Al Zuni of Arizona, Inc. - Page 6




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               Since 1980, Peck has been the preparer of Al Zuni’s                    
          corporate Federal income tax returns and of Khalaf’s individual             
          Federal income tax returns.                                                 
               Al Zuni’s corporate Federal income tax returns for 1989,               
          1991, and 1992 were untimely filed.  Al Zuni has not filed a                
          signed Federal income tax return for 1990.                                  
               On Al Zuni’s 1989, 1990 (unsigned), 1991, and 1992 corporate           
          Federal income tax returns, there were reported each year the               
          following total costs for jewelry inventory purchased, sold, and            
          yearend jewelry inventory:                                                  


      As Reported on Al Zuni's Federal Income Tax Returns                             
      Cost of                1989      1990            1991          1992             
      Jewelry purchased      $696,795    $1,242,051    $1,634,220    $1,845,156       
      Jewelry sold           560,426     985,030       1,536,380   1,908,386*         
      Ending inventory       246,369     503,390       601,230          - 0 -         
               * After subtraction of jewelry with a reported                         
                    cost of $538,000 to reflect transfer of the                       
                    jewelry inventory to Khalaf.                                      

               On Al Zuni’s 1992 corporate Federal income tax return, which           
          was prepared using the accrual method of accounting, the transfer           
          of jewelry to Khalaf was reflected as a “transfer”.  The transfer           
          is not expressly reflected as either a sale or as a distribution            
          to Khalaf.  On Al Zuni's 1992 corporate Federal income tax                  
          return, no gain or loss was reported with respect to the                    
          September 15, 1992, transfer of Al Zuni’s jewelry inventory to              
          Khalaf.                                                                     



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