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                                  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, 2000

                                       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 National Market 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 April 3, 2001 was $1,464,704.

<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 April 3, 2001 was 6,649,655 shares.

         Documents incorporated by reference: None


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                                D.G. JEWELRY INC.
                         2000 ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS


<TABLE>
<S>      <C>                                                                            <C>
                                     PART I

Item 1.  Business........................................................................1
Item 2.  Properties......................................................................8
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.............................................15
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.................28
Item 13. Certain Relationships and Related Transactions.................................30

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................32

Signatures..............................................................................33
</TABLE>

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                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, contain 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 April 3, 2001, the exchange rate was
Cdn$1.5792 per US$1.00.

<TABLE>
<CAPTION>
Year Ended December 31,          1994        1995         1996         1997          1998          1999           2000
-----------------------          ----        ----         ----         ----          ----          ----           ----

<S>                            <C>         <C>          <C>          <C>           <C>           <C>           <C>
Rate at end of period          $0.7143     $0.7353      $0.7299      $0.6991       $0.6532       $0.6929       $ 0.6687
Average rate during period      0.7299      0.7299       0.7353       0.7223        0.6745        0.6730         0.6675
High                            0.7092      0.7009       0.7212       0.6945        0.7061        0.6929         0.6417
Low                             0.7642      0.7533       0.7526       0.77493       0.6376        0.6582         0.6993
</TABLE>

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                                     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,
catalogue showrooms, 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 32 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, The Twain Group, Zellers, Inc. and The Shopping
Channel. In the last five years, we have also focused on the much larger
American market. The DG division currently sells products to customers such as
Wal-Mart, Value Vision International Inc., Suarez Corporation, which is a direct
mail order company, 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 2000, approximately 79.6% of our sales were in the United States, as
compared to 69.7% and 81% in 1999 and 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.

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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. We have begun to utilize each division's
distribution lines and customers to promote and "cross-sell" the products of the
other divisions. We believe that we will continue this cross-promotion to
increase the rate of penetration of our products into the U.S. markets.

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, catalogue showrooms 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 and earrings.

             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.

                                        2

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Marketing

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

             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. Marketing of the Aviv line is aided by
Aviv's specialization in bridal jewelry, which allows our sales people to focus
their marketing efforts on certain market segments.

             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. Aviv also utilizes independent sales representatives, who promote Aviv's
products to smaller retail outlets.

             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.

             Although our sales are generally non-refundable, we may accept
returns of certain items in order to maintain customer goodwill and as part of
promotional programs. Returns of products are not significant and generally are
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 not yet
experienced any difficulty in reselling returned merchandise.

             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, J.C. Penney 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), 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

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pursuant to any formal or long-term contracts, although we do have a long-term
supply agreement with Zellers, Inc.

             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. For the year ended December 31,
1999, two major customers accounted for approximately 43% of sales. For the year
ended December 31, 1999, Value Vision accounted for approximately 27% of sales
and Diamante accounted for 16% of sales. Other than ValueVision and Diamante, no
customer accounted for more than 10% of sales in the year ended December 31,
1999. The loss of any of these customers or a significant reduction in their
orders would have an adverse effect on D.G. Jewelry Inc.

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., particularly 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 be
sold for as much as $1,000. The rings are made principally in 10 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 is in the process of being integrated in 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.

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             Diamonair offers approximately 700 rings, primarily adorned with
cubic zirconia stones. Although many of Diamonair's products are made of
precious metals, 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 are planning to
introduce other stones, which may include gem stones as well as other synthetic
stones into the Diamonair products.

             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 and
bracelets. 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

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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 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 Cedar
Knolls, 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 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. 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. 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.

             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.

                                        6

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             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.

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.

             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., Oroamerica, 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.

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             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.

The New York Gold and Diamond Exchange

             As part of the acquisition of Aviv, we acquired the New York Gold
and Diamond Exchange, a retail store. New York Gold and Diamond Exchange is
located in a 1,500 square foot area of the Aviv facility in Houston, Texas. New
York Gold and Diamond Exchange sells the products of Aviv and other
manufacturers and offers us an excellent opportunity to profitably dispose of
excess inventory of Aviv products.

Employees

             At April 3, 2001, we employed 153 persons on a full-time basis,
including approximately 128 engaged in manufacturing and distribution, 10
salespeople, 20 general and administrative and 7 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 2000
represented approximately 44.23% of total revenues.

         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. In addition, we do not expect to be as effected because of
our revenues from alternative customers such as television shopping networks and
sales over the Internet.

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 $124,387.78, increasing
each


                                        8

<PAGE>

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 $105,854.82
for the 12 months ended December 31, 2000. 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, 2000 the mortgage was $504,759. 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. The sublease is to terminate on the
earliest of (i) May 30, 2003, (ii) four months after we give notice, or (iii)
upon termination of the primary lease on the property. The primary lease is not
due to terminate until March 2014, although it is terminable by the landlord
upon certain events, such as the failure of the tenant to pay rent. We pay
annual rent of $130,484. In October 2000, the manufacturing operations of the
Houston facility were transferred to our facility in Toronto. We currently use
the Houston facility for our retail store, which occupies approximately 1,500
square feet, and for minor repairs and storage.

         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. We have the option, upon
thirty days notice, to reduce the total area which it occupies and receive a
proportionate reduction in rent so long as we occupy at least 5,000 square feet.
The sublease was renewed on November 20, 1999 for a further one-year period to
November 1, 2000 with an option to extend to September 30, 2001, which option
has been exercised. We pay annual rent of $84,789. We use the facility 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 January 2000, Haymarket LLC commenced an action in the Supreme
Court of the State of New York, County of New York, and seeking undetermined
damages. The complaint alleged that D.G. breached the terms of a Purchase
Agreement entered into by the parties. In its defense, D.G. asserted that
Haymarket was barred from enforcing the agreement because it had wrongfully and
in bad faith manipulated the price of D.G. Jewelry stock downwards. The case was
split into separate determinations on the issues of liability and damages, and
the issue of liability was tried before a jury in November, 2000. On November
16, 2000, the jury returned a verdict in D.G.'s favor, and the judge thereafter
set aside the jury verdict and directed a verdict for Haymarket. On December 13,
2000, the court entered judgment for Haymarket, ordering the delivery of 316,933
shares of D.G.'s stock to Haymarket. D.G. filed a Notice of Appeal on January 4,
2001 and obtained a stay of enforcement on the order requiring delivery of the
shares while the appeal is pending. No trial on damages will be scheduled unless
D.G. fails to prevail on its appeal.

In November, 2000, Aviv, Inc. commenced an action against Samuels Jewelers Inc.
in the State of Texas at Austin, Texas, to recover an account balance totaling
some $480,000, of which some returns of approximately $280,000 have been
received. Currently there remains an outstanding net balance of approximately
$184,000. Samuels has defended claiming all products were delivered on a
consignment basis,


                                        9
<PAGE>

which Aviv denies. Pleadings have been completed and the case remains pending.
Aviv, Inc. is a wholly-owned subsidiary of DG.

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

         Not required.














