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U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 20-F o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
 OR x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the fiscal
year ended December 31, 2003
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ______ to ______ Commission file number 0-29620 LJ INTERNATIONAL INC. 
 LJ INTERNATIONAL INC. 
 British Virgin Islands   Unit #12, 12/F, Block A
Focal Industrial Centre
21 Man Lok Street
Hung Hom, Kowloon, Hong Kong
(Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act. Name of each exchangeTitle of each class
    
    on which registeredNone
    
    
    N/A




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Securities registered or to be registered pursuant to Section 12(g) of the Act. $.01 Par Value Common Stock (Common Stock)   Warrants to Purchase Common Stock (Warrants)   Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act. None   Indicate the number of outstanding shares of each of the issuers classes
of capital or common stock as of the close of the period covered by the annual
report: 9,890,006 Common Stock
1,679,000 Warrants Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  x
    
    No  o
 Indicate by check mark which financial statement item the registrant has
elected to follow. Item 17  o
    
    Item 18  x
 (APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS) Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Not Applicable. -2-




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TABLE OF CONTENTS  PART IITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERSITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLEITEM 3. KEY INFORMATIONITEM 4. INFORMATION ON THE COMPANYITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTSITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEESITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONSITEM 8. FINANCIAL INFORMATIONITEM 9. THE OFFER AND LISTINGITEM 10. ADDITIONAL INFORMATIONITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIESPART IIITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIESITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDSITEM 15. CONTROLS AND PROCEDURESITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERTITEM 16B. CODE OF ETHICSITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICESITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.PART IIIITEM 17. FINANCIAL STATEMENTSITEM 18. FINANCIAL STATEMENTSITEM 19. EXHIBITSSIGNATURESEX-4.1 EMPLOYMENT AGREEMENTEX-8.1 LIST OF SIGNIFICANT SUBSIDIARIESEX-11.1 CODE OF ETHICSEX-12.1 CERTIFICATIONS PURSUANT TO RULE 13A-14(A)EX-12.2 CERTIFICATIONS PURSUANT TO RULE 13A-14(A)EX-13.1 CERT TO RULE 13A-14(B) & 18 U.S.C. SEC1350EX-13.2 CERT TO RULE 13A-14(B) & 18 U.S.C. SEC1350    Table of Contents  SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS This annual report contains forward-looking statements that involve risks
and uncertainties. These include statements about our expectations, plans,
objectives, assumptions or future events. In some cases, you can identify
forward-looking statements by terminology such as anticipate, estimate,
plans, potential, projects, continuing, ongoing, expects,
management believes, we believe, we intend and similar expressions.
These statements involve estimates, assumptions and uncertainties that could
cause actual results to differ materially from those expressed for the reasons
described in this annual report. You should not place undue reliance on these
forward-looking statements. You should be aware that our actual results could differ materially from
those contained in the forward-looking statements due to a number of factors:  
    
    dependence upon certain customers
    
    dependence on key personnel
    
    control by principal shareholder
    
    competitive factors
    
    the operation of our business
    
    general economic conditions You should also consider carefully the statements under Risk Factors and
other sections of this annual report, which address additional factors that
could cause our actual results to differ from those set forth in the
forward-looking statements and could materially and adversely affect our
business, operating results and financial condition. All subsequent written
and oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the applicable cautionary
statements. The forward-looking statements speak only as of the date on which they are
made, and, except to the extent required by federal securities laws, we
undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement is made or to
reflect the occurrence of unanticipated events. In addition, we cannot assess
the impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from
those contained in any forward-looking statements. We use data and industry forecasts in this annual report which we have
obtained from internal surveys, market research, publicly available information
and industry publications. Industry publications generally state that the
information they provide has been obtained from sources believed to be reliable
but that the accuracy and completeness of such information is not guaranteed.
Similarly, we believe that the surveys and market research we or others have
performed are reliable, but we have not independently verified this
information. -3-




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PART I 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. 
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. 
 ITEM 3. KEY INFORMATION A. SELECTED FINANCIAL DATA. SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share amounts) The following selected consolidated financial data with respect to each of
the years in the three-year period ended April 30, 2002, the eight months ended
December 31, 2002 and the year ended December 31, 2003 have been derived from
our audited consolidated financial statements. The following selected
consolidated financial data should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of Operations and
the Consolidated Financial Statements and Notes included elsewhere in this
annual report. -4-




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Selected Financial Data Year ended
    
    Eight-month period ended
    
    Year endedApril 30,
    
    December 31,
    
    December 31,2000
    
    2001
    
    2002
    
    2001
    
    2002
    
    2002
    
    2003(Unaudited)
    
    
    
    
    
    (Unaudited)Statement of Operations Data:Revenues
    
    
    38,926
    
    
    
    46,285
    
    
    
    39,240
    
    
    
    25,042
    
    
    
    31,809
    
    
    
    46,007
    
    
    
    58,167Cost of Goods sold
    
    
    25,496
    
    
    
    31,540
    
    
    
    35,731
    
    
    
    18,602
    
    
    
    22,820
    
    
    
    39,951
    
    
    
    44,947Gross profit
    
    
    13,430
    
    
    
    14,745
    
    
    
    3,509
    
    
    
    6,440
    
    
    
    8,989
    
    
    
    6,056
    
    
    
    13,220Operating expensesSelling, general and administrative
    
    
    (7,406
    )
    
    
    (9,398
    )
    
    
    (8,963
    )
    
    
    (5,905
    )
    
    
    (6,433
    )
    
    
    (9,525
    )
    
    
    (9,133
    )Unrealized gain (loss) on derivatives
    
    
    44
    
    
    
    44
    
    
    
    (660
    )
    
    
    (119
    )
    
    
    (435
    )
    
    
    (975
    )
    
    
    (162
    )Depreciation
    
    
    (705
    )
    
    
    (808
    )
    
    
    (1,031
    )
    
    
    (565
    )
    
    
    (863
    )
    
    
    (1,328
    )
    
    
    (1,184
    )Impairment on property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    (345
    )
    
    
    
    
    
    
    (108
    )
    
    
    (417
    )
    
    
    (84
    )Amortization and impairment loss on goodwill
    
    
    
    
    
    
    (27
    )
    
    
    (242
    )
    
    
    (18
    )
    
    
    (400
    )
    
    
    (624
    )
    
    
    (200
    )Income (loss) from operations
    
    
    5,363
    
    
    
    4,556
    
    
    
    (7,732
    )
    
    
    (167
    )
    
    
    750
    
    
    
    (6,814
    )
    
    
    2,457Other revenues
    
    
    458
    
    
    
    570
    
    
    
    352
    
    
    
    265
    
    
    
    205
    
    
    
    291
    
    
    
    453Interest expenses
    
    
    (1,446
    )
    
    
    (1,780
    )
    
    
    (652
    )
    
    
    (424
    )
    
    
    (441
    )
    
    
    (668
    )
    
    
    (753
    )Issuance costs for convertible debentures
    
    
    (585
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Impairment loss on investment security
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (200
    )
    
    
    (200
    )
    
    
    Operating income (loss) before income taxes
and minority interests
    
    
    3,790
    
    
    
    3,346
    
    
    
    (8,032
    )
    
    
    (326
    )
    
    
    314
    
    
    
    (7,391
    )
    
    
    2,157Incomes taxes (expense) credit
    
    
    (3
    )
    
    
    (211
    )
    
    
    101
    
    
    
    (39
    )
    
    
    (101
    )
    
    
    39
    
    
    
    (352
    )Income (Loss) before minority interests
    
    
    3,787
    
    
    
    3,135
    
    
    
    (7,931
    )
    
    
    (365
    )
    
    
    213
    
    
    
    (7,352
    )
    
    
    1,805Minority interests in consolidated subsidiaries
    
    
    52
    
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    120
    
    
    
    150
    
    
    
    8Net income (loss)
    
    
    3,839
    
    
    
    3,135
    
    
    
    (7,901
    )
    
    
    (365
    )
    
    
    333
    
    
    
    (7,202
    )
    
    
    1,813Net income (loss) per share:Basic
    
    
    0.58
    
    
    
    0.37
    
    
    
    (0.91
    )
    
    
    (0.04
    )
    
    
    0.04
    
    
    
    (0.84
    )
    
    
    0.21Diluted
    
    
    0.56
    
    
    
    0.37
    
    
    
    (0.91
    )
    
    
    (0.04
    )
    
    
    0.04
    
    
    
    (0.84
    )
    
    
    0.19Pro forma basic (Note)
    
    
    0.57
    
    
    
    0.13
    
    
    
    (0.91
    )
    
    
    (0.04
    )
    
    
    0.04
    
    
    
    (0.84
    )
    
    
    0.19Pro forma diluted (Note)
    
    
    0.54
    
    
    
    0.13
    
    
    
    (0.91
    )
    
    
    (0.04
    )
    
    
    0.04
    
    
    
    (0.84
    )
    
    
    0.17Weighted average number of sharesBasic
    
    
    6,589
    
    
    
    8,567
    
    
    
    8,672
    
    
    
    8,672
    
    
    
    8,493
    
    
    
    8,551
    
    
    
    8,757Diluted
    
    
    6,944
    
    
    
    8,617
    
    
    
    8,779
    
    
    
    8,832
    
    
    
    8,493
    
    
    
    8,551
    
    
    
    9,706Pro forma basic (Note)
    
    
    6,589
    
    
    
    8,567
    
    
    
    8,672
    
    
    
    8,672
    
    
    
    8,493
    
    
    
    8,551
    
    
    
    8,757Pro forma diluted (Note)
    
    
    6,944
    
    
    
    8,617
    
    
    
    8,779
    
    
    
    8,832
    
    
    
    8,493
    
    
    
    8,551
    
    
    
    9,706Balance Sheet Data:Working capital
    
    
    20,561
    
    
    
    20,153
    
    
    
    12,115
    
    
    
    18,537
    
    
    
    11,896
    
    
    
    11,896
    
    
    
    17,053Total assets
    
    
    40,049
    
    
    
    48,094
    
    
    
    43,523
    
    
    
    51,062
    
    
    
    48,888
    
    
    
    48,888
    
    
    
    60,686Long-term obligation
    
    
    2,943
    
    
    
    287
    
    
    
    8
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    77Total stockholders equity
    
    
    24,739
    
    
    
    31,161
    
    
    
    23,557
    
    
    
    30,943
    
    
    
    23,294
    
    
    
    23,294
    
    
    
    27,902
 Note: Pro forma information has been prepared as if compensation expense for
stock options be determined based on the fair value at the date of grant and
been amortized over the period from -5-




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the date of grant to the date that the award is vested, consistent with the
provisions of SFAS No. 123. B. CAPITALIZATION AND INDEBTEDNESS. Not applicable. C. REASONS FOR THE OFFER AND USE OF PROCEEDS. Not applicable. D. RISK FACTORS. We depend upon QVC, Inc. for a large portion of our sales and we cannot be
certain that these sales will continue. If they do not, our revenues will
likely decline. Although we sell to a large number of customers in a variety of markets, a
large portion of our sales involves offerings to one volume customer, QVC, Inc.
For the fiscal years ended December 31, 2002 and 2003, QVC, Inc. accounted for
approximately 25% and 10% of our sales. Although we have maintained a good
and longstanding relationship with this customer, we do not have any long-term
contracts with QVC, Inc., who orders only on a purchase order basis. The loss
of QVC, Inc. as a customer or a significant reduction in its orders would have
a materially adverse effect. We are controlled by one of our existing shareholders, whose interests may
differ from other shareholders. Our largest shareholder beneficially owns or controls approximately 38.1%
of our outstanding shares as of December 31, 2003. Accordingly, he has
controlling influence in determining the outcome of any corporate transaction
or other matter submitted to the shareholders for approval, including mergers,
consolidations and the sale of all, or substantially all, of our assets,
election of directors, and other significant corporate actions. He also has
the power to prevent or cause a change in control. In addition, without the
consent of this shareholder, we could be prevented from entering into
transactions that could be beneficial to us. The interests of this shareholder
may differ from the interests of the other shareholders. We face significant competition from larger competitors. -6-




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The making and distribution of jewelry is a highly competitive industry
characterized by the diversity and sophistication of the product. We compete
with major domestic and international companies with substantially greater
financial, technical and marketing resources and personnel than us. There can
be no assurance other jewelry makers will not similarly develop low-cost,
high-volume production capability or an even better process, providing greater
competition for us and materially affecting our business prospects. There are numerous factors relating to the operations of our business that
could adversely affect our success and results. As a maker and merchandiser of low-cost, high-quality gem-set jewelry, our
existing and future operations are and will be influenced by several factors,
including:  
    
    technological developments in the mass production of
jewelry;
    
    our ability to meet the design and production requirements
of our customers efficiently;
    
    the market acceptance of our customers jewelry;
    
    increases in expenses associated with continued sales growth;
    
    our ability to control costs;
    
    our managements ability to evaluate the publics taste and
new orders to target satisfactory profit margins;
    
    our capacity to develop and manage the introduction of new
designed products; and
    
    our ability to compete. Quality control is also essential to our operations since customers demand
compliance with design and product specifications and consistency of
production. We cannot assure that revenue growth will occur on a quarterly or
annual basis. Our production facilities are located in China. Our results of operations and
financial condition may, therefore, be influenced by the economic, political,
legal and social conditions in China. Since 1978, the Chinese government has been reforming, and is expected to
continue to reform, Chinas economic and political systems. Such reforms have
resulted in significant social progress. Other political, economic and social
factors could also lead to further readjustment of the reform measures. This
refinement and readjustment process may not always have a positive effect on
our operations in China. At times, we may also be adversely affected by
changes in policies of the Chinese government such as changes in laws and
regulations or their interpretation, the introduction of additional measures to
control inflation, changes in the rate or method of taxation and imposition of
additional restrictions on currency conversion and remittances abroad. -7-




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Our products are currently made at our production facility located in Shenzhen,
China. However, our insurance may not adequately cover any losses due to fire,
casualty or theft. We have obtained fire, casualty and theft insurance aggregating
approximately $19.8 million, covering several of our stock in trade, goods and
merchandise, furniture and equipment and production facility in China. The
proceeds of such insurance may not be sufficient to cover material damage to,
or the loss of, our production facility due to fire, severe weather, flood or
other cause, and such damage or loss would have a material adverse effect on
our financial condition, business and prospects. Consistent with the customary
practice among enterprises in China and due to the cost in relation to the
benefit, we do not carry any business interruption insurance in China. Sales of our jewelry to retailers are generally stronger during the quarter
ending December 31 of each year due to the importance of the holiday selling
season. The approximately 35% of our sales during the fiscal year ended December
31, 2003 to our TV shopping channel customers was not seasonal in nature. It
has been our managements experience that the remaining 65% of our total sales
is seasonally sensitive and is greater during the quarter ending December 31 of
each year. Our holding company structure creates restrictions on the payment of dividends. We have no direct business operations, other than the ownership of our
subsidiaries. While we have no current intention of paying dividends, should
we, as a holding company, decide in the future to do so, our ability to pay
dividends and meet other obligations depends upon the receipt of dividends or
other payments from our operating subsidiaries and other holdings and
investments. In addition, our operating subsidiaries are subject to
restrictions on their ability to make distributions to us, including as a
result of restrictive covenants and minimum net worth requirements in loan
agreements, restrictions on the conversion of local currency into U.S. dollars
or other hard currency and other regulatory restrictions. It may be difficult to serve us with legal process or enforce judgments against
us or our management. We are a British Virgin Islands holding company, and all or a substantial
portion of our assets are located in China and Hong Kong. In addition, all but
one of our directors and officers are non-residents of the United States, and
all or substantial portions of the assets of such non-residents are located
outside the United States. As a result, it may not be possible to effect
service of process within the United States upon such persons. Moreover, there
is doubt as to whether the courts of the British Virgin Islands, China or Hong
Kong would enforce:  
    
    judgments of United States courts against us, our directors
or our officers based on the civil liability provisions of the
securities laws of the United States or any state; or -8-




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
    
    in original actions brought in the British Virgin Islands,
China or Hong Kong, liabilities against us or non-residents based
upon the securities laws of the United States or any state. Some information about us may be unavailable due to exemptions under the
Exchange Act for a foreign private issuer. We are a foreign private issuer within the meaning of the rules under the
Exchange Act. As such, we are exempt from certain provisions applicable to
United States public companies, including:  
    
    the rules under the Exchange Act requiring the filing with
the Securities and Exchange Commission of quarterly reports on Form
10-Q or current reports on Form 8-K;
    
    the provisions of Regulation FD aimed at preventing issuers
from making selective disclosures of material information;
    
    the sections of the Exchange Act regulating the solicitation
of proxies, consents or authorizations in respect of a security
registered under the Exchange Act; and
    
    the sections of the Exchange Act requiring insiders to file
public reports of their stock ownership and trading activities and
establishing insider liability for profits realized from any
short-swing trading transaction. Because of these exemptions, investors are not provided with the same
information which is generally available about public companies organized in
the United States. Since we are a British Virgin Islands company, the rights of our shareholders
may be more limited than those of shareholders of a company organized in the
United States. Under the laws of most jurisdictions in the United States, majority and
controlling shareholders generally have certain fiduciary responsibilities to
the minority shareholders. Shareholder action must be taken in good faith, and
actions by controlling shareholders which are obviously unreasonable may be
declared null and void. British Virgin Island law protecting the interests of
minority shareholders may not be as protective in all circumstances as the law
protecting minority shareholders in U.S. jurisdictions. In addition, the
circumstances in which a shareholder of a BVI company may sue the company
derivatively, and the procedures and defenses that may be available to the
company, may result in the rights of shareholders of a BVI company being more
limited than those of shareholders of a company organized in the U.S. Furthermore, our directors have the power to take certain actions without
shareholder approval which would require shareholder approval under the laws of
most U.S. jurisdictions. The directors of a BVI corporation, subject in
certain cases to court approval but without shareholder approval, may implement
a reorganization, merger or consolidation, the sale of any assets, property,
part of the business, or securities of the corporation. Our ability to amend
our Memorandum of Association and Articles of Association without shareholder
approval could -9-




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have the effect of delaying, deterring or preventing a change in our control
without any further action by the shareholders, including a tender offer to
purchase our common stock at a premium over then current market prices. -10-




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ITEM 4. INFORMATION ON THE COMPANY A. HISTORY AND DEVELOPMENT OF THE COMPANY. LJ International Inc. (we) was incorporated as an international business
company under the International Business Companies Act of the British Virgin
Islands on January 30, 1997. We own all of the issued share capital in the
following significant subsidiaries:  
    
    Lorenzo Jewelry Limited (Lorenzo Jewelry), a company incorporated in
Hong Kong on February 20, 1987.
    
    Lorenzo Gems Manufacturing (Shenzhen) Co., Ltd.
    
    Lorenzo Jewellery (Shenzhen) Co., Ltd.
    
