---









CONSOLIDATED FINANCIAL STATEMENTS



YEARS ENDED FEBRUARY 28, 2011, 2010 AND 2009

(Expressed in Canadian Dollar)

---

Managements Responsibility for Financial Reporting

To the Shareholders and Directors of Rockwell Diamonds Inc.

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

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

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

|/s/JAH Campbell                   | /s/ Gerhard Jacobs     
|--------------------------------- | -----------------------
|                                  |                        
|James AH Campbell                 | Gerhard Jacobs         
|Director, Chief Executive Officer | Chief Financial Officer
|September 6, 2011                 | September 6, 2011      

---

Report of the Independent Registered Public Accounting
Firm

The Board of Directors and Shareholders of Rockwell Diamonds
Inc.

We have audited the accompanying consolidated balance sheets of
Rockwell Diamonds Inc. as of February 28, 2011 and 2010, and the related
consolidated statements of operations and comprehensive loss, accumulated
comprehensive loss and deficit, shareholders' equity and cash flows for each of
the years in the three year period ended February 28, 2011. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Rockwell Diamonds Inc. as of February 28, 2011 and 2010 and the results of its
operations and its cash flows for each of the years in the three year period
ended February 28, 2011, in conformity with Canadian generally accepted
accounting principles.

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

KPMG IncRegistered Accountants and
AuditorsJohannesburg, Republic of South AfricaSeptember 6, 2011

---

ROCKWELL DIAMONDS
INC.Consolidated Balance Sheets(Expressed in Canadian
Dollar)

|                                                               |   | February 28, 2011 |   |   | February 28, 2010 |  
|-------------------------------------------------------------- | - | ----------------- | - | - | ----------------- | -
|ASSETS                                                         |   |                   |   |   |                   |  
|                                                               |   |                   |   |   |                   |  
|Current assets                                                 |   |                   |   |   |                   |  
|Cash and cash equivalents (note 5)                             | $ | 4,771,124         |   | $ | 2,512,610         |  
|Accounts receivable
      (note 5)                             |   | 4,743,034         |   |   | 6,260,717         |  
|Restricted cash (note 5, 19)                                   |   |                  |   |   | 4,946             |  
|Trade receivable from a
      related party (note 15)          |   | 92,398            |   |   | 46,108            |  
|Inventories (note 6)                                           |   | 2,628,090         |   |   | 2,976,058         |  
|Taxes receivable                                               |   | 540,956           |   |   |                  |  
|Prepayments                                                    |   | 82,808            |   |   | 75,275            |  
|                                                               |   | 12,858,410        |   |   | 11,875,714        |  
|Non-current assets                                             |   |                   |   |   |                   |  
|Property, plant and
      equipment (note 7)                   |   | 62,828,438        |   |   | 58,790,736        |  
|Mineral property interests (note 8)                            |   | 29,565,304        |   |   | 30,850,998        |  
|Investment in associate
      (note 12)                        |   | 129,660           |   |   |                  |  
|Other assets and deposits (note 11)                            |   | 2,042,291         |   |   | 827,871           |  
|Reclamation deposits (note 5, 10)                              |   | 2,759,611         |   |   | 2,898,067         |  
|                                                               |   | 97,325,304        |   |   | 93,367,672        |  
|                                                               |   |                   |   |   |                   |  
|                                                               | $ | 110,183,714       |   | $ | 105,243,386       |  
|                                                               |   |                   |   |   |                   |  
|LIABILITIES AND SHAREHOLDERS' EQUITY                           |   |                   |   |   |                   |  
|                                                               |   |                   |   |   |                   |  
|Current liabilities                                            |   |                   |   |   |                   |  
|Bank indebtedness (note
      19)                              | $ | 1,787,479         |   | $ | 698,015           |  
|Accounts payable and accrued
      liabilities (note 5)        |   | 6,373,382         |   |   | 6,458,751         |  
|Due to related parties
      (note 5, 15)                      |   | 72,064            |   |   | 641,323           |  
|Taxes payable                                                  |   | 245,228           |   |   | 583,194           |  
|Current portion of capital lease obligations (note 5,
      9) |   | 142,630           |   |   | 3,196,189         |  
|                                                               |   | 8,620,783         |   |   | 11,577,472        |  
|                                                               |   |                   |   |   |                   |  
|Non-current liabilities                                        |   |                   |   |   |                   |  
|Capital lease
      obligations (note 5, 9)                    |   |                  |   |   | 140,332           |  
|Due to related parties (note 5, 15)                            |   | 424,572           |   |   | 414,566           |  
|Future income taxes
      (note 16)                            |   | 14,118,000        |   |   | 11,545,000        |  
|Reclamation obligation (note 10)                               |   | 3,814,638         |   |   | 3,722,984         |  
|                                                               |   | 18,357,210        |   |   | 15,822,882        |  
|                                                               |   |                   |   |   |                   |  
|Non-controlling interest                                       |   | 647,407           |   |   | 648,941           |  
|                                                               |   |                   |   |   |                   |  
|Shareholders' equity                                           |   |                   |   |   |                   |  
|Share capital (note 13)                                        |   | 135,989,508       |   |   | 127,999,040       |  
|Contributed surplus                                            |   | 7,079,937         |   |   | 6,195,051         |  
|Accumulated other comprehensive loss                           |   | (6,363,878        | ) |   | (7,979,683        | )
|Deficit                                                        |   | (54,147,253       | ) |   | (49,020,317       | )
|                                                               |   | 82,558,314        |   |   | 77,194,091        |  
|Continuance of
      operations and going concern (note 1)     |   |                   |   |   |                   |  
|Contingencies (notes 20)                                       |   |                   |   |   |                   |  
|Subsequent events (note 21)                                    |   |                   |   |   |                   |  
|                                                               |   |                   |   |   |                   |  
|                                                               | $ | 110,183,714       |   | $ | 105,243,386       |  

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

Approved by the Board of Directors

|/s/ David James Copeland | /s/ Dr. Mark Bristow
|------------------------ | --------------------
|                         |                     
|David James Copeland     | Dr. Mark Bristow    
|Director                 | Director            

---

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

|                                                                     |   | Year
      ended |   |   | Year
      ended |   |   | Year
      ended |  
|-------------------------------------------------------------------- | - | ---------------- | - | - | ---------------- | - | - | ---------------- | -
|                                                                     |   | February 28,     |   |   | February 28,     |   |   | February 28,     |  
|                                                                     |   | 2011             |   |   | 2010             |   |   | 2009             |  
|                                                                     |   |                  |   |   |                  |   |   |                  |  
|Revenue                                                              |   |                  |   |   |                  |   |   |                  |  
|Rough diamond sales                                                  | $ | 42,507,747       |   | $ | 29,776,933       |   | $ | 34,330,078       |  
|                                                                     |   |                  |   |   |                  |   |   |                  |  
|Cost of sales                                                        |   |                  |   |   |                  |   |   |                  |  
|Cost of rough diamond sales                                          |   | (28,079,696      | ) |   | (23,790,340      | ) |   | (25,113,363      | )
|Amortization and depletion                                           |   | (10,407,037      | ) |   | (9,545,727       | ) |   | (11,287,197      | )
|Operating
      profit (loss)                                        |   | 4,021,014        |   |   | (3,559,134       | ) |   | (2,070,482       | )
|                                                                     |   |                  |   |   |                  |   |   |                  |  
|Expenses                                                             |   |                  |   |   |                  |   |   |                  |  
|Net reclamation obligation
      recognised (utilized) (note 10)     |   | 1,809            |   |   | (394,409         | ) |   | 1,072,389        |  
|Exploration                                                          |   | 49,184           |   |   | 97,805           |   |   | 498,739          |  
|Foreign exchange loss (gain)                                         |   | 1,381            |   |   | 483,902          |   |   | (350,485         | )
|Interest on capital lease obligations                                |   | 119,286          |   |   | 969,530          |   |   | 1,592,001        |  
|Interest expense                                                     |   | 329,717          |   |   | 576,272          |   |   | 3,009,680        |  
|Legal, accounting and audit                                          |   | 1,211,186        |   |   | 1,389,272        |   |   | 1,863,261        |  
|Office and administration                                            |   | 3,615,436        |   |   | 3,411,990        |   |   | 3,489,460        |  
|Shareholder communications                                           |   | 185,490          |   |   | 506,482          |   |   | 453,489          |  
|Stock-based compensation (note
      13(b))                          |   | 884,886          |   |   | 335,358          |   |   | 1,834,422        |  
|Travel and conferences                                               |   | 433,636          |   |   | 194,544          |   |   | 605,812          |  
|Transfer agent                                                       |   | 99,416           |   |   | 246,866          |   |   | 250,878          |  
|                                                                     |   | 6,931,427        |   |   | 7,817,612        |   |   | 14,319,646       |  
|Other items                                                          |   |                  |   |   |                  |   |   |                  |  
|Write-off of receivables                                             |   |                 |   |   | 167,414          |   |   | 291,063          |  
|Fair value adjustment to
      investments held (note 11 (a))        |   | 31,920           |   |   |                 |   |   |                 |  
|Loss on disposal of
      equipment                                  |   | 296,510          |   |   | 36,720           |   |   | 364,918          |  
|Write-down or loss on disposal
      of mineral property (note 8(c)) |   |                 |   |   | 657,634          |   |   | 203,339          |  
|Other Income                                                         |   | (193,157         | ) |   | (513,338         | ) |   | (303,399         | )
|Interest income                                                      |   | (101,953         | ) |   | (466,688         | ) |   | (2,672,021       | )
|Share of profit from equity accounted
      investment (note 12)     |   | (34,396          | ) |   |                 |   |   |                 |  
|Write-down of property, plant and equipment
      (note 7)           |   | 284,696          |   |   | 23,862           |   |   | 2,590,958        |  
|                                                                     |   | 283,620          |   |   | (94,396          | ) |   | 474,858          |  
|                                                                     |   |                  |   |   |                  |   |   |                  |  
|Loss before
      income taxes                                       |   | 3,194,033        |   |   | 11,282,350       |   |   | 16,864,986       |  
|Current income tax expense
      (note 16)                           |   |                 |   |   | 18,946           |   |   | 7,000            |  
|Future income tax (recovery) expense (note 16)                       |   | 2,021,000        |   |   | (2,645,000       | ) |   | (3,347,000       | )
|Loss before non-controlling interest                                 |   | 5,215,033        |   |   | 8,656,296        |   |   | 13,524,986       |  
|Non-controlling interest                                             |   | (88,097          | ) |   | (1,618,603       | ) |   | (549,024         | )
|Loss for the year                                                    |   | 5,126,936        |   |   | 7,037,693        |   |   | 12,975,962       |  
|Other
      comprehensive loss (income)                              |   | (1,615,805       | ) |   | (5,429,700       | ) |   | 13,409,383       |  
|Total comprehensive loss                                             | $ | 3,511,131        |   | $ | 1,607,993        |   | $ | 26,385,345       |  
|                                                                     |   |                  |   |   |                  |   |   |                  |  
|Basic and
      diluted loss per common share                        | $ | 0.15             |   | $ | 0.40             |   | $ | 0.82             |  
|                                                                     |   |                  |   |   |                  |   |   |                  |  
|Weighted average number ofcommon shares
      outstanding            |   | 34,545,683       |   |   | 17,810,954       |   |   | 15,861,610       |  

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

---

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

|                                                                                        |   | Year
      ended |   |   | Year
      ended |   |   | Year
      ended |  
|--------------------------------------------------------------------------------------- | - | ---------------- | - | - | ---------------- | - | - | ---------------- | -
|                                                                                        |   | February 28,     |   |   | February 28,     |   |   | February 28,     |  
|                                                                                        |   | 2011             |   |   | 2010             |   |   | 2009             |  
|                                                                                        |   |                  |   |   |                  |   |   |                  |  
|                                                                                        |   |                  |   |   |                  |   |   |                  |  
|Accumulated other comprehensive loss                                                    |   |                  |   |   |                  |   |   |                  |  
|Balance at beginning of the year                                                        | $ | (7,979,683       | ) | $ | (13,409,383      | ) | $ |                 |  
|Comprehensive income (loss) on
      currency translation of self-sustaining operations |   | 1,615,805        |   |   | 5,429,700        |   |   | (13,409,383      | )
|Balance at end of the year                                                              | $ | (6,363,878       | ) | $ | (7,979,683       | ) | $ | (13,409,383      | )
|                                                                                        |   |                  |   |   |                  |   |   |                  |  
|Deficit                                                                                 |   |                  |   |   |                  |   |   |                  |  
|Balance at beginning of the
      year                                                  | $ | (49,020,317      | ) | $ | (41,982,624      | ) | $ | (29,006,662      | )
|Loss for the year                                                                       |   | (5,126,936       | ) |   | (7,037,693       | ) |   | (12,975,962      | )
|Balance at end of the year                                                              | $ | (54,147,253      | ) | $ | (49,020,317      | ) | $ | (41,982,624      | )

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

---

ROCKWELL DIAMONDS
INC.Consolidated Statements of Shareholders'
Equity(Expressed in Canadian Dollar unless oherwise stated)

Year
        ended February 28,
      
      
      Year
        ended February 28,
      
      
      Year
        ended February 28,2011
      
      
      
      
      
      2010
      
      
      
      
      
      2009Share capital
      
      Number of
        shares
      
      
      
      
      
      Number of
        shares
      
      
      
      
      
      Number of
        sharesBalance at beginning of the year
      
      370,843,069
      
      $
      127,999,040
      
      
      238,041,569
      
      $
      119,952,532
      
      
      223,755,854
      
      $
      112,095,390Consideration
        for additional interest of operating mines net of issue cost at $0.55
        per share        (note 13(c))
      
      
      
      
      
      
      
      
      
      
      
      
      
      14,285,715
      
      
      7,857,142Share purchase options exercised at $0.62
        per share
      
      
      
      
      
      
      
