Rockwell Diamonds (RDIAF) 6-K Interim Consolidated Financial Statements

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED AUGUST 31, 2010 AND 2009

(Expressed in Canadian Dollars)

(Unaudited)

NOTICE OF NO AUDITOR REVIEW OF
CONSOLIDATED INTERIM FINANCIAL STATEMENTS

In accordance with National Instrument 51-102 Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of these consolidated interim financial statements they must be accompanied by a notice indicating that these consolidated interim financial statements have not been reviewed by an auditor.

The accompanying unaudited consolidated interim financial statements of the Company have been prepared by and are the responsibility of the Company's management.

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

		August 31, 2010			February 28, 2010
		(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	4,629,408		$	2,512,610
Accounts receivable		10,127,254			6,260,717
Restricted cash (note 13)		2,022			4,946
Trade receivable from a related party (note 12)		47,965			46,108
Inventories (note 4)		4,290,932			2,976,058
Prepayments		243,107			75,275
		19,340,688			11,875,714
Non-current assets
Property, plant and equipment (note 5)		60,981,504			58,790,736
Mineral property interests (note 6)		30,125,301			30,850,998
Investment in equity accounted associate (note 9)		124,440			–
Other assets and deposits (note 10)		2,098,734			827,871
Reclamation deposits (note 8)		3,083,294			2,898,067
		96,413,273			93,367,672
	$	115,753,961		$	105,243,386
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank indebtedness (note 13)	$	3,297,300		$	698,015
Accounts payable and accrued liabilities		7,165,894			6,458,751
Due to related parties (note 12)		174,180			641,323
Taxes payable		585,887			583,194
Current portion of capital lease obligations (note 7)		1,008,467			3,196,189
		12,231,728			11,577,472
Non-current liabilities
Capital lease obligations (note 7)		–			140,332
Due to related parties (note 12)		437,615			414,566
Future income taxes		11,978,066			11,545,000
Reclamation obligation (note 8)		3,641,881			3,722,984
		16,057,562			15,822,882
Non-controlling interest		475,502			648,941
Shareholders' equity
Share capital (note 11)		135,989,508			127,999,040
Contributed surplus		6,491,550			6,195,051
Accumulated other comprehensive loss		(5,453,972	)		(7,979,683	)
Deficit		(50,037,917	)		(49,020,317	)
		86,989,169			77,194,091
Continuance of operations and going concern (note 1)
Contingencies (note 14)
Subsequent events (note 15)
	$	115,753,961		$	105,243,386

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

Approved by the Board of Directors

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

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

		Three months ended August 31,						Six months ended August 31,
		2010			2009			2010			2009
Revenue
Rough diamond sales	$	11,387,950		$	5,802,006		$	19,844,532		$	9,674,805
Other sales		53,889			116,756			53,889			173,130
		11,441,839			5,918,762			19,898,421			9,847,935
Cost of sales
Cost of rough diamonds sales		(8,909,124	)		(4,789,630	)		(11,764,944	)		(9,640,211	)
Amortization and depletion		(3,093,167	)		(3,139,309	)		(6,241,517	)		(4,958,389	)
Operating (loss) profit		(560,452	)		(2,010,177	)		1,891,960			(4,750,665	)
Expenses
Accretion (reduction) of reclamation obligation (note 8)		(61,254	)		31,885			269,844			17,597
Exploration		–			2,305			13,648			59,916
Foreign exchange (gain) loss		22			2,362			(833	)		548,421
Interest (recouped) paid on capital leases		(55,787	)		251,548			32,768			594,269
Interest expense		98,944			73,047			147,902			480,349
Legal, accounting and audit		320,830			159,309			679,856			493,009
Office and administration		1,019,072			800,144			1,752,080			1,456,613
Shareholder communications		57,525			212,170			115,931			331,536
Stock-based compensation - exploration (note 11(b))		4,612			7,807			25,578			37,640
Stock-based compensation - administration (note 11(b))		70,906			10,150			270,921			96,426
Travel and conferences		86,968			41,163			205,987			76,782
Transfer agent		26,123			57,381			55,013			79,554
		1,567,961			1,649,271			3,568,695			4,272,112
Other items
Reversal of accounts receivable		(153,837	)		–			–			–
Write-down of property plant & equipment		144,658			–			144,658			–
(Gain) loss on disposal of equipment		(34,496	)		11,439			(34,496	)		37,220
Interest income		(82,105	)		(91,692	)		(95,451	)		(234,481	)
Share of profit from equity accounted investment (note 9)		(21,102	)		–			(23,429	)		–
Write-down of investments held for reclamation		1,109			–			147,779			657,634
		(145,773	)		(80,253	)		139,061			460,373
Loss before income taxes		(1,982,640	)		(3,579,195	)		(1,815,796	)		(9,483,150	)
Current income tax expense		188,613			–			190,000			–
Future income tax recovery		(959,000	)		(719,427	)		(633,000	)		(2,065,834	)
Loss before non-controlling interest		(1,212,253	)		(2,859,768	)		(1,372,796	)		(7,417,316	)
Non-controlling interest		223,682			(338,122	)		355,196			(791,739	)
Loss for the period		(988,571	)		(2,521,646	)		(1,017,600	)		(6,625,577	)
Other comprehensive income		2,509,842			2,876,659			2,525,711			8,351,576
Total comprehensive income	$	1,521,271		$	355,013		$	1,508,111		$	1,725,999
Basic and diluted loss per common share	$	(0.002	)	$	(0.01	)	$	(0.002	)	$	(0.03	)
Weighted average number ofcommon shares outstanding		518,185,238			238,041,651			497,918,370			237,963,291