    Shenzhen PGS Jewelry Mfg. Our principal place of business and our executive offices are located at
Units #09-#12, 12/F, Block A, Focal Industrial Centre, 21 Man Lok Street, Hung
Hom, Kowloon, Hong Kong, telephone: (011) 852-2764-3622. We have designated CT
Corporation, 111 Eighth Avenue, New York, New York 10011 as our agent for
service of process in the United States. During our last three fiscal years, we have made the following significant
capital expenditures:  
    
    we purchased a 16.8% equity interest in iBBC Inc. for $600,000 during
the fiscal year ended April 30, 2001.
    
    we purchased a 20% equity interest in Goldleaves International Inc.
for $2,684,000 during the fiscal year ended April 30,2001.
    
    we purchased 68.8% of the common shares of iBBC Inc. for $2,460,000
during the fiscal year ended April 30, 2002
    
    we made a capital contribution of $670,000 for our 95% equity interest
in Lorenzo Giftware Inc. during the fiscal year ended December 31,
2002
    
    we invested $721,000 for the purchase of 3,502 square meters of
production space in our Shenzhen, China facility during the fiscal
year ended December 31, 2002
    
    we invested $390,000 for the purchase of 1,751 square meters of
production space in our Shenzhen, China facility during the fiscal
year ended December 31, 2003 B. BUSINESS OVERVIEW. We are a totally vertically integrated company that designs, brands,
markets and distributes a complete range of fine jewelry. While we specialize
in the semi-precious jewelry segment, we also offer high-end pieces set in
yellow gold, white gold, platinum or sterling silver and adorned with
semi-precious stones, diamonds, pearls and precious stones. We distribute
mainly to fine jewelers, department stores, national jewelry chains and
electronic and specialty retailers throughout North America and Western Europe.
Our product lines incorporate all major categories sought by major retailers,
including earrings, necklaces, pendants, rings and bracelets. -11-




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We believe that our vertically integrated structure provides significant
advantages over our competitors. All profits from value added processes are
captured internally, rather than shared with third party manufacturers. This
results in very competitive pricing for the retailer and enhanced profits for
us. Innovative processes in stone cutting and production further enhance our
competitive position. We employ an international design team and all of our designs and
merchandising strategies are proprietary. The exclusive and innovative
concepts that we create offer brand potential. Our primary marketing focus has
been in North America where we have sold directly to certain high volume
customers that need specialized product development services, and through a
marketing relationship with International Jewelry Connection (IJC) for those
customers that need higher levels of service and training. We organize our marketing and distribution strategies by retail
distribution channels. Concepts are developed for the specific needs of
different market segments. We have identified the following as prime retail
targets:  
    
    fine jewelers;
    
    national jewelry chains;
    
    department stores;
    
    TV shopping channels; and
    
    discount chain stores. For the eight-month period ended December 31, 2002 and the year ended
December 31, 2003, approximately 77% and 74% of our sales were in North
America. The following is a breakdown of our total revenues (in thousands) by
geographic market for each of our past three financial years: Year ended April 30,
    
    8 months ended December 31,
    
    Year ended December 31,2001
    
    2002
    
    2001
    
    2002
    
    2002
    
    2003(Unaudited)
    
    
    
    
    
    (Unaudited)US$
    
    US$
    
    US$
    
    US$
    
    US$
    
    US$US & Canada
    
    
    38,463
    
    
    
    28,810
    
    
    
    19,373
    
    
    
    24,545
    
    
    
    33,886
    
    
    
    42,851Hong Kong
    
    
    599
    
    
    
    4,897
    
    
    
    1,383
    
    
    
    1,451
    
    
    
    4,361
    
    
    
    1,961Europe and other countries
    
    
    7,028
    
    
    
    5,518
    
    
    
    4,167
    
    
    
    3,469
    
    
    
    4,964
    
    
    
    8,017PRC
    
    
    74
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Japan
    
    
    121
    
    
    
    9
    
    
    
    119
    
    
    
    2,344
    
    
    
    2,796
    
    
    
    5,33846,285
    
    
    
    39,240
    
    
    
    25,042
    
    
    
    31,809
    
    
    
    46,007
    
    
    
    58,167
 -12-




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Our Industry The jewelry industry is comprised of two major groups that distribute
finished jewelry to retailers in the United States:  
    
    a small number of producers that make and distribute their own jewelry
directly to retailers; and
    
    a large number of wholesalers and distributors who purchase products
or portions of products from third parties and resell those items to
retailers. We believe that vertically integrated companies that control costs by
performing all value added processes enjoy a distinct competitive advantage
over wholesalers and distributors who pay premium acquisition prices for items
that they intend to resell. We further believe that large retailers want to
rely upon prime producers because they believe that prime producers are
reliable, low cost producers who can accommodate the large quantities of
production that large retailers commonly purchase. Our Business Strategy Our business strategy is to:  
    
    increase our market share of moderately priced high-quality
gem-set semi-precious and precious jewelry by capitalizing on our
unique vertically integrated production processes to produce diamond
and high-end precious stone jewelry in addition to high volume,
high-quality semi-precious products;
    
    further develop our existing customer relationships with our
specialized services; and
    
    expand aggressively into new distribution channels,
particularly in the United States and throughout Western Europe,
Japan, China, and Australia. We are aggressively developing new product lines in exotic stones, which
have high perceived values among semi-precious stones. We continue to expand
into new product categories by:  
    
    marketing a line of sterling silver jewelry. These are typically merchandised with a retail price
range of $30 to $150
    
    adding more lines into our  Lorenzo branded products with a retail price range of $199 to $999
    
    offering diamond jewelry and expanding this business to our current client base by adding diamonds to
some of our settings, as well as offering newly designed jewelry
    
    launching Lorenzo Gold, a gold products made from Italy . We intend to implement our business strategy by: -13-




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##### Table of Contents




    
    promoting visits with customers to coordinate and cater to their particular promotional sales needs
and monitoring their on-hand inventory in order to promote more active sell-through
    
    expanding our distribution channels to include all major TV shopping programs in North America, Japan,
Korea and Australia and further developing business with top-40 Retail Jewelry Chains in the U.S.
    
    entering the retail jewelry market in China. Our Production Capability We have established a sophisticated facility in China that performs stone
cutting and polishing and jewelry production. The facility is located in the
city of Shenzhen in Guangdong Province, China. We closed our former second
facility in Shantou during the fiscal year ended December 31, 2002 and
consolidated all our production in the Shenzhen facility, which has been
operating for five years and has 9,232 square meters of production space. We
currently employ approximately 2,000 skilled gemstone cutters and production
personnel and turned out more than a million pieces of finished fine jewelry
during the fiscal year ended December 31, 2003. We purchase imported choice gemstone material, which are from mines
located in Africa, China and South America, especially those concentrated in
Brazil. We source our diamonds mainly from suppliers in India. Gemstone
craftsmen are trained and managed by our Hong Kong personnel to ensure that the
highest levels of cutting and polishing quality are achieved. The professional
skills possessed by our cutters are applied to a wide variety of shapes and
sizes, maximizing the yield and value of the gemstone material that we
purchase. By performing internally the value-added processes of cutting and
polishing our semi-precious gemstones, we maximize quality control and improve
our profitability. We specialize in a wide range of popular and exotic
semi-precious gemstones ranging from amethyst, aquamarine and peridot to
tanzanite and tourmaline. Sales and Marketing Our merchandising strategy is to provide unique and differentiated
products that are enhanced by the favorable pricing that results from our
vertically integrated structure. We invest significant effort in design and
model making to produce items which are distinctly different from our
competitors. We continue to devote our efforts towards brand development and
utilize marketing concepts to enhance the saleability of our products. We
recognize that retailers favor certain price points. As part of our product
development strategy, we strive to align our wholesale prices to match
retailers target prices as a means of achieving these popular price targets. Our sales and marketing team is located in our executive offices in Hong
Kong and Los Angeles, California. Our marketing and distribution strategy is
to identify the strongest retail -14-




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customers in each distribution channel and to
focus design and sales efforts towards the largest and fastest growing
retailers. We maintain a broad base of customers and concentrate our efforts
on five major jewelry market segments:  
    
    fine jewelers;
    
    national jewelry chains;
    
    department stores;
    
    TV shopping channels; and
    
    discount chain stores. In addition to direct sales to retailers, we also sell our products to
retailers through International Jewelry Connection. The principal focus of IJC
is on major U.S. department stores and jewelry retailers, who require
specialized levels of marketing, service and training. These sales
representatives are paid on a commission-only basis. Our sales promotion efforts include attendance by our representatives at
U.S. and international trade shows and conventions, including Las Vegas,
Orlando, New York, Basel, Switzerland, Hong Kong and Japan. In addition, we
advertise actively in trade journals and related industry publications. Design and Product Development We have seven internationally trained designers who work from our Hong
Kong executive office and ten designers who work in our Shenzhen facility. Our
designers create styles that have been accepted by our various clients
worldwide. Our design teams attend trade fairs worldwide to gather product
ideas and monitor the latest product trends. We provide our customers with a broad selection of high-quality 10, 14 and
18 karat gold, platinum and sterling silver jewelry products that incorporate
traditional yet fashionable styles and designs. We currently offer
approximately 5,000 different styles of rings, bracelets, necklaces, earrings,
pendants and matching sets that are contemporary and desired in the market. We study product trends that are emerging in the international market and
adapt these trends to the needs of our retail customers. The jewelry offered
for sale considers color, fabric and fashion trends, which are projected over a
two-year period. We market our products as lifestyle inspired. Production Process We make our jewelry at our facility in Shenzhen, China. Our production
processes combine vertical integration, modern technology, mechanization and
handcraftsmanship to turn out contemporary and fashionable jewelry. Our
production operations basically involve:  
    
    cutting and polishing semi-precious gemstones; -15-




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
    
    combining pure gold, platinum or sterling silver with
gemstones or diamonds to produce jewelry; and
    
    finishing operations such as cleaning and polishing,
resulting in high quality finished jewelry. Supply We produce and cut our own semi-precious stones. We purchase imported
gemstones which are from South America, Africa and China. South America is the
major source of ametrine, amethyst, aquamarine, imperial topaz, tourmaline and
white topaz, and Africa is the main source of tanzanite, mandarine garnet,
aquamarine and topaz. We also purchase imported aquamarine, peridot and topaz
from China. We source our diamonds mainly from suppliers in India. We believe
that we have good relationships with our suppliers, most of whom have supplied
us for many years. We maintain our supply of inventory at our warehouse. The amount of our
inventory of a particular gemstone determines the extent and size of our
marketing program for that product. We purchase our gemstones and diamonds in
advance and in anticipation of orders resulting from our marketing programs. We purchase our gold from banks, gold refiners and commodity dealers who
supply substantially all of our gold needs, which we believe is sufficient to
meet our requirements. Gold acquired for production is at least .995 fine and is combined with
other metals to produce 10, 14 and 18 karat gold. The term karat refers to
the gold content of alloyed gold, measured from a maximum of 24 karats, which
is 100% fine gold. Varying quantities of metals such as silver, copper, nickel
and zinc are combined with fine gold to produce 14 karat gold of different
colors. These alloys are in abundant supply and are readily available to us. We purchase our gold requirements within a reasonable period after each
significant purchase order is received. We believe that any change in the
price of gold would have had little, if any, impact on the valuation of our
inventories. We purchase supplies and raw materials from a variety of suppliers and we
do not believe the loss of any of the suppliers would have a material adverse
effect on our business. Alternative sources of supply for raw materials for
production of jewelry are readily available. Security -16-




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We have installed certain measures at our Shenzhen, China, production and
our Hong Kong administrative facilities to protect against loss, including
multiple alarm systems, infrared motion detectors and a system of closed
circuit television cameras, which provide surveillance of all critical areas of
our premises. We inspect carefully all materials sent and received from outside
suppliers, monitor the location and status of all inventory, and have strict
internal control procedures of all jewelry as it proceeds through the
production process. A complete physical inventory of gold and gemstones is
taken at our production and administrative facilities on a quarterly basis. Insurance We maintain primary all-risk insurance, with limits in excess of our
current inventory levels, to cover thefts and damage to inventory located on
our premises. We also maintain insurance covering thefts and damage to our
owned inventory located off-site. The amount of coverage available under such
policies is limited and may vary by location, but is generally in excess of the
value of the gold and gemstones supplied by us. We carry transit insurance,
the coverage of which includes the transportation of jewelry outside of our
office. Competition The jewelry production industry is highly competitive, and our competitors
include domestic and foreign jewelry manufacturers, wholesalers, and importers
who may operate on a national, regional and local scale. Our competitive
strategy is to provide competitively priced, high-quality products to the
high-volume retail jewelry market. According to our management, competition is
based on pricing, quality, service and established customer relationships. We
believe that we have positioned ourselves as a low-cost producer without
compromising our quality. Our ability to conceive, design and develop products
consistent with the requirements of each retail distribution channel represents
a competitive advantage. We believe that few competitors have the capacity and production skills to
be effective competitors. We believe that our vertically integrated production
capabilities distinguish us from most of our competitors and enable us to
produce very competitively priced, high quality and consistent products. In North America, the market, although highly fragmented, does contain a
number of major competitors, many of whom import much of their product from the
Far East and many of whom sell higher priced items. The key United States
competitors include:  
    
    E.E.A.C. Inc.;
    
    Fabrikant. International competitors include Pranda International and Beauty Gems
Limited. Most of these manufacturers/wholesalers have been successful vendors
for many years and enjoy good -17-




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##### Table of Contents



relations with their clients. Although it may be
difficult for a newcomer to break into established relationships, we have
already made substantial inroads in the North American jewelry market and we
believe we can remain competitive, based on our vertically integrated,
low-cost, high-volume and high-quality production process. Common Stock Purchase Agreement for Equity Line of Credit Facility Effective April 15, 2002, we had entered into a common stock purchase
agreement with Navigator Investments Holding IX Limited, a Nevis corporation,
for the future issuance and purchase of shares of our common stock. This
common stock purchase agreement established what is sometimes termed an equity
line of credit or an equity drawn down facility. On June 7, 2002, we filed a
registration statement (SEC File No. 333-90016) covering the shares issuable
under the equity line of credit. On July 23, 2003, Navigator and we mutually agreed to terminate the common
stock purchase agreement. The registration statement had not been declared
effective and no securities had been sold in connection with the offering
contemplated by the registration statement. Thereafter, in August 2003, we
formally withdrew the registration statement with the SEC. -18-




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##### Table of Contents



C. ORGANIZATIONAL STRUCTURE AS OF DECEMBER 31, 2003: The following diagram provides a listing of our significant subsidiaries.
The respective country of organization/incorporation is shown in brackets. LJ INTERNATIONAL INC.
(British Virgin Islands) 100%  -
    
    Lorenzo Jewelry Limited
(Hong Kong)-
    
    Lorenzo Gems Manufacturing (Shenzhen) Co., Ltd.
(P.R.C.)-
    
    Lorenzo Jewellery (Shenzhen) Co., Ltd.
(P.R.C.)-
    
    Shenzhen PGS Jewelry Mfg.
(P.R.C.) D. PROPERTY, PLANTS AND EQUIPMENT. Our principal executive offices are located at Units #9-#12, 12/F, Block
A, Focal Industrial Centre, 21 Man Lok Street, Hung Hom, Kowloon, Hong Kong.
We own approximately 4,800 square feet of office and showroom at this location. Our jewelry production facility in Shenzhen, China consists of 9,232
square meters of building space located in the Shatoujiao Free Trade Zone,
Shenzhen. We own approximately 5,254 square meters of this space. We also
currently lease 1,751 square meters for a term of five years expiring August
31, 2007 from an unaffiliated third party at a rental rate of $5,700 per month;
1,751 square meters for a term of two years expiring June 30, 2004, at a rental
rate of $3,600 per month; and 476 square meters for a term of one year expiring
December 31, 2004, at a rental rate of $862 per month. -19-




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We own two warehouse facilities in Hung Hom and Aberdeen consisting of
5,432 square feet and 2,897 square feet. We also own additional properties in
Sai Kung and Hung Hom. We lease all four of these properties to non-affiliated third parties. We have
pledged all of our land and buildings to collateralize general banking
facilities granted to us. Our production facilities are currently utilized for one shift per day but
are capable of being expanded to accommodate three shifts per day as necessary. -20-




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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS The following discussion and analysis should be read in conjunction with
our financial statements and notes to the financial statements appearing
elsewhere in this Form 20-F. See Special Note Regarding Forward-looking
Statements. All amounts referring to 2002 contained herein represent those of
year ended December 31, 2002 (which are unaudited). We exceeded both internal and external expectations in the fiscal year
ended 31 December 2003. Since consolidating all our operations under one roof
in our expanded, 9,232 square meters Shenzhen facility at the beginning of
2003, we have achieved double-digit growth in both revenue and profit and won
important new clients as well as receiving expanded orders from existing ones.
Sales revenue jumped from $46 million in 2002 to nearly $58 million in 2003, an
impressive climb of almost 26%, while our gross profit margin rose to 23% from
13%. We also made strategic inroads into a major, fast-growing new market 
China. Our continuing focused marketing drive clinched us yet another major
client, ShopNBC in 2003, so by now we are selling to all the three biggest US
shopping networks: QVC, Home Shopping Network and ShopNBC. Additionally, our US
clientele includes two thirds of the Top 40 jewelry chains as well as general
large retailers. In fact, we even opened our first US sales and marketing
office in August to augment the efforts of our team here in their accelerated
penetration of this market. We have also made significant headway in widening our reach in China. The
Chinese government has given us the green light to expand our presence in its
jewelry market and we are proceeding with plans to market our Lorenzo brand
of top-end jewelry through franchises and eMotion on-line sales kiosks
throughout the country. The opening of our 5,000 square-foot showroom in Hong
Kongs jewelry district in March 2004 forms part of our strategy to expand into
China. Meanwhile, our debut in Australia in January this year, when we won an
initial sales order from the countrys biggest home shopping channel, also
allows us not only to establish our footprint in Australia, but also to enhance
our presence in China as the network also broadcasts there. Besides our concerted marketing efforts, the on-going refinement and
diversification of our product lines has also contributed in no small way to
expanding our sales coffers, attracting new customers, winning large orders
from existing ones and our success at high-profile trade shows such as the JCK
Gem Show in Las Vegas in 2003. We continue to develop our highly successful and
profitable diamond line, introduced in 2002 and for which we installed a high
tech facility, fitted out with CAD/CAM model making equipment and a wide range
of wax set molding equipment. Our efforts in fashioning new, creative designs
with semi-precious gems remain relentless. In April 2003, we won the trademark
for our recently-discovered Brazilian plum-rose colored stone we have named the
Rosenite Garnet. While it may still be premature to talk about a definite global economic
recovery, we at -21-




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LJ International can say with reasonable confidence that things
are picking up in the jewelry sector and we expect to keep registering in the foreseeable years ahead the
kind of double-digit growth in both sales and net income that characterized our
company in its early years. We continue to benefit from the cost savings and
the administrative, sales and operational efficiencies resulting from the
corporate reengineering exercise we undertook in late 2001 and saw our selling,
general and administrative expenses in fiscal 2003 falling to $9 million, or
16% of our revenue, compared with nearly $9.6 million, or 21% of our revenue,
in 2002. At the same time, we are optimistic that our market expansion and
product diversification will continue in 2004 and into the years beyond. A. OPERATING RESULTS. Reclassifications Certain prior year amounts have been reclassified to conform to the current
year presentation. Revenues % changeEight-month period ended
    
    
    
    
    
    
    
    
    
    Years ended
    
    Eight-month
    
    Years endedYears ended April 30,
    
    December 31,
    
    Year ended December 31,
    
    April 30,
    
    period
    
    December 31,(in thousands)
    
    2001
    
    2002
    
    2001
    
    2002
    
    2002
    
    2003
    
    2001-2002
    
    2001-2002
    
    2002-2003Unaudited
    
    
    
    
    
    UnauditedRevenues
    
    $
    46,285
    
    
    $
    39,240
    
    
    $
    25,042
    
    
    $
    31,809
    
    
    $
    46,007
    
    
    $
    58,167
    
    
    
    -15
    %
    
    
    27
    %
    
    
    26
    %
 The increase in revenue for the year ended December 31, 2003, compared
with the year ended December 31, 2002,was primarily due to the acceptance of
new products, and the increase in orders from existing customers. The increase in revenue for the eight-month period ended December 31,
2002, compared with the same period in 2001,was due to our successful marketing
efforts in winning new, major blue chip customers, as well as the positive
reception of our new diamond line. The global economic fallout from the September 11 attacks in the US
accounted largely for the decrease in revenue for the year ended April 30,
2002, compared with the year ended April 30, 2001. Additionally, a significant
decline in orders from a major client also contributed to this decrease. -22-




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Cost of Sales and Gross Profit % changeEight-month period ended
    
    
    
    
    
    
    
    
    
    Years ended
    
    Eight-month
    
    Years endedYears ended April 30,
    
    December 31,
    
    Year ended December 31,
    
    April 30,
    
    period
    
    December 31,(in thousands)
    
    2001
    
    2002
    
    2001
    
    2002
    
    2002
    
    2003
    
    2001-2002
    
    2001-2002
    
    2002-2003Unaudited
    
    
    
    
    
    UnauditedCost of sales
    
    $
    31,540
    
    
    $
    30,021
    
    
    $
    18,602
    
    
    $
    22,820
    
    
    $
    34,241
    
    
    $
    44,947
    
    
    
    -5
    %
    
    
    23
    %
    
    
    31
    %% of revenues
    
    
    68
    %
    
    
    77
    %
    
    
    74
    %
    
    
    72
    %
    
    
    74
    %
    
    
    77
    %Cost of sales -
write down of
inventory
    
    $
    0
    
    
    $
    5,710
    
    
    $
    0
    
    
    $
    0
    
    
    $
    5,710
    
    
    $
    0
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    -100
    %% of revenues
    
    
    0
    %
    
    
    15
    %
    
    
    0
    %
    
    
    0
    %
    
    
    12
    %
    
    
    0
    %Gross profit
    
    $
    14,745
    
    
    $
    3,509
    
    
    $
    6,440
    
    
    $
    8,989
    
    
    $
    6,056
    
    
    $
    13,220
    
    
    
    -76
    %
    
    
    40
    %
    
    
    118
    %% of revenues
    
    
    32
    %
    
    
    9
    %
    
    
    26
    %
    
    
    28
    %
    
    
    13
    %
    
    
    23
    %
 The gross profit margin increased to 23% for the year ended December 31,
2003 from 13% for the year ended December 31, 2002. It was due to various
adjustments on inventory made for the year ended December 31, 2002 as shown
below.  
    
