Gems are returning in Diablo III as previous items put into sockets of other items. They are almost identical in use to gems in Diablo II, with a few new features being added. They can be combined by an Artisan Jeweler, in the same way gems and runes could be combined in the Horadric Cube in Diablo II. There are reportedly 14 variations of each type of gem.

3 gems of the same quality combine to become 1 gem that is a step better, the 14th Variation is very exquisite, and will require lots of gems to be crafted. It is estimated it will take 14,348,907 gems of the lowest quality to make 1 gem of the highest quality.

There are 5 ranks of gems, such as chipped, normal, flawless and so on. During the Artisan unveiling in GamesCom 2010, someone asked Jay Wilson about a way to combine different types of gems, such as a ruby mixed with an emerald. Jay seemed interested in the idea, and said he would talk it over with his staff.

Diablo III Gems

Gems found in the BlizzCon 2008 demo were much similar to ones found in Diablo II, as they had a colour, and a quality. Different colour types would have different themed effects on items, and the quality would determine how big the effect would be. What was new was that they also had a "cut", like jewels from World of WarCraft. Names could like this: "Chipped Star Topaz", implying that more sorts of gem names (and attribute bonuses) will be available.

Gems will still be inserted into sockets on items and will likely have a greater role to play in Diablo III than it's predecessor, since runes now are associated with skills instead of items or runewords.

Emeralds

The GamesCon Artisan video showed a "normal emerald" as a socketable gem. It gave +% casting speed to weapons, attacker takes damage of x to Helms, and added dexterity to other items.

Official Comments

Bashiok commented briefly on item sockets and gems in February, 2009.[1]

We haven't released any information on our site, but it was possible to collect socketed items as well as gems in the BlizzCon demo... The gem stats at this point are more or less just the basics yanked from Diablo II to get the system running and have something to play around with.