UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2001
                                       or
                TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

         For the transition period from ____________ to________________

                        Commission file number 001-15279

                                D.G. JEWELRY INC.
             (Exact name of registrant as specified in its charter)

Province of Ontario                                        n/a
-------------------                                 ------------------
(State or other jurisdiction of                      (I.R.S. Employer
incorporation or organization)                      Identification No.)

1001 Petrolia Road
Toronto, Ontario, Canada                                    M3J  2X7
(Address of principal executive offices)                   (Zip Code)

                                 (416) 665-8844
              (Registrant's telephone number, including area code)
                                 --------------

      Securities registered pursuant to Section 12 (b) of the Exchange Act
Title of each class                      Name of exchange on which registered
-------------------                      ------------------------------------
None.

Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, no par value                    Nasdaq Small Cap System

Common Stock Purchase Warrants

         Indicate  by check  mark  whether  the  registrant:  (1) has  filed all
reports  required to be filed by Section 13 or 15(d) of the Securities  Exchange
Act of 1934 during the preceding 12 months (or for such shorter  period that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|

         Indicate by check mark if there is disclosure  of delinquent  filers in
response  to Item  405 of  Regulation  S-K  contained  herein  and  will  not be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |_|

         The aggregate  market value of the voting stock held by  non-affiliates
of the issuer as of March 31, 2002 was $3,097,100.60.

<PAGE>

ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS

         Indicate by check mark whether the  registrant  has filed all documents
and reports  required  to be filed by Section 12, 13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court. Yes |_| No |_|

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS

         The number of shares  outstanding of the registrant's  Common Stock, no
Par Value, on March 31, 2002 was 7,446,947 shares.

         Documents incorporated by reference: None

<PAGE>

                                D.G. JEWELRY INC.
                         2001 ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS

                                     PART I

Item 1.           Business....................................................1
Item 2.           Properties..................................................9
Item 3.           Legal Proceedings...........................................9
Item 4.           Submission of Matters to Vote of Security Holders..........10

                                     PART II

Item 5.           Market for Registrant's Common Equity and Related
                           Stockholder Matter ...............................11
Item 6.           Selected Financial Data....................................14
Item 7.           Management's Discussion and Analysis of Financial
                           Condition and Results of Operations...............14
Item 7A.          Quantitative and Qualitative Disclosures About
                           Market Risk.......................................18
Item 8.           Financial Statements and Supplementary Data................19
Item 9.           Changes in and Disagreements with Accountants on
                           Accounting and Financial Disclosures..............19

                                    PART III

Item 10. Directors and Executive Officers of the Registrant..................20
Item 11. Executive Compensation..............................................22
Item 12.          Security Ownership of Certain Beneficial Owners and
                           Management........................................30
Item 13. Certain Relationships and Related Transactions......................31

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports
                 on Form 8-K.................................................34

Signatures...................................................................35

<PAGE>
                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

         Certain  statements  contained herein  including,  without  limitation,
those concerning (i) the Company's strategy,  (ii) the Company's expansion plans
and  (iii)  the  Company's  capital  expenditures,   contained   forward-looking
statements  (within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act") and Section 21E of the Securities Exchange Act of
1934, as amended (the  "Exchange  Act"))  concerning  the Company's  operations,
economic  performance and financial  condition.  Because such statements involve
risks and  uncertainties,  actual  results  may  differ  materially  from  those
expressed  or implied by such  forward-looking  statements.  Factors  that could
cause such  differences  include,  but are not limited to, those discussed under
"Business." The Company  undertakes no obligation to publicly release the result
of any revisions to these forward-looking statements that may be made to reflect
any future events or circumstances.

EXCHANGE RATE DATA

         We maintain our books of account in Canadian dollars, but have provided
the financial  data in this Form 10-K in United States  dollars and on the basis
of generally accepted accounting principles as applied in the United States, and
our audit has been  conducted in accordance  with  generally  accepted  auditing
standards in the United  States.  All  references to dollar amounts in this Form
10-K, unless otherwise indicated, are to United States dollars.

         The  following  table sets forth,  for the periods  indicated,  certain
exchange  rates  based  on the noon  buying  rate in New  York  City  for  cable
transfers  in  Canadian  dollars.  Such  rates are the  number of United  States
dollars  per one  Canadian  dollar and are the  inverse  of rates  quoted by the
Federal Reserve Bank of New York for Canadian  dollars per US$1.00.  The average
exchange  rate is based on the average of the exchange  rates on the last day of
each month  during  such  periods.  On March 31,  2002,  the  exchange  rate was
Cdn$1.5926 per US$1.00.

<TABLE>
<S>                        <C>       <C>       <C>       <C>       <C>       <C>       <C>

Year Ended December 31,      1995      1996      1997      1998      1999     2000      2001
----------------------       ----      ----      ----      ----      ----     ----      ----
Rate at end of period      $0.7143   $0.7299   $0.6991   $0.6532   $0.6929  $0.6687    $0.6279
Average rate during period  0.7299    0.7353    0.7223    0.6745    0.6730   0.6675     0.6500
High                        0.7092    0.7212    0.6945    0.7061    0.6929   0.6417     0.6695
Low                         0.7642    0.7526    0.77493   0.6376    0.6582   0.6993     0.6242

</TABLE>

<PAGE>
                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

         We are primarily engaged in the design, manufacture,  merchandising and
distribution  of  stone-set  jewelry  for  department  stores,  mass  merchants,
television   shopping  networks  and  other  high  volume  retailers  and  major
discounters.  We also take advantage of non-traditional  wholesale  distribution
outlets such as Internet wholesale advertising services, liquidation operations,
and consumer product rental companies.

         We believe we have established ourselves as a low-cost, high-volume and
quality manufacturer in the value priced jewelry market. Our primary competitive
advantage,  particularly  for the DG division,  is our innovative  manufacturing
methods  which  allow  for  substantially   reduced  costs  per  unit,   provide
substantial  capacity and better quality, and require minimal skilled labor. Our
merchandising strategy also involves the design of products that we believe will
continually  appeal  to the  mass  market.  We  also  assist  our  customers  in
creatively merchandising our jewelry to encourage impulse purchases.

         Our  operations  are  divided  into two  divisions.  The "DG  division"
manufactures  and  distributes  value priced  stone-set  rings and other jewelry
products.  We  have  operated  the DG  division  in  Canada  for 33  years.  The
"Diamonair"  division  assembles  and  distributes  jewelry,  primarily set with
synthetic stones. We acquired Diamonair in November, 1997.

         Growth has been achieved by providing  our  customers  with quality and
service and in recent years through our manufacturing  process, which enables us
to provide our  customers  with value priced  stone-set  mass appeal  jewelry at
lower cost than many of our competitors. We maintain long-standing relationships
with Canadian  customers such as Zellers,  Inc.,  RTO  Enterprises  Inc.,  Sears
Canada,  and The  Shopping  Channel.  In the last  several  years,  we have also
focused on the much larger  American  market.  The DG division  currently  sells
products  to  customers  such as  Wal-Mart,  ShopNBC  (operated  by  ValueVision
International  Inc.),  and  others,  including  Zales  Corporation,  the largest
jewelry  retailer  in  the  United  States.  We  have  also  utilized  strategic
acquisitions  to  increase  our  presence  in  the  United  States.  Diamonair's
customers  include Finlay Fine Jewelry Corp,  which operates leased fine jewelry
departments in department stores for retailers such as May Department Stores and
Federated Department Stores. In 2001,  approximately 83.23% of our sales were in
the United States,  as compared to 79.6 %, 69.7% and 81% in 2000, in 1999 and in
1998, respectively.

Business Strategy

         We believe that our business strategy is enabling us to become a leader
in the value  priced,  stone-set  jewelry  market.  We believe that our business
strategy  allows  us to  leverage  the  expertise  and  customer  base  we  have
established in the Canadian  market to increase sales in the much larger markets
of the United  States.  We also believe that we can increase  sales of our other
products,  including bridal jewelry,  by integrating our divisions.  Our primary
business strategies are as follows:

Capitalize on Our Manufacturing Processes

         Our  manufacturing  process  allows us to produce  mass  quantities  of
stone-set,  value priced jewelry.  We are able to offer quality  products to our
customers  at prices  that are  competitive  with or lower than our  competitors
offering similar goods,  while maintaining  adequate profit margins.  Management
believes  that our  manufacturing  process  produces  goods that are superior to
comparably  priced  goods  produced  by  competitors.   We  believe  that  these
advantages  will  allow for  continued  growth in market  share of value  priced
jewelry.

                                        1
<PAGE>

Integrate the Aviv and Diamonair Acquisitions

         We completed both the Aviv and Diamonair  acquisitions  in 1997. The DG
division  manufactures  products for  Diamonair and the Aviv line which has been
moved from Houston to Toronto. We continue to review the Diamonair product lines
to determine how to continue to manufacture more of their product lines with our
manufacturing process.

Extend Customer Base and Utilize Non-traditional  Distribution Lines such as the
Internet

         While we have developed a broad customer base, we currently  target our
marketing  efforts  towards large  retailers,  such as department  stores,  mass
merchandisers,  television shopping networks,  and other discount stores,  whose
overall share of retail jewelry sales is expected to increase.  These  customers
typically  require  a high  level of  service,  and we seek to  build  long-term
relationships by making it convenient and  cost-effective for these customers to
rely on us for essential services such as product design,  inventory control and
delivery.

         We  also   sell  our   products   through   non-traditional   wholesale
distribution   outlets  such  as  Internet   wholesale   advertising   services,
liquidation  operations  and  consumer  product  rental  companies.   Management
believes that our products are ideal for  non-traditional  type  outlets,  which
usually feature moderate and lower priced products.  D.G is the sole supplier to
NetJewels.com,  Inc.  which is 50% owned by us and 50% owned by two sons of Jack
Berkovits. See "Certain Transactions".

Maintain a Broad Product Mix

         We maintain a broad  product mix so that we can meet the varying  needs
of our  customers,  who range from  discount  stores such as  Wal-Mart,  Inc. to
department stores such as Saks Fifth Avenue. This also enables us to supply each
customer  with a number of  different  styles  of each  product,  which  jewelry
retailers  generally  like to have  in  stock.  The DG  division  and  Diamonair
currently  offer our  customers  approximately  11,000  and 700 styles of rings,
respectively.  We also  offer our  customers  over  1,000  other  products,  the
majority of which consist of pendants, earrings, tennis bracelets and brooches.

         We attempt  to  provide  our  customers  with  rings and other  jewelry
products that  incorporate  traditional  styles and designs.  While we regularly
update  our  product  lines  and offer new  products,  we seek to avoid  designs
incorporating  fashion trends that are expected to have short life cycles.  This
approach enables us and our customers to avoid accumulating  obsolete inventory.
Additionally,  we can create specially designed products in response to requests
or pictures  submitted  to us by our  customers.  This  variety and  flexibility
allows us to meet a wide variety of our customers' jewelry needs.

Acquisitions and Joint Ventures

         We have  utilized the Aviv and Diamonair  acquisitions  to increase the
rate of our penetration  into the U.S.  jewelry  markets.  Each acquisition also
broadened our product line and  increased  the number of customers  that we work
with, creating cross-selling opportunities. Although we have no current plans or
potential  targets,  we may make  additional  acquisitions of  manufacturers  or
distributors of complementary  jewelry products in the future, if such potential
targets offer strategic opportunities for us as a whole.

         We also  intend to use  strategic  partnerships  and joint  ventures to
create  additional  revenue  and to  create  opportunities  for the  sale of our
products.

Marketing

         We  maintain  sales  offices  at our  Toronto  headquarters  and at the
Diamonair  offices in  Parsippany,  New  Jersey.  Our sales  staff  promote  our
products to a wide range of customers  via existing  relationships,  trade shows
and product presentations.

                                       2

<PAGE>

         We seek to provide value priced,  quality  products.  Price and quality
are of  particular  importance  in the  jewelry  market  because,  except at the
highest end of the market,  advertising and brand name  recognition are minimal.
We believe that our manufacturing  process allows us to provide our customers DG
division  products  at  prices  that  are  competitive  with or  lower  than our
competitors' products.  Similarly, the incorporation of DG division products and
manufacturing  into  Diamonair  has  allowed  for  competitive  pricing  of that
division's  products.  The Aviv line,  which  usually is made of more  expensive
metals and contains more expensive  stones,  is also  competitively  priced when
compared with goods of similar quality.

         Often,  retail  stores are provided  pre-arranged  presentation  trays.
These trays usually  contain our most popular styles in common sizes. We believe
that these trays make it  convenient  and cost  effective  for retail  stores to
display and promote our  products.  We believe that retail store  operators  who
utilize   these   pre-arranged   presentation   displays,   which  may   include
point-of-purchase  displays,  will  elicit  impulse  purchases  of our  products
because  the styles  are  familiar  to  customers  and are priced at  attractive
levels.

         Management  emphasizes  maintaining and building upon our relationships
with  existing  customers.  We  provide  specialized  support  services  to  our
customers,  including  bar-coding  and  drop  shipping  to  individual  customer
locations,  as well as central distribution  centers.  Further, in order to fill
customer orders more quickly and  effectively we have  implemented an electronic
data interchange  program pursuant to which we  electronically  receive purchase
orders from participating customers and electronically transmit to the customers
order  acknowledgments,  invoices and advance shipping  notices.  The electronic
data  interchange  link and other  support  options,  in  management's  opinion,
assures an ongoing business relationship. We believe these specialized services,
which are particularly  important in marketing to large  retailers,  enhance our
ability to attract and retain customers.

         We may accept  returns of certain  items in order to maintain  customer
goodwill and as part of promotional programs.  Returns of products are generally
made as part of stock balancing  transactions in which the returned products are
replaced with products better suited to the customer's  needs. We have developed
alternate  retailer  destinations  for any  product we choose to take back,  and
generally sell such returns for prices which  approximate  the original  selling
price.  These  alternate  retailer   destinations  include  Internet  retailers,
shopping networks and small jewelry chain stores.

         In 1997, we began  listing  excess  inventory on an Internet  wholesale
commerce web site. We intend to continue  this  practice  because it provides an
inexpensive method for disposing of excess inventory on terms favorable to us.

Customers

         We  maintain  a broad  base of  customers  concentrated  in four  major
jewelry segments: (i) department stores such as Sears Roebuck, Bloomingdales and
Saks Fifth Avenue (our  products are also sold in certain  Federated  Department
Stores and May Department  Stores through Finlay Fine Jewelry Corp., an operator
of jewelry boutiques within other department  stores);  (ii) specialty  markets,
such as The Shopping Channel (Canada),  and ShopNBC  (`ValueVision');  and (iii)
jewelry chain stores such as Zales  Corporation,  Gordons,  Freidmans and others
and (iv) mass merchandisers such as Zellers,  Inc. and Wal-Mart. We generally do
not sell  pursuant to any formal or long-term  contracts,  although we do have a
long-term supply agreement with Zellers,  Inc., and a short-term contract with a
major  television  shopping  network.  We are also  the  exclusive  supplier  of
products to Diamante Fine Jewellery Limited which operates five stores under the
"Oromart" name in Ontario,  to Pegasus  Acquisition  Corp. I which operates four
stores in Arizona,  to Florida  Acquisition  I Corp.  which  operates a store in
Coral Springs,  Florida, to Michigan Acquisition Corp. I. which operates a store
in Birch Run,  Michigan,  and to Lilly's  Jewelers 2001, Inc. which operates six
stores in West Virginia.

                                        3

<PAGE>

         For the year ended December 31, 2001, 2 major  customers  accounted for
64.5% of sales.  ShopNBC  (ValueVision)  accounted  for 46.3% of sales,  and the
retail group of Diamante,  Pegasus,  Florida, Michigan and Lilly's accounted for
approximately  18.2% of sales. No other customer  accounted for more than 10% of
sales for the year ended  December  31,  2001.  For the year ended  December 31,
2000, two major customers  accounted for approximately  59.52% of sales. For the
year ended  December 31,  2000,  ValueVision  accounted  for 44.52% of sales and
Diamante and Pegasus accounted for approximately 15% of sales. No other customer
accounted for more than 10% of sales for the year ended  December 31, 2000.  The
loss of any of these customers or a significant  reduction in their orders could
have an adverse  effect on D.G.  Jewelry Inc.  For this reason,  the Company has
made  significant  effort to grow its customer list and continues to do business
with its smaller  accounts,  and hopes to achieve  positive  results in 2002 and
beyond.

Product and Design

         We seek to provide  our  customers  with a broad  selection  of jewelry
products  that  incorporate  traditional  styles and  designs.  We seek to avoid
designs  incorporating  fashion  trends  which are  expected  to have short life
cycles.  This  approach  enables  us and our  customers  to  avoid  accumulating
obsolete inventory.  Additionally,  producing a greater quantity of a particular
product results in a more efficient manufacturing process.

         However,  we regularly update our product lines and offer new products.
We maintain a staff of model  makers/designers  who develop new designs based on
research  of  the  market  and  surveying   stores,   catalogues   and  industry
publications to determine current trends. Additionally,  we can create specially
designed  products in response  to requests or pictures  submitted  to us by our
customers. New product design prototypes are created, and after evaluation,  the
final product design is produced.

         A principal  goal of our design  program is to maximize  the  perceived
value of our products through design and manufacturing  innovations that enhance
the appearance of the jewelry without causing corresponding increases in product
costs. This design approach assists us in producing quality products  reflecting
general consumer tastes.  D.G. Jewelry Inc.,  through both the D.G. division and
Diamonair,  seeks products,  not as fashion  leaders or faddish  styles,  but of
enduring styles that encourage moderately priced impulse purchases.

         Rings  account  for  approximately  90% of our sales by units  sold and
dollar revenue. The D.G. division currently offers approximately 6,000 styles of
rings.  The rings are moderately  priced and the average  wholesale price of the
rings is approximately  $150.00.  The retail price of the D.G. division's better
selling products ranges from $30.00 to $600.00,  although some products can cost
as much as $5,000.  The rings are made  principally in 10 and 14 karat gold. Our
products  contain a variety of stones  classified as diamonds,  precious  (e.g.,
rubies,  sapphires,  emeralds),  semi-precious (e.g., garnet,  topaz,  amethyst,
aquamarine,  opal) or synthetics  (e.g.,  cubic  zirconia,  spinel).  The use of
stones  increases  average  unit sales  price and  results  in greater  margins.
Additionally,  the inclusion of stones creates a greater  margin  flexibility to
insulate  us  from  fluctuation  in  the  value  of  gold.  The  D.G.   division
manufactures a number of rings with multiple stones because management  believes
our  manufacturing  process allows us to produce  multiple stone items at a cost
lower than our competitors.

         The Aviv line which has been  integrated  into the Diamonair  operation
offers  approximately  5,000  rings,  most of which are  intended  to be used as
wedding or engagement rings. The rings are made up of precious metals, including
22 karat gold and  platinum.  The  average  wholesale  price of the Aviv line is
$700.00.  The retail price of Aviv's better selling products ranges from between
$500.00  and  $1,500.00.  Some of  Aviv's  diamond  rings are sold for more than
$5,000.

         Diamonair offers approximately 700 rings,  primarily adorned with cubic
zirconia  stones.  Although  many of  Diamonair's  products are made of precious
metals,

                                        4

<PAGE>

the Diamonair  products are generally lower priced goods. The average  wholesale
price of Diamonair's  products is $100.  The retail price of Diamonair's  better
selling  products  ranges  from $50 to  $500.  We have  successfully  introduced
genuine  gemstones,  which may  include  gem  stones as well as other  synthetic
stones into the Diamonair products during 2001.

         Through  each  of our  two  divisions,  we  offer  approximately  1,000
earrings  and  pendants.  Many of these  products are  manufactured  through our
manufacturing process, which allows us to produce these items at costs which are
competitive  with or less than our  competitors.  We also  design  earrings  and
pendants to match some of our rings so that the products can be sold as a set.