                                       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 two fiscal years through the
first quarter of fiscal 2001.*

                                                           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

* Prior to May 27, 1999, the company's stock was trading on the Nasdaq Small Cap
Market. On February 9, 2001, the company's common stock once again began trading
on the Nasdaq Small Cap Market. For stocks trading on the Small Cap Market, the
stock price information required is the high and low bid prices. In Fiscal 1999,
First Quarter, the high and low bid prices were 9.625 and 4.500 respectively,
and in Fiscal 1999, Second Quarter, the high and low bid prices were 9.000 and
5.625 respectively. In Fiscal 2001, First Quarter, the high and low bid prices
were 1.375 and 0.813 respectively.

         As of April 3, 2001, there were 20 shareholders of record and
approximately 1,000 beneficial owners.

         On April 3, 2001, the last sale price of our common stock as reported
on the Nasdaq Small Cap Market System was $1.00.

                                 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.

                                       11
<PAGE>

                            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.

Common Stock

             We are authorized to issue an unlimited number of shares of common
stock, no par value per share, of which 6,649,655 shares of common stock are
issued and outstanding as of April 3, 2001. 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 April 3, 2001, there were no issued and outstanding
Class A Preference Shares.

                                       12

<PAGE>

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.

             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.

             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. This warrant
expires 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 April 3, 2001.

                                       13

<PAGE>

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.

ITEM 6.      SELECTED FINANCIAL DATA

             The following summary financial information for the fiscal years
2000, 1999, 1998 and 1997 have been derived from the audited financial
statements of the Company.

             The following selected statement of operations data is for the
period from January 1, 1997 through December 31, 2000. The selected balance
sheet data is for the period from January 1, 1997 through December 31, 2000. The
statement of operations and balance sheet data is derived from our financial
statements and the related notes included elsewhere in this report. 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.

<TABLE>
<CAPTION>
                                                     Year ended, December 31,
                                             1997              1998                 1999                2000
                                             ----              ----                 ----                ----
                                                     (in thousands except per share data)

<S>                                         <C>               <C>                 <C>                 <C>
Statement of Operations Data:
Revenue                                     $22,128           $35,350             $35,414             $39,956
Gross profit                                  6,450            11,495              13,059              14,798
Net income                                    1,045             3,279               1,000               1,382
Net income per share - diluted                  .22              0.59                0.16                0.21



                                                    Year ended, December 31,
                                             1997              1998                 1999                2000
                                             ----              ----                 ----                ----
                                                     (in thousands except per share data)
Balance Sheet Data:
Working capital                            $10,235            $13,735             $20,400             $20,882
Total Assets                                34,283             43,504              51,512              56,065
Long-term debt                               2,865              2,696               2,202               2,164
Total liabilities                           23,688             29,211              31,112              35,183
Shareholders' equity                        10,595             14,292              20,400              20,882
</TABLE>

                                       14

<PAGE>




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.

         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. This warrant
expires 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 three stores in Phoenix,
Arizona.

         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 and $1,192,513 in 2000.

         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 2000 on a non-consolidated, unaudited
basis were $5.7 million and the profit margin was approximately 41.5%. 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.

                                       15

<PAGE>

         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 of approximately $7.8 million, approximately $1.2
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
were approximately 18.6% for the year ended December 31, 2000. We do not
anticipate that the cost of many of the Aviv products will be reduced
significantly by our 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 intend
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 Aviv and Diamonair sales
offices and Diamonair's manufacturing facilities will be beneficial for
maintenance of those 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, 2000 ("Fiscal 2000") Compared to Fiscal Year Ended
December 31, 1999 ("Fiscal 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 12.8%. 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 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 14.33% 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 $9,070,937 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 (on fully diluted basis) 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.

                                       16

<PAGE>

         As a result, income before income taxes and discontinued operations was
$2,357,050 in Fiscal 2000 as compared to $1,553,482 in Fiscal 1999, 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.

Year Ended December 31, 1999 Compared to Fiscal Year Ended December 31, 1998

         Sales for the year ended December 31, 1999 were $35,414,133 as
compared to $35,350,022 for the year ended December 31, 1998. The modest
increase in sales is the result of Management's decision to decrease sales to
some accounts that carried a lower than targeted gross profit. As a result, the
cost of sales decreased by approximately $1.5 million as compared to the
previous fiscal year and the gross profit increased by 4.36%. Operating expenses
decreased to approximately $3.9 million for the year ended December 31, 1999 as
compared to approximately $4.9 million for the year ended December 31, 1998.
Operating expenses represented 11.13% of revenues in the year ended December 31,
1999 as compared to 13.9% in the year ended December 31,1998. Other income
recorded in Fiscal 1998 was primarily the result of the Zellers settlement.

         Interest expenses increased by approximately $29,000. Other expenses
decreased by approximately $730,000. Most of the difference is attributable to a
decrease in bad debt expense.

         Income before income taxes was $1,553,482 as compared to $4,756,061, a
decrease of $3,202,579. Income taxes decreased by $924,115, from $1,477,369 to
$553,254 in the year ended December 31, 1999. Net income was $1,000,228 in the
year ended December 31,1999 as compared to net income of $3,278,692 in the year
ended December 31, 1998.

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 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 April 3, 2001 amounted to 7.50%. Interest on any borrowings
is payable monthly. 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 and Pegasus,
jewelry retail chains owned by Mr. Berkovits' daughter 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, 2000, we used cash in operating
activities of $173,587; accounts receivable increased by $3.1 million and
inventory increased by $2.2 million.

                                       17

<PAGE>

         Our accounts receivable net of allowances for doubtful accounts as of
December 31, 2000 were $27.2 million, or 68% of revenue for the year ended
December 31, 2000. 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.

         Our inventory as of December 31, 2000 was $25.5 million, or 64% of
revenue for the year ended December 31, 2000. Inventory is such a large
percentage of sales because the inventory reflects needs for both divisions for
their anticipated expansion and growth in 2001.

         At December 31, 2000, we had loans outstanding to our principal
shareholder, Jack Berkovits, of approximately $1.9 million which bear interest
at 15.0% per annum.

         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.

         We are required to issue additional shares of our common stock to cover
any potential adjustment in the amount of shares of common stock purchased in
the May private placement offering. Pursuant to the Common Stock Purchase
Agreement between Haymarket, LLC and us, the number of shares purchased by
Haymarket, LLC will be adjusted to reflect a reset in the purchase price of the
shares acquired according to the following terms: (i) the reset price of the
shares will be the average of the lowest twelve bid prices of our common stock
during the applicable reset period (as defined below); (ii) the number of shares
of common stock to be issued upon the expiration of each of the two reset
periods will be calculated by the following formula: (307,692.5 (1/2 the number
of shares purchased)) x (1,500,000 x 115% - the average of the lowest twelve bid
prices of our common stock during the applicable reset period) / (the average of
the lowest twelve bid prices of our common stock during the applicable reset
period); and (iii) there will be two reset periods, each reset period consisting
of thirty trading days. We have not issued any additional shares required to be
issued pursuant to the agreement. See "Legal Proceedings."

         Pursuant to the terms of the Common Stock Purchase Agreement, we have
the option to sell, and Haymarket, LLC has agreed to buy, up to a maximum of
$2,000,0000 worth of our common stock. The number of shares acquired by
Haymarket, LLC will be calculated according to the following formula: (the
dollar amount of the shares we have an option to issue (up to a maximum of
$2,000,000 worth)) / ($3,000,000 / 100% of the bid price of the shares of our
common stock on the trading day immediately preceding the date of the purchase
of the additional shares). The issuance of the additional shares will occur on
the earlier of (a) November 13, 1999 or (b) 20 days after the expiration of the
second reset period. We are required to exercise our option to sell the
additional shares within 20 days after the earlier of (a) or (b). We did not
exercise the option.