      1,500
      
      
      929
      
      
      
      
      
      Fair value of stock options
        allocated to shares issued on exercise
      
      
      
      
      
      
      
      
      
      
      808
      
      
      
      
      
      Private placement fourth quarter, net
        of issue costs at $0.065 per share (note 13(d))
      
      
      
      
      
      
      
      132,800,000
      
      
      8,044,771
      
      
      
      
      
      Rights offering at subscription
        price of $0.05 per share (note 13(e))
      
      92,710,767
      
      
      4,583,644
      
      
      
      
      
      
      
      
      
      
      
      Private placement, net of issue costs
        at $0.065 per share (note 13(f))
      
      54,631,402
      
      
      3,406,824
      
      
      
      
      
      
      
      
      
      
      
      Consolidation of Shares (note 13(g))
      
      (483,639,555
      )
      
      
      
      
      
      
      
      
      
      
      
      
      
      Balance at
        end of the year
      
      34,545,683
      
      $
      135,989,508
      
      
      370,843,069
      
      $
      127,999,040
      
      
      238,041,569
      
      $
      119,952,532WarrantsBalance at beginning of the year
      
      
      
      $
      
      
      
      
      
      $
      1,693,197
      
      
      
      
      $
      1,693,197Expired
        broker warrants
      
      
      
      
      
      
      
      
      
      
      (1,693,197
      )
      
      
      
      
      Balance at end of the year
      
      
      
      $
      
      
      
      
      
      $
      -
      
      
      
      
      $
      1,693,197Contibuted surplusBalance at beginning of the year
      
      
      
      $
      6,195,051
      
      
      
      
      $
      4,167,304
      
      
      
      
      $
      2,332,882Stock-based compensation
        (note 13(b))
      
      
      
      
      884,886
      
      
      
      
      
      335,358
      
      
      
      
      
      1,834,422Expired broker warrants
      
      
      
      
      
      
      
      
      
      
      1,693,197
      
      
      
      
      
      Fair value of stock options allocated
        to shares issued on exercise
      
      
      
      
      
      
      
      
      
      
      (808
      )
      
      
      
      
      Balance at
        end of the year
      
      
      
      $
      7,079,937
      
      
      
      
      $
      6,195,051
      
      
      
      
      $
      4,167,304Accumulated other comprehensive lossBalance at beginning of the year
      
      
      
      $
      (7,979,683
      )
      
      
      
      $
      (13,409,383
      )
      
      
      
      $
      Comprehensive
        income (loss) on currency translation of self-sustaining operations
      
      
      
      
      1,615,805
      
      
      
      
      
      5,429,700
      
      
      
      
      
      (13,409,383
      )Balance at end of the year
      
      
      
      $
      (6,363,878
      )
      
      
      
      $
      (7,979,683
      )
      
      
      
      $
      (13,409,383
      )DeficitBalance at beginning of the year
      
      
      
      $
      (49,020,317
      )
      
      
      
      $
      (41,982,624
      )
      
      
      
      $
      (29,006,662
      )Loss for the year
      
      
      
      
      (5,126,936
      )
      
      
      
      
      (7,037,693
      )
      
      
      
      
      (12,975,962
      )Balance at
        end of the year
      
      
      
      $
      (54,147,253
      )
      
      
      
      $
      (49,020,317
      )
      
      
      
      $
      (41,982,624
      )TOTAL SHAREHOLDERS' EQUITY
      
      
      
      $
      82,558,314
      
      
      
      
      $
      77,194,091
      
      
      
      
      $
      70,421,026


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

---

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

|                                                                                         |   | Year
      ended |   |   | Year
      ended |   |   | Year
      ended |  
|---------------------------------------------------------------------------------------- | - | ---------------- | - | - | ---------------- | - | - | ---------------- | -
|                                                                                         |   | February 28,     |   |   | February 28,     |   |   | February 28,     |  
|Cash provided
      by (used in):                                                        |   | 2011             |   |   | 2010             |   |   | 2009             |  
|                                                                                         |   |                  |   |   |                  |   |   |                  |  
|Operating activities                                                                     |   |                  |   |   |                  |   |   |                  |  
|Loss for the year                                                                        | $ | (5,126,936       | ) | $ | (7,037,693       | ) | $ | (12,975,962      | )
|Items not affecting cash                                                                 |   |                  |   |   |                  |   |   |                  |  
|Net reclamation obligation
      recognised (utilized) (note 10)                         |   | 1,809            |   |   | (394,409         | ) |   | 1,072,389        |  
|Amortization and
      depletion                                                         |   | 10,247,569       |   |   | 6,235,261        |   |   | 8,347,837        |  
|Amortization of capital lease
      equipment                                            |   | 159,468          |   |   | 3,310,466        |   |   | 2,939,360        |  
|Write-down of
      rough diamond inventories and mine supplies (note 6)                 |   | 899,034          |   |   | 1,380,538        |   |   |                 |  
|Write-down of assets                                                                     |   | 284,696          |   |   | 23,862           |   |   | 2,590,958        |  
|Diamond sale
      price adjustment                                                      |   |                 |   |   | 1,515,099        |   |   |                 |  
|Write-off of accounts receivable                                                         |   |                 |   |   | 167,414          |   |   | 291,063          |  
|Share of profit
      from equity accounted investment (note 12)                         |   | (34,396          | ) |   |                 |   |   |                 |  
|Stock-based compensation (note
      13(b))                                              |   | 884,886          |   |   | 335,358          |   |   | 1,834,422        |  
|Write-down or
      loss on disposal of equipment and mineral properties                 |   | 296,510          |   |   | 694,354          |   |   | 364,918          |  
|Future income tax expense
      (recovery)                                               |   | 2,021,000        |   |   | (2,645,000       | ) |   | (3,347,000       | )
|Unrealized
      foreign exchange (gain) loss                                            |   | (73,408          | ) |   | 198,448          |   |   | (768,117         | )
|Fair value adjustment to
      investments held (note 11 (a))                            |   | 31,920           |   |   |                 |   |   |                 |  
|Non-controlling
      interest                                                           |   | (88,097          | ) |   | (1,618,603       | ) |   | (549,024         | )
|Changes in non-cash working capital items                                                |   |                  |   |   |                  |   |   |                  |  
|Accounts
      receivable                                                                |   | 1,680,272        |   |   | (3,762,497       | ) |   | (790,642         | )
|Amounts due to and from related
      parties                                            |   | (634,248         | ) |   | 3,107            |   |   | (2,369,910       | )
|Inventories                                                                              |   | (476,349         | ) |   | (320,530         | ) |   | (123,266         | )
|Prepayments                                                                              |   | 5,755            |   |   | (8,571           | ) |   | 885,083          |  
|Accounts payable
      and accrued liabilities                                           |   | (242,916         | ) |   | 1,685,554        |   |   | 411,826          |  
|Taxes payable                                                                            |   | (899,141         | ) |   | 127,148          |   |   | (434,286         | )
|Cash provided by (used in) operating activities                                          |   | 8,937,428        |   |   | (110,694         | ) |   | (2,620,351       | )
|                                                                                         |   |                  |   |   |                  |   |   |                  |  
|Investing activities                                                                     |   |                  |   |   |                  |   |   |                  |  
|Acquisition of Saxendrift Mines (Pty) Limited                                            |   |                 |   |   |                 |   |   | (10,652,026      | )
|Amounts paid pursuant to acquisition                                                     |   |                 |   |   |                 |   |   | (294,402         | )
|Restricted cash                                                                          |   | 4,946            |   |   | 2,949,919        |   |   | 10,636,405       |  
|Investment in Associate                                                                  |   | (95,690          | ) |   |                 |   |   |                 |  
|Purchase of equipment and mineral properties                                             |   | (11,636,472      | ) |   | (2,696,965       | ) |   | (12,687,176      | )
|Proceeds received on disposal of
      equipment                                         |   | 301,518          |   |   | 380,037          |   |   | 310,944          |  
|Other assets and deposits                                                                |   | (1,234,575       | ) |   | (685,817         | ) |   | 3,060,972        |  
|Reclamation deposits                                                                     |   | 209,837          |   |   | (21,968          | ) |   | (842,765         | )
|Cash used in
      investing activities                                                  |   | (12,450,436      | ) |   | (74,794          | ) |   | (10,468,048      | )
|                                                                                         |   |                  |   |   |                  |   |   |                  |  
|Financing activities                                                                     |   |                  |   |   |                  |   |   |                  |  
|Principal repayments under capital
      lease obligations                               |   | (3,298,941       | ) |   | (6,175,065       | ) |   | (6,078,521       | )
|Common shares and warrants issued for cash, net of
      issue costs                     |   | 7,990,468        |   |   | 8,045,700        |   |   |                 |  
|Repayment of credit facility                                                             |   |                 |   |   | (3,170,344       | ) |   |                 |  
|Drawdown of
      credit facility                                                        |   | 1,079,995        |   |   |                 |   |   | 3,540,880        |  
|Cash provided by (used in) financing activities                                          |   | 5,771,522        |   |   | (1,299,709       | ) |   | (2,537,641       | )
|                                                                                         |   |                  |   |   |                  |   |   |                  |  
|                                                                                         |   |                  |   |   |                  |   |   |                  |  
|Increase (decrease) in cash and cash equivalents during
      the year                   |   | 2,258,514        |   |   | (1,485,197       | ) |   | (15,626,040      | )
|                                                                                         |   |                  |   |   |                  |   |   |                  |  
|Cash and cash
      equivalents, beginning of year                                       |   | 2,512,610        |   |   | 3,997,807        |   |   | 19,623,847       |  
|                                                                                         |   |                  |   |   |                  |   |   |                  |  
|Cash and cash
      equivalents, end of year                                             | $ | 4,771,124        |   | $ | 2,512,610        |   | $ | 3,997,807        |  
|                                                                                         |   |                  |   |   |                  |   |   |                  |  
|Interest paid on facilities during the year                                              | $ | 329,717          |   | $ | 576,272          |   | $ | 3,009,680        |  
|Interest paid on capital leases                                                          |   | 119,286          |   |   | 969,530          |   |   | 1,592,001        |  
|Interest received                                                                        |   | 101,953          |   |   | 466,688          |   |   | 2,672,021        |  
|Income taxes paid during the year                                                        |   |                 |   |   |                 |   |   | 434,511          |  
|                                                                                         |   |                  |   |   |                  |   |   |                  |  
|Supplemental disclosure of non-cash
      investing and financing activities:            |   |                  |   |   |                  |   |   |                  |  
|Issuance of common shares as consideration for
      acquisition of property (note 8(b)) |   |                 |   |   |                 |   |   | 7,857,143        |  
|Fair value of stock options allocated
      to shares issued upon exercise               |   |                 |   |   | 808              |   |   |                 |  

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

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in
      Canadian Dollar unless otherwise stated)

|1. | CONTINUANCE OF OPERATIONS AND GOING
  CONCERN                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Rockwell Diamonds Inc. (Rockwell or the Company) is
      incorporated under the British Columbia Business Corporations Act(formerly the Company Actof British Columbia), and is engaged
      in the business of diamond production and the acquisition and exploration
      of natural resource properties. The Companys principal mineral property
      interests are located in South Africa.                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | The accompanying consolidated financial statements have
      been prepared on a going concern basis in accordance with Canadian
      generally accepted accounting principles (''Canadian GAAP''). The going
      concern basis of presentation assumes that Rockwell will continue in
      operation for the foreseeable future and will be able to realise its
      assets and discharge its liabilities and commitments in the normal course
      of business.                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | For the year ended February 28, 2011, the Company
      incurred consolidated losses of $5.1 million and has incurred
      accumulated losses to date of $54.1 million                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | In fiscal 2011, diamond prices have increased gradually
      from US$1,010 for fiscal 2010 to US$1,365 for the year ending February 28,
      2011, with an average fourth quarter sales value of US$1,430.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | At February 28, 2011, the Companys current assets
      exceeded its current liabilities by $4.2 million and the Companys total
      assets exceeded its total liabilities by $83.2 million. The Company has
      forecasted its cash flows for the fiscal years 2012 and 2013 and these
      forecasts indicate that the Company will continue as a going concern. The
      forecasts assume the plant operating at 85% of capacity, prices remaining
      at current levels and the South African Rand remaining at current levels
      relative to the United States and Canadian Dollars.                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | On the performance of the last two quarters, the
      operations made a positive contribution towards the cashflow. This is not
      sufficient to fund to planned capital projects at Wouterspan and Tirisano.
      These expansion projects will be funded by means of a planned private
      placement.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Based on the Companys cash resources and the above
      forecasts, the Company has sufficient working capital and reserves to
      maintain operations. Accordingly, the financial statements have been
      prepared on the basis of accounting policies applicable to a going
      concern. Future events beyond the Companys control may change the
      Companys ability to continue as a going concern. If the going concern
      concept was no longer appropriate, significant adjustments would be
      required to the carrying value of assets and liabilities and would be
      recorded at that time.                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|2. | BASIS OF PRESENTATION AND PRINCIPLES OF
      CONSOLIDATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | These consolidated financial statements have been
      prepared in accordance with Canadian generally accepted accounting
      principles. These consolidated financial statements include the accounts
      of the Company, its subsidiaries and equity accounted associate and its
      variable interest entities where the Company has been determined to be the
      primary beneficiary. All significant intercompany balances and
      transactions have been eliminated upon consolidation. Material variations
      in the accounting measurement principles, practices and methods used in
      preparing these financial statements from measurement principles,
      practices and methods accepted in the United States are set out in note
      17.