Manufacturing Process

         Our  manufacturing  process  is  a  special  process  for  producing  a
high-volume of low-cost multi-stone rings. Our manufacturing process provides us
with a current estimated  manufacturing  capacity of approximately  20,000 rings
per week.  This process is utilized at the Toronto  facility for the DG division
product line and certain Diamonair  products.  The Toronto facility is presently
producing  an average  of  approximately  4,000  rings per week,  but  sometimes
producing as much as 20,000 rings in a week.  We believe that our  manufacturing
capabilities  distinguish  us from  most of our  competitors  and  enable  us to
produce very competitively  priced,  quality and consistent  products satisfying
our customers' demands for mass merchandising.

         Our manufacturing process combines modern technology, mechanization and
hand  craftsmanship to produce  fashionable and moderately  priced jewelry.  Our
manufacturing  operations  involve  combining  pure  gold with  other  metals to
produce  10 and  14  karat  gold,  manufacturing  cast  jewelry,  and  finishing
operations such as cleaning, polishing, diamond-cutting,  engraving, plating and
other  jewelry  work.  We utilize the  lost-wax/cast-in-place  method of jewelry
manufacturing to produce high-quality gold rings, earrings,  pendants, bracelets
and brooches. This is based on an investment casting process used in the jewelry
manufacturing  industry.  It entails  creating wax duplicates of the items which
are encased in a plaster mold. The plaster is hardened in an oven while the heat
melts away the wax, leaving a hollow mold pre-set with stones in place. The mold
is injected with metal,  in effect  reverse-mounting  the stones in the jewelry.
After the  casting  process,  the jewelry  undergoes  a series of  cleaning  and
polishing  stages  before being  labeled with the  retailer's  price tag and bar
codes and  shipped.  This  process  allows  unskilled  labor with  virtually  no
training to set as many as 8,000 stones per day per stone setter.  This compares
to the normal setting process of a skilled setter,  setting up to 150 stones per
day, at a cost of up to $1.00 per stone or more. However, the percentage savings
are far more  significant  when the  intrinsic  values which make up the jewelry
item are lower. This is so because the greater the labor factor in the product's
cost  structure,  the greater the  percentage  savings when such labor factor is
reduced.

         Many of the  D.G.  division's  manufacturing  personnel  are  paid on a
piece-work basis.  Management believes this basis provides incentive to maximize
productivity while at the same time, it provides us accuracy in cost accounting.
Our strict quality control  guidelines ensure that quality is not sacrificed for
productivity.  We use a bar-coded  tracking system for all inventory in process.
When a job bag is transferred from one employee to another,  it is automatically
electronically  "wanded"  (UPC bar coded for number of units,  style,  and other
pertinent  customer  information)  into that  employee's  custody.  This has the
effect  of  assigning  responsibility  for the  inventory.  It also  causes  the
recipient  employee  to  verify  quality  of  the  product  prior  to his or her
commencement  of work, in effect,  policing the prior person's work product.  If
the previous employee's work product was substandard, the recipient would return
the job to production control who would require the previous employee to correct
the work product with no  compensation.  Otherwise,  the recipient would have to
correct the product at no  additional  compensation  and would  further make the
recipient's  work more  difficult  as well as  delaying  his or her  production.
Therefore, the system is self policing.

         These  significant  savings allow us to produce jewelry that previously
did not warrant  large labor costs and,  accordingly  have not been  produced by
anyone

                                        5

<PAGE>

else.  Specifically,  multi-stone  sterling  silver products are now produced en
masse to retail at prices geared to mass  merchandiser's  "customers"  profiles.
These  products  sell in a range  from  $9.99 to $49.97  retail,  and  project a
quality and perceived  value of several times that amount.  Management  believes
the  jewelry  industry  has  avoided  producing  this type of product  since the
sterling  silver  metal  value and the  synthetic  stone  values did not warrant
increased  labor  costs.  Our reduced  labor costs  enables us to produce  these
products profitably.

         Currently, manufacturing and other operations for the Aviv product line
are accomplished at our facilities in Toronto and New Jersey.

         Diamonair primarily purchases products from the D.G. division and other
manufacturers in a finished condition. However, Diamonair does do some assembly,
repair and  packaging  of its  products  from its  facility in  Parsippany,  New
Jersey.

         The  manufacturing  process in the  jewelry  industry  results in great
volumes of gold scrap.  We have strict  controls to minimize  waste.  Management
believes that our manufacturing processes reduce the handling of the end jewelry
product and accordingly,  the quantity of jewelry scrap is greatly reduced.  The
scrap in the form of chips, filings,  grindings and sweepings,  are recovered by
us and sent to refiners to recover the gold.  Our recovery from refiners in 2001
was 4,965 ounces or approximately $1,288,936. Our recovery from refiners in 2000
and 1999 were  4,992  ounces or  approximately  $1,219,826  and 4,774  ounces or
approximately $1,406,029 respectively.

Supply

         We purchase our gold from banks,  gold refiners and commodity  dealers.
Management   believes  this  arrangement  is  sufficient  to  meet  our  current
requirements.  In November,  2001,  the Company  availed  itself of a gold lease
arrangement  provided  by the  Bank of Nova  Scotia.  Under  the  terms  of that
agreement,  the  Company  is able to lease  fine gold up to a  maximum  of $4.68
million in value. At December 31, 2001, the Company leased 9,023 oz, for a total
value of  $2,471,452.  Gold  leases are a common form of  procuring  gold in the
jewelry  industry.  Its primary  advantage is that the loan is advanced in metal
form and is repayable in metal form, or in cash, at our option.  As a result, if
the lessee is  disciplined,  and  replenishes  its gold as it sells it, then its
gold  exposure is  effectively  hedged.  Thus,  the lessee is not  `gambling' on
having to replace gold at higher cost than the price at which the gold was sold.
Another benefit of gold leasing is that the Company's investment in inventory is
reduced. Finally, gold lease rates are generally very favorable to the lessee.

         Gold  acquired  for  manufacture  is at least .995 fine and is combined
with other metals such as silver,  copper, nickel and zinc, to produce 10,14,18,
or 22 karat  gold of  different  colors.  The term  "karat"  refers  to the gold
content of alloyed gold,  measured from a maximum of 24 karats (100% fine gold).
These  alloys are in abundant  supply and are  readily  available  to us.  Other
precious and  semi-precious  stones are available  from many suppliers in Canada
and the United States.

         The  world's  supply  of  diamonds   comes   primarily  from  De  Beers
Consolidated Mines, Limited, a South African company. The continued availability
of diamonds to the jewelry industry is dependent, to some degree, on a continual
supply from De Beers Consolidated Mines, Limited.  While several other countries
are major suppliers of diamonds,  in the event of an interruption of supply from
South Africa,  the Jewelry industry,  as a whole,  could be adversely  effected,
which could impact the supply of diamonds to us.

         We do not  presently  engage in  hedging  activities  with  respect  to
possible  fluctuations  in the prices of  precious,  semi-precious  gemstones or
metals,  other than through the gold lease  arrangements  referred to above.  We
believe the risk of price fluctuations can be mitigated by changes in the prices
we charge our  customers,  which we have  historically  done in response to such
fluctuations.  However,  there can be no assurance  that a downward trend in the
prices  of stones or metals  would  not have a  material  adverse  impact on the
valuation  of our  inventories  or that an increase in prices  would not make it
more difficult or costly for us to acquire inventory.

                                       6

<PAGE>

         We purchase our supplies and raw materials  from a variety of suppliers
and we do not  believe  the loss of any of the  suppliers  would have a material
effect on our  business.  Alternative  sources of supply for raw  materials  for
production of jewelry are readily available.

         Although the Company  believes its sources of supply are  adequate,  it
entered  into  special  relationships  with  several  key  diamond  supplier  in
November, 2001. Under the terms of these agreements, seven key diamond suppliers
agreed to  exchange  some debt for shares of the  Company.  In  addition  to the
shares issued to them, the Company agreed to provide these  suppliers  preferred
status and to purchase its needs from these  suppliers as long as they  provided
the most favorable  terms.  These agreements are for one year, at which time the
Company may re-purchase the shares, at its option.

         We  carefully  inspect all  materials  sent and  received  from outside
suppliers,  monitor the  location and status of all  inventory,  and have strict
internal  control   procedures  of  all  jewelry  as  it  proceeds  through  the
manufacturing process. A complete audited physical inventory of gold, silver and
gemstones is taken at our  manufacturing  and  administrative  facilities  on an
annual  basis,  in addition to other  physical  inventories  during the year. We
employ  an  agency  to  provide  a  security  staff  and have  various  security
procedures  in the hiring of personnel as well as  internal-security  procedures
regulating  employee  conduct.  We are  currently  undergoing  a  review  of all
security  procedures and expect to take additional  stringent steps to safeguard
our assets.

Insurance

         We maintain  primary  all-risk  insurance to cover thefts and damage to
inventory located on our premises.  We also maintain  insurance  covering thefts
and  damage to the  inventory  we own which is located  off-site.  The amount of
coverage available under such policies is limited and may vary by location,  but
generally  is in  excess of the value of the gold  supplied  by us. We  maintain
fidelity  insurance which provides coverage against theft or embezzlement by our
employees.   Additionally,   we  maintain  director's  and  officer's  liability
insurance in the amount of approximately $10,000,000.

Competition

         The  jewelry  manufacturing  industry  is highly  competitive,  and our
competitors  include domestic and foreign jewelry  manufacturers and wholesalers
and  importers  who may operate on a national,  regional  and local  scale.  The
primary competitive  factors are price,  design,  quality,  customer service and
established customer relationships.

         The  diverse  distribution  channels  in which we market  our  products
frequently  involve  different  competitive  factors.  The  ability  to  provide
specialized services is a particularly important competitive factor in our sales
to certain  large  retailers  such as mass  merchandisers,  discount  stores and
warehouse  clubs.  Product  availability  and the  ability  to offer  consistent
product quality at competitive prices tend to be the key competitive  factors to
the customer  segments which we serve. Some of our competitors may specialize in
sales  to  particular  distribution  channels  and may have  relationships  with
customers  in those  distribution  channels  that  make  competition  by us more
difficult.  We believe that the recent trend towards consolidation at the retail
level in the jewelry  industry  will  increase the level of  competition  in the
markets in which we compete.

         In Canada,  management  believes we have two primary  competitors,  A&A
Jewelry of Scarborough, Ontario and Finecraft Industries Limited. A&A Jewelry of
Scarborough,  Ontario  is one of  Canada's  largest  jewelry  manufacturers.  It
manufactures  both casted ring  products and stamped gold earrings and pendants,
and its sales are both in Canada and the  United  States.  Finecraft  Industries
Limited is another major Canadian manufacturer,  which also imports from the Far
East.

                                        7

<PAGE>

         In the United States,  the market,  although  highly  fragmented,  does
contain a number of major  competitors many of whom import much of their product
from the Far East and many of whom sell higher priced  items.  The United States
competitors  include M. Fabrikant & Sons, Inc.,  Samuel Aaron Inc., Simon Golub,
PAJ, Inc.,  Nissko  Jewellery  Trading,  World Pacific  Products,  Andel,  Andin
International Inc., Dalow Industries and Michael Anthony Jewelers Inc.

Patents and Trademarks

         We have received trademarks of certain product names and for patents on
approximately  300 Aviv product  designs.  These  trademarks and patents are not
economically material to us.

         We do not have,  nor do we rely, on patents to establish or protect our
market position.  We have not applied for patent protection of our manufacturing
processes  to  avoid  disclosing  our  unique   application,   modification  and
improvements relating to certain basic processes known in the industry. Further,
we cannot be assured  that the  process  which we believe is  proprietary  would
qualify for a patent, and if a patent would be granted, there is no assurance as
to the extent of its enforceability.  There can be no assurance that competitors
will not be able to imitate  our  manufacturing  processes,  which  could have a
material adverse effect on our business.

Employees

         At March 31,  2001,  we  utilized  135 persons as both  employees  on a
full-time  basis,  and as  contractors,  including  approximately  94 engaged in
manufacturing and distribution,  11 salespeople,  24 general and  administrative
and 6 executives,  each of whom performs  various other  functions such as sales
and marketing.

         We have no unions and believe we have an  excellent  relationship  with
our employees.

Environmental Compliance

         Certain of the manufacturing  processes  utilized by us require the use
of  chemicals  and other  hazardous  materials.  We have an  ongoing  compliance
program  to ensure  that our  manufacturing  processes  are in  compliance  with
environmental rules and regulations.

Seasonality

         Retail sales of jewelry are generally  weighted to the fourth  quarter.
For most  manufacturers  these sales  patterns  reflect a business that tends to
fall  one-third in the first half of the year with the  remaining  two-thirds in
the second  half of the year.  Our sales in the first  half of 2001  represented
approximately 44.8% of total revenues for the year.

         While  our  sales  are   subject  to   seasonal   fluctuations,   these
fluctuations  are mitigated to a degree by the early placement of orders by many
of our  customers,  particularly  for the  Christmas  holiday  season.  Further,
management  believes  that  our  sales  and  those of our  customers  are not as
seasonally  effected as most competitor's sales because many of our products are
lower priced goods  designed for mass  merchandising,  which generate year round
impulse purchases.

         Sales by Internet  retailers,  who generally  plug their product to the
consumer  (as opposed to retail  stores),  have their  revenues  generally  less
weighted for Christmas due primarily to the  consumer's  fear of late  delivery,
and because of the consumer's  likelihood to be in the `Internet  shopping mall'
during that key shopping season. In addition,  these retailers generally benefit
in the key winter months when the consumer is more likely to order from home. As
a result,  we do not  expect to be as  affected  because  of our  revenues  from
alternative  customers such as television  shopping  networks and sales over the
Internet.

                                        8
<PAGE>

ITEM 2. PROPERTIES

         Our executive and administrative  offices and primary manufacturing and
marketing  facilities  are located in a 23,000  square foot facility in Toronto,
Ontario.  This facility is leased from 1001  Petrolia Road Limited  Partnership,
the general partner being 1013418 Ontario Inc. Jack Berkovits, Chairman, CEO and
President of D.G. Jewelry Inc. is the sole shareholder,  officer and director of
the general partner,  1013418 Ontario Inc. The lease is a 10 year net, net lease
and expires January 31, 2005. Annual lease payments are $115,520.00,  increasing
each year by the greater of $.33 a square foot or the percentage increase in the
Consumer Price Index for the Municipality of Metropolitan  Toronto.  Real estate
taxes,  utilities,  maintenance and insurance cost us approximately  $82,359 for
the 12 months ended  December 31,  2001.  Management  is of the opinion that the
terms of the lease are as favorable as could be obtained from unaffiliated third
parties. See "Certain Transactions."

         The general partnership, 1013418 Ontario Inc, of which Mr. Berkovits is
the sole shareholder,  officer and director, originally obtained a $660,000 five
year  mortgage on the property  from the Canadian  Imperial  Bank of Commerce in
1993. At December 31, 2001 the mortgage was $475,956. The loan bears interest at
7.8% and was renewed in October  1998 for an  additional  five  years.  We are a
guarantor  of this  mortgage.  A second  mortgage  was  obtained  to secure  our
financing facilities with The Bank of Nova Scotia.

         Effective as of June 1, 1997, we entered into a sublease for the 25,000
square foot manufacturing and office facility in Houston, Texas from which Aviv,
Inc. had operated  prior to its  acquisition.  In 2001, we paid rent of $66,398,
from January 1, 2001 until the lease was terminated by us as at August 31, 2001.
In October,  2000,  the  manufacturing  operations of the Houston  facility were
transferred  to our  facility in Toronto,  and at the end of August,  2001,  the
retail store in the Houston facility was also closed down, and sales and service
of the Aviv line were transferred to the Diamonair division in New Jersey.

         Effective as of November  21, 1997,  we entered into a sublease for the
7,880 square foot facility in Cedar Knolls,  New Jersey that Litton  Systems had
used to operate Diamonair prior to its acquisition. This lease had been extended
to and including  September 30, 2001, and thereafter on a short term basis until
the new Diamonair  premises in Parsippany,  New Jersey were ready for occupancy.
In 2001,  we paid rent of $91,239 in respect of the Cedar Knolls and  Parsippany
premises.  Effective  January 24, 2002, the Diamonair  division moved into 7,200
square foot premises located at 2 Cranberry Road, Parsippany,  New Jersey 07054,
under a new 5 year lease  whereby we pay annual  base rent of  $77,400.00,  plus
proportionate share of taxes,  insurance,  and operating  expenses.  We have the
option,  upon  written  notice  given at least six months prior to expiry of the
term, to renew for a further 5 year term, during which the annual base rent will
be $88,200.00  per annum.  We use  Diamonair's  facilities  for the assembly and
storage of  Diamonair  products,  as well as sales,  design  and  administrative
offices.

         We believe that our facilities  are adequate for our current  operating
levels and presently foreseeable growth.

ITEM 3. LEGAL PROCEEDINGS

         In December  1999,  Haymarket  LLC  ("Haymarket")  commenced  an action
against the Company in the Supreme Court of the State of New York, County of New
York,  alleging  that D.G. had  breached  the terms of a Common  Stock  Purchase
Agreement  (the   "Agreement')   entered  into  by  the  parties,   and  seeking
undetermined  damages.  In its defense,  the Company asserted that Haymarket was
barred from  enforcing the agreement  because it had wrongfully and in bad faith
depressed  the price of the  Company's  stock.  The issue of liability was tried
before a jury in  November  2000.  On November  16,  2000,  the jury  returned a
verdict in the Company's  favor. The judge thereafter set aside the jury verdict
and directed a verdict for Haymarket, and on

                                        9

<PAGE>

December 13,  2000,  the court  entered  judgment  for  Haymarket,  ordering the
delivery  of 316,933  shares of the  Company's  stock (the  "Reset  Shares")  to
Haymarket  pursuant to a reset provision in the Agreement.  On January 17, 2002,
the Appellate Division,  First Department of the New York Supreme Court affirmed
the  decision of the IAS Court  setting  aside the jury  verdict in favor of the
Company and entering  judgment in favor of  Haymarket  on its claim  against the
Company  for breach of the  Agreement.  The  Company is seeking  leave to appeal
further to the New York Court of Appeals.

         On  February  6, 2002 the Company  delivered  a share  certificate  for
316,933 shares to Haymarket in satisfaction of the judgment.  The IAS Court will
also assess  damages  owing to Haymarket  for the delay in delivery of the reset
shares,  based upon the difference  between the actual value of the reset shares
when  required to be  delivered  under the  Agreement in October  1999,  and the
actual value of the reset shares on February 6, 2002,  when they were delivered.
The IAS  court  has  specifically  declined  to  enforce  a  liquidated  damages
provision in the Agreement  under which damages would have been  calculated at a
rate of two per  cent  (2%)  per day  during  the  period  the  shares  were not
delivered.

         On May 4, 2001, Southridge Capital Management LLC, Cootes Drive LLC and
York LLC  commenced  an  action in the  Supreme  Court for the State of New York
against D.G. Jewelry Inc.,  Samuel Jacob Berkovits and another.  The Company and
the other defendants  removed the action to the United States District Court for
the  Southern  District  of New  York on June 4,  2001.  The  complaint  alleges
tortious  interference  with  contract,  defamation  and trade libel against the
Company and Mr. Berkovits, and seeks compensatory damages,  punitive damages and
costs.  The Company has  counterclaimed  against  plaintiff  Southridge  Capital
Management LLC for defamation. Management believes that the complaint is without
merit, and it intends to defend the case vigorously.

         Other than the above, the Company is not involved in any material legal
proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         In connection  with our Annual  Meeting held August 16, 2001,  the 2001
Stock  Option  Plan,  which  had been  adopted  by the Board of  Directors,  was
submitted to the  shareholders  for their  approval.  On a vote of  shareholders
present or represented by proxy, the 2001 Stock Option Plan was approved.