    $5,394,000 for the write-down of cut stones for orders in
relation to special programs that were later postponed or cancelled;
    
    $316,000 for the write-down of fine jewelry cost. Excluding the above special charge on inventory, the gross profit margin
was 25% for the year ended December 31, 2002. The gross profit margin increased to 28% for the eight-month periods ended
December 31, 2002 from 26% for the same period ended December 31, 2001. The gross profit margin dropped from 32% for the year ended April 30, 2001
to 9% for the year ended April 30, 2002. The decrease was due to various
adjustments on inventory as explained for the year 2002. Excluding the above
special charge on inventory, the gross profit margin was 24% for the year ended
April 30, 2002. Selling, General and Administrative Expenses -23-




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##### Table of Contents



% changeEight-month period ended
    
    
    
    
    
    
    
    
    
    Years ended
    
    Eight-month
    
    Years endedYears ended April 30,
    
    December 31,
    
    Year ended December 31,
    
    April 30,
    
    period
    
    December 31,(in thousands)
    
    2001
    
    2002
    
    2001
    
    2002
    
    2002
    
    2003
    
    2001-2002
    
    2001-2002
    
    2002-2003Unaudited
    
    
    
    
    
    UnauditedSelling, general
and administrative
expenses
    
    $
    9,398
    
    
    $
    8,963
    
    
    $
    5,905
    
    
    $
    6,433
    
    
    $
    9,525
    
    
    $
    9,133
    
    
    
    -5
    %
    
    
    9
    %
    
    
    -4
    %% of revenues
    
    
    20
    %
    
    
    23
    %
    
    
    24
    %
    
    
    20
    %
    
    
    21
    %
    
    
    16
    %
 Selling, general and administrative (SG&A) expenses decreased by 5% of
revenue for the year ended December 31, 2003, compared with the year ended
December 31, 2002. Between 2002 and 2003, our SG&A expenses fell as a direct
result of the corporate reengineering exercise we undertook right after the
9/11 terrorist attacks in the US. The measures we instituted led to substantial
cost savings and administrative, sales and operational efficiencies. Selling, general and administrative (SG&A) expenses increased by 3% of
revenue for the year ended April 30, 2002, compared with the year ended April
30, 2001. The increase was mainly attributable to the severance payment on
cost-cutting program. Unrealized loss (gain) on derivatives % changeEight-month period ended
    
    
    
    
    
    
    
    
    
    Years ended
    
    Eight-month
    
    Years endedYears ended April 30,
    
    December 31,
    
    Year ended December 31,
    
    April 30,
    
    period
    
    December 31,(in thousands)
    
    2001
    
    2002
    
    2001
    
    2002
    
    2002
    
    2003
    
    2001-2002
    
    2001-2002
    
    2002-2003Unaudited
    
    
    
    
    
    UnauditedUnrealised loss
(gain) on
derivatives
    
    $
    (44
    )
    
    $
    660
    
    
    $
    119
    
    
    $
    435
    
    
    $
    975
    
    
    $
    162
    
    
    
    -1600
    %
    
    
    266
    %
    
    
    -83
    %% of revenues
    
    
    0
    %
    
    
    2
    %
    
    
    0
    %
    
    
    1
    %
    
    
    2
    %
    
    
    0
    %
 We have secured gold loan facilities with various banks in Hong Kong,
which typically bear a below-market interest rate. Under the gold loan
arrangements, we may defer the purchase until such time as we decide
appropriate, the price to be paid being the current market price at time of
payment. The gold loan, however, does expose us to certain market risks
associated with potential future increases in the price of gold. In the past,
we did not hedge against such risks and at the close of each reporting period,
the gold loan was valued at fair value with changes reflected on the income
statement. However, the volatility of prices in the lead-up to the war in Iraq
prompted us to make unrealized loss on derivatives of $660,000 and $435,000 for
the year
ended -24-




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##### Table of Contents



April 30, 2002 and for the eight months ended December 31, 2002 to cover
possible losses resulting from price fluctuations. Since 2003, we have commenced hedging the fluctuations in the price of
gold related to the gold loans by entering into contracts with financial
institutions for the future purchase of gold. As a result, we have reduced the
unrealized loss to $162,000 for the year ended December 31, 2003, compared with
the unrealized loss of $975,000 for the year ended December 31, 2002 and have
realized gain of $249,000 before the hedging activities were in place. Depreciation % changeEight-month period ended
    
    
    
    
    
    
    
    
    
    Years ended
    
    Eight-month
    
    Years endedYears ended April 30,
    
    December 31,
    
    Year ended December 31,
    
    April 30,
    
    period
    
    December 31,(in thousands)
    
    2001
    
    2002
    
    2001
    
    2002
    
    2002
    
    2003
    
    2001-2002
    
    2001-2002
    
    2002-2003Unaudited
    
    
    
    
    
    UnauditedDepreciation
    
    $
    808
    
    
    $
    1,031
    
    
    $
    565
    
    
    $
    863
    
    
    $
    1,328
    
    
    $
    1,184
    
    
    
    28
    %
    
    
    53
    %
    
    
    -11
    %% of revenues
    
    
    2
    %
    
    
    3
    %
    
    
    2
    %
    
    
    3
    %
    
    
    3
    %
    
    
    2
    %
 Depreciation decreased 11% to $1,184,000 for the year ended December 31,
2003 from $1,328,000 for the year ended December 31, 2002, as depreciation of
$158,000 on leasehold improvements in production facilities was included in
April 2002 that we ceased to use before the expiry of their leases. The increase in depreciation costs primarily represents the impact of
on-going capital expenditures and assets acquired for the eight months ended
December 2002 and for the year ended April 30, 2002. It also incorporated a
provision of $158,000 for the depreciation on leasehold improvements to
production facilities we ceased to use before the expiry of their leases. Impairment on property, plant and equipment -25-




---



##### Table of Contents



% changeEight-month period ended
    
    
    
    
    
    
    
    
    
    Years ended
    
    Eight-month
    
    Years endedYears ended April 30,
    
    December 31,
    
    Year ended December 31,
    
    April 30,
    
    period
    
    December 31,(in thousands)
    
    2001
    
    2002
    
    2001
    
    2002
    
    2002
    
    2003
    
    2001-2002
    
    2001-2002
    
    2002-2003Unaudited
    
    
    
    
    
    UnauditedImpairment on
property,
plant and
equipment
    
    $
    0
    
    
    $
    345
    
    
    $
    0
    
    
    $
    108
    
    
    $
    417
    
    
    $
    84
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    -80
    %% of revenues
    
    
    0
    %
    
    
    1
    %
    
    
    0
    %
    
    
    0
    %
    
    
    1
    %
    
    
    0
    %
 The impairment loss represents the write-off of property, plant and
equipment as a result of the consolidation of production facilities. Amortization and impairment loss on goodwill % changeEight-month period ended
    
    
    
    
    
    
    
    
    
    Years ended
    
    Eight-month
    
    Years endedYears ended April 30,
    
    December 31,
    
    Year ended December 31,
    
    April 30,
    
    period
    
    December 31,(in thousands)
    
    2001
    
    2002
    
    2001
    
    2002
    
    2002
    
    2003
    
    2001-2002
    
    2001-2002
    
    2002-2003Unaudited
    
    
    
    
    
    UnauditedAmortization
and impairment
loss on
goodwill
    
    $
    27
    
    
    $
    242
    
    
    $
    18
    
    
    $
    400
    
    
    $
    624
    
    
    $
    200
    
    
    
    796
    %
    
    
    2122
    %
    
    
    -68
    %% of revenues
    
    
    0
    %
    
    
    1
    %
    
    
    0
    %
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
 Amortization of goodwill was related to the acquisition of a jewelry
company during the year ended April 30, 2000. In July 2001, Financial Accounting Standards Board issued SFAS No. 142,
Goodwill and Other Intangible Assets, which provides that goodwill and
intangible assets with indefinite
useful lives will not be amortized but rather will be tested at least annually
for impairment. As a result, we stopped amortizing but fully expensed the
balancing goodwill of $215,000 during the year ended April 30, 2002. Impairment loss of goodwill for the eight-month period ended December 31,
2002 and for the year ended December 31, 2003 was related to the goodwill
arising from the acquisition of the jewelry retail company in March 2002. -26-




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##### Table of Contents



Interest cost % changeEight-month period ended
    
    
    
    
    
    
    
    
    
    Years ended
    
    Eight-month
    
    Years endedYears ended April 30,
    
    December 31,
    
    Year ended December 31,
    
    April 30,
    
    period
    
    December 31,(in thousands)
    
    2001
    
    2002
    
    2001
    
    2002
    
    2002
    
    2003
    
    2001-2002
    
    2001-2002
    
    2002-2003Unaudited
    
    
    
    
    
    UnauditedInterest expenses
    
    $
    868
    
    
    $
    652
    
    
    $
    424
    
    
    $
    441
    
    
    $
    668
    
    
    $
    753
    
    
    
    -25
    %
    
    
    4
    %
    
    
    13
    %% of revenues
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %Interest
expenses arising
from beneficial
conversion
features of
convertible
debentures
    
    $
    874
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    
    -100
    %
    
    
    N/A
    
    
    
    N/A% of revenues
    
    
    2
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Amortization of
discount on
convertible
debentures
    
    $
    38
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    
    -100
    %
    
    
    N/A
    
    
    
    N/A% of revenues
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 Interest expenses Interest expenses increased for the year ended December 31, 2003 because
of a higher utilization rate of credit line facilities. The decrease in interest expenses for the eight months period ended
December 31, 2002 and for the year ended April 30, 2002 was due to consecutive
cuts of interest rates from early 2001 to early 2002. Beneficial Conversion Features of Convertible Debentures The embedded beneficial conversion feature associated with the issue of a
convertible debt security was recognized and measured by an amount equal to the
intrinsic value of that feature reflected as a discount from the convertible
debentures with a corresponding credit to additional paid-in capital. That
amount is calculated at the commitment date (i.e. issue date of the convertible
debentures in this case) as the difference between the conversion price and the
fair value of the common stock into which the security is convertible,
multiplied by the number of shares into which the security is convertible. The
intrinsic value of the beneficial conversion -27-




---



##### Table of Contents



feature is amortized to the statement of operations over the life of the
convertible debentures. The beneficial conversion feature charged to income
as interest expense amounted to $874,000 for the year ended April 30, 2001. Amortization of discount on convertible debentures In connection with the convertible debentures issued with detachable
warrants to debenture holders, the proceeds from the issuance was allocated
between the warrant and the convertible debenture based on their fair values at
time of issuance. The difference between the proceeds allocated to the
debentures and the face value of the debentures was recorded as discount or
premium. The discount or premium was amortized over the life of the
debentures. Impairment loss on investment % changeEight-month period ended
    
    
    
    
    
    
    
    
    
    Years ended
    
    Eight-month
    
    Years endedYears ended April 30,
    
    December 31,
    
    Year ended December 31,
    
    April 30,
    
    period
    
    December 31,(in thousands)
    
    2001
    
    2002
    
    2001
    
    2002
    
    2002
    
    2003
    
    2001-2002
    
    2001-2002
    
    2002-2003Unaudited
    
    
    
    
    
    UnauditedImpairment
loss on
investment
securities
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    200
    
    
    $
    200
    
    
    $
    0
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    -100
    %% of revenues
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    1
    %
    
    
    0
    %
    
    
    0
    %
 Impairment loss on investment was related to the acquisition in April 2001
for 20% equity interests in a company whose principal activities are the
manufacturing and trading of rough and pre-formed gemstones. Other Revenues -28-




---



##### Table of Contents



% changeEight-month period ended
    
    
    
    
    
    
    
    
    
    Years ended
    
    Eight-month
    
    Years endedYears ended April 30,
    
    December 31,
    
    Year ended December 31,
    
    April 30,
    
    period
    
    December 31,(in thousands)
    
    2001
    
    2002
    
    2001
    
    2002
    
    2002
    
    2003
    
    2001-2002
    
    2001-2002
    
    2002-2003Unaudited
    
    
    
    
    
    UnauditedInterest incomes
    
    $
    508
    
    
    $
    217
    
    
    $
    172
    
    
    $
    47
    
    
    $
    91
    
    
    $
    41
    
    
    
    -57
    %
    
    
    -73
    %
    
    
    -55
    %% of revenues
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Rental incomes
    
    $
    62
    
    
    $
    135
    
    
    $
    93
    
    
    $
    158
    
    
    $
    200
    
    
    $
    163
    
    
    
    118
    %
    
    
    70
    %
    
    
    -19
    %% of revenues
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Realized gain
on derivative
contracts
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    249
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A% of revenues
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 Interest income decreased to $41,000 for the year ended December 31, 2003,
compared with $91,000 for the year ended December 31, 2002. The decrease was
mainly due to the decrease in restricted cash as security deposit for banking
facilities. The decrease in interest income for the eight months ended December 31,
2002 and the year ended April 30, 2002, compared with the corresponding period
in 2001, was mainly due to consecutive cuts of interest rates from early 2001
to early 2002. Rental incomes for the year ended December 31, 2003 decreased by 19% to
$163,000, compared with the year ended December 31, 2002, as there was slight
price adjustment on renewal of tenancy agreement. The increase in rental income for the eight months ended December 31, 2002
and for the year ended April 30, 2002, compared with the corresponding periods
in 2001 were due to an additional investment property was rented out in 2002. For the year ended December 31, 2003, we have commenced hedging the
fluctuations in the price of gold related to the gold loans by entering into
contracts with a financial institution for the future purchase of gold. We have
realized gain of $249,000 before the hedging activities were in place. Income taxes -29-




---



##### Table of Contents



% changeEight-month period ended
    
    
    
    
    
    
    
    
    
    Years ended
    
    Eight-month
    
    Years endedYears ended April 30,
    
    December 31,
    
    Year ended December 31,
    
    April 30,
    
    period
    
    December 31,(in thousands)
    
    2001
    
    2002
    
    2001
    
    2002
    
    2002
    
    2003
    
    2001-2002
    
    2001-2002
    
    2002-2003Unaudited
    
    
    
    
    
    UnauditedIncomes taxes
expense
(credit)
    
    $
    211
    
    
    $
    (101
    )
    
    $
    39
    
    
    $
    101
    
    
    $
    (39
    )
    
    $
    352
    
    
    
    -148
    %
    
    
    159
    %
    
    
    -1003
    %% of revenues
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    1
    %
 We were incorporated in the British Virgin Islands and, under current law
of the British Virgin Islands, are not subject to tax on income or on capital
gains. For our subsidiaries in Hong Kong, the prevailing corporate income tax
rate is 17.5%. Our subsidiaries in China are registered to qualify as Foreign Investment
Enterprises in China and are eligible for certain tax holidays and concessions.
Accordingly, certain of our Chinese subsidiaries are exempt from Chinese
income tax for two years starting from their first profit-making year, followed
by a 50% reduction of tax for the next three years. One of our subsidiaries in China is currently enjoying the tax concessions
which will expire in fiscal 2005. Other subsidiaries in China either no longer
enjoy the tax holiday and concession or have not yet commenced its first
profit-making year. PRC income tax is calculated at the applicable rates
relevant to these subsidiaries which currently are 15%. During the years ended April 30, 2001, and 2002, and December 31, 2003,
there were tax overprovision of $27,000, $103,000 and $92,000 respectively,
after the finalization of tax assessment for the year. Inflation We do not consider inflation to have had a material impact on our results
of operations over the last three years. Foreign Exchange More than 99% of our sales are denominated in U.S. Dollars whereas the
other sales are basically denominated in Hong Kong Dollars. The largest
portion of our expenses are denominated in Hong Kong Dollars, followed by U.S.
Dollars and Renminbi. The exchange rate of the Hong Kong Dollar is currently pegged to the U.S. Dollar, but during the
past several years the market exchange rate has fluctuated within a narrow
range. The Chinese government principally sets the exchange rate between the
Renminbi and all other currencies. As a result, the exchange rates between the
Renminbi and the U.S. Dollar and the Hong Kong Dollar have fluctuated in the
past and may fluctuate in the future. If the value of the Renminbi or the Hong
Kong Dollar decreases relative to the U.S. Dollar, such fluctuation may have a
positive effect on the results of our operations. If the value of the Renminbi
or the Hong -30-




---



##### Table of Contents



Kong Dollar increases relative to the U.S. Dollar, such fluctuation may have a
negative effect on the results of our operations. We do not currently hedge
our foreign exchange positions. Governmental economic and political policies and factors For information regarding governmental economic, fiscal, monetary and
political policies that could materially affect our operations, directly or
indirectly, please refer to the Risk Factors section on
pages 6 to 10. B. LIQUIDITY AND CAPITAL RESOURCES. We have no direct business operations other than the ownership of our
subsidiaries and investment securities. Our ability to pay dividends and meet
other obligations depends upon our receipt of dividends or other payments from
our operating subsidiaries and investment securities. Cash Flows Eight-month period endedYears ended April 30,
    
    December 31,
    
    Years ended December 31,(in thousands)
    
    2001
    
    2002
    
    2001
    
    2002
    
    2002
    
    2003(Unaudited)
    
    
    
    
    
    (Unaudited)Net cash provided
by (used in)
operating
activities
    
    $
    3,707
    
    
    $
    (753
    )
    
    $
    (787
    )
    
    $
    3,374
    
    
    $
    4,276
    
    
    $
    1,489Net cash provided
by (used in)
investing
activities
    
    
    (6,058
    )
    
    
    (2,248
    )
    
    
    (384
    )
    
    
    (2,207
    )
    
    
    (4,941
    )
    
    
    (468
    )Net cash provided
by (used in)
financing
activities
    
    
    2,390
    
    
    
    2,017
    
    
    
    185
    
    
    
    (824
    )
    
    
    1,009
    
    
    
    704Effect of foreign
exchange rate
change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (68
    )
    
    
    (68
    )
    
    
    Net increase
(decrease) in cash
and cash
equivalents
    
    
    39
    
    
    
    (984
    )
    
    
    (986
    )
    
    
    275
    
    
    
    276
    
    
    
    1,725
 Operating Activities: The decrease in net cash provided by operating activities in the year
ended December 31, 2003 compared with the year ended December 31, 2002, and the
negative cash flow from
operating activities for the eight-month period ended December 31, 2001
reflected our accumulation of cut stones inventory in anticipation of
significant increase in sales for the new -31-




---



##### Table of Contents



fiscal year. The rise in the cost of rough gemstones, the build-up of more
sample lines of jewelry and the maintaining of sufficient inventory for
block-orders also accentuated the negative cash flow. The increase in cash flow in the eight-month period ended December 31,
2002 compared with the same period in 2001 resulted from growth in revenues and
improved working capital management. The negative cash flow from operating activities for the year ended April
30, 2002 was primarily due to decrease in sales and gross profit margin. Investing Activities: For the year ended December 31, 2003, net cash used in investing
activities was for the capital expenditures, mainly for new production
facilities in Shenzhen, and for other on-going business necessities, reduced by
the release of restricted cash deposits from the bank. In addition to on-going capital expenditures and restricted cash deposits,
we undertook various one-off investments that contributed to changes in our net
cash positions for the various reporting periods. The increase in cash used in
investing activities for the year ended December 31, 2002 and for the
eight-month period ended December 31, 2002, was due to new manufacturing
facilities in China, as well as an increase in restricted cash deposits for
securing banking facilities. For the year ended December 31, 2002 and the year ended April 30, 2002,
our investing activities included the further acquisition of 68.8% of a
subsidiary, iBBC Inc., which engages in marketing jewelry from its display
cases in retail shops. In September 2003, we redeemed all shares of 6,800,000
of common stock held by a former employee at $125. As a result, we now hold
94.6% of the subsidiary. For the year ended April 30, 2001, our negative cash flow from investing
activities reflected the acquisition of investment securities for $3,284,000.
These investment securities included the acquisition of 20% equity interests in
a company whose principal activities are the manufacturing and trading of rough
and pre-formed gemstones, and an acquisition of 16.8% equity interests in a
jewelry retail company for our further expansion through vertical integration
and the development of distribution channels in the United States. We had no
significant control and influence over both companies operating and financial
policies. Our capital expenditure by category for the periods presented were: -32-




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##### Table of Contents



Eight-month period endedYears ended April 30,
    
    December 31,
    
    Years ended December 31,(in thousands)
    
    2001
    
    2002
    
    2001
    
    2002
    
    2002
    
    2003(Unaudited)
    
    
    
    
    
    (Unaudited)Land & buildings
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    721
    
    
    $
    721
    
    
    $
    330Leasehold improvement
    
    $
    343
    
    
    $
    215
    
    
    $
    95
    
    
    $
    159
    
    
    $
    279
    
    
    $
    189Furniture, fixtures and equipment
    
    $
    300
    
    
    $
    181
    
    
    $
    239
    
    
    $
    382
    
    
    $
    324
    
    
    $
    250Plant and machinery
    
    $
    178
    
    
    $
    24
    
    
    $
    21
    
    
    $
    282
    
    
    $
    285
    
    
    $
    93Motor vehicles
    
    $
    16
    
    
    $
    
    
    
    $
    
    
    
    $
    12
    
    
    $
    12
    
    
    $
    133Total
    
    $
    837
    
    
    $
    420
    
    
    $
    355
    
    
    $
    1,556
    
    
    $
    1,621
    
    
    $
    995
 Financing Activities: Net cash provided by financing activities for the year ended December 31,
2003 was $704,000. It was represented by the proceeds from issuance of shares
upon exercise of stock options of $2,245,000 and sales of treasury stock of
$541,000, raise of new bank loans, reduced by repayment of matured bank loans,
and decrease in utilization of bank overdraft facilities. The negative net cash from financing activities for the eight-month period
ended December 31, 2002, compared with the same period in 2001, reflected the
repayment of gold loan of $2,474,000 and the repurchase of common stock of the
Company at an aggregate consideration of $391,000. The positive net cash
provided by financing activities in each of the other periods mainly reflected
our gold loan arrangement and the utilization of overdraft facilities. Our cash and cash equivalents are mainly held in U.S. dollars and HK
dollars. Financing Sources Banking Facilities and Notes Payables We have various letters of credit, factoring facilities and overdrafts
under banking facilities. The banking facilities are collateralized by land and
buildings, investment properties, restricted cash deposits, factored
receivables and personal guarantees of and properties owned by one of our
directors. Letters of Credit, overdrafts and others: -33-




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##### Table of Contents



As of April 30,
    
    As of December 31,
    
    As of December 31,(in thousands)
    
    2001
    
    2002
    
    2001
    
    2002
    
    2002
    
    2003(Unaudited)Facilities grantedLetters of credit and others
    
    $
    13,001
    
    
    $
    17,748
    
    
    $
    14,424
    
    
    $
    12,985
    
    
    $
    12,985
    
    
    $
    19,005Overdrafts
    
    $
    6,274
    
    
    $
    3,532
    
    
    $
    3,532
    
    
    $
    3,244
    
    
    $
    3,244
    
    
    $
    3,39719,275
    
    
    
    21,280
    
    
    
    17,956
    
    
    
    16,229
    
    
    
    16,229
    
    
    
    22,402UtilizedLetters of credit and others utilized
    
    $
    4,139
    
    
    $
    6,208
    
    
    $
    8,197
    
    
    $
    8,559
    
    
    $
    8,559
    
    
    $
    13,619Overdrafts utilized
    
    $
    3,262
    
    
    $
    2,607
    
    
    $
    2,313
    
    
    $
    3,107
    
    
    $
    3,107
    
    
    $
    1,3127,401
    
    
    
    8,815
    
    
    
    10,510
    
    
    
    11,666
    
    
    
    11,666
    
    
    
    14,931
 The letters of credit and bank overdrafts are denominated in H.K. dollars
and U.S. dollars, bear interest at the floating commercial bank lending rates
in Hong Kong, and are renewable annually with the consent of the relevant
banks. The factoring facilities granted are limited to the extent of accounts
receivable collateralized to the banks. Notes payable: As of April 30,
    
    As of December 31,
    
    As of December 31,(in thousands)
    
    2001
    
    2002
    
    2001
    
    2002
    
    2002
    
    2003(Unaudited)Notes payable
    
    $
    773
    
    
    $
    282
    
    
    $
    447
    
    
    $
    1,073
    
    
    $
    1,073
    
    
    $
    1,516
 We have term loans classified under notes payable which are related to the
Groups properties. These loans are denominated in H.K. dollars and Renminbi,
bear interest at pre-fixed rates in Hong Kong and China upon renewal. Gold Loan Facilities: -34-