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

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

	Six months ended August 31,				Year ended February 28,
	2010(unaudited)				2010
Share capital	Number of shares				Number of shares
Balance at beginning of the period	370,843,069	$	127,999,040		238,041,569	$	119,952,532
Share purchase options exercised at $0.62 per share	–		–		1,500		929
Fair value of stock options allocated to shares issued on exercise	–		–		–		808
Private placement, net of issue cost at $0.065 per share (note 11(c))	–		–		132,800,000		8,044,771
Rights offering at subscription price of $0.05 per share (note 11(d))	92,710,767		4,583,644		–		–
Private placement, net of issue cost at $0.065 per share (note 11(e))	54,631,402		3,406,824		–		–
Balance at end of the period	518,185,238	$	135,989,508		370,843,069	$	127,999,040
Warrants
Balance at beginning of the period		$	-			$	1,693,197
Expired broker warrants			–				(1,693,197	)
Balance at end of the period		$	-			$	-
Contibuted surplus
Balance at beginning of the period		$	6,195,051			$	4,167,304
Stock-based compensation (note 11(b))			296,499				335,358
Expired broker warrants			–				1,693,197
Fair value of stock options allocated to shares issued on exercise			–				(808	)
Balance at end of the period		$	6,491,550			$	6,195,051
Accumulated other comprehensive loss
Balance at beginning of the period		$	(7,979,683	)		$	(13,409,383	)
Comprehensive income on currency translation of self-sustaining operations			2,525,711				5,429,700
Balance at end of the period		$	(5,453,972	)		$	(7,979,683	)
Deficit
Balance at beginning of the period		$	(49,020,317	)		$	(41,982,624	)
Loss for the period			(1,017,600	)			(7,037,693	)
Balance at end of the period		$	(50,037,917	)		$	(49,020,317	)
TOTAL SHAREHOLDERS' EQUITY		$	86,989,169			$	77,194,091

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

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

		Three months			Three months			Six months ended			Six months ended
		ended August 31,			ended August 31,			August 31,			August 31,
		2010			2009			2010			2009
Accumulated other comprehensive loss
Balance at beginning of the period	$	(7,963,814	)	$	(7,934,466	)	$	(7,979,683	)	$	(13,409,383	)
Comprehensive income on currency translation of          self-sustaining operations		2,509,842			2,876,659			2,525,711			8,351,576
Balance at end of the period	$	(5,453,972	)	$	(5,057,807	)	$	(5,453,972	)	$	(5,057,807	)
Deficit
Balance at beginning of the period	$	(49,049,346	)	$	(46,086,555	)	$	(49,020,317	)	$	(41,982,624	)
Loss for the period		(988,571	)		(2,521,646	)		(1,017,600	)		(6,625,577	)
Balance at end of the period	$	(50,037,917	)	$	(48,608,201	)	$	(50,037,917	)	$	(48,608,201	)