                                       10

<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         Since the  initial  public  offering  of our common  stock on April 17,
1997,  our common stock and warrants  were traded on the Nasdaq Small Cap Market
under symbols "DGJL." and "DGJW, respectively. On May 27, 1999, our common stock
began trading on the Nasdaq National Market System.  As of February 9, 2001, our
common stock once again began  trading on the Nasdaq Small Cap Market.  Prior to
April  1997,  there was no market  for our shares of common  stock.  There is no
non-United  States  trading market for our securities and there is no limitation
on non-Canadians owning shares of our common stock.

         The  following  table sets forth the high and the low sales  prices for
our common stock during each quarter for the last three fiscal years through the
first quarter of fiscal 2002.

                                                           Common Stock
                                                           ------------
                                                  High                  Low
                                                  ---------------------------
Fiscal 1999
First Quarter                                     9.750                 4.000
Second Quarter                                    9.063                 5.625
Third Quarter                                     8.250                 3.875
Fourth Quarter                                    5.688                 2.625

Fiscal 2000
First Quarter                                     4.000                 2.875
Second Quarter                                    3.375                 1.750
Third Quarter                                     2.125                 1.281
Fourth Quarter                                    2.000                 0.688

Fiscal 2001
First Quarter                                     1.563                 0.844
Second Quarter                                    1.500                 0.938
Third Quarter                                     2.100                 0.750
Fourth Quarter                                    1.600                 1.050

Fiscal 2002
First Quarter                                     1.350                 0.490

         As of  March  31,  2002,  there  were 20  shareholders  of  record  and
approximately 1,000 beneficial owners.

         On March 31, 2002,  the last sale price of our common stock as reported
on the Nasdaq Small Cap Market System was $1.100.

                                 DIVIDEND POLICY

         The  payment  of  dividends,  if  any,  in the  future  is  within  the
discretion of the board of directors and will depend upon our earnings,  capital
and legal  requirements and financial  condition and such other factors that the
board of directors deems  relevant.  For the  foreseeable  future,  we intend to
retain  future  earnings,  if  any,  for  reinvestment  in the  development  and
expansion of our business.

                            DESCRIPTION OF SECURITIES

General

         The following  description of the material terms of the common stock is
subject to the Ontario  Business  Corporation  Act,  1982 and to the  provisions
contained in D.G.  Jewelry  Inc.'s  articles of  incorporation  and by-laws,  as
amended.

                                       11
<PAGE>

Common Stock

         We are  authorized  to issue an  unlimited  number  of shares of common
stock, no par value per share, of which as of the date of this filing  7,446,947
shares of common stock are issued and  outstanding.  All  outstanding  shares of
common stock are validly authorized, issued, fully paid, and non-assessable.

         The  holders of common  stock are  entitled  to one vote for each share
held of record on all matters  submitted to a vote of  shareholders.  Holders of
common stock are entitled to receive ratably dividends as may be declared by the
board of directors out of funds legally available therefore. In the event of our
liquidation, dissolution or winding up, holders of the common stock are entitled
to share ratably in all assets remaining,  if any, after payment of liabilities.
Holders of common stock have no preemptive  rights and have no rights to convert
their common stock into any other securities.

         Pursuant to the Ontario  Business  Corporation Act, a shareholder of an
Ontario  Corporation  has the right to have the  corporation pay the shareholder
the fair  market  value for his  shares  of the  corporation  in the event  such
shareholder  dissents  to  certain  actions  taken  by the  corporation  such as
amalgamation  or the  sale  of all or  substantially  all of the  assets  of the
corporation and such shareholder follows the procedures set forth in the Ontario
Business Corporation Act.

Class A Preference Shares

         In August, 2000, the Articles of Incorporation were amended to increase
the  authorized  capital  of  the  Company  by  the  creation  of  five  million
(5,000,000)  Class A  Preference  Shares,  issuable in series as  determined  by
resolution of the Board of Directors,  who shall also determine the designation,
rights,  privileges,  restrictions and conditions attaching to the shares in any
series,  subject  to the  limitations  set  out in the  articles.  The  Class  A
Preference  Shares shall be entitled to priority  over the common  shares of the
Company and over any other shares of any other class ranking junior to the Class
A Preference Shares with respect to priority in the payment of dividends and the
return  of  capital  and  the  distribution  of  assets  in  the  event  of  the
liquidation,  dissolution  or  winding-up of the Company,  whether  voluntary or
involuntary,  or any other  distribution  of the assets of the Company among its
shareholders  for the  purpose of winding up its  affairs.  No series of Class A
Preference  Shares  shall rank in priority to any other series of such shares in
respect of dividends or return of capital in such circumstances. No dividends on
the common shares may be declared or set aside for payment, except with approval
of all holders of Class A  Preference  Shares,  nor shall the  Company  call for
redemption  or purchase  for  cancellation  or  otherwise  reduce or pay off any
shares,  unless  all  dividends  on Class A  Preference  Shares  shall have been
declared  and  paid  or set  aside  for  payment.  The  holders  of the  Class A
Preference Shares are not entitled to receive notice of nor to attend or vote at
any meeting of the shareholders of the Company,  except a meeting of the Class A
Preference shareholders

         As of March 31,  2002,  there  were no issued and  outstanding  Class A
Preference Shares.

Warrants

         Pursuant  to the  initial  public  offering in April 1997 and a private
placement in May 1999,  we have issued an  aggregate  of  1,547,308  warrants to
purchase our common stock.

         1,265,000  warrants  were issued in the  initial  public  offering  and
pursuant to a warrant  agreement  between D.G.  Jewelry Inc. and American  Stock
Transfer & Trust Company,  the warrant and transfer agent. Each warrant entitles
its holder to purchase one share of common  stock at an exercise  price of $6.25
per share,  subject to adjustment in accordance with the anti-dilution and other
provisions referred to below. These warrants are exercisable from April 17, 1998
until April 16, 2002.  None of these warrants have been exercised as of the date
hereof.

                                       12

<PAGE>

         By Resolution  of the Board of  Directors,  the Company has reduced the
exercise  price of the  warrants to $4.00 per share and has  extended the period
during which the warrants are exercisable for a further three years, until April
16, 2005.

         Such  warrants  may be redeemed by us at any time after April 17, 1998,
at a  redemption  price of $.10 per  warrant,  on not less  than 30 days'  prior
written notice to the holders of such  warrants,  provided that the closing high
bid price of the common stock on Nasdaq, or the last sale price per share of the
common stock, if listed on the Nasdaq National Market or on a national exchange,
is at least 150% ($9.38 per share,  subject to adjustment) of the exercise price
of the warrants for a period of 15 consecutive  trading days ending on the fifth
day prior to the date the notice of  redemption  is given.  Holders of  warrants
shall have  exercise  rights until the close of the business day  preceding  the
date fixed for  redemption.  The exercise price of these  warrants  should in no
event be regarded as an indication of any future market price of the  securities
offered hereby.

         The exercise price and the number of shares of common stock purchasable
upon  the  exercise  of  these  warrants  are  subject  to  adjustment  upon the
occurrence  of  certain  events,   including  stock  dividends,   stock  splits,
combinations or reclassification of the common stock. The warrants do not confer
upon the holders any voting or any other rights as shareholders of D.G.  Jewelry
Inc.

         We have agreed to pay Joseph  Dillon & Company a fee of five percent of
the  exercise  price of each  warrant  exercised,  a portion of which fee may be
allowed  to the  dealer  who  solicited  the  exercise.  As of the  date of this
prospectus,  we have not paid Joseph  Dillon & Company any  commissions.  Joseph
Dillon & Company is no longer in business.

         In  connection  with our  initial  public  offering  we  issued  to the
underwriters 110,000 warrants to acquire 110,000 shares of common stock at $9.90
per share and/or 110,000 warrants at an exercise price of $0.165. These warrants
expire in April 2002.

         In May 1999,  172,308  warrants  were issued to  investors in a private
placement  offering.  Each warrant  entitles its holder to purchase one share of
common stock at an exercise  price of $8.13 per share,  subject to adjustment in
accordance with the anti-dilution and other provisions  referred to below. These
warrants are exercisable from May 1999 until May 2004.

         The  exercise  price  and the  number of  shares  purchasable  upon the
exercise of these  warrants are subject to  adjustment  upon the  occurrence  of
certain  events,  including  stock  splits,  stock  dividends,  combinations  or
reclassifications  of the common  stock.  These  warrants do not confer upon the
holders any voting or any other rights as the shareholders of D.G. Jewelry Inc.

         The holders of these warrants have the option to pay the exercise price
in cash or pursuant to a cashless exercise.

         None of these warrants have been exercised as of March 31, 2002.

Transfer Agent

         The  transfer  agent of our shares of common  stock is  American  Stock
Transfer & Trust Company,  59 Maiden Lane,  New York,  New York 10038.  American
Stock Transfer & Trust Company also acts as the warrant agent for our warrants.

                                       13
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

         The following summary financial  information for the fiscal years 2001,
2000,  and 1999 have been derived from the audited  financial  statements of the
Company percent are percent of Net Sales.

         The following  selected  statement of operations data is for the period
from January 1, 1999 through  December 31, 2001. The selected balance sheet data
is for the period from January 1, 1999 through  December 31, 2001. The statement
of operations  and balance  sheet data is derived from our financial  statements
and the related notes included  elsewhere in this prospectus  audited by Solursh
Feldman  &  Partners,LLP,  Chartered  Accountants.  Our books  and  records  are
maintained in Canadian Dollars,  but our auditors have reconciled such financial
data to United States dollars and the financial statements contained herein have
been prepared in accordance with generally accepted accounting principles in the
United  States.   All  information  should  be  read  in  conjunction  with  our
consolidated financial statements and the notes which are attached hereto.


                                                     Year ended, December 31,
                                      1999                 2000          2001
                                      ----                 ----          ----
                                          (in thousands except per share data)

Statement of Operations Data:
Revenue                              $35,414              $39,956       $36,037
Gross profit                          13,059               14,798        10,824
Net income                             1,000                1,382         1,571
Net income per share                    0.16                 0.21          0.23
Net income per share - diluted          0.16                 0.21          0.22


                                                    Year ended, December 31,
                                       1999                 2000         2001
                                       ----                 ----         ----
                                          (in thousands except per share data)
Balance Sheet Data:
Working capital                      $20,400              $20,882       $23,221
Total Assets                          51,512               56,117        52,830
Long-term debt                         2,202                2,241         1,977
Total liabilities                     31,112               35,235        29,609
Shareholders' equity                  20,400               20,882        23,221

ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

You should read the following  discussion in conjunction  with our  consolidated
financial  statements and related notes included  elsewhere in this  prospectus.
See "Special Note Regarding Forward- Looking Statements."

         Our future success as a manufacturer  and distributor of  value-priced,
stone-set jewelry will be influenced by several factors including  technological
developments in the mass production of jewelry,  our ability to efficiently meet
the  design  and  production  requirements  of our  customers,  and  the  market
acceptance  of  our  jewelry.  Further  factors  impacting  our  operations  are
increases in expenses  associated  with continued  sales growth,  our ability to
control costs,  management's  ability to evaluate the public's tastes and orders
to target  satisfactory  profit  margins,  the ability to develop and manage the
introduction of new designed products, and competition.  Quality control is also
essential to our success,  since  customers  demand  compliance  with design and
product specifications and consistency of production.

                                       14

<PAGE>

         In  connection  with our  initial  public  offering  we  issued  to the
underwriters  warrants to acquire  110,000  shares of common  stock at $9.90 per
share and 110,000 shares warrants at an exercise price of $0.165. These warrants
expire April 2002.

         Our utilization of our high-volume  manufacturing  techniques sometimes
results  in  excess  inventories.  In the  past,  we either  sold  these  excess
inventories in lots at prices which usually resulted in losses of our investment
in labor and  overhead  and without  recovering  our full cost of stones,  or we
internally  recycled  the metal and most stones by  disassembling  the  product,
re-melting the gold or silver and removing the stones.  This recycling  resulted
in additional  incurred labor and overhead costs. Once Diamante  established its
factory  outlet  stores,  it provided us with an  opportunity to sell our excess
inventories on more favorable terms. By selling to Diamante,  we avoid the costs
and  losses  that  we had  incurred  in the  past  and  we are  afforded  a more
advantageous method of dealing with our excess inventories. We are the exclusive
supplier of products to Diamante  and our account  receivable  from  Diamante is
fully secured by all the assets of Diamante,  which  security  interest has been
pledged  by us to The  Bank of Nova  Scotia  for our  financing  facilities.  In
addition, we perform certain administrative  functions for Diamante. We are also
the exclusive  supplier of products to Pegasus  Acquisition  Corp. I, a Delaware
corporation  owned by Yamit Karp of  Toronto.  Yamit Karp is a daughter  of Jack
Berkovits,  CEO of D.G.  Pegasus  owns and  operates  four  stores  in  Phoenix,
Arizona.

         We are also the exclusive  supplier of products to Florida  Acquisition
I.  Corp,  a  Delaware  corporation  which  operates  a store in Coral  Springs,
Florida,  and to Lilly's Jewelers 2001, Inc., a West Virginia  corporation which
operates six stores in West Virginia.  Both of these  corporations  are owned by
Yamit Karp,  daughter of Jack  Berkovits,  CEO of DG. We are also the  exclusive
supplier of products to Michigan  Acquisition  Corp. I., a Michigan  corporation
which  operates a store in Birch Run,  Michigan  and which is owned by Eli Karp,
husband of Yamit Karp and son-in-law of Jack Berkovits, CEO of DG.

         Generally,  we do not provide products pursuant to long-term contracts.
We have an exclusive jewelry supply contract with Zellers,  Inc. of Canada that,
pursuant to its terms,  is to terminate in December 2004.  Sales to Zellers Inc.
of Canada  were $1.6  million in 1996,  $550,000  in 1997,  $1,814,000  in 1998,
$862,526 in 1999, $1,192,513 in 2000 and $1,144,487 in 2001.

         On November 21, 1997,  we acquired  substantially  all of the assets of
the wholesale  jewelry  division of Litton  Systems,  Inc.,  which  division had
operated under the trade name Diamonair,  for  approximately  $5.8 million.  The
acquisition  was  accounted  for  using  the  purchase   accounting  method.  In
accordance with the purchase  accounting method,  Diamonair's  results have been
included in our consolidated financial statements since the acquisition date.

         Sales of Diamonair  products in 2001 on a  non-consolidated,  unaudited
basis were  $6.221  million  and the  profit  margin  was  approximately  42.7%.
Diamonair   purchased  products  from   approximately  25  suppliers.   We  have
consistently increased the amount of Diamonair products manufactured by us using
our manufacturing  process thus increasing  consolidated gross margins.  We have
increased sales of Diamonair products by introducing the Diamonair products into
the distribution lines used by the D.G. division and the Aviv division.

         On February 10, 1998, we completed our acquisition of substantially all
of the assets of Aviv, Inc., by assuming approximately $4.3 million in debt. The
effective date of the acquisition was June 1, 1997.

         Of  Aviv's  total  sales  in  2001  of  approximately  $6.770  million,
approximately  $1.095 million were attributable to the New York Gold and Diamond
Exchange,  a retail store at Aviv's  facilities  in Houston,  Texas.  The profit
margin on Aviv's sales was  approximately  7.3% for the year ended  December 31,
2001.  We do not  anticipate  that the cost of many of the Aviv products will be
reduced significantly by our

                                       15

<PAGE>

manufacturing  process.  Aviv's products  generally are made with more expensive
metals  and  stones  than  our  other  products.   Therefore,   savings  in  the
manufacturing process do not result in unit cost reductions that are material in
relation  to the total  price of the Aviv  jewelry.  We also  expect to increase
sales of Aviv  products by  introducing  the Aviv  products to the  distribution
lines used by the D.G. division and Diamonair division.

         We continuously  review our administrative  costs to determine if there
are areas  where  expenses  could be reduced  through  further  integration  and
consolidation of the  acquisitions.  Although we expect to achieve some level of
consolidation, these potential cost reductions are limited in many areas because
(i)  operating  in the  United  States  and  Canada  limits  the  advantages  of
consolidating   certain  accounting  and  human  resources  functions  and  (ii)
management  believes that  maintaining the existing  Diamonair sales offices and
manufacturing  facilities  will be beneficial for maintenance of that divisions'
existing  customer  relationships  and will  increase our  opportunities  in the
United States.

         Fluctuations   in  the  Canadian   dollar  against  other   currencies,
especially  the U.S.  dollar,  may have a  material  effect  on our  results  of
operations.  A  substantial  portion of our sales and  purchases are set in U.S.
dollars or are influenced by local currency against the U.S. dollar. To date, we
have not sought to hedge the risks  associated  with  fluctuations  in  exchange
rates and currently do not a have a policy relating to hedging.

Results of Operations

Year Ended December 31, 2001 Compared to Fiscal Year Ended December 31, 2000

         Sales for Fiscal 2001 were  $36,036,610 as compared to $39,955,503  for
the year ended  December  31,  2000,  a decrease  of  approximately  9.8%.  This
decrease is due mostly to  decreased  sales in the last four months of the year,
after September 11, 2001.

         Gross  profit  decreased  by  approximately  7% (from 37.04% in 2000 to
30.04% in  2001).  This  one-time  decrease  is  attributable  primarily  to the
Company's subscription to a gold lease program implemented in 2001. Actual gross
profit  before  factoring  in the gold lease was 36.9%,  a decrease  of 0.14% as
compared to the previous year.

         Operating  expenses increased to $6,425,868 for the year ended December
31, 2001 from  $5,861,183  for the year ended  December 31, 2000.  This resulted
mostly from increased advertising  allowances and discounts.  Operating expenses
represented  17.8% of revenues in Fiscal 2001  compared to 14.67% of revenues in
Fiscal 2000.

         Interest  expenses  decreased by  approximately  $126,000 due mainly to
decreased interest rates.

         Operating  income  for the year was  $4,398,573  or $0.62  per share as
compared to $8,937,062 or $1.36 per share in 2000. This decrease is attributable
to the  Company's  subscription  to a gold lease  program  implemented  in 2001.
Unusual  items  amounted  to  $414,444  and are  associated  with the  Haymarket
litigation.

         As a result,  income before income taxes was  $2,369,958 as compared to
$2,223,175,  an increase of  approximately  $147,000.  Income taxes decreased by
$42,197, from $841,268 in fiscal 2000 to $799,071 in fiscal 2001.

Year Ended December 31, 2000 Compared to Fiscal Year Ended December 31, 1999

         Sales for fiscal 2000 were  $39,955,503 as compared to $35,414,133  for
the year ended  December  31,  1999,  an increase  of  approximately  37%.  This
increase is due mostly to larger sales to NetJewels.com, Diamante Fine Jewellery
Limited  and  Pegasus  Acquisition  Corp.  I.  The cost of  sales  increased  by
approximately $2.9 million as compared to the previous fiscal year and the gross
profit  increased  by 0.16% (From  36.88% in 1999 to 37.04% in 2000).  Operating
expenses increased to $5,727,308 for

                                       16

<PAGE>

the year ended December 31, 2000 from $4,257,790 for the year ended December 31,
1999.  This resulted  mostly from an increase of  approximately  $1.5 million in
selling expenses. Most of the increase is due to an increase in bad debt expense
of approximately  $980,000.  Operating expenses represented 14.7% of revenues in
Fiscal 2000 compared to 12.02% in Fiscal 1999.

         Interest expenses  increased by approximately  $94,000 due to increased
financing to service our growth during the year.

         Operating  income  for the year was  $8,937,062  or $1.36  per share as
compared to $8,800,847 or $1.39 per share on a fully diluted basis in 1999.  The
number of shares outstanding in 2000 were 6,649,655, as compared to 6,343,622 in
Fiscal 1999. The Company decided to write-off a portion of the loans  receivable
from Diamante Fine Jewelry Inc.  ($269,320),  the full amount of the  receivable
from its 50% owned subsidiary,  NetJewels.com, Inc. in the amount of $2,109,496,
and to  set-up  the  potential  liability  on  the  litigation  associated  with
Haymarket ($2,403,869). The total unusual write-offs amounted to $4,782,685.