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##### Table of Contents



As of April 30,
    
    As of December 31,
    
    As of December 31,(in thousands)
    
    2001
    
    2002
    
    2001
    
    2002
    
    2002
    
    2003(Unaudited)Gold loans outstanding (in $)
    
    $
    2,151
    
    
    $
    5,341
    
    
    $
    3,627
    
    
    $
    3,700
    
    
    $
    3,700
    
    
    $
    3,118Gold loans outstanding (in
troy ounces)
    
    
    6,950
    
    
    
    18,450
    
    
    
    12,450
    
    
    
    12,950
    
    
    
    12,950
    
    
    
    10,900Gold loan interest rate
    
    
    2%-2.9
    %
    
    
    1.7%-3.4
    %
    
    
    1.65%-4.1
    %
    
    
    1.5%-2.4
    %
    
    
    1.5%-2.4
    %
    
    
    1.6%-2.4
    %
 We have also secured gold loan facilities with various banks in Hong
Kong, which bear a below-market interest rate. Due to lower interest rates
charged for gold loans, our cost through our gold loan program has been
substantially less than the costs that would have been incurred if we were to
finance the purchase of all of our gold requirements with borrowings under our
letter of credit facility or other credit arrangements. The gold loan,
however, does expose us to certain market risks associated with potential
future increases in the price of gold, so in 2003, we have put in place
mechanisms to hedge against such risks. Under the gold loan arrangements, we
may defer the purchase until such time as we deem appropriate, the price to be
paid being the current market price at time of payment. At the close of each
reporting period, the gold loan is valued at fair value with changes reflected
on the income statement. Convertible Debentures: On October 29, 1999, we entered into a Securities Purchase Agreement with
an accredited investor pursuant to which we agreed to issue, and the investor
agreed to purchase, up to $10,500,000 of 3% convertible debentures, as well as
common stock purchase warrants. During the fiscal year ended April 30, 2000,
we received gross proceeds of $6,500,000 from the issue of the 3% convertible
debentures to that investor. $3,500,000 of the gross proceeds and related
interest expenses have been converted into 1,072,412 shares of our common stock
as of April 30, 2000. The remaining $3,000,000 and accrued interest was
subsequently converted into 1,233,557 shares of our common stock during the
fiscal year ended April 30, 2001. The proceeds of convertible debentures was
used to provide restricted cash of $906,000 and $1,940,000 as collateral for
general banking facilities in fiscal 2000 and 2001, and partly used to finance
the purchases of investment securities in 2001. Looking Forward: We anticipate that cash flow from operations, borrowings available under
our existing credit line and our gold loan arrangement will be sufficient to
satisfy our capital needs for the next twelve months. -35-




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Impact of recently issued US GAAP accounting standards.  In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS No. 149 amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. The new guidance amends SFAS No. 133 for
decisions made as part of the Derivatives Implementation Group (DIG)
process that effectively required amendments to SFAS No. 133, and
decisions made in connection with other FASB projects dealing with
financial instruments and in connection with implementation issues raised
in relation to the application of the definition of a derivative and
characteristics of a derivative that contains financing components. In
addition, it clarifies when a derivative contains a financing component
that warrants special reporting in the statement of cash flow. SFAS No.
149 is effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. The
Company believes that SFAS 149 will not have significant impact on the
Companys financial statements.In May 2003, the FASB issued FASB No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. This Statement is effective for financial instruments entered
into or modified after May 31, 2003. This Statement provides guidance
for determining the classification of and accounting for certain
financial instruments that embody obligations of the issuing entity. The
Company considered that adoption of SFAS No. 150 does not have
significant impact on its financial statements. C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC. During each of the last three fiscal years, we did not spend any
significant amounts on company-sponsored research and development activities. -36-




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D. TREND INFORMATION. The total production for fiscal year ended December 31, 2004 is estimated
to be at least 15% greater than the level for fiscal year 2003. The sales for
fiscal year 2004 is estimated at approximately US$68 million, compared to US$58
million for the fiscal year ended December 31, 2003. The gross profit margin
for fiscal year 2004 is estimated to stay at the same 23% level as fiscal year
2003. E. OFF-BALANCE SHEET ARRANGEMENTS. We do not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors. F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS. As of the December 31, 2003, we had the following known contractual
obligations: Payments due by periodTotal
    
    Less than 1 year
    
    1-3 years
    
    3-5 years
    
    More than 5 yearsUS$
    
    US$
    
    US$
    
    US$
    
    US$Long-Term Debt Obligations
    
    
    0Capital (Finance) Lease Obligations
    
    
    95
    
    
    
    18
    
    
    
    38
    
    
    
    39
    
    
    
    0Operating Lease Obligations
    
    
    808
    
    
    
    310
    
    
    
    283
    
    
    
    215
    
    
    
    0Purchase Obligations
    
    
    0Other Long-Term Liabilities Reflected on the Companys
    
    
    0Balance Sheet under the GAAP of the primary financial statements
    
    
    0Total
    
    
    903
    
    
    
    328
    
    
    
    321
    
    
    
    254
    
    
    
    0
 We had entered into finance lease agreements for the purchase of motor
vehicles in 2003. The financed amount was $95,000, bearing interest at 5%-6%
per annum, and repayable in 60 monthly installments beginning in 2003. A
minimum finance charge may be charged if we pay off all the balance early. -37-




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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. DIRECTORS AND SENIOR MANAGEMENT. Our senior management and directors are as follows: Name
    
    Age
    
    PositionYu Chuan Yih
    
    
    64
    
    
    Chairman of the Board of Directors, President and
Chief Executive OfficerKa Man Au
    
    
    39
    
    
    Chief Operating Officer, Secretary and DirectorHon Tak Ringo Ng
    
    
    44
    
    
    Chief Financial Officer and DirectorPo Yee Elsa Yue
    
    
    39
    
    
    Non-Executive DirectorLionel C. Wang
    
    
    48
    
    
    Non-Executive Director
 None of our directors and officers was selected due to any agreement or
understanding with any other person. There is no family relationship between
any of our directors or executive officers and any other director or executive
officer. Mr. Yihestablished the business of Lorenzo Jewelry Ltd. and has served as
president and managing director since 1987. Mr. Yih is primarily responsible
for business development and overall company management. He has over 20 years
of experience in semi-precious stone production and marketing. Mr. Yih had
been a gemstone trader in Brazil and has extensive experience and relationships
in gem sourcing and jewelry design. Mr. Yih is also the Founding Sponsor of
the Hong Kong branch of the Gemological Institute of America (GIA), the
nonprofit educational organization for the jewelry industry. Ms. Auhas served as a director of Lorenzo Jewelry Ltd. since its
incorporation in 1987. Ms. Au has been our chief operating officer since
January 1, 2002 and is primarily responsible for our general administration,
human resources, operations and management. Mr. Nghas served as our chief financial officer since September 1997 and
as one of our directors since May 1, 2001. He received his Bachelor of Science
degree in civil engineering from the University of London in 1984 and his
Master of Commerce in accounting and commercial administration from the
University of New South Wales in 1994. From July 1994 through September 1997,
he was an audit senior with Moores Rowland C.A., Certified Public Accountants.
Mr. Ng is a certified practising accountant of the Australian Society of CPAs. Ms. Yuehas served as a non-executive director since December 1999. She
is a graduate gemologist from the Gemological Institute of America and served
as vice president of GIA, Hong Kong, from August 1994 to December 2002. Her
responsibilities included managing the Hong Kong office and administering their
education programs, marketing and related activities. Since December 2002, Ms.
Yue has served as a manager for a colored gems import and export trading
company. -38-




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Mr. Wanghas served as a non-executive director since June 1998. He
received his Bachelor of Commerce from Tamkung University, Taipei, Taiwan in
1978, his Master of Business Administration from California State Polytechnic University in 1980,
and his Master of Science from Stanford University in 1981. From 1984 to 1990,
Mr. Wang was a marketing research analyst and senior strategic planning analyst
for The Gillette Company, Boston, Massachusetts. From 1990 to 1995, he served
as associate director and then director of product development for Information
Resources, Inc., Waltham, Massachusetts. From 1995 to 1996, Mr. Wang was
vice-president at Nielsen North America, with responsibility for analytical and
modeling projects on the Kraft Foods/White Plains account. From 1996 until
June 2000, Mr. Wang served as director of analytical services for The NPD
Group, Inc., Port Washington, New York. From June 2000 until June 2001, he was
vice president of product development for NFO Interactive, Greenwich,
Connecticut. Since June 2001, Mr. Wang has been president of his own firm,
Marketing and Innovation, LLC., Greenwich, Connecticut. B. COMPENSATION. The aggregate compensation paid by us to all of our directors and
executive officers as a group for the fiscal year ended December 31, 2003 on an
accrual basis, for services in all capacities, was $714,000. During the fiscal
year ended December 31, 2003, we contributed an aggregate amount of $22,000
toward the pension plans of our directors and executive officers. Executive Service Contract We entered into an employment agreement with Mr. Yu Chuan Yih, effective
October 1, 2003, for a period of three years at an annual salary of $233,000.
Mr. Yihs remuneration package includes benefits with respect to an automobile.
In addition, Mr. Yih is entitled to an annual management bonus of a sum to be
determined by the board at its absolute discretion, having regard for our
operating results and the performance of Mr. Yih during the relevant financial
year. The amount payable to Mr. Yih will be decided by majority decision of
the members of the board present in the meeting called for that purpose. Mr.
Yih shall abstain from voting and not be counted in the quorum in respect of
the resolution regarding the amount payable to him. On July 1, 2003, we granted Mr. Yih options exercisable to acquire 800,000
shares of common stock at $2.00 per share at any time through June 30, 2013. -39-




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C. BOARD PRACTICES. Each of our five current directors was elected at our last annual meeting
of shareholders held December 5, 2003 to serve a one-year term or until their
successor is elected and qualified. There are no directors service contracts with us or any of our
subsidiaries providing for benefits upon termination of employment. Our board of directors has established an audit committee, which consists
of Messrs. Yih and Wang and Ms. Yue. Its functions are to:  
    
    recommend annually to the board of directors the appointment
of our independent public accountants;
    
    discuss and review the scope and the fees of the prospective
annual audit and review the results thereof with the independent
public accountants;
    
    review and approve non-audit services of the independent public accountants;
    
    review compliance with our existing accounting and financial policies;
    
    review the adequacy of our financial organization; and
    
    review our managements procedures and policies relative to
the adequacy of our internal accounting controls and compliance with
federal and state laws relating to financial reporting. We do not have a remuneration committee of the board of directors. D. EMPLOYEES. As of December 31, 2003, we employed approximately 2,000 persons on a
full-time basis for our production of jewelry and gemstone cutting and
polishing. Approximately 100 of these people include our management and
executive staff in Hong Kong and China. None of our employees is represented
by a labor union and we believe that our employee relations are good. E. SHARE OWNERSHIP. The following table sets forth certain information regarding the
beneficial ownership of our shares of common stock as of December 31, 2003 by:  
    
    each person who is known by us to own beneficially more than 5% of our outstanding
common stock;
    
    each of our current executive officers and directors; and
    
    all executive officers and directors as a group. As of December 31, 2003, we had 9,890,006 shares of our common stock issued and
outstanding. -40-




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This information gives effect to securities deemed outstanding pursuant to
Rule 13d-3(d)(l) under the Securities Exchange Act of 1934, as amended. The address for each person named below is c/o LJ International Inc., Unit
#12, 12/F, Block A, Focal Industrial Centre, 21 Man Lok Street, Hung Hom,
Kowloon, Hong Kong. Name of Beneficial Holder
    
    Number
    
    PercentShares Beneficially OwnedYu Chuan Yih
    
    
    4,457,853
    (1)(2)
    
    
    38.1
    %Ka Man Au
    
    
    120,000
    (3)
    
    
    1.2
    %Hon Tak Ringo Ng
    
    
    115,000
    (4)
    
    
    1.2
    %Po Yee Elsa Yue
    
    
    0
    
    
    
    0.0
    %Lionel C. Wang
    
    
    0
    
    
    
    0.0
    %All directors and executive officers as a group (5 persons)
    
    
    4,692,853
    
    
    
    39.6
    %
  (1)
    
    Of Mr. Yihs 2,524,553 shares, 1,500,000 shares are owned of record by
Pacific Growth Developments Ltd., a British Virgin Islands corporation,
which is owned by Mr. Yih (60%), his wife Tammy Yih (20%) and an adult
daughter, Bianca Tzu Hsiu Yih (20%).(2)
    
    Includes options currently exercisable by Mr. Yih to acquire 775,000
shares of common stock at $2.00 per share at any time until April 30, 2008
and 800,000 shares of common stock at $2.00 per share at any time until
June 30, 2013, and options currently exercisable to acquire 230,000 shares
of common stock held by Mr. Yihs wife at $2.00 per share at any time
until April 30, 2008.(3)
    
    Includes options currently exercisable to acquire 70,000 shares of common
stock at $2.00 per share at any time until April 30, 2008.(4)
    
    Includes options currently exercisable to acquire 75,000 shares of common
stock at $2.00 per share at any time until April 30, 2008. The 1998 Stock Compensation Plan Effective June 1, 1998, we adopted and approved the 1998 Stock
Compensation Plan. The purpose of the plan is to:  
    
    encourage ownership of our common stock by our officers,
directors, employees and advisors; -41-




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
    
    provide additional incentive for them to promote our success
and our business; and
    
    encourage them to remain in our employ by providing them with
an opportunity to benefit from any appreciation of our common stock
through the issuance of stock options. Options constitute either incentive stock options within the meaning of
Section 422 of the United States Internal Revenue Code of 1986, as amended, or
options which constitute nonqualified options at the time of issuance of such
options. The plan provides that incentive stock options and/or nonqualified
stock options may be granted to our officers, directors, employees and advisors
selected by the compensation committee. A total of 4,000,000 shares of common
stock are authorized and reserved for issuance during the term of the plan,
which expires in June 2008. The compensation committee has the sole authority
to interpret the plan and make all determinations necessary or advisable for
administering the plan. The exercise price for any incentive option must be at
least equal to the fair market value of the shares as of the date of grant.
Upon the exercise of the option, the exercise price must be paid in full either
in cash, shares of our stock or a combination. If any option is not exercised
for any reason, such shares shall again become available for the purposes of
the plan. On October 17, 2000, the Company offered each option holder the
opportunity to cancel all or some of the stock options previously granted in
exchange for the granting on April 30, 2001 of options to acquire an equal
number of shares with an exercise price equal to the then last sale price of
the stock on April 30, 2001, for a new term of seven years expiring April 30,
2008. As of December 31, 2003, 1,122,500 options had been exercised and the
following options to purchase shares of our common stock under the plan
remained outstanding:  
    
    stock options to purchase 1,814,000 and 872,000 shares at
$2.00 per share through April 30, 2008 and June 30, 2013
respectively, of which 1,950,000 are held by our directors and
officers as a group. The 2003 Stock Compensation Plan Effective July 1, 2003, we adopted and approved the 2003 Stock
Compensation Plan, which our shareholders approved on December 5, 2003. The
purpose of the plan is to:  
    
    encourage ownership of our common stock by our officers,
directors, employees and advisors;
    
    provide additional incentive for them to promote our success
and our business; and
    
    encourage them to remain in our employ by providing them with
an opportunity to benefit from any appreciation of our common stock
through the issuance of stock options. Options constitute either incentive stock options within the meaning of
Section 422 of the United States Internal Revenue Code of 1986, as amended, or
options which constitute -42-




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nonqualified options at the time of issuance of such
options. The plan provides that incentive
stock options and/or nonqualified stock options may be granted to our officers,
directors, employees and advisors selected by the compensation committee. A
total of 4,000,000 shares of common stock are authorized and reserved for
issuance during the term of the plan, which expires in June 2013. The
compensation committee has the sole authority to interpret the plan and make
all determinations necessary or advisable for administering the plan. The
exercise price for any incentive option or nonqualified option may be less than
the fair market value of the shares as of the date of grant. Upon the exercise
of the option, the exercise price must be paid in full either in cash, shares
of our stock or a combination. If any option is not exercised for any reason,
such shares shall again become available for the purposes of the plan. As of December 31, 2003, no options had been exercised and the following
options to purchase shares of our common stock under the plan remained
outstanding:  
    
    stock options to purchase 1,128,000 shares at $2.00 per share
through June 30, 2013, of which 316,000 are held by our directors
and officers as a group. Other Options and Warrants Outstanding As of December 31, 2003, the following additional options and warrants to
purchase shares of our common stock were outstanding:  
    
    1,679,000 common stock purchase warrants which are publicly
traded and which we issued in our April 1998 initial public offering
to purchase 1,679,000 shares of common stock at $5.75 per share
through April 15, 2005 (as amended)
    
    146,000 stock purchase options to purchase 146,000 shares of
common stock at $8.25 per share through April 15, 2005 (as amended),
which we sold to the IPO underwriter and/or persons related to the
underwriter
    
    options to purchase 35,000 shares at $5.00 per share through
July 30, 2004, which we granted to a former financial consultant on
July 31, 1999, for services rendered in connection with public
relations
    
    warrants to purchase 75,000 shares at $3.75 per share through
November 30, 2004, and warrants to purchase 87,500 shares at $6.9375
per share through March 31, 2005, which we granted to two investors
and a placement agent in connection with two tranches of our 3%
Convertible Debentures on November 5, 1999, and March 22, 2000
    
    warrants to purchase shares which we granted to a former
financial consultant on June 1, 2001, for services rendered in
connection with corporate development as follows:  
    
    80,000 shares at $3.43 per share exercisable through May 31, 2004; and
    
    80,000 shares at $4.57 per share exercisable through May 31, 2005.  
    
    warrants to purchase 200,000 shares at $3.00 per share
through August 15, 2006, which we granted to The Bauer Partnership,
Inc. on August 16, 2001, in connection with a proposed debt
placement which was never completed -43-




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
    
    warrants to purchase 600,000 shares at $2.00 per share
through March 31, 2004, which we granted to an investor relations
consultant pursuant to a strategic advisory services agreement dated
July 1, 2003 
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. MAJOR SHAREHOLDERS. Please see Item 6.E. for share ownership information regarding our major
shareholders. Our major shareholders do not have different voting rights. As of December 31, 2003, we had 296 record holders of our common stock. Of
the 9,890,006 shares outstanding as of December 31, 2003, 7,097,460 shares were
held by CEDE & Co. To the extent known to us, we are not directly or indirectly owned or
controlled by another corporation, by any foreign government or by any other
natural or legal persons severally or jointly. To our knowledge, there are no arrangements the operation of which may at
a subsequent date result in a change in control of our company. B. RELATED PARTY TRANSACTIONS. Yu Chuan Yih, our chairman and president, is a director and principal
shareholder of Gemological Institute of America, Hong Kong Limited. Mr. Yih is
also a director of iBBC Inc. which has a subsidiary, Gemriver Jewelry Limited.
During the fiscal years ended April 30, 2002 and December 31, 2002 and 2003,
Mr. Yih and these affiliated companies received unsecured advances from, and
made unsecured advances to, us, which were interest free and repayable on
demand. There was no outstanding amount due to Mr. Yih as of April 30, 2002
and December 31, 2002 and 2003. Certain of our banking facilities are collateralized by properties owned
by Yih Yu Chuan and his personal guarantee to the extent of $8,440,000,
$8,311,000 and $9,147,000 as of April 30, 2002 and December 31, 2002 and 2003.
Mr. Yih has not received any additional compensation or consideration from us
in return for his personal guarantees. During the fiscal year ended April 30, 1999, we provided a guarantee to a
bank in respect of mortgage loans granted to Yu Chuan Yih to the extent of
$632,000. As of December 31, 2003, the guarantee amount was $370,000. -44-




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During the fiscal year ended April 30, 2000, we received management fee
income of $36,000 from Gemological Institute of America, Hong Kong Limited,
which were determined by the directors for the services provided. During the fiscal year ended April 30, 2001, we sold finished goods of
$158,000 to Gemriver Jewelry Limited, which were made according to the
published prices and conditions offered to our major customers. We also
received from Gemriver Jewelry Limited for rental and management fee income of
$21,000 and $32,000 respectively. In addition, we received management fee
income of $27,000 from Gemological Institute of America, Hong Kong Limited,
which were determined by the directors for the services provided. During the fiscal year ended April 30, 2002, we further acquired 68.8%
equity interest of iBBC Inc. from entities controlled by a director for a
consideration for $2,460,000. C. INTERESTS OF EXPERTS AND COUNSEL. Not applicable. 
 ITEM 8. FINANCIAL INFORMATION A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION. The Consolidated Financial Statements are filed in this Annual Report as
Item 18. Export sales constitute significantly all of our total sales volume. There are no legal or arbitration proceedings, including those relating to
bankruptcy, receivership or similar procedures and those involving any third
party, which may have, or have had in the recent past, significant effects on
our financial position or profitability. We are not aware of any governmental
proceedings pending or known to be contemplated. We have no direct business operations, other than the ownership of our
subsidiaries. While we have no current intention of paying dividends, should
we, as a holding company, decide in the future to do so, our ability to pay
dividends and meet other obligations depends upon the receipt of dividends or
other payments from our operating subsidiaries and other holdings and
investments. In addition, our operating subsidiaries are subject to
restrictions on their ability to make distributions to us, including as a
result of restrictive covenants and minimum net worth requirements in loan
agreements, restrictions on the conversion of local currency into U.S. dollars
or other hard currency and other regulatory restrictions. -45-




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B. SIGNIFICANT CHANGES. We believe that no significant changes have occurred since the date of the
annual financial statements included in this annual report. 
 ITEM 9. THE OFFER AND LISTING A. OFFER AND LISTING DETAILS. Our common stock is listed and quoted for trading on The Nasdaq National
Market under the symbol JADE. The following table sets forth, during the
periods indicated, the high and low last sale prices for the common stock as
reported by Nasdaq: Period
    