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

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

		Three months ended August 31						Six months ended August 31
Cash provided by (used in):		2010			2009			2010			2009
Operating activities
Loss for the period	$	(988,571	)	$	(2,521,646	)	$	(1,017,600	)	$	(6,625,577	)
Items not affecting cash
Accretion (reduction) of reclamation obligation		(61,254	)		31,885			269,844			17,597
Amortization and depletion		3,092,170			3,125,915			5,862,733			3,818,835
Amortization of capital lease equipment		997			13,394			378,784			1,139,554
Write-down of mineral property interests		–			–			–			657,634
Write-down of assets		144,658			–			144,658			–
Write-down of investment held for reclamation		1,109			–			147,779			–
Reversal of amounts receivable		(153,837	)		–			–			–
Stock-based compensation (note 11 (b))		75,518			17,957			296,499			134,066
Loss on disposal of equipment		–			11,439			–			37,220
Future income tax recovery		(959,000	)		(719,427	)		(633,000	)		(2,065,834	)
Unrealized foreign exchange gain		–			(93,117	)		–			(409,836	)
Profit on disposal of equipment		(34,496	)		–			(34,496	)		–
Non-controlling interest		(223,682	)		(338,122	)		(355,196	)		(791,739	)
Share of profit from equity accounted investment		(21,102	)		–			(23,429	)		–
Changes in non-cash working capital items
Accounts receivable		(3,965,321	)		466,344			(3,866,537	)		249,175
Amounts due to and from related parties		1,812			724,662			(445,951	)		2,662,165
Movement in reclamation obligation		(494,625	)		–			(545,328	)		–
Inventory		4,049,498			(842,453	)		(1,447,460	)		(756,589	)
Prepayments		(209,163	)		(77,011	)		(167,832	)		(46,490	)
Accounts payable and accrued liabilities		916,802			514,222			1,066,242			835,331
Income taxes		(42,539	)		159,439			2,693			501,785
Cash provided by (used in) operating activities		1,128,974			473,481			(367,597	)		(642,703	)
Investing activities
Investment in Associate		–			–			(95,690	)		–
Restricted cash		2,924			–			2,924			2,698,719
Purchase of equipment and mineral properties		(3,939,186	)		(455,198	)		(4,069,136	)		(2,854,924	)
Proceeds received on disposal of equipment		34,496			32,953			34,496			366,415
Other assets and deposits		(1,175,764	)		(74,527	)		(1,316,892	)		(97,386	)
Reclamation deposits		(333,006	)		(120,845	)		(333,006	)		(423,866	)
Cash used in investing activities		(5,410,536	)		(617,617	)		(5,777,304	)		(311,042	)
Financing activities
Principal repayments under capital lease obligations		(938,551	)		(579,022	)		(2,328,054	)		(1,754,240	)
Common shares issued for cash, net of issue costs		–			–			7,990,468			930
Drawdown of credit facility		1,284,370			(611,013	)		2,599,285			(423,982	)
Cash provided by (used in) financing activities		345,819			(1,190,035	)		8,261,699			(2,177,292	)
(Decrease) Increase in cash and cash equivalents during the period		(3,935,743	)		(1,334,171	)		2,116,798			(3,131,037	)
Cash and cash equivalents, beginning of period		8,565,151			2,200,941			2,512,610			3,997,807
Cash and cash equivalents, end of period	$	4,629,408		$	866,770		$	4,629,408		$	866,770
Interest paid on facilities during the period	$	98,944		$	73,047		$	147,902		$	480,349
Interest paid (recouped) on capital leases	$	(55,787	)	$	251,548		$	32,768		$	594,269
Interest received	$	82,105		$	91,692		$	95,451		$	234,481
Income taxes paid during the period	$	–		$	(159,439	)	$	–		$	(501,785	)

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

ROCKWELL DIAMONDS INC.

Notes to the Interim Consolidated Financial Statements

For the three and six months ended August 31, 2010 and 2009.

(Unaudited – Expressed in Canadian Dollars unless otherwise stated)