         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.

<TABLE>
<CAPTION>
                                                                                                               Page
Financial Statements:                                                                                        Number
                                                                                                             ------

<S>                                                                                                           <C>
Report of Independent Auditors................................................................................F - 2

Consolidated Balance Sheets as at December 31, 2000 and 1999 .................................................F - 3

Consolidated Statements of Stockholders' Equity for
        the years ended December 31, 2000, 1999, and 1998.....................................................F - 4

Consolidated Statements of Earnings
     for the years ended December 31, 2000 and 1999...........................................................F - 5

Consolidated Statements of Cash Flows
     for the years ended December 31, 2000 and 1999...........................................................F - 6


Notes to Consolidated Financial Statements....................................................................F - 7 - F-23
</TABLE>




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

         On December 12, 2000, Schwartz Levitsky Feldman, LLP Chartered
Accountants ("SLF"), the independent Chartered Accountants for D.G. Jewelry,
Inc. (the "Company") was dismissed by the Company. During the years ended
December 31, 1999 and 1998 the reports by SLF on the financial statements of the
Company did not contain an adverse opinion or a disclaimer of opinion, or was
qualified or modified as to uncertainty, audit scope, or accounting principles.
During the Company's two most recent fiscal years and subsequent period up to
December 12, 2000, there were no disagreements with the former accountant on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved to their
satisfaction would have caused them to make reference in connection with their
opinion to the subject matter of the disagreement. On December 12, 2000, upon
receipt of approval of its Board of Directors, the Company engaged Solursh
Feldman & Partners, LLP to serve as the Company's independent Chartered
Accountants. During the Company's two most recent fiscal years, and during any
subsequent period through December 12, 2000, the Company did not consult with
Solursh Feldman & Partners, LLP on any accounting or auditing issues.

                                       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>
<CAPTION>
                  Name                      Age          Position with the                   Position Held
                                                                  Company                         Since

<S>                                         <C>       <C>                                         <C>
Samuel J. Berkovits.....................    48        Chairman of the Board,                      1979
                                                      CEO, CFO and President
Anca Periet.............................    46        Vice President-Finance & Operations,        2000
                                                      Controller and Treasurer
BenTzion Berkovits......................    27        Executive Vice President - Sales            2000
                                                          & Marketing
Michael P. Johns........................    59        Executive Vice President -
                                                          Specialty Retail Services               2001
Leonard Fasullo.........................    60        Vice President-Production                   1989
Bruce Fleischer.........................    46        Vice President - Specialty Retail Services  2000
Kenneth H. Saul.........................    55        General Counsel; Secretary                  2000
Meyer Feiler............................    48        Director                                    1998
Theodore L. Bonsignore..................    54        General Manager, Diamonair; Director        1998
Jay M. Kaplowitz.......................     54        Director                                    2000
Saul M. Muskat..........................    53        Director                                    2000
Steven Reichmann........................    47        Director                                    2000
Andrew R. Reiser .......................    43        Director                                    2001
</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 14 years, and was appointed to
the multiple positions of Vice President - Finance & Operations, Controller,
Treasurer and Secretary in May, 2000. 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

         BenTzion Berkovits has been with DG for more than 4 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 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.

       Michael P. Johns joined D.G. Jewelry Inc. on March 26, 2001 as Executive
Vice President - Specialty Retail 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 W. G. Young Co. the latter
portion of which he served as Sr. VP - Marketing and Sales. Under his
stewardship, W. G. Young Co. 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.

       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 - Specialty Retail 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.

         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 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 School, Toronto, and a Teacher of Adults Certificate from
Centennial College, Toronto, as well as successfully completing the Canadian
Securities Course at Toronto, in June, 1998.

         Theodore L. Bonsignore has served as our General Manager of Diamonair
since May, 1998 and as a Director of D.G. Jewelry Inc. since July 1998. Mr.
Bonsignore works for us on an average of between fifteen - to twenty hours a
week and also operates T.L. Bonsignore Management and Advisory Services, a
consulting firm specializing in the jewelry industry. From 1975 to 1997, Mr.
Bonsignore was employed by Krementz & CO., a jewelry manufacturer, serving as
President since 1990. Mr. Bonsignore has been a Director of the Jewelers Board
of Trade since 1990 and served as Chairman of that Board during 1998 and 1999.
Mr. Bonsignore is a certified public accountant.

                                       20

<PAGE>

         Meyer Feiler has been a Director 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.

         Jay M. Kaplowitz was appointed a Director on August 11, 2000. He is a
founding partner of the law firm Gersten, Savage & Kaplowitz, LLP, the Company's
securities counsel in the United States. Mr. Kaplowitz has more than twenty-five
years experience in corporate, banking and securities law. He has negotiated and
structured numerous financial and business transactions and has extensive
expertise in public and private and equity and debt offerings. He received a JD
from Boston University, and a BA from the Brooklyn College, City University of
New York.

         Saul M. Muskat was appointed a Director on August 11, 2000. Mr. Muskat
founded the Toronto office of Schwartz, Levitsky & Feldman, llp, where he was
the managing partner from its founding in 1977 until 2000. Mr. Muskat's practice
areas included Corporate Finance, Mergers and Acquisitions, Merchant Banking,
Initial Public Offerings, Corporate Reorganizations and Management Consulting.
Mr. Muskat is currently engaged as a management consultant. Prior to founding
the Toronto office of Schwartz , Levitsky & Feldman, llp, he articled and
practiced at the Toronto office of Price Waterhouse from 1973 to 1977. He is a
member of the Canadian Institute of Chartered Accountants and a member of the
Ontario Institute of Chartered Accountants. He received a diploma in Polymer
Chemistry from Ryerson Polytechnical Institute, Toronto, and an honors BBA
degree from York University, Ontario.

         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.

        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, 2000, the Audit Committee consisted of Messrs.
Berkovits, Muskat and Feiler. On January 25, 2001, Mr. Reiser was appointed to
the audit committee to replace Mr. Muskat. 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


                                       21


<PAGE>

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. Berkovits, Kaplowitz and Feiler. The Compensation
Committee is expected to periodically review and evaluate officers' compensation
and will administer our 1996 Stock Option Plan, 1998 Stock Option Plan and the
1999 Stock Option Plan.

        For a period of three years after the effective date of our Initial
Public Offering on April 17, 1997, we have agreed to invite a designee of Joseph
Dillon & Company to attend all meetings of the board of directors, but such
designee will not be entitled to vote or be compensated.

        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, 2000,
December 31, 1999 and December 31, 1998 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.