    High
    
    LowYear ended April 30, 1999
    
    $
    9.81
    
    
    $
    4.00Year ended April 30, 2000
    
    $
    6.69
    
    
    $
    3.00Year ended April 30, 2001
    
    $
    3.88
    
    
    $
    1.63Year ended April 30, 2002
    
    $
    2.79
    
    
    $
    1.18Year ended December 31, 2002
    
    $
    1.56
    
    
    $
    1.11Year ended December 31, 2003
    
    $
    5.00
    
    
    $
    1.14Quarter ended July 31, 2001
    
    $
    2.79
    
    
    $
    2.00Quarter ended October 31, 2001
    
    $
    2.11
    
    
    $
    1.48Quarter ended January 31, 2002
    
    $
    1.56
    
    
    $
    1.22Quarter ended April 30, 2002
    
    $
    1.74
    
    
    $
    1.18Quarter ended July 31, 2002
    
    $
    1.56
    
    
    $
    1.11Quarter ended October 31, 2002
    
    $
    1.37
    
    
    $
    1.12Quarter ended December 31, 2002
    
    $
    1.33
    
    
    $
    1.15Quarter ended March 31, 2003
    
    $
    1.30
    
    
    $
    1.14Quarter ended June 30, 2003
    
    $
    1.85
    
    
    $
    1.17Quarter ended September 30, 2003
    
    $
    5.00
    
    
    $
    1.85Quarter ended December 31, 2003
    
    $
    4.89
    
    
    $
    3.44Month ended September 30, 2003
    
    $
    4.34
    
    
    $
    3.37
 -46-




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Period
    
    High
    
    LowMonth ended October 31, 2003
    
    $
    4.89
    
    
    $
    3.93Month ended November 30, 2003
    
    $
    4.43
    
    
    $
    3.90Month ended December 31, 2003
    
    $
    4.08
    
    
    $
    3.44Month ended January 31, 2004
    
    $
    5.74
    
    
    $
    3.75Month ended February 29, 2004
    
    $
    5.56
    
    
    $
    4.20
 Our warrants are listed and quoted for trading on The Nasdaq National
Market under the symbol JADEW. The following table sets forth, during the
periods indicated, the high and low last sale prices for the warrants as
reported by Nasdaq: Period
    
    High
    
    LowYear ended April 30, 1999
    
    $
    5.38
    
    
    $
    0.63Year ended April 30, 2000
    
    $
    3.25
    
    
    $
    1.00Year ended April 30, 2001
    
    $
    1.38
    
    
    $
    0.22Year ended April 30, 2002
    
    $
    0.55
    
    
    $
    0.02Year ended December 31, 2002
    
    $
    0.15
    
    
    $
    0.01Year ended December 31, 2003
    
    $
    1.13
    
    
    $
    0.02Quarter ended July 31, 2001
    
    $
    0.55
    
    
    $
    0.30Quarter ended October 31, 2001
    
    $
    0.44
    
    
    $
    0.06Quarter ended January 31, 2002
    
    $
    0.22
    
    
    $
    0.02Quarter ended April 30, 2002
    
    $
    0.20
    
    
    $
    0.06Quarter ended July 31, 2002
    
    $
    0.13
    
    
    $
    0.04Quarter ended October 31, 2002
    
    $
    0.10
    
    
    $
    0.01Quarter ended December 31, 2002
    
    $
    0.15
    
    
    $
    0.03Quarter ended March 31, 2003
    
    $
    0.12
    
    
    $
    0.04Quarter ended June 30, 2003
    
    $
    0.12
    
    
    $
    0.02Quarter ended September 30, 2003
    
    $
    1.13
    
    
    $
    0.12Quarter ended December 31, 2003
    
    $
    1.08
    
    
    $
    0.54Month ended September 30, 2003
    
    $
    0.94
    
    
    $
    0.56Month ended October 31, 2003
    
    $
    1.08
    
    
    $
    0.70Month ended November 30, 2003
    
    $
    0.91
    
    
    $
    0.68Month ended December 31, 2003
    
    $
    0.75
    
    
    $
    0.54Month ended January 31, 2004
    
    $
    1.30
    
    
    $
    0.75Month ended February 29, 2004
    
    $
    1.15
    
    
    $
    0.75
 -47-




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We do not believe that there is any principal non-United States trading
market for our common stock or our warrants. We believe that Cede & Co. holds
a substantial majority of the outstanding common stock and warrants as record
holder. B. PLAN OF DISTRIBUTION. Not applicable. C. MARKETS. Our common stock and our warrants have been listed and quoted for trading
on The Nasdaq National Market System since April 15, 1998. D. SELLING SHAREHOLDERS. Not applicable. E. DILUTION. Not applicable. F. EXPENSES OF THE ISSUE. Not applicable. 
 ITEM 10. ADDITIONAL INFORMATION A. SHARE CAPITAL. Not applicable. -48-




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B. MEMORANDUM AND ARTICLES OF ASSOCIATION. Corporate Powers. We have been registered in the British Virgin Islands
since January 30, 1997, under British Virgin Islands International Business
Companies number 216796.
Clause 4 of our Memorandum of Association states that the objects for which we
are established are to engage in any businesses which are not prohibited by law
in force in the British Virgin Islands. Directors. A director who is materially interested in any transaction
with us shall declare the material facts of and nature of his interest at the
meeting of the Board of Directors. A director may vote or be counted as the
quorum on any resolution of the Board in respect of any transaction in which he
is materially interested. With the prior or subsequent approval by a
resolution of members, the directors may, by a resolution of directors, fix the
emoluments of directors with respect to services to be rendered in any capacity
to us. The directors may, by a resolution of directors, exercise all the
powers of the Company to borrow money. There is no age limit requirement for
retirement or non-retirement of directors. A director shall not require a
share qualification. Share Rights, Preferences and Restrictions. Our authorized share capital
is US$1 million divided into 100 million shares of par value US$0.01 per share.
All dividends unclaimed for three years after having been declared may be
forfeited by resolution of the directors for our benefit. All shares vote as
one class and each whole share has one vote. Directors stand for reelection on
an annual basis. Cumulative voting for directors is not authorized. We may
redeem any of our own shares for such fair value as we by a resolution of
directors determine. All shares have the same rights with regard to dividends
and distributions upon our liquidation. Changing Share Rights. The rights of each class and series of shares that
we are authorized to issue shall be fixed by the resolution of directors. If
the authorized capital is divided into different classes, the rights attached
to any class may be varied with the consent in writing of the holders of not
less than three-fourths of the issued shares of that class and of the holders
of not less than three-fourths of the issued shares of any other class which
may be affected by such variation. Shareholder Meetings. The directors may convene meetings of our members
at such times and in such manner and places as the directors consider necessary
or desirable. The directors shall convene such a meeting upon the written
request of members holding 10 percent or more of our outstanding voting shares.
At least seven days notice of the meeting shall be given to the members whose
names appear on the share register. Restrictions on Rights to Own Securities. There are no limitations on the
rights to own our securities. -49-




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Change in Control Provisions. There are no provisions of our Memorandum
of Association and Articles of Association that would have an effect of
delaying, deferring or preventing a change in our control and that would have
operate only with respect to a merger, acquisition or corporate restructuring
involving us. Disclosure of Share Ownership. There are no bylaw provisions governing
the ownership threshold above which shareholder ownership must be disclosed. Applicable Law. Under the laws of most jurisdictions in the US, majority
and controlling shareholders generally have certain fiduciary responsibilities
to the minority shareholders. Shareholder action must be taken in good faith
and actions by controlling shareholders which are obviously unreasonable may be
declared null and void. BVI law protecting the interests of minority
shareholders may not be as protective in all circumstances as the law
protecting minority shareholders in US jurisdictions. While BVI law does permit a shareholder of a BVI company to sue its
directors derivatively, that is, in the name of, and for the benefit of, our
company and to sue a company and its directors for his benefit and for the
benefit of others similarly situated, the circumstances in which any such
action may be brought, and the procedures and defenses that may be available in
respect of any such action, may result in the rights of shareholders of a BVI
company being more limited than those of shareholders of a company organized in
the US.
Our directors have the power to take certain actions without shareholder
approval, including an amendment of our Memorandum of Association or Articles
of Association or an increase or reduction in our authorized capital, which
would require shareholder approval under the laws of most US jurisdictions. In
addition, the directors of a BVI corporation, subject in certain cases to court
approval but without shareholder approval, may, among other things, implement a
reorganization, certain mergers or consolidations, the sale, transfer, exchange
or disposition of any assets, property, part of the business, or securities of
the corporation, or any combination, if they determine it is in the best
interests of the corporation, its creditors, or its shareholders. Our ability
to amend our Memorandum of Association and Articles of Association without
shareholder approval could have the effect of delaying, deterring or preventing
a change in our control without any further action by the shareholders,
including a tender offer to purchase our common stock at a premium over then
current market prices. The International Business Companies Act of the British Virgin Islands
permits the creation in our Memorandum and Articles of Association of staggered
terms of directors, cumulative voting, shareholder approval of corporate
matters by written consent, and the issuance of preferred shares. Currently,
our Memorandum and Articles of Association only provide for shareholder
approval of corporate matters by written consent, but not for staggered terms
of directors, cumulative voting or the issuance of preferred shares. As in most US jurisdictions, the board of directors of a BVI corporation
is charged with the management of the affairs of the corporation. In most US
jurisdictions, directors owe a fiduciary duty to the corporation and its
shareholders, including a duty of care, under which -50-




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directors must properly
apprise themselves of all reasonably available information, and a duty of
loyalty, under which they must protect the interests of the corporation and
refrain from conduct that injures the corporation or its shareholders or that
deprives the corporation or its shareholders of any profit or advantage. Many
US jurisdictions have enacted various statutory provisions which permit the
monetary liability of directors to be eliminated or limited. Under BVI law,
liability of a corporate director to the corporation is primarily limited to
cases of willful malfeasance in the performance of his duties or to cases where
the director has not acted honestly and in good faith and with a view to the
best interests of the corporation. However,
under our Articles of Association, we are authorized to indemnify any director
or officer who is made or threatened to be made a party to a legal or
administrative proceeding by virtue of being one of our directors or officers,
provided such person acted honestly and in good faith and with a view to our
best interests and, in the case of a criminal proceeding, such person had no
reasonable cause to believe that his conduct was unlawful. Our Articles of
Association also enable us to indemnify any director or officer who was
successful in such a proceeding against expense and judgments, fines and
amounts paid in settlement and reasonably incurred in connection with the
proceeding. The above description of certain differences between BVI and US corporate
laws is only a summary and does not purport to be complete or to address every
applicable aspect of such laws. However, we believe that all material
differences are disclosed above. Changes in Capital. Requirements to effect changes in capital are not
more stringent than is required by law. C. MATERIAL CONTRACTS. None. D. EXCHANGE CONTROLS. There are no material British Virgin Islands laws, decrees, regulations or
other legislation that impose foreign exchange controls on us or that affect
our payment of dividends, interest or other payments to non-resident holders of
our capital stock. British Virgin Islands law and our Memorandum of
Association and Articles of Association impose no limitations on the right of
non-resident or foreign owners to hold or vote our common stock. E. TAXATION. The following is a summary of anticipated material U.S. federal income and
British Virgin Islands tax consequences of an investment in our common stock.
The summary does not deal with all possible tax consequences relating to an
investment in our common stock and does -51-




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not purport to deal with the tax
consequences applicable to all categories of investors, some of which, such as
dealers in securities, insurance companies and tax-exempt entities, may be
subject to special rules. In particular, the discussion does not address the
tax consequences under state, local and other non-U.S. and non-British Virgin
Islands tax laws. Accordingly, each prospective investor should consult its
own tax advisor regarding the particular tax consequences to it of an
investment in the common stock. The discussion below is based upon laws and
relevant interpretations in effect as of the date of this annual report, all of
which are subject to change. United States Federal Income Taxation The following discussion addresses only the material U.S. federal income
tax consequences to a U.S. person, defined as a U.S. citizen or resident, a
U.S. corporation, or an estate or trust subject to U.S. federal income tax on
all of its income regardless of source, making an investment in the common
stock. For taxable years beginning after December 31, 1996, a trust will be a
U.S. person only if:  
    
    a court within the United States is able to exercise primary
supervision over its administration; and
    
    one or more United States persons have the authority to
control all of its substantial decisions. In addition, the following discussion does not address the tax
consequences to a person who holds or will hold, directly or indirectly, 10% or
more of our common stock, which we refer to as a 10% Shareholder. Non-U.S.
persons and 10% Shareholders are advised to consult their own tax advisors
regarding the tax considerations incident to an investment in our common stock. A U.S. investor receiving a distribution of our common stock will be
required to include such distribution in gross income as a taxable dividend, to
the extent of our current or accumulated earnings and profits as determined
under U.S. federal income tax principles. Any distributions in excess of our
earnings and profits will first be treated, for U.S. federal income tax
purposes, as a nontaxable return of capital, to the extent of the U.S.
investors adjusted tax basis in our common stock, and then as gain from the
sale or exchange of a capital asset, provided that our common stock constitutes
a capital asset in the hands of the U.S. investor. U.S. corporate shareholders
will not be entitled to any deduction for distributions received as dividends
on our common stock. Gain or loss on the sale or exchange of our common stock will be treated
as capital gain or loss if our common stock is held as a capital asset by the
U.S. investor. Such capital gain or loss will be long-term capital gain or
loss if the U.S. investor has held our common stock for more than one year at
the time of the sale or exchange. A holder of common stock may be subject to backup withholding at the
rate of 31% with respect to dividends paid on our common stock if the dividends
are paid by a paying agent, -52-




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broker or other intermediary in the United States
or by a U.S. broker or certain United States-related brokers to the holder
outside the United States. In addition, the proceeds of the sale, exchange or
redemption of common stock may be subject to backup withholding, if such
proceeds are paid by a paying agent, broker or other intermediary in the United
States. Backup withholding may be avoided by the holder of common stock if such
holder:  
    
    is a corporation or comes within other exempt categories; or
    
    provides a correct taxpayer identification number, certifies
that such holder is not subject to backup withholding and otherwise
complies with the backup withholding rules. In addition, holders of common stock who are not U.S. persons are
generally exempt from backup withholding, although they may be required to
comply with certification and identification procedures in order to prove their
exemption. Any amounts withheld under the backup withholding rules from a payment to
a holder will be refunded or credited against the holders U.S. federal income
tax liability, if any, provided that amount withheld is claimed as federal
taxes withheld on the holders U.S. federal income tax return relating to the
year in which the backup withholding occurred. A holder who is not otherwise
required to file a U.S. income tax return must generally file a claim for
refund or, in the case of non-U.S. holders, an income tax return in order to
claim refunds of withheld amounts. British Virgin Islands Taxation Under the International Business Companies Act of the British Virgin
Islands as currently in effect, a holder of common stock who is not a resident
of BVI is exempt from BVI income tax on dividends paid with respect to the
common stock and all holders of common stock are not liable for BVI income tax
on gains realized during that year on sale or disposal of such shares; BVI
does not impose a withholding tax on dividends paid by a company incorporated
under the International Business Companies Act. There are no capital gains, gift or inheritance taxes levied by BVI on
companies incorporated under the International Business Companies Act. In
addition, the common stock is not subject to transfer taxes, stamp duties or
similar charges. There is no income tax treaty or convention currently in effect between
the United States and the British Virgin Islands. F. DIVIDENDS AND PAYING AGENTS. Not applicable. -53-




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G. STATEMENT BY EXPERTS. Not applicable. H. DOCUMENTS ON DISPLAY. The documents concerning our company, which are referred to in this annual
report, may be inspected at our principal executive offices at Unit #12, 12/F,
Block A, Focal Industrial Centre, 21 Man Lok Street, Hung Hom, Kowloon, Hong
Kong. I. SUBSIDIARY INFORMATION. Not applicable. -54-




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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not believe that we have any material exposures to market risk
associated with activities in derivative financial instruments, other financial
instruments, derivative commodity instruments, and other market risk sensitive
instruments, positions and transactions. 
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 
 PART II 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. 
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS Effective December 5, 2002, we announced a two-year extension of the
exercise term to April 15, 2005 for our 1,679,000 outstanding registered common
stock purchase warrants (Nasdaq: JADEW). Each warrant remains exercisable to
purchase one share of common stock at $5.75 per share. 
 ITEM 15. CONTROLS AND PROCEDURES We carried out an evaluation, under the supervision and with the
participation of our chairman, chief financial officer and chief operating
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of our fiscal year. Based on this
evaluation, which will be used as input for further improvement actions, they
concluded that our disclosure controls and procedures are effective to timely
alerting them to material information about LJ International Inc. and its
consolidated subsidiaries. There have been no significant changes in our internal controls or in
other factors that could significantly affect those controls subsequent to the
date of this evaluation. -55-




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ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT Our Board of Directors has determined that we currently do not have at
least one audit committee financial expert serving on our audit committee. We
intend to identify and retain an audit committee financial expert no later than
July 31, 2005. 
 ITEM 16B. CODE OF ETHICS We have adopted a code of ethics that applies to all of our employees,
including our chief executive officer and our chief financial officer. 
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES (a) Audit Fees.The aggregate fees billed for each of the last two fiscal
years for professional services rendered by our principal accountant for the
audit of our annual financial statements or services that are normally provided
by the accountant in connection with statutory and regulatory filings or
engagements for those fiscal years were $170,000 for the fiscal year ended
December 31, 2002 and $120,000 for the fiscal year ended December 31, 2003. (b) Audit  Related Fees.No fees were billed in each of the last two
fiscal years for assurance and related services by our principal accountant
that are reasonably related to the performance of the audit or review of our
financial statements and are not reported under paragraph (a) of this Item for
the fiscal year ended December 31, 2002 and for the fiscal year ended December
31, 2003. (c) Tax Fees.The aggregate fees billed in each of the last two fiscal
years for professional services rendered by our principal accountant for tax
compliance, tax advice, and tax planning were $3,000 for the fiscal year ended
December 31, 2002 and $8,000 for the fiscal year ended December 31, 2003. The
nature of the services comprising these fees included data gathering for
preparation, review and submission as agent of tax filing. (d) All Other Fees.No fees were billed in each of the last two fiscal
years for products and services provided by our principal accountant, other
than the services reported in paragraphs (a) through (c) of this Item for the
fiscal year ended December 31, 2002 and for the fiscal year ended December 31,
2003. (e) Audit Committee Pre-Approval Policies and Procedures.To ensure
continuing auditor -56-




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objectivity and to safeguard the independence of our
auditors, our audit committee has determined a framework for the type and
authorization of non-audit services which our auditors,
Moores Rowland Mazars, may provide. The audit committee has adopted policies for the pre-approval of specific
services that may be provided by our principal auditors. These policies are
kept under review and amended as necessary to meet the dual objectives of
ensuring that we benefit in a cost effective manner from the cumulative
knowledge and experience of our auditors whilst also ensuring that the auditors
maintain the necessary degree of independence and objectivity. Our audit committee approved the engagement of Moores Rowland Mazars as our
auditors to render audit and non-audit services before Moores Rowland Mazars
was engaged by us. All of the services described in each of paragraphs (b) through (d) of
this Item were approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of Regulation S-X. (f).Not applicable. 
 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES. Not applicable. 
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS. Not applicable. -57-




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PART III 
 ITEM 17. FINANCIAL STATEMENTS Not applicable. 
 ITEM 18. FINANCIAL STATEMENTS The following financial statements are being filed as part of this Annual
Report on Form 20-F: Report of Independent Auditors Consolidated statements of operations for the years ended April 30, 2001,
2002 and for the eight-month period ended December 31, 2002 and for the year
ended December 31, 2003. Consolidated balance sheets as of April 30, 2001, 2002 and December 31,
2002 and 2003. Consolidated statements of shareholders equity for the years ended April
30, 2001, 2002 and for the eight-month period ended December 31, 2002 and for
the year ended December 31, 2003. Consolidated statements of cash flows for the years ended April 30, 2001,
2002 and for the eight-month period ended December 31, 2002 and for the year
ended December 31, 2003. Notes to and forming part of the financial statements -58-




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LJ INTERNATIONAL INC. INDEX TO FINANCIAL STATEMENTS PageReport of Independent Auditors
    
    
    F-2Consolidated statements of operations
    
    
    F-3Consolidated balance sheets
    
    
    F-4Consolidated statements of shareholders equity
    
    
    F-5Consolidated statements of cash flows
    
    
    F-6Notes to and forming part of the financial statements
    
    
    F-7  F-34
 F-1




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Report of Independent Auditors To The Shareholders and The Board of Directors of
LJ International Inc. We have audited the accompanying consolidated balance sheets of LJ
International Inc. and its subsidiaries as of December 31, 2003, December 31,
2002 and April 30, 2002 and the related consolidated statements of operations,
shareholders equity and cash flows for the year ended December 31, 2003, for
the eight-month period ended December 31, 2002 and for each of the years in the
two-year period ended April 30, 2002. These financial statements are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the management, as well as
evaluating the overall financial statements presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of LJ
International Inc. and its subsidiaries as of December 31, 2003, December 31,
2002 and April 30, 2002, and the consolidated results of their operations and
their cash flows for the year ended December 31, 2003, for the eight-month
period ended December 31, 2002 and for each of the years in the two-year period
ended April 30, 2002, in conformity with generally accepted accounting
principles in the United States of America. Moores Rowland MazarsChartered Accountants
Certified Public Accountants, Hong Kong Dated: March 30, 2004 F-2




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LJ INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share data) Year ended
    
    8 months ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    April 30,
    
    April 30,Notes
    
    2003
    
    2002
    
    2002
    
    2001US$
    
    US$
    
    US$
    
    US$Operating revenue
    
    
    2
    (c)
    
    
    58,167
    
    
    
    31,809
    
    
    
    39,240
    
    
    
    46,285Costs of goods sold
    
    
    
    
    
    
    (44,947
    )
    
    
    (22,820
    )
    
    
    (35,731
    )
    
    
    (31,540
    )Gross profit
    
    
    
    
    
    
    13,220
    
    
    
    8,989
    
    
    