1.	CONTINUANCE OF OPERATIONS AND GOING CONCERN
	Rockwell Diamonds Inc. (“Rockwell” or the “Company”) is engaged in the business of diamond production as well as the acquisition and exploration of natural resource properties. The Company’s mineral property interests are located in South Africa.
	The accompanying interim 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 six months ended August 31, 2010 the Company made a loss of $1,017,600 that has increased Rockwell’s accumulated losses (deficit) to $50.0 million.
	In fiscal 2009, diamond sales prices increased from US$585 per carat during March 2009 to $1,154 per carat during February 2010. The average sales price for fiscal 2010 was US$1,322 per carat. The average diamond sales price achieved for the first six months of fiscal 2011 is US$1,243 per carat.
	At August 31, 2010, the Company’s current assets exceeded its current liabilities by $7.1 million and the Company’s total assets exceeded its total liabilities by $87.5 million. Based on Rockwell’s current forecasted cash flows for fiscal years 2011 and 2012 the Company is confident that it will continue as a going concern. The forecasts assume the Company achieves its projected operating parameters, prices remain at around current levels, which are approximately 15 – 20% below pre- economic crisis levels, and the South African Rand remains at current levels relative to the United States and Canadian dollar.
	Based on the Company’s cash resources and the above forecasts, the Company has sufficient working capital and reserves to maintain operations through breakeven point and sufficient cash and working capital to fund the continuing losses until then. Accordingly, the financial statements have been prepared on the basis of accounting policies applicable to a going concern. Future events beyond the Company’s control may change the Company’s ability to continue as a going concern. If the going concern concept was no longer appropriate, significant adjustments would be required to the carrying value of assets and liabilities and would be recorded at that time.
2.	BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
	These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. These interim consolidated financial statements include the accounts of the Company, its subsidiaries and its variable interest entities where the Company has been determined to be the primary beneficiary. All significant intercompany balances and transactions have been eliminated upon consolidation.

ROCKWELL DIAMONDS INC.

Notes to the Interim Consolidated Financial Statements

For the three and six months ended August 31, 2010 and 2009.

(Unaudited – Expressed in Canadian Dollars unless otherwise stated)

3.	CHANGES IN ACCOUNTING POLICIES
	Effective March 1, 2010, the Company adopted the following accounting standards issued by the Canadian Institute of Chartered Accountants (“CICA”). These new standards have been adopted with no restatement to prior period financial statements.
	(a)Section 3050 – Long Term investments – Companies subject to significant influence
	Investments in companies subject to significant influence are accounted for using the equity method. The equity method is a basis of accounting whereby the investment is initially recorded at cost and the carrying value is adjusted thereafter to include the Company’s pro-rata share of post-acquisition income or loss. The amount of the adjustment is included in the determination of net income (loss) by the Company and the investment account of the Company is also increased or decreased to reflect the Company’s share of capital transactions and changes in accounting policies and corrections of errors. Profit distributions received or receivable from the investments will reduce the carrying value of the investment. Investments accounted for on the equity basis are written down to their fair value when they have a loss in value that is other than a temporary decline.
	(b)Accounting Policies Not Yet Adopted

(i)International Financial Reporting Standards ("IFRS")

The AcSB has announced its decision to replace Canadian generally accepted accounting principles (“Canadian GAAP”) with IFRS for all Canadian publicly-listed companies. The AcSB announced that the changeover date will commence for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The transition date for the Company to changeover to IFRS will be 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 fiscal 2010, the Company has established a formal project plan, allocated internal resources and engaged expert consultants, monitored by a steering committee to manage the transition from Canadian GAAP to IFRS reporting.

ii) Business Combinations/Consolidated Financial Statements/Non- Controlling Interests

The AcSB issued CICA Sections 1582,Business Combinations, 1601,Consolidated Financial Statements, and 1602,Non-Controlling Interests, which superseded current Sections 1581,Business Combinations and 1600Consolidated Financial Statements. These new Sections replace existing guidance on business combinations and consolidated financial statements to harmonize Canadian accounting for business combinations with IFRS. These Sections will be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011. Earlier adoption is permitted. If an entity applies these Sections before January 1, 2011, it is required to disclose that fact and apply each of the new sections concurrently. The Company is currently evaluating the impact of the adoption of these changes on its consolidated financial statements.

ROCKWELL DIAMONDS INC.

Notes to the Interim Consolidated Financial Statements

For the three and six months ended August 31, 2010 and 2009.

(Unaudited – Expressed in Canadian Dollars unless otherwise stated)

4. INVENTORIES

		As at		As at
		August 31, 2010		February 28, 2010
Rough diamond inventories	$	1,936,655	$	1,283,604
Mine supplies		2,354,277		1,692,454
Total inventories	$	4,290,932	$	2,976,058

As at August 31, 2010, rough diamond inventories were valued at cost and mine supplies at cost less accumulative impairment charges.

The cost of inventories is based on the weighted average cost basis and includes all direct mining cost in bringing diamond inventory to its existing location and condition.