                           Summary Compensation Table
<TABLE>
<CAPTION>
                                                            Restricted
Name and                  Year                              Stock               Other
Principal Position        Ended     Salary     Bonus        Awards   Options    Compensation
------------------        -----     ------     -----        ------   -------    ------------

<S>                       <C>       <C>        <C>             <C>   <C>        <C>
Jack Berkovits            2000      $266,756   $200,067          0          0   $ 12,000(1)
Chief Executive Officer   1999      $247,645   $      0          0     10,000   $ 12,000(1)
Chief Financial Officer   1998      $216,951   $125,000          0    266,000   $ 12,000(1)
and Chairman              1997      $197,242   $187,798          0    377,500   $ 12,000(1)

Gadi Beer                 2000      $142,199   $      0          0          0   $  8,854(3)
Vice President of Sales   1999      $167,724   $      0          0          0   $  7,710(3)
And Marketing, Aviv       1998      $196,755   $      0          0     10,000   $  7,710(3)
                          1997(2)   $109,375   $      0          0          0   $      0
</TABLE>


(1)     Represents monthly auto allowance.
(2)     Mr. Beer's employment with D.G. Jewelry Inc. commenced on June 1, 1997,
        after our acquisition of Aviv and terminated in October, 2000.
(3)     Represents car allowance of $6,195 and health insurance of $2,659.

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 with
yearly increases of no less than $10,000. Mr. Berkovits employment agreement
expires on April 17, 2001 and 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.

                                       22


<PAGE>


             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.

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 2000 to the Company's Named
Executive Officers.

                                  Option Grants
<TABLE>
<CAPTION>
                      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 Fiscal Year     ($/Share)    Date                5%($) 10%($)
--------------        -------      --------------     ---------    ----                ----- ------
<S>                   <C>          <C>                <C>          <C>                 <C>   <C>
                      -0-          -0-
</TABLE>


<TABLE>
<CAPTION>
                        Option Exercises in Last Fiscal Year and Fiscal Year End Values (1)
                                                                                                           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
---------                     ------------     --------                     -------------             -------------
<S>                           <C>              <C>                          <C>                     <C>
Jack Berkovits                241,875          $ 556,187.50                 122,250/141,250         $ 122,250/141,250
</TABLE>


(1)      The closing bid price of a share of the Company's Common Stock at
         December 31, 2000 was $0.9062.


                                       23


<PAGE>


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>
<CAPTION>
     Officer and/or Director            Expiration Date        Options      Percent        Exercise Price
     -----------------------            ---------------        -------      -------        --------------
<S>                                        <C>                 <C>          <C>                 <C>
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).
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 directors of D.G. and the percentage of
Options issued to such persons.

<TABLE>
<CAPTION>
     Officer and/or Director            Expiration Date        Options      Percent        Exercise Price
     -----------------------            ---------------        -------      -------        --------------
<S>                                        <C>                 <C>          <C>                 <C>
Jack Berkovits........................     07/14/03            266,000      53.2%               $2.77
Anca Periet...........................     07/14/03             20,000       4.0%               $2.77
Leonard Fasullo.......................     07/14/03             20,000       4.0%               $2.77
Theodore L. Bonsignore................     07/14/03             10,000       2.0%               $2.77
Meyer Feiler...........................    07/14/03             60,000      12.0%               $ (1)
</TABLE>


---------
(1)      10,000 of such options are exercisable at $2.77 and the remaining
         50,000 are at $4.00 per share.


                                       24


<PAGE>


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, 44,500 options have been granted under the 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 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


                                       25
<PAGE>


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 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 Plans."


                                       26


<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").


                               [GRAPHIC OMITTED]

<TABLE>
<CAPTION>
                                                                    Nasdaq
                                DG Jewelry        Nasdaq U.S.   Non- Financial
                                ----------        ----------    --------------
<S>                                 <C>              <C>            <C>
           April 18, 1997           100.00           100.00         100.00
           December 31, 1997         12.50           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
</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.

                                       27


<PAGE>


ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT

        The following table sets forth certain information as of April 3, 2001
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>
<CAPTION>
        Names and Address of Beneficial           Amount and Nature of    Percentage of Shares
                    Owner(1)                     Beneficial Ownership(2)      Outstanding
                    --------                     -----------------------      -----------
<S>                                                    <C>                       <C>
Jack Berkovits .................................       3,549,650(3)              52.4%

The Berkovits Family Trust .....................         426,000                  6.4%

Sheba Berkovits ................................         816,000(4)              12.3%

Leonard Fasullo ................................          30,500(5)                 *

Theodore L. Bonsignore .........................          18,750(6)                 *

Myer Feiler ....................................          74,750(7)               1.1%

Jay M. Kaplowitz ...............................           1,250(8)                 *

Saul M. Muskat .................................           1,250(8)                 *

Steven Reichmann ...............................           1,250(8)                 *

Andrew R. Reiser ...............................           1,250(8)                 *

Anca Periet ....................................          17,500(9)                 *

BenTzion Berkovits .............................         145,500(10)              2.2%

Bruce Fleischer ................................           5,250(11)                *

Michael P. Johns................................             500(12)                *

Kenneth H. Saul.................................           2,500(13)                *

Michael B. Mcelligott ..........................       1,191,051(14)             17.9%
85 Dudley Road,
Billerica, MA 01821-4132

All directors and executive officers,
and 5% shareholders, as a group
(16) persons ...................................       5,430,951(15)             78.8%
</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


                                       28


<PAGE>


     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 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 April 3, 2001, the Company had 6,649,655 shares of
     Common Stock 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) 122,250
     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 5,500 shares issuable upon the exercise of options which are
     currently exercisable or exercisable in the next sixty days.

(6)  Includes 18,750 shares issuable upon the exercise of options which are
     currently exercisable or exercisable in the next sixty days.

(7)  Includes 58,750 shares issuable upon the exercise of options which are
     currently exercisable or exercisable in the next sixty days.

(8)  Includes 1,250 shares issuable upon the exercise of options which are
     currently exercisable or exercisable in the next sixty days.

(9)  Includes 17,500 shares issuable upon the exercise of options which are
     currently exercisable or exercisable in the next sixty days.

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

(11) Includes 5,250 shares issuable upon the exercise of options which are
     currently exercisable or exercisable in the next sixty days.

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

(13) Includes 2,500 shares issuable upon the exercise of options which are
     currently exercisable or exercisable in the next sixty days.

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

(15) Such number of shares has been calculated to account for the indirect
     beneficial ownership by Mr. Berkovits and Ms. Berkovits of the 426,000
     shares owned by the Berkovits Family Trust, so that the 426,000 shares
     have only been counted once in calculating the aggregate number of shares
     held by officers, directors and 5% shareholders as a group.

                                       29


<PAGE>


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 $110,886 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 $97,000 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.

             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, 2000, the principal
amount outstanding was $504,759. 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, 2000 aggregated approximately
$1.9 million with an interest rate of 15%.

             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.

             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


                                       30


<PAGE>


price of $1,800,000. 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.

             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, 2000, we paid Theodore L.
Bonsignore approximately $125,000 for consulting fees. Mr. Bonsignore is a
director of D.G. and the General Manager of its Diamonair subsidiary. 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, in the opinion of management, except
for the interest rate charges on a portion of Mr. Berkovits' loans which are
above the market rate, 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.


                                       31


<PAGE>


                                     PART IV

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

(a)  Financial Statements:                                              Number
                                                                        ------

Report of Independent Auditors .....................................     F-2

Consolidated Balance Sheets as at December 31, 2000 and 1999 .......     F-3

Consolidated Statements of Stockholders' Equity for
        the years ended December 31, 2000, 1999 and 1998 ...........     F-4

Consolidated Statements of Earnings
     for the years ended December 31, 2000 and 1999 ................     F-5

Consolidated Statements of Cash Flows
     for the years ended December 31, 2000 and 1999 ................     F-6



Notes to Consolidated Financial Statements .........................  F-7 - F-23

(b)Reports on Form 8-K.

