the calculation of diluted loss
        per share assumes that the proceeds receivable upon exercise of dilutive
        share purchase options and warrants are used to repurchase common shares
        at the average market price during the period.                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Diluted loss per share has not been presented separately
        as the effect of outstanding options and warrants would be anti-dilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(p) | Use of estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The preparation of consolidated financial statements
        in conformity with Canadian generally accepted accounting principles requires
        management to make estimates and assumptions that affect the reported
        amounts of assets and liabilities and the disclosure of contingent assets
        and liabilities as at the balance sheet date, and the reported amounts
        of revenues and expenses during the reporting period. Significant areas
        requiring the use of management estimates relate to the impairment of
        mineral property interests, determination of reclamation obligations and
        the assumptions used in determining stock-based compensation expense.
        Actual results could differ from those estimates.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(q) | Comparative figures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Certain of the prior years comparative figures
        have been reclassified to conform to the financial statement presentation
        adopted for the current year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|3. | DIAMOND INVENTORY AND SUPPLIES
|-- | ------------------------------

| |                                    |   | May 31, 2007 |  |   | May 31, 2006 | 
| | ---------------------------------- | - | ------------ |  | - | ------------ | 
| | Rough diamond inventory            | $ | 644,459      |  | $ |             | 
| | Mine supplies                      |   | 1,741,412    |  |   |             | 
| | Fuel, oil and grease               |   | 218,813      |  |   |             | 
| | Total inventory and
      supplies | $ | 2,604,684    |  | $ |             | 

---

|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

|4. | PROPERTY, PLANT AND EQUIPMENT
|-- | -----------------------------

| |                                                          |   | As at May 31, 2007 | 
| | -------------------------------------------------------- | - | ------------------ | 
| |                                                          |   |                    | 
| |                                                          |   | Cost               | 
| | Real property  land and building                        | $ | 3,823,455          | 
| | Processing plant and equipment                           |   | 16,307,635         | 
| | Processing plant and equipment under capital
      lease |   | 24,686,561         | 
| | Office equipment                                         |   | 299,072            | 
| | Vehicles and light equipment                             |   | 1,065,396          | 
| | Vehicles and light
      equipment under capital lease   |   | 158,795            | 
| |                                                          | $ | 46,340,914         | 

The Company did not have any property,
  plant and equipment prior to the acquisition of Durnpike Investments (Pty) Limited,
  which occurred on January 31, 2007.

|5. | MINERAL PROPERTY INTERESTS
|-- | --------------------------

| | Acquisition Costs                                     |   | As at May 31 |  
| | ----------------------------------------------------- | - | ------------ | -
| |                                                       |   | 2007         |  
| | Durnpike Investments (Pty) Limited                    |   |              |  
| | Acquisition costs                                     | $ | 18,696,487   |  
| | Financial, legal, advisory,
      and other fees      |   | 527,328      |  
| | Future income tax liability                           |   | 5,421,981    |  
| | Depletion of mineral properties during
      the year |   | (523,942     | )
| | Durnpike Investments (Pty) Limited, end of year       |   | 24,121,854   |  
| | Ricardo Property                                      |   | 1            |  
| | Balance, end of
      year                            | $ | 24,121,855   |  

|    | Title to mining properties involves certain inherent
        risks due to the difficulties in determining the validity of certain claims
        as well as the potential for problems arising from the often complicated
        conveyancing history characteristic of many mining properties. The Company
        does not have title insurance but has investigated title to its Ricardo
        mineral property and, to the best of its knowledge and belief, title to
        its property is in good standing.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(a) | Acquisition of Durnpike Investments (Pty) Limited                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | On June 30, 2006, the Company entered into an Agreement-in-Principle
        to acquire interests and/or rights in four alluvial diamond properties
        in South Africa and the Democratic Republic of Congo. These four properties
        include the Holpan/Klipdam Property in South Africa, Wouterspan Property
        in South Africa, Kwango River Project in the Democratic Republic of Congo
        and Galputs Minerale Project in South Africa.                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Subsequently, pursuant to the terms of the Definitive
        Agreement, the Company acquired all of the shares and loans in Durnpike,
        a private South African company, from eight vendors (the Vendors)
        for consideration set forth below, payable in common shares of the Company                                                                                                                                                                                                                 

---

|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

(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 (Cdn$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 (Cdn$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
      Democratic Republic of Congo (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

---

|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)



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. 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. 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

---

|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

January 2007 for the property and mining
  permits. Pursuant to this option exercise, HCVW also entered into a sub-contracting
  agreement with Folmink Delwery CC to perform bulk sampling commencing in March
  2007. In April 2007 HCVW entered into an agreement to purchase ZAR21.3 million
  (approximately $3.2 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.