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

The net realizable value of diamond inventories are estimated at the average price per carat achieved for the most recent diamond tender taking into account the variable factors of clarity, carat, shape and color. As at February 28, 2010, rough diamond inventories were written down by $360,429 from cost to net realizable value.

No further impairments were recorded against mine supplies for the six months ending August 31, 2010.

ROCKWELL DIAMONDS INC.

Notes to the Interim Consolidated Financial Statements

For the three and six months ended August 31, 2010 and 2009.

(Unaudited – Expressed in Canadian Dollars unless otherwise stated)

5. PROPERTY, PLANT AND EQUIPMENT

		As at August 31, 2010
				Accumulated
				Amortization and		Carrying
		Cost		Impairments		value
Land and buildings	$	7,693,281	$	805,043	$	6,888,238
Processing plant and equipment		78,931,235		33,429,526		45,501,709
Processing plant and equipment under capital lease obligation		6,576,040		1,956,628		4,619,412
Construction in progress		2,739,672		–		2,739,672
Office equipment		1,026,334		578,501		447,833
Vehicles and light equipment		1,861,643		1,077,003		784,640
	$	98,828,205	$	37,846,701	$	60,981,504

		As at February 28, 2010
				Accumulated
		Cost		Amortization and		Carrying
				Impairments		value
Land and buildings	$	7,226,428	$	598,462	$	6,627,966
Processing plant and equipment		66,230,352		25,074,689		41,155,663
Processing plant and equipment under capital lease obligation		13,553,529		3,782,247		9,771,282
Office equipment		946,759		492,287		454,472
Vehicles and light equipment		1,675,705		894,352		781,353
	$	89,632,773	$	30,842,037	$	58,790,736

Components of property, plant and equipment are amortized over their estimated useful life. The amortization charge for the six months ending August 31, 2010 was $5,105,833 (2009 – $4,790,494).

The group’s bankers have registered two notarial general covering bonds of ZAR10.0 million each ($1,443,001) over all moveable assets on the property of the farm Holpan, Barkley West, Northern Cape and one over moveable assets.

Construction in progress includes projects at Saxendrift mine (jig plant, in-pit screening, scrubber, trammel upgrades) and Wouterspan mine (Phase I engineering, scoping, technical data pack and drawings). The construction of the Saxendrift project and Phase I of the Wouterspan project are to be completed within the 2011 financial year.

ROCKWELL DIAMONDS INC.

Notes to the Interim Consolidated Financial Statements

For the three and six months ended August 31, 2010 and 2009.

(Unaudited – Expressed in Canadian Dollars unless otherwise stated)

6. MINERAL PROPERTY INTERESTS

		As at			As at
		August 31, 2010			February 28, 2010
H.C. Van Wyk Diamonds Ltd and Klipdam MiningCompany Ltd
Balance, beginning of period	$	22,128,231		$	22,373,983
Foreign exchange adjustments		280,863			2,042,252
Depletion of mineral properties during the period		(778,006	)		(1,630,370	)
Write-down of mineral property		–			(657,634	)
H.C. Van Wyk Diamonds Ltd and Klipdam Mining Company Ltd, end of period		21,631,088			22,128,231
Saxendrift Mine (Pty) Ltd
Balance, beginning of period	$	8,722,767		$	6,520,494
Acquisition costs		–			1,703,195
Foreign exchange adjustments		129,124			733,083
Future income tax liability		–			662,354
Depletion of mineral properties during the period		(357,678	)		(896,359	)
Saxendrift Mine (Pty) Ltd, end of period		8,494,213			8,722,767
Balance, end of period	$	30,125,301		$	30,850,998

ROCKWELL DIAMONDS INC.

Notes to the Interim Consolidated Financial Statements

For the three and six months ended August 31, 2010 and 2009.

(Unaudited – Expressed in Canadian Dollars unless otherwise stated)

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

		As at		As at
		August 31, 2010		February 28, 2010
Wesbank	$	28,735	$	48,792
Komatfin		979,732		3,287,729
	$	1,008,467	$	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 9.50%, 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 at
		August 31, 2010			February 28, 2010
2011	$	1,028,721		$	3,301,394
2012		–			141,544
Total minimum lease payments		1,028,721			3,442,938
Less: interest portion		(20,254	)		(106,417	)
Present value of capital lease obligations		1,008,467			3,336,521
Current portion		1,008,467			3,196,189
Non-current portion	$	–		$	140,332

ROCKWELL DIAMONDS INC.