         D.G. Jewelry Inc. filed a Form 8K and Form 8KA, on December 18, 2000
and December 20, 2000, respectively, regarding the change of its independent
Chartered Accountants from Schwartz Levitsky Feldman, LLP, to Solursh Feldman &
Partners, LLP.

(c)Exhibits.

         None.


                                       32


<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.


                                           By:   /s/ Samuel Jacob Berkovits
                                                 --------------------------
                                                 Samuel Jacob Berkovits
                                                 Chairman of the Board, Chief
                                                 Executive Officer, Chief
                                                 Financial Officer and President

Dated:   April 11, 2001

             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 Berkovits
--------------------------         Chairman of the Board          April 11, 2001
Samuel Jacob Berkovits             Chief Executive Officer,
                                   Chief Financial Officer, and
                                   President


/s/ Meyer Feiler
--------------------------         Director                       April 11, 2001
Meyer Feiler


/s/ Theodore L. Bonsignore
--------------------------         Director                       April 11, 2001
Theodore L. Bonsignore

/s/ Jay M. Kaplowitz
--------------------------         Director                       April 11, 2001
Jay M. Kaplowitz


/s/ Saul M. Muskat
--------------------------         Director                       April 11, 2001
Saul M. Muskat


/s/ Steven Reichmann
--------------------------         Director                       April 11, 2001
Steven Reichmann


/s/ Andrew R. Reiser
--------------------------         Director                       April 11, 2001
Andrew R. Reiser


                                       33
<PAGE>

                                D.G. JEWELRY INC.

                        CONSOLIDATED FINANCIAL STATEMENTS

                  AS OF DECEMBER 31, 2000 AND DECEMBER 31, 1999

                  TOGETHER WITH REPORT OF INDEPENDENT AUDITORS

                                    CONTENTS

Report of Independent Auditors                                           F-2

Consolidated Balance Sheet                                               F-3

Consolidated Statement of Stockholders' Equity                           F-4

Consolidated Statement of Earnings                                       F-5

Consolidated Statement of Cash Flows                                     F-6

Notes to Consolidated Financial Statements                            F-7 - F-23


                                      F-1
<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, 2000 and 1999, and the results of
their operations and their cash flows for each of the two years in the year
ended December 31, 2000, 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. The financial
statements of D.G. Jewelry Inc. as of December 31, 1999, were audited by other
auditors whose report dated March 17, 2000 expressed an unqualified opinion on
those statements.

      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 preform 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 8, 2001, 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.

Toronto, Canada                       CHARTERED ACCOUNTANTS
March 8, 2001


                                      F-2
<PAGE>

                                D.G. JEWELRY INC.
                           Consolidated Balance Sheet
                        (Stated in United States Dollars)
                                December 31, 2000

<TABLE>
<CAPTION>
                                                                        (Note 20)
                                                          2000            1999
                                     ASSETS
<S>                                                  <C>             <C>
Current
   Cash                                              $    274,133    $  1,359,104
   Accounts receivable                                 27,197,897      24,129,922
   Inventories (note 3)                                25,522,902      23,310,679
   Prepaid expenses                                       181,983         102,676
   Cash surrender value of life insurance (note 4)         60,418          57,232
   Other receivable                                       301,548         313,304
                                                     ----------------------------
                                                       53,538,881      49,272,917
Investment in 50% Owned Investee Company                      133             141
Capital (note 5)                                        1,445,594       1,128,875
Goodwill (note 6)                                       1,080,000       1,110,000
                                                     ----------------------------
                                                     $ 56,064,608    $ 51,511,933
                                                     ============================

                                  LIABILITIES
Current
   Bank indebtedness (note 7)                        $ 18,864,676    $ 19,280,551
   Accounts payable and accrued charges (note 8)       10,532,238       5,892,808
   Long-term debt - current portion (note 9)              217,867         541,849
                                                     ----------------------------
                                                       29,614,781      25,715,208
Long-Term Debt (note 9)                                 2,164,104       2,201,770
Income Taxes Payable (note 13)                          3,403,875       3,195,246
                                                     ----------------------------
                                                       35,182,760      31,112,224
                                                     ----------------------------

                              STOCKHOLDERS' EQUITY
Capital Stock (note 10)                                12,476,962      11,917,040
Impairment in Value of Notes Receivable (note 10)      (1,194,710)       (663,407)
                                                     ----------------------------
                                                       11,282,252      11,253,633
Accumulated Other Comprehensive Income (note 11)         (314,491)        613,896
Retained Earnings                                       9,914,087       8,532,180
                                                     ----------------------------
                                                       20,881,848      20,399,709
                                                     ----------------------------
                                                     $ 56,064,608    $ 51,511,933
                                                     ============================
</TABLE>

                                      F-3
<PAGE>

                                D.G. JEWELRY INC.

                  Consolidated Statement of Stockholders Equity

                        (Stated in United States Dollars)

                          Year Ended December 31, 2000

<TABLE>
<CAPTION>
                                              Common       Issued and
                                               Stock      Outstanding                       Cumulative
                                           Number of           Common         Retained     Translation
                                              Shares         Warrants  Amount Earnings     Adjustments
                                          ------------------------------------------------------------------------------
<S>                                        <C>              <C>            <C>              <C>              <C>
Balance - December 31, 1998                5,167,000        1,265,000      $ 6,704,986      $ 7,531,952      $    55,501
  Common stock issued (note 10)            1,240,780               --        5,212,054               --               --
  Foreign currency translation                    --               --               --               --          558,395
  Net earnings                                    --               --               --        1,000,228               --
                                          ------------------------------------------------------------------------------
Balance - December 31, 1999 (note 20)      6,407,780        1,265,000       11,917,040        8,532,180          613,896
  Common stock issued (note 10)              241,875               --          559,922               --               --
  Foreign currency translation                    --               --               --               --         (928,387)
  Net earnings                                    --               --               --        1,381,907               --
                                          ------------------------------------------------------------------------------
Balance - December 31, 2000                6,649,655        1,265,000      $12,476,962      $ 9,914,087      $  (314,491)
                                          ==============================================================================
</TABLE>


                                      F-4
<PAGE>

                                D.G. JEWELRY INC.

                       Consolidated Statement of Earnings

                        (Stated in United States Dollars)

                          Year Ended December 31, 2000

                                                                     (Note 20)
                                                              2000        1999

Sales                                                  $39,955,503   $35,414,133

Cost of Sales                                           25,157,258    22,355,496
                                                       -------------------------

Gross Profit                                            14,798,245    13,058,637
                                                       -------------------------

Expenses
   Selling                                               3,559,160     2,078,089
   Administrative                                        2,168,148     2,179,701
   Financial                                             1,931,202     1,831,780
                                                       -------------------------

                                                         7,658,510     6,089,570
                                                       -------------------------

Earnings Before the Undernoted                           7,139,735     6,969,067

   Unusual items (note 12)                               4,782,685     5,415,585
                                                       -------------------------

Earnings Before Income Taxes and
  Discontinued Operations                                2,357,050     1,553,482

   Income taxes (note 13)                                  841,268       553,254
                                                       -------------------------

Earnings Before Discontinued Operations                  1,515,782     1,000,228

   Loss from discontinued operation (note 19)              133,875            --
                                                       -------------------------

Net Earnings                                           $ 1,381,907   $ 1,000,228
                                                       -------------------------

Earnings per Common Share (note 10)                    $      0.21   $      0.16
                                                       -------------------------

Earnings per Common Share
  Assuming Dilution (note 10)                          $      0.21   $      0.16
                                                       -------------------------


                                      F-5
<PAGE>

                                    D.G. JEWELRY INC.

                           Consolidated Statement of Cash Flows

                            (Stated in United States Dollars)

                               Year Ended December 31, 2000

                                                                     (Note 20)
                                                           2000            1999

Cash Flows from Operating Activities
   Net earnings                                     $ 1,381,907     $ 1,000,228
   Adjustments for:
    Amortization                                        375,741         611,366
    Other comprehensive income                         (928,387)        558,395
    Impairment in value of note receivable             (531,303)       (663,407)
    Goodwill                                             30,000         168,879
    Income taxes payable                                208,629         985,776
                                                    ---------------------------

                                                        536,587       2,661,237
   Changes in non-cash working capital
    Accounts receivable                              (3,067,334)     (5,155,820)
    Inventories                                      (2,211,293)     (2,424,487)
    Prepaid expenses and sundry assets                  (82,493)        (76,831)
    Other receivable                                     11,756        (313,304)
    Accounts payable and accrued charges              4,639,190         876,876
                                                    ---------------------------

                                                       (173,587)     (4,432,329)
                                                    ---------------------------

Cash Flows from Investing Activities
   Additions to capital assets (net)                   (692,430)        234,029
   Investment in 50% owned Investee company                   8            (141)
                                                    ---------------------------

                                                       (692,422)        233,888
                                                    ---------------------------

Cash Flows from Financing Activities
   Increase (decrease) in bank indebtedness            (417,064)        426,539
   Repayments of long-term debt (net)                  (361,820)       (386,832)
   Issuance of capital stock (note 10)                  559,922       5,212,054
                                                    ---------------------------

                                                       (218,962)      5,251,761
                                                    ---------------------------

Net (Decrease) Increase in Cash                      (1,084,971)      1,053,320

Cash - beginning of  year                             1,359,104         305,784
                                                    ---------------------------

Cash - end of year                                  $   274,133     $ 1,359,104
                                                    ===========================


                                      F-6
<PAGE>

                                D.G. JEWELRY INC.

                   Notes to Consolidated Financial Statements

                        (Stated in United States Dollars)

                                December 31, 2000

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 inter-company 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, 2000 and December 31, 1999
            respectively.

      b)    Principal Activities

            The company was incorporated in 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 $NIL (1999 - $780,946). Of this
            amount, $NIL (1999 - $5,736) was owed to these customers at December
            31, 2000 (1999).


                                      F-7
<PAGE>

                                D.G. JEWELRY INC.

                   Notes to Consolidated Financial Statements

                        (Stated in United States Dollars)

                                December 31, 2000

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.

      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 recorded at cost and amortization of capital
            assets is provided over the estimated useful lives of the assets,
            principally using the declining balance method.

            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. The
            company's amortization policy for goodwill is on a straight line
            basis over 40 years.

            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 undiscounted net revenue stream to be
            generated by the related activity.

      k)    Sales

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


                                      F-8
<PAGE>

                                D.G. JEWELRY INC.

                   Notes to Consolidated Financial Statements

                        (Stated in United States Dollars)

                                December 31, 2000

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

      l)    Income Taxes

            The company accounts for income taxes under the provisions of
            Statement of Financial Accounting Standards 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 bases of assets
            and liabilities.

      m)    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 12.

      n)    Stock Based Compensation

            In December 1995, Statement of Financial Accounting Standards 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.

      o)    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
            shareholders' equity.


                                      F-9
<PAGE>

                                D.G. JEWELRY INC.

                   Notes to Consolidated Financial Statements

                        (Stated in United States Dollars)

                                December 31, 2000

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

      p)    Concentrations of Credit Risks

            The company's receivables are 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, 2000, due to the wide variety of customers, markets and
            geographic areas to which the company's products are sold.

      q)    Net Income and Fully Diluted Net Income Per Weighted Average Common
            Share

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

            Fully diluted net income per common share is computed by dividing
            net income for the year by the weighted average number of common
            share outstanding during the year, assuming that all stock options
            as described in note 10 were exercised. Stock warrants as described
            in note 10 have not been included in the fully diluted net income
            per common share calculations as their inclusion would have been
            anti-dilutive.

      r)    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

                                                                  (Note 20)
                                                        2000          1999

          Accounts receivable                    $28,168,979   $24,451,688
          Less:  allowance for doubtful accounts     971,082       321,766
                                                 -------------------------

          Accounts receivable, net               $27,197,897   $24,129,922
                                                 =========================


                                      F-10
<PAGE>

                                D.G. JEWELRY INC.

                   Notes to Consolidated Financial Statements

                        (Stated in United States Dollars)

                                December 31, 2000

3.    Inventories

                                                                  (Note 20)
                                                   2000               1999

          Raw materials                     $ 5,913,002        $ 2,911,749
          Work-in-process                       589,342            909,547
          Finished goods                     19,020,558         19,489,383
                                            ------------------------------
                                            $25,522,902        $23,310,679
                                            ==============================

4.    Cash Surrender Value of Life Insurance

      The cash surrender value of life insurance represents the value of life
      insurance policies of the former directors of Aviv, Inc.

5.    Capital

<TABLE>
<CAPTION>
                                                                                              (Note 20)
                                                                    2000                          1999
                                                             Accumulated                   Accumulated
                                                     Cost   Amortization           Cost   Amortization
                                               -------------------------------------------------------
<S>                                            <C>            <C>            <C>            <C>
      Office equipment                         $  372,825     $  176,419     $  419,672     $  218,687
      Machinery and manufacturing equipment       650,206        527,463        808,850        355,508
      Computer equipment and software           1,109,398        428,530        736,036        262,988
      Automobile                                    6,000          6,000          6,000          4,500
      Leasehold improvements                      112,821         39,193        159,966        159,966
      Waxes and moulds                            422,272         50,323      1,468,697      1,468,697
                                               -------------------------------------------------------
                                               $2,673,522     $1,227,928     $3,599,221     $2,470,346
                                               -------------------------------------------------------
      Net carrying amount                                     $1,445,594                    $1,128,875
                                               =======================================================
</TABLE>


                                      F-11
<PAGE>

                                D.G. JEWELRY INC.

                   Notes to Consolidated Financial Statements

                        (Stated in United States Dollars)

                                December 31, 2000

6.    Goodwill

                                                                  (Note 20)
                                                       2000           1999
      Cost                                       $1,200,000     $1,200,000
      Less:  accumulated amortization               120,000         90,000
                                                 -------------------------

      Net                                        $1,080,000     $1,110,000
                                                 =========================

7.    Bank Indebtedness

      The bank loan bears interest at the bank's prime lending rate plus 3/4%
      per annum (7.25% at December 31, 2000 and 7.25% at December 31, 1999) with
      interest payable monthly. The weighted average interest rates incurred on
      the bank loan were 7.51% and 7.38% per annum for the year ended December
      31, 2000 and December 31, 1999 respectively. As security, the company has
      provided a general assignment of accounts receivable, a general security
      agreement constituting 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 $692,857 as of December 31, 2000
      and $692,857 as of December 31, 1999. The available line of credit, which
      depends on key financial ratios, amounted to $21,340,446 as at December
      31, 2000.

