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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, 1999

                                       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

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Common Stock Purchase Warrants

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

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

         The aggregate market value of the voting stock held by non-affiliates
of the issuer as of March 31, 2000 was $13,133,072.

ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS

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

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS

         The number of shares outstanding of the registrant's Common Stock,
no Par Value, on March 31, 2000 was 6,434,530 shares.

         Documents incorporated by reference: None


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                                D.G. JEWELRY INC.
                         1999 ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                       PART I

<S>              <C>                                                                                             <C>
Item 1.           Business........................................................................................1
Item 2.           Properties.....................................................................................10
Item 3.           Legal Proceedings..............................................................................11
Item 4.           Submission of Matters to Vote of Security Holders..............................................11

                                                      PART II

Item 5.           Market for Registrant's Common Equity and Related Stockholder Matter ..........................12
Item 6.           Selected Financial Data........................................................................15
Item 7.           Management's Discussion and Analysis of Financial Condition and Results of
                   Operations....................................................................................16
Item 7A.          Quantitative and Qualitative Disclosures About Market Risk.....................................20
Item 8.           Financial Statements and Supplementary Data....................................................21
Item 9.           Changes in and Disagreements with Accountants on Accounting and Financial
                   Disclosures...................................................................................21

                                                     PART III

Item 10.          Directors and Executive Officers of the Registrant.............................................22
Item 11.          Executive Compensation.........................................................................23
Item 12.          Security Ownership of Certain Beneficial Owners and Management.................................31
Item 13.          Certain Relationships and Related Transactions.................................................33

                                                      PART IV

Item 14.          Exhibits, Financial Statement Schedules and Reports on Form 8-K................................35

Signatures.......................................................................................................36

</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, contained forward-looking
statements (within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act") and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) concerning the Company's operations,
economic performance and financial condition. Because such statements involve
risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. Factors that could
cause such differences include, but are not limited to, those discussed under
"Business." The Company undertakes no obligation to publicly release the result
of any revisions to these forward-looking statements that may be made to reflect
any future events or circumstances.

EXCHANGE RATE DATA

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

             The following table sets forth, for the periods indicated, certain
exchange rates based on the noon buying rate in New York City for cable
transfers in Canadian dollars. Such rates are the number of United States
dollars per one Canadian dollar and are the inverse of rates quoted by the
Federal Reserve Bank of New York for Canadian dollars per US$1.00. The average
exchange rate is based on the average of the exchange rates on the last day of
each month during such periods. On March 31, 2000, the exchange rate was
Cdn$1.4494 per US$1.00.

<TABLE>
<CAPTION>

Year Ended December 31,                   1994          1995         1996          1997           1998            1999
-----------------------                   ----          ----         ----          ----           ----            ----
<S>                                    <C>           <C>          <C>            <C>             <C>            <C>
Rate at end of period                  $0.7143       $0.7353      $0.7299        $0.6991         $0.6532        $0.6929
Average rate during period              0.7299        0.7299       0.7353         0.7223          0.6745         0.6730
High                                    0.7092        0.7009       0.7212         0.6945          0.7061         0.6929
Low                                     0.7642        0.7533       0.7526        0.77493          0.6376         0.6582
</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 three 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 31 years. The "Aviv"
division manufactures and assembles bridal jewelry. We acquired Aviv in February
1998, effective June 1, 1997. 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 Reed's Jewellers, the Twain Group, Zellers, Inc.
and The Shopping Channel. In the last four years, we have also focused on the
much larger American market. The DG division established a United States sales
office in Tampa, Florida and 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. Aviv sells to Zales Corporation and Finlay Jewelry Corp., as well as
many independent jewelers in the United States. In 1999, approximately 69.7% of
our sales were in the United States, as compared to 81% and 63% in 1998 and
1997, 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


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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.

Integrate the Aviv and Diamonair Acquisitions

             We completed both the Aviv and Diamonair acquisitions in 1997.
Although the DG division manufactures products for Diamonair, the three
divisions' operations have not been fully integrated. We continue to review the
Aviv and 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. In 1998 and 1999,
we entered into agreements to sell our products on or through Bid.com, U-Bid,
Amazon.com, Lycos, Go2Net, Egghead, Shop at Home and others. Management believes
that our products are ideal for many of these non-traditional outlets, which
usually feature moderate and lower priced products. These agreements have been
assigned to NetJewels.com, Inc. which is 50% owned by us and 50% owned by two
sons of Jack Berkovits. See "Certain Transactions." D.G is the sole supplier to
NetJewels.com, Inc.

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, Aviv and Diamonair
currently offer our customers


                                       2

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approximately 6,000, 5,000 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.

Marketing

             We maintain sales offices at our Toronto headquarters, at the Aviv
manufacturing and office facility in Houston, Texas, at the Diamonair offices in
Cedar Knolls, New Jersey and in Tampa, Florida. 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 products, which usually are made of more expensive
metals and contain more expensive stones, are also competitively priced when
compared with goods of similar quality. Marketing of Aviv products is aided by
Aviv's specialization in bridal jewelry, which allows Aviv's 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.

                                       3
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             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
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, 1999, two major customers accounted
for approximately 43% of sales. For the year ended December 31, 1999,
ValueVision accounted for 27% of sales and Diamante accounted for 16% of sales.
No other customer accounted for more than 10% of sales for the year ended
December 31, 1999. For the year ended December 31, 1998, three major customers
accounted for approximately 36% of sales. For the year ended December 31, 1998 ,
Value Vision accounted for approximately 21% of sales. Other than ValueVision,
no customer accounted for more than 10% of sales in the year ended December 31,
1998. 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



                                       4
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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 cost
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.

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

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

             We, through each of our three divisions, 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.


                                       5
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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
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


                                       6
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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 facility in Texas. The lease to this factory was
assigned to D.G. Jewelry Inc. in connection with the acquisition of Aviv. This
six year old facility produces an average weekly volume of 600 rings and
management believes its current facilities have the capacity to produce
approximately 4,500 rings per week.

             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 1998
and 1999 were 4,774 ounces or approximately $1,406,029 and 6,757 ounces or
approximately $1,942,912, 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

                                       7
<PAGE>

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.

             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 Cdn$15,000,000.

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


                                       8

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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.

             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 March 31, 2000, we employed 215 persons on a full-time basis,
including approximately 174 engaged in manufacturing and distribution, 13
salespeople, 21 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 1999
represented approximately 45% of total revenues.


                                       9
<PAGE>

         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 recently renovated 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 $110,886, increasing 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. Real estate taxes, utilities, maintenance and insurance
cost us approximately $97,000 for the 12 months ended December 31, 1999.
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, 1999, the mortgage was $566,064. 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. We use the Houston facility primarily for the
manufacturing and storage of the Aviv products, as well as sales, design and
administrative offices. Also located at the Houston facility is our retail
store, which occupies approximately 1,500 square feet.

         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 November 1, 2001. 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


                                       10

<PAGE>

ITEM 3.           LEGAL PROCEEDINGS

         In August 1999, Engex, Inc. commenced a suit in the United States
District Court, Southern District of New York alleging breach of contract and
fraud. The complaint seeks damages the plaintiff alleges to be in excess of
$2,000,000. D.G. disputes the claims and the parties are proceeding with
discovery.

         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 alleges that D.G breached the terms of a Purchase Agreement
entered into by the parties. D.G. disputes the claims and is proceeding with
discovery.

         On August 13, 1997, L. Luria & Son, Inc., a customer of DG Jewelry,
commenced a Chapter 11 bankruptcy action in the United States Bankruptcy Court
in the Southern District of Florida. The Trustee in Bankruptcy is seeking to
recover preferential transfers of approximately $133,857. The Trustee alleges,
among other claims, that certain payments were fraudulent conveyance. We believe
the allegations are without merit and intend to vigorously defend our position.
The outcome of the litigation can not be presently determined. D.G. was never
properly served with the summons and complaint in this bankruptcy litigation and
plaintiff's counsel failed to provide us with any proof that the Court has
continued to extend the time in which service on D.G. was to have been made.


         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.




                                       11
<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 SmallCap Market
under symbols "DGJL." and "DGJW, respectively. On May 27, 1999, our common stock
began trading on the Nasdaq National Market System. 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 2000.

                                                           Common Stock
                                                           ------------
                                                  High                  Low
                                                  ---------------------------
Fiscal 1998
First Quarter                                     3 5/8                 1 3/4
Second Quarter                                    4 5/8                 3 1/8
Third Quarter                                     5 1/2                 1 7/8
Fourth Quarter                                    9 7/16                4 1/2

Fiscal 1999
First Quarter                                     9 7/16                4 1/2
Second Quarter                                    8 1/2                 5 5/8
Third Quarter                                     8 1/16                4 3/8
Fourth Quarter                                    5 3/86                2 7/8

Fiscal 2000
First Quarter                                     3 15/16               3.00

         As of March 31, 2000, there were 17 shareholders of record and
approximately 800 beneficial owners.

         On March 31, 2000, the last sale price of our common stock as reported
on the Nasdaq National Market System was $3 7/16.

                                 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.



                                       12
<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 as of the date of this filing 6,434,530
shares of common stock are issued and outstanding. All outstanding shares of
common stock are validly authorized, issued, fully paid, and non-assessable.

             The holders of common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of shareholders. Holders of
common stock are entitled to receive ratably dividends as may be declared by the
board of directors out of funds legally available therefor. 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.

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

                                       13
<PAGE>

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 the date of this
prospectus.

Transfer Agent

             The transfer agent of our shares of common stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005. American
Stock Transfer & Trust Company also acts as the warrant agent for our warrants.



                                       14

<PAGE>

ITEM 6.      SELECTED FINANCIAL DATA

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

             The following selected statement of operations data is for the
period from January 1, 1997 through December 31, 1999. The selected balance
sheet data is for the period from January 1, 1997 through December 31, 1999. The
statement of operations and balance sheet data is derived from our financial
statements and the related notes included elsewhere in this prospectus audited
by Schwartz Levitsky Feldman, Certified Accountants. Our books and records are
maintained in Canadian Dollars, but our auditors have reconciled such financial
data to United States dollars and the financial statements contained herein have
been prepared in accordance with generally accepted accounting principles in the
United States. All information should be read in conjunction with our
consolidated financial statements and the notes which are attached hereto.

<TABLE>
<CAPTION>

                                                     Year ended, December 31,
                                            1997                 1998                1999
                                            ----                 ----                ----
                                                 (in thousands except per share data)
<S>                                       <C>                 <C>                 <C>
Statement of Operations Data:
Revenue                                   $22,128             $35,350             $35,414
Gross profit                                6,450              11,495              13,059
Net income                                  1,045               3,279               1,000
Net income per share - diluted               0.22                0.59                0.16


                                                    Year ended, December 31,
                                            1997                 1998                1999
                                            ----                 ----                ----
                                                 (in thousands except per share data)
Balance Sheet Data:
Working capital                           $10,235             $13,735             $20,049
Total Assets                               34,283              43,504              51,199
Long-term debt                              2,865               2,696               2,202
Total liabilities                          23,688              29,211              31,112
Shareholders' equity                       10,595              14,292              20,086

</TABLE>


                                       15
<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 our
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 primary
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.

         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 and
$862,526 in 1999.

         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 1999 on a non-consolidated, unaudited
basis were $6.4 million and the profit margin was approximately 49%. 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


                                       16

<PAGE>

sales of Diamonair products by introducing the Diamonair products into the
distribution lines used by the D.G. division and the Aviv division.

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

         Of Aviv's total sales of approximately $6.7 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 21% for the year ended December 31, 1999. 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 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, 1999 Compared to Fiscal Year Ended December 31, 1998

         Sales for fiscal 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% (From 32.52% in 1998 to 36.88% in 1999).
Operating expenses decreased to $3,940,668 for the year ended December 31, 1999
from $ 4,912,686 for the year ended December 31, 1998. This resulted from a more
efficient use of the Company's selling and administrative personnel including
the apportionment of some staff costs to the Company's 50% owned internet
subsidiary, NetJewels.com, Inc. and others. Operating expenses represented
11.13% of revenues in Fiscal 1999 compared to 13.9% in Fiscal 1998. Other income
recorded in Fiscal 1998 was primarily the result of the Zellers settlement.
There was no other income in Fiscal 1999.



                                       17

<PAGE>

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

         Operating income for the year was $ 9,117,969 or $ 1.44 per share as
compared to $ 7,664,397 or $ 1.38 per share on a fully diluted basis in 1998.
The number of shares outstanding in 1999 (on fully diluted basis) were
6,343,662, as compared to 5,558,341 in Fiscal 1998.The Company decided to
write-off intangible assets including: goodwill ($146,449), the entire balances
of waxes, moulds and leasehold improvements ($1,836,288) and the unamortized
value of a supply contract which runs until December, 2004 ($1,369,748). The
Company reserved fully against the receivable from its 50% owned subsidiary,
NetJewels.com, Inc. in the amount of $ 2,063,100. The total unusual write-offs
amounted to $ 5,415,585.

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

Year Ended December 31, 1998 Compared to Fiscal Year Ended December 31, 1997

         Sales for the year ended December 31, 1998 increased by $13,222,199
compared to the year ended December 31, 1997. This increase of 59.8% was a
result of the successful integration of the Aviv and Diamonair acquisitions, as
well as the increase in revenues from alternative customers, such as
ValueVision. Gross profit increased by $5,044,889 and represented 32.5% of sales
as compared to 29.1% in the year ended December 31, 1997. Operating expenses
increased to approximately $4,912,686 for the year ended December 31, 1998
compared to $3,651,550 for the year ended December 31, 1997. Operating expenses
represented 13.9% of revenues in the year ended December 31, 1998 compared to
16.5% in the year ended December 31,1997. This improvement was the result of our
ability to control general and administrative costs which were only partially
offset by increases in selling expenses.

         Interest expenses increased by approximately $998,000 as a result of
increased financing to service our growth. Other expenses increased by $698,525
from $389,533 to $1,088,058 primarily as a result of the Zellers Inc. of
Canada's settlement. We had other income of $1,082,239 in the year ended
December 31, 1998, primarily as a result of the settlement with Zellers Inc.
Canada.

         Income before income taxes was $4,756,061 compared to $1,586,657, an
increase of $3,165,404 or approximately 200%. As a result of the higher income,
income taxes increased from $541,423 to $1,477,369 in the year ended December
31, 1998. Net income was $3,278,692 in the year ended December 31,1998 as
compared to net income of $1,045,234 in the year ended December 31, 1997. This
was an increase of 214%.

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


                                       18

<PAGE>

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 $20.8 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
$10.0 million. We utilized the credit line to borrow the $5.8 million and $4.3
million necessary for the acquisitions of Diamonair and Aviv, respectively.

         Our borrowings under the line of credit bear interest at Canadian prime
plus 3/4% which at March 30, 2000 amounted to 7.75%. 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, a jewelry retail
chain owned by one of our Vice Presidents 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, 1999, we generated cash from operating
activities of $1.2 million; accounts receivable increased by $5.3 million and
inventory increased by $1.1 million.

         Our accounts receivable net of allowances for doubtful accounts as of
December 31, 1999 was $24.1 million, or 68% of revenue for the year ended
December 31, 1999. 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, 1999 was $23.3 million, or 66% of
revenue for the year ended December 31, 1999. Inventory is such a large
percentage of sales because the inventory reflects needs for all three divisions
for their anticipated expansion and growth in 2000.

         At December 31, 1999, we had loans outstanding to our principal
shareholder, Jack Berkovits, of $1.9 million which bear interest at 11.6% 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.



                                       19

<PAGE>

         We are be 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 agreeement. 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.





                                       20

<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 - 1

Consolidated Balance Sheets as at December 31, 1999 and 1998 .................................................F - 2

Consolidated Statements of Income for the
         years ended December 31, 1999, 1998 and 1997.........................................................F - 4

Consolidated Statements of Cash Flows
     for the years ended December 31, 1999, 1998 and 1997.....................................................F - 5

Consolidated Statements of Stockholders' Equity
     for the years ended December 31, 1999, 1998 and 1997.....................................................F - 7

Notes to Consolidated Financial Statements....................................................................F - 8
</TABLE>


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

Not applicable.






                                       21
<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>
                                                                                                     Position Held
                  Name                          Age                  Position with the                   Since
                                                                          Company
<S>                                               <C>       <C>                                         <C>
Samuel J. Berkovits.....................          48        Chairman of the Board,                      1979
                                                            CEO and President
Gary Davis..............................          52        Vice President-Finance,                     1987
                                                            Chief Financial Officer,
                                                            Controller, Treasurer,
                                                            Secretary
Leonard Fasullo.........................         59         Vice President-Production                   1989
Meyer Feiler............................         47         Director                                    1998
Theodore L. Bonsignore..................         53         General Manager,                            1998
                                                            Diamonair, Director
Ronald Rutman...........................         47         Director                                    1999
</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.

        Gary Davis has served as our Chief Financial Officer and Vice President
- Finance since 1987. Prior to that, Mr. Davis served for 12 years as Chief
Financial Officer at a Canadian company engaged in manufacturing jewelry. Mr.
Davis has been a certified general accountant since 1972.

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




                                       22
<PAGE>

         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.

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

         Ronald Rutman has served a Director of D.G. Jewelry Inc. since March
1999. Mr. Rutman is a Chartered Accountant with the firm of Zeifman & Company
where he is a partner. Mr. Rutman has been with Zeifman & Company since 1973.
Mr. Rutman specializes in taxation, consulting and bank finance. He has a
particular expertise in the jewelry and health care industries. He has a B.A.
from the University of Toronto.

        There is no family relationship between any of the above named officers
or directors.

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

Audit and Compensation Committees

        The Audit Committee consists of Messrs. Berkovits, Rutman and Feiler.
The responsibilities of the Audit Committee include recommending to the board of
directors the firm of independent auditors to serve us, reviewing the
independent auditors reports, services and results of audit, and reviewing the
scope, results and adequacy of our internal control procedures. The Compensation
Committee consists of Messrs. Berkovits, Rutman 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, 1999,
December 31, 1998 and December 31, 1997 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.


                                       23


<PAGE>

                           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                  1999         $247,645         $    -0-       0               10,000         $12,000(1)
Chief Executive 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                       1999         $167,724         $0             0               0              $7,710(3)
Vice President of Sales         1998         $196,755         $0             0               10,000         $7,710(3)
and Marketing, Aviv             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.
(3)     Represents car allowance of $5,628 and health insurance of $2,082.

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, 2000 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.

             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.


                                       24
<PAGE>

             We entered into an employment agreement with Gadi Beer, the
Vice-President of Sales and Marketing of Aviv for a term of one year terminating
on February 9, 2000, which has been renewed on the same terms and conditions for
an additional one-year to February 10, 2001. Mr. Beer earns an annual base
salary of $120,000 and is entitled to receive 0.8% of the total sales of Aviv.
Mr. Beer has agreed to a covenant not to compete with D.G. Jewelry Inc. for a
period of three years from the date of termination of the agreement. The
agreement is renewable for additional successive one year terms upon the consent
of both parties.

             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 1999 to the Company's Named
Executive Officers.
<TABLE>
<CAPTION>
                                                   Option Grants



                      Number                                                       Potential Realizable
                      of                                                             Value at Assumed
                      Securities   % of Total                                        Annual Rates of
                      Underly-     Options                                             Stock Price
                      ing          Granted            Exercise     Expira-           Appreciation for
                      Options      to Employees       Price        tion                Option Term
Name of Holder        Granted      in Fiscal Year     ($/Share)    Date                5%($) 10%($)
--------------        -------      --------------     ---------    ----                ----- ------
<S>                   <C>          <C>                <C>          <C>              <C>       <C>
Jack Berkovits        10,000       22.5%              $4.125       7/19/09           25,950  65,750
Gadi Beer             -0-          -0-


                        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
---------                     ------------     --------                     -------------             -------------
                                                     $                                                 $
Jack Berkovits                362,125          965,013.75                   148,375/133,000        185,026.25/63,840
Gadi Beer                     -0-              -0-                              5,000/5,000              2,400/2,400
</TABLE>


(1)      The closing bid price of a share of the Company's Common Stock at
         December 31, 1999 was $3.25.



                                       25
<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
Gary Davis.......................            02/09/02          15,000        3.0%               $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
Gary Davis............................     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
Myer Feiler...........................     07/14/03             60,000      12.0%               $ (1)

</TABLE>


                                       26
<PAGE>


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

1999 Stock Option plan

         In July 1999, the board of directors and shareholders adopted the 1999
stock option plan. The plan will be administered by the compensation committee
or our board of directors, who will determine among other things, those
individuals who shall receive options, the time period during which the options
may be partially or fully exercised, the number of shares of common stock
issuable upon the exercise of the options and the option exercise price. The
options may be granted as either or both of the following: (a) incentive stock
options, or (b) non-qualified stock options. 500,000 shares may be issued under
this plan. To date, 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.



                                       27

<PAGE>

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

Indemnification of Officers and Directors

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

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



                                       28

<PAGE>

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




















                                       29

<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

                                                                   Nasdaq
                                DG Jewelry        Nasdaq U.S.   Non- Financial
                                ----------        ----------    --------------
           April 18, 1997           100              100            100
           December 31, 1997         29              130            126
           December 31, 1998         92              183            185
           December 31, 1999         54              339            365





















         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.




                                       30


<PAGE>

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT

        The following table sets forth certain information as of March 31, 2000
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.............................             2,609,000(3)                            40.1%
The Berkovits Family Trust.................                  426,000                             6.6%
Sheba Berkovits............................               816,000(4)                            12.7%
Gary Davis.................................                   34,000                                *
Leonard Fasullo............................                   25,000                                *
Theodore L. Bonsignore.....................                10,000(5)                                *
Myer Feiler................................                47,500(6)                                *
Ronald Rutman..............................                 2,500(7)                                0
All directors and executive officers
as a group (6) persons.....................                2,728,000                            42.1%
</TABLE>

* Less than one percent
-----------------------------

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

(2)  Based upon information furnished to the Company by either the directors and
     executive officers or obtained from the stock transfer books of the
     Company. The Company is informed that these persons hold the sole voting
     and dispositive power with respect to the Common Stock except as noted
     herein. For purposes of computing 'beneficial ownership' and the percentage
     of outstanding Common Stock held by each person or group of persons named
     above as of the date of this Prospectus, 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 March 31, 2000, the Company had 6,434,530 shares of
     Common Stock outstanding.


                                       31
<PAGE>

(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) 69,000
     shares issuable upon options that are currently exercisable or exercisable
     in the next sixty days. Does not include an aggregate of 390,000 shares of
     Common Stock owned by two of Mr. Berkovits' sons who are independent of
     their 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 10,000 shares issuable upon the exercise of options which are
     currently exercisable or exercisable in the next sixty days.

(6)  Includes 32,500 shares issuable upon the exercise of options which are
     currently exercisable or exercisable in the next sixty days.

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






                                       32
<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, 1999, the principal
amount outstanding was $566,064. 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, 1999 aggregated approximately
$1.9 million with an interest rate of 11.6%. In 1997, we repaid $1.2 million of
such loans, including payments to a third party, Laurbrad Holdings Limited, who
had loaned funds to Mr. Berkovits. Mr. Berkovits loaned the funds to us on the
same terms, which included an 11.6% annual interest rate.

             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 one of our Vice Presidents,
Leonard Fasullo, who is also Diamante's President (since 1998). 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.

             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


                                       33

<PAGE>

settlement of a note in that amount. Based on the closing prices we have issued
an aggregate of 45,145 shares. All of the former owners are presently employees
of D.G. Jewelry Inc.

             We have entered into a supply agreement with NetJewels.com, Inc.,
which is a newly formed company owned 50% by D.G. Jewelry Inc. and 50% by two
sons of Jack Berkovits. The agreement provides that NetJewels will purchase
jewelry from us on the best terms offered to our other customers. In turn,
NetJewels will sell such jewelry to or through certain Internet companies who
have previously entered into arrangements with D.G. Jewelry Inc. In June 1999,
we transferred certain Internet contracts to NetJewels for an aggregate purchase
price of $1,800,000. As of December 31, 1999, we have advanced approximately
$587,982 to NetJewels, primarily to finance their start-up costs. NetJewels has
agreed to repay these amount owed to us at a rate of twenty percent (20%) per
year over the next five years.

             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, 1999, we paid Theodore L.
Bonsignore $73,000 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.



                                       34

<PAGE>

                                     PART IV

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

<TABLE>
<CAPTION>
<S>                                                                                                               <C>
(a)          Financial Statements.
             Report of Independent Auditors.....................................................................F-1
             Consolidated Balance Sheets as at December 31, 1999 and 1998.......................................F-2
             Consolidated Statements of Income
                 for the years ended December 31, 1999, 1998 and 1997...........................................F-4
             Consolidated Statements of Cash Flows
                 for the years ended December 31, 1999, 1998 and 1997...........................................F-5
             Consolidated Statements of Stockholders' Equity
                 for the years ended December 31, 1999, 1998 and 1997...........................................F-7
             Notes to Consolidated Financial Statements.........................................................F-8

             (b)Reports on Form 8-K.

             There were no reports filed on Form 8-K during the last quarter of 1999 by D.G. Jewelry Inc.

             (c)Exhibits.


 27          Financial Data Schedule
-------------------------------------------------------------------------------------------------------------------
</TABLE>



                                       35

<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
                                                        Chief Executive Officer

                                                Dated:   April 12, 2000

             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.

<TABLE>
<CAPTION>

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

<S>                                             <C>                                         <C>
 /s/ Samuel Jacob Berkovits                    Chairman, Chief Executive Officer             April 12, 2000
-------------------------------                and President
     Samuel Jacob Berkovits

 /s/ Gary Davis                                Vice President, Finance, Chief Financial      April 12, 2000
-------------------------------                Officer, Controller, Treasurer and
     Gary Davis                                Secretary


 /s/ Theodore L. Bonsignore                    General Manager, Diamonair and                April 12, 2000
-------------------------------                Director
     Theodore L. Bonsignore

 /s/ Myer Feiler                               Director                                      April 12, 2000
-------------------------------
     Myer Feiler

 /s/ Ronald Rutman                             Director                                      April 12, 2000
-------------------------------
     Ronald Rutman
</TABLE>



                                       36
<PAGE>
                                D.G. JEWELRY INC.

                    (Formerly D.G. Jewellery of Canada Ltd.)

                        CONSOLIDATED FINANCIAL STATEMENTS

                  AS OF DECEMBER 31, 1999 AND DECEMBER 31, 1998

                  TOGETHER WITH REPORT OF INDEPENDENT AUDITORS


<PAGE>


                                D.G. JEWELRY INC.

                    (Formerly D.G. Jewellery of Canada Ltd.)

                        CONSOLIDATED FINANCIAL STATEMENTS

                  AS OF DECEMBER 31, 1999 AND DECEMBER 31, 1998

                  TOGETHER WITH REPORT OF INDEPENDENT AUDITORS



                                TABLE OF CONTENTS


Report of Independent Auditors                                       F-1

Consolidated Balance Sheets                                          F-2

Consolidated Statements of Income                                    F-4

Consolidated Statements of Cash Flows                                F-5

Consolidated Statements of Stockholders' Equity                      F-7

Notes to Consolidated Financial Statements                           F-8





<PAGE>


Schwartz Levitsky Feldman llp
CHARTERED ACCOUNTANTS
TORONTO, MONTREAL, OTTAWA


                         REPORT OF INDEPENDENT AUDITORS


To the Board of Directors and Stockholders of
D.G. Jewelry Inc.
(Formerly D.G. Jewellery of Canada Ltd.)


We have audited the accompanying consolidated balance sheets of D.G. Jewelry
Inc. (Formerly D.G. Jewellery of Canada Ltd.) (incorporated in Canada) as of
December 31, 1999 and 1998 and the related consolidated statements of income,
cash flows and changes in stockholders' equity for each of the years ended
December 31, 1999 and 1998. These consolidated financial statements are the
responsibility of the management of D.G. Jewelry Inc. (Formerly D.G. Jewellery
of Canada Ltd.) Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of D.G. Jewelry Inc.
(Formerly D.G. Jewellery of Canada Ltd.) as of December 31, 1999 and 1998 and
the consolidated results of its operations and its cash flows for each of the
years ended December 31, 1999 and 1998, in conformity with generally accepted
accounting principles in the United States of America.

On March 17, 2000 and March 17, 1999 respectively, we reported separately to the
directors of D.G. Jewelry Inc. on the consolidated financial statements for the
same periods, prepared in accordance with generally accepted accounting
principles in Canada.




Toronto, Ontario
March 17, 2000                                            Chartered Accountants




1167 Caledonia Road
Toronto, Ontario M6A 2X1

                                       F-1




<PAGE>


D.G. JEWELRY INC.
(Formerly D.G. Jewellery of Canada Ltd.)
Consolidated Balance Sheets
As of December 31,
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
                                                                            1999                1998

                                                                              $                   $
<S>                                                                    <C>                 <C>
                                     ASSETS
CURRENT ASSETS

    Cash                                                                  1,359,104             305,784
    Accounts receivable (notes 3, 8 and 10)                              24,129,922          18,974,743
    Inventory (notes 4, 8 and 10)                                        23,310,675          20,887,122
    Cash surrender value of life insurance (note 5)                          57,232              57,232
    Prepaid expenses and sundry assets                                      102,673              25,845
                                                                        -----------         -----------

                                                                         48,959,606          40,250,726

INVESTMENT IN 50% OWNED INVESTEE COMPANY                                        141                 -

PROPERTY, PLANT AND EQUIPMENT (notes 6, 8 and 10)                         1,128,875           1,974,300

GOODWILL (note 7)                                                         1,110,000           1,278,879
                                                                        -----------         -----------

                                                                         51,198,622          43,503,905
                                                                        ===========         ===========
</TABLE>


                                      F-2




<PAGE>


D.G. JEWELRY INC.
(Formerly D.G. Jewellery of Canada Ltd.)
Consolidated Balance Sheets
As of December 31,
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
                                                                            1999                1998

                                                                              $                   $
<S>                                                                    <C>                 <C>
                                   LIABILITIES
CURRENT LIABILITIES

    Bank indebtedness (note 8)                                           19,280,551          18,855,201
    Accounts payable and accrued expenses (note 9)                        5,892,801           5,016,172
    Income taxes payable                                                  3,195,246           2,209,470
    Current portion of loans payable (note 10)                              541,849             434,788
                                                                        -----------         -----------

                                                                         28,910,447          26,515,631

LOANS PAYABLE (note 10)                                                   2,201,770           2,695,835
                                                                        -----------         -----------

                                                                         31,112,217          29,211,466
                                                                        -----------         -----------

COMMITMENTS AND CONTINGENCIES (notes 17 and 18)

                                STOCKHOLDERS' EQUITY

CAPITAL STOCK (note 11)                                                  10,940,329           6,704,986

ACCUMULATED OTHER COMPREHENSIVE INCOME (note 12)                            613,896              55,501

RETAINED EARNINGS                                                         8,532,180           7,531,952
                                                                        -----------         -----------

                                                                         20,086,405          14,292,439
                                                                        -----------         -----------

                                                                         51,198,622          43,503,905
                                                                        ===========         ===========
</TABLE>

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


                                       F-3

<PAGE>


D.G. JEWELRY INC.
(Formerly D.G. Jewellery of Canada Ltd.)
Consolidated Statements of Income
For the years ended December 31,
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
                                                                            1999                1998                1997

                                                                              $                   $
<S>                                                                    <C>                 <C>                    <C>
Net sales                                                                35,414,133          35,350,022          22,127,825

Cost of sales                                                            22,355,496          23,855,178          15,677,870
                                                                       ------------         -----------          ----------

Gross profit                                                             13,058,637          11,494,844           6,449,955

    Other income                                                               -              1,082,239               -
                                                                       ------------         -----------          ----------

Gross earnings                                                           13,058,637          12,577,083           6,449,955
                                                                       ------------         -----------          ----------

Operating expenses

    Selling                                                               1,317,528           2,305,130           1,188,308
    General and administrative                                            2,623,140           2,607,556           2,463,242
                                                                       ------------         -----------          ----------

                                                                          3,940,668           4,912,686           3,651,550
                                                                       ------------         -----------          ----------

Operating income                                                          9,117,969           7,664,397           2,798,405
                                                                       ------------         -----------          ----------

Interest expenses                                                         1,791,463           1,820,278             822,215
Other expenses                                                              357,439           1,088,058             389,533
                                                                       ------------         -----------          ----------

                                                                          2,148,902           2,908,336           1,211,748
                                                                       ------------         -----------          ----------

Income before undernoted items                                            6,969,067           4,756,061           1,586,657

    Unusual items (note 13)                                              (5,415,585)                -                  -
                                                                       ------------         -----------          ----------

Income before income taxes                                                1,553,482           4,756,061           1,586,657

    Provision for income taxes (note 14)                                    553,254           1,477,369             541,423
                                                                       ------------         -----------          ----------

Net income                                                                1,000,228           3,278,692           1,045,234
                                                                       ------------         -----------          ----------

Earnings per common share (note 15)                                            0.16                0.63                0.22
                                                                       ------------         -----------          ----------

Earnings per common share assuming dilution (note 15)                          0.16                0.59                0.22
                                                                       ============         ===========          ==========
</TABLE>


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

                                       F-4

<PAGE>
D.G. JEWELRY INC.
(Formerly D.G. Jewellery of Canada Ltd.)
Consolidated Statements of Cash Flows
For the years ended December 31,
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
                                                                            1999                1998               1997

                                                                              $                   $                  $
<S>                                                                    <C>                 <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES

    Net income                                                            1,000,228           3,278,692          1,045,234
                                                                        -----------         -----------        -----------

    Adjustments to reconcile net income to
      net cash used in operating activities:
         Amortization                                                       301,561             509,871            389,603
         Unusual items (note 13)                                          5,415,585                  -                  -
         Increase in accounts receivable                                 (5,344,846)         (2,726,285)        (8,325,895)
         Increase in inventory                                           (1,120,914)         (9,712,446)        (6,073,422)
         Decrease (increase) in cash surrender value
            of life insurance                                                 3,569             397,006           (476,445)
         Decrease (increase) in prepaid expenses
            and sundry assets                                               (77,294)            137,778           (102,429)
         Increase in accounts payable
            and accrued expenses                                            563,823           1,487,961          1,908,971
         Increase in income taxes payable                                   465,209           1,512,698            415,146
                                                                        -----------         -----------        -----------

         Total adjustments                                                  206,693          (8,393,417)       (12,264,471)
                                                                        -----------         -----------        -----------

                                                                          1,206,921          (5,114,725)       (11,219,237)
                                                                        -----------         -----------        -----------

    CASH FLOWS FROM INVESTING ACTIVITIES

         Purchases of property, plant and equipment                      (1,259,294)           (659,383)        (1,491,736)
         Investment in 50% owned investee company                              (141)               -            (1,200,000)
         Advances to 50% owned investee company                          (2,123,852)               -                    -
                                                                        -----------         -----------        -----------

                                                                         (3,383,287)           (659,383)        (2,691,736)
                                                                        -----------         -----------        -----------

    CASH FLOWS FROM FINANCING ACTIVITIES

         Proceeds from (repayment to) bank indebtedness                    (646,481)          6,373,022          4,018,732
         Proceeds from (repayment of) loans payable                        (582,221)         (2,829,520)         3,802,343
         Issuance of capital stock                                        4,474,316               4,325          6,705,382
         Redemption of capital stock                                           -                    -              (81,067)
                                                                        -----------         -----------        -----------

                                                                          3,245,614           3,547,827         14,445,390
                                                                        ===========         ===========        ===========
</TABLE>

                                       F-5

<PAGE>


D.G. JEWELRY INC.
(Formerly D.G. Jewellery of Canada Ltd.)
Consolidated Statements of Cash Flows
For the years ended December 31
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
                                                                            1999                1998               1997

                                                                              $                   $                  $
<S>                                                                    <C>                 <C>                   <C>
Effect of foreign currency exchange rate changes                            (15,928)          2,170,718          (314,723)
                                                                        -----------         -----------          --------

Net increase (decrease) in cash and cash equivalents                      1,053,320             (55,563)          219,694
Cash and cash equivalents
    -  Beginning of year                                                    305,784             361,347           141,653
                                                                        -----------         -----------          --------

    -  End of year                                                        1,359,104             305,784           361,347
                                                                        -----------         -----------          --------

Interest paid                                                             1,466,782           1,789,275           822,215
                                                                        ===========         ===========          ========

Income taxes paid                                                           285,502               -                43,000
                                                                        ===========         ===========          ========

</TABLE>

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

                                       F-6


<PAGE>


D.G. JEWELRY INC.
(Formerly D.G. Jewellery of Canada Ltd.)
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 1999 and 1998
(Amounts expressed in US dollars)
<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 as of December 31, 1996        3,900,000               -                 84         3,208,026           (44,711)

Common stock issued (note 11)          1,265,000           1,265,000      6,700,743             -                 -

Foreign Currency translation               -                   -              -                 -              (314,723)

Net income for the year                    -                   -              -             1,045,234             -
                                      ----------          ----------    -----------        ----------         ---------

Balance as at December 31, 1997        5,165,000           1,265,000      6,700,827         4,253,260          (359,434)

Common stock issued (note 11)              3,000               -              4,159             -                 -

Foreign currency translation               -                   -              -                 -               414,935

Net income for the year                    -                   -              -             3,278,692             -
                                      ----------          ----------    -----------        ----------         ---------

Balance as at December 31, 1998        5,168,000           1,265,000      6,704,986         7,531,952            55,501

Common stock issued (note 11)          1,240,780                          4,235,343

Foreign currency translation                                                                                    558,395

Net income for the year                                                                     1,000,228
                                      ----------          ----------    -----------        ----------         ---------

Balance as at December 31, 1999        6,408,780           1,265,000     10,940,329         8,532,180           613,896
                                      ==========          ==========    ===========        ==========         =========
</TABLE>

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

                                       F-7

<PAGE>
D.G. JEWELRY INC.
(Formerly D.G. Jewellery of Canada Ltd.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Amounts expressed in US dollars)




1. BASIS OF CONSOLIDATED FINANCIAL STATEMENTS PRESENTATION

   These financial statements consolidate, using the purchase method, the
   accounts of the company and its two wholly-owned subsidiaries, Diamonair,
   Inc. and Aviv, Inc. All material intercompany accounts have been eliminated.
   Consolidation commenced with the effective dates of acquisition of the
   operations of the subsidiary companies and these financial statements include
   the financial results of the subsidiaries to December 31, 1999 and December
   31, 1998.


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   i)   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.

   ii)  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.

   iii) 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.

   iv)  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.

   v)   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 approximately
        $780,946 ($1,050,000 as at December 31, 1998). Of this amount, $5,736
        ($287,000 as at December 31, 1998) was owed to these customers as at
        December 31, 1999.


                                       F-8


<PAGE>
D.G. JEWELRY INC.
(Formerly D.G. Jewellery of Canada Ltd.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Amounts expressed in US dollars)




2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

   vi)   Inventory

         Raw materials and work-in-process are valued at the lower of cost
         (first-in, first-out basis) or market.

         Finished goods are valued at the lower of cost or market. Cost is
         calculated using selling price less normal gross margin.

   vii)  Investment in a 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.

   viii) Capital Assets

         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.

   ix)   Goodwill

         Goodwill is the excess of cost over the value of tangible assets
         acquired on the acquisition of subsidiary companies. It is being
         amortized on the 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.

   x)    Sales

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

  xi)    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 income taxes are
         recognized for all significant temporary differences between the tax
         and financial statement bases of assets and liabilities.

                                       F-9


<PAGE>
D.G. JEWELRY INC.
(Formerly D.G. Jewellery of Canada Ltd.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Amounts expressed in US dollars)




2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

   xii)  Long-Lived Assets

         On January 1, 1996, the company adopted the provisions of SFAS No. 121,
         Accounting for the Impairment of Long-Lived Assets and for Long-Lived
         Assets to be Disposed of. SFAS No. 21 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 have
         determined that no impairment has occurred, other than those written
         off as unusual items as disclosed in note 13.

   xiii) Stock Based Compensation

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

   xiv)  Foreign Currency Translation

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

   xv)   Concentrations of Credit Risks

         The company's receivables are unsecured and are generally due in 90
         days. Currently, the company's 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, 1999, due to the wide variety of customers, markets and
         geographic areas to which the company's products are sold.

   xvi)  Net Income and Fully Diluted Net Income Per Weighted Average Common
         Stock

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

         Fully diluted net income per common stock is computed by dividing net
         income for the year by the weighted average number of common stock
         outstanding during the year, assuming that all stock options as
         described in note 11 were exercised. Stock warrants as described in
         note 11 have not been included in the fully diluted net income per
         common stock calculations as their inclusion would have been
         anti-dilutive.

                                      F-10


<PAGE>
D.G. JEWELRY INC.
(Formerly D.G. Jewellery of Canada Ltd.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Amounts expressed in US dollars)



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

   xvii) Use of Estimates

         The preparation of financial statements in conformity with generally
         accepted accounting principals in the United States of America requires
         management to make estimates and assumptions that affect certain
         reported amounts of assets and liabilities and disclosures 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.


3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
                                                                         1999                 1998

                                                                           $                    $
<S>                                                                   <C>                  <C>
   Accounts receivable                                                 24,414,383           19,279,616
   Less:  Allowance for doubtful accounts                                 284,461              304,873
                                                                       ----------           ----------

   Accounts receivable, net                                            24,129,922           18,974,743
                                                                       ==========           ==========
</TABLE>

4. INVENTORY

   Inventory comprised of the following: 1999 1998
<TABLE>
<CAPTION>
                                                                         1999                 1998

                                                                           $                    $
<S>                                                                   <C>                  <C>
   Raw materials                                                        2,913,617            4,502,270
   Work-in-process                                                        909,547              426,456
   Finished goods                                                      19,487,511           15,958,396
                                                                       ----------           ----------

                                                                       23,310,675           20,887,122
                                                                       ==========           ==========
</TABLE>

5. 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.

                                      F-11


<PAGE>

D.G. JEWELRY INC.
(Formerly D.G. Jewellery of Canada Ltd.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Amounts expressed in US dollars)




6. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
                                                                         1999                 1998

                                                                           $                    $
<S>                                                                   <C>                  <C>
   Office equipment                                                       359,334              315,861
   Machinery and manufacturing equipment                                  944,686            1,000,806
   Computer equipment and software                                        757,058              396,637
   Automobile                                                               6,000                6,000
   Leasehold improvements                                                      -               362,570
   Waxes and moulds                                                            -             1,677,943
                                                                        ---------            ---------

   Cost                                                                 2,067,078            3,759,817
                                                                        ---------            ---------

   Less:   Accumulated amortization
           Office equipment                                               208,157              165,164
           Machinery and manufacturing equipment                          453,226              346,023
           Computer equipment and software                                272,320              148,507
           Automobile                                                       4,500                3,000
           Leasehold improvements                                              -               112,306
           Waxes and moulds                                                    -             1,010,517
                                                                        ---------            ---------

                                                                          938,203            1,785,517
                                                                        ---------            ---------

   Net                                                                  1,128,875            1,974,300
                                                                        ---------            ---------

   Assets under capital leases included in capital assets (net)           248,913                   -
                                                                        =========            =========
</TABLE>

7. GOODWILL
<TABLE>
<CAPTION>
                                                                         1999                 1998

                                                                           $                    $
<S>                                                                   <C>                  <C>
   Cost                                                                 1,200,000            1,452,506
   Less:  Accumulated amortization                                         90,000              173,627
                                                                        ---------            ---------

   Net                                                                  1,110,000            1,278,879
                                                                        =========            =========
</TABLE>
                                      F-12


<PAGE>


D.G. JEWELRY INC.
(Formerly D.G. Jewellery of Canada Ltd.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Amounts expressed in US dollars)


8. BANK INDEBTEDNESS

   The bank loan bears interest at the bank's prime lending rate plus 3/4% per
   annum depending on key financial ratios (7.25% at December 31, 1999 and 7.25%
   at December 31, 1998) with interest payable monthly. The weighted average
   interest rates incurred on the bank loan were 7.38% and 7.13% per annum for
   the years ended December 31, 1999 and December 31, 1998 respectively. As
   security, the company has provided a general assignment of accounts
   receivable, a general security agreement constituting a first charge over all
   present and future personal property of the company and an assignment of key
   man life insurance of a director of $692,857 payable to the bank as of
   December 31, 1999 and $652,188 as of December 31, 1998. The available line of
   credit under the bank loan amounted to $20,785,699 (Canadian $30,000,000) as
   at December 31, 1999.

   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 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 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, a company 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.

   The facility contains covenants specifying minimum and maximum selected
   financial ratios. The agreement contains restrictions on changes in ownership
   and line of business, on further encumbrances of assets and on the guarantees
   and other contingent liabilities.


9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

                                         1999                 1998

                                           $                    $

  Trade payables                        5,517,628           4,454,250
  Accrued expenses                        375,173             561,922
                                        ---------           ---------

                                        5,892,801           5,016,172
                                        =========           =========

                                      F-13


<PAGE>
D.G. JEWELRY INC.
(Formerly D.G. Jewellery of Canada Ltd.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Amounts expressed in US dollars)


10. LOANS PAYABLE
<TABLE>
<CAPTION>
                                                                                 1999                 1998

                                                                                   $                    $
<S>                                                                           <C>                  <C>
    a)   Loans from stockholders

         Loans are secured by a general assignment of the company's
         assets subject to the prior encumbrances disclosed in note 8,
         subordinated to the company's banker, bear interest at 11.6% per
         annum (12% for 1998) and not subject to specified
         terms of repayments                                                   1,905,356           2,297,267

    b)   Loan is provided by the company's banker, subject to the
         encumbrances disclosed in note 8, bearing interest at the prime
         lending rate of the company's bank plus 1 1/4% (1998 - prime
         lending rate plus 1%) per annum, repayable in 11 equal monthly
         instalments plus interest with the final
         payment due in November 2000                                            423,422             833,356

    c)   Capital leases bearing at the bank's prime lending rate plus
         1 1/4%, repayable in accordance with the terms and
         conditions of each respective lease contract                            414,841                  -
                                                                               ---------           ---------

                                                                               2,743,619           3,130,623

         Less:   Current portion                                                 541,849             434,788
                                                                               ---------           ---------

                                                                               2,201,770           2,695,835
                                                                               =========           =========

         Aggregate maturities of loans payable are as follows:
                                                                                 1999                 1998

                                                                                   $                    $

         Repayable during the following periods:
             Within one year                                                     541,849             434,788
             Over one year but not exceeding two years                           182,152             398,568
             Over two year but not exceeding three years                         114,262                  -
                                                                               ---------           ---------

                                                                                 838,263             833,356
                                                                               =========           =========
</TABLE>


         The weighted average interest rates per annum incurred were 10.5% for
         the year ended December 31, 1999 and 9.9% for the year ended December
         31, 1998.

                                      F-14
<PAGE>
D.G. JEWELRY INC.
(Formerly D.G. Jewellery of Canada Ltd.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Amounts expressed in US dollars)


11. CAPITAL STOCK

    a)   Authorized

              An unlimited number of common stock

              Issued
<TABLE>
<CAPTION>
                                                                                       1999             1998

                                                                                         $                $
<S>                                                                           <C>                  <C>
              6,408,780   Common stock (5,168,000 in 1998)                           10,827,104      6,591,761
              1,265,000   Warrants                                                      113,225        113,225
                                                                                     ----------      ---------

                                                                                     10,940,329      6,704,986
                                                                                     ==========      =========

    b)   During the year, the company issued common shares as follows:
                                                                                       1999             1998

                                                                                         $                $
         i)   Proceeds received from private placement issuance of 615,385
              common shares                                                           4,000,000           -

              Issue expenses (net of income taxes)                                      177,682           -
                                                                                     ----------      ---------

              Net proceeds                                                            3,822,318           -
                                                                                     ==========      =========

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

         ii)  Proceeds received from conversion of promissory notes payable for
              45,145 common shares                                                      325,823           -
                                                                                     ==========      =========

         iii) Proceeds received from issuance of 554,250 (3,000 in 1998)
              common shares on exercise of stock options                                980,224          4,159

              Less:  subscription receivable                                           (893,022)          -
                                                                                     ----------      ---------

                                                                                         87,202          4,159
                                                                                     ==========      =========

         iv)  26,000 Common shares issued at US$3 per share                              78,000           -

                    Less:  subscription receivable                                      (78,000)          -
                                                                                     ----------      ---------

                                                                                             -            -
                                                                                     ==========      =========

         v)   Total                                                                   4,235,343          4,159
                                                                                     ==========      =========
</TABLE>
                                      F-15

<PAGE>

D.G. JEWELRY INC.
(Formerly D.G. Jewellery of Canada Ltd.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Amounts expressed in US dollars)




11. CAPITAL STOCK (cont'd)

    c)  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 investing, 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 1996 Plan.

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

        The Board has granted 500,000 Options to date under the 1996 Plan to 10
        persons, including officers, directors and key employees. The options
        are exercisable at $1.38 per share. 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 1999, 415,125 (3,000 in 1998) of these options have been
        exercised for total proceeds of $572,872 ($4,159 in 1998).

    d)  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 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.

                                      F-16
<PAGE>


D.G. JEWELRY INC.
(Formerly D.G. Jewellery of Canada Ltd.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Amounts expressed in US dollars)


11. CAPITAL STOCK (cont'd)

    d)  Cont'd

        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.

        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, 2003.

        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 1999, 139,125 (none in 1998) of these options have been exercised
        for total proceeds of $407,352 ($nil in 1998).

    e)  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 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 the number of shares of Common Stock reserved for
        issuance upon the exercise of options granted under the 1999 Plan may
        not be increased without the consent of the stockholders of the Company.

        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-17
<PAGE>
D.G. JEWELRY INC.
(Formerly D.G. Jewellery of Canada Ltd.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Amounts expressed in US dollars)




11. CAPITAL STOCK (cont'd)

    e)  Cont'd

        The 40,000 options are not exercisable until January 20, 2000 at which
        time they will be 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 are not exercisable until June
        9, 2000 at which time they will be 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 are not
        exercisable until June 7, 2000 at which time they will be 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.


    f)  Stock options outstanding were as follows:

                                                                   Aggregate
                                                                  option price
                                              No. of options            $
                                              --------------     ---------------

        Balance, December 31, 1997                610,000           1,779,000

        Granted                                   500,000           1,465,700

        Expired                                      -                   -

        Exercised                                  (3,000)          (4,140.00)
                                                ---------           ---------

        Balance, December 31, 1998              1,107,000           3,240,560

        Granted                                    44,500             188,625

        Forfeited                                  (4,250)            (11,772)

        Expired                                      -                   -

        Exercised                                (554,250)           (980,224)
                                                ---------           ---------

        Balance, December 31, 1999                593,000           2,437,189
                                                =========           =========

    g)  As at December 31, 1999 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.

                                      F-18

<PAGE>

D.G. JEWELRY INC.
(Formerly D.G. Jewellery of Canada Ltd.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Amounts expressed in US dollars)


11. CAPITAL STOCK (cont'd)

    h)  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
        [included in note (8) above] at $0.165. This option expires in 2002.

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


12. 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:

                                                          1999           1998

                                                            $              $

    Net income                                          1,000,228      3,278,692
    Other comprehensive income:
         Foreign currency translation adjustments         558,395        414,935
                                                        ---------      ---------

    Comprehensive income                                1,558,623      3,693,627
                                                        =========      =========

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

    Accumulated other comprehensive loss, December 31, 1997            (359,434)

    Foreign currency translation adjustments for the year ended
         December 31, 1998                                              414,935
                                                                     ----------

    Accumulated other comprehensive income, December 31, 1998            55,501

    Foreign currency translation adjustments for the year ended
         December 31, 1999                                              558,395
                                                                     ----------

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

    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 as
    disclosed in note 2 (xiv).

                                      F-19

<PAGE>

D.G. JEWELRY INC.
(Formerly D.G. Jewellery of Canada Ltd.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Amounts expressed in US dollars)



13. UNUSUAL ITEMS

    Unusual items include the following:

    a)  Provision for loss of advances to 50% investee company        2,063,100

    b)  Costs of acquiring a supply contract from a customer
        were written off                                              1,369,748

    c)  Net book values of waxes and moulds and leasehold
        improvements were written off                                 1,836,288

    d)  Net book value of certain goodwill was written off              146,449
                                                                      ---------

                                                                      5,415,585
                                                                      =========

        Equity loss in 50% investee company for the year of $423,156 has
        effectively been included in the provision for loss of advances to 50%
        investee company.


14. INCOME TAXES

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


15. EARNINGS PER COMMON SHARE

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

                                                         1999           1998

                                                           $              $

     Weighted average common stock outstanding         6,078,990      5,165,090
     Weighted average common stock issuable              264,672        393,251
                                                       ---------      ---------

     Average common stock outstanding assuming
       dilution                                        6,343,662      5,558,341
                                                       =========      =========


    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-20
<PAGE>


D.G. JEWELRY INC.
(Formerly D.G. Jewellery of Canada Ltd.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Amounts expressed in US dollars)




16. RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
                                                                                 1999           1998

                                                                                   $              $
<S>                                                                              <C>            <C>
    Rent paid to a company owned by majority stockholders                        110,886        115,502
    Interest paid to stockholders                                                215,364        178,103
    Sales to 50% owned investee company                                        1,239,723             -
    Sales of internet contracts to 50% owned investee company                  1,800,000             -
</TABLE>

    (See additional related party transactions disclosure in notes 10 and 17).


17. COMMITMENTS

    a)  The company has an operating lease for leasehold improvements and
        premises which extends through January 31, 2005. Rental and leasing
        expenses for the year ended December 31, 1999 under this lease agreement
        was $110,886 ($115,502 in 1998).

        Future minimum rental payments as of December 31, 1999 under the
        operating lease agreement are as follows:

        Within one year                                    $     319,995
        Over one year but not exceeding two years                257,306
        Over two years but not exceeding three years             265,274
        Over three years but not exceeding four years            153,631
        Over four years but not exceeding five years             154,653
                                                           -------------

                                                           $   1,150,859
                                                           =============

    b)  Annual rent payments for vehicles under operating leases which are in
        effect for the next four years amount to $63,276. Minimum lease payments
        for the next four years are as follows:

        Within one year                                    $      32,201
        Over one year but not exceeding two years                 21,695
        Over two years but not exceeding three years               8,990
        Over three years but not exceeding four years                390
                                                           -------------

                                                           $      63,276
                                                           =============

                                      F-21

<PAGE>


D.G. JEWELRY INC.
(Formerly D.G. Jewellery of Canada Ltd.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Amounts expressed in US dollars)




18. CONTINGENCIES

        The company is contingently liable under contested lawsuits amounting to
        approximately $2,185,000. 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 in the amount of approximately $566,064 given to
        a party related to the major stockholders of the company.

        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.


19. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE

        The Year 2000 Issue arises because many computerized systems use two
        digits rather than four to identify a year. Date-sensitive systems may
        recognize the year 2000 as 1900 or some other date, resulting in errors
        when information using year 2000 dates is processed. In addition,
        similar problems may arise in some systems which use certain dates in
        1999 to represent something other than a date. Although the change in
        date has occurred it is not possible to conclude that all aspects of the
        Year 2000 Issue affecting the company, including those related to the
        efforts of customers, suppliers, or other third parties, have been fully
        resolved.


20. SEGMENTED INFORMATION

    a)  Sales to Major Customers                        1999           1998

        Sales to major customers                     $27,950,486    $23,487,403
        Percentage of total sales                            79%            66%

        Accounts receivable due from major
          customers                                  $12,044,409    $10,905,973
        Percentage of total accounts receivable              50%            62%

                                      F-22


<PAGE>


D.G. JEWELRY INC.
(Formerly D.G. Jewellery of Canada Ltd.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Amounts expressed in US dollars)



20. SEGMENTED INFORMATION (cont'd)

    b)  Sales by Geographic Area                      1999          1998

                                                       $              $

        United States of America                   24,694,864     28,568,376
        Canada                                     10,629,447      6,729,624
        Other                                          89,822         52,022
                                                   ----------     ----------

                                                   35,414,133     35,350,022
                                                   ==========     ==========

    c)  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.

                                                       1999           1998

                                                         $              $

        United States of America                      688,055      2,649,699
        Canada                                        294,087        624,168
        Other                                          18,086          4,825
                                                   ----------     ----------

                                                    1,000,228      3,278,692
                                                   ==========     ==========


    d)  Identifiable Assets by Geographic Area       1999           1998

                                                       $              $

        United States of America                   19,261,074     19,557,885
        Canada                                     31,937,548     23,946,020
                                                   ----------     ----------

                                                   51,198,622     43,503,905
                                                   ==========     ==========

                                      F-23
<PAGE>


D.G. JEWELRY INC.
(Formerly D.G. Jewellery of Canada Ltd.)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Amounts expressed in US dollars)



20. SEGMENTED INFORMATION (cont'd)

    e)  Purchases From Major Suppliers                    1999          1998

        Purchases from major suppliers                $11,097,894     $8,993,250
        Percentage of total purchases                         45%            36%

        Accounts payable due to major suppliers        $2,398,486     $1,276,632
        ercentage of total suppliers                         43%            29%


21. OTHER SUPPLEMENTAL INFORMATION

    The following items were included in the statements of income:

                                                           1999          1998

                                                             $             $

    Amortization of property, plant and equipment         271,561        484,383
    Amortization of goodwill                               30,000         40,442
                                                       ----------      ---------

                                                          301,561        524,825
                                                       ==========      =========

    Operating lease rentals for rental premises           270,626        313,862
                                                       ==========      =========

    Interest expense on
         -  bank indebtedness                           1,520,633      1,413,186
         -  loans payable                                 215,364        260,706
         -  other                                          55,466        146,386
                                                       ----------      ---------

                                                        1,791,463      1,820,278
                                                       ==========      =========


22. COMPARATIVE FIGURES

    Certain figures in the December 31, 1998 consolidated financial statements
    have been reclassified to conform with the basis of presentation used in
    1999.

                                      F-24