Notes to the Interim Consolidated Financial Statements

For the three and six months ended August 31, 2010 and 2009.

(Unaudited – Expressed in Canadian Dollars unless otherwise stated)

8.	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
		August 31, 2010			February 28, 2010
Holpan, Wouterspan and Klipdam Mines
Balance, beginning of period	$	2,918,102		$	2,690,335
Changes during the period:
Reclamation (expenditure incurred)/obligation recognized		(545,328	)		(473,278	)
Foreign exchange on reclamation		137,275			219,113
Accretion expense		–			481,932
Balance, end of period	$	2,510,049		$	2,918,102
Saxendrift Mine
Balance, beginning of period	$	804,882		$	1,112,320
Changes during the period
Reclamation (expenditure incurred)/obligation recognized		–			(403,063	)
Foreign exchange on reclamation		57,106			95,625
Accretion expense		269,844			–
Balance, end of period	$	1,131,832		$	804,882
Total reclamation obligation, end of period	$	3,641,881		$	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 August 31, 2010, the Company had cash reclamation deposits totaling $3,083,294 (February 28, 2010 – $2,898,067) comprised of $1,511,415 (February 28, 2010 – $1,238,104) for the Holpan, Wouterspan and Klipdam mine and $ 1,571,879 (February 28, 2010 – $1,659,963) for the Saxendrift mine. These deposits are invested in interest bearing money market linked investments. These investments have been ceded as security in favour of the guarantees the bank issued on behalf of the group. Refer to note 13.

ROCKWELL DIAMONDS INC.

Notes to the Interim Consolidated Financial Statements

For the three and six months ended August 31, 2010 and 2009.

(Unaudited – Expressed in Canadian Dollars unless otherwise stated)

9. INVESTMENT IN EQUITY ACCOUNTED ASSOCIATE

		As at		As at
		August 31, 2010		February 28, 2010
Investment in associate at cost	$	95,690	$	–
Foreign exchange adjustments		5,321		–
Share of profit for the period ended August , 31 2010		23,429		–
Balance at the end of the period	$	124,440	$	–

On May 5, 2010 the Company acquired a 20% shareholding in Flawless Diamonds Trading House (Pty) Limited (“Flawless”) incorporated in the Republic of South Africa. 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 income for the period.

Summarised financial information of associate		As at		As at
		August 31,		February 28,
		2010		2010
Financial Position
Total Assets	$	10,981,656	$	5,159,027
Total Liabilities		10,335,462		4,672,164
Net Assets		646,194		486,863

		Six months		Year ended
		ended August		February 28,
		31,2010		2010
Financial Performance
Total Revenue	$	28,427,620	$	36,813,912
Total profit for the period		122,511		168,712
Capital commitments and contingent liabilities of associate		Nil		Nil

ROCKWELL DIAMONDS INC.

Notes to the Interim Consolidated Financial Statements

For the three and six months ended August 31, 2010 and 2009.

(Unaudited – Expressed in Canadian Dollars unless otherwise stated)

10. OTHER ASSETS AND DEPOSITS

		As at		As at
		August 31, 2010		February 28, 2010
Refundable security deposits	$	163,680	$	152,259
Investments(a)		706,368		574,086
Deposits on future assets(b)		–		101,526
Etruscan Diamonds Limited(c)		1,228,686		–
Total other assets and deposits	$	2,098,734	$	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 August 31, 2010 amounted to $3,789,662 (February 28, 2010 - $3,472,153) of which $3,083,294 (February 28, 2010 - $2,898,067) has been disclosed as reclamation deposits (refer note 8).

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

^(c) Short-term amounts receivable from Etruscan Diamonds Limited that is not interest bearing and has no fixed repayment terms (refer note 15).

11. SHARE CAPITAL

(a)      Authorized share capital

The Company’s authorized share capital consists of an unlimited number of common shares, without par value, and an unlimited number of preferred shares without par value, of which no preferred, shares have been issued.

(b)     Stock–based compensation

The continuity of stock–based compensation for the period ended August 31, 2010 is as follows:

ROCKWELL DIAMONDS INC.

Notes to the Interim Consolidated Financial Statements

For the three and six months ended August 31, 2010 and 2009.