         As a result, income before income taxes and discontinued operations was
$2,357,050  as compared to  $1,553,482,  an increase of  $803,568.  Income taxes
increased by $288,014,  from $553,254 in Fiscal 1999 to $841,268 in Fiscal 2000.
Income  before  loss  from  discontinued  operation  was  $1,515,782  in 2000 as
compared  to net  income  of  $1,000,228  in 1999.  The loss  from  discontinued
operations (Aviv Inc.) was $133,875, resulting in a net income of $1,381,907.

Liquidity and Capital Resources

         In April 1997, we completed an initial public offering in which we sold
1,265,000  shares of common  stock and  1,265,000  warrants to  purchase  common
stock.  We realized  net proceeds of $6.7  million  from this  offering.  We may
realize  additional  proceeds from the exercise of the warrants,  although there
can be no assurance that such warrants will be exercised.

         We  currently  have an  operating  line of credit with The Bank of Nova
Scotia in the amount of $21.3  million,  including the gold lease  arrangements,
subject to certain margin  requirements.  The amount available to us is equal to
75% to 80% of "eligible accounts  receivable",  as defined in the Line of Credit
Agreement,  plus 50% of the  inventory  values up to a maximum  advance  against
inventory of approximately  $10.3 million. We utilized the credit line to borrow
the $5.8 million and $4.3 million  necessary for the  acquisitions  of Diamonair
and Aviv, respectively.

         Our borrowings under the line of credit bear interest at Canadian prime
plus 3/4% which at March 31, 2002 amounted to 4.50%.  Interest on any borrowings
is payable monthly.  As at December 31, 2001, we are in full compliance with all
of the banking covenants  (including the financial covenants and ratios) and are
required to report to our bankers on a monthly basis.

         Our  obligations  under the revolving  credit facility are secured by a
security  interest  on all of  our  assets,  guaranteed  by  Diamante,  Pegasus,
Florida, and Lilly's,  jewelry retail chains owned by Mr. Berkovits's  daughter,
and by Michigan, a jewelry retail operation owned by Mr. Berkovits'  son-in-law,
and are  further  secured  by a  mortgage  on the  property  owned by a  limited
partnership  controlled by Jack  Berkovits  and leased to us, which  mortgage we
have guaranteed.

         For the year ended  December 31, 2001, we generated cash from operating
activities of  approximately  $4.1  million;  accounts  receivable  increased by
approximately  $1.2  million  and  inventory  decreased  by  approximately  $5.1
million.

         Our accounts  receivable net of allowances for doubtful  accounts as of
December 31, 2001 were approximately $28 million.  Accounts receivable is such a
large percentage of sales because (i) accounts receivable include a 7% goods and
services tax and a 10% federal  excise tax on most Canadian  sales,  which taxes
are not  included in sales,  and (ii) sales  volume is  generally  higher in the
fourth  quarter  and some  customers  do not pay us for  goods  until  after the
holiday selling season.

                                       17
<PAGE>

         Our inventory (net of gold lease of  approximately  $2.5 million) as of
December 31, 2001 was approximately  $20.5 million,  or 56.8% of revenue for the
year ended  December 31, 2001.  Inventory  is such a large  percentage  of sales
because the inventory  reflects needs for both  divisions for their  anticipated
expansion and growth in 2002.

         At December  31,  2001,  we had loans  outstanding  from our  principal
shareholder,  Jack Berkovits, of approximately $1.7 million, which bear interest
at 12.0% per annum, and this rate is otherwise determined from year to year.

         In May 1999, we issued  615,385 shares of common stock and an aggregate
of 172,308 warrants  exercisable at $8.13 per share in connection with a private
placement offering.  The exercise price of the warrants is subject to adjustment
in certain circumstances. These warrants are exercisable from May 1999 until May
2004.  We issued  615,385  shares of common  stock to  Haymarket,  LLC,  110,769
warrants to purchase  common stock to  Haymarket,  LLC,  and 61,539  warrants to
purchase common stock to Oscar Gruss & Son.

         Pursuant to the Common Stock Purchase Agreement between Haymarket,  LLC
and us, the number of shares  purchased  by  Haymarket,  LLC was  required to be
adjusted  to  reflect  a reset  in the  purchase  price of the  shares  acquired
according to a detailed  formula set out in the Agreement.  On February 6, 2002,
in light of the decision of the appeal decision of the Appellate Division, First
Department,  of the New York Supreme Court issued on January 17, 2002, we issued
316,933 shares to Haymarket LLC. See "Legal Proceedings."

         We  anticipate  that cash flow from  operations,  as well as borrowings
available  under our  existing  credit  line will be  sufficient  to satisfy our
credit  needs  for the next  twelve  months.  In  addition,  we may sell  equity
securities to raise additional capital as needed.

ITEM 7A. QUANTITATIVE AND QUALITATIVE MARKET RISK

         Not Applicable.

                                       18

<PAGE>

ITEM 8. FINANCIAL STATEMENTS

         The financial  statements are included at the end of this Annual Report
on Form 10-K at the pages included below.

                                                                      Page
Financial Statements:                                                 Number
                                                                      ------

Report of Independent Auditors.........................................F - 1

Consolidated Balance Sheets as at December 31, 2001 and 2000 ..........F - 2

Consolidated Statements of Income for the
         years ended December 31, 2001, and 2000 ......................F - 4

Consolidated Statements of Cash Flows
     for the years ended December 31, 2001 and 2000 ...................F - 5

Consolidated Statements of Stockholders' Equity
     for the years ended December 31, 2001 and 2000....................F - 7

Notes to Consolidated Financial Statements.............................F - 8

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

Not applicable.

                                       19

<PAGE>

                                    PART III

ITEM  10.  DIRECTORS,   EXECUTIVE  OFFICERS,   PROMOTERS  AND  CONTROL  PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

Directors and Executive Officers

<TABLE>
<S>                                        <C>   <C>                     <C>

      Name                                 Age   Position with the       Position Held
                                                   Company                   Since

Samuel J. Berkovits.....................   50  Chairman of the Board,         1979
                                               CEO and President
Anca Periet.............................   47  CFO, Vice President-Finance
                                               & Operations, Controller,      2000
                                               and Treasurer
Michael P. Johns........................   60  Executive Vice President       2001
                                               - Retail Specialty Services
BenTzion Berkovits......................   28  Executive Vice President       2001
                                               - Sales & Marketing
Kenneth H. Saul.........................   56  General Counsel, Secretary     2000
Leonard Fasullo.........................   61  Vice President-Production      1989
Bruce Fleischer.........................   47  Vice President - Retail        2000
                                               Specialty Services
Meyer Feiler............................   49  Director                       1998
Steven Reichmann........................   48  Director                       2000
Andrew R. Reiser........................   44  Director                       1998
Ralph R. Lean, Q.C......................   56  Director                       2001
Edward A. Foster........................   56  Director                       2001
Thomas Schonberger......................   54  Director                       2002

</TABLE>

         Samuel  Jacob  "Jack"  Berkovits  has  served  as our  President  and a
Director  since  1979.  He is a  founding  member  of  the  Jeweler's  Vigilance
Committee (Canadian  Jeweler's  Association) and is active in community affairs.
Mr. Berkovits became a member of the Canadian Institute of Chartered Accountants
in 1976.  He practiced as an  accountant  in Montreal  from 1972 to 1977 when he
joined D.G. Jewelry Inc.

         Anca Periet has been with DG for more than 15 years,  and was appointed
to the multiple positions of Vice President - Finance & Operations,  Controller,
Treasurer  and Secretary in May,  2000.  In 2001,  she turned over the duties of
Secretary  to enable  her to assume the duties of Chief  Financial  Officer.  In
addition to her financial  responsibilities for the Company and its subsidiaries
and  affiliated   companies,   she  is  also  responsible  for  identifying  and
investigating potential  acquisitions.  Ms. Periet has an M. Comm from AES and a
B. Sc. from York University

         Michael P.  Johns  joined  D.G.  Jewelry  Inc.  on March 26,  2001,  as
Executive  Vice  President  - Retail  Specialty  Services.  He  brings to us his
extensive  background  in retail  management.  He began his career  during his 8
years with the T. Eaton Co. in London,  Ontario, where he first undertook retail
management  responsibilities.  He then  served for 27 years with the W.G.  Young
Co.,  the  latter  portion of which he served as Sr. VP -  Marketing  and Sales.
Under his stewardship, W.G. Young grew from a local entity with just 6 stores in
the  London  area  to a  national  chain  with  37  stores.,  for  which  he was
supervising  a  staff  of 280 and  exercising  responsibility  for  the  chain's
acquisition,  promotion and sales of merchandise. Since 1995, Mr. Johns has been
the owner of his own small jewelry chain in the western Ontario area.

         BenTzion  Berkovits  has been  with DG for more  than 5 years,  and was
appointed  Executive  Vice  President - Sales & Marketing in May, 2000, in which
role  he   continues   to  manage  key   accounts  of  the   Company   including
ShopNBC/ValueVision,  QVC and Wal-Mart, as well as making regular appearances on
TV, and being  involved in product  development,  and general  direction  of the
Company's sales efforts.

         Kenneth H. Saul joined D.G. Jewelry Inc. as General Counsel in October,
2000,  and was appointed  Secretary on March 12, 2001. Mr. Saul has carried on a
varied

                                       20

<PAGE>

legal practice in the Toronto area since April,  1973,  and more  recently,  has
taught law-related and  Internet-related  courses at both Centennial College and
at Devry  Institute.  He has a B.A. from  University of Toronto,  an LL.B.  from
Osgoode  Hall Law Scholl,  Toronto,  and, as well,  successfully  completed  the
Canadian Securities Course at Toronto, in June, 1998.

         Leonard Fasullo has been our Vice President-Production  since 1989. Mr.
Fasullo joined D.G. Jewelry Inc. as a manufacturing foreman in 1984.

         Bruce Fleischer began serving as Vice President - Business  Development
for the Company in August,  1997,  assumed the  additional  responsibilities  of
managing  DG's  retail  interests  in  February,  1998  and was  appointed  Vice
President - Retail  Specialty  Services in May,  2000. Mr.  Fleischer  began his
retail marketing career in 1975 with Canadian Tire Corporation  Limited,  one of
Canada's most successful retailers. In 1996, Mr. Fleischer joined Thorn Americas
as Director, Marketing & Merchandising for its Rent-A-Center store chain.

         Meyer Feiler has been a Director of D.G.  Jewelry Inc. since July 1998.
Mr.  Feiler has served as President of Carmen  Incorporated,  one of the largest
jewelry  companies  in  Canada  since  1993.  Mr.  Feiler  has  worked at Carmen
Incorporated since 1979.

         Steven  Reichmann  was  appointed  a Director on August 11,  2000.  Mr.
Reichmann  is the founder and  Executive  Vice  President  of Everest  Broadband
Networks  Canada  Ltd.  ("EBN").  EBN  provides   telecommunications   services,
primarily high-speed inter-net  applications and telephone and video services to
occupants of multi-tenant office and residential building, and hotel properties.
Mr.  Reichmann  is a member of EBN's Real Estate  Advisory  Board.  Prior to his
founding of EBN, Mr. Reichmann was the Vice President of Corporate Expansion and
Acquisition of Olympia Tile International,  a family-owned  business,  where his
objective was to increase  business  operations  throughout  North  America.  He
received an MBA from York University, Toronto in 1988.

         Andrew R. Reiser was  appointed a Director  on January  25,  2001.  Mr.
Reiser is  currently  Managing  Director  -  Corporate  Finance  of Donald & Co.
Securities  Inc.,  New York NY, a full  service  investment  bank and retail and
institutional brokerage firm with regional offices throughout the United States.
Mr.  Reiser's  responsibilities  with  Donald & Co.  include  management  of all
aspects of corporate  financing  including initial public  offerings,  follow-on
offerings, private placements and advisory services. Additional responsibilities
include  development of  institutional  clientele and contacts,  coordination of
syndications of offerings and arranging  analyst  coverage.  As well, Mr. Reiser
has  provided  advisory  services  such  as  merger  and  acquisition  analysis,
preparation of fairness opinions and valuations,  and corporate  development and
strategic planning.  Mr. Reiser has resigned from the board for personal reasons
effective March 6, 2002.

         Ralph R. Lean,  Q.C. is a senior  partner in the Toronto  legal firm of
Cassels,  Brock  and  Blackwell,  LLP.  He has  advised  business  clients  from
multi-nationals  to  entrepreneurs  with respect to a full range of business law
issues,  and works closely with clients  dealing with the municipal,  provincial
and federal levels of government. Mr. Lean serves on the boards of many Canadian
public and private companies as well as many charitable corporations,  including
Oceanic Adventures  International Corp., Sirit Technologies Inc., the World Film
Festival of Toronto Inc., Teachers' Pension Plan Board, Galaxy OnLine, Inc., and
Trustee,  Molson  Indy Board of  Trustees.  Mr.  Lean  received an Honours BA in
Business Administration from the University of Western Ontario, London, Ontario,
and his LL.B. from Osgoode Hall Law School,  York  University,  Toronto.  He was
called to the bar of Ontario in 1973.

         Edward  A.  Foster  is  President  and  Chief   Operating   Officer  of
International Commerce Exchange Systems, Inc. (`ICES') a New York-based Internet
and traditional  business holding company,  which holds controlling  interest in
18.  He holds a number  of  offices  and  directorships  of the ICES  companies,
including  President of Helios  Ventures,  Inc.  which is being  merged  through
Medical  Edge  Technologies,  Inc.  with  Healthcare  Integrated  Services  Inc.
(Amex:HII).  Mr. Foster is also  President and CEO of NetCare  Health  Services,
Inc., an ICES in-house pharmacy and medical supply

                                       21

<PAGE>

company based in Connecticut,  and which recently signed a merger agreement with
Digital  Commerce  International,  Inc.  (OTCBB:THBK),  a provider of e-commerce
infrastructure  services.  Mr. Foster will continue post-merger as President and
CEO of the  combined  company,  which  will make its core  focus the  healthcare
industry.  In the past,  Mr. Foster has, as Chairman,  guided Aratek  Integrated
Systems  Inc. in Canada and Aratek  America,  Inc.  in the US,  both  engaged in
software engineering research and development,  and through his holding company,
Faward  Holdings  Ltd.,  held a  significant  interest in Data  Kinetics and was
active in the development of software strategy for Data Kinetics Ltd. Mr. Foster
obtained  a degree  in  accounting  and  marketing  at Wayne  State  University,
Detroit, and a business administration degree from York University, Toronto.

         Thomas Schonberger is President and CEO of Greenleaf Investments Corp.

         There is no family relationship between any of the above named officers
or  directors,  save and except for the fact that  Samuel  Jacob  Berkovits  and
BenTzion Berkovits are father and son.

         The term of office for directors and officers is one year.

Audit and Compensation Committees

         As of December  31,  2001,  the Audit  Committee  consisted  of Messrs.
Reiser,  Feiler and Lean. On March 7,2002,  Mr. Schonberger was appointed to the
audit  committee  to  replace  Mr.  Reiser.  The  Company  has  adopted an audit
committee charter in compliance with SEC and Nasdaq requirements.

         The responsibilities of the Audit Committee include recommending to the
board of directors the firm of independent  auditors to serve us,  reviewing the
independent  auditors reports,  services and results of audit, and reviewing the
scope, results and adequacy of our internal control procedures. The Compensation
Committee  consists  of  Messrs.  Feiler,  Lean  and  Foster.  The  Compensation
Committee is expected to periodically review and evaluate officers' compensation
and will administer our 1996 Stock Option Plan, 1998 Stock Option Plan, the 1999
Stock Option Plan, and the 2001 Stock Option Plan.

         It is not expected  that any director or committee  member will receive
any  compensation for acting in such capacity.  We will reimburse  directors and
committee members for all ordinary and necessary  expenses incurred in attending
any meeting of the board or any committee thereof.

Executive Compensation

         The  following  table sets  forth all cash  compensation  for  services
rendered in all  capacities to us, for the fiscal years ended December 31, 2001,
December 31, 2000 and December 31, 1999 paid to our Chief Executive Officer, and
the other most  highly  compensated  executive  officers at the end of the above
fiscal years whose total annual salary plus bonus exceeded $100,000 per annum.

<TABLE>
<S>                      <C>     <C>     <C>     <C>         <C>      <C>

                           Summary Compensation Table


                                                              Restricted
Name and                 Year                     Stock                   Other
Principal Position       Ended   Salary   Bonus   Awards      Options  Compensation
------------------       -----   ------   -----   ------      -------  ------------

Jack Berkovits           2001   $249,351  $125,565     0             0   $12,000 (1)
 Chief Executive Officer 2000   $266,756  $200,067     0             0   $12,000 (1)
                         1999   $247,645  $    -0-     0        10,000   $12,000 (1)
                         1998   $216,951  $125,000     0       266,000   $12,000 (1)
                         1997   $197,242  $187,798     0       377,500   $12,000 (1)

</TABLE>

(1)     Represents monthly auto allowance.

                                       22

<PAGE>

Employment Contracts

         Jack  Berkovits  and  D.G.  Jewelry  Inc.  entered  into a  three  year
employment  agreement  commencing  April 17, 1997 for Mr.  Berkovits to serve as
Chief  Executive  Officer and  President  at an annual  salary of $250,000  (the
contract actually  provided for a salary of Cdn$340,000,  which was more or less
equivalent  at that time) with yearly  increases  of no less than  $10,000  (the
contract actually provides for yearly increases of no less than Cdn$14,000). Mr.
Berkovits'  employment agreement expired on April 17, 2001, and was extended for
the  time  being  by  the  Board  of  Directors  while  it  is  currently  being
renegotiated.  Should Mr.  Berkovits die during the term of this agreement,  his
estate or designee shall receive,  upon his death, two years full salary. In the
event of  disability,  Mr.  Berkovits  is to  receive  70% of his salary for the
remainder of the term of the  agreement.  The agreement  also provides for us to
maintain  approximately  $2,000,000  in  key-man  insurance  on the  life of Mr.
Berkovits.  Currently,  we are beneficiary of two "key-man" term policies with a
total death benefit of $840,000. The $700,000 policy has been assigned to secure
our  financing  facilities  with The Bank of Nova  Scotia.  We  maintain a third
policy  with a death  benefit of $1.1  million  for which Mr.  Berkovits  is the
beneficiary.

         Based upon any  wrongful  termination,  which  includes  changes in the
control of D.G.  Jewelry Inc.  through an  acquiring  person (any person who has
acquired or announces a tender offer or exchange for 25% of D.G.  Jewelry Inc.),
a sale of  substantially  all of the assets or merger,  acquisition of us or our
consolidation with another,  or certain types of board changes, we shall pay Mr.
Berkovits  a lump sum  payment,  based  upon his  then  compensation,  including
benefits and  perquisites,  from such  termination.  Such  payment  shall be the
balance of his  compensation  for the remainder of the term or compensation  for
one year whichever is less;  provided,  if the payment is in excess of $100,000,
then such excess shall be payable in equal  quarterly  payments with interest at
the  legal   rate.   The   employment   agreement   also   contains  a  one-year
non-competition  provision within a 200 mile radius of our primary  operation in
Canada or anywhere in the United States.

         No other  officer has an  employment  contract  with D.G.  Jewelry Inc.
except for a verbal  agreement  with its CFO,  Anca Periet,  effective  April 1,
2001. This verbal  agreement is currently in process of being  renegotiated  and
reduced to a written contract,  and will be effective from October 1, 2001, when
completed.

Compensation of Directors

         There  are no  standard  arrangements  for the  payment  of any fees to
directors  of D.G.  Jewelry  Inc.  for acting in such  capacity.  Directors  are
reimbursed for expenses for attending meetings.