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

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

---

|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

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

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

|    | The allocation of purchase price is based on managements
        estimates of the fair value of the assets acquired and liabilities assumed
        at the date of acquisition, January 31, 2007.                                                                                                                                                                                                                                                        
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | As 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 payment of ZAR30 million was made to the Van Wyk Trust
        in June 2007 subsequent to the May 31, 2007 year end.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(b) | Ricardo Property, Chile                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | The Company holds a 100% interest in certain mineral
        exploration and exploitation concessions in the Calama Mining District
        in Chile. The Company continues to maintain the Ricardo Property in good
        standing.                                                                                                                                                                                                                    

---

|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

|6. | 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 5) 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 $588,869, 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.

---

|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

|7. | 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.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|8. | 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 Mine (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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

---

|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

|9. | CAPITAL LEASE OBLIGATIONS
|-- | -------------------------

Included in property, plant and equipment
  are mining equipment that the Company acquired pursuant to three to four year
  capital lease agreements.

The Companys capital lease obligationsare
  with the following financial institutions:

| |                  |   | As at        | 
| | ---------------- | - | ------------ | 
| |                  |   | May 31, 2007 | 
| | Liebherr Finance | $ | 131,572      | 
| | ELB Finance      |   | 175,180      | 
| | Stannic          |   | 3,452,953    | 
| | Wesbank          |   | 557,153      | 
| | Nedbank          |   | 4,383,372    | 
| | Komatfin         |   | 8,403,305    | 
| |                  | $ | 17,103,535   | 

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

Future minimum lease payments are as
  follows:

| |                                            |   | As at        |  
| | ------------------------------------------ | - | ------------ | -
| |                                            |   | May 31, 2007 |  
| | 2008                                       | $ | 9,602,424    |  
| | 2009                                       |   | 6,830,180    |  
| | 2010                                       |   | 2,850,918    |  
| | Total Minimum lease payments               |   | 19,283,522   |  
| | Less interest portion                      |   | (2,179,986   | )
| | Present value of capital lease obligations |   | 17,103,536   |  
| | Current portion                            |   | (7,808,955   | )
| | Non-current portion                        | $ | 9,294,581    |  

---

|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

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

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

| | Balance, May 31, 2006                                  | $ |          | 
| | ------------------------------------------------------ | - | --------- | 
| | Changes during fiscal 2007:                            |   |           | 
| | Reclamation estimate                                   |   | 1,306,086 | 
| | Accretion
      expense                                |   | 55,471    | 
| | Site closure and reclamation obligations, May 31, 2007 | $ | 1,361,557 | 

The estimated amount of the reclamation
  costs, adjusted for estimated inflation at 6% per year, is $800,000 for the
  Klipdam mine in the year 2011, $1.3 million for the Holpan mine in the year
  2013 and $2.6 million for the Wouterspan mine in the year 2027 and is expected
  to be spent over periods of approximately three years beginning in 2011, 2013
  and 2027. The credit-adjusted risk free rate at which the estimated future cash
  flows have been discounted is 13%, to arrive at a net present value of $1,361,557.
  The accretion of $55,471 is charged to the statement of operations.

As required by regulatory authorities,
  at May 31, 2007, the Company had cash reclamation deposits totaling $1,038,066
  comprised of $878,678 for the Holpan and Wouterspan mines and $159,388 for the
  Klipdam mine. These deposits are invested in interest bearing money market linked
  investments at rates ranging from 8% to 9.5% .

|11. | SHARE CAPITAL
|--- | -------------

|(a) | Authorized share capital                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The Companys authorized share capital consists
        of an unlimited number of common shares, without par value, and an unlimited
        number of preferred shares without par value, of which none have been
        issued.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(b) | Share purchase options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The Company has a share purchase option compensation
        plan approved by the shareholders that allows the Company to grant options
        for up to 10% of the issued and outstanding shares of the Company at any
        one time, typically vesting over two years, to its directors, employees,
        officers, and consultants. The exercise price of each option can be set
        equal to or greater than the closing market price of the common shares
        on the TSX Venture Exchange on the day prior to the date of the grant
        of the option, less any allowable discounts. Options have a maximum term
        of five years and typically terminate 30 days following the termination
        of the optionees employment, except in the case of retirement or
        death.

---

|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

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

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

As at May 31, 2007, 327,917 of the options
  outstanding with a weighted average exercise price of $0.40 per share had vested
  with grantees. Subsequent to May 31, 2007, 101,667 options were exercised, 5,905,500
  were granted with an average exercise price of $0.62 and 5,000 options were
  cancelled.

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

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

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

The continuity of share purchase options
  for the year ended May 31, 2005 is:

| |                                                                      |   | Exercise |  |   | May 31    |  |   |         |      |   |           |  |   | Expired/  |  |   | May 31 | 
| | -------------------------------------------------------------------- | - | -------- |  | - | --------- |  | - | ------- | ---- | - | --------- |  | - | --------- |  | - | ------ | 
| | Expiry date                                                          |   | price    |  |   | 2004      |  |   | Granted |      |   | Exercised |  |   | cancelled |  |   | 2005   | 
| | April 6, 2005                                                        | $ | 0.64     |  |   | 12,500    |  |   |        |      |   |          |  |   | 12,500    |  |   |       | 
| | May 20, 2005 (i)                                                     | $ | 0.40     |  |   | 11,250    |  |   |        |      |   |          |  |   | 11,250    |  |   |       | 
| | May 20, 2005                                                         | $ | 0.48     |  |   | 6,375     |  |   |        |      |   |          |  |   | 6,375     |  |   |       | 
| | May 20, 2005                                                         | $ | 0.60     |  |   | 1,236,250 |  |   |        |      |   |          |  |   | 1,236,250 |  |   |       | 
| | May 20, 2005                                                         | $ | 0.64     |  |   | 11,250    |  |   |        |      |   |          |  |   | 11,250    |  |   |       | 
| | July 29, 2005                                                        | $ | 0.40     |  |   | 7,500     |  |   |        |      |   | 7,500     |  |   |          |  |   |       | 
| | May 19, 2006                                                         | $ | 0.32     |  |   |          |  |   | 30,000  |      |   |          |  |   | 2,500     |  |   | 27,500 | 
| |                                                                      |   |          |  |   | 1,285,125 |  |   | 30,000  |      |   | 7,500     |  |   | 1,280,125 |  |   | 27,500 | 
| |                                                                      |   |          |  |   |           |  |   |         |      |   |           |  |   |           |  |   |        | 
| | Weighted average exercise price                                      |   |          |  | $ | 0.60      |  | $ | 0.32    |      | $ | 0.40      |  | $ | 0.60      |  | $ | 0.32   | 
| |                                                                      |   |          |  |   |           |  |   |         |      |   |           |  |   |           |  |   |        | 
| | Weighted
      average fair value of options granted during the year |   |          |  |   |           |  |   | $       | 0.40 |  

| | (i) | The Company extended the expiry from the original date
        of December 20, 2004 to May 20, 2005.
| | --- | ----------------------------------------------------------------------------------------------------

---

|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

As at May 31, 2005, all of the options
  outstanding had vested with grantees.

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

| |                                                       |   | Year ended May 31 | 
| | ----------------------------------------------------- | - | ----------------- | 
| |                                                       |   | 2007              | 
| | Exploration and engineering                           | $ | 41,372            | 
| | Operations and administration                         |   | 38,251            | 
| | Total compensation cost expensed to operations,       |   |                   | 
| | with the offset credited to contributed
      surplus | $ | 79,623            | 

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

| |                         |  | 2007      |  |  | 2006      |  |  | 2005      | 
| | ----------------------- |  | --------- |  |  | --------- |  |  | --------- | 
| | Risk free interest rate |  | 4%        |  |  | 4%        |  |  | 3%        | 
| | Expected life           |  | 2.0 years |  |  | 2.0 years |  |  | 1.9 years | 
| | Expected volatility     |  | 97%       |  |  | 124%      |  |  | 162%      | 
| | Expected dividends      |  | nil       |  |  | nil       |  |  | nil       | 

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

| |                                   |   | November 22, |  |   |                    |  |   |                    | 
| | --------------------------------- | - | ------------ |  | - | ------------------ |  | - | ------------------ | 
| | Expiry date                       |   | 2007(i)      |  |   | May
      09, 2009 |  |   | May
      09, 2009 | 
| | Exercise price (note 11(d and e)) | $ | 0.60         |  | $ | 0.70               |  | $ | 0.70               | 
| |                                   |   |              |  |   |                    |  |   |                    | 
| | Balance, May 31, 2006             |   |             |  |   |                   |  |   |                   | 
| | Issued (note 11(d and e))         |   | 42,000,000   |  |   | 116,007,154        |  |   | 5,772,000          | 
| | Exercised                         |   |             |  |   |                   |  |   |                   | 
| | Expired                           |   |             |  |   |                   |  |   |                   | 
| |                                   |   |              |  |   |                    |  |   |                    | 
| | Balance, May 31,
      2007       |   | 42,000,000   |  |   | 116,007,154        |  |   | 5,772,000          | 

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

Using a Black-Scholes option pricing
  model the fair values of 5,772,000 broker warrants granted in the amount of
  $1,693,197 have been reflected in the consolidated balance sheet. The weighted-average
  assumptions used to estimate the fair value of warrants granted were an expected
  volatility of 97%, expected dividends of nil, expected life of 2 years and risk
  free rate of 4%.

---

|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

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

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

The continuity of share purchase warrants
  (each warrant exercisable into one common share) for the year ended May 31,
  2005 is:

| |                                       |   | Exercise |  |   | May 31    |  |   |        |  |   |           |  |   |         |  |   | May 31    | 
| | ------------------------------------- | - | -------- |  | - | --------- |  | - | ------ |  | - | --------- |  | - | ------- |  | - | --------- | 
| | Expiry                                |   | price    |  |   | 2004      |  |   | Issued |  |   | Exercised |  |   | Expired |  |   | 2005      | 
| | December 31, 2005 (note 6(b)(i))      | $ | 0.40     |  |   | 9,375,000 |  |   |       |  |   | 400,000   |  |   |        |  |   | 8,975,000 | 
| | Weighted average exercise
      price |   |          |  | $ | 0.40      |  | $ |       |  | $ | 0.40      |  | $ |        |  | $ | 0.40      | 

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

---

|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

|12. | RELATED PARTY BALANCES AND TRANSACTIONS
|--- | ---------------------------------------

| | Balances payable                                  |   | As at        |  |   | As at        | 
| | ------------------------------------------------- | - | ------------ |  | - | ------------ | 
| |                                                   |   | 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            | 
| | Plateau Resources (Proprietary) Limited
      (j) |   |                  | 
| | Cashmere Trading (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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

---

|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

| | (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).                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (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.                                                                                                                                                                                                                                                                                                                                                                                                            

---

|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

|13. | INCOME TAXES
|--- | ------------

A reconciliation of income taxes calculated
  at applicable statutory rates is as follows:

| |                                 |   |                    |   |   |            |   |   |            |  
| | ------------------------------- | - | ------------------ | - | - | ---------- | - | - | ---------- | -
| |                                 |   | Years ended May 31 |  
| |                                 |   | 2007               |   |   | 2006       |   |   | 2005       |  
| |                                 |   |                    |   |   |            |   |   |            |  
| | Loss for the year               | $ | (6,585,756         | ) | $ | (1,600,673 | ) | $ | (1,485,694 | )
| |                                 |   |                    |   |   |            |   |   |            |  
| | Expected income tax recovery    | $ | (2,324,000         | ) | $ | (555,000   | ) | $ | (533,000   | )
| | Difference in foreign tax rates |   | 101,000            |   |   | 7,000      |   |   | 3,000      |  
| | Other non-deductible items      |   | 309,000            |   |   | 375,000    |   |   | 294,000    |  
| | Change in tax rate              |   |                   |   |   | (35,000    | ) |   | (36,000    | )
| | Change in valuation allowance   |   | 1,409,433          |   |   | 208,000    |   |   | 272,000    |  
| | Other                           |   | (131,206           | ) |   |           |   |   |           |  
| |                                 |   |                    |   |   |            |   |   |            |  
| | Net income tax recovery         | $ | (635,773           | ) | $ |           |   | $ |           |  

The significant component of the Companys
  future tax assets are as follows:

| |                            |   | As at May 31 |  
| | -------------------------- | - | ------------ | -
| |                            |   | 2007         |  
| |                            |   |              |  
| | Mineral properties         | $ | (5,005,000   | )
| | Resource allowances        |   | 2,133,000    |  
| | Loss carry forwards        |   | 3,824,000    |  
| | Equipment                  |   | (7,331,000   | )
| | Other                      |   | 1,835,000    |  
| |                            |   | (4,544,000   | )
| | Less: valuation allowance  |   | (7,434,860   | )
| |                            |   |              |  
| | Net future tax liabilities | $ | (11,978,860  | )

At May 31, 2007, the Company had available
  for deduction against future taxable income non-capital losses of approximately
  $18,907,000 (2006  $3,727,000; 2005  $3,610,000). These losses,
  if not utilized, will expire in various years ranging from 2008 to 2027. Subject
  to certain restrictions, the Company also had Canadian resource expenditures
  of approximately $7,909,000 (2006  $4,503,000; 2005  $3,300,000),
  which are available to reduce taxable income in future years.

---

|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

|14. | SEGMENTED INFORMATION
|--- | ---------------------

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

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

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

| | For the year ended         |  |            |   |  |          |   |  |              |  |  |            |  
| | -------------------------- |  | ---------- | - |  | -------- | - |  | ------------ |  |  | ---------- | -
| | May 31, 2005               |  | Canada     |   |  | Chile    |   |  | South Africa |  |  | Total      |  
| | Loss for the year          |  | (1,239,140 | ) |  | (246,554 | ) |  |             |  |  | (1,485,694 | )
| | Total assets               |  | 558,951    |   |  | 100,626. |   |  |             |  |  | 659,577    |  
| | Mineral property interests |  |           |   |  | 46,857   |   |  |             |  |  | 46,857     |  
| | Property, plant and        |  |           |   |  |         |   |  |             |  |  |           |  
| | equipment                  |  |            |   |  |          |   |  |              |  |  |            |  

---

|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

|15. | SUBSEQUENT EVENTS
|--- | -----------------

|(a) | Acquisition of Saxendrift Mine (Pty) Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | On March 6, 2007, the Company and Trans Hex
        Group Limited (Trans Hex) entered into a conditional agreement
        whereby the Companys wholly owned South African subsidiary, Rockwell
        Resources RSA (Pty) Ltd. (Rockwell RSA), would acquire two
        open pit alluvial diamond mines and three alluvial diamond exploration
        projects from Trans Hex (the Transaction). Trans Hex, through
        its wholly-owned subsidiary, Trans Hex Operations (Pty) Ltd. (THO),
        is the owner of two open pit alluvial diamond mines, namely Saxendrift
        and Niewejaarskraal, and three alluvial diamond exploration projects,
        namely Kwartelspan, Zwemkuil-Mooidraai and Remhoogte-Holsloot, which are
        located along the southern bank of the Middle Orange River between Douglas
        and Prieska in the Northern Cape Province of South Africa (Northern
        Cape) and which are collectively referred to as the Middle Orange
        River Operations and Projects (or MORO). The MORO includes:
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | The Company will pay cash 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 ($0.6
        million)). An independent consultant has been appointed to determine the
        value of the rehabilitation bonds. All payments and liabilities are expected
        to total approximately $17.7 million, subject to certain final adjustments.
        Trans Hex will transfer all its relevant mineral rights and associated
        assets into a new special purpose entity (Saxendrift SPV),
        to be acquired by the Rockwell RSA. The implementation of the Transaction
        is subject to fulfillment of certain conditions precedent including:                                                                                                                                                                                                      
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|    | Fulfillment of some of the conditions precedent
        may be waived, or the date specified for their fulfillment extended, in
        certain limited circumstances. The MORO will be placed in care and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

|    | maintenance with effect from date of signature of the
        relevant transaction agreements pending fulfillment of the conditions
        precedent.                                                                                                                                                                                                                                  
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                         
|(b) | Payment of ZAR30 million to Van Wyk Trust.                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                         
|    | As at May 31, 2007, the Company had a ZAR30 million
        ($4.5 million) payment commitment to the Van Wyk Trust relating to the
        acquisition of Durnpike remaining. The payment of ZAR30 million was made
        in June 2007.                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                         
|(c) | Shares issued and share options granted subsequent
        to May 31, 2007.                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                         
|    | Subsequent to May 31, 2007, the Company issued 101,667
        common shares pursuant to the exercise of share purchase options at $0.42
        per share and 300,000 common shares pursuant to the exercise of warrants
        at $0.60 per warrant. In addition, 6,205,500 share options were granted
        with an average exercise price of $0.62 expiring between 3 to 5 years.

|16. | CONTINGENCIES AND COMMITMENTS
|--- | -----------------------------

| | (a) | 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.                                                                                                                                                                                                                                                                                                                                                 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (b) | One of the 50% shareholders of Midamines has, subsequent
        to the conclusion of the Midamines Agreement (see note 5(a)) 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 (see Note
        5(a)) 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.                

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|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

| | (c) | Pursuant to the Definitive Agreement disclosed
        in note 5(a), the Company has the following commitments:                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | (d) | In April 2007 the Company, as per note
        5(a), entered into an agreement 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:
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

|17. | DIFFERENCES BETWEEN CANADIAN AND
      UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
|--- | ---------------------------------------------------------------------------------------------

These consolidated financial statements
  have been prepared in accordance with Canadian generally accepted accounting
  principles ("Canadian GAAP"). Material variations in the accounting measurement
  principles, practices and methods used in preparing these financial statements
  from measurement principles, practices and methods accepted in the United States
  (US GAAP) are described and quantified below.

Mineral properties and deferred exploration
  costs

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

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

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

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

Marketable securities

Under Canadian GAAP, short-term marketable
  securities are carried at the lower of aggregate cost or current market value,
  with any unrealized loss included in the statements of operations. Long-term
  investments are carried on the cost or equity basis and are only written down
  when there is evidence of a decline in value that is other than temporary.

Under US GAAP, Statement of Financial
  Accounting Standard No. 115, Accounting for Certain Investments in
  Debt and Equity Securities (SFAS 115) requires that certain
  equity investments must be classified into available-for-sale or trading securities
  and carried at fair market value. Any unrealized holding gains or losses are
  reported as a separate component of shareholders equity until realized
  for available-for-sale securities, and included in earnings for trading securities.
  Under SFAS 115, for the years ended May 31, 2007, 2006 and 2005 the Companys

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|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

investments in marketable securities
  would be classified as trading securities and there is no difference between
  Canadian GAAP and US GAAP.

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

| |                     |   | 2007        |  |   | 2006        |  
| | ------------------- | - | ----------- |  | - | ----------- | -
| |                     |   | Balance,    |  |   |             |  
| |                     |   | Canadian    |  |   |             |  
| |                     |   | GAAP        |  |   | Adjustments |  
| |                     |   |             |  |   |             |  
| | Current assets      | $ | 56,142,572  |  | $ | 529,308*    |  
| | Property, plant     |   |             |  |   |             |  
| | and equipment       |   | 44,790,441  |  |   |            |  
| | Other assets and    |   |             |  |   |             |  
| | deposits            |   | 3,513,449   |  |   |            |  
| |                     |   |             |  |   |             |  
| | Reclamation         |   |             |  |   |             |  
| | deposits            |   | 1,038,066   |  |   |            |  
| |                     |   |             |  |   |             |  
| | Mineral property    |   | 24,121,855  |  |   | (1          | )
| |                     | $ | 129,606,383 |  | $ | 529,307     |  
| |                     |   |             |  |   |             |  
| | Current liabilities | $ | 29,399,774  |  | $ | 529,308*    |  
| | Long-term           |   |             |  |   |             |  
| | liabilities         |   | 22,634,998  |  |   |            |  
| | Non-controlling     |   |             |  |   |             |  
| | interest            |   | 5,978,769   |  |   |            |  
| | Stockholders'       |   |             |  |   |             |  
| | equity              |   | 71,592,842  |  |   | (1          | )
| |                     | $ | 129,606,383 |  | $ | 529,307     |  

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

| |                                                       |   | 2007         |   |   | 2006        |   |   | 2005        |  
| | ----------------------------------------------------- | - | ------------ | - | - | ----------- | - | - | ----------- | -
| | Loss for the year, Canadian GAAP                      | $ | (6,365,142   | ) | $ | (1,600,673  | ) | $ | (1,485,694  | )
| | Write-down of mineral property interests              |   |             |   |   | 46,856      |   |   |            |  
| | Unrealized gain in marketable securities              |   |             |   |   |            |   |   |            |  
| | Loss for the year, US GAAP                            | $ | (6,365,142   | ) | $ | (1,553,817  | ) | $ | (1,485,694  | )
| | Basic and diluted loss per share, US GAAP             | $ | (0.11        | ) | $ | (0.07       | ) | $ | (0.06       | )
| | Weighted average number of common shares outstanding, |   |              |   |   |             |   |   |             |  
| | US GAAP                                               |   | 55,418,242 3 |   |   | 23,640,1233 |   |   | 23,376,1222 |  

---

|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

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

| |                                                                   |   | 2007        |   |   | 2006       |   |   | 2005       |  
| | ----------------------------------------------------------------- | - | ----------- | - | - | ---------- | - | - | ---------- | -
| | Cash used in operating activities, Canadian
      GAAP            | $ | (7,733,373  | ) | $ | (1,393,378 | ) | $ | (1,322,916 | )
| | Purchase of marketable securities                                 |   |            |   |   |           |   |   |           |  
| | Proceeds from sale of marketable securities                       |   |            |   |   | 146,970    |   |   | 11,563     |  
| | Cash used in operating activities, US GAAP                        |   | (7,733,373  | ) |   | (1,246,408 | ) |   | (1,311,353 | )
| |                                                                   |   |             |   |   |            |   |   |            |  
| | Cash provided by (used in) investing activities, Canadian         |   |             |   |   |            |   |   |            |  
| | GAAP                                                              |   | (35,400,108 | ) |   | 146,970    |   |   | 11,563     |  
| | Purchase of marketable securities                                 |   |            |   |   |           |   |   |           |  
| | Proceeds from sale of marketable securities                       |   |            |   |   | (146,970   | ) |   | (11,563    | )
| | Cash provided by investing activities, US GAAP                    |   | (35,400,108 | ) |   |           |   |   |           |  
| |                                                                   |   |             |   |   |            |   |   |            |  
| | Cash provided by financing activities, Canadian GAAP and US       |   |             |   |   |            |   |   |            |  
| | GAAP                                                              |   | 75,567,827  |   |   | 1,085,762  |   |   | 128,391    |  
| | Reclassification of bank advances                                 |   | 529,308     |   |   |           |   |   |           |  
| | Cash provided by financing activities, US GAAP                    |   | 76,097,135  |   |   | 1,085,762  |   |   | 128,391    |  
| |                                                                   |   |             |   |   |            |   |   |            |  
| | Increase (decrease) in cash and equivalents
      during the year |   | 32,963,654  |   |   | (160,646   | ) |   | (1,182,962 | )
| | Cash and equivalents, beginning of year                           |   | 192,031     |   |   | 352,677    |   |   | 1,535,639  |  
| |                                                                   |   | 33,155,685  |   |   | 192,031    |   |   | 352,677    |  

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

Impact of recent United States accounting pronouncements:

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

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|ROCKWELL DIAMONDS INC.                                       
|-------------------------------------------------------------
|Notes to the Consolidated Financial Statements               
|For the years ended May 31, 2007, 2006, and 2005             
|(Expressed in Canadian
      Dollars unless otherwise stated)

| |     | of the Interpretation for companies within the scope
        of the AICPA Audit and Accounting Guide (Guide). This FSP
        concludes that no additional consolidation guidance is necessary to the
        Guide. The Companys preliminary assessment does not indicate that
        this FSP will have a significant impact on the financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | iv) | FASB Interpretation (FIN) No. 48: Accounting
        for Uncertainty in Income Taxes, an interpretation of FASB Statement
        No.109, clarifies the accounting for uncertainty in income taxes recognized
        in an enterprises financial statements in accordance with SFAS No.
        109, Accounting for Income Taxes. This interpretation (1) prescribes
        a recognition threshold and measurement attribute for the financial statement
        recognition and measurement of a tax position taken or expected to be
        taken in a tax return and (2) provides guidance on derecognition, classification,
        interest and penalties, accounting in interim periods, disclosure, and
        transition. This interpretation is effective for fiscal years beginning
        after December 15, 2006. Management is analyzing the requirements of this
        new standard.

---