(Unaudited – Expressed in Canadian Dollars unless otherwise stated)

	Exercise		Feb 28,	Granted/		Expired/		Aug 31,
Expiry date	price		2010	Issued	Exercised	cancelled		2010
September 24, 2012	$ 0.62		5,896,500	–	–	(5,000	)	5,891,500
November 14, 2012	$ 0.63		1,101,500	–	–	(15,000	)	1,086,500
June 20, 2011	$ 0.45		950,000	–	–	–		950,000
December 7, 2014	$ 0.06		14,270,890	–	–	(135,000	)	14,135,890
January 18, 2015	$ 0.07		600,000	–	–	–		600,000
			22,818,890	–	–	(155,000	)	22,663,890
Weighted average exercise price		$	$    0.25	$    –	$    –	$    0.14		$    0.25
Weighted average fair value of stock options granted during the period								–

As at August 31, 2010, 17,756,327 of the stock options outstanding with a weighted average exercise price of $0.27 per share have vested with grantees.

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

		Three months ended				Six months ended
		August 31				August 31
		2010		2009		2010		2009
Exploration and engineering	$	4,612	$	7,807	$	25,578	$	37,640
Operations and administration		70,906		10,150		270,921		96,426
Total compensation cost expensed to operations,with the offset credited to contributed surplus	$	75,518	$	17,957	$	296,499	$	134,066

(c)     Private Placements between December 2009 to February 2010

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

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

(d)     Rights Offering

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

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

ROCKWELL DIAMONDS INC.

Notes to the Interim Consolidated Financial Statements

For the three and six months ended August 31, 2010 and 2009.

(Unaudited – Expressed in Canadian Dollars unless otherwise stated)

(e)     Private Placement March 2010

In March 2010, the Company completed a private placement of 54.6 million common shares at a price of $0.065 per share for total proceeds of $3.4 million. The Company paid a cash fee of $0.1 million finder’s fees relating to the private placement.

12. RELATED PARTY BALANCES AND TRANSACTIONS

Balances payable		As at August 31, 2010		As at February 28, 2010
Banzi Trade 26 (Pty) Ltd (d)	$	23,814	$	603
Hunter Dickinson Services Inc. (a)		79,009		627,435
Seven Bridges Trading (b)		10,941		13,285
Flawless Diamonds Trading House (c)		60,416		–
Current balances payable	$	174,180	$	641,323
Liberty Lane (f)		437,615		414,566
Long–term balances payable	$	437,615	$	414,566
Balances receivable
Banzi Trade 26 (Pty) Ltd (d)		47,965		46,108
	$	47,965	$	46,108

		Three months ended Aug 31				Six months ended Aug 31
Transactions		2010		2009		2010		2009
Services rendered and expenses reimbursed:
Hunter Dickinson Services Inc. (a)	$	155,575	$	173,616	$	295,908	$	536,627
Seven Bridges Trading (b)		32,956		57,396		63,106		73,135
Flawless Diamonds Trading House (c)		38,022		58,020		144,962		96,748
Banzi Trade 26 (Pty) Ltd (d)		65,609		6,666		90,950		7,578
Jakes Tyres (e)		–		38,815		–		43,845
Sales rendered to:
Banzi Trade 26 (Pty) Ltd (d)	$	143	$	861	$	394	$	1,438

ROCKWELL DIAMONDS INC.

Notes to the Interim Consolidated Financial Statements

For the three and six months ended August 31, 2010 and 2009.

(Unaudited – Expressed in Canadian Dollars unless otherwise stated)

All related party transactions are arm’s length transactions 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)	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.
(c)	Flawless Diamonds Trading House (Pty) Ltd (“Flawless”) is a private company where certain directors, former directors and officers of the Company, namely, Messr. Brenner, J.W. and D.M. Bristow are shareholders of Flawless. 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. On May 5, 2010 the Company acquired a 20% shareholding in Flawless Diamonds Trading House (Pty) Limited incorporated in the Republic of South Africa.
(d)	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.
(e)	Jakes Tyres is a private company with former directors and officers (HC 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.
(f)	Liberty Lane is the BEE partner of the Saxendrift property and has certain directors in common with the Company.

ROCKWELL DIAMONDS INC.

Notes to the Interim Consolidated Financial Statements

For the three and six months ended August 31, 2010 and 2009.