      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). Furthermore, an affiliated company (owned wholly by the company's
      majority stockholders, has provided a general security agreement
      constituting 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 and Phoenix Acquisition I Corporation, 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 and on
      the guarantees and other contingent liabilities.


                                      F-12
<PAGE>

                                D.G. JEWELRY INC.

                   Notes to Consolidated Financial Statements

                        (Stated in United States Dollars)

                                December 31, 2000

8.    Accounts Payable and Accrued Expenses

                                                                  (Note 20)
                                                   2000               1999

          Trade payables                    $ 8,302,150        $ 5,517,635
          Accrued expenses                    2,230,088            375,173
                                            ------------------------------

                                            $10,532,238        $ 5,892,808
                                            ==============================

9.    Long-term Debt

<TABLE>
<CAPTION>
                                                                                               (Note 20)
                                                                                  2000             1999
                                             Current         Long-term           Total            Total
                                         ---------------------------------------------------------------
<S>                                      <C>              <C>              <C>              <C>
      Obligation under capital leases    $   252,824      $   299,566      $   552,390      $   454,790
      Less: Deferred interest                (34,957)         (24,170)         (59,127)         (39,949)
                                         ---------------------------------------------------------------

                                             217,867          275,396          493,263          414,841
      Advances from stockholders                  --        1,888,708        1,888,708        1,905,356
      Term loan                                   --               --               --          423,422
                                         ---------------------------------------------------------------

                                         $   217,867      $ 2,164,104      $ 2,381,971      $ 2,743,619
                                         ===============================================================
</TABLE>

      Advances from stockholders

      The advances bear interest at 15% per annum (1999 - 11.6%) 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 7.

      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:

                     2001                         $  217,866
                     2002                            275,128
                     2003                                268
                                                  ----------
                                                  $  493,262
                                                  ==========


                                      F-13
<PAGE>

                                D.G. JEWELRY INC.

                   Notes to Consolidated Financial Statements

                        (Stated in United States Dollars)

                                December 31, 2000

10.   Capital Stock

<TABLE>
<CAPTION>
      Authorized
          Unlimited  number of common shares
          5,000,000  class 'A' preference shares
                                                                                                                      (Note 20)
                                                                                                          2000            1999
<S>                                                                                                <C>             <C>
             6,649,655 common shares (1999 - 6,407,780)                                            $12,363,737     $11,803,815
             1,265,000 warrants                                                                        113,225         113,225
                                                                                                   ---------------------------
                                                                                                   $12,476,962     $11,917,040
                                                                                                   ===========================

      During the year, the company issued common shares as follows:

          Proceeds received from private placement issuance of
           NIL common shares (1999 - 615,385)                                                      $        --      $4,000,000
          Issue expenses (net of income taxes)                                                              --         177,682
                                                                                                   ---------------------------
          Net proceeds                                                                                      --       3,822,318

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

          Proceeds received from conversion of promissory notes payable for 45,145
           common shares                                                                                    --         488,795

          Proceeds received from issuance of 241,875 (1999
           - 554,250) common shares on exercise of stock options                                       559,922         980,224

          26,000 common shares issued at $3 per share                                                       --          78,000
                                                                                                   ---------------------------

          Total                                                                                    $   559,922      $5,369,337
                                                                                                   ===========================
</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, may require vesting, and shall be at an exercise price all as
      determined by the Board.


                                      F-14
<PAGE>

                                D.G. JEWELRY INC.

                   Notes to Consolidated Financial Statements

                        (Stated in United States Dollars)

                                December 31, 2000

10.   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 U.S. $1.38 per share, 327,500 of such options expire on
      August 21, 2002 and 172,500 expire on February 9, 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 shares issuable
      under the Options, and an additional 25% each six month anniversary date
      thereafter.

      During 2000, 81,875 (415,125 in 1999) of these options have been exercised
      for total proceeds of $113,746 ($572,872 in 1999). 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, may require 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.


                                      F-15
<PAGE>

                                D.G. JEWELRY INC.

                   Notes to Consolidated Financial Statements

                        (Stated in United States Dollars)

                                December 31, 2000

10.   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% each six month anniversary date
      thereafter.

      During 2000, 160,000 (1999 - 139,125) of these options have been exercised
      for total proceeds of $443,200 (1999 - $407,352).

      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, expiring on July 19, 2009.
      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, may require 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
      "ITA"). 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 ther 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.

      The Board has granted 44,500 options to date under the 1999 Plan to 6
      persons, including officers, directors and key employees. 40,000 options
      are exercisable at $4.125 per share for ten years expiring November 16,
      2009. 2,500 options are exercisable at $5.25 per share for ten years
      expiring September 8, 2009. The remaining 2,000 options are exercisable at
      $5.25 per share for ten years expiring September 6, 2009.


                                      F-16
<PAGE>

                                D.G. JEWELRY INC.

                   Notes to Consolidated Financial Statements

                        (Stated in United States Dollars)

                                December 31, 2000

10.   Capital Stock (cont'd)

      The 40,000 options expiring November 16, 2009 were not exercisable until
      January 20, 2000 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%
      each six month anniversary date thereafter, with the full amount being
      exercisable on or after July 20, 2001. The 2,500 options were not
      exercisable until June 9, 2000 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% each nine month anniversary date thereafter, with
      the full amount being exercisable on or after September 9, 2002. The 2000
      options were not exercisable until June 7, 2000 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% each nine month anniversary date
      thereafter, with the full amount being exercisable on or after September
      7, 2002.

      None of these options have been exercised to date.

      Stock options outstanding were as follows:

                                                                    Aggregate
                                                   No. of options Option Price

          Balance - December 31, 1998             1,107,000     $ 3,240,560
          Granted                                    44,500         188,625
          Expired                                    (4,250)        (11,772)
          Exercised                                (414,125)       (592,078)
                                                  -------------------------

          Balance - December 31, 1999               733,125       2,825,335
          Forfeited                                 (16,500)        (45,705)
          Exercised                                (241,875)       (556,188)
                                                  -------------------------

          Balance - December 31, 2000               474,750     $ 2,223,442
                                                  =========================

      As at December 31, 2000 and since 1997, the company had warrants
      outstanding to purchase 1,265,000 shares of the common stock at $6.25 per
      share. The warrants expire in 2002.

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

      In May 1999, pursuant to the private placement issuance, 110,769 warrants
      to purchase 110,769 common shares 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 shares exercisable at
      $8.13. The warrants expire in May 2004.


                                      F-17
<PAGE>

                                D.G. JEWELRY INC.

                   Notes to Consolidated Financial Statements

                        (Stated in United States Dollars)

                                December 31, 2000

10.   Capital Stock (cont'd)

      Impairment in Value of Notes Receivable

      As at December 31, 2000, $1,194,710 (1999 - $663,407) 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 changed to stockholders' equity.

11.   Comprehensive Income

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

<TABLE>
<CAPTION>
                                                                                                    (Note 20)
                                                                                       2000             1999
<S>                                                                             <C>              <C>
      Net income                                                                $ 1,381,907      $ 1,000,228
      Other comprehensive income:
        Foreign currency translation adjustments                                   (928,387)         558,395
                                                                                ----------------------------

      Comprehensive income                                                      $   453,520      $ 1,558,623
                                                                                ----------------------------

      The components of accumulated other comprehensive income (loss) are as
      follows:

      Accumulated other comprehensive loss - December 31, 1998                                    $  55,501

      Foreign currency translation adjustments - December 31, 1999                                  558,395
                                                                                                  ---------

      Accumulated other comprehensive income - December 31, 1999 (note 20)                          613,896

      Foreign currency translation adjustments - December 31, 2000                                 (928,387)
                                                                                                  ---------

      Accumulated other comprehensive income - December 31, 2000                                  $(314,491)
                                                                                                  =========
</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, done only for the convenience
      of the Reader.


                                      F-18
<PAGE>

                                D.G. JEWELRY INC.

                   Notes to Consolidated Financial Statements

                        (Stated in United States Dollars)

                                December 31, 2000

12.   Unusual Items

    Unusual items include the following:

<TABLE>
<CAPTION>
                                                                                      (Note 20)
                                                                         2000            1999
<S>                                                                 <C>            <C>
          Litigation associated with Haymarket (note 17)            2,403,869      $       --
          Provision for loss to 50% investee company                2,109,496       2,063,100
          Loan receivable - Diamante Fine Jewellery Limited           269,320              --
          Net book values of waxes and moulds and leasehold
           improvement were written off                                    --       1,836,288
          Costs of acquiring a supply contract from a customer
           were written off                                                --       1,369,748
          Net book value of certain goodwill was written off               --         146,449
                                                                    -------------------------
          Balance - December 31, 2000                               4,782,685      $5,415,585
                                                                    =========================
</TABLE>

    Equity loss in 50% investee company for the year of $ 105,783 (1999 -
    $423,156) has effectively been included in the provision for loss of
    advances to 50% investee company. The loan receivable from Diamante Fine
    Jewellery Limited has been written down to the net recoverable amount based
    on future discounted cash flows.

13. Income Taxes

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

14. Earnings Per Common Share

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

                                                                      (Note 20)
                                                           2000           1999

      Weighted average common stock outstanding       6,649,655      6,407,780
      Weighted average common stock issuable                 --        264,672
                                                      ------------------------
                                                      6,649,655      6,672,452
                                                      ========================

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


                                      F-19
<PAGE>

                                D.G. JEWELRY INC.

                   Notes to Consolidated Financial Statements

                        (Stated in United States Dollars)

                                December 31, 2000

15.   Related Party Transactions

<TABLE>
<CAPTION>
                                                                                   (Note 20)
                                                                        2000           1999
<S>                                                               <C>            <C>
      Rent paid to a company owned by majority stockholders       $  124,387     $  110,886
      Interest paid to stockholders                                  254,871        215,364
      Sales to 50% owned investee company                          2,871,675      1,239,723
      Sales of internet contract to 50% owned investee company            --      1,800,000
      Sales to companies related to principle stockholder          6,952,516      2,012,445
</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.

16.   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, 2000 under these leasing agreements were
      $251,409 (1999 - $110,886).

      Future minimum rental payments as of December 31, 2000 under the operating
      lease agreements are as follows:

      Within one year                                               $  328,382
      Over one year but not exceeding two years                        317,063
      Over two years but not exceeding three years                     187,178
      Over three years but not exceeding four years                    146,050
      Over four years but not exceeding five years                     153,770
                                                                    ----------
                                                                    $1,132,443
                                                                    ==========

      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:

      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
                                                                      ==========


                                      F-20
<PAGE>

                                D.G. JEWELRY INC.

                   Notes to Consolidated Financial Statements

                        (Stated in United States Dollars)

                                December 31, 2000

17.   Contingencies

      The company is contingently liable under contested lawsuits amounting to
      approximately $56,000. 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 shareholders
      of the company in the amount of $504,759.

      The company has entered into various contracts with the suppliers of its
      50% owned investee company on the investee company's behalf. The company
      is contingently liable for the non-performance, if any, by the investee
      company on those contracts for a maximum amount of $750,000.

      The company is contingently liable for damages and costs that are
      associated with litigation that resulted in an unfavourable decision
      presently under appeal. As a result, a provision has been made for these
      damages and costs approximating $2,400,000. It is management's opinion
      that the amount provided for will be sufficient to cover the ultimate
      liability, if any.

18.   Segmented Information

<TABLE>
<CAPTION>
                                                                          (Note 20)
                                                               2000           1999
<S>                                                     <C>            <C>
      Sales to major customers                          $38,332,085    $27,950,486
      Percentage of total sales                                  96%            79%

      Accounts receivable due from major customers       24,664,820     12,044,409
      Percentage of total accounts receivable                    91%            50%
</TABLE>

      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.


                                      F-21
<PAGE>

                                D.G. JEWELRY INC.

                   Notes to Consolidated Financial Statements

                        (Stated in United States Dollars)

                                December 31, 2000

18.   Segmented Information (cont'd)

    Sales by Geographic Area

                                                                       (Note 20)
                                                      2000                 1999
          United States of America             $31,816,107          $24,694,864
          Canada                                 8,092,938           10,629,447
          Other                                     46,458               89,822
                                               --------------------------------
                                               $39,955,503          $35,414,133
                                               ================================

    Net Income by Geographic Area

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

                                                                       (Note 20)
                                                      2000                 1999
          United States of America              $  480,830           $  688,055
          Canada                                   895,934              294,087
          Other                                      5,143               18,086
                                               --------------------------------
                                                $1,381,907           $1,000,228
                                               ================================

      Identifiable Assets by Geographic Area

                                                                       (Note 20)
                                                      2000                 1999
          United States of America             $16,355,781          $19,261,074
          Canada                                39,708,827           31,937,548
                                               --------------------------------
                                               $56,064,608          $51,198,622
                                               ================================


                                      F-22
<PAGE>

                                D.G. JEWELRY INC.

                   Notes to Consolidated Financial Statements

                        (Stated in United States Dollars)

                                December 31, 2000

18.   Segmented Information (cont'd)

      Purchases from Major Suppliers

                                                                       (Note 20)
                                                      2000                 1999
      Purchases from major suppliers            $13,455,004        $11,097,894
      Percentage of total purchases                      58%                53%

      Accounts payable due to major suppliers     2,259,738          2,398,486
      Percentage of total accounts payable               21%                41%

19.   Discontinued Operations

      During the year, the company close down its manufacturing division in
      Houston, Texas. The measurement date was October 2, 2000 and the disposal
      date will be October 31, 2001 during which time the company has agreed to
      continue the normal operations of the division. Loss from the discontinued
      segment from October 2, 2000 to the planned disposal date of October 31,
      2001 is estimated to be $205,963 less $72,088 of applicable income tax
      saving, resulting in a net loss of $133,875.

20.   Comparative Information

      Certain comparative figures have been reclassified in order to conform
      with the current year's financial statement presentation. Prior year's
      figures were audited by another firm of chartered accountants.


                                      F-23