Gem

Gems are returning in Diablo III as previous items put into sockets of other items.

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 socket-filler. 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.