(Unaudited – Expressed in Canadian Dollars unless otherwise stated)

13.	BANK INDEBTEDNESS AND RESTRICTED CASH
	Consistent with the prior financial year, the Company has an overdraft facility in the amount of ZAR28.0 million ($4.0 million) available for its operations (current balance $3,297,300). This facility has an interest cost of prime (currently 9.5% 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.
	HC van Wyk Diamonds Ltd, Klipdam Mining Company Ltd and Saxendrift Mine (Pty) Ltd hold guarantees by the bank towards Eskom (Electricity Provider) of ZAR4,711,100 ($679,812) and the Department of Minerals and Energy (DME) of ZAR21,367,228 ($3,083,294) towards rehabilitation expenses.
	Restricted cash of $2,022 (February 28, 2010 - $4,946) relates to monies held in trust by the group's lawyers.
14.	CONTINGENCIES
	Kwango River Project, Democratic Republic of Congo
	Rockwell's subsidiary, Durnpike Investments (Proprietary) Limited's ("Durnpike") interest in the Kwango River Project was constituted by an agreement ("Midamines Agreement") which concluded during 2006 with Midamines SPRL ("Midamines"), the holder of the exploration permit on the Kwango River Project, 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 several 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 (commencing on December 31, 2007). During the first quarter of 2008, pursuant to an amendment to the Midamines Agreement, Durnpike paid consideration of US$600,000 to Midamines as compensation for access to the entire concession area (Permit 331), as opposed to the limited contract area. As part of such amendment, Midamines waived its right to payment of the abovementioned US$1.2 million royalty payment due on December 31, 2007.
	Subsequently, and pursuant to Midamines' persistent breach of material provisions of the Midamines Agreement (coupled with its failure to remedy such instances of breach notwithstanding notice to do so), Durnpike and/or Rockwell cancelled the Midamines Agreement. Midamines thereafter disputed the entitlement of Durnpike and/or Rockwell to cancel the Midamines Agreement. It has referred to arbitration a dispute against Durnpike and Rockwell, in which it claims payment of an estimated and provisional amount of $41.8 million. Durnpike and/or Rockwell have, in turn, instituted a counter- claim in the estimated and provisional amounts of approximately ZAR25.4 million for equipment purchased by Rockwell to undertake exploration and feasibility work, $1.6 million for start-up and acquisition costs in the DRC, and US$20 million (while reserving the right to increase the counter- claim to at least $164.9 million) as an initial estimate of possible lost earnings.

ROCKWELL DIAMONDS INC.

Notes to the Interim Consolidated Financial Statements

For the three and six months ended August 31, 2010 and 2009.

(Unaudited – Expressed in Canadian Dollars unless otherwise stated)

	Comprehensive documentation has been filed by the parties and arbitration proceedings have been initiated in Belgium. The Company remains of the view that the claim against it is without merit and will vigorously defend against it.
	Niewejaarskraal
	During the course of 2008 and prior to the prospecting and mining rights having been transferred from Trans Hex to Rockwell, a representative of the land owner of Niewejaarskraal asserted a claim of ownership over the equipment located on Niewejaarskraal. This claim was ostensibly based on a surface rights agreement entered into between Trans Hex and the owner of Niewejaarskraal and an allegation that Trans Hex had abandoned the mining equipment concerned. This Contract expired prior to Rockwell receiving the Niewejaarskraal mining rights. Since the transfer of the prospecting and mining rights associated with and the mining equipment located on Niewejaarskraal to Rockwell, it has not received any formal approach from the land owner of Niewejaarskraal to progress this claim.
	Discussions with the landowner have indicated that he would be happy to enter into amenable and workable landowner agreements with Rockwell, subject to appropriate land use agreements being entered into between the Parties. Rockwell would defend its ownership of that equipment and would if necessary also rely on protective warranties and indemnities that were given to it by Trans Hex in the Sale of Shares and Claims Agreement.
15.	SUBSEQUENT EVENTS
	Etruscan Diamonds Limited
	Post quarter-end the Company has signed the Sale of Shares agreement with Etruscan Diamonds Limited whereby the Company agrees to purchase Etruscan’s Blue Gum diamond operation in the Ventersdorp region, South Africa. The acquisition is for 74% of the operation with the balance owned pursuant to South Africa’s Black Economic Empowerment regime. The price to be paid to Etruscan is an amount not exceeding ZAR33.5 million (approximately $4.83 million) payable in Rockwell shares valued at $0.068 each. The Company will also assume certain non-material property maintenance obligations effective immediately and other financial obligations upon completion of the acquisition.
	The Company is awaiting transfer of the Mineral Right by the Department of Mineral Resources (“DMR”), which is the final suspensive condition, to proceed with the transaction.