    3,509
    
    
    
    14,745Operating expensesSelling, general and administrative
expenses
    
    
    
    
    
    
    (9,133
    )
    
    
    (6,433
    )
    
    
    (8,963
    )
    
    
    (9,398
    )Unrealized gain (loss) on derivatives
    
    
    
    
    
    
    (162
    )
    
    
    (435
    )
    
    
    (660
    )
    
    
    44Depreciation
    
    
    
    
    
    
    (1,184
    )
    
    
    (863
    )
    
    
    (1,031
    )
    
    
    (808
    )Impairment on property, plant and
equipment
    
    
    
    
    
    
    (84
    )
    
    
    (108
    )
    
    
    (345
    )
    
    
    Amortization and impairment loss on
goodwill
    
    
    8
    
    
    
    (200
    )
    
    
    (400
    )
    
    
    (242
    )
    
    
    (27
    )Operating income (loss)
    
    
    
    
    
    
    2,457
    
    
    
    750
    
    
    
    (7,732
    )
    
    
    4,556Other revenue and expenseOther revenues
    
    
    2
    (c)
    
    
    453
    
    
    
    205
    
    
    
    352
    
    
    
    570Interest expenses
    
    
    
    
    
    
    (753
    )
    
    
    (441
    )
    
    
    (652
    )
    
    
    (1,780
    )Impairment loss on investment securities
    
    
    9
    
    
    
    
    
    
    
    (200
    )
    
    
    
    
    
    
    Income (loss) before income taxes and
minority interests
    
    
    
    
    
    
    2,157
    
    
    
    314
    
    
    
    (8,032
    )
    
    
    3,346Income taxes credit (expense)
    
    
    11
    
    
    
    (352
    )
    
    
    (101
    )
    
    
    101
    
    
    
    (211
    )Income (Loss) before minority interests
    
    
    
    
    
    
    1,805
    
    
    
    213
    
    
    
    (7,931
    )
    
    
    3,135Minority interests in consolidated
subsidiaries
    
    
    
    
    
    
    8
    
    
    
    120
    
    
    
    30
    
    
    
    Net income (loss)
    
    
    
    
    
    
    1,813
    
    
    
    333
    
    
    
    (7,901
    )
    
    
    3,135Numerator:Net income (loss) used in computing
basic earnings (loss) per share
    
    
    
    
    
    
    1,813
    
    
    
    333
    
    
    
    (7,901
    )
    
    
    3,135Interest on 3% convertible debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16Adjusted net income (loss) used
in computing diluted earnings (loss)
per share
    
    
    
    
    
    
    1,813
    
    
    
    333
    
    
    
    (7,901
    )
    
    
    3,151Denominator:Weighted average number of shares used
in calculating basic earnings (loss)
per share
    
    
    
    
    
    
    8,757,266
    
    
    
    8,492,851
    
    
    
    8,671,615
    
    
    
    8,567,366Effect of dilutive potential ordinary
shares:3% convertible debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,753Warrants
    
    
    
    
    
    
    183,151
    
    
    
    
    
    
    
    7
    
    
    
    Stock options
    
    
    
    
    
    
    765,267
    
    
    
    
    
    
    
    106,759
    
    
    
    731Weighted average number of shares
used in calculating diluted earnings
(loss) per share
    
    
    
    
    
    
    9,705,684
    
    
    
    8,492,851
    
    
    
    8,778,381
    
    
    
    8,616,850Earnings (loss) per share:Basic
    
    
    2
    (g)
    
    
    0.21
    
    
    
    0.04
    
    
    
    (0.91
    )
    
    
    0.37Diluted
    
    
    2
    (g)
    
    
    0.19
    
    
    
    0.04
    
    
    
    (0.91
    )
    
    
    0.37
 The accompanying notes are an integral part of these financial statements. F-3




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LJ INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share and per share data) As of
    
    As of
    
    As ofDecember 31,
    
    December 31,
    
    April 30,Notes
    
    2003
    
    2002
    
    2002US$
    
    US$
    
    US$ASSETSCurrent assetCash and cash equivalents
    
    
    
    
    
    
    2,722
    
    
    
    997
    
    
    
    722Restricted cash
    
    
    
    
    
    
    5,931
    
    
    
    6,358
    
    
    
    5,643Trade receivables, net of allowance for
doubtful accounts (December 31, 2003:US$159; December 31, 2002: US$280;
April 30, 2002: US$225)
    
    
    
    
    
    
    15,243
    
    
    
    10,962
    
    
    
    8,575Derivative contracts
    
    
    
    
    
    
    651
    
    
    
    
    
    
    
    Inventories
    
    
    5
    
    
    
    21,487
    
    
    
    17,932
    
    
    
    15,802Prepayments and other current assets
    
    
    
    
    
    
    3,726
    
    
    
    1,233
    
    
    
    1,203Total current assets
    
    
    
    
    
    
    49,760
    
    
    
    37,482
    
    
    
    31,945Properties held for lease, net
    
    
    6
    
    
    
    1,506
    
    
    
    1,561
    
    
    
    1,616Property, plant and equipment, net
    
    
    7
    
    
    
    4,931
    
    
    
    5,153
    
    
    
    4,635Due from related parties
    
    
    16
    (b)
    
    
    508
    
    
    
    511
    
    
    
    521Goodwill, net
    
    
    8
    
    
    
    1,521
    
    
    
    1,721
    
    
    
    2,121Investment securities, net
    
    
    9
    
    
    
    2,460
    
    
    
    2,460
    
    
    
    2,685Total assets
    
    
    
    
    
    
    60,686
    
    
    
    48,888
    
    
    
    43,523LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesBank overdrafts
    
    
    10
    
    
    
    1,312
    
    
    
    3,107
    
    
    
    2,607Notes payable
    
    
    10
    
    
    
    1,516
    
    
    
    1,073
    
    
    
    282Capitalized lease obligation, current portion
    
    
    12
    
    
    
    18
    
    
    
    23
    
    
    
    46Letters of credit, gold and others
    
    
    10
    
    
    
    16,737
    
    
    
    12,259
    
    
    
    11,549Embedded derivative
    
    
    
    
    
    
    1,430
    
    
    
    739
    
    
    
    356Trade payables
    
    
    
    
    
    
    8,417
    
    
    
    6,620
    
    
    
    3,310Accrued expenses and other payables
    
    
    
    
    
    
    2,864
    
    
    
    1,696
    
    
    
    1,677Income taxes payable
    
    
    
    
    
    
    326
    
    
    
    69
    
    
    
    3Deferred taxation
    
    
    
    
    
    
    87
    
    
    
    
    
    
    
    Total current liabilities
    
    
    
    
    
    
    32,707
    
    
    
    25,586
    
    
    
    19,830Capitalized lease obligation, non-current
    
    
    12
    
    
    
    77
    
    
    
    
    
    
    
    8Total liabilities
    
    
    
    
    
    
    32,784
    
    
    
    25,586
    
    
    
    19,838Minority interest
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    128Commitments and contingencies
    
    
    12Shareholders equityCommon stocks, par value US$0.01 each,
Authorized - 100 million shares,
Issued - 9,890,006 shares as of
December 31, 2003; 8,671,615 shares as
of
December 31, 2002 and April 30, 2002
    
    
    13
    
    
    
    99
    
    
    
    87
    
    
    
    87Additional paid-in capital
    
    
    
    
    
    
    19,802
    
    
    
    17,410
    
    
    
    17,464Treasury stock
    
    
    13
    (d)
    
    
    
    
    
    
    (391
    )
    
    
    Accumulated other comprehensive loss
    
    
    
    
    
    
    (151
    )
    
    
    (151
    )
    
    
    Retained earnings
    
    
    
    
    
    
    8,152
    
    
    
    6,339
    
    
    
    6,006Total shareholders equity
    
    
    
    
    
    
    27,902
    
    
    
    23,294
    
    
    
    23,557Total liabilities and shareholders equity
    
    
    
    
    
    
    60,686
    
    
    
    48,888
    
    
    
    43,523
 The accompanying notes are an integral part of these financial statements. F-4




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##### Table of Contents



LJ INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (Amounts in thousands, except share and per share data) Common stock
    
    Additional
    
    Treasury stock
    
    AccumulatedotherNumber
    
    Par
    
    Paid-in
    
    Number
    
    
    
    
    
    comprehensive
    
    RetainedNotes
    
    of shares
    
    value
    
    Capital
    
    of shares
    
    Cost
    
    loss
    
    earnings
    
    TotalUS$
    
    US$
    
    
    
    
    
    US$
    
    US$
    
    US$
    
    US$Balance as of April 30, 2000
    
    
    
    
    
    
    7,438,058
    
    
    
    75
    
    
    
    13,892
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,772
    
    
    
    24,739Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,135
    
    
    
    3,135Issuance of common stock on
conversion of convertible
debentures
    
    
    13
    (c)
    
    
    1,233,557
    
    
    
    12
    
    
    
    3,004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,016Interest expense arising on
beneficial conversion features
of convertible debentures
    
    
    2
    (t)
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Compensation costs for
stock-based transactions
    
    
    15
    (b)
    
    
    
    
    
    
    
    
    
    
    266
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    266Balance as of April 30, 2001
    
    
    
    
    
    
    8,671,615
    
    
    
    87
    
    
    
    17,167
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,907
    
    
    
    31,161Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,901
    )
    
    
    (7,901
    )Compensation costs for
stock-based transactions
    
    
    15
    (b)
    
    
    
    
    
    
    
    
    
    
    297
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    297Balance as of April 30, 2002
    
    
    
    
    
    
    8,671,615
    
    
    
    87
    
    
    
    17,464
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,006
    
    
    
    23,557Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    333
    
    
    
    333Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (151
    )
    
    
    
    
    
    
    (151
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    182Reversal of cancelled warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (54
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (54
    )Purchase of treasury stock
    
    
    13
    (d)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (318,200
    )
    
    
    (391
    )
    
    
    
    
    
    
    
    
    
    
    (391
    )Balance as of December 31, 2002
    
    
    
    
    
    
    8,671,615
    
    
    
    87
    
    
    
    17,410
    
    
    
    (318,200
    )
    
    
    (391
    )
    
    
    (151
    )
    
    
    6,339
    
    
    
    23,294Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,813
    
    
    
    1,813Issuance of common stock upon
exercise of stock options
    
    
    15
    (a)
    
    
    1,122,500
    
    
    
    11
    
    
    
    2,234
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,245Issuance of common stock upon
exercise of warrants
    
    
    15
    (b)(vi)
    
    
    95,891
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compensation costs for
stock-based transactions
    
    
    15
    (b)
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9Sales of treasury stock
    
    
    13
    (d)
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    318,200
    
    
    
    391
    
    
    
    
    
    
    
    
    
    
    
    541Balance as of December 31, 2003
    
    
    
    
    
    
    9,890,006
    
    
    
    99
    
    
    
    19,802
    
    
    
    
    
    
    
    
    
    
    
    (151
    )
    
    
    8,152
    
    
    
    27,902
 The accompanying notes are an integral part of these financial statements. F-5




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##### Table of Contents



LJ INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands, except share and per share data) Year ended
    
    8 months ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    April 30,
    
    April 30,Notes
    
    2003
    
    2002
    
    2002
    
    2001US$
    
    US$
    
    US$
    
    US$Cash flows from operating activities:Net income (loss)
    
    
    
    
    
    
    1,813
    
    
    
    333
    
    
    
    (7,901
    )
    
    
    3,135Adjustments to reconcile income (loss) to net cash
provided by (used in) operating activities:Depreciation of property, plant and equipment
    
    
    
    
    
    
    1,184
    
    
    
    863
    
    
    
    1,031
    
    
    
    808Impairment loss on property, plant and equipment
    
    
    
    
    
    
    84
    
    
    
    108
    
    
    
    345
    
    
    
    Amortization and impairment loss on goodwill
    
    
    
    
    
    
    200
    
    
    
    400
    
    
    
    242
    
    
    
    27Impairment loss on investment securities
    
    
    
    
    
    
    
    
    
    
    200
    
    
    
    
    
    
    
    Unrealized (gain) loss on derivatives
    
    
    
    
    
    
    162
    
    
    
    435
    
    
    
    660
    
    
    
    (44
    )Loss on disposal and write-off of property, plant
and equipment
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    214
    
    
    
    10Allowance for doubtful debts
    
    
    
    
    
    
    5
    
    
    
    61
    
    
    
    82
    
    
    
    (119
    )Write-down of inventories
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,710
    
    
    
    Minority interests
    
    
    
    
    
    
    (8
    )
    
    
    (120
    )
    
    
    (30
    )
    
    
    Interest expense arising on beneficial conversion
features of convertible debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    874Amortization of financial consulting fee paid to
the
representative in the public offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18Costs associated with stock-based transactions
    
    
    
    
    
    
    9
    
    
    
    (54
    )
    
    
    297
    
    
    
    266Amortization of discount on convertible
debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38Changes in operating assets and liabilities:Trade receivables
    
    
    
    
    
    
    (4,286
    )
    
    
    (2,448
    )
    
    
    (1,873
    )
    
    
    (1,022
    )Inventories
    
    
    
    
    
    
    (3,555
    )
    
    
    (2,130
    )
    
    
    (647
    )
    
    
    (1,619
    )Prepayments and other current assets
    
    
    
    
    
    
    (2,493
    )
    
    
    (30
    )
    
    
    830
    
    
    
    905Due from related parties
    
    
    
    
    
    
    3
    
    
    
    10
    
    
    
    
    
    
    
    (950
    )Trade payables
    
    
    
    
    
    
    1,797
    
    
    
    3,310
    
    
    
    (120
    )
    
    
    (196
    )Accrued expenses and other payables
    
    
    
    
    
    
    1,168
    
    
    
    19
    
    
    
    (1,101
    )
    
    
    378Due to a director
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (247
    )
    
    
    246Letters of credit and others
    
    
    
    
    
    
    5,060
    
    
    
    2,351
    
    
    
    2,069
    
    
    
    693Income taxes payable and deferred taxation
    
    
    
    
    
    
    344
    
    
    
    66
    
    
    
    (314
    )
    
    
    259Net cash provided by (used in) operating activities
    
    
    
    
    
    
    1,489
    
    
    
    3,374
    
    
    
    (753
    )
    
    
    3,707Cash flows from investing activities:Change in restricted cash
    
    
    
    
    
    
    427
    
    
    
    (715
    )
    
    
    (328
    )
    
    
    (1,952
    )Advance to related parties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,442
    )
    
    
    Purchase of investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,284
    )Purchase of property, plant and equipment
    
    
    
    
    
    
    (897
    )
    
    
    (1,556
    )
    
    
    (420
    )
    
    
    (832
    )Purchase of subsidiary
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    (2,381
    )
    
    
    Proceeds on disposals of property, plant and
equipment
    
    
    
    
    
    
    2
    
    
    
    64
    
    
    
    12
    
    
    
    10Repayment from related parties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,311
    
    
    
    Net cash used in investing activities
    
    
    
    
    
    
    (468
    )
    
    
    (2,207
    )
    
    
    (2,248
    )
    
    
    (6,058
    )Cash flows from financing activities:Change in bank overdrafts
    
    
    
    
    
    
    (1,795
    )
    
    
    500
    
    
    
    (655
    )
    
    
    2,441Proceeds from issuance of shares upon exercise of
stock options
    
    
    
    
    
    
    2,245
    
    
    
    
    
    
    
    
    
    
    
    Loans acquired
    
    
    
    
    
    
    1,516
    
    
    
    1,695
    
    
    
    3,190
    
    
    
    564Repayment of loans
    
    
    
    
    
    
    (1,777
    )
    
    
    (2,597
    )
    
    
    (490
    )
    
    
    (538
    )Repayment of capitalized lease obligation
    
    
    
    
    
    
    (26
    )
    
    
    (31
    )
    
    
    (28
    )
    
    
    (77
    )Sale (Purchase) of treasury stock
    
    
    
    
    
    
    541
    
    
    
    (391
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    
    
    
    
    704
    
    
    
    (824
    )
    
    
    2,017
    
    
    
    2,390Effect of foreign exchange rate change
    
    
    
    
    
    
    
    
    
    
    (68
    )
    
    
    
    
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    
    
    
    
    1,725
    
    
    
    275
    
    
    
    (984
    )
    
    
    39Cash and cash equivalents, as of beginning of period
    
    
    
    
    
    
    997
    
    
    
    722
    
    
    
    1,706
    
    
    
    1,667Cash and cash equivalents, as of end of period
    
    
    
    
    
    
    2,722
    
    
    
    997
    
    
    
    722
    
    
    
    1,706Supplemental disclosure information:Interest expense
    
    
    
    
    
    
    728
    
    
    
    424
    
    
    
    638
    
    
    
    861Income taxes paid (refunded)
    
    
    
    
    
    
    9
    
    
    
    31
    
    
    
    212
    
    
    
    (47
    )Non-cash transactions:Conversion of convertible debentures
    
    
    13
    (c)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,016Purchase of property, plant and equipment under
capitalized lease
    
    
    
    
    
    
    98
    
    
    
    
    
    
    
    
    
    
    
    
 The accompanying notes are an integral part of these financial statements. F-6




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  1.
    
    NATURE OF BUSINESS AND BASIS OF FINANCIAL STATEMENTSLJ International Inc. (LJI) and its subsidiaries (collectively referred as
the Company) are principally involved in the design, manufacture,
marketing and sale of precious and semi-precious gemstones as well as
diamond jewelry. While the Company is based in Hong Kong, its
manufacturing operations are in the Peoples Republic of China (PRC) and
most of its sales are currently in the United States of America (US). The
Company also owns certain commercial and residential properties located in
Hong Kong, which are held primarily for investment purposes.The Company changed to a calendar-year basis of reporting financial
results effective May 1, 2002. As a requirement of the change in fiscal
year, the Company is reporting consolidated results of operations and cash
flows for a special transition period for the eight months ended December
31, 2002. The comparative consolidated balance sheets are as of December
31, 2002 and April 30, 2002.  2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (a)
    
    Basis of accountingThe financial statements are prepared in accordance with generally
accepted accounting principles in the US. The measurement basis used
in the preparation of the financial statements is historical cost.(b)
    
    Principles of consolidation and goodwillThe consolidated financial statements include the financial
information of LJI and its subsidiaries. The results of subsidiaries
acquired or disposed of during the year/period are consolidated from
or to their effective dates of acquisition or disposal respectively.
All material intercompany balances and transactions have been
eliminated on consolidation.Goodwill represents the excess of cost over fair value of acquired net
assets. Prior to May 1, 2002, goodwill arising on acquisition of
subsidiaries had been amortized on a straight-line basis over 10
years. Following the adoption of Statement of Financial Accounting
Standard (SFAS) No. 142, Goodwill and Other Intangible Assets,
issued by the Financial Accounting Standard Board (FASB), goodwill is
no longer amortized but subject to annual impairment tests. As part
of an ongoing review of the valuation and amortization of goodwill,
management assesses the carrying value of the Companys goodwill to
determine if changes in facts and circumstances suggest that they may
be impaired. If this review indicates that the goodwill is not
recoverable, as determined by a discounted cash flow analysis over the
remaining amortization period, the carrying value of the Companys
goodwill would be reduced to its estimated fair value. F-7




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  (c)
    
    Revenue recognitionOperating revenue represents sale of goods at invoiced value to
customers, net of returns and discounts, and is recognized when goods
are delivered and title has passed to customers.Other revenue is recognized on the following basis:  (i)
    
    Interest income is accrued on a time proportion basis
on the principal outstanding and at the interest rate applicable;
and(ii)
    
    Rental income from investment properties under
operating leases is recognized in the period in which the
properties are let out and on the straight-line basis over the
lease terms.  (d)
    
    Sales return reserveThe Company has allowed sales returns and its sales generally include
specified return policy for certain customers. The Company reserves
for sales returns as a reduction of revenue at the time the operating
revenue is recognized based on historical sales return experience.(e)
    
    Shipping and handling costsThe shipping and handling costs are included in costs of goods sold.
The amounts of revenue received for shipping and handling are included
in operating revenue.(f)
    
    Advertising and promotion costsAdvertising and promotion expenses are generally expensed when
incurred. Advertising costs included in costs of goods sold were
US$871, US$316, US$455 and US$217 for the year ended December 31,
2003, for the eight months ended December 31, 2002, for the years
ended April 30, 2002 and 2001 respectively.(g)
    
    Earnings (loss) per shareThe calculation of basic earnings (loss) per share is based on net
income (loss) for the year/period attributable to shareholders and on
the weighted average number of ordinary shares outstanding during the
year/period.The calculation of diluted earnings (loss) per share is based on net
income (loss) for the year/period attributable to shareholders and on
the weighted average number of ordinary shares outstanding during the
year/period, adjusted for the effects of all dilutive potential
ordinary shares. The dilutive effect of convertible securities is
reflected in diluted earnings (loss) per share by application of the
if-converted method.(h)
    
    Fair value of financial instrumentsThe financial instruments used by the Company in the normal course of
business, including cash and cash equivalents, trade receivables,
trade payables, notes payable and letter of credit, gold and other
loans, have fair values which approximate their recorded value as the
financial instruments are either short term in nature or carry
interest rate that approximate market rates. F-8




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  (i)
    
    Accounts receivableAccounts receivable are stated at the amount billed to customers, net
of discounts. The Company provides an allowance for doubtful
accounts, which is based upon a review of outstanding receivables,
historical collection information and existing economic conditions.
No interest is chargeable to customers for accounts that are unpaid
after the due date. Accounts past due more than one year are
considered delinquent. Delinquent receivables are written off based
on individual credit evaluation and specific circumstances of the
customer.(j)
    
    InventoriesInventories are stated at the lower of cost and market. Cost, which
comprises all costs of purchase and, where applicable, costs of
conversion and other costs that have been incurred in bringing the
inventories to their present location and condition, is calculated
using the first-in, first-out method. Estimated losses on inventories
represent reserves for obsolescence, excess quantities, irregulars and
slow moving inventory. The Company estimates the loss/write-down on
the basis of its assessment of the inventorys net realizable value
based upon current market conditions and historical experience.(k)
    