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

|3. | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Revenue from rough diamond sales is recognized when
      persuasive evidence of an arrangement exists, the significant risks and
      rewards of ownership of the diamonds have been transferred to the
      customer, the Companys price to the customer is fixed or determinable and
      collection of the resulting receivable is reasonably assured. Significant
      risks and rewards of ownership of the diamonds normally transfer at the
      moment the sales tender has been awarded and finalized.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Rough diamond inventories are valued at the lower of
      average production cost and net realizable value. Production costs include
      the cost of consumable materials, direct labour, mine-site overhead
      expenses and amortization.                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Supplies are valued at the lower of cost, at the average
      purchase cost basis, and net realizable value. Appropriate provisions are
      made for redundant and slow-moving items. Cost of items that are not
      ordinarily interchangeable, and goods and services produced and segregated
      for specific projects, are assigned by using a specific identification of
      their individual costs.                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Consistent use of either first-in first-out or weighted
      average cost formula to measure the cost of other inventories is
      applied.                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Previous write-downs are reversed to the lower of cost
      and net realizable value when there is a subsequent increase in the value
      of inventories.                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Property, plant and equipment are stated at cost less
      accumulated amortization and accumulated impairment losses. Assets are
      amortized on a straight-line method over the estimated useful lives of the
      related assets, which are as follows:                                                                                                                                                                                                                                                       

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


Land is not amortized.

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

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

(d)     
  Mineral property interests

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

The acquisition costs of mineral
properties are capitalized until the property is placed into production, sold,
or abandoned, or when management has determined that there has been an
impairment in value. Such acquisition costs are amortized over the estimated
life of the property, based on the unit of production method, or written off to
operations if the property is abandoned, allowed to lapse, or if there is little
prospect of further work being carried out by the Company. Under the unit of
production method, the yearly depreciation charge is calculated by dividing the
actual resources mined into the estimated resources at the beginning of the year
and then multiplying the resulting fraction by the net carrying value of the
related assets. Mineral resources are estimated by professional geologists and
engineers in accordance with recognized industry, professional and regulatory
standards. These estimates require inputs such as future diamond prices, future
operating costs, and various technical geological, engineering, and construction
parameters. Changes in any of these inputs could cause a significant change in
the estimated resources which, in turn, could have a material effect on the
carrying value of mineral properties. The unit of production method results in a
systematic and rational allocation of the cost of the mineral property interests
over the year the resources are utilized.

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

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

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

(e)     
  Financial instruments

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

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

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

| |  | Held-to-maturity investments, loans and receivables, and
      other financial liabilities are initially measured at fair value and
      subsequently measured at amortized cost. Amortization of premiums or
      discounts and losses due to impairment are included in current year net
      earnings (loss).                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Available-for-sale financial assets are measured at fair
      value. Changes in fair value are included in other comprehensive income
      (loss) until the gain or loss is recognized in net earnings (loss) or if
      an impairment is determined to be other than temporary.                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Held-for-trading financial instruments are measured at
      fair value. All gains and losses are included in net earnings (loss) in
      the year in which they arise.                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | All derivative financial instruments are measured at fair
      value, even when they are part of a hedging relationship. Changes in fair
      value are included in net earnings (loss) in the year in which they arise,
      except for hedge transactions which qualify for hedge accounting treatment
      in which case unrealized gains and losses are recognized in other
      comprehensive income (loss) until realized.

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

| |  | Cash and cash equivalents, restricted cash and bank
      indebtedness are classified as held-for-trading financial instruments and
      are measured at fair value. Cash and cash equivalents consist of cash and
      highly liquid investments, having maturity dates of three months or less
      from the date of purchase, that are readily convertible to known amounts
      of cash.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Accounts receivable and trade receivable from a related
      party are classified as loans and receivables and are measured at fair
      value and subsequently measured at amortized cost.                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Accounts payable and accrued liabilities, capital lease
      obligations, amounts owing pursuant to acquisition and balances payable to
      related parties are classified as other financial liabilities and are
      measured initially at fair value and subsequently measured at amortized
      cost.                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Reclamation deposits invested in interest bearing money
      market linked investments are classified as available-for-sale assets and
      are carried at fair market value, with the unrealized gain or loss
      recorded in shareholders equity as a component of other comprehensive
      income (loss).                                                                              

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

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

(f)      Site
  closure and reclamation obligations

The Company recognizes any statutory,
contractual or other legal obligation related to the retirement of tangible
long-lived assets when such obligations are incurred, if a reasonable estimate
of fair value can be made.

These obligations are measured
initially at fair value and the resulting costs are capitalized to the carrying
value of the related asset. In subsequent years, the liability is adjusted for
the accretion of the discount and any changes in the amount or timing of the
underlying future cash flows. The asset retirement cost is amortized to
operations over the life of the asset. Changes resulting from revisions to the
timing or the amount of the original estimate of undiscounted cash flows are
recognized as an increase or a decrease in the carrying amount of the liability,
and the related asset retirement cost is capitalized as part of the carrying
amount of the related long-lived asset. In the event the required decrease in
the asset retirement cost is in excess of the carrying value, the excess amount
is recorded as a change in estimate in the statement of operations.

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

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

(g)      Impairment
  of long-lived assets

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

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

Assets to be disposed of would be
separately presented in the balance sheet and reported at the lower of the
carrying amount and the fair value less costs to sell, and are no longer
amortized.

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

(h)     
  Variable interest entities

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

(i)     
  Foreign currency translation

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

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

(j)     
  Share capital

The Company records proceeds from share
issuances net of issue costs. Common shares issued for mineral property
interests are recorded at their fair market value based upon the trading price
of the shares on the Toronto Stock Exchange (TSX) on the date of issue.

(k)    
 Stock-based compensation

The Company has a share option plan
which is described in note 13. The Company accounts for all stock-based payments
under the fair value based method.

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

(l)     
  Income taxes

The Company uses the asset and
liability method of accounting for income taxes. Under this method, future
income tax assets and liabilities are computed based on differences between the
carrying amount of assets and liabilities on the balance sheet and their
corresponding tax values, using the enacted or substantively enacted income
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

Future income tax assets also result
from unused tax losses carried forward, resource-related pools and other
deductions. A valuation allowance is recorded against any future income tax
assets if it is more likely that the asset will not be realized.

(m)      Loss
  per share

Basic income (loss) per share is
calculated by dividing the net earnings (loss) for the year by the weighted
average number of common shares outstanding during the year.

Diluted income (loss) per share is
calculated using the treasury stock method. Under the treasury stock method, the
weighted average number of common shares outstanding used for the calculation of
diluted income (loss) per share assumes that the proceeds receivable upon
exercise of dilutive stock based compensation and warrants are used to
repurchase common shares at the average market price during the year.

Diluted loss per share has not been
presented separately as the effect of outstanding options and warrants would be
anti-dilutive for all years presented.

(n)     
  Use of estimates

The preparation of consolidated
financial statements in conformity with Canadian generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities as at the balance sheet date, and the reported amounts of
revenues and expenses during the reporting year. Significant areas requiring the
use of management estimates relate to the impairment of long-lived assets, rates
for depletion and amortization, determination of reclamation obligations and the
assumptions used in determining stock-based compensation expense. Actual results
could differ from those estimates.

(o)    
 Comparative figures

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

(p)Investments in
Associates

An associate is an entity over which
the Company has significant influence and that is neither a subsidiary nor an
interest in a joint venture. Significant influence is the power to participate
in the financial and operating policy decisions of the investee but is not
control or joint control over those policies. The investment in an associate is
accounted for under the equity method, where the investment is initially
recognised at cost and adjusted for the Companys share of the changes in the
net assets of the investee after the date of acquisition, and for any impairment
in value which includes access to mineral rights identified on acquisition. If
the Companys share of losses of an associate exceeds its interest in the
associate, the Company discontinues recognising its share of further losses.
Unrealised gains and losses on transactions between the Company and its
associates are eliminated to the extent of the Companys interest in the
associates. Accounting policies of associates have been changed where necessary
to ensure consistency with the policies adopted by the Company.

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

|4. | CHANGES IN ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | Accounting Policies Not Yet Adopted                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | The AcSB has announced its decision to replace Canadian generally accepted accounting principles ("Canadian GAAP" ) with IFRS for all Canadian publicly-listed companies. The AcSB announced that the changeover date will
commence for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The transition date for the Company to changeover to IFRS will be March 1, 2011. Therefore, the IFRS adoption will require the
restatement for comparative purposes of amounts reported by the Company for the year ending February 28, 2011. During the year, the Company has established a formal project plan, allocated internal resources and engaged expert consultants, monitored
by a steering committee to manage the transition from Canadian GAAP to IFRS reporting.    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | The AcSB issued CICA Sections 1582, Business Combinations, 1601, Consolidated Financial Statements, and 1602, Non-Controlling Interests, which superceded current Sections 1581, Business Combinationsand
1600, Consolidated Financial Statements. These new Sections replace existing guidance on business combinations and consolidated financial statements to harmonize Canadian accounting for business combinations with IFRS. These sections will be
applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011. Earlier adoption is permitted. If an entity applies these Sections
before January 1, 2011, it is required to disclose that fact and apply each of the new sections concurrently.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|5. | CAPITAL MANAGEMENT AND FINANCIAL INSTRUMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | (a) Capital Management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | As at February 28, 2010, the Company is not subject to externally imposed capital requirements other than its restricted cash and its overdraft facility. Refer to note 19.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | At February 28, 2011, of the $4,771,124 (February 28, 2010 – $2,512,610) cash and cash equivalents held by the Company, $1,976,678 (February 28, 2010 – $1,376,073) were held in South African Rand
("ZAR" ), $2,785,215 (February 28, 2010 – $1,125,905) in Canadian Dollars and $9,231 (February 28, 2010 – $10,632) in United States Dollars. Cash and cash equivalents exclude cash subject to restrictions. Refer
to note 19.                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | The Company's primary objectives when managing capital are to safeguard the Company's ability to continue as a going concern, so that it can continue to provide returns for shareholders, and to have sufficient funds on hand for
business opportunities as they arise. The Company considers the components of shareholders' equity, as well as its cash and cash equivalents, and bank indebtedness as capital. The Companys investment
policy is to invest its cash in highly liquid short-term interest-bearing
investments, having maturity dates of three months or less from the date of
acquisition, that are readily convertible to known amounts of cash.                                                                                                                                                             

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

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

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

There were no changes to the Companys
approach to capital management during the year ended February 28, 2011 and the
Company expects it will be able to raise sufficient capital resources to carry
out its plans of operations for fiscal 2012 as disclosed in note 1.

(b)Carrying Amounts and Fair Values of Financial Instruments

The fair value of a financial
instrument is the price at which a party would accept the rights and/or
obligations of the financial instrument from an independent third party. When
determining the fair value of financial assets and liabilities the Company
considers its own credit risk as well as the credit risk of its counterparties.
Given the varying influencing factors, the reported fair values are only
indicators of the prices that may actually be realized for these financial
instruments.

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

Level 1  Unadjusted quoted prices in
active markets for identical assets or liabilities;

Level 2  Inputs other than quoted
prices that are observable for the asset or liability either directly or
indirectly; and

Level 3  Inputs that are not based on
observable market data.

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

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

| |                                                |   | As
      at  |  |   | As
      at  |  |   | As
      at  |  |   | As
      at  | 
| | ---------------------------------------------- | - | ------------ |  | - | ------------ |  | - | ------------ |  | - | ------------ | 
| |                                                |   | February 28, |  |   | February 28, |  |   | February 28, |  |   | February 28, | 
| |                                                |   | 2011         |  |   | 2011         |  |   | 2010         |  |   | 2010         | 
| | Assets carried at fair value                   |   | Carrying     |  |   | Fair value   |  |   | Carrying     |  |   | Fair value   | 
| |                                                |   | amount       |  |   |              |  |   | amount       |  |   |              | 
| | Cash and equivalents                           | $ | 4,771,124    |  | $ | 4,771,124    |  | $ | 2,512,610    |  | $ | 2,512,610    | 
| | Restricted cash                                |   |             |  |   |             |  |   | 4,946        |  |   | 4,946        | 
| | Reclamation deposits                           |   | 2,759,611    |  |   | 2,759,611    |  |   | 2,898,067    |  |   | 2,898,067    | 
| |                                                | $ | 7,530,735    |  | $ | 7,530,735    |  | $ | 5,415,623    |  | $ | 5,415,623    | 
| |                                                |   |              |  |   |              |  |   |              |  |   |              | 
| | Assets carried at amortized cost               |   |              |  |   |              |  |   |              |  |   |              | 
| |                                                |   |              |  |   |              |  |   |              |  |   |              | 
| | Accounts receivable                            | $ | 4,743,034    |  | $ | 4,743,034    |  | $ | 6,260,717    |  | $ | 6,260,717    | 
| |                                                |   |              |  |   |              |  |   |              |  |   |              | 
| | Liabilities carried at fair value              |   |              |  |   |              |  |   |              |  |   |              | 
| | Bank indebtedness                              | $ | 1,787,479    |  | $ | 1,787,479    |  | $ | 698,015      |  | $ | 698,015      | 
| |                                                |   |              |  |   |              |  |   |              |  |   |              | 
| | Liabilities carried at amortized
      cost    |   |              |  |   |              |  |   |              |  |   |              | 
| | Accounts payable and accrued
      liabilities | $ | 6,373,382    |  | $ | 6,373,382    |  | $ | 6,458,751    |  | $ | 6,458,751    | 
| | Capital lease obligations                      |   | 142,630      |  |   | 142,630      |  |   | 3,336,521    |  |   | 3,336,521    | 
| |                                                | $ | 6,516,012    |  | $ | 6,516,012    |  | $ | 9,795,272    |  | $ | 9,795,272    | 

The following table illustrates the
classification of the Companys financial instruments recorded at fair value
within the fair value hierarchy as at February 28, 2011:

| |                      |   | Financial assets at fair value | 
| | -------------------- | - | ------------------------------ | 
| |                      |   |                                | 
| |                      |   | Level 1                        | 
| |                      |   |                                | 
| | Cash and equivalents | $ | 4,771,124                      | 
| | Restricted cash      |   |                               | 
| | Reclamation deposits |   | 2,759,611                      | 
| |                      | $ | 7,530,735                      | 

| |                   |   | Financial liabilities at fair value | 
| | ----------------- | - | ----------------------------------- | 
| |                   |   |                                     | 
| |                   |   | Level 1                             | 
| |                   |   |                                     | 
| | Bank indebtedness | $ | 1,787,479 $                         | 

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

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

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

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

The carrying amounts of the Company's
  other financial instruments approximate their fair values.

(c)     
Financial Instrument Risk Exposure and Risk Management

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

Credit Risk

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

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

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

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

The aging of receivables at the reporting
  date was:

| |                                                            |   | February
      28, 2011 |  |   | February
      28, 2010 | 
| | ---------------------------------------------------------- | - | ----------------------- |  | - | ----------------------- | 
| |                                                            |   | Gross 2011              |  |   | Impairment              | 
| |                                                            |   |                         |  |   | 2011                    | 
| |                                                            |   |                         |  |   |                         | 
| | Not past due                                               |   |                         |  |   |                         | 
| |                                                            |   |                         |  |   |                         | 
| | Accounts receivables                                       | $ | 4,910,448               |  | $ | 167,414                 | 
| |                                                            |   |                         |  |   |                         | 
| | Trade receivable from a related party 
      Not past due |   | 92,398                  |  |   |                        | 
| | Past due 0-30 days                                         |   |                        |  |   |                        | 
| |                                                            |   |                         |  |   |                         | 
| | Past due 31-120 days                                       |   |                        |  |   |                        | 
| | More than one year                                         |   |                        |  |   |                        | 
| |                                                            | $ | 5,002,846               |  | $ | 167,414                 | 

During the current year a diamond sale
price adjustment of $Nil (February 28, 2010 - $1,515,098) was made against
diamond revenue recognized. This diamond sale price adjustment relates to the
retainer debtor balance with respect to an agreement between the Company and a
client purchasing large diamonds. The diamond sale price adjustment was
attributable to the decline in diamond prices subsequent to the original
sale.

Liquidity Risk

Liquidity risk is the risk that the
Company will not be able to meet its financial obligations as they fall due. The
Company raised $8.0 million in a private placement and rights offering in the
first quarter of fiscal 2011. After taking into account cash flows from
operations and the Companys holdings of cash and cash equivalents, the Company
believes that these sources will be sufficient to cover the operational
requirements for the foreseeable future. Capital expansion projects will be
funded by means of a private placement. (Refer to note 1). The Companys cash
and equivalents are invested in business accounts which are available on demand
for the Companys programmes, and which are not invested in any asset backed
deposits/investments.

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

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

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

| | February 28, 2011                    |   | Carrying  |  |   | Contractual |  |   | 2012      |  |   | 2013    |  |   | 2014 | 
| | ------------------------------------ | - | --------- |  | - | ----------- |  | - | --------- |  | - | ------- |  | - | ---- | 
| |                                      |   | amount    |  |   | cash flow   |  |   |           |  |   |         |  |   |      | 
| | Non-derivative financial liabilities |   |           |  |   |             |  |   |           |  |   |         |  |   |      | 
| | Accounts payable and                 | $ | 6,373,382 |  | $ | 6,373,382   |  | $ | 6,373,382 |  | $ |        |  | $ |     | 
| | accrued liabilities                  |   |           |  |   |             |  |   |           |  |   |         |  |   |      | 
| | Due to related parties               |   | 496,636   |  |   | 496,636     |  |   | 72,064    |  |   | 424,572 |  |   |     | 
| | Bank indebtedness                    |   | 1,787,479 |  |   | 1,787,479   |  |   | 1,787,479 |  |   |        |  |   |     | 
| | Capital lease obligations            |   | 142,630   |  |   | 142,630     |  |   | 142,630   |  |   |        |  |   |     | 
| |                                      |   |           |  |   |             |  |   |           |  |   |         |  |   |      | 
| | February 28, 2010                    |   | Carrying  |  |   | Contractual |  |   | 2011      |  |   | 2012    |  |   | 2013 | 
| |                                      |   | amount    |  |   | cash flow   |  |   |           |  |   |         |  |   |      | 
| | Non-derivative financial liabilities |   |           |  |   |             |  |   |           |  |   |         |  |   |      | 
| | Accounts payable and                 | $ | 6,458,751 |  | $ | 6,458,751   |  | $ | 6,458,751 |  | $ |        |  | $ |     | 
| | accrued liabilities                  |   |           |  |   |             |  |   |           |  |   |         |  |   |      | 
| | Due to related parties               |   | 1,055,889 |  |   | 1,055,889   |  |   | 641,323   |  |   | 414,566 |  |   |     | 
| | Bank indebtedness                    |   | 698,015   |  |   | 698,015     |  |   | 698,015   |  |   |        |  |   |     | 
| | Capital lease obligations            |   | 3,336,521 |  |   | 3,336,521   |  |   | 3,196,189 |  |   | 140,332 |  |   |     | 

Currency Risk

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

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

| | Currency                                  |   | February 28, 2011 |  |   | February 28, 2010 | 
| | ----------------------------------------- | - | ----------------- |  | - | ----------------- | 
| | South African Rand                        |   |                   |  |   |                   | 
| | Cash and cash equivalents                 | $ | 1,976,678         |  | $ | 1,376,073         | 
| | Restricted cash                           |   |                  |  |   | 4,946             | 
| | Accounts receivable                       |   | 4,743,034         |  |   | 6,260,717         | 
| | Trade receivable from related
      party |   | 92,398            |  |   | 46,108            | 
| | Reclamation deposits                      |   | 2,759,611         |  |   | 2,898,067         | 
| | United States Dollar                      |   |                   |  |   |                   | 
| | Cash and cash equivalents                 |   | 9,231             |  |   | 10,632            | 
| | Total Financial Assets                    | $ | 9,580,952         |  | $ | 10,596,543        | 

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

| | Currency                     |   | February 28, 2011 |  |   | February 28, 2010 | 
| | ---------------------------- | - | ----------------- |  | - | ----------------- | 
| | South African Rand           |   |                   |  |   |                   | 
| | Bank indebtedness            | $ | 1,787,479         |  | $ | 698,015           | 
| | Accounts payable and accrued |   | 6,123,849         |  |   | 5,811,039         | 
| | liabilities                  |   |                   |  |   |                   | 
| | Due to related parties       |   | 496,636           |  |   | 1,055,889         | 
| | Capital lease obligations    |   | 142,630           |  |   | 3,336,521         | 
| | Total Financial Liabilities  | $ | 8,550,594         |  | $ | 10,901,464        | 

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

The following exchange rates applied
during the fiscal years ended February 28, 2011 and 2010:

| |            |  | Annual
      Average rate |  |  | Year end spot rate | 
| | ---------- |  | ------------------------- |  |  | ------------------ | 
| |            |  | February 28,              |  |  | February 28,       | 
| |            |  | 2011                      |  |  | 2010               | 
| | CAD vs ZAR |  | 0.1411                    |  |  | 0.1386             | 

Sensitivity analysis:

A 10 percent increase/decrease of the
  Canadian dollar against the ZAR at February 28, 2011 would have a net gain/loss
  effect of $226,349 (February 28, 2010  $ 391,238). This analysis assumes
  that all other variables, in particular interest rates, remain constant.

Interest Rate Risk

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

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

Sensitivity analysis:

A 10 percent increase/decrease of the
prime rate for the year ended February 28, 2011 would have a net loss/gain
effect of $7,241 (February 28, 2010  $154,580). This analysis assumes that all
other variables, in particular foreign exchange rates, remain constant.

Diamond price risk

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

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

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

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

| |                           |   | As
      at       |  |   | As
      at       | 
| | ------------------------- | - | ----------------- |  | - | ----------------- | 
| |                           |   | February 28, 2011 |  |   | February 28, 2010 | 
| | Rough diamond inventories | $ | 824,512           |  | $ | 1,283,604         | 
| | Mine
      supplies       |   | 1,803,578         |  |   | 1,692,454         | 
| | Total inventories         | $ | 2,628,090         |  | $ | 2,976,058         | 

|   | As at February 28, 2011, rough diamond inventories were
      valued at net realizable value and mine supplies at cost less accumulative
      impairment charges. Mine supplies were written down by $190,700 (2010  $
      588,927) to $1,803,578 (2010  $1,692,454) during the year.                                                                                               
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                          
|   | The net realizable value of diamond inventories are
      estimated at the average price per carat achieved for the most recent
      diamond tender taking into account the variable factors of clarity, carat,
      shape and color. As at February 28, 2011, rough diamond inventories were
      written down by $708,334 (2010 - $791,611) from cost to net realizable
      value.
|   |                                                                                                                                                                                                                                                                                                                                                                                          
|7. | PROPERTY, PLANT AND
EQUIPMENT                                                                                                                                                                                                                                                                                                                                                            

| |                                                               |   | As at February 28, 2011 | 
| | ------------------------------------------------------------- | - | ----------------------- | 
| |                                                               |   |                         | 
| |                                                               |   |                         | 
| |                                                               |   |                         | 
| |                                                               |   | Cost                    | 
| | Land and buildings                                            | $ | 7,502,768               | 
| | Construction in progress (a)                                  |   | 6,282,698               | 
| | Processing plant and equipment                                |   | 84,028,081              | 
| | Processing plant and equipment under capital lease obligation |   | 1,017,514               | 
| | Office equipment                                              |   | 1,006,922               | 
| | Vehicles and light
      equipment                            |   | 1,594,663               | 
| |                                                               | $ | 101,432,646             | 

| | (a) | Construction in progress includes $6,149,422 relating to
      the construction of the plant at Etruscans Blue Gum diamond operations in
      the Ventersdorp region. Refer to note 21 (a) for additional information
      regarding the status of this acquisition.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

Components of property, plant and
equipment are amortized over their estimated useful life. The amortization
charge for the year was $7,509,446 (2010  $7,018,998 and 2009  $8,903,261).

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

As at February 28, 2011, the Company
completed an impairment analysis which considered the indicators of impairment
in accordance with Section 3063, Impairment of Long-lived Assets. The Company
prepared cash flow forecasts for the mine and development projects using price
assumptions reflecting prevailing diamond prices and analysts consensus
forecasts, current life-of-mine plans and forecast operating cost profiles. The
analysis was based on the life of the individual mining properties, using
long-term price assumptions of US$2,000 for Saxendrift and US$1,000 for Klipdam
and Holpan mines respectively as well as a foreign exchange of US$1 to ZAR 7.0
in the next twelve months. Sales are assumed to remain constant over the year,
even though the Bank of Montreal scale indicates increasing demand and prices.
Production volumes were set at 85% of operation production capacity with
increased efficiencies on diesel in a revised production method. Other
assumptions used in determining whether impairment existed include: (a)
Inflation rate of 5%, (b) Prime lending rate of 9%, (c) Standard finance lease
periods of 36 months; (d) 8% increase in salaries and wages; (e) Royalty
payments average of 1.7%; and (f) Electricity increases of 25%. The undiscounted
estimated future cash flows associated with these assets were higher than the
carrying values.

The Company identified damaged items of
property, plant and equipment which were impaired by $164,059 to its fair value.
In fiscal 2010 items of property, plant and equipment, still in use at year end,
were impaired by $23,862 (2009  $2,590,958).

Prior to year end the Company entered
into an agreement to dispose of land and buildings at a price lower than its
carrying values. As a result these items of property, plant and equipment were
adjusted to its fair value resulting in an impairment of $120,637.

Construction in progress includes
projects at the Wouterspan mine (Phase I engineering, scoping, technical data
pack and drawings) and the Tirisano mine establishment project at Ventersdorp,
which represents the planning, erection, re  configuring and commissioning of
the processing and recovery plant and mine infrastructure and establishment
costs to date. The Wouterspan design phase and the construction of phase I of
the Wouterspan project are to be completed within the 2012 fiscal year.

---

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

| |                                                                |   | As
      at       |   |   | As
      at       |  
| | -------------------------------------------------------------- | - | ----------------- | - | - | ----------------- | -
| |                                                                |   | February 28, 2011 |   |   | February 28, 2010 |  
| |                                                                |   |                   |   |   |                   |  
| | H.C. Van Wyk Diamonds Ltd and Klipdam
      Mining Company Ltd |   |                   |   |   |                   |  
| |                                                                |   |                   |   |   |                   |  
| | Balance, beginning of year                                     | $ | 22,128,231        |   | $ | 22,373,983        |  
| | Acquisition                                                    |   | 845,773           |   |   |                  |  
| | Future income taxation                                         |   | 328,912           |   |   |                   |  
| | Foreign exchange adjustments                                   |   | 315,219           |   |   | 2,042,252         |  
| | Depletion of mineral
      properties during the year          |   | (2,302,318        | ) |   | (1,630,370        | )
| | Write down of mineral property                                 |   |                  |   |   | (657,634          | )
| | H.C. Van Wyk Diamonds Ltd and Klipdam
      Mining             |   | 21,315,817        |   |   | 22,128,231        |  
| | Company Ltd, end
      of year                                 |   |                   |   |   |                   |  
| |                                                                |   |                   |   |   |                   |  
| | Saxendrift Mine (Pty) Ltd                                      |   |                   |   |   |                   |  
| |                                                                |   |                   |   |   |                   |  
| | Balance, beginning of year                                     |   | 8,722,767         |   |   | 6,520,494         |  
| | Acquisition costs                                              |   |                  |   |   | 1,703,195         |  
| | Foreign exchange
      adjustments                             |   | 121,993           |   |   | 733,083           |  
| | Future income tax liability                                    |   |                  |   |   | 662,354           |  
| | Depletion of mineral properties during
      the year          |   | (595,273          | ) |   | (896,359          | )
| | Saxendrift Mine
      (Pty) Ltd, end of year                   |   | 8,249,487         |   |   | 8,722,767         |  
| |                                                                |   |                   |   |   |                   |  
| | Balance, end of
      year                                     | $ | 29,565,304        |   | $ | 30,850,998        |  

|    | recognized industry, professional and regulatory
      standards. These estimates require inputs such as future diamond prices,
      future operating costs, and various technical geological, engineering, and
      construction parameters. Changes in any of these inputs could cause a
      significant change in the estimated resources which, in turn, could have a
      material effect on the carrying value of mineral properties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The carrying value of mineral properties is also
      dependant on the valuation used for the common shares and warrants of the
      Company issued for the acquisition of mineral properties. The value of the
      common shares issued is the price of the common shares of the Company at
      the date of issuance to effect the acquisition. The Company uses the
      Black-Scholes pricing model to estimate a value for the warrants issued
      upon the acquisition of a property. This model, and other models which are
      used to value options and warrants, require inputs such as expected
      volatility, expected life to exercise, and interest rates. Changes in any
      of these inputs could cause a significant change in the carrying value
      initially recorded for mineral properties at acquisition dates.                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(a) | Acquisition of Saxendrift Mine (Pty) Ltd                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | On March 6, 2007, the Company and Trans Hex Group Limited
      (Trans Hex) entered into a conditional agreement whereby the Companys
      wholly owned South African subsidiary, Rockwell Resources RSA (Pty) Ltd
      (Rockwell RSA), would acquire two open pit alluvial diamond mines and
      three alluvial diamond exploration projects from Trans Hex (the
      Transaction). Trans Hex, through its wholly-owned subsidiary, Trans Hex
      Operations (Pty) Ltd. (THO), was the owner of two open pit alluvial
      diamond mines, namely Saxendrift and Niewejaarskraal, and three alluvial
      diamond exploration projects, namely
Kwartelspan, Zwemkuil-Mooidraai and Remhoogte-Holsloot, which are located along
the southern bank of the Middle Orange River between Douglas and Prieska in the
Northern Cape Province of South Africa (Northern Cape) and which are
collectively referred to as the Middle Orange River Operations and Projects (or
MORO). The MORO includes:

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

| |  | the rights to prospect, explore and/or mine precious
      stones and/or other minerals and/or metals held directly or indirectly by
      THO in the Saxendrift area of the Northern Cape;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                            
| |  | a series of large remnant
      alluvial diamond terraces;                                                                                                                                 
| |   |                                                                                                                                                                                            
| |  | the plant, machinery, equipment
      and other movable assets owned and/or used by THO;                                                                                                   
| |   |                                                                                                                                                                                            
| |  | certain employees of THO; and                                                                                                                                                              
| |   |                                                                                                                                                                                            
| |  | a rehabilitation liability which
      will be taken over by the Company.                                                                                                                  

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

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

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

Effective July 1, 2008, a Black
Economic Empowerment (BEE) group, Liberty Lane Investments (Pty) Ltd (Liberty
Lane) acquired a shareholding of 26% by subscribing for shares in Saxendrift
Mine (Pty) Ltd. The acquisition by Liberty Lane was financed via loans provided
by Rockwell RSA to Liberty Lane. The Company has determined that its 74%
interest in Saxendrift Mine (Pty) Ltd qualifies as a variable interest entity
(VIE) due to certain voting arrangements required under the Saxendrift Mine
(Pty) Ltd shareholders agreement. The Company has also determined that the
Company is the primary beneficiary of the VIE as it is most closely related to
the activities and has primary exposure to the expected losses of the VIE.
Consequently, the Company has consolidated 100% of the results of operations of
Saxendrift Mine (Pty) Ltd since the date of acquisition. Upon full repayment of
the outstanding loans by Liberty Lane, the Company will increase the
non-controlling interest to 26% and consolidate 74% of Saxendrift Mine (Pty)
Ltds results of operations. As at February 28, 2011, the status in relation to
this transaction and the accounting treatment remain unchanged.

|(b) | Acquisition of Durnpike Investments (Pty)
      Limited                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | On January 31, 2007, the Company completed the
      acquisition of Durnpike Investments (Pty) Limited (Durnpike), a private
      South African company (Acquisition). Durnpike held interest in the
      Holpan, Klipdam and Wouterspan properties in South Africa.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | On March 1, 2008, the Company ratified an exchange
      agreement and increased its ownership of H.C. Van Wyk Diamonds Ltd
      (HCVW) and Klipdam Mining Company Limited (Klipdam) by
  34%, resulting in an 85% interest, by
issuing 14,285,715 (pre-consolidation, refer note 13(g)) common shares of the
Company pursuant to the Definitive Agreement and thereby reducing the
non-controlling interest to 15%. On June 1, 2008, the BEE group, African
Vanguard Resources (Pty) Ltd increased its shareholding from 15% to 26% by
subscribing for an additional 11% shares in HCVW and Klipdam, thereby reducing
the Companys interest to 74%. This additional 11% is at a subscription price of
ZAR17.5 million and is funded by Rockwell Resources RSA (Pty) Ltd. Consequently,
the Company has effectively consolidated 85% of the results of operations of
HCVW and Klipdam until the outstanding loans by the BEE group are fully repaid,
at which time the Company will increase the non-controlling interest to 26% and
effectively consolidate 74% HCVW and Klipdams results of operations. As at
February 28, 2011, the status in relation this transaction and the accounting
treatment remain unchanged.

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

|(c) | Kwango River Project  Democratic Republic of
      Congo                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | The Company had planned to incur US$7.0 million on a
      feasibility study on the Kwango River Project with Midamines SPRL
      (Midamines), the holder of an exploration permit in the Democratic
      Repulic of Congo.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | During the first quarter of 2008, pursuant to an amending
      agreement to the Midamines Agreement, the Company paid consideration of
      $600,000 to Midamines in order to increase the size of the concession
      (Permit 331). As part of such amending agreement, Midamines waived its
      right to payment of the abovementioned US$1,200,000 royalty payment on
      December 31, 2007. Subsequently, and pursuant to Midamines persistent
      breach of material provisions of the Midamines Agreement (coupled with its
      failure to remedy such instances of breach notwithstanding notice to do
      so), Durnpike cancelled the Midamines Agreement and wrote down the
      associated mineral properties (2010  $657,634, 2009  $203,339) as well
      as claimed damages.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | Midamines has subsequently disputed Durnpikes
      entitlement to cancel the Midamines Agreement and has demanded payment of
      US$1,200,000 as well as other amounts which have not yet been determined.
      Refer to note 20.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(d) | Acquisition of Erf 2004 Windsorton                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | On November 1, 2010, HCVW exercised an option in terms of
      an agreement with Batla Resources (Pty) Ltd, the holder of a prospecting
      and mineral right and MJA Boerdery CC, the surface owner whereby HCVW
      would acquire the prospect and mining rights to Erf 2004 Windsorton (a
      portion of Erf 2003) for ZAR 6.0 million ($0.8 million) of which ZAR 2.0
      million ($0.3 million) was paid immediately and the balance to be paid in
      ten equal monthly installments monthly thereafter. Erf 2004 is adjacent to
      Klipdam mine and will be explored and bulk sampled during fiscal
    2012.                                                                                                                                                                         

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

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

As
      at
    As
      atFebruary 28, 2011
    February 28, 2010Wesbank
    $ 
    $ 48,792Komatfin
    142,630
    3,287,729$ 142,630
    $ 3,336,521


Capital lease obligations as detailed
above are secured over plant and equipment and are repayable, on average, in 36
monthly installments with the final payment being on June 30, 2011. Interest is
charged at rates of between 1.25% to 2.00% less the prevailing prime rate, which
is currently 9.00%, per annum. There are no significant restrictions imposed on
the lessee as a result of the lease agreements.

Future minimum lease payments are as
follows:

As
      at
    
    
    As
      atFebruary, 2011
    
    
    February 28, 20102011
    $
    
    
    $
    3,301,3942012
    
    143,997
    
    
    141,544Total minimum lease payments
    
    143,997
    
    
    3,442,938Less: interest portion
    
    (1,367
    )
    
    (106,417
    )Present value of capital lease obligations
    
    142,630
    
    
    3,336,521Current portion
    
    142,630
    
    
    3,196,189Non-current portion
    $
    
    
    $
    140,332


---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

|10. | RECLAMATION OBLIGATION                                                                                                                            
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                   
|    | The continuity of the provision for reclamation costs
      related to the Holpan, Wouterspan, Klipdam and Saxendrift mines, are as
      follows:

| |                                                        |   | As
      at       |   |   | As
      at       |  
| | ------------------------------------------------------ | - | ----------------- | - | - | ----------------- | -
| |                                                        |   | February 28, 2011 |   |   | February 28, 2010 |  
| |                                                        |   |                   |   |   |                   |  
| | Holpan, Wouterspan and
      Klipdam Mines             |   |                   |   |   |                   |  
| |                                                        |   |                   |   |   |                   |  
| | Balance, beginning of year                             | $ | 2,918,102         |   | $ | 2,690,335         |  
| | Changes during the year:                               |   |                   |   |   |                   |  
| | Net reclamation
      obligation (utilized) recognized |   | (426,066          | ) |   | 8,654             |  
| | Foreign exchange on reclamation                        |   | 73,341            |   |   | 219,113           |  
| | Balance, end of year                                   | $ | 2,565,377         |   | $ | 2,918,102         |  
| |                                                        |   |                   |   |   |                   |  
| | Saxendrift Mine                                        |   |                   |   |   |                   |  
| |                                                        |   |                   |   |   |                   |  
| | Balance, beginning of year                             | $ | 804,882           |   | $ | 1,112,320         |  
| | Changes during the year:                               |   |                   |   |   |                   |  
| | Net reclamation
      obligation (utilized) recognized |   | 427,875           |   |   | (403,063          | )
| | Foreign exchange on reclamation                        |   | 16,504            |   |   | 95,625            |  
| | Balance, end of year                                   | $ | 1,249,261         |   | $ | 804,882           |  
| |                                                        |   |                   |   |   |                   |  
| | Total reclamation obligation, end of year              | $ | 3,814,638         |   | $ | 3,722,984         |  

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

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

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

As required by regulatory authorities,
at February 28, 2011, the Company had cash reclamation deposits totaling
$2,759,611 (February 28, 2010  $2,898,067) comprised of $1,686,913 (2010 
$1,238,104) for the Holpan, Wouterspan and Klipdam mine and $1,072,698 (2010 
$1,659,963) for the Saxendrift mine. These deposits are invested in interest
bearing money market linked investments at rates ranging from 9.5% to 11.0% per
annum. These investments have been ceded as security in favour of the guarantees
the bank issued on behalf of the Company. Refer to note 19.

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

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

| |                                    |   | As
      at       |  |   | As
      at       | 
| | ---------------------------------- | - | ----------------- |  | - | ----------------- | 
| |                                    |   | February 28, 2011 |  |   | February 28, 2010 | 
| |                                    |   |                   |  |   |                   | 
| | Refundable
      security deposits | $ | 75,079            |  | $ | 152,259           | 
| | Investments(a)                     |   | 1,199,182         |  |   | 574,086           | 
| | Deposits on
      future assets(b) |   |                  |  |   | 101,526           | 
| | Loans receivable(c)                |   | 768,030           |  |   |                  | 
| | Total other assets and deposits    | $ | 2,042,291         |  | $ | 827,871           | 

(a)The Company invests in
investment policies with endowment benefits on maturity of the policies.
Premiums are invested on an initial lump sum and/or monthly annuity premium
basis with the insurers and invested in specific investment plans. Policy
investment value at any one time represents the value of premiums and growth
after deduction of administration and investment fees. Withdrawals could be made
against the policies before endowment against the deduction of penalties, which
is lower than the investment value. To surrender the policy prior to maturity
date will similarly attract penalties at a lower rate, and represents the value
accessible at any one stage. Fair value at any one stage represents the
surrender value of the investments. The fair value of the policies at February
28, 2011 amounted to $3,958,793 (February 28, 2010 - $3,472,153) of which
$2,759,611 (February 28, 2010 - $2,898,067) has been disclosed as reclamation
deposits (refer note 10).

(b) This deposit relates to
deposits on motor vehicles only delivered in the 2011 fiscal year.

(c) Loans receivable
represents amounts paid to Etruscan Diamonds Limited (Refer note 21)

|12. | INVESTMENT IN
ASSOCIATE
|--- | -----------------------

| |                                       |   | As
      at       |   |   | As
      at       | 
| | ------------------------------------- | - | ----------------- | - | - | ----------------- | 
| |                                       |   | February 28, 2011 |   |   | February 28, 2010 | 
| |                                       |   |                   |   |   |                   | 
| | Investment in
      associate at cost | $ | 95,690            |   | $ |                  | 
| | Share of profit for the year          |   | 34,396            |   |   |                  | 
| | Foreign exchange adjustments          |   | (426              | ) |   |                  | 
| | Balance at end of year                | $ | 129,660           |   | $ |                  | 

On April 21, 2010 the Company acquired
a 20% shareholding in Flawless Diamonds Trading House (Pty) Limited incorporated
in the Republic of South Africa for ZAR700,000 ($95,690) cash. Flawless is a
registered diamond broker which provides specialist diamond valuation, marketing
and tender sales services to the Company.

As the Company has significant
influence over Flawless operations it accounts for the investment using the
equity method and includes a pro-rata share of the Flawless net income (loss)
for the year.

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

Summarised
      financial information of associate
    
    As atFebruary 28,2011Financial PositionTotal Assets
    $
    9,690,007Total Liabilities
    
    8,969,428Net Assets
    
    703,579


Nine months endedFebruary 28,2011Financial PerformanceTotal Revenue
    $
    60,383,011Total net earnings (loss) for the year
    
    206,374Capital commitments and contingent
      liabilities of associate
    
    Nil


|13. | SHARE CAPITAL                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The Companys authorized share capital consists of an
      unlimited number of common shares, without par value, and an unlimited
      number of preferred shares without par value, of which no preferred shares
      have been issued.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The Company has a stockbased compensation plan approved
      by the shareholders that allows the Company to grant options for up to 10%
      of the issued and outstanding shares of the Company at any one time,
      typically vesting over two years, to its directors, employees, officers,
      and consultants. The exercise price of each stock option is set by the
      board of directors at the time of the grant and cannot be less than the
      market price (less permissible discounts) on the Toronto Stock Exchange.
      Stock options have a maximum term of five years and typically terminate 30
      days following the termination of the optionees employment, except in the
      case of retirement or death.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | From time to time, the Company may grant stock options to
      employees, directors, and service providers. The Company uses the
      Black-Scholes option pricing model to estimate a value for these options.
      This model, and other models which are used to fair value stock options,
      require inputs such as expected volatility, expected life to exercise, and
      interest rates. Changes in any of these inputs could cause a significant
      change in the stock-based compensation expense charged in a
  period.                                                                                                                                                                                                      

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

The continuity of stockbased
compensation for the year ended February 28, 2011 is as follows:

Exercise
      
      
      Feb 28,
      
      
      Granted/
      
      
      
      
      
      Expired/
      
      
      Feb 28,Expiry date
      
      price
      
      
      2010
      
      
      Issued
      
      
      Exercised
      
      
      cancelled
      
      
      2011September 24, 2012
      $
      9.30
      
      
      393,100
      
      
      
      
      
      
      
      
      (333
      )
      
      392,767November 14, 2012
      $
      9.45
      
      
      73,433
      
      
      
      
      
      
      
      
      (1,000
      )
      
      72,433June 20, 2011
      $
      6.75
      
      
      63,333
      
      
      
      
      
      
      
      
      
      
      
      63,333December 7, 2014
      $
      0.90
      
      
      951,393
      
      
      
      
      
      
      
      
      (39,220
      )
      
      912,173January 18, 2015
      $
      1.05
      
      
      40,000
      
      
      
      
      
      
      
      
      
      
      
      40,000October 8,2015
      $
      0.98
      
      
      
      
      
      1,002,800
      
      
      
      
      
      
      
      
      1,002,8001,521,259
      
      
      1,002,800
      
      
      
      
      
      (40,553
      )
      
      2,483,506Weighted average exercise price
      
      
      
      $
      3.75
      
      $
      0.98
      
      $
      
      
      $
      1.20
      
      $
      2.70Weighted average fair value of stock options granted during the year
      
      
      
      
      
      
      
      $
      0.84


As at February 28, 2011, 1,184,938 of
the stock options outstanding with a weighted average exercise price of $0.90
per share have vested with grantees.

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

Exercise
      
      
      Feb 28,
      
      
      Granted/
      
      
      
      
      
      Expired/
      
      
      Feb 28,Expiry date
      
      price
      
      
      2009
      
      
      issued
      
      
      Exercised
      
      
      cancelled
      
      
      2010September 24, 2012
      $
      9.30
      
      
      393,422
      
      
      
      
      
      (100
      )*
      
      (222
      )
      
      393,100November 14, 2012
      $
      9.45
      
      
      73 656
      
      
      
      
      
      
      
      
      (223
      )
      
      73,433June 20, 2011
      $
      6.75
      
      
      63,333
      
      
      
      
      
      
      
      
      
      
      
      63,333December 7, 2014
      $
      0.90
      
      
      
      
      
      955,393
      
      
      
      
      
      (4,000
      )
      
      951,393January 18, 2015
      $
      1.05
      
      
      
      
      
      40,000
      
      
      
      
      
      
      
      
      40,000530,411
      
      
      995,393
      
      
      (100
      )
      
      (4,445
      )
      
      1,521,259Weighted average exercise price
      
      
      
      $
      9.00
      
      $
      0.90
      
      $
      9.29
      
      $
      1.80
      
      $
      3.75Weighted average fair value of stock options
        granted during the year
      
      
      
      
      
      
      
      $
      0.81


As at February 28, 2010, 841,399 of the
stock options outstanding with a weighted average exercise price of $5.85 per
share have vested with grantees.

* Pre-consolidation options exercised
is 1,500 options at a weighted average exercise price of $0.62

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

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

Exercise
      
      
      Feb 29,
      
      
      
      
      
      
      
      
      Expired/
      
      
      Feb 28,Expiry date
      
      price
      
      
      2008
      
      
      Granted/
      
      
      Exercised
      
      
      cancelled
      
      
      2009issuedMarch 28, 2008
      $
      7.50
      
      
      10,000
      
      
      
      
      
      
      
      
      (10,000
      )
      
      July 10, 2010
      $
      10.20
      
      
      20,000
      
      
      
      
      
      
      
      
      (20,000
      )
      
      _September 24, 2012
      $
      9.30
      
      
      393,533
      
      
      
      
      
      
      
      
      (111
      )
      
      393,422November 14, 2012
      $
      9.45
      
      
      73,933
      
      
      
      
      
      
      
      
      (278
      )
      
      73,656June 20, 2011
      $
      6.75
      
      
      
      
      
      76,667
      
      
      
      
      
      (13,333
      )
      
      63,333497,466
      
      
      76,667
      
      
      
      
      
      (43,722
      )
      
      530,411Weighted average exercise price
      
      
      
      $
      9.30
      
      $
      6.75
      
      $
      
      
      $
      8.55
      
      $
      9.00Weighted average fair value of stock options granted during the year
      
      
      
      
      
      
      
      $
      5.01


As at February 28, 2009, 332,496 of the
stock options outstanding with a weighted average exercise price of $9 per share
have vested with grantees.

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

| |                                                                                                                   |   | Year ended   |  |   | Year ended   |  |   | Year ended   | 
| | ----------------------------------------------------------------------------------------------------------------- | - | ------------ |  | - | ------------ |  | - | ------------ | 
| |                                                                                                                   |   | February 28, |  |   | February 28, |  |   | February 28, | 
| |                                                                                                                   |   | 2011         |  |   | 2010         |  |   | 2009         | 
| | Exploration and engineering                                                                                       | $ | 270,674      |  | $ | 74,008       |  | $ | 629,347      | 
| | Operations and
      administration                                                                               |   | 614,212      |  |   | 261,350      |  |   | 1,205,075    | 
| | Total stock-based compensation cost expensed to
      operations, with the offset credited to contributed surplus | $ | 884,886      |  | $ | 335,358      |  | $ | 1,834,422    | 

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

| |                         | Year ended February 28
| | ----------------------- | ----------------------
| |                         | 2011                  
| | Risk free interest rate | 1.9%                  
| | Expected life           | 5.0 years             
| | Expected volatility     | 128.6%                
| | Expected dividends      | nil                   

(c)     
Shares issued, March 2008

On March 1, 2008, the Company issued
14,285,715 (pre-consolidation, refer note 13(g)) common shares at a price of
$0.55 per share for a total of $7,857,142 (net of issue cost) to increase its
ownership of HCVW and Klipdam by 34%, resulting in a total interest holding of
85%, and thereby reducing the non-controlling interest of HCVW and Klipdam to
15%. Refer to note 8(b).

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

(d)     
Private placements between December 2009 to February 2010

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

(e)Rights
  offering

On March 19, 2010 the Company completed
a rights offering whereby each registered holder of the Company's common shares,
on the record date, received one right for each common share held. The rights
offering was 100% subscribed and applications for additional shares were
received but could not be fulfilled because they exceeded the maximum
subscription quantity on offer. Pursuant to the rights offering, Rockwell issued
92,710,767 (pre-consolidation, refer note 13(g)) common shares at a subscription
price of $0.05 per common share yielding gross proceeds of approximately
$4,583,644 (ZAR33.2 million).

(f)Private placement

In March 2010, the Company completed a
private placement of 54,631,402 (pre-consolidation, refer note 13(g)) common
shares at a price of $0.065 per share for total proceeds of $3,406,824 (net of
issue cost). The Company paid a cash fee of $0.1 million finders fees relating
to the private placement.

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

g)      Share
  consolidation

Effective July 11, 2011 the Company
completed a consolidation of its outstanding Common Shares on the basis of 15
pre-consolidated common shares for 1 post consolidated common share. As of
August 4, 2011 there were 34,992,567 Common Shares issued and outstanding, each
Common Share carrying the right to one vote. At a general meeting of the
Company, on a show of hands, every shareholder present in person shall have one
vote and, on a poll, every shareholder shall have one vote for each Common Share
of which he is the holder. As at the date hereof there are no preferred shares
issued or outstanding.

February 28, 2011:

Pre-share consolidation
    Post share consolidationWeighted number of shares
    518,185,238
    34,545,683Basic and diluted loss per common share
    $0.01
    $0.15


---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

February 28, 2010:

Pre-share consolidation
    Post share consolidationWeighted number of shares
    267,164,309
    17,810,954Basic and diluted loss per common share
    $0.03
    $ 0.40


February 28, 2009:

Pre-share consolidation
    Post share consolidationWeighted number of shares
    237,924,152
    15,861,610Basic and diluted loss per common share
    $0.05
    $0.82


|    | The effect of the consolidation on the basic and diluted
      earnings per common share and weighted average number of common shares
      outstanding was adjusted in the Consolidated Statement of Operations and
      Comprehensive Loss. The impact of the share consolidations on the closing
      balance of common shares as at February 28, 2011 is disclosed in the
      statement of changes in equity. Accordingly, note 13(b) and 14 were
      amended, for all periods disclosed, to reflect the post share
      consolidation amounts.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|14. | LOSS PER SHARE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

| |                                                                          |  | Year ended   |  |  | Year ended   |  |  | Year ended   | 
| | ------------------------------------------------------------------------ |  | ------------ |  |  | ------------ |  |  | ------------ | 
| |                                                                          |  | February 28, |  |  | February 28, |  |  | February 28, | 
| | Number of
      common shares(pre-consolidation, refer note
      13(g)) |  | 2011         |  |  | 2010         |  |  | 2009         | 
| | Basic weighted average shares outstanding:                               |  | 34,545,683   |  |  | 17,810,954   |  |  | 15,861,610   | 
| | Weighted average shares dilution adjustments:                            |  |              |  |  |              |  |  |              | 
| | Dilutive
      stock options(a)                                          |  |             |  |  |             |  |  |             | 
| | Common share
      purchase warrants(a)                                  |  |             |  |  |             |  |  |             | 
| | Diluted weighted average shares outstanding                              |  | 34,545,683   |  |  | 17,810,954   |  |  | 15,861,610   | 

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

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

|15. | RELATED PARTY BALANCES AND
  TRANSACTIONS
|--- | -----------------------------------------

| |                                           |   | As
      at  |  |   | As
      at  | 
| | ----------------------------------------- | - | ------------ |  | - | ------------ | 
| | Balances payable                          |   | February 28, |  |   | February 28, | 
| |                                           |   | 2011         |  |   | 2010         | 
| | Banzi
      Trade 26 (Pty) Ltd (e)        | $ | 34,385       |  | $ | 603          | 
| | Hunter Dickinson Services
      Inc. (a)  |   | 34,113       |  |   | 627,435      | 
| | Flawless
      Diamonds Trading House (d) |   | 3,566        |  |   |             | 
| | Seven Bridges Trading (c)                 |   |             |  |   | 13,285       | 
| | Current balances payable                  | $ | 72,064       |  | $ | 641,323      | 
| |                                           |   |              |  |   |              | 
| | Liberty Lane (g)                          |   | 424,572      |  |   | 414,566      | 
| |                                           |   |              |  |   |              | 
| | Longterm balances payable                | $ | 424,572      |  | $ | 414,566      | 
| |                                           |   |              |  |   |              | 
| | Balances receivable                       |   |              |  |   |              | 
| |                                           |   |              |  |   |              | 
| | Banzi Trade 26 (Pty) Ltd (e)              |   | 92,398       |  |   | 46,108       | 
| | Current balances receivable               | $ | 92,398       |  | $ | 46,108       | 

| |                                            |   | Year
      ended |  |   | Year
      ended |  |   | Year
      ended | 
| | ------------------------------------------ | - | ---------------- |  | - | ---------------- |  | - | ---------------- | 
| | Transactions                               |   | February 28,     |  |   | February 28,     |  |   | February 28,     | 
| |                                            |   | 2011             |  |   | 2010             |  |   | 2009             | 
| |                                            |   |                  |  |   |                  |  |   |                  | 
| |                                            |   |                  |  |   |                  |  |   |                  | 
| | Services rendered and expenses reimbursed: |   |                  |  |   |                  |  |   |                  | 
| | Hunter
      Dickinson Services Inc. (a)   | $ | 467,151          |  | $ | 961,042          |  | $ | 1,280,316        | 
| | CEC Engineering (b)                        |   | 23,331           |  |   | 17,818           |  |   | 26,904           | 
| | Seven
      Bridges Trading (c)            |   | 134,483          |  |   | 139,789          |  |   |                 | 
| | Cashmere Trading (h)                       |   |                 |  |   |                 |  |   | 18,808           | 
| | Banzi
      Trade 26 (Pty) Ltd (e)         |   | 165,077          |  |   | 17,688           |  |   | 29,768           | 
| | Jakes Tyres (f)                            |   |                 |  |   |                 |  |   | 440,283          | 
| | Diacor CC
      (i)                        |   |                 |  |   |                 |  |   | 39,510           | 
| | Flawless Diamonds Trading
      House (d)  |   | 420,006          |  |   | 316,081          |  |   | 346,768          | 
| |                                            |   |                  |  |   |                  |  |   |                  | 
| | Sales rendered to:                         |   |                  |  |   |                  |  |   |                  | 
| | Banzi Trade 26 (Pty) Ltd (e)               | $ | 879              |  | $ | 1,989            |  | $ | 884              | 

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

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

| | (a) | Hunter Dickinson Services Inc. (HDSI) is a private
      company with a director in common with the Company. HDSI provides
      geological, technical, corporate development, administrative and
      management services to, and incurs third party costs on behalf of, the
      Company on a full cost recovery market related basis pursuant to an
      agreement dated November 21, 2008.                                                                                                                                                                                                                                                                           
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (b) | CEC Engineering Ltd is a private company owned by David
      Copeland, Chairman and a director of the Company, which provides
      engineering and project management services at market rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (c) | Seven Bridges Trading 14 (Pty) Ltd (Seven Bridges
      Trading) is a wholly-owned subsidiary of Randgold Resources Ltd, a public
      company where Mark Bristow, a director of the Company, serves in an
      executive capacity. Seven Bridges Trading provides office, conferencing,
      information technology, and other administrative and management services
      at market rates to the Companys South African subsidiaries.                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (d) | Flawless Diamonds Trading House (Pty) Ltd (Flawless
      Diamonds Trading House) is a private company where certain directors,
      former directors and officers of the Company, namely, Messr. Brenner, J.W.
      and D.M. Bristow and Van Wyk, are shareholders. During fiscal 2011 the
      Company acquired a 20% shareholding in Flawless Diamonds Trading House
      (Pty) Limited (refer note 12). Flawless is a registered diamond broker
      which provides specialist diamond valuation, marketing and tender sales
      services to the Company for a fixed fee of 1% of turnover which is below
      the market rate charged by similar tender houses.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (e) | Banzi Trade 26 (Pty) Ltd (Banzi) is 49% owned by HC van
      Wyk Diamonds Ltd and 51% by Bokomoso Trust. Banzi is an empowered private
      company established to provide self sustaining job creation programs to
      local communities as part of the companys Social and Labour Plan which is
      required in terms of the Minerals and Petroleum Resources Development Act
      (MPRDA). Banzi provides the Company with building materials at market
      rates.                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (f) | Jakes Tyres is a private company with former directors
      and officers (H C van Wyk) in common with the Company that provides tyres,
      tyre repair services and consumables at market rates to Rockwells remote
      Middle Orange River operations.                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (g) | Liberty Lane is the BEE partner of the Saxendrift
      property and has certain directors in common with the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (h) | Cashmere Trade 19 (Pty) Ltd (Cashmere Trade) is a private
      company owned by Hennie Van Wyk, a former officer of the Company, which
      provides helicopter services for the movement of products on an ad-hoc
      basis at competitive market rates thereby providing benefits to the
      Company and its employees in respect of secure transport of high value
      product and reduced insurance premiums.                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (i) | Diacor CC is a private company of which H C van Wyk, a
      former director and officer of the Company, is a director from which the
      Company has purchased consumable materials at market
  rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

|16. | INCOME TAXES
|--- | ------------

Income tax expense (recovery) differs
from the amount which would result from applying the statutory income tax rates
in 2011 of 28.18% (2010  29.76%, 2009  30.75%) for the following reasons:

| |                                                             |   | Year
      ended |   |   | Year
      ended |   |   | Nine
      months |  
| | ----------------------------------------------------------- | - | ---------------- | - | - | ---------------- | - | - | ----------------- | -
| |                                                             |   | February 28      |   |   | February 28      |   |   | ended February 28 |  
| |                                                             |   | 2011             |   |   | 2010             |   |   | 2009              |  
| |                                                             |   |                  |   |   |                  |   |   |                   |  
| | Loss before income taxes and non-controlling
      interest | $ | (3,194,033       | ) | $ | (11,282,350      | ) | $ | (16,864,986       | )
| |                                                             |   |                  |   |   |                  |   |   |                   |  
| | Expected income tax recovery                                | $ | (900,000         | ) | $ | (3,357,000       | ) | $ | (5,186,000        | )
| | Difference in foreign tax rates                             |   | 13,000           |   |   | 156,000          |   |   | (253,000          | )
| | Permanent differences                                       |   | 369,000          |   |   | 912,000          |   |   | 1,232,000         |  
| | Change in tax rate                                          |   | 47,000           |   |   | (195,946         | ) |   | 671,000           |  
| | Change in valuation allowance                               |   | 1,932,000        |   |   | (185,000         | ) |   | (390,000          | )
| | Other non-deductible items                                  |   | 560,000          |   |   | 6,000            |   |   | 586,000           |  
| |                                                             |   |                  |   |   |                  |   |   |                   |  
| | Net income tax recovery (expense)                           | $ | 2,021,000        |   | $ | (2,626,054       | ) | $ | (3,340,000        | )

As at February 28, 2011 and 2010, the
estimated tax effect of the significant components within the Companys future
tax assets and liabilities are as follows:

As
      at
    
    
    As
      atFebruary 28
    
    
    February 282011
    
    
    2010Future income tax asset (liability)Resource allowances
    $
    1,173,000
    
    $
    1,173,000Loss carry forwards
    
    7,595,000
    
    
    7,332,000Other
    
    1,454,000
    
    
    2,057,000Total
    
    10,222,000
    
    
    10,562,000Less: valuation allowance
    
    (8,312,000
    )
    
    (6,380,000
    )1,910,000
    
    
    4,182,000Mineral properties
    
    (8,278,000
    )
    
    (8,638,000
    )Equipment
    
    (7,750,000
    )
    
    (7,089,000
    )Net future tax liability
    $
    (14,118,000
    )
    $
    (11,545,000
    )


At February 28, 2011, the Company had
available for deduction against future taxable income non-capital losses in
Canada of approximately $21,112,000 (2010  $18,380,000). These losses, if not
utilized, will expire in various years ranging from 2014 to 2031. Subject to
certain restrictions, the Company also had Canadian resource expenditures of
approximately $4,691,000 (2010 $4,691,000), which are available to reduce
taxable income in future years.

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

|    | The Company has losses in South Africa of $8,223,000
      (2010 - $9,773,000 ) which are available for deduction against future
      taxable income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The valuation allowance is a full valuation allowance
      against the net Future Income Tax Allowance (FITA) under Canadian Tax
      Law. The FITA in primarily arises from the resource pools carried forward
      and the losses carried forward.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The rationale for placing a full valuation allowance
      against these FITAs is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | - The Company has cumulative losses in recent
    years;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | - The Company has a history of tax losses expiring
      unused; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | - The Companys resource pools are not likely to be
      utilized as the Company would only be able to use its resource pools to
      offset income from the mine from which the expenses were
  incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|17. | DIFFERENCES BETWEEN CANADIAN AND UNITED STATES
      GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | These consolidated financial statements have been
      prepared in accordance with Canadian generally accepted accounting
      principles ("Canadian GAAP"). Material variations in the accounting
      measurement principles, practices and methods used in preparing these
      financial statements from measurement principles, practices and methods
      accepted in the United States (US GAAP) are described and quantified
      below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Mineral properties and deferred exploration
      costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Under Canadian GAAP and US GAAP, the Company accounts for
      mineral properties as described in note 3(d). As it indicates, acquisition
      costs are amortized over the estimated life of the property, based on the
      unit of production method, or written off to operations if the property is
      abandoned, allowed to lapse, or if there is little prospect of further
      work being carried out by the Company. Under the unit of production
      method, the periodic depreciation charge is calculated by dividing the
      actual resources mined into the estimated resources at the beginning of
      the period and then multiplying the resulting fraction by the net carrying
      value of the related assets. Mineral resources are estimated by
      professional geologists and engineers in accordance with recognized
      industry, professional and regulatory standards. These estimates require
      inputs such as future diamond prices, future operating costs, and various
      technical geological, engineering, and construction parameters. Changes in
      any of these inputs could cause a significant change in the estimated
      resources which, in turn, could have a material effect on the carrying
      value of mineral properties. The unit of production method results in a
      systematic and rational allocation of the cost of the mineral property
      interests over the period the resources are utilized.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The initial carrying value of mineral properties is also
      dependant on the valuation used for the common shares and warrants of the
      Company issued for the acquisition of mineral properties. The value of the
      common shares issued is the price of the common shares of the Company at
      the date of issuance to effect the acquisition. The Company uses the
      Black-Scholes pricing model to estimate a value for the warrants issued
      upon the acquisition of a property. This model, and other models which are
      used to value options and warrants, require inputs such as expected
      volatility, expected life to exercise, and interest rates. Changes in any
      of these inputs could cause a significant change in the carrying value
      initially recorded for mineral properties at acquisition
  dates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

In March 2004, the Emerging Issues Task
Forces (EITF) reached a consensus in EITF 04-2 that mineral interests should
be considered tangible assets. On April 30, 2004, the Financial Accounting
Standards Board (FASB) issued a FASB Staff Position (FSP) amending SFAS 141
and SFAS 142, Goodwill and Other Intangible Assets, to provide that certain
mineral use rights are considered tangible assets and that mineral use rights
should be accounted based on their substance.

In March 2004, in EITF 04-3 Mining
Assets: Impairment and Business Combinations, the EITF reached a consensus that
an entity should include the cash flows associated with value beyond proven and
probable reserves in estimates of future cash flows (both undiscounted and
discounted) used for determining whether a mining asset is impaired under
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets.

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 expensed 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 at
acquisition, have been expensed as incurred.

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

| |                               |   | February
      28, 2011 |  |   | February
      28, 2010 |  
| | ----------------------------- | - | ----------------------- |  | - | ----------------------- | -
| |                               |   | Balance,                |  |   |                         |  
| |                               |   | Canadian                |  |   |                         |  
| |                               |   | GAAP                    |  |   | Adjustments             |  
| |                               |   |                         |  |   |                         |  
| | Current assets                | $ | 12,858,410              |  | $ |                        |  
| |                               |   |                         |  |   |                         |  
| | Property, plant and equipment |   | 62,828,438              |  |   |                        |  
| |                               |   |                         |  |   |                         |  
| | Other assets and deposits     |   | 2,042,291               |  |   |                        |  
| |                               |   |                         |  |   |                         |  
| | Investment in associate       |   | 129,660                 |  |   |                        |  
| |                               |   |                         |  |   |                         |  
| | Reclamation deposits          |   | 2,759,611               |  |   |                        |  
| |                               |   |                         |  |   |                         |  
| | Mineral property              |   | 29,565,304              |  |   |                        |  
| |                               | $ | 110,183,714             |  | $ |                        |  
| |                               |   |                         |  |   |                         |  
| | Current liabilities           | $ | 8,620,783               |  | $ |                        |  
| |                               |   |                         |  |   |                         |  
| | Non-current liabilities       |   | 18,357,210              |  |   |                        |  
| |                               |   |                         |  |   |                         |  
| | Non-controlling interest      |   | 647,407                 |  |   | (647,407                | )
| |                               |   |                         |  |   |                         |  
| | Shareholders' Equity          |   | 82,558,314              |  |   | 647,407                 |  
| |                               | $ | 110,183,714             |  | $ |                        |  

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

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

| |                                                                     |   | Year ended   |   |   | Year ended   |   |   | Year ended   |  
| | ------------------------------------------------------------------- | - | ------------ | - | - | ------------ | - | - | ------------ | -
| |                                                                     |   | February 28, |   |   | February 28, |   |   | February 28, |  
| |                                                                     |   | 2011         |   |   | 2010         |   |   | 2009         |  
| | Loss for the period, Canadian
      GAAP                            | $ | 5,126,936    |   | $ | 7,037,693    |   | $ | 12,975,962   |  
| |                                                                     |   |              |   |   |              |   |   |              |  
| | Adjustment                                                          |   |             |   |   |             |   |   |             |  
| |                                                                     |   |              |   |   |              |   |   |              |  
| | Non-controlling interest                                            |   | 88,097       |   |   | 1,618,603    |   |   | 549,024      |  
| |                                                                     |   |              |   |   |              |   |   |              |  
| | Net loss for the period, US
      GAAP                              | $ | 5,215,033    |   | $ | 8,656,296    |   | $ | 13,524,986   |  
| |                                                                     |   |              |   |   |              |   |   |              |  
| | Attributable to
      non-controlling interest                      |   | (88,097      | ) |   | (1,618,603   | ) |   | (549,024     | )
| |                                                                     |   |              |   |   |              |   |   |              |  
| | Attributable to common
      shareholders                           | $ | 5,126,936    |   | $ | 7,037,693    |   | $ | 12,975,962   |  
| |                                                                     |   |              |   |   |              |   |   |              |  
| | Other comprehensive loss
      (income), Canadian GAAP and US GAAP  |   | (1,615,805   | ) |   | (5,429,700   | ) |   | 13,409,383   |  
| |                                                                     |   |              |   |   |              |   |   |              |  
| | Total comprehensive loss
      (income), US GAAP                    | $ | 3,511,131    |   | $ | 1,607,993    |   | $ | 26,385,345   |  
| |                                                                     |   |              |   |   |              |   |   |              |  
| | Basic and diluted loss per
      share, US GAAP                     | $ | 0.15         |   | $ | 0.40         |   | $ | 0.82         |  
| |                                                                     |   |              |   |   |              |   |   |              |  
| | Weighted average number of
      common shares outstanding, US GAAP |   | 34,545,683   |   |   | 17,810,954   |   |   | 15,861,610   |  

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

| |                                                      |   | Year ended   |  |   | Year ended   |  |   | Year ended   | 
| | ---------------------------------------------------- | - | ------------ |  | - | ------------ |  | - | ------------ | 
| |                                                      |   | February 28, |  |   | February 28, |  |   | February 28, | 
| |                                                      |   | 2011         |  |   | 2010         |  |   | 2009         | 
| | Shareholders equity,
      Canadian GAAP Adjustment | $ | 82,558,314   |  | $ | 77,194,091   |  | $ | 70,421,026   | 
| | Non-controlling interest                             |   | 647,407      |  |   | 648,941      |  |   | 1,882,009    | 
| | Shareholders equity, US GAAP                        | $ | 83,205,721   |  | $ | 77,843,032   |  | $ | 72,303,035   | 

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar 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:

| |                                                                      |   | Year ended   |   |   | Year ended   |   |   | Year ended   |  
| | -------------------------------------------------------------------- | - | ------------ | - | - | ------------ | - | - | ------------ | -
| |                                                                      |   | February 28, |   |   | February 28, |   |   | February 28, |  
| |                                                                      |   | 2011         |   |   | 2010         |   |   | 2009         |  
| | Cash provided by(used in) operating
      activities, Canadian GAAP  | $ | 8,937,428    |   | $ | (110,694     | ) | $ | (2,620,351   | )
| | Adjustment                                                           |   |             |   |   |             |   |   |             |  
| | Cash provided by(used in) operating
      activities, US GAAP        |   | 8,937,428    |   |   | (110,694     | ) |   | (2,620,351   | )
| |                                                                      |   |              |   |   |              |   |   |              |  
| | Cash used in investing activities, Canadian
      GAAP               |   | (12,450,436  | ) |   | (74,794      | ) |   | (10,468,048  | )
| | Adjustment                                                           |   |             |   |   |             |   |   |             |  
| | Cash used in investing activities, US GAAP                           |   | (12,450,436  | ) |   | (74,794      | ) |   | (10,468,048  | )
| |                                                                      |   |              |   |   |              |   |   |              |  
| | Cash provided by (used in) financing
      activities, Canadian GAAP |   | 5,771,522    |   |   | (1,299,709   | ) |   | (2,537,641   | )
| | Adjustment                                                           |   | -            |   |   | -            |   |   | -            |  
| | Cash provided by (used in) financing
      activities, US GAAP       |   | 5,771,522    |   |   | (1,299,709   | ) |   | (2,537,641   | )
| |                                                                      |   |              |   |   |              |   |   |              |  
| | Increase (decrease) in cash and equivalents
      during the period  |   | 2,258,514    |   |   | (1,485,197   | ) |   | (15,626,040  | )
| | Cash and cash equivalents, beginning of period                       |   | 2,512,610    |   |   | 3,997,807    |   |   | 19,623,847   |  
| | Cash and cash equivalents, end of period                             |   | 4,771,124    |   |   | 2,512,610    |   |   | 3,997,807    |  

|(a) | Accounting differences and recently adopted Accounting
      pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | (i)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | Under Canadian GAAP the Company classifies the
      non-controlling interest as a separate caption on the balance sheet. In
      December 2007, the FASB updated the Accounting Standards Codification
      (ASC) guidance for non-controlling interests in consolidated financial
      statements to establish accounting and reporting standards for the
      non-controlling interest in a subsidiary and for the deconsolidation of a
      subsidiary. The guidance clarifies that a non-controlling interest in a
      subsidiary is an ownership interest in the consolidated entity that should
      be reported as equity in the consolidated financial statements. The
      Company adopted the provisions on March 1, 2009. Except for presentation
      changes, the adoption had no impact on the Company's financial
      statements.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | (ii)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | In calculating stock-based compensation to be recognized,
      US GAAP requires the Company to estimate future forfeitures. For Canadian
      GAAP purposes, the Company uses the fair value method to account for all
      stock option grants but accounts for forfeitures as they occur, as
      permitted by Canadian GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | Based on the Company's historical stock option forfeiture
      rates, the expense that would be recognized for US GAAP purposes under ASC
      topic Stock Compensation is not materially different from that recorded
      for Canadian GAAP purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

(iii)Income
  taxes

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

Under US GAAP the company applies ASC
Topic 740 Income taxes (ASC 740). US GAAP prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. The
interpretation requires that the Company recognize the impact of a tax position
in the financial statements if the position is more likely than not of being
sustained on audit, based on the technical merits of the position. US GAAP also
provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods and disclosure. In accordance with the provisions
of US GAAP, any cumulative effect resulting from the change in accounting
principle is to be recorded as an adjustment to the opening balance of deficit.
The application of ASC 740 does not result in a material impact on the Companys
consolidated financial position or results of operations.

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

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

|18. | SEGMENTED INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | Operating segments are defined as components of an
      enterprise about which separate financial information is available that is
      evaluated regularly by the chief operation decision maker, or decision-
      making group, in deciding how to allocate resources and in assessing
      performance. All of the Company's operations are within the mineral
      exploration and diamond mining sector. The Company's resource properties
      are currently located only in the Northern Cape region of the Republic of
      South Africa.

| | For the year ended            |   |            |   |   |          |   |   |              |   |   |             |  
| | ----------------------------- | - | ---------- | - | - | -------- | - | - | ------------ | - | - | ----------- | -
| | February 28,
      2011       |   | Canada     |   |   | Chile    |   |   | South Africa |   |   | Total       |  
| | External revenue              | $ |           |   | $ |         |   | $ | 42,507,747   |   | $ | 42,507,747  |  
| | Loss for the year             |   | (2,251,967 | ) |   |         |   |   | (2,874,969   | ) |   | (5,126,936  | )
| | Total assets                  |   | 2,552,926  |   |   |         |   |   | 107,630,788  |   |   | 110,183,714 |  
| | Mineral property interests    |   |           |   |   |         |   |   | 29,565,304   |   |   | 29,565,304  |  
| | Property, plant and equipment |   |           |   |   |         |   |   | 62,828,438   |   |   | 62,828,438  |  
| |                               |   |            |   |   |          |   |   |              |   |   |             |  
| | For the year ended            |   |            |   |   |          |   |   |              |   |   |             |  
| | February 28,
      2010       |   | Canada     |   |   | Chile    |   |   | South Africa |   |   | Total       |  
| | External revenue              | $ |           |   | $ |         |   | $ | 29,776,933   |   | $ | 29,776,933  |  
| | Loss for the year             |   | (2,767,485 | ) |   |         |   |   | (4,270,208   | ) |   | (7,037,693  | )
| | Total assets                  |   | 1,232,734  |   |   |         |   |   | 104,010,652  |   |   | 105,243,386 |  
| | Mineral property interests    |   |           |   |   |         |   |   | 30,850,998   |   |   | 30,850,998  |  
| | Property, plant and equipment |   |           |   |   |         |   |   | 58,790,736   |   |   | 58,790,736  |  
| |                               |   |            |   |   |          |   |   |              |   |   |             |  
| | For the year ended            |   |            |   |   |          |   |   |              |   |   |             |  
| | February 28,
      2009       |   | Canada     |   |   | Chile    |   |   | South Africa |   |   | Total       |  
| | External revenue              | $ |           |   | $ |         |   | $ | 34,330,078   |   | $ | 34,330,078  |  
| | Loss for the year             |   | (5,590,213 | ) |   | (135,528 | ) |   | (7,250,221   | ) |   | (12,975,962 | )
| | Total assets                  |   | 575,275    |   |   |         |   |   | 105,787,141  |   |   | 106,362,416 |  
| | Mineral property interests    |   |           |   |   |         |   |   | 28,894,477   |   |   | 28,894,477  |  
| | Property, plant and equipment |   |           |   |   |         |   |   | 59,569,186   |   |   | 59,569,186  |  

|19. | BANK INDEBTEDNESS AND RESTRICTED CASH                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Consistent with the prior financial year, the Company has
      an overdraft facility in the amount of ZAR28.0 million ($3.9 million)
      available for its operations (current balance of $1,787,479). This
      facility has an interest cost of prime (currently 9% per annum) plus 0.6%.
      The security for the ZAR28.0 million consists of 2 notorial bonds of
      ZAR10.0 million ($1.4 million) each over loose assets and property of the
      farm Holpan.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | At February 28, 2011 HC van Wyk Diamonds Ltd, Klipdam
      Mining Company Ltd, Saxendrift Mine (Pty) Ltd held guarantees with the
      bank towards Eskom (Electricity Provider) of ZAR4,856,100 ($679,850) and
      the Department of Minerals and Energy (DME) of ZAR21,367,228 ($2,759,611)
      towards rehabilitation expenses.                                                                                                                                     

---

|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

|    | At February 28, 2010 HC van Wyk Diamonds Ltd, Klipdam Mining Company Ltd, Saxendrift Mine (Pty) Ltd held guarantees with the bank towards Eskom (Electricity Provider) of ZAR1,419,660 ($194,059) and the Department of Minerals
and Energy (DME) of ZAR21,200,228 ($2,898,067) towards rehabilitation expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | Restricted cash of $Nil (2010 - $4,946) relates to monies held in trust by the group's lawyers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|20. | CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | Kwango River Project, Democratic Republic of Congo                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | Rockwell's subsidiary, Durnpike Investments (Proprietary) Limited's ("Durnpike" ) interest in the Kwango River project that was constituted by an agreement ("Midamines Agreement'')
which was concluded between Durnpike and Midamines SPRL ("Midamines''), the holder of the permit for the Kwango River Project, during 2006, in terms of which Durnpike was to act as independent contractor on behalf of
Midamines to manage and carry out exploration activities and potentially, mining activities. Durnpike was entitled to an 80% share of the net revenue from the sale of any diamonds produced from the contract area.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | Under the Midamines Agreement, Durnpike agreed to certain minimum royalty payments being made to Midamines, and Midamines undertook certain obligations in favour of Durnpike, including that of procuring and facilitating
Durnpike's access to the Kwango River Project site. The royalties took the form of a series of recurring annual minimum royalty payments of US$1.2 million per annum, as escalated in accordance with the Midamines Agreement (commencing on
December 31, 2007). During the first quarter of 2008, pursuant to an amendment to the Midamines Agreement (contained in the Fifth Addendum thereto), Durnpike paid consideration of US$600,000 to Midamines as compensation for access to the entire
concession area (Permit 331), as opposed to the limited contract area. As part of such amendment, Midamines waived its right to payment of the above mentioned US$1.2 million royalty payment due on December 31, 2007.                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | Subsequently, and pursuant to Midamines' persistent breach of material provisions of the Midamines Agreement coupled with its failure to remedy such instances of breach not withstanding notice to do so, Durnpike and/or
Rockwell cancelled the Midamines Agreement and/or the Fifth Addendum thereto. Midamines thereafter disputed the entitlement of Durnpike and/or Rockwell to cancel the Midamines Agreement. It has referred to arbitration a dispute against Durnpike and
Rockwell, in which it claims payment by Rockwell and Durnpike of compensation in the amount of US$41.8 million (while reserving the right to increase the claim to US$68.073 million if the DRC authorities cancel Midamines' permit for
the Kwango Project) plus interest. Durnpike and/or Rockwell have defended the claim and have, in turn, instituted a counter-claim in the estimated and provisional amounts of approximately ZAR25.4 million for equipment purchased to undertake
exploration and feasibility work, C$1.6 million for start-up and acquisition costs in the DRC, and US$20 million (while reserving the right to increase the counter-claim to at least $164.3 million) as an initial estimate of possible lost
earnings.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | Comprehensive documentation has been filed by the parties and both Parties have appeared before the Arbitration Tribunal at two sets of hearings in Brussels during March and May 2011 to present evidence and answer questions.
Expert witnesses representing the Parties also presented evidence at these hearings. Simultaneous final written submissions were submitted to the Arbitration Tribunal on July 8, 2011, and then Parties expect to receive a written award from the
Arbitration Tribunal on or about October 17, 2011. The Company
remains of the view that the claim against it is without merit. The Company has
vigorously argued against the claims made by Midamines and has continued to
vigorously defend its position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

|21. | SUBSEQUENT EVENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | On September 9, 2010 Rockwell Resources RSA (Pty) Ltd has
      signed a sale of shares and claims agreement with Etruscan Diamonds
      Bermuda Limited, Etruscan Diamonds Limited and Etruscan Resources Inc.
      whereby the Company proposes to purchase Etruscans Blue Gum diamond
      operation in the Ventersdorp region of South Africa. The acquisition is
      for 74% of the operation with the balance owned pursuant to South Africas
      BEE regime. The price to be paid to Etruscan is an amount not exceeding
      ZAR33.5 million (approximately $4.7 million) payable in Rockwell
      pre-consolidation shares valued at $0.068 each. The Company will also
      assume certain non-material property maintenance obligations effective
      immediately and other financial obligations upon completion of the
      acquisition.                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The Company is awaiting approval from the Industrial
      Development Corporation (IDC) to transfer the shares to Etruscan and
      effect the transaction, as well as approval of the South African Reserve
      Bank. No recognition has been given to this future transaction in these
      consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The Holpan operation was faced with significant
      challenges resulting from heavy and unseasonal rainfall during the fourth
      quarter. As a result, the deposit was saturated and the plants ability to
      produce at its full designed capacity was negatively affected. This, in
      turn, led to higher unit costs due to lower efficiencies and rendered the
      mine to be unprofitable in the fourth quarter. In order to address these
      issues and return the mine to profitability in fiscal 2012, Rockwell
      entered into negotiations during fiscal 2011 with the recognised trade
      union to implement full calendar operations (continuous operations);
      however, the Company was unable to reach an agreement. Management is in
      the process of restructuring the Holpan and Klipdam operations, which are
      adjacent to each other. In its first step to rationalise the two
      operations, notice was given to the Union on April 5, 2011, that
      Management is placing the Holpan operation on care and
  maintenance.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | A process has been completed in June 2011 to consolidate
      the operations of Holpan and Klipdam, which will result in a mine with a
      combined life of four years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The Company has considered these fourth quarter
      challenges in conducting its impairment analysis over its long lived
      assets (note 7). The Company expects that these challenges will be
      resolved and the Holpan and Klipdam operations will generate future cash
      flows to recover the carrying amounts of the long lived assets. If the
      Company is unable to resolve these challenges, a future impairment charge
      may be required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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|ROCKWELL DIAMONDS INC.                                      
|------------------------------------------------------------
|Notes to the Consolidated Financial Statements              
|For the years ended February 28, 2011, 2010 and 2009.       
|(Expressed in Canadian
      Dollar unless otherwise stated)

(c)Share capital issued

In April 2011, the company issued
shares as payment of $0.4 million to the RBC share account for payment of
finders fees for previous private placements at a price of $0.065 per share.

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