Options to Named Executive Officers

         The following tables set forth certain  information with respect to all
outstanding  stock options  granted during 2001 to the Company's Named Executive
Officers.

<TABLE>
<S>                <C>          <C>           <C>       <C>    <C>

                             Option Grants

                   Number                                      Potential Realizable
                   of                                              Value at Assumed
                   Securities   % of Total                          Annual Rates of
                   Underly-     Options                                 Stock Price
                   ing          Granted        Exercise  Expira-   Appreciation for
                   Options      to Employees   Price     tion           Option Term
Name of Holder     Granted      in FiscalYear  ($/Share) Date          5%($) 10%($)
--------------     -------      -------------- --------  ----          ----- ------

Jack Berkovits,   0                 0            n/a     n/a      n/a      n/a

</TABLE>

                                       23
<PAGE>

       Option Exercises in Last Fiscal Year and Fiscal Year End Values (1)

<TABLE>
<S>             <C>              <C>        <C>                        <C>

                                                                           Value of
                                             Number of                  Unexercised
                                            Unexercised                In-the-Money
                                               Options                      Options
                      Shares                 at FY-End                    at FY-End
                 Acquired on      Value     Exercisable/               Exercisable/
Name             Exercise (#)     Realized  Unexercisable             Unexercisable
---------        ------------     --------  -------------             -------------

Jack Berkovits        0              0       *   /  *                   *   /   *

</TABLE>
---------------
(1) The closing bid price of a share of the  Company's  Common Stock at December
31, 2001 was $1.210.

Stock Option Plans

1996 Stock Option Plan

         In December 1996, the board of directors and  shareholders  adopted the
1996 D.G. Jewelry Stock Option Plan,  pursuant to which 500,000 shares of common
stock are provided for issuance. All of such options have been granted.

         In February 1997, the Board granted 172,500 Options under the 1996 Plan
to 20 persons, including officers, directors and key employees. The Options were
to be exercisable  at $4.50 per share for five years expiring  February 9, 2002.
On August 22, 1997,  the  Compensation  Committee  lowered the exercise price to
$1.38, which was the Company's stock price on such date. On August 22, 1997, the
Company granted an additional 327,500 options  exercisable at $1.38 per share to
Jack Berkovits.  All options granted vest at the rate of 25% every six months so
that the options are fully vested two years from their  issuance date. The table
below  reflects  the Options  under the 1996 Stock  Option  Plan  granted to the
present  officers and directors of D.G. and the  percentage of Options issued to
such persons.

<TABLE>
<S>                         <C>               <C>       <C>          <C>

  Officer and/or Director   Expiration Date   Options   Percent      Exercise Price
  -----------------------   ---------------   -------   -------      --------------

Jack Berkovits...........           (1)       377,500     75.5%             $1.38
Anca Periet..............       02/09/02       10,000      2.0%             $1.38
Leonard Fasullo..........       02/09/02       15,000      3.0%             $1.38
</TABLE>
--------
(1)  327,500  of such  options  expire on August 21,  2002 and 50,000  expire on
February 9, 2002.

1998 Stock Option Plan

         In July 1998, the Board granted 500,000 options to 34 persons including
officers, directors, consultants and key employees. The options were exercisable
at the following prices; $2.77 (410,000); $3.25 (40,000); and $4.00 (50,000). On
March 12, 2001, the Board of Directors  reduced the exercise price from $2.77 to
$1.00 on a total of 93,000 unexercised  options under the 1998 Plan. All Options
under  the 1998  Stock  Option  Plan  granted  vest at the rate of 25% every six
months so that the options are fully vested two years from their  issuance date.
The table below reflects the Options under the 1998 Stock Option Plan granted to
the present officers and

                                       24

<PAGE>

directors of D.G. and the percentage of Options issued to such persons.

<TABLE>
<S>                         <C>               <C>       <C>          <C>

  Officer and/or Director   Expiration Date   Options   Percent      Exercise Price
  -----------------------   ---------------   -------   -------      --------------

Jack Berkovits...........     07/14/03        266,000     53.2%          $ (1)
Anca Periet..............     07/14/03         20,000      4.0%          $2.77 (2)
Leonard Fasullo..........     07/14/03         20,000      4.0%          $2.77 (2)
Myer Feiler..............     07/14/03         60,000     12.0%          $ (3)
Bruce Fleischer..........     07/14/03          5,000      1.0%          $2.77
</TABLE>
---------
(1) 195,500 of such options were  exercised at an exercise  price of $2.77;  the
remaining  56,500  options were re-priced by the Board of Directors on March 12,
2001 to $1.00 per share.
(2) 15,000 of such options were exercised at an exercise price of $2.77; and the
remaining  5,000  options were  re-priced by the Board of Directors on March 12,
2001 to $1.00 per share.
(3) 10,000 of such options are exercisable at $2.77 and the remaining 50,000 are
at $4.00 per share.

1999 Stock Option plan

         In July 1999, the board of directors and shareholders  adopted the 1999
stock option plan. The plan will be administered by the  compensation  committee
or our  board of  directors,  who  will  determine  among  other  things,  those
individuals who shall receive options,  the time period during which the options
may be  partially  or fully  exercised,  the  number of  shares of common  stock
issuable  upon the exercise of the options and the option  exercise  price.  The
options may be granted as either or both of the following:  (a) incentive  stock
options, or (b) non-qualified stock options.  500,000 shares may be issued under
this plan. To date,  438,500  options have been granted under the plan, of which
5,750 have been  exercised,  39,750  have been  forfeited,  and  393,000  remain
outstanding;  101,250 options  (including those forfeited)  remain available for
grant under the 1999 Stock Option Plan.

         In connection with the plan, the exercise price of each incentive stock
option may not be less than 100% of the fair market value of our common stock on
the  date of  grant or 110% of fair  market  value  in the  case of an  employee
holding 10% or more of our outstanding  common stock.  The aggregate fair market
value of shares of common stock for which incentive stock options granted to any
employee are exercisable for the first time by such employee during any calendar
year, pursuant to all of our, or any related  corporation's,  stock option plan,
may not exceed $100,000.  Non-qualified  stock options may be granted at a price
determined by our compensation  committee,  but not at less than 85% of the fair
market value of our common stock.  Stock options  granted  pursuant to our stock
option plan will expire not more than ten years from the date of grant.

         The plan is  effective  for a period of ten  years,  expiring  in 2009.
Options  may be granted to  officers,  directors,  consultants,  key  employees,
advisors and similar  parties who provide  their skills and expertise to us. The
plan is designed to enable our  management  to attract and retain  qualified and
competent directors, employees, consultants and independent contractors. Options
granted under the plan may be exercised for up to ten years,  and shall be at an
exercise  price all as  determined  by our board.  Options are  non-transferable
except by the laws of descent and  distribution or a change in control of us, as
defined in the plan, and are exercisable  only by the participant  during his or
her lifetime.  Change in control includes (a) the sale of  substantially  all of
the assets of us and merger or  consolidation  with  another  company,  or (b) a
majority  of the  board  changes  other  than by  election  by the  stockholders
pursuant to board  solicitation  or by  vacancies  filled by the board caused by
death or resignation of such person.

         If a  participant  ceases  affiliation  with  us by  reason  of  death,
permanent  disability  or  retirement  at or after age 70,  the  option  remains
exercisable for one

                                       25

<PAGE>

year from such  occurrence but not beyond the option's  expiration  date.  Other
types of termination allow the participant three months to exercise,  except for
termination for cause which results in immediate termination of the option.

         Any  unexercised   options  that  expire  or  that  terminate  upon  an
employee's  ceasing to be employed  by us become  available  again for  issuance
under the plan.

         The plan  may be  terminated  or  amended  at any time by our  board of
directors,  except  that the  number  of shares of  common  stock  reserved  for
issuance  upon  the  exercise  of  options  granted  under  the  plan may not be
increased without the consent of our stockholders.

         In 2001,  the Board  granted  74,000  options to 23  persons  including
officers, directors,  consultants and key employees. The options are exercisable
at a price of $1.00 per share. On March 12, 2001, the Board of Directors reduced
the  exercise  price  from  $4.125  to $1.00  per  share  on a total  of  30,000
unexercised  options that had been  granted  under the 1999 Plan during the 1999
fiscal year.  Options  under the 1999 Stock Option Plan granted vest at the rate
of 25% every six  months,  or in some  cases  every  three  months,  so that the
options are fully vested within no more than two years from their issuance date.
The table below reflects the Options under the 1998 Stock Option Plan granted to
the present  officers and directors of D.G. and the percentage of Options issued
to such persons.

<TABLE>
<S>                         <C>               <C>       <C>          <C>

  Officer and/or Director   Expiration Date   Options   Percent      Exercise Price
  -----------------------   ---------------   -------   -------      --------------

Jack Berkovits...........          (1)        195,000         %          $1.00  (2)
Anca Periet..............     11/09/10         35,000         %          $1.00
Michael P. Johns.........     03/29/11         15,000         %          $1.00
Bentzion Berkovits.......     11/09/10         35,000         %          $1.00
Kenneth H. Saul..........     02/23/11         10,000         %          $1.00
Leonard Fasullo..........     01/03/11          2,000         %          $1.00
Bruce Fleischer..........     01/03/11          1,000         %          $1.00
Myer Feiler..............          (3)         35,000         %          $1.00  (4)
Steven Reichmann.........     12/29/10          5,000         %          $1.00
Andrew R. Reiser.........     12/29/10          5,000         %          $1.00
Ralph R. Lean............     12/29/10          5,000         %          $1.00
Edward A. Foster.........        n/a                0        0%            n/a
Thomas Schonberger.......        n/a                0        0%            n/a
</TABLE>
---------

(1) 10,000 of such options  expire  07/19/10,  180,000  expire  11/09/10 and the
remaining 5,000 expire 12/29/10.
(2) 10,000 of such options were originally issued at an exercise price of $4.125
and on March 12, 2001,  the exercise price was reduced by the Board of Directors
to $1.00 per share.
(3) 10,000 of such  options  expire  11/16/09,  20,000  expire  01/03/11 and the
remaining 5,000 expire 12/29/10.
(4) 10,000 of such options were originally issued at an exercise price of $4.125
and on March 12, 2001,  the exercise price was reduced by the Board of Directors
to $1.00 per share.

2001 Stock Option Plan

         In August,  2001, the board of directors and  shareholders  adopted the
2001  Stock  Option  Plan.  The plan will be  administered  by the  compensation
committee or our board of  directors,  who will  determine  among other  things,
those  individuals who shall receive  options,  the time period during which the
options  may be  partially  or fully  exercised,  the number of shares of common
stock issuable upon the exercise of the options and the option  exercise  price.
The options  may be granted as either or both of the  following:  (a)  incentive
stock options, or (b) non-qualified stock options.  500,000 shares may be issued
under this plan.  To date,  no options have been options have been granted under
the plan.

                                       26

<PAGE>

         In connection with the plan, the exercise price of each incentive stock
option may not be less than 100% of the fair market value of our common stock on
the  date of  grant or 110% of fair  market  value  in the  case of an  employee
holding 10% or more of our outstanding  common stock.  The aggregate fair market
value of shares of common stock for which incentive stock options granted to any
employee are exercisable for the first time by such employee during any calendar
year, pursuant to all of our, or any related  corporation's,  stock option plan,
may not exceed $100,000.  Non-qualified  stock options may be granted at a price
determined by our compensation  committee,  but not at less than 85% of the fair
market value of our common stock.  Stock options  granted  pursuant to our stock
option plan will expire not more than ten years from the date of grant.

         The plan is  effective  for a period of ten  years,  expiring  in 2009.
Options  may be granted to  officers,  directors,  consultants,  key  employees,
advisors and similar  parties who provide  their skills and expertise to us. The
plan is designed to enable our  management  to attract and retain  qualified and
competent directors, employees, consultants and independent contractors. Options
granted under the plan may be exercised for up to ten years,  and shall be at an
exercise  price all as  determined  by our board.  Options are  non-transferable
except by the laws of descent and  distribution or a change in control of us, as
defined in the plan, and are exercisable  only by the participant  during his or
her lifetime.  Change in control includes (a) the sale of  substantially  all of
the assets of us and merger or  consolidation  with  another  company,  or (b) a
majority  of the  board  changes  other  than by  election  by the  stockholders
pursuant to board  solicitation  or by  vacancies  filled by the board caused by
death or resignation of such person.

         If a  participant  ceases  affiliation  with  us by  reason  of  death,
permanent  disability  or  retirement  at or after age 70,  the  option  remains
exercisable  for one year from  such  occurrence  but not  beyond  the  option's
expiration date. Other types of termination  allow the participant  three months
to  exercise,  except for  termination  for cause  which  results  in  immediate
termination of the option.

         Any  unexercised   options  that  expire  or  that  terminate  upon  an
employee's  ceasing to be employed  by us become  available  again for  issuance
under the plan.

         The plan  may be  terminated  or  amended  at any time by our  board of
directors,  except  that the  number  of shares of  common  stock  reserved  for
issuance  upon  the  exercise  of  options  granted  under  the  plan may not be
increased without the consent of our stockholders.

Indemnification of Officers and Directors

         We shall,  to the fullest extent  permitted by the laws of the Province
of Ontario,  as the same may be amended and  supplemented,  indemnify under said
section  from and against any and all  expenses,  liabilities  or other  matters
referred in or covered by said  section,  and the  indemnification  provided for
herein  shall  not be  deemed  exclusive  of any  other  rights  to which  those
indemnified may be entitled under any by-law, agreement, vote of stockholders or
disinterested  directors or otherwise,  both as to action in his or her official
capacity and as to action in another  capacity while holding such office,  shall
continue  as to a person who has ceased to be a director,  officer,  employee or
agent and shall inure to the benefit of the heirs,  executors and administrators
of such a person. We will have the power to purchase and maintain  officers' and
directors'  liability  insurance in order to insure against the  liabilities for
which such officers and directors are indemnified pursuant to Article 6.

         Insofar as indemnification for liabilities arising under the Securities
Act of  1933,  as  amended,  it may be  permitted  to  directors,  officers  and
controlling  persons of D.G. Jewelry Inc. pursuant to the foregoing  provisions,
or  otherwise,  we have been  advised  that in the opinion of the United  States
Securities and Exchange Commission such indemnification is against public policy
as expressed  in the  Securities  Act of 1933,  as amended,  and is,  therefore,
unenforceable. In the event

                                       27

<PAGE>

that a claim  for  indemnification  against  such  liabilities  (other  than the
payment by us of expenses incurred or paid by a director, officer or controlling
person of us in the  successful  defense of any action,  suit or  proceeding) is
asserted by such director,  officer or controlling person in connection with the
securities  being  registered,  we will,  unless in the  opinion of counsel  the
matter  has  been  settled  by  controlling  precedent,  submit  to a  court  of
appropriate  jurisdiction  the question  whether such  indemnification  by it is
against  public policy as expressed in the  Securities  Act of 1933, as amended,
and will be governed by the final adjudication of such issue.

Executive Compensation Policy

         The  Company's  executive  compensation  policy is designed to attract,
motivate,  reward and retain the key executive  talent  necessary to achieve the
Company's  business  objectives and  contribute to the long-term  success of the
Company. In order to meet these goals, the Company's compensation policy for its
executive  officers focuses primarily on determining  appropriate  salary levels
and  providing  long-term  stock-based  incentives.  To  a  lesser  extent,  the
Company's compensation policy also contemplates performance-based cash bonuses.

Cash Compensation

         In determining  its  recommendations  for adjustments to officers' base
salaries  the  Company  focuses   primarily  on  the  scope  of  each  officer's
responsibilities,  each  officer's  contributions  to the  Company's  success in
moving toward its long-term goals during the fiscal year, the  accomplishment of
goals set by the officer and approved by the Board for that year,  the Company's
assessment of the quality of services  rendered by the officer,  comparison with
compensation  for  officers of  comparable  companies  and an  appraisal  of the
Company's financial position.  In certain situations,  relating primarily to the
completion of important  transactions or developments,  the Company may also pay
cash bonuses,  the amount of which will be determined  based on the contribution
of the officer and the benefit to the Company of the transaction or development.

Equity  Compensation

         The  grant  of stock  options  to  executive  officers  constitutes  an
important  element of long-term  compensation  for the executive  officers.  The
grant of stock options  increases  management's  equity ownership in the Company
with the goal of  ensuring  that the  interests  of  management  remain  closely
aligned with those of the Company's stockholders.  The Board believes that stock
options in the Company provide a direct link between executive  compensation and
stockholder value. By attaching vesting requirements,  stock options also create
an  incentive  for  executive  officers  to remain with the Company for the long
term. See "Stock Option Plan."

                                       28

<PAGE>

                           CORPORATE PERFORMANCE GRAPH

         The following graph shows a comparison of cumulative total  stockholder
return from April 18, 1997 through December 31, 1999 for the D.G.  Jewelry,  the
Nasdaq Stock Market - U.S.  Index ("Nasdaq  U.S.") and the Nasdaq  Non-Financial
Index ("Nasdaq Non-Financial").

[OBJECT OMITTED]

<TABLE>
<S>                             <C>               <C>           <C>

                                                                   Nasdaq
                                DG Jewelry        Nasdaq U.S.   Non- Financial
                                ----------        ----------    --------------
           April 18, 1997         100.00            100.00         100.00
           December 31, 1997       12.90            130.06         126.16
           December 31, 1998       21.88            183.37         185.16
           December 31, 1999       16.67            340.77         363.01
           December 31, 2000        1.05            204.87         211.54
           December 31, 2001       12.74            158.14         162.65

</TABLE>

         The graph  assumes that the value of the  investment  in D.G  Jewelry's
common stock, the Nasdaq U.S. and the Nasdaq Non-Financial was $100 on April 18,
1997 and that all dividends were reinvested.  No dividends have been declared or
paid on D.G. Jewelry's common stock.

                                       29
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain  information as of March 31,2002
with  respect  to each  beneficial  owner  of five  percent  (5%) or more of the
outstanding shares of common stock of D.G. Jewelry, each officer and director of
D.G.  Jewelry and all  officers  and  directors  as a group.  The table does not
include options that have not yet vested or are not  exercisable  within 60 days
of the date hereof.

<TABLE>
<S>                              <C>                          <C>

Names and Address of Beneficial  Amount and Nature of         Percentage of Shares
     Owner(1)                    Beneficial Ownership(2)          Outstanding
------------------------------   -----------------------      --------------------

Jack Berkovits................             3,539,900 (3)                 47.53%

The Berkovits Family Trust....               426,000                      5.72%

Sheba Berkovits...............               816,000 (4)                 10.96%

Leonard Fasullo...............                36,000 (5)                    *

Myer Feiler...................                85,000 (6)                  1.00%

Steven Reichmann..............                 5,000 (7)                    *

Andrew R. Reiser..............                 5,000 (7)                    *

Ralph R. Lean.................                 5,000 (7)                    *

Edward A. Foster..............                     0 (8)                    *

Thomas Schonberger............                     0 (9)                    *

Anca Periet...................                40,000 (10)                   *

BenTzion Berkovits............               171,250 (11)                 2.29%

Michael P. Johns..............                 5,000 (12)                   *

Kenneth H. Saul...............                10,000 (13)                   *

Bruce Fleischer...............                 5,500 (14)                   *

Michael B. McElligott........              1,159,051 (15)                15.56%
85 Dudley Road,
Billerica, MA 01821-4132

All directors and executive officers,
And >5% shareholders, as a group
 (16 persons) .................            5,066,701                     68.04%

</TABLE>

* Less than one percent
-----------------------------
(1) Except as set forth above,  the address of each  individual is 1001 Petrolia
Road, Toronto, Ontario, Canada M3J 2X7.

(2) Based upon information  furnished to the Company by either the directors and
executive officers or obtained from the stock transfer books of the Company. The
Company is informed  that these  persons  hold the sole  voting and  dispositive
power with respect to the Common Stock except as noted  herein.  For purposes of
computing 'beneficial  ownership' and the percentage of outstanding Common Stock
held by each  person  or group  of  persons  named  above as of the date of this
Report, any security

                                       30

<PAGE>

which such  person or group of persons  has the right to acquire  within 60 days
after  such  date is deemed  to be  outstanding  for the  purpose  of  computing
beneficial ownership and the percentage ownership of such person or persons, but
is not deemed to be  outstanding  for the purpose of  computing  the  percentage
ownership of any other person.  As of March 31, 2002,  the Company had 7,446,947
shares of Common Stock issued and outstanding.

(3) Includes (i) 426,000  shares of Common Stock owned by the  Berkovits  Family
Trust of which Mr. Berkovits and his wife are  co-trustees;  (ii) 390,000 shares
of Common Stock owned by his wife individually and (iii) 262,500 shares issuable
upon options that are currently  exercisable  or  exercisable  in the next sixty
days.  Does not  include  135,500  shares  of Common  Stock  owned by one of Mr.
Berkovits' sons who is independent of his father.

(4) Includes  426,000 shares of Common Stock owned by the Berkovits Family Trust
of which Ms.  Berkovits  is a  co-trustees.  Ms.  Berkovits  is the wife of Jack
Berkovits.

(5)  Includes  6,000  shares  issuable  upon the  exercise of options  which are
currently e xercisable or exercisable in the next sixty days.

(6) Includes  70,000  shares  issuable  upon the  exercise of options  which are
currently exercisable or exercisable in the next sixty days.

(7)  Includes  5,000  shares  issuable  upon the  exercise of options  which are
currently exercisable or exercisable in the next sixty days. Mr. Reiser resigned
from the Board for personal reasons on March 6, 2002.

(8) Mr. Foster was appointed to the Board on October 31, 2001.

(9) Mr. Schonberger was appointed to the Board on March 7, 2002.

(10)  Includes  40,000  shares  issuable  upon the exercise of options which are
currently exercisable or exercisable in the next sixty days.

(11)  Includes  36,250  shares  issuable  upon the exercise of options which are
currently exercisable or exercisable in the next sixty days.

(12)  Includes  5,000 shares  issuable  upon the  exercise of options  which are
currently exercisable or exercisable in the next sixty days.

(13)  Includes  5,000 shares  issuable  upon the  exercise of options  which are
currently exercisable or exercisable in the next sixty days.

(14)  Includes  5,500 shares  issuable  upon the  exercise of options  which are
currently exercisable or exercisable in the next sixty days.

(15)  Includes  603,846  shares  owned by  McElligott  Associates  Trust,  Money
Purchase Pension Plan, dated 01/01/83 of which Mr. McElligott is trustee.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         In February 1995, we entered into a 10 year lease  consisting of 23,000
square feet for our  executive  offices and  manufacturing  operations  in North
York,  Ontario.  The lease is with 1001 Petrolia Road Limited  Partnership,  the
general  partner  being  1013418  Ontario Inc.  Jack  Berkovits,  our  president
Chairman,  CEO and  President,  is the sole owner,  officer and director of that
general partner. Current rent is $115,520 and increases each year by the greater
of $.37 a square foot or the percentage increase in the Consumer Price Index for
the  Municipality  of  Metropolitan  Toronto.  Additionally,  we are paying real
estate  taxes,  utilities and  insurance  aggregating  $82,359 per year for this
facility.  See  "Properties".  Management is of the opinion that the lease is on
terms as favorable as obtainable from unaffiliated third parties.

                                       31

<PAGE>

         1001 Petrolia Road Limited Partnership  through 1013418 Ontario,  Inc.,
the general partner, of which Mr. Berkovits is the sole shareholder, officer and
director, had obtained a five year $660,000 mortgage on the property,  which was
renewed in October 1998. On December 31, 2001, the principal amount  outstanding
was $475,956. We are a guarantor of this mortgage.

         Jack  Berkovits  loaned us monies from time to time for  operations and
working capital which sums at December 31, 2001 aggregated  approximately $1.740
million with an interest rate of 12%.

         Diamante is a Canadian  company  operating under the name Oromart which
has five retail  jewelry  stores and operates  jewelry  departments  in ten Best
Value  Discount  Stores.  Diamante  is  owned by Yamit  Karp,  daughter  of Jack
Berkovits.   The  inventory   provided  to  Diamante,   consists   primarily  of
manufacturing  surplus,  returns or  refurbished  jewelry,  and on occasion gold
chains and watches  purchased  by us for resale to  Diamante.  The  inventory is
secured by a  registered  security  agreement  covering  the assets of Diamante,
which  security  agreement  has been  assigned to The Bank of Nova Scotia  which
holds a substantial security interest in our assets. Diamante has guaranteed our
bank  financing  and  provided the bank with a direct  security  interest in its
assets. We consolidated,  for financial reporting purposes,  with Diamante until
February 7, 1997, the termination date of the agreement with Diamante reflecting
our  control  over that  retail  operation.  We perform  certain  administrative
functions for Diamante.

         Diamante  leases each facility for its five stores,  of which one lease
is  guaranteed  by D.G.  Jewelry Inc. This lease is terminable by Diamante on 90
days written notice,  and is for five years,  is a net, net lease,  with renewal
options  for a  rental  rate of  approximately  $17,000  per  year  plus  taxes,
maintenance, insurance and utilities.

         Pegasus  Acquisition Corp. I is a Delaware  corporation,  authorized to
transact business in Arizona.  Pegasus is owned by Yamit Karp,  daughter of Jack
Berkovits.

         Florida Acquisition I. Corp. is a Delaware  corporation,  authorized to
transact business in Florida.  Florida is owned by Yamit Karp,  daughter of Jack
Berkovits.

         Michigan Acquisition Corp. I is a Michigan  corporation,  authorized to
transact business in Michigan.  Michigan is owned by Eli Karp,  husband of Yamit
Karp, and son-in-law of Jack Berkovits.

         Lilly's Jewelers 2001, Inc. is a West Virginia corporation,  authorized
to transact business in West Virginia.  Lilly's is owned by Yamit Karp, daughter
of Jack Berkovits.

         In connection  with the purchase of Aviv, we agreed to issue the former
owners  of Aviv an  amount of  shares  having a value of  $325,000  based on the
average  closing  price in April 1999 in  settlement  of a note in that  amount.
Based on the closing prices we have issued an aggregate of 45,145 shares.

         We have entered into a supply agreement with NetJewels.com, Inc., which
is a  company  owned  50% by  D.G.  Jewelry  Inc.  and  50% by two  sons of Jack
Berkovits.  The agreement  provides that NetJewels will purchase jewelry from us
on the best terms offered to our other customers.  In turn,  NetJewels will sell
such  jewelry to or  through  certain  Internet  companies  who have  previously
entered into  arrangements  with D.G.  Jewelry Inc. In June 1999, we transferred
certain  Internet  contracts to NetJewels  for an  aggregate  purchase  price of
$1,800,000. In March, 2002, we re-acquired these Internet contracts at their net
book value of  $753,102.  For the year ended  December  31,  2000,  we  advanced
inventory,  monies and services for approximately $2.1 million to NetJewels,  to
provide   them   with   product   and   working   capital.   We   provided   for
non-collectibility of this account in its entirety.

                                       32

<PAGE>

         We provide general corporate services to NetJewels at a price of $5,000
per month plus actual expenses. These services include maintenance of insurance,
property and casualty,  medical, dental and life, payroll processing,  including
the withholding of taxes, employment insurance and Canada pension plan payments,
preparation  and  filing  of  tax  returns,   benefits  and  administration  and
telecommunications.

         We entered  into an agreement to sublet 3,000 square feet of our office
space to NetJewels  at an annual rent of $6,000.  The sublease has a term of two
years and three months and expires on December  31, 2001,  with an option for an
additional five years.

         During the year ended December 31, 2001, we paid Theodore L. Bonsignore
approximately $93,000 for consulting fees. Mr. Bonsignore was a director of D.G.
and the General Manager of its Diamonair subsidiary,  until his resignation from
both positions  effective  October 4, 2001. Mr. Bonsignore was paid for his work
as a consultant to both D.G. and Diamonair.

         All  transactions  between  D.G  Jewelry,   its  officers,   directors,
principal  shareholders  or affiliates  are, with the possible  exception of the
interest  rate  charges  on a  portion  of Mr.  Berkovits'  loans  which,  being
subordinated  to the Bank,  are not readily  comparable  in the  market,  in the
opinion of  management,  on terms no less  favorable  to us than may be obtained
from unaffiliated  third parties.  All future  transactions and loans between us
and our  officers,  directors  and 5%  shareholders  are to be on  terms no less
favorable than could be obtained from independent, unaffiliated parties and will
be approved by a majority of our independent, disinterested directors.

                                       33
<PAGE>

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)   Financial Statements.

      Report of Independent Auditors.........................................F-1
      Consolidated Balance Sheets as at December 31, 2001 and 2000...........F-2
      Consolidated Statements of Income
                 for the years ended December 31, 2001 and 2000..............F-4
      Consolidated Statements of Cash Flows
                 for the years ended December 31, 2001 and 2000..............F-5
      Consolidated Statements of Stockholders' Equity
                 for the years ended December 31, 2001 and 2000..............F-7
      Notes to Consolidated Financial Statements.............................F-8

(b)   Reports on Form 8-K.

      There were no reports  filed on Form 8-K during the last quarter of 2001
      by D.G. Jewelry Inc.

(c)   Exhibits.

                                       34
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

D.G. JEWELRY INC.                             D.G JEWELRY INC.


By:/s/Samuel Jacob Berkovits                  By:/s/Anca Periet
   -----------------------                       --------------------------
   Samuel Jacob Berkovits                           Anca Periet
   Chairman of the Board, Chief Executive           Chief Financial Officer,
   Officer, and President                           Vice President - Finance &
                                                    Operations, Treasurer

Dated:   April 1, 2002                        Dated:   April 1, 2002

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates indicated.

Signature                     Title                       Date
---------                     -----                       -----

/s/Samuel Jacob Berkovitz     Chairman of the Board       April 1, 2001
Samuel Jacob Berkovits        Chief Executive Officer,
                                 and President


/s/Meyer Feiler               Director                    April 1, 2001
Meyer Feiler


______________________        Director                    April 1, 2001
Steven Reichmann


/s/Ralph R. Lean              Director                    April 1, 2001
Ralph R. Lean


/s/Edward A. Foster           Director                    April 1, 2001
Edward A. Foster


______________________        Director                    April 1, 2001
Thomas Schonberger

                                       35


<PAGE>

                                D.G. JEWELRY INC.

                        CONSOLIDATED FINANCIAL STATEMENTS

                  AS OF DECEMBER 31, 2001 AND DECEMBER 31, 2000

                  TOGETHER WITH REPORT OF INDEPENDENT AUDITORS

                                    CONTENTS

Report of Independent Auditors                      1

Consolidated Balance Sheet                          2

Consolidated Statement of Stockholders' Equity      3

Consolidated Statement of Earnings                  4

Consolidated Statement of Cash Flows                5

Notes to Consolidated Financial Statements        6 - 26

<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of D.G. Jewelry Inc.

         In our opinion,  the accompanying  consolidated  balance sheets and the
related consolidated statements of stockholders' equity, earnings and cash flows
present fairly, in all material respects, the financial position of D.G. Jewelry
Inc.  and its  subsidiaries  at December  31, 2001 and 2000,  and the results of
their  operations  and  their  cash  flows for each of the two years in the year
ended  December 31, 2001, in conformity  with  accounting  principles  generally
accepted in the United States of America.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

         We conducted  our audits of these  statements  in  accordance  with the
auditing  standards  generally  accepted in the United States of America,  which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.


         On March 25,  2002,  we reported  separately  to the  directors of D.G.
Jewelry  Inc. on the  consolidated  financial  statements  for the same  period,
prepared in accordance with generally accepted accounting principles in Canada.

/s/SF Partnership, LLP
CHARTERED ACCOUNTANTS

Toronto, Canada
March 25, 2002


<PAGE>

D.G. JEWELRY INC.
Consolidated Balance Sheet
(Stated in United States Dollars)
December 31, 2001

<TABLE>
<S>                                                                                         <C>           <C>


                                                                                                         (Note 23)
                                                                                            2001              2000
                                     ASSETS
Current
    Cash                                                                                $ 105,908        $ 248,986
    Accounts receivable (note 2)                                                       28,383,667       27,197,897
    Inventories (note 3)                                                               20,454,134       25,522,902
    Prepaid expenses and sundry assets                                                    562,170          621,301
                                                                                    --------------     -----------
                                                                                       49,505,879       53,591,086
Investment in and Advances to
   50% Owned Investee Company (note 5)                                                    308,580              133
Capital Assets (note 6)                                                                 1,463,282        1,445,594
Goodwill (note 7)                                                                       1,050,000        1,080,000
Intangible Asset (note 8)                                                                 501,982                -
                                                                                    --------------     -----------
                                                                                     $ 52,829,723     $ 56,116,813
                                                                                    --------------     -----------
                                   LIABILITIES
Current
    Bank indebtedness (note 9)                                                       $ 15,765,744      $18,839,529
    Accounts payable and accrued charges (note 10)                                      7,838,575       10,532,239
    Long-term debt - current portion (note 11)                                            211,175          217,867
    Income taxes payable (note 12)                                                      3,815,832        3,403,875
                                                                                    --------------     -----------
                                                                                       27,631,326       32,993,510
Long-Term Debt (note 11)                                                                1,976,948        2,241,455
                                                                                    --------------     -----------
                                                                                       29,608,274       35,234,965
                                                                                    --------------     -----------
                              STOCKHOLDERS' EQUITY
Capital Stock (note 13)                                                                13,333,325       12,476,962
Impairment in Value of Notes Receivable (note 14)                                     (1,408,533)      (1,194,710)
                                                                                    --------------     -----------
                                                                                       11,924,792       11,282,252
Accumulated Other Comprehensive Income (note 15)                                        (188,317)        (314,491)
Retained Earnings                                                                      11,484,974        9,914,087
                                                                                    --------------     -----------
                                                                                       23,221,449       20,881,848
                                                                                    --------------     -----------
                                                                                     $ 52,829,723     $ 56,116,813
                                                                                    --------------     -----------
APPROVED ON BEHALF OF THE BOARD


_________________________________     _______________________________________
          Director                                  Director

</TABLE>

                                       2

<PAGE>

D.G. JEWELRY INC.
Consolidated Statement of Stockholders' Equity
(Stated in United States Dollars)
Year Ended December 31, 2001

<TABLE>
<S>                                <C>          <C>          <C>      <C>           <C>

                                    Common      Issued and
                                     Stock      Outstanding                          Cumulative
                                   Number of    Common                 Retained      Translation
                                     Shares     Warrants      Amount   Earnings      Adjustments
                                  ----------  -------------  -------   ---------    --------------

Balance - December 31, 1999       6,407,780    1,265,000   $11,917,040 $8,532,180      $613,896

   Common stock issued (note 13)    241,875        -           559,922      -             -

   Foreign currency translation        -           -              -         -          (928,387)

   Net earnings                        -           -              -     1,381,907         -
                                  ----------  -------------  --------- -----------  --------------
Balance - December 31,
   2000 (note 23)                 6,649,655    1,265,000    12,476,962  9,914,087      (314,491)

   Common stock issued (note 13)    480,359        -           856,363      -             -

   Foreign currency translation        -           -              -         -           126,174

   Net earnings                        -           -              -     1,570,887         -
                                  ----------  -------------  --------- -----------  --------------
Balance - December 31, 2001       7,130,014    1,265,000   $13,333,325 11,484,974     $(188,317)
                                  ----------  -------------  --------- -----------  --------------
</TABLE>

                                        3
<PAGE>

D.G. JEWELRY INC.
Consolidated Statement of Earnings
(Stated in United States Dollars)
Year Ended December 31, 2001

<TABLE>
<S>                                                                                  <C>                 <C>


                                                                                                         (Note 23)
                                                                                            2001              2000

Sales                                                                               $ 36,036,610       $39,955,503

Cost of Sales                                                                         25,212,169        25,157,258
                                                                                   --------------     -------------
Gross Profit (note 3)                                                                 10,824,441        14,798,245
                                                                                   --------------     -------------
Expenses
    Selling                                                                            4,348,170         3,565,161
    Administrative                                                                     2,077,698         2,296,022
    Financial                                                                          1,706,301         1,931,202
                                                                                   --------------     -------------
                                                                                       8,132,169         7,792,385
                                                                                   --------------     -------------
Earnings Before the Undernoted                                                         2,692,272         7,005,860

    Unusual items (note 16)                                                              441,616         4,782,685
    Share of earnings - 50% owned investee company                                      (119,302)             -
                                                                                   --------------     -------------
                                                                                         322,314         4,782,685
                                                                                   --------------     -------------
Earnings Before Income Taxes                                                           2,369,958         2,223,175

    Income taxes (note 12)                                                               799,071           841,268
                                                                                   --------------     -------------
Net Earnings                                                                         $ 1,570,887       $ 1,381,907
                                                                                   --------------     -------------
Earnings per Common Share (note 17)                                                  $      0.23       $      0.21
                                                                                   --------------     -------------
Earnings per Common Share Assuming
  Dilution (note 17)                                                                 $      0.22       $      0.21
                                                                                   --------------     -------------
</TABLE>

                                       4

<PAGE>

D.G. JEWELRY INC.
Consolidated Statement of Cash Flows
(Stated in United States Dollars)
Year Ended December 31, 2001

<TABLE>
<S>                                                                                       <C>            <C>


                                                                                                         (Note 23)
                                                                                            2001              2000
Cash Flows from Operating Activities
    Net earnings                                                                       $1,570,887       $1,381,907
    Adjustments for:
      Amortization - Capital assets                                                       720,551          375,741
                   - Goodwill                                                              30,000           30,000
                   - Intangible asset                                                     251,120             -
      Other comprehensive income                                                          126,174         (928,387)
      Impairment in value of notes receivable                                            (213,823)        (531,303)
                                                                                   ----------------     -------------
                                                                                        2,484,909          327,958
    Changes in non-cash working capital
      Accounts receivable                                                              (1,185,770)      (3,067,334)
      Inventories                                                                       5,068,768       (2,211,289)
      Prepaid expenses and sundry assets                                                   59,131         (156,509)
      Accounts payable and accrued charges                                             (2,693,663)       4,639,190
      Income taxes payable                                                                411,957          208,629
                                                                                   ----------------     -------------
                                                                                        4,145,332         (259,355)
                                                                                   ----------------     -------------
Cash Flows from Investing Activities
    Additions to capital assets (net)                                                   (738,237)         (692,430)
    Investment in 50% owned Investee company                                            (308,447)                6
    Additions to intangible asset                                                       (753,102)           -
                                                                                   ----------------     -------------
                                                                                      (1,799,786)         (692,424)
                                                                                   ----------------     -------------
Cash Flows from Financing Activities
    Decrease in bank indebtedness                                                     (3,073,785)         (147,080)
    Repayment of long-term debt (net)                                                   (271,202)         (276,047)
    Issuance of capital stock (note 13)                                                  856,363           559,922
                                                                                   ----------------     -------------
                                                                                      (2,488,624)          136,795
                                                                                   ----------------     -------------
Net Decrease in Cash                                                                    (143,078)         (814,984)

Cash - beginning of year                                                                 248,986         1,063,970
                                                                                   ----------------     -------------
Cash - end of year                                                                     $ 105,908         $ 248,986
                                                                                   ----------------     -------------
Cash Disbursements Made For:
    Income taxes                                                                       $   -             $   -
                                                                                   ----------------     -------------
    Interest                                                                          $1,706,301        $1,931,202
                                                                                   ----------------     -------------
</TABLE>

                                       5

<PAGE>

D.G. JEWELRY INC.
Notes to Consolidated Financial Statements
(Stated in United States Dollars)
December 31, 2001

1.    Summary of Significant Accounting Policies

      a)    Principles of Consolidation

            These financial statements consolidate, using the purchase method,
            the accounts of the company and its two wholly-owned subsidiaries,
            Diamonair, Inc. and Aviv, Inc. All material intercompany accounts
            have been eliminated. Consolidation commenced with the effective
            dates of acquisition of the operations of the subsidiary companies
            and these financial statements include the financial results of the
            subsidiaries to December 31, 2001 and December 31, 2000
            respectively.

      b)    Principal Activities

            The company was incorporated in Ontario, Canada on October 18, 1979.
            The company is principally engaged in the production and trading of
            jewelry products in Canada and the United States of America.

      c)    Bank Indebtedness and Cash Equivalents

            Bank indebtedness and cash equivalents include cash on hand, amounts
            due to banks and any other highly liquid investments purchased with
            a maturity of three months or less. The carrying amount approximates
            fair value because of the short maturity of those instruments.

      d)    Other Financial Instruments

            The carrying amount of the company's other financial instruments
            approximates fair value because of the short maturity of these
            instruments or the current nature of interest rates borne by these
            instruments.

      e)    Long-term Financial Instruments

            The fair value of each of the company's long-term financial assets
            and debt instruments is based on the amount of future cash flows
            associated with each instrument discounted using an estimate of what
            the company's current borrowing rate for similar instruments of
            comparable maturity would be.

      f)    Accounts Receivable and Accounts Payable

            In certain instances, the company's practice is to sell to and
            purchase from the same entities. In such circumstances, on a
            periodic basis, the payable is set-off against the receivable as
            payment. Until such time as such a set-off occurs, the respective
            receivable and payable amounts are reported on a gross basis. At
            year end, amounts owing to the company from customers who
            participate in this practice was $700,000 (2000 - $NIL). Of this
            amount, $700,000 (2000 - $NIL) was owed to these customers at
            December 31, 2001 (2000).

                                       6
<PAGE>

D.G. JEWELRY INC.
Notes to Consolidated Financial Statements
(Stated in United States Dollars)
December 31, 2001

1.    Summary of Significant Accounting Policies (cont'd.)

      g)    Inventories

            Raw materials and work-in-process are valued at laid down cost on
            a first-in, first-out basis.

            Finished goods are valued at the lower of cost and net realizable
            value. Cost is calculated using selling price less normal gross
            margin.

            The Company satisfies a portion of its gold supply needs through a
            gold consignment agreement with a financial institution that leases
            gold to the Company (gold lender), whereby the gold lender has
            agreed to consign fine gold to the Company (see note 4). In
            accordance with the terms of the agreement, the Company has the
            option of repaying the gold lenders in an equivalent number of
            ounces of fine gold or cash based upon the then quoted market price
            of gold as determined by the daily London Afternoon Fixing Price.

      h)    Investment in 50% Owned Investee Company

            The company accounts for its investment in a 50% owned investee
            company on the equity method. Under the equity method, the pro-rata
            share of the investee's earnings since acquisition is recorded as
            income and added to the carrying value of the investment shown on
            the balance sheet. Dividends received are considered as a return of
            capital and are accordingly deducted from the carrying value of the
            investment.

      i)    Capital Assets and Amortization

            Capital assets are stated at cost. Amortization, based on the
            estimated useful lives of the assets, is provided using the
            undernoted annual rates and methods:

<TABLE>
              <S>                                              <C>               <C>

              Office equipment                                      10%          Declining balance
              Machinery and manufacturing equipment                 10%          Declining balance
              Computer equipment and software                       30%          Declining balance
              Leasehold improvements                           10 years          Straight-line
              Waxes, models and molds                           4 years          Straight-line

</TABLE>

            The company's policy is to record leases, which transfer
            substantially all benefits and risks incidental to ownership of
            property, as acquisition of assets and to record the incurrences of
            corresponding obligations as long-term liabilities. Obligation under
            capital leases are reduced by rental payments, net of imputed
            interest.

      j)    Goodwill

            Goodwill is the excess cost over the value of tangible assets
            acquired and is recorded at cost less accumulated amortization.

                                       7
<PAGE>

D.G. JEWELRY INC.
Notes to Consolidated Financial Statements
(Stated in United States Dollars)
December 31, 2001

1.    Summary of Significant Accounting Policies (cont'd.)

      k)    Goodwill (cont'd)

            The valuation and amortization of goodwill is evaluated on an
            ongoing basis and, if considered permanently impaired, goodwill is
            written down. The determination as to whether there has been an
            impairment in value is made by comparing the carrying value of the
            goodwill to the projected discounted net revenue stream to be
            generated by the related activity.

      l)    Intangible Assets

            Intangible assets acquired are recorded at cost less accumulated
            amortization.

            The valuation and amortization of intangibles are evaluated on an
            ongoing basis and, if considered permanently impaired, intangibles
            are written down. The determination as to whether there has been an
            impairment in value is made by comparing the carrying value of the
            intangibles to the projected discounted net revenue stream to be
            generated by the related activity.

      m)    Sales

            Sales represent the invoiced value of goods supplied to customers.
            Sales are recognized upon delivery of goods and passage of title to
            customers.

      n)    Income Taxes

            The company accounts for income taxes under the provisions of
            Statement of Financial Accounting Standards (FAS No. 109), which
            requires recognition of deferred tax assets and liabilities for the
            expected future tax consequences of events that have been included
            in the financial statements or tax returns. Deferred income taxes
            are provided using the liability method. Under the liability method,
            deferred taxes are recognized for all significant temporary
            differences between the tax and financial statement basis of assets
            and liabilities.

      o)    Long-Lived Assets

            On January 1, 1996, the company adopted the provisions of Statement
            of Financial Accounting Standards (FAS No. 121). "Accounting for the
            Impairment of Long-Lived Assets" and for Long-Lived Assets to Be
            Disposed Of. FAS No. 121 requires that long-lived assets to be held
            and used by an entity be reviewed for impairment whenever events or
            changes in circumstances indicate that the carrying amount of an
            asset may not be recoverable. Management used its best estimate of
            the undiscounted cash flows to evaluate the carrying amount and has
            determined that no impairment has occurred, other than those written
            off as unusual items as disclosed in note 16.

                                       8
<PAGE>

D.G. JEWELRY INC.
Notes to Consolidated Financial Statements
(Stated in United States Dollars)
December 31, 2001

1.    Summary of Significant Accounting Policies (cont'd.)

      p)    Stock Based Compensation

            In December 1995, Statement of Financial Accounting Standards (FAS
            No. 123), "Accounting for Stock-Based Compensation", was issued. It
            introduced the use of a fair value-based method of accounting for
            stock-based compensation. It encourages, but does not require,
            companies to recognize compensation expense for stock-based
            compensation to employees based on the new fair value accounting
            rules. The company chose to continue to account for stock-based
            compensation using the intrinsic value method prescribed in
            Accounting Principles Board Opinion No. 25, "Accounting for Stock
            Issued to Employees", and related interpretations. Accordingly,
            compensation cost for stock options is measured as the excess, if
            any, of the quoted market price of the company's stock at the
            measurement date over the amount an employee must pay to acquire the
            stock.

      q)    Foreign Currency Translation

            The translation of the financial statements from Canadian dollars
            into United States dollars is performed for the convenience of the
            Reader. Balance sheet accounts are translated using closing exchange
            rates in effect at the balance sheet date and income and expense
            accounts are translated using an average exchange rate prevailing
            during each reporting period. No representation is made that the
            Canadian dollar amounts could have been, or could be, converted into
            United States dollars at the rates on the respective dates and or at
            any other certain rates. Adjustments resulting from the translation
            are included in the cumulative translation adjustments in
            stockholders' equity.

      r)    Concentrations of Credit Risks

            Portions of the company's receivables are both secured and unsecured
            and are generally due in 90 days. Currently, customers are primarily
            local, national and international users of jewelry products. The
            company's receivables do not represent significant concentrations of
            credit risk as at December 31, 2001, due to the wide variety of
            customers, markets and geographic areas to which the company's
            products are sold.

                                       9
<PAGE>

D.G. JEWELRY INC.
Notes to Consolidated Financial Statements
(Stated in United States Dollars)
December 31, 2001

1.    Summary of Significant Accounting Policies (cont'd.)

      s)    Net Earnings and Fully Diluted Net Earnings Per Weighted Average
            Common Share

            Net earnings per common share is computed by dividing net earnings
            for the year by the weighted average number of common shares
            outstanding during the year.

            Fully diluted net earnings per common share is computed by dividing
            net earnings for the year by the weighted average number of common
            shares outstanding during the year, assuming that all stock options
            as described in note 13 were exercised so long as the option price
            was equal to or less than the market price. Stock warrants as
            described in note 13 have not been included in the fully diluted net
            earnings per common share calculations as their inclusion would have
            been anti-dilutive.

      t)    Use of Estimates

            The preparation of financial statements, in conformity with
            generally accepted accounting principles, requires management to
            make estimates and assumptions that affect the reported amounts of
            assets and liabilities and disclosure of contingent assets and
            liabilities at the date of the financial statements and the reported
            amounts of revenues and expenses during the reporting period. Actual
            results could differ from those estimates.


2.    Accounts Receivable

<TABLE>
<S>                                                                                        <C>           <C>

                                                                                                         (Note 23)
                                                                                            2001              2000

      Accounts receivable                                                              $29,444,822     $28,168,979
      Less:  allowance for doubtful accounts                                             1,061,155         971,082
                                                                                     --------------   -------------

      Accounts receivable, net                                                         $28,383,667     $27,197,897
                                                                                     --------------   -------------

</TABLE>

                                       10

<PAGE>

D.G. JEWELRY INC.
Notes to Consolidated Financial Statements
(Stated in United States Dollars)
December 31, 2001

3.    Inventories

<TABLE>
<S>                                                                                        <C>           <C>

                                                                                                         (Note 23)
                                                                                            2001              2000

      Raw materials                                                                   $ 3,944,917       $5,913,002
      Work-in-process                                                                     767,222          589,342
      Finished goods                                                                   18,213,447       19,020,558
                                                                                     -------------    -------------
                                                                                       22,925,586       25,522,902
      Less: consigned gold (note 4)                                                     2,471,452             -
                                                                                     -------------    -------------
                                                                                     $ 20,454,134     $ 25,522,902
                                                                                     -------------    -------------
</TABLE>

As a result of reporting  the  consigned  gold as a contra to ending  inventory,
Gross Profit has effectively been reduced by approximately 7%.

4.    Gold Consignment Agreement

      During the year, the company entered into a gold consignment agreement
      with a Gold Lender. Under the terms of the agreement, the Company is
      entitled to lease a maximum dollar limit of gold totaling $4,680,000. The
      consigned gold is secured by certain property of the Company including its
      inventory and equipment. Title to such gold remains with the gold lenders
      until the Company purchases the gold. However, during the period of
      consignment, the entire risk of physical loss, damage or destruction of
      the gold is borne by the Company. The purchase price per ounce is based on
      the daily London Afternoon Fixing Price. The Company pays the gold
      consignors a consignment fee based on the dollar value of gold ounces
      outstanding as defined in the agreement.

      The consignment agreement may be terminated by the Company or the
      respective Gold Lender upon thirty (30) days notice. If the Gold Lender
      was to terminate its existing gold consignment agreement, the Company
      believes it would not experience an interruption of its gold supply that
      would materially adversely affect its business.

      The consignment agreement contains restrictive covenants relating to
      maximum usage, net worth, working capital and other financial ratios, for
      which the company is in compliance.

                                       11
<PAGE>

D.G. JEWELRY INC.
Notes to Consolidated Financial Statements
(Stated in United States Dollars)
December 31, 2001

5.    Investment in and Advances to 50% Owned Investee Company

<TABLE>
<S>                                                                                       <C>            <C>

                                                                                                         (Note 23)
                                                                                            2001              2000

      Investment to 50% owned investee company                                             $  133         $    133
      Advances to 50% owned investee company                                              189,145               -
      Equity pick-up of 50% owned investee company                                        119,302               -
                                                                                        -----------      ----------
      Balance as at December 31, 2001                                                    $308,580         $    133
                                                                                        -----------      ----------
</TABLE>

6.    Capital Assets

<TABLE>
<S>                                                      <C>       <C>                      <C>       <C>
                                                                                                         (Note 23)
                                                                           2001                               2000
                                                                    Accumulated                        Accumulated
                                                         Cost      Amortization             Cost      Amortization
------------------------------------------------------------------------------------------------------------------
      Office equipment                             $  229,931         $149,958           $292,577        $165,995
      Machinery and manufacturing
          equipment                                   331,811          163,370            650,206         443,705
      Computer equipment and software                 609,646          366,722            630,369         309,217
      Automobile                                         -                 -                6,000           6,000
      Assets under capital lease                      617,436          227,367            524,477         131,366
      Leasehold improvements                          123,506            7,461             62,983          36,684
      Waxes, models and molds                         658,731          192,901            422,272          50,323
------------------------------------------------------------------------------------------------------------------
                                                  $ 2,571,061       $1,107,779         $2,588,884      $1,143,290
------------------------------------------------------------------------------------------------------------------

      Net carrying amount                                           $1,463,282                         $1,445,594
                                                               -----------------                    ----------------
</TABLE>

7.    Goodwill

<TABLE>
<S>                                                                                       <C>            <C>
                                                                                                         (Note 23)
                                                                                            2001              2000

      Cost                                                                           $ 1,200,000        $1,200,000
      Less:  accumulated amortization                                                    150,000           120,000
                                                                                   ---------------   ----------------
      Net                                                                            $ 1,050,000        $1,080,000
                                                                                   ---------------   ----------------
</TABLE>

                                       12

<PAGE>

D.G. JEWELRY INC.
Notes to Consolidated Financial Statements
(Stated in United States Dollars)
December 31, 2001

8.    Intangible Asset

<TABLE>
<S>                                                                                       <C>            <C>

                                                                                                         (Note 23)
                                                                                            2001              2000

      Cost                                                                              $ 753,102        $    -
      Less:  accumulated amortization                                                     251,120             -
                                                                                   ---------------   ----------------
      Net                                                                               $ 501,982        $    -
                                                                                   ---------------   ----------------
</TABLE>

      During the year, the company acquired the rights to market and sell
      merchandise through an internet auction exchange in settlement of advances
      made to the 50% investee company. This contract expires in 2003. This
      transaction was recorded at the exchange amount which is the amount of
      consideration agreed upon by the related parties.

9.    Bank Indebtedness

      The bank loan bears interest at the bank's prime lending rate plus 3/4%
      per annum (4.75% at December 31, 2001 and 7.25% at December 31, 2000) with
      interest payable monthly. The weighted average interest rates incurred on
      the bank loan were 5.81% and 7.51% per annum for the year ended December
      31, 2001 and December 31, 2000 respectively. As security, the company has
      provided a general assignment of accounts receivable, a general security
      agreement consisting of a first charge over all present and future
      personal property of the company and the assignment of key man life
      insurance of a director in the amount of $627,800 as of December 31, 2001
      and $692,857 as of December 31, 2000. The available line of credit, which
      depends on key financial ratios, amounted to $17,618,148 as at December
      31, 2001.

      The company also provided to the bank an assignment of accounts
      receivable, and a general security agreement constituting a first charge
      over all present and future property with UCC filings of security in the
      appropriate jurisdictions of its wholly-owned subsidiary companies, as
      well as hypothecation of all the shares of these subsidiaries (see note
      1(a)). Furthermore, an affiliated company (owned wholly by the company's
      majority stockholders) has provided a general security agreement
      consisting of a first charge over its present and future property and a
      corporate guarantee secured by a collateral mortgage providing a second
      fixed charge over its property. Furthermore, the company also provided to
      the bank an assignment of all security taken by the company from Diamante
      Fine Jewellery Limited, Florida Acquisition I Corp. and Pegasus
      Acquisition Corp. I which shares the company's majority stockholders
      previously had a right to acquire. Certain stockholders have provided a
      postponement of their loans to the company's bankers.

      The facility contains covenants specifying minimum and maximum selected
      financial ratios. The agreement contains restrictions on changes in
      ownership and lines of business, on further encumbrances of assets, the
      provision of loan guarantees and other contingent liabilities, for which
      the company is in compliance.

                                       13
<PAGE>

D.G. JEWELRY INC.
Notes to Consolidated Financial Statements
(Stated in United States Dollars)
December 31, 2001

10.   Accounts Payable and Accrued Charges

<TABLE>
<S>                                                                                        <C>           <C>

                                                                                                         (Note 23)
                                                                                            2001              2000

      Trade payables                                                                 $ 5,462,560        $8,302,150
      Accrued charges                                                                  2,376,015         2,230,089
                                                                                   ---------------   ----------------
                                                                                    $  7,838,575       $10,532,239
                                                                                   ---------------   ----------------
</TABLE>

11.   Long-Term Debt

<TABLE>
<S>                                                  <C>             <C>                   <C>           <C>

                                                                                                         (Note 23)
                                                                                            2001              2000
                                                      Current         Long-Term            Total             Total
------------------------------------------------------------------------------------------------------------------
      Obligation under capital leases               $ 234,535          $245,876          $480,411        $629,741
      Less: deferred interest                         (23,360)           (9,144)          (32,504)        (59,127)
------------------------------------------------------------------------------------------------------------------
                                                      211,175           236,732           447,907         570,614
      Advances from stockholders                       -              1,740,216         1,740,216       1,888,708
------------------------------------------------------------------------------------------------------------------
                                                    $ 211,175        $1,976,948        $2,188,123      $2,459,322
------------------------------------------------------------------------------------------------------------------

</TABLE>

      Obligation under Capital Leases

      The leases bear interest at a floating rate of prime plus 1 1/4% per annum
      calculated monthly, repayable in accordance with the terms and conditions
      of each respective contract.

      Future principal repayments pertaining to capital leases are as follows:

                       2002                               $ 211,175
                       2003                                 180,645
                       2004                                  56,087
                                                       ---------------
                                                          $ 447,907
                                                       ---------------
      Advances from Stockholders

      The advances bear interest at 12% per annum (2000 - 15%) with no specific
      terms of repayment and are secured by inventories. These loans have been
      postponed to the company's bankers as described in note 9.

                                       14

<PAGE>

D.G. JEWELRY INC.
Notes to Consolidated Financial Statements
(Stated in United States Dollars)
December 31, 2001

12.   Income Taxes

      The provision for income taxes includes current and deferred income taxes
      and is calculated based on the Federal, State and Provincial tax rates.

13.   Capital Stock

        Authorized
             Unlimited  number of common stock
             5,000,000  class 'A' preference stock

<TABLE>
<S>                                                                                         <C>           <C>

                                                                                                          (Note 23)
                                                                                             2001              2000

        Issued
             7,130,014  common stock (2000 - 6,649,655)                                $13,220,100      $12,363,737
             1,265,000  warrants                                                           113,225          113,225
                                                                                   ---------------   ----------------
                                                                                       $13,333,325      $12,476,962
                                                                                   ---------------   ----------------
      During the year, the company issued Common Stock as follows:

      Net proceeds include the non-cash items or deferred costs of private issue
        and deferred income tax recoveries

        Proceeds received from conversion of accounts
          payable for 469,859 common stock                                             $  845,863        $     -

        Proceeds received from issuance of 10,500 (2000 -
         241,875) common stock on exercise of stock options                                10,500         559,922
                                                                                   ---------------   ----------------
      Total                                                                            $  856,363        $559,922
                                                                                   ---------------   ----------------

</TABLE>

      In December, 1996, the Board of Directors and Stockholders adopted the
      1996 D.G. Jewelry Inc. Stock Option Plan (the "1996 Plan"), pursuant to
      which 500,000 shares of Common Stock are provided for issuance. The 1996
      Plan is administered by the Board of Directors.

      The 1996 Plan is for a period of ten years, expiring on December 15, 2006.
      Options may be granted to officers, directors, consultants, key employees,
      advisors and similar parties who provide their skills and expertise to the
      company. Options granted under the 1996 Plan may be exercisable for up to
      ten years, requires vesting and shall be at an exercise price all as
      determined by the Board.

                                       15
<PAGE>

D.G. JEWELRY INC.
Notes to Consolidated Financial Statements
(Stated in United States Dollars)
December 31, 2001

13.   Capital Stock (cont'd.)

      The exercise price of an option may not be less than the fair market value
      per share of Common Stock on the date the option is granted in order to
      receive certain tax benefits under the Income Tax Act of Canada. The
      exercise price of all future options will be at least 85% of the fair
      market value of the Common Stock on the date of granting of the options.

      Any unexercised options that expire or that terminate upon an employee's
      ceasing to be employed by the company become available again for issuance
      under the 1996 Plan.

      The 1996 Plan may be terminated or amended at any time by the Board of
      Directors, except that the number of shares of Common Stock reserved for
      issuance upon the exercise of options granted under the 1996 Plan may not
      be increased without the consent of the Stockholders of the company.

      The Board has granted 500,000 options to date under the 1996 Plan to 10
      persons, including officers, directors and key employees. The options are
      exercisable at $1.38 per share, 172,500 expire on February 9, 2002 and
      327,500 of such options expire on August 21, 2002.

      These options were not exercisable until August 20, 1997 at which time
      they were able to be exercised up to 25% of the amount of stock issuable
      under the Options, and an additional 25% at each six month anniversary
      date thereafter.

      During 2001, none (81,875 in 2000) of these options were exercised for
      total proceeds of $ NIL ($113,746 in 2000). At the end of 2000, all
      500,000 options in the Plan were granted and exercised.

      In July 1998, the Board of Directors and Stockholders adopted the 1998
      D.G. Jewelry Inc. Stock Option Plan (the "1998 Plan"), pursuant to which
      500,000 shares of Common Stock are provided for issuance. The 1998 Plan is
      administered by the Board of Directors.

      The 1998 Plan is for a period of ten years, expiring on July 14, 2008.
      Options may be granted to officers, directors, consultants, key employees,
      advisors and similar parties who provide their skills and expertise to the
      company. Options granted under the 1998 Plan may be exercisable for up to
      ten years, requires vesting, and shall be at an exercise price all as
      determined by the Board.

      The exercise price of an option may not be less than the fair market value
      per share of Common Stock on the date the option is granted in order to
      receive certain tax benefits under the Income Tax Act of Canada. The
      exercise price of all future options will be at least 85% of the fair
      market value of the common stock on the date of granting of the options.

      Any unexercised options that expire or that terminate upon an employee's
      ceasing to be employed by the company become available again for issuance
      under the 1998 Plan.

                                       16

<PAGE>

D.G. JEWELRY INC.
Notes to Consoliated Financial Statements
(Stated in United States Dollars)
December 31, 2001

13.   Capital Stock (cont'd)

      The 1998 Plan may be terminated or amended at any time by the Board of
      Directors, except that the number of shares of Common Stock reserved for
      issuance upon the exercise of options granted under the 1998 Plan may not
      be increased without the consent of the Stockholders of the company.

      The Board has granted 500,000 options to date under the 1998 plan to 34
      persons, including officers, directors and key employees. The options are
      exercisable ranging from $2.77 to $4.00 per share for five years expiring
      July 14, 2008.

      These options were not exercisable until January 14, 1999 at which time
      they were able to be exercised up to 25% of the amount of shares issuable
      under the options, and an additional 25% at each six month anniversary
      date thereafter.

      On March 12, 2001, the Board of Directors reduced the exercise price from
      $2.77 to $1.00 on a total of 93,000 unexercised options under the 1998
      Plan.

      During 2001, none (160,000 in 2000) of these options have been exercised
      for total proceeds of $NIL ($443,200 in 2000).

      In July 1999, the Board of Directors and Stockholders adopted the 1999
      D.G. Jewelry Inc. Stock Option Plan (the "1999 Plan"), pursuant to which
      500,000 shares of Common Stock are provided for issuance. The 1999 Plan is
      administered by the Board of Directors.

      The 1999 Plan is for a period of ten years from the date the options are
      granted. Options may be granted to officers, directors, consultants, key
      employees, advisors and similar parties who provide their skills and
      expertise to the Company. Options granted under the 1999 Plan may be
      exercisable for up to ten years, requires vesting, and shall be at an
      exercise price all as determined by the Board.

      The exercise price of an option may not be less than the fair market value
      per share of Common Stock on the date the option is granted in order to
      receive certain tax benefits under the Income Tax Act of Canada. The
      exercise price of all future options will be at least 85% of the fair
      market value of the Common Stock on the date of granting of the options.

      Any unexercised options that expire or that terminate upon an employee's
      ceasing to be employed by the Company become available again for issuance
      under the 1999 Plan.

      The 1999 Plan may be terminated or amended at any time by the Board of
      Directors, except that the number of shares of Common Stock reserved for
      issuance upon the exercise of options granted under the 1999 Plan may not
      be increased without the consent of the Stockholders of the company.

                                       17
<PAGE>

D.G. JEWELRY INC.
Notes to Consolidated Financial Statements
(Stated in United States Dollars)
December 31, 2001

13.   Capital Stock (cont'd.)

      The Board has granted 438,500 options to date under the 1999 Plan to 40
      persons, including officers, directors and key employees which was amended
      in March, 2001. 30,000 options are exercisable at $1.00 per share expiring
      July 19, 2010. 10,000 options are exercisable at $4.125 per share expiring
      July 19, 2010. 2,500 options are exercisable at $5.250 per share expiring
      September 8, 2009. 2,000 options are exercisable at $5.250 per share
      expiring September 6, 2009. 15,000 options are exercisable at $1.00 per
      share expiring March 29, 2011. 285,000 options are exercisable at $1.00
      per share expiring November 9, 2010. 49,000 options are exercisable at
      $1.00 per share expiring January 3, 2011. 35,000 options are exercisable
      at $1.00 per share expiring December 29, 2010. 10,000 options are
      exercisable at $1.00 per share expiring February 23, 2011.

      During 2001, 10,500 (none in 2000) of these options were exercised for
      total proceeds of $10,500 ($NIL in 2000).

      In August 2001, the Board of Directors and Stockholders adopted the 2001
      D.G. Jewelry Inc. Stock Option Plan (the "2001 Plan"), pursuant to which
      500,000 shares of Common Stock are provided for issuance. The 2001 Plan is
      administered by the Board of Directors.

      The 2001 Plan is for a period of 10 years, expiring in August 2011.
      Options may be granted to officers, directors, consultants, key employees,
      advisors and similar parties who provide their skills and expertise to the
      company. Options granted under the 2001 plan may be exercisable for up to
      10 years, requires vesting and shall be at an exercise price all as
      determined by the board.

      The exercise price of an option may not be less than the fair market value
      per share of Common Stock on the date the option is granted in order to
      receive certain tax benefits under the Income Tax Act of Canada. The
      exercise price of all future options will be at least 85% of the fair
      market value of the Common Stock on the date of granting of the options.

      Any unexercised options that expire or that terminate upon an employee's
      ceasing to be employed by the Company become available again for issuance
      under the 2001 Plan.

      The 2001 Plan may be terminated or amended at any time by the Board of
      Directors, except that the number of shares of Common Stock reserved for
      issuance upon the exercise of options granted under the 2001 Plan may not
      be increased without the consent of the Stockholders of the company.

      The Board has not granted any options to date under the 2001 plan.

                                       18

<PAGE>

D.G. JEWELRY INC.
Notes to Consolidated Financial Statements
(Stated in United States Dollars)
December 31, 2001

13.   Capital Stock (cont'd.)

      Stock options outstanding were as follows:

<TABLE>
<S>                                                                              <C>                  <C>


                                                                                                         Aggregate
                                                                                  No. of Options      Option Price

      Balance - December 31, 1999                                                        447,125      $ 1,008,237
      Forfeited                                                                          (16,500)         (45,705)
      Exercised                                                                         (241,875)        (559,922)
                                                                                   ---------------   ----------------
      Balance - December 31, 2000                                                        188,750          402,610
      Granted                                                                            394,000          457,625
      Forfeited                                                                          (40,750)         (40,750)
      Option price adjustment                                                               -            (258,360)
      Exercised                                                                          (10,500)         (10,500)
                                                                                   ---------------   ----------------
      Balance - December 31, 2001                                                        531,500        $ 550,625
                                                                                   ---------------   ----------------
</TABLE>

      As at December 31, 2001 and since 1997, the company had warrants
      outstanding to purchase 1,265,000 shares of the Common Stock at $6.25 per
      share. These warrants expire in 2002. Subsequent to the year end, the
      Board of Directors reduced the price per share to $4.00 and extended the
      expiry date of the warrants to 2005.

      The underwriters for the issuance of the Common Stock in 1997 hold options
      to acquire 110,000 Common Stock at $9.90 and 110,000 warrants at $0.165.
      These options expire in 2002.

      In May 1999, pursuant to the private placement issuance, 110,769 warrants
      to purchase 110,769 Common Stock exercisable at $8.13 were issued to the
      investor. The placement agent for the private placement issuance was
      issued 61,539 warrants to purchase 61,539 Common Stock exercisable at
      $8.13. The warrants expire in May 2004.


14.   Impairment in Value of Notes Receivable

      As at December 31, 2001, $1,408,533 (2000 - $1,194,710) in notes
      receivable were due from various Stockholders and management for options
      exercised from stock option plans. It is the company's opinion that the
      notes are of no value, given the nature of the terms for repayment and
      accordingly, the entire amount has been charged to Stockholders' Equity.

                                       19

<PAGE>

D.G. JEWELRY INC.
Notes to Consolidated Financial Statements
(Stated in United States Dollars)
December 31, 2001

15.   Accumulated Other Comprehensive Income

      The company has adopted Statement of Financial Accounting Standards (FAS
      No. 130) "Reporting Comprehensive Income" as of January 1, 1999 which
      requires new standards for reporting and display of comprehensive earnings
      and its components in the financial statements. However, it does not
      affect net earnings or total stockholders' equity. The components of
      comprehensive income are as follows:

<TABLE>
<S>                                                                                      <C>             <C>
                                                                                                         (Note 23)
                                                                                            2001             2000

      Net earnings                                                                    $ 1,570,887        $1,381,907
      Other comprehensive income:
         Foreign currency translation adjustments                                         126,174          (928,387)
                                                                                   ---------------   ----------------
      Comprehensive income                                                            $ 1,697,061        $  453,520
                                                                                   ---------------   ----------------
      The components of accumulated other comprehensive income are as follows:

      Accumulated other comprehensive income - December 31, 1999                                         $  613,896

     Foreign currency translation adjustments - December 31, 2000                                          (928,387)
                                                                                                     -----------------
     Accumulated other comprehensive income - December 31, 2000 (note 23)                                  (314,491)

     Foreign currency translation adjustments - December 31, 2001                                           126,174
                                                                                                     -----------------
      Accumulated other comprehensive income - December 31, 2001                                         $ (188,317)
                                                                                                     -----------------
</TABLE>

      The foreign currency translation adjustments are not currently adjusted
      for income taxes since the company is situated in Canada and the
      adjustments relate to the translation of the financial statements from
      Canadian dollars into United States dollars and is done only for the
      convenience of the Reader.

                                       20

<PAGE>

D.G. JEWELRY INC.
Notes to Consolidated Financial Statements
(Stated in United States Dollars)
December 31, 2001

16.   Unusual Items

      Unusual items include the following:

<TABLE>
<S>                                                                                         <C>           <C>

                                                                                                          (Note 23)
                                                                                             2001              2000

      Litigation associated with Haymarket LLC (note 20)                                 $ 441,616       $2,403,869
      Provision for loss to 50% investee company                                              -           2,109,496
      Loan receivable - Diamante Fine Jewellery Limited                                       -             269,320
                                                                                   ---------------   ----------------
      Balance - December 31, 2001                                                        $ 441,616       $4,782,685
                                                                                   ---------------   ----------------

17.   Earnings Per Common Share

      The company has adopted Statement of Financial Accounting Standards (FAS
      No. 128), Earnings Per Common Share, which requires presentation, in the
      consolidated statement of earnings, of both basic and fully diluted
      earnings per common share.

                                                                                                         (Note 23)
                                                                                            2001              2000

      Weighted average Common Share outstanding                                         6,777,244        6,649,655
                                                                                   ---------------   ----------------

</TABLE>

      The outstanding warrants and underwriters' options were not included in
      the computation of Earnings per Common Share, assuming dilution, because
      the exercise prices were greater than the average market price of the
      Common Share.

                                       21
<PAGE>

D.G. JEWELRY INC.
Notes to Consolidated Financial Statements
(Stated in United States Dollars)
December 31, 2001

17.   Earnings Per Common Share (cont'd.)

      Earnings per Common Share and Earnings per Common Share Assuming Dilution

<TABLE>
<S>                                                           <C>                   <C>                  <C>

                                                               Income                Shares              Per-Share
                                                             (Numerator)            (Denominator)          Amount
------------------------------------------------------------------------------------------------------------------
      Net Earnings                                            $1,570,887
                                                              ----------

      Basic EPS

      Earnings available to Common Stockholders               $1,570,887              6,777,244             $0.23
                                                                                                            -----

      Effect of Dilutive Securities

      Contracts with suppliers which may be settled
        in stock or cash                                                                187,974

      Contingently issuable stock (note 20)                                              26,411

      Employee stock options                                                            250,333

      Diluted EPS

      Earnings available to Common Stockholders
       + assumed conversions                                 $1,570,887               7,241,962             $0.22
                                                             ----------               ---------             -----
</TABLE>

18.   Related Party Transactions

<TABLE>
<S>                                                                                        <C>            <C>

                                                                                                          (Note 23)
                                                                                             2001             2000

      Rent paid to a company owned by majority Stockholders                             $ 114,913         $124,387
      Interest paid to Stockholders                                                       224,982          254,871
      Sales to 50% owned investee company                                               2,187,575        2,871,675
      Purchase of internet contract from 50% owned investee company                       753,102            -
      Sales to companies related to principle Stockholder                               4,113,255        6,952,516

</TABLE>

      These transactions are in the normal course of operations and are measured
      at the exchange amount which is the amount of consideration established
      and agreed to by the related parties.

                                       22
<PAGE>

D.G. JEWELRY INC.
Notes to Consolidated Financial Statements
(Stated in United States Dollars)
December 31, 2001

19.   Commitments

      The company is obligated under various occupancy leases for rental space
      which extends through January 31, 2005. Rental and leasing expenses for
      the year ended December 31, 2001 under these leasing agreements were
      $273,157 (2000 - $251,409).

      Future minimum rental payments as of December 31, 2001 under the operating
lease agreements are as follows:

<TABLE>
<S>                                                                                                      <C>

      Within one year                                                                                    $ 373,579
      Over one year but not exceeding two years                                                            299,587
      Over two years but not exceeding three years                                                          92,053
                                                                                                      ---------------
                                                                                                         $ 765,219
                                                                                                      ---------------
</TABLE>

      Annual rent payments for vehicles under operating leases which are in
      effect for the next four years amount to $66,330. Minimum lease payments
      for the next four years are as follows:

<TABLE>
<S>                                                                                                      <C>

      Within one year                                                                                     $ 36,037
      Over one year but not exceeding two years                                                             20,154
      Over two years but not exceeding three years                                                           8,399
      Over three years but not exceeding four years                                                          1,740
                                                                                                      ---------------
                                                                                                          $ 66,330
</TABLE>

20.   Contingencies

      The company is contingently liable under contested lawsuits of amounts
      approximating $322,000. In the opinion of management, there is no merit
      for these claims and the company has filed counter claims. No provision
      has been recorded in the accounts for possible losses or gains. Should any
      expenditures be incurred by the company for the resolution of these
      lawsuits, they will be charged to the operations of the year in which such
      expenditures are incurred.

      The company is contingently liable to a mortgage corporation for the
      guarantee of a mortgage given to a party related to the major Stockholder
      of the company in the amount of $475,956.

                                       23
<PAGE>

D.G. JEWELRY INC.
Notes to Consolidated Financial Statements
(Stated in United States Dollars)
December 31, 2001

20.   Contingencies (cont'd.)

      The company is contingently liable for damages and costs associated with
      litigation relating to Haymarket LLC that resulted in an unfavorable
      decision. As a result, an adjustment to the provision has been made in the
      2001 fiscal period for these damages and costs approximating $1,800,000
      (2000 - $2,400,000). It is management's opinion that the amount provided
      for will be sufficient to cover the ultimate liability, if any.

      During the year the company entered into an arrangement whereby
      approximately $800,000 (settlement value) of trade payables were settled
      by way of issuing Common Stock to the suppliers. The issued stock are held
      in escrow until October, 2002 at which time if the stock price is trading
      below the agreed upon settlement value before October, 2002 the company
      will be held liable for the difference.


21.   Segmented Information

<TABLE>
<S>                                                                                      <C>             <C>
                                                                                                          (Note 23)
                                                                                             2001              2000

      Sales to major customers                                                        $ 23,252,102      $38,332,085
      Percentage of total sales                                                               65%             96%

      Accounts receivable due from major customers                                      27,206,332       24,644,820
      Percentage of total accounts receivable                                                 96%             91%

      Ongoing credit evaluations of each customer's financial condition are
      performed and, generally, no collateral is required. The company maintains
      reserves for potential credit losses and such losses, in the aggregate,
      have not exceeded management's expectations.

      Sales by Geographic Area

</TABLE>

<TABLE>
<S>                                                                                    <C>              <C>

                                                                                                         (Note 23)
                                                                                            2001             2000

      United States of America                                                       $ 29,994,391      $31,816,107
      Canada                                                                            6,015,498        8,092,938
      Other                                                                                26,721           46,458
                                                                                    ----------------  ------------
                                                                                     $ 36,036,610      $39,955,503
                                                                                    ----------------  ------------
</TABLE>

                                       24

<PAGE>

D.G. JEWELRY INC.
Notes to Consolidated Financial Statements
(Stated in United States Dollars)
December 31, 2001

21.   Segmented Information (cont'd.)

      Net Earnings by Geographic Area

      The company's accounting records do not readily provide information on net
      earnings by geographic area. Management is of the opinion that the
      proportion of net earnings based principally on sales, presented below,
      fairly presents the results of operations by geographic area.

<TABLE>
<S>                                                                                     <C>              <C>

                                                                                                         (Note 23)
                                                                                            2001              2000

      United States of America                                                        $ 1,307,498         $480,830
      Canada                                                                              262,224          895,934
      Other                                                                                 1,165            5,143
                                                                                    --------------       -----------
                                                                                      $ 1,570,887       $1,381,907
                                                                                    --------------      ------------
      Identifiable Assets by Geographic Area

                                                                                                         (Note 23)
                                                                                            2001              2000

      United States of America                                                        $10,936,214      $16,355,781
      Canada                                                                           41,893,509       39,761,032
                                                                                    --------------     -------------
                                                                                      $52,829,723      $56,116,813
                                                                                     -------------     -------------


      Purchases from Major Suppliers

                                                                                                         (Note 23)
                                                                                            2001              2000

      Purchases from major suppliers                                                 $ 12,584,260      $13,455,004
      Percentage of total purchases                                                         75%             58%
      Accounts payable due to major suppliers                                             604,201        2,259,738
      Percentage of total accounts payable                                                   8%             21%

</TABLE>

                                       25

<PAGE>

D.G. JEWELRY INC.
Notes to Consolidated Financial Statements
(Stated in United States Dollars)
December 31, 2001

22.   Subsequent Event

      On February 6, 2002, the company issued 316,933 Common Stock to Haymarket
      LLC, under court order, which represents partial settlement of ongoing
      litigation as described in Note 20.


23.   Comparative Information

      Certain comparative figures have been reclassified in order to conform
      with the current year's financial statement presentation.



                                       26