    Properties held for leaseProperties held for lease are carried at cost, less accumulated
depreciation, which is computed using the straight-line method over
the estimated useful lives of the assets. Rental income from these
properties is recorded on a monthly basis in accordance with the lease
terms.(l)
    
    Property, plant and equipment (PPE) and depreciationPPE are stated at cost, less accumulated depreciation and accumulated
impairment loss, and include expenditure that substantially increase
the useful lives of existing assets. Maintenance and repairs are
charged to current operations as incurred. Upon sale, retirement, or
other disposition of these assets, the cost and related accumulated
depreciation and accumulated impairment loss are removed from the
respective accounts, and any gain or loss is included in the
consolidated statement of operations.Depreciation is provided by using the straight-line method over the
estimated useful lives of the related assets at the following annual
rates: Leasehold land and buildings
    
    2% or over the unexpired term of leasesLeasehold improvement
    
    shorter of 10% or the unexpired term of leasesFurniture, fixtures and equipment
    
    20% to 50%Plant and machinery
    
    10%Motor vehicles
    
    20%
 F-9




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  (m)
    
    Impairment of long-lived assetsLong-lived assets are reviewed at least annually for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount
of an asset to undiscounted future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired,
impairment is measured at the difference between the carrying amount
and fair value of the asset. Goodwill will not be allocated to
long-lived assets, when tested for impairment.(n)
    
    Investment securitiesInvestment in non-marketable securities held for an identified long
term purpose are stated at cost and subject to impairment review at
each reporting date to reflect any diminution in their value, which is
expected to be other than temporary. The amount of impairment is
recognized as an expense in the period in which the decline occurs.(o)
    
    Gold loans and embedded derivativeGold loans are commodity-indexed debts with an embedded derivative.
The loan is recorded at its original amount and adjusted for
additional borrowings and repayments. The embedded derivative
component was valued at fair value, considering the market price of
gold, volatility of gold and the time value of money. Any changes in
fair value of embedded derivative are included in the consolidated
statement of operations and an asset or liability representing the
value of the embedded derivative portion.(p)
    
    DerivativesThe Company enters into derivative contracts to hedge the future
settlement of gold loans in order to mitigate the risk of market price
fluctuations. They consist of contracts that are used to hedge
against changes in the fair value of gold price when the Company
settles the gold loans.The derivative contracts and the embedded derivative are valued at
fair value. Changes in fair value of derivative contracts are
included in the consolidated statement of operations, net of changes
in fair value of embedded derivative set out in note 2(o).(q)
    
    Stock-based compensationThe Company records compensation expense for stock-based employee
compensation plans using the intrinsic value method in which
compensation expense, if any, is measured as the excess of the market
price of the stock over the exercise price of the award on the
measurement date. F-10




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  (q)
    
    Stock-based compensation (Continued)At December 31, 2003, the Company has two stock-based employee
compensation plans, details of which are set out in note 15(a). As
the exercise price of the Companys incentive stock options is same as
or higher than the market price of the underlying stock on the date of
grant, pursuant to APB Opinion No. 25, no compensation expense has
been recognized for stock options granted to employees for each of the
periods presented. Had compensation expense for the same stock
options been determined based on the fair value at the date of grant
and been amortized over the period from the date of grant to the date
that the award is vested, consistent with the provisions of SFAS No.
123, the Companys net income and earnings per share would have been
reported as follows: Year ended
    
    8 months ended
    
    Year endedDecember 31,
    
    December 31,
    
    April 30,2003
    
    2002
    
    2001US$
    
    US$
    
    US$Net income, as reported
    
    
    1,813
    
    
    
    333
    
    
    
    3,135Total stock-based
employee compensation
expenses determined under
fair value based method
for all awards, net of
tax
    
    
    (160
    )
    
    
    
    
    
    
    (2,027
    )Pro forma net income
    
    
    1,653
    
    
    
    333
    
    
    
    1,108
 Year ended
    
    8 months ended
    
    Year endedDecember 31,
    
    December 31,
    
    April 30,2003
    
    2002
    
    2001US$
    
    US$
    
    US$Earnings per share:Basic, as reported
    
    
    0.21
    
    
    
    0.04
    
    
    
    0.37Basic, pro forma
    
    
    0.19
    
    
    
    0.04
    
    
    
    0.13Diluted, as reported
    
    
    0.19
    
    
    
    0.04
    
    
    
    0.37Diluted, pro forma
    
    
    0.17
    
    
    
    0.04
    
    
    
    0.13
  There were no stock options granted to employees during the year ended
April 30, 2002 and accordingly no pro forma net loss and loss per
share for the same year is presented. F-11




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  (q)
    
    Stock-based compensation (Continued)The fair value of these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions: Year ended
    
    8 months ended
    
    Year endedDecember 31,
    
    December 31,
    
    April 30,2003
    
    2002
    
    2001Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Expected stock price volatility
    
    
    9
    %
    
    
    7
    %
    
    
    22
    %Risk-free interest rate
    
    
    3.56
    %
    
    
    4.47
    %
    
    
    5.34
    %Expected life of options
    
    3 years
    
    
    3 years
    
    
    3 years
  The weighted average fair value per option granted during the year
ended December 31, 2003, the eight months ended December 31, 2002 and
for the year ended 30 April, 2001 was US$0.14, US$Nil and US$0.45
respectively.(r)
    
    Income taxesThe Company accounts for income taxes under the liability method.
Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. The
Company provides a valuation allowance, if necessary, to reduce
deferred tax assets to their estimated realizable value.(s)
    
    Foreign currenciesLJIs functional currency is United States dollars. The functional
currencies of foreign subsidiaries are their respective local
currencies. The assets and liabilities of foreign subsidiaries are
translated at the exchange rates in effect at the balance sheet date,
with related transaction gains or losses reported as a separate
component of accumulated other comprehensive income (loss). Foreign
currency transaction gains and losses are included in the consolidated
statement of operations.(t)
    
    Discount on and beneficial conversion features of convertible
debenturesThe proceeds from issuance of convertible debenture with detachable
warrants are allocated between the warrant and the convertible
debenture based on their fair values at time of issuance. The
difference between the proceeds allocated to the debentures and the
face value of the debenture is recorded as discount or premium. The
discount or premium is amortized over the life of the debenture, using
the interest method, to the consolidated statement of operations. The
amount of discount on convertible debentures amortized for the year
ended April 30, 2001 was US$38. F-12




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LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  (t)
    
    Discount on and beneficial conversion features of convertible
debentures (Continued)The embedded beneficial conversion feature associated with the issue
of a convertible debt security is recognized and measured by an amount
equal to the intrinsic value of that feature reflected as a discount
from the convertible debentures with a corresponding credit to
additional paid-in capital. That amount is calculated at the
commitment date (i.e. issue date of the convertible debentures) as the
difference between the conversion price and the fair value of the
common stock into which the security is convertible, multiplied by the
number of shares into which the security is convertible. The
intrinsic value of the beneficial conversion feature is amortized to
the consolidated statement of operations over the life of the
convertible debentures. The beneficial conversion feature charged to
income as interest expense amounted to US$874 for the year ended April
30, 2001.(u)
    
    Treasury StockThe Company applies the cost method of accounting for treasury stock.
The cost method requires the Company to record the cost of acquiring
treasury stock as a deduction from the total capital. The treasury
stock account is debited for the cost of the shares acquired and will
be credited upon reissuance at cost on a first-in-first-out basis. If
the treasury stock is reissued at a price in excess of acquisition
cost, the excess will be credited to additional paid-in capital in
excess of par value from treasury stock. If the treasury stock is
reissued at less than acquisition cost, the deficiency will be treated
first as a reduction of any capital in excess of par related to
previous reissuances or retirements. If the balance in capital in
excess of par value from treasury stock is insufficient to absorb the
deficiency, the remainder is recorded as a reduction of retained
earnings.(v)
    
    Cash equivalentsThe Company considers all short-term, highly liquid investments with
maturities of three months or less to be cash equivalents.(w)
    
    Uses of estimatesThe preparation of the Companys financial statements in conformity
with generally accepted accounting principles requires the Companys
management to make estimates and assumptions that affect the amounts
reported in these financial statements and accompanying notes. Actual
amounts could differ from those estimates.(x)
    
    Related partiesParties are considered to be related if one party has the ability,
directly or indirectly, to control the other party, or exercise
significant influence over the other party in making financial and
operating decisions. Parties are also considered to be related if
they are subject to common control or common significant influence. F-13




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LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  (y)
    
    DividendThe Directors of the Company have never declared or paid any cash
dividends on the Companys capital stock and do not anticipate paying
cash dividends in the foreseeable future. The ability to pay
dividends depends upon receipt of dividends or other payments from
subsidiaries and other holdings and investments. In addition, the
operating subsidiaries from time to time may be subject to
restrictions on their ability to make distributions to the Company,
including as a result of restrictive covenants in loan agreements,
restrictions on the conversion of local currency into US dollars or
other currencies and other regulatory restrictions. Currently, none
of the subsidiaries has such restriction during the periods presented
except for the covenants as set out in note 10 to the financial
statements.(z)
    
    New accounting pronouncementsIn April 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. SFAS No. 149
amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133. The new guidance amends SFAS
No. 133 for decisions made as part of the Derivatives Implementation
Group (DIG) process that effectively required amendments to SFAS No.
133, and decisions made in connection with other FASB projects dealing
with financial instruments and in connection with implementation
issues raised in relation to the application of the definition of a
derivative and characteristics of a derivative that contains financing
components. In addition, it clarifies when a derivative contains a
financing component that warrants special reporting in the statement
of cash flow. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003. The Company believes that SFAS 149 will not have
significant impact on the Companys financial statements.In May 2003, the FASB issued FASB No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. This Statement is effective for financial instruments
entered into or modified after May 31, 2003. This Statement provides
guidance for determining the classification of and accounting for
certain financial instruments that embody obligations of the issuing
entity. The Company considered that adoption of SFAS No. 150 does not
have significant impact on its financial statements. F-14




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LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  3.
    
    ACQUISITIONSDuring the year ended April 30, 2001, the Company acquired 12,000,000
common stocks (16.8% equity interest) of iBBC Inc., a company engaged in
marketing jewelry from its display cases in retail shops, for the
consideration of US$600. For further expansion through vertical
integration and the development of distribution channel, the Company
further acquired 49,200,000 common stocks (68.8% equity interest) of iBBC
Inc. from entities controlled by a director for a consideration of
US$2,460 on March 21, 2002. The objective of the acquisition was to
acquire the know-how of interactive showcase as well as the established
distribution retail network in the US and therefore increase shareholders
value.Details of the identifiable assets and liabilities acquired at the date of
acquisition are as follows: iBBC Inc.2002US$Net assets acquired:Property, plant and equipment
    
    
    1,056Trade receivables
    
    
    6Inventories
    
    
    43Other receivables
    
    
    160Cash and cash equivalents
    
    
    79Trade payables
    
    
    (133
    )Accrued expenses and other payables
    
    
    (115
    )1,096Minority interests
    
    
    (157
    )Goodwill arising from acquisition
    
    
    2,121Total purchase consideration
    
    
    3,060Satisfied by cash paid in the financial year:2001
    
    
    6002002
    
    
    2,4603,060
  None of the amount of goodwill is expected to be deductible for tax
purposes. F-15




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LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  3.
    
    ACQUISITIONS (CONTINUED)The Companys consolidated results of operations have incorporated iBBC
Inc.s activity on a consolidated basis from the date of acquisition,
which was March 21, 2002. The following unaudited consolidated results of
operations reflect pro forma results of operations for each of the years
in the three-year period ended April 30, 2002, as if the acquisition had
occurred on May 1, 1999, and after giving effect to purchase accounting
adjustments. The pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of what operating
results would have been had the acquisitions actually taken place on May
1, 1999 and may not be indicative of future operating results. Year endedApril 30, 2002
    
    April 30, 2001
    
    April 30, 2000US$
    
    US$
    
    US$Pro forma:Operating revenue
    
    
    39,296
    
    
    
    46,285
    
    
    
    38,926Net income (loss)
    
    
    (9,900
    )
    
    
    2,264
    
    
    
    3,839Earnings (loss) per share:Basic
    
    
    (1.14
    )
    
    
    0.26
    
    
    
    0.58Diluted
    
    
    (1.14
    )
    
    
    0.26
    
    
    
    0.56
 F-16




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  4.
    
    OPERATING RISKS  (a)
    
    Concentrations of credit risksDetails of major customers from which the Company derived operating
revenue are shown in note 17(b).Credit risk represents the accounting loss that would be recognized at
the reporting date if counterparties failed completely to perform as
contracted. Concentrations of credit risk (whether on or off balance
sheet) that arise from financial instruments exist for groups of
customers or counterparties when there are similar economic
characteristics that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic or other
conditions. The major concentration of credit risk arises from the
Companys receivables. Even though the Company does have major
customers, it does not consider itself be exposed to significant
credit risk with regards to collection of the related receivables.
Historical losses have not been significant.(b)
    
    Country risksThe Company may also be exposed to certain risks as a result of its
manufacturing operation being located in the PRC and its investment
properties in Hong Kong which are not typically associated with
companies operating in North America and Western Europe. These
include risks associated with, among others, the political, economic
and legal environments and foreign currency exchange. The Companys
results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of
taxation, among other things. The Companys management believe these
risks not to be significant. There can be no assurance, however, that
changes in political, social and other conditions will not result in
any adverse impact.(c)
    
    Cash and time depositsThe Company maintains its cash balances and investments in time
deposits with various banks and financial institutions. In common
with local practice, such amounts are not insured or otherwise
protected should the financial institutions be unable to meet their
liabilities. There has been no history of credit losses. F-17




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LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  5.
    
    INVENTORIESInventories consisted of the following: As of
    
    As of
    
    As ofDecember 31,
    
    December 31,
    
    April 30,2003
    
    2002
    
    2002US$
    
    US$
    
    US$Raw materials
    
    
    14,774
    
    
    
    12,892
    
    
    
    10,691Work-in-progress
    
    
    742
    
    
    
    341
    
    
    
    533Finished goods
    
    
    5,971
    
    
    
    4,699
    
    
    
    4,57821,487
    
    
    
    17,932
    
    
    
    15,802
  Included in the inventories as of April 30, 2002 above are certain
gemstones (raw materials) and fine jewelry (finished goods) at a carrying
value of US$6,762, which represent managements estimate of its net
realizable value. Such inventories were intended to be used or reused
exclusively for the production of fine jewelry, in particular to meet
orders in relation to special programs in previous years. Because of
uncertain economic conditions, the demand for fine jewelry dropped
dramatically in the year ended April 30, 2002 and was expected to remain
that way in foreseeable future. As a result, gemstones built up which
were intended to meet orders in relation to special programs were stated
at net realizable value when the orders did not materialize. Slow moving
fine jewelry inventories were stated at net realizable value based on
forecasts for close-out sales in the ensuing years. The effect of such
estimate has resulted in a write-down of inventories amounting to US$5,710
being recognized in costs of goods sold for the year ended April 30, 2002.
The Company has adopted the same basis for the valuation of inventories
in the accounting periods since May 1, 2002.6.
    
    PROPERTIES HELD FOR LEASE, NETThe Company owns leasehold land and buildings in Hong Kong and leases them
out for lease terms of 2 years. Properties held for lease consists of the
following: As of
    
    As of
    
    As ofDecember 31,
    
    December 31,
    
    April 30,2003
    
    2002
    
    2002US$
    
    US$
    
    US$Leasehold land and buildings
    
    
    2,037
    
    
    
    2,037
    
    
    
    2,055Less: Accumulated depreciation
    
    
    (531
    )
    
    
    (476
    )
    
    
    (439
    )1,506
    
    
    
    1,561
    
    
    
    1,616
  The Company pledged all properties held for lease as collateral for
general banking facilities granted to the Company as of December 31, 2003,
December 31, 2002 and April 30, 2002 (see note 10). F-18




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LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  6.
    
    PROPERTIES HELD FOR LEASE, NET (CONTINUED)The future aggregate minimum rental receivables under non-cancellable
operating leases are as follows: As ofDecember 31,2003US$2004
    
    
    872005
    
    
    34121
  7.
    
    PROPERTY, PLANT AND EQUIPMENT, NETProperty, plant and equipment consist of the following: As of
    
    As of
    
    As ofDecember 31,
    
    December 31,
    
    April 30,2003
    
    2002
    
    2002US$
    
    US$
    
    US$Leasehold land and buildings
    
    
    1,995
    
    
    
    1,665
    
    
    
    953Leasehold improvement
    
    
    2,839
    
    
    
    2,650
    
    
    
    2,513Furniture, fixtures and equipment
    
    
    3,475
    
    
    
    3,246
    
    
    
    2,904Plant and machinery
    
    
    2,442
    
    
    
    2,349
    
    
    
    2,152Motor vehicles
    
    
    455
    
    
    
    322
    
    
    
    31311,206
    
    
    
    10,232
    
    
    
    8,835Less: Accumulated depreciation and
impairment losses
    
    
    (6,275
    )
    
    
    (5,079
    )
    
    
    (4,200
    )4,931
    
    
    
    5,153
    
    
    
    4,635
  The Company pledged leasehold land and buildings with net book values of
US$1,232, US$898 and US$583 as of December 31, 2003, December 31, 2002 and
April 30, 2002 respectively as collateral for general banking facilities
granted to the Company (see note 10). F-19




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LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  8.
    
    GOODWILL, NETFollowing the adoption of SFAS No. 142, the Company discontinued
amortization of goodwill effective May 1, 2002. As of December 31, 2003,
goodwill is attributed to the acquisition of a jewelry retail company in
2002 (see note 3). Year ended
    
    8 Months ended
    
    Year endedDecember 31,
    
    December 31,
    
    April 30,2003
    
    2002
    
    2002US$
    
    US$
    
    US$Carrying value, beginning of
year/period
    
    
    1,721
    
    
    
    2,121
    
    
    
    242Goodwill acquired
    
    
    
    
    
    
    
    
    
    
    2,121Amortization
    
    
    
    
    
    
    
    
    
    
    (27
    )Impairment loss
    
    
    (200
    )
    
    
    (400
    )
    
    
    (215
    )Carrying value, end of year/period
    
    
    1,521
    
    
    
    1,721
    
    
    
    2,121
  The Company conducts annual impairment tests. The testing included the
determination of each reporting units fair value using the market
multiples and discount cash flow analysis. The Companys reduced earnings
and cash flow forecast, primarily due to the prolonged downturn in the
economy, uncertain demand, and competitive industry conditions, resulted
in the Company determining that a goodwill impairment charge of US$200 was
necessary. The accumulated amortization and impairment losses were
US$869, US$669 and US$269 as of December 31, 2003, December 31, 2002 and
April 30, 2002 respectively.9.
    
    INVESTMENT SECURITIES, NET As of
    
    As of
    
    As ofDecember 31,
    
    December 31,
    
    April 30,2003
    
    2002
    
    2002US$
    
    US$
    
    US$Equity securities at cost, unlisted
    
    
    2,660
    
    
    
    2,660
    
    
    
    2,685Less: Accumulated impairment losses
    
    
    (200
    )
    
    
    (200
    )
    
    
    2,460
    
    
    
    2,460
    
    
    
    2,685
  During the year ended April 30, 2001, the Company acquired 20% equity
interests in a company whose principal activities are the manufacturing
and trading of rough and pre-formed gemstones, of which the Company had no
significant control and influence over its operating and financial
policies.The directors of the Company consider such acquisition would enhance the
Company by forward and backward vertical integration.No impairment loss was recognized for the year ended December 31, 2003,
April 30, 2002 and 2001. The amount of impairment loss charged to the
consolidated statement of operations for the eight months ended December
31, 2002 was US$200. F-20




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LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  10.
    
    BANKING FACILITIES AND OTHER LOANS As of
    
    As of
    
    As ofDecember 31,
    
    December 31,
    
    April 30,Note
    
    2003
    
    2002
    
    2002US$
    
    US$
    
    US$Bank overdrafts
    
    
    (a
    )
    
    
    1,312
    
    
    
    3,107
    
    
    
    2,607Notes payable:Current portion
    
    
    (b
    )
    
    
    1,516
    
    
    
    1,073
    
    
    
    282Letters of credit, gold and
others:Letters of credit and others
    
    
    (a
    )
    
    
    13,619
    
    
    
    8,559
    
    
    
    6,208Gold loan
    
    
    (c
    )
    
    
    3,118
    
    
    
    3,700
    
    
    
    5,34116,737
    
    
    
    12,259
    
    
    
    11,549
  The Company s banking facilities are collateralized by leasehold land and
buildings (see notes 6 and 7), restricted cash deposits, factored
receivables, and personal guarantees of and properties owed by a director
(see note 16(b)).The material provisions of indentures relating to the Companys various
banking facility agreements contain covenants pertaining to (i)
maintenance of the net worths of LJI and one of its subsidiaries amounting
to US$16,000 and US$4,487 respectively; and (ii) cross-default provisions
in the event of default in aggregate of at least US$10,000 under separate
loan facilities. In the event of default, the bank would at its
discretion to cancel the facilities and demand immediate repayment of all
principal, interest, fees and other amount outstanding. As of December
31, 2003, both LJI and the subsidiary maintained the minimum net worth
requirement, and the Company did not breach any cross-default provision.  (a)
    
    As of December 31, 2003, the Company had various revolving bank
facilities of overdrafts, letters of credit and factoring facilities
granted by banks, amounting to US$3,397, US$10,461 and US$8,364
respectively.The bank overdrafts are denominated in Hong Kong dollars, bear
interest at the floating commercial bank lending rates in Hong Kong,
which ranged from 5.5% to 6% per annum as of December 31, 2003.The factoring facilities granted are limited to the extent of
accounts receivable collateralized to the banks.Under the banking facilities arrangements, the Company is required
to maintain certain cash balances based on the amount of facilities
granted. These balances are reflected as restricted cash in the
balance sheet.(b)
    
    The Company also had term loans classified under notes payable
which are related to the Companys leasehold land and buildings.
These loans aggregated to US$1,516 as of December 31, 2003. The
expected maturities of these notes payable are within one year.
Interest charges on these loans range from 2.7% to 8% per annum as of
December 31, 2003. F-21




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  10.
    
    BANKING FACILITIES AND OTHER LOANS (CONTINUED)  (c)
    
    The Company had outstanding loans to purchase 10.9 oz of gold
as of December 31, 2003 with the related balances being US$3,118.
These loans are due within the following year, however, have been
historically renewed. These loans bear interest at 1.6% to 2.4% per
annum as of December 31, 2003 and can be repaid in cash at the
current exchange rate of gold any time prior to maturity.  11.
    
    INCOME TAXESThe Company is subject to income taxes on an entity basis on income
arising in or derived from the tax jurisdiction in which it is domiciled
and operated. Income tax credit (expense) comprises of the following: Year ended
    
    8 months ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    April 30,
    
    April 30,2003
    
    2002
    
    2002
    
    2001US$
    
    US$
    
    US$
    
    US$Current taxes arising in
foreign subsidiaries:For the year/period
    
    
    (357
    )
    
    
    (101
    )
    
    
    (2
    )
    
    
    (238
    )Over provision in prior
years
    
    
    92
    
    
    
    
    
    
    
    103
    
    
    
    27Total current tax
    
    
    (265
    )
    
    
    (101
    )
    
    
    101
    
    
    
    (211
    )Deferred taxes arising in
foreign subsidiaries:For the year/period
    
    
    (87
    )
    
    
    
    
    
    
    
    
    
    
    Income taxes credit (expense)
    
    
    (352
    )
    
    
    (101
    )
    
    
    101
    
    
    
    (211
    )
  Reconciliation to the expected statutory tax rate in Hong Kong of 17.5%
(2002: 16% and 2001: 16%)is as follows: Year ended
    
    8 months ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    April 30,
    
    April 30,2003
    
    2002
    
    2002
    
    2001%
    
    %
    
    %
    
    %Statutory rate
    
    
    17.5
    
    
    
    16.0
    
    
    
    (16.0
    )
    
    
    16.0Tax effect of net operating losses
    
    
    20.0
    
    
    
    106.2
    
    
    
    6.7
    
    
    
    6.1Non taxable profits, net
    
    
    (25.8
    )
    
    
    (147.9
    )
    
    
    
    
    
    
    (17.7
    )Impairment loss on goodwill and
investment securities
    
    
    1.6
    
    
    
    30.6
    
    
    
    
    
    
    
    Others
    
    
    3.0
    
    
    
    27.3
    
    
    
    8.0
    
    
    
    1.9Effective rate
    
    
    16.3
    
    
    
    32.2
    
    
    
    (1.3
    )
    
    
    6.3
 F-22




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  11.
    
    INCOME TAXES (CONTINUED)Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Companys deferred tax assets and
liabilities are as follows: As of
    
    As of
    
    As ofDecember 31,
    
    December 31,
    
    April 30,2003
    
    2002
    
    2002US$
    
    US$
    
    US$Deferred tax assets:Net operating loss
    
    
    2,595
    
    
    
    1,789
    
    
    
    1,128Depreciation
    
    
    103
    
    
    
    47
    
    
    
    Start up costs
    
    
    22
    
    
    
    32
    
    
    
    2,720
    
    
    
    1,868
    
    
    
    1,128Valuation allowance
    
    
    (2,658
    )
    
    
    (1,868
    )
    
    
    (1,128
    )Total deferred tax assets
    
    
    62
    
    
    
    
    
    
    
    Deferred tax liabilities:Accelerated tax allowance
    
    
    (149
    )
    
    
    
    
    
    
    Net deferred tax liabilities
    
    
    (87
    )
    
    
    
    
    
    
    
  In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible.Based on the history of the Companys profitability, management believes
that it is more likely than not that the Company will realize the benefits
of the deferred tax assets of US$62, net of valuation allowances as of
December 31, 2003. F-23




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  12.
    
    COMMITMENTS AND CONTINGENCIES  (a)
    
    CommitmentsThe Company leases certain of its office and factory premises under
various operating leases. Rent expenses under these leases totalled
approximately US$657, US$430, US$599 and US$552 for the year ended
December 31, 2003, for the eight months ended December 31, 2002, for
the years ended April 30, 2002 and 2001 respectively.Future minimum rental payments under capitalized leases and
non-cancelable operating leases are approximately as follows: As of December 31, 2003Capitalized leases
    
    Operating leasesUS$
    
    US$2004
    
    
    22
    
    
    
    3102005
    
    
    22
    
    
    
    1252006
    
    
    22
    
    
    
    1582007
    
    
    22
    
    
    
    1302008
    
    
    20
    
    
    
    85Thereafter
    
    
    
    
    
    
    Total future minimum lease payments
    
    
    108
    
    
    
    808Less: amount representing interest
    
    
    (13
    )95
  As of December 31, 2003, the Company had capital expenditure
commitments of US$126.(b)
    
    ContingenciesAs of December 31, 2003, December 31, 2002 and April 30, 2002, the
Company provided guarantee in respect of bank mortgage loans granted
to a director, Mr. Yih Yu Chuan to the extent of US$370, US$437 and
US$672 respectively. F-24




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  13.
    
    COMMON STOCK, WARRANTS AND CONVERTIBLE DEBENTURES  (a)
    
    In the Initial Public Offering, the Company has issued
1,679,000 warrants (including 219,000 over-allotment warrants). Each
warrant entitles the holders to purchase one share of common stock at
a price of US$5.75 per share for a period of five years from the
effective date of the offering on April 15, 1998. The Company has
received all proceeds from the issue totalling US$210 and was
recorded in the Companys additional paid-in capital. On December 5,
2002, the Company announced a two-year extension for these 1,679,000
warrants to April 15, 2005.(b)
    
    In addition to note 13(a) above, the representative of the
Initial Public Offering received warrants to purchase 146,000 shares
of common stock at US$8.25 per share and options to purchase 146,000
warrants, each of which also entitles the holder to purchase one
share of common stock at US$8.25 per share, at US$0.20625 per
warrant. The warrants are exercisable from April 15, 1998 and have
been extended by two years to April 15, 2005. The options are
exercisable from April 15, 1998 and expired on April 15, 2003.(c)
    
    On October 29, 1999, the Company entered into a Securities
Purchase Agreement with an accredited investor pursuant to which the
Company agreed to issue and the investor agreed to purchase up to
US$10,500 of 3% Convertible Debentures, as well as common stock
purchase warrants. The Debenture is convertible into the shares of
the Companys common stock, with an exercise price at the lesser of
Fixed Conversion Price or the Variable Conversion Price. The Fixed
Conversion Price is the greater of US$5.00 per share or 125% of the
average closing bid price of the common stock for the 15 trading days
ending on the trading day immediately before the respective Closing
Dates. The Variable Conversion Price represents 92% of the average
of the two lowest closing bid prices of the common stock during the
20 trading days immediately prior to conversion.On November 5, 1999, the Company issued the first tranche of
US$3,000 of 3% Convertible Debentures with the date of maturity on
November 5, 2002; and Warrants for the Convertible Debenture holder
to purchase 45,000 shares of the Companys common stock at an
exercise price of US$3.75 per share with an expiration date of
November 30, 2004. In addition, Warrants to purchase 30,000 shares
of the Companys common stock were issued to the placement agent as
partial compensation for its services, with the same terms as the
detachable warrants.On March 22, 2000, the Company issued the second tranche of US$3,500
of 3% Convertible Debentures with the date of maturity on March 22,
2003; and Warrants for the Convertible Debenture holder to purchase
52,500 shares of the Companys common stock at an exercise price of
US$6.94 per share with an expiration date of March 31, 2005. In
addition, Warrants to purchase 35,000 shares of the Companys common
stock were issued to the placement agent as partial compensation for
its services, with the same terms as the detachable warrants.During the year ended April 30, 2000, all the first tranche of
US$3,000 and US$500 out of the US$3,500 second tranche Convertible
Debentures and related interest amounting to US$23 up to the dates
of conversion, were exercised, and 1,072,412 shares of common stock
were issued in this respect. The remaining second tranche of
Convertible Debentures of US$3,000 and the accrued interest thereof
amounting to US$16 were converted into 1,233,557 shares of common
stock during the year ended April 30, 2001. F-25




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  13.
    
    COMMON STOCK, WARRANTS AND CONVERTIBLE DEBENTURES (CONTINUED)  (d)
    
    During the eight months ended December 31, 2002, the Company
repurchased, through open market purchases, 318,200 shares of common
stock of the Company at an aggregate consideration of US$391. In
July 2003, the Company sold 318,200 shares to a non-affiliated party
for a consideration of US$541.(e)
    
    During the year ended December 31, 2003, warrants to purchase
150,000 shares of common stock and 1,122,500 stock options were
exercised. As a warrantholder elected to take the cashless exercise
of 95,891 shares of common stock, a total of 1,218,391 shares of
common stock of the Company were issued accordingly.  As of December 31, 2003, the Company had 9,890,006 shares of
common stock issued.14.
    
    EMPLOYEE RETIREMENT BENEFIT PLANSPrior to December 1, 2000, the Company operated a defined contribution
retirement plan (Retirement Plan) which is optional for all qualified
employees in Hong Kong. The assets of the Retirement Plan are held
separately from those of the Company in a provident fund managed by an
independent trustee. The pension cost charge represents contributions
payable to the fund by the Company at rates specified in the rules of the
Retirement Plan. Where employees leave the Retirement Plan prior to
vesting fully in the contributions, the contributions payable by the
Company are reduced by the amount of forfeited contributions.Following the introduction of the Mandatory Provident Fund (MPF)
legislation in Hong Kong, the Company has participated in the defined
contribution mandatory provident fund since December 1, 2000. Both the
Company and its employees in Hong Kong make monthly contributions to the
fund at 5% of the employees earnings as defined under Mandatory Provident
Fund legislation. The 5% monthly contribution of the Company and the
employees are subject to a cap of US$0.128 per month and thereafter
contributions are voluntary. When employees leave the MPF scheme prior to
vesting fully in voluntary contributions, the contributions payable by the
Company are reduced by the amount of forfeited contributions.The amounts of forfeitures in respect of Retirement Plan and MPF scheme
for the year ended December 31, 2003, for the eight months ended December
31, 2002, for the years ended April 30, 2002 and 2001 were US$11, US$17,
US$46 and US$2 respectively which was available to reduce the Companys
employer contribution payable in future periods.As stipulated by the rules and regulations in the PRC, the PRC
subsidiaries are required to contribute to a state-sponsored social
insurance plan for all of its employees at rates ranging from 12% to 17%
of the basic salary of its employees. The state-sponsored retirement plan
was responsible for the entire pension obligations for the actual pension
payments or post-retirement benefits beyond the annual contributions. F-26




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  14.
    
    EMPLOYEE RETIREMENT BENEFIT PLANS (CONTINUED)The Company has adopted Profit Sharing Plan and Trust (Profit
Sharing Plan) for the benefit of substantially all employees in the
US that satisfied the age and service requirements. The Companys
contributions are determined according to a discretionary formula in
an amount determined each year by the management and will be
allocated to each Qualifying Participants Individual account using
the pro rata formula. No profit sharing expense made during all
financial periods since its adoption.Contributions paid and payable by the Company in respect of the employee
retirement benefit plans charged to the consolidated statement of
operations were US$543, US$290, US$481 and US$377 for the year ended
December 31, 2003, for the eight months ended December 31, 2002, for
the years ended April 30, 2002 and 2001 respectively.15.
    
    STOCK-BASED COMPENSATION  (a)
    
    Stock incentive planOn June 1, 1998, the Company adopted a stock option plan (The 1998
Plan) which was approved by the shareholders on December 9, 1998.
The 1998 Plan allows the Board of Directors, or a committee thereof
at the Boards discretion, to provide for a total of 2,000,000 stock
options to officers, directors, key employees and advisors of the
Company. Out of the stock options provided, 1,285,000 stock options
were issued in accordance with the terms of the 1998 Plan on April
12, 1999 to certain officers, directors, key employees and advisors
of the Company at an exercise price of US$5.0 per share (the fair
market value of the common stock as of April 12, 1999) and are
exercisable during the period from April 12, 1999 to April 11, 2009.Pursuant to the 1999 Annual Meeting of the Shareholders on December
15, 1999, the authorized number of stock options was increased from
2,000,000 to 4,000,000. The purchase price of the shares of the
Common Stock covered by the 1998 Plan shall be at least 100% of the
fair market value per share of such shares on the date of grant,
with a term of ten years.On July 1, 2003, the Company adopted the second stock plan (The 2003
Plan) which was approved by the shareholders on December 5, 2003.
The 2003 Plan allows the Board of Directors, or a committee thereof
at the Boards discretion, to provide for a total of 4,000,000 stock
options to officers, directors, key employees and advisors of the
Company. The purchase price of the shares of the Common Stock
covered by The 2003 Plan could be less than, equal to or greater
than 100% of the fair market value of the Common Stock at the time
of grant, with a term of ten years. F-27




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  15.
    
    STOCK-BASED COMPENSATION (CONTINUED)  (a)
    
    Stock incentive plan (Continued)The stock options activities and related information are summarized
as follows: As of December 31,
    
    As of April 30,2003
    
    2002
    
    2002
    
    2001Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    average
    
    
    
    
    
    average
    
    
    
    
    
    averageexercise
    
    
    
    
    
    exercise
    
    
    
    
    
    exercise
    
    
    
    
    
    exerciseOptions
    
    price
    
    Options
    
    price
    
    Options
    
    Price
    
    Options
    
    priceUS$
    
    
    
    
    
    US$
    
    
    
    
    
    US$
    
    
    
    
    
    US$Outstanding,
beginning of
year/period
    
    
    3,025,500
    
    
    
    2.00
    
    
    
    2,918,000
    
    
    
    2.00
    
    
    
    3,376,000
    
    
    
    2.00
    
    
    
    1,550,000
    
    
    
    5.00Granted
    
    
    2,000,000
    
    
    
    2.00
    
    
    
    300,000
    
    
    
    2.00
    
    
    
    
    
    
    
    
    
    
    
    5,226,000
    
    
    
    2.35Exercised
    
    
    (1,122,500
    )
    
    
    2.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cancelled
    
    
    (89,000
    )
    
    
    2.00
    
    
    
    (192,500
    )
    
    
    2.00
    
    
    
    (458,000
    )
    
    
    2.00
    
    
    
    (3,400,000
    )
    
    
    3.91Outstanding, end of
year/period
    
    
    3,814,000
    
    
    
    2.00
    
    
    
    3,025,500
    
    
    
    2.00
    
    
    
    2,918,000
    
    
    
    2.00
    
    
    
    3,376,000
    
    
    
    2.00Exercise price
equals to market
price on date of
grant
    
    
    1,739,000
    
    
    
    2.00
    
    
    
    2,838,000
    
    
    
    2.00
    
    
    
    2,918,000
    
    
    
    2.00
    
    
    
    3,376,000
    
    
    
    2.35Exercise price
exceeds to market
price on date of
grant
    
    
    2,075,000
    
    
    
    2.00
    
    
    
    187,500
    
    
    
    2.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,814,000
    
    
    
    2.00
    
    
    
    3,025,500
    
    
    
    2.00
    
    
    
    2,918,000
    
    
    
    2.00
    
    
    
    3,376,000
    
    
    
    2.35Exercisable, end of
year/period
    
    
    2,557,000
    
    
    
    2.00
    
    
    
    2,913,000
    
    
    
    2.00
    
    
    
    2,918,000
    
    
    
    2.00
    
    
    
    3,376,000
    
    
    
    2.00Weighted average
remaining
contractual life
    
    7.04 years
    
    
    
    
    
    5.33 years
    
    
    
    
    
    6.06 years
    
    
    
    
    
    7.06 years
  All options issued, other than 1,257,000 options are immediately
exercisable as of December 31, 2003. The 1,257,000 options are
issued and outstanding but only vest in additional increments of
337,500, 337,500, 300,000 and 282,000 upon 2004, 2005, 2006 and 2007
respectively. The options totaling 1,257000 and 112,500 for the
year ended December 31, 2003 and for the eight months period ended
December 31, 2002 respectively, were not included in the diluted
income per share calculation because their effect would have been
anti-dilutive. F-28




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  15.
    
    STOCK-BASED COMPENSATION (CONTINUED)  (b)
    
    Warrants  (i)
    
    The Company issued to a placement agent two
warrants to purchase an aggregate of 65,000 shares of common
stock for the services rendered in respect of the issue of the
convertible debentures on November 5, 1999 and March 22, 2000
(see note 13(c)).(ii)
    
    On July 31, 1999 the Company entered into a
consulting agreement with a consultant which providing investor
relationship services to the Company, and the Company agreed to
issue a 5-year common stock purchase warrant, with the expiry
date on July 30, 2004. The consulting agreement was terminated
on January 31, 2000 and a warrant to purchase 35,000 shares of
common stock of the Company at an exercise price of US$5.00 was
issued.(iii)
    
    On May 26, 2001, the Company entered into a
consulting agreement with a consultant for a period of 24
months commencing on June 1, 2001. Pursuant to the agreement,
the Company issued to the consultant warrants to purchase
260,000 shares of common stock of the Company on June 1, 2001.
Of the warrants issued on June 1, 2001, the warrantholder is
entitled to:  
    
    purchase 100,000 shares at US$2.29 per
share exercisable through May 31, 2003 (expired, as of
December 31, 2003);
    
    purchase 80,000 shares at US$3.43 per share exercisable through May 31, 2004;
    
    purchase 80,000 shares at US$4.57 per share exercisable through May 31, 2005.  (iv)
    
    On May 27, 2001, the Company entered into another
consulting agreement with a consultant. Pursuant to the
agreement, the Company issued to the consultant warrants to
purchase 100,000 shares of the common stock of the Company. On
the same day, the Company issued to the consultant the said
warrants at US$2.79 per share exercisable through May 26, 2002.(v)
    
    On August 16, 2001, the Company issued to an agent
warrants to purchase 200,000 shares of common stock of the
Company in consideration for consultancy services at US$3.00
per share exercisable through August 15, 2006.(vi)
    
    On April 15, 2002, in accordance with a common
stock purchase agreement, the Company issued to an investor
warrants to purchase 150,000 shares of common stock of the
Company at US$1.79 per share exercisable through April 14,
2005. The warrants were exercised in July 2003 and 95,891 shares of common stock were issued accordingly pursuant to the
cashless exercise.(vii)
    
    Pursuant to a strategic advisory services
agreement dated July 1, 2003, the Company issued to a
consultant warrants to purchase 600,000 shares of common stock
of the Company at US$2 per share exercisable through March 31,
2004. F-29




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  15.
    
    STOCK-BASED COMPENSATION (CONTINUED)  (b)
    
    Warrants (Continued)Save as disclosed above, none of the warrants as aforesaid was
exercised for the year ended December 31, 2003, for the eight-month
period ended December 31, 2002 and for each of the years in the
two-year period ended April 30, 2002. The costs associated with
these transactions are accounted for based on fair value of the
warrants at the date of issue.In addition, incentive stock options were issued to
consultants/advisers under The 1998 Plan (see note 15(a)) to
purchase the common stock of the Company as part of their fees
during the year ended April 30, 2001. The costs associated with
these transactions are also accounted for based on the fair value of
these options at the date of issue.Using the Black-Scholes option pricing model with the following
weighted-average assumptions: Year endedDecember 31, 2003
    
    April 30, 2002
    
    April 30, 2001Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Expected stock price volatility
    
    
    9
    %
    
    
    23
    %
    
    
    22
    %Risk-free interest rate
    
    
    1.07
    %
    
    
    4.23
    %
    
    
    5.34
    %Expected life of options
    
    0.75 years
    
    3.21 years
    
    3 years
  The fair value of these warrants and options was estimated as US$9,
US$297, US$266 respectively for the years ended December 31, 2003,
April 30, 2002 and 2001. There were no incentive stock options and
warrants granted and issued to consultants/advisers during the eight
months ended December 31, 2002, and accordingly no related costs
arose. The additional expense was recognized in the consolidated
statement of operations and the same amount was recorded in the
Companys additional paid-in capital. F-30




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  16.
    
    RELATED PARTY TRANSACTIONS  (a)
    
    Names and relationship of related parties: Existing relationships with the CompanyYih Yu Chuan
    
    Director and major shareholder of the
CompanyGemological Institute of
America, Hong Kong Limited
    
    Common directoriBBC Inc.
    
    Common director (Became a subsidiary)Gemriver Jewelry Limited
    
    Common directors (Became a subsidiary)Tanzanite (H.K.) Limited
    
    Common directors
  (b)
    
    Summary of balances with related parties: As of
    
    As of
    
    As ofDecember 31,
    
    December 31,
    
    April 30,Note
    
    2003
    
    2002
    
    2002US$
    
    US$
    
    US$Due from related parties:Gemological Institute of America,
Hong Kong Limited
    
    
    
    
    
    
    464
    
    
    
    464
    
    
    
    468Tanzanite (H.K.) Limited
    
    
    
    
    
    
    44
    
    
    
    47
    
    
    
    53(i
    )
    
    
    508
    
    
    
    511
    
    
    
    521Certain banking facilities granted
to the Company collateralized by
properties owned by Yih Yu Chuan
and his personal guarantee to the
extent of
    
    
    
    
    
    
    9,147
    
    
    
    8,311
    
    
    
    8,440
 F-31




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##### Table of Contents



16.
    
    RELATED PARTY TRANSACTIONS (CONTINUED)  (c)
    
    Summary of related party transactions: Year ended
    
    8 months ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    April 30,
    
    April 30,Notes
    
    2003
    
    2002
    
    2002
    
    2001US$
    
    US$
    
    US$
    
    US$Sales:Gemriver Jewelry
Limited
    
    (ii)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    158Purchase of equity
interest in iBