SecProbe.io

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February 11, 2005

Mr. George F. Ohsiek, Jr.
Branch Chief
Mail Stop 03-08
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: Form 10-K for the fiscal year ended May 31, 2004
    File Date: August 27, 2004
    File No. 001-07848

    Form 10-Q for the periods ended August 31, 2004 and November 30, 2004

Dear Mr. Ohsiek,

We respond as follows to the Staff's comments received on January 18, 2005
relating to the above-captioned Annual Report on Form 10-K and quarterly report
on Forms 10-Q. As previously agreed with you in our telephone conversation, our
response is hereby submitted on or before the 15th of February 2005. Please note
that for the Staff's convenience, we have recited each of the Staff's comments
and provided our response to each comment immediately thereafter.

Question #1 - Controls and Procedures.

You state that there were no "significant changes" in your "internal controls"
or in other factors that could "significantly affect" these controls subsequent
to the date of your evaluation. However, Item 308(c) of Regulation S-K requires
that you disclose any change in your "internal control over financial reporting"
identified in connection with the evaluation required by paragraph (d) of
Exchange Act Rules 13a-15 or 15d-15 that occurred during the most recent fiscal
quarter that has "materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting." See also
paragraph 4(c) of Exhibits 31.1 and 31.2. Revise your disclosures accordingly in
future filings. Also confirm to us supplementally that there were no changes in
your internal control over financial reporting that occurred during the most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect your internal control over financial reporting.

Response to Question #1

The Company will provide disclosure in future filings to include the following
statement:

"There has been no change in the Company's internal controls over financial
reporting during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to affect, the Company's internal controls
over financial reporting".

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Further, please be advised that there were no changes in the Company's internal
controls over the financial reporting that occurred during the most recent
fiscal quarter that has materially affected, or is reasonably likely to affect,
the Company's internal controls over financial reporting.

Question #2 - Results of operations

Where you identify intermediate causes of changes in your operating results,
also describe the reasons underlying the intermediate causes. This is
particularly important for changes in your net sales, gross margin and selling,
general and administrative expenses. For example, you indicate that sales
increased because of increased sales of branded polished diamonds and rough
diamonds, partially offset by lower sales of commercial stones. While this
information is helpful to the reader, you should also explain the underlying
reasons for the increased or decreased sales of these different product
categories. Similarly, where you discuss changes in your gross margin, it is not
sufficient to say that your gross margin increased because of improved margins
on certain products. You should also explain how you were able to achieve the
improved margins on the identified products. Refer to Item 303 of Regulation S-K
and SEC Release No. 33-8350.

Response to Question #2

The Company will expand its disclosure in future filings to directly articulate
the reasons underlying intermediate causes of changes in net sales, gross margin
and selling, general and administrative expense. The Company will also further
explain how it was able to achieve improved margins on identified products.

Question #3 - Liquidity In future filings please revise your contractual
obligations table to include the following:

         a.  estimated interest payments on your debt; and

         b.  purchase obligations as defined in Item 303(A)(5)(ii)(D) of
             Regulation S-K, if applicable.

     Because the table is aimed at increasing transparency of cash flow, we
     believe these payments should be included in the table. If you choose not
     to include these payments, a footnote to the table should clearly identify
     the excluded items and provide any additional information that is material
     to an understanding of your cash requirements. See Section IV.A and
     footnote 46 to the Commission's MD&A Guidance issued December 19, 2003
     available at www.sec.gov.

Response to Question #3

The Company will address your comment in future filings by including estimated
interest payments on debt and purchase obligations (if any) in its contractual
obligations table or in a footnote to the table clearly identifying the excluded
items along with any additional information that is material to an understanding
of the Company's cash requirements.

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Question #4 Cooperative advertising

You indicate in Item 1 of your Form 10-K that you engage in cooperative
advertising programs with your customers. Please disclose your accounting policy
for cooperative advertising programs and any other types of arrangements within
the scope of EITF 01-9 in which you participate. Also disclose the statements of
operations line item where each type of arrangement is included. For each type
of arrangement treated as an expense rather that as a reduction of revenues,
please tell us how this type of arrangement meets the requirements in EITF 01-9.
Please also discuss in MD&A any significant estimates resulting from these
arrangements.

Response to Question #4

The company participates in the following arrangements with customers that fall
within the scope of EITF 01-9:

     a.)  Cooperative advertising - The Company participates in cooperative
          advertising arrangements with customers in order to build brand
          awareness and product acceptance. Under such an arrangement a customer
          is eligible to receive an allowance of up to a specified percentage of
          its purchases from the Company if certain qualitative advertising
          criteria are met and if specified amounts are spent on qualifying
          advertising. For example, under the Company's basic program, if a
          participating retailer purchased $30,000 of qualifying diamonds in a
          specified time period the retailer would be eligible for up to $1,500
          (5% of qualifying purchases) of cooperative advertising credit. In
          order to earn the credit the retailer would have to submit qualifying
          media invoices of up to $3,000. The Company would then reimburse the
          customer for 50% of the qualifying expenditure. In order for the
          advertisement to qualify the customer must select the advertisement
          from a selection of approved advertisements designed by the Company.

Consistent with the consensus stated in paragraph 9 of EITF 01-9 the Company
characterizes as (selling, general and administrative) expense the consideration
it pays to customers for cooperative advertising. The Company believes its
programs meet both of the criteria necessary for such treatment specified in the
accounting model (paragraphs 9a and b). First, the Company is receiving from its
customer an identifiable benefit (advertising) in return for the allowance it
grants. The benefit is sufficiently separable from the customer's purchase of
the Company's products because the Company could have purchased the advertising
from another party that does not purchase the Company's products. Therefore, the
first condition of the model is met. The second condition of the model is also
met because an estimate of the fair value of the advertising benefit is made
through an allocation of cost incurred by a retailer for the advertising on the
basis of the portion of an advertisement that includes the Company's products
(i.e., the customer must use an ad designed by the Company).

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     b.)  Customer rebates - From time to time the Company has had arrangements
          whereby it would rebate to a customer a percentage of certain of its
          qualifying purchases.

     In accordance with the consensus stated in paragraph 9 of EITF 01-9 the
     Company characterizes such rebates as a reduction of sales.

     c.)  Point of sale incentive programs - The Company offers programs whereby
          certain sales staff employed by the Company's customers can receive
          consideration for sales of the Company's products. For example, a
          salesperson can receive $20, $30 or $50 from the Company depending on
          the size of the qualifying diamond the salesperson sells.

Consistent with the consensus stated in paragraph 9 of EITF 01-9 the Company
characterizes as selling, general and administrative expense the consideration
it pays to the salesperson. The Company believes such programs meet both of the
criteria necessary for such treatment specified in the accounting model. First,
the Company is receiving from the salesperson an identifiable benefit
(successful selling of the Company's products) in return for the consideration
it pays. The benefit is sufficiently separable from the customer's purchase of
the Company's product as the salesperson and the customer are different parties
with different inherent interests. Therefore, the first condition of the model
is met. The second condition of the model is also met because the payment is
based on the pre-established value of a successful selling effort as determined
by the Company in accordance with the program terms.

Question #5 Shipping and Handling

Please disclose your policy for classifying shipping and handling costs in the
statements of operations. If shipping costs or handling costs are significant
and are not classified in cost of sales, disclose the amount(s) of these costs
and the line item(s) that include them. Please also confirm to us supplementally
that amounts paid to you by customers for shipping and handling are included in
net sales, as required by EITF 00-10.

Response to Question #5

Shipping and handling costs incurred by the Company are classified in the
Company's income statement as selling general and administrative expense.
Selling, general and administrative expense for each of the fiscal years ended
May 31, 2004 and 2003 reflects approximately $0.3 million of such costs.

In future filings the Company will state that its policy is to record such costs
as selling, general and administrative expense and disclose the amount so
classified.

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Generally, the Company's unit selling price for diamonds contemplates the
shipping and handling costs to be billed to customers. Accordingly, sales as
reported by the Company captures amounts billed in consideration of shipping and
handling costs. However, from time to time a customer will require that a
shipment be sent overnight or by a specialized means of transit. In such
situations the Company bills the added costs to the customer and records the
related billing as a reduction to selling general and administrative expense.
For each of the fiscal years ended May 31, 2004 and 2003 the amount of such
shipping and handling costs charged to customers and recorded as a reduction of
selling general and administrative expense was approximately $0.1 million. The
Company considers such amounts to be immaterial to gross margin and selling
general and administrative expense.

Question #6 - Consideration received from vendors

Please disclose your accounting policy for consideration received from a vendor
in connection with the purchase or promotion of the vendor's products, such as
rebates, co-operative advertising fees, or other similar types of consideration.

Also disclose the statements of operations line item in which each of these
types of payments is included. Please also revise your MD&A to discuss the
changes in these payments between periods and how they impacted the related
statements of operations line items, if material. Refer to EITF 02-16.

Response to Question  #6

Periodically, the Company negotiates agreements with vendors to share
certain promotional costs. The Company classifies amounts expended on such
promotions as selling general and administrative expense when incurred.
Similarly, amounts reimbursed by vendors are characterized as a reduction of
selling, general and administrative expense. The Company believes this
treatment is in accordance with the consensus opinion reflected in paragraph 4
(subsection (b)) of EITF 02-16, which states that a reimbursement of costs
incurred by a customer to sell the vendor's products should be characterized
as a reduction of that cost when recognized in the customer's income statement.

The aggregate amount of such consideration received by the company in fiscal
2004 ($0.4 million) was less than the amount received in fiscal 2003 by $0.2
million. The Company does not believe this fluctuation to be material with
respect to selling, general and administrative expense.

In future filings the Company will include the following disclosure:
Periodically, the Company negotiates agreements with vendors to share certain
promotional costs. The Company classifies amounts expended on such promotions
as selling general and administrative expense when incurred. Similarly, amounts
reimbursed by vendors are characterized as a reduction of selling, general and
administrative expense.

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Question #7 - Sales arrangements with customers

Please revise your disclosure in future filings to clarify the nature and terms
of each of the types of arrangements under which you make sales to customers.
For example, disclose the nature and terms of the arrangements under which you
are obligated to share realized profits on the sale of stones and also the
arrangements where you "jointly sell" stones with other wholesalers. Also
disclose separately for each type of arrangement your revenue recognition
policy, including the timing of revenue recognition. Show us supplementally what
the revised disclosures will look like.

Response to question #7

The Company will expand its disclosure in future filings to further clarify the
nature and terms of each of the types of arrangements under which it make sales
to customers. The future disclosure will appear as follows:

The Company's polished diamond and diamond jewelry customers consist primarily
of wholesale and retail clients. The Company's rough diamond customers consist
primarily of rough diamond traders and diamond cutters. The Company generally
ships inventory to customers subject to verification of the diamond particulars.

In addition:

o The Company has an arrangement with a diamond producer whereby the Company
sells certain polished diamonds that are cut and polished in Russia. The risk
and rewards of ownership of these diamonds is transferred to the Company upon
delivery to the Company of the diamonds in polished form. Generally, upon
receipt, the Company pays a negotiated base price and the producer receives an
economic interest in future profits associated with the diamonds.

o The Company has a technical cooperation agreement with an entity responsible
for the development and marketing of diamonds produced in Angola. Pursuant to
this agreement the Company has established a joint buying and rou