You can find gems by killing monsters. The quality of the gems depend on the level of the monsters killed. Better quality gems give better bonuses.
Gems can be used to decorate armours or weapons. Decorating them gives them additional bonuses.
All armours and weapons can hold three gems. The gems can not be removed later, so think carefully how you use them.
NOTE: This system is still in BETA mode, so expect tunes (up or down) in the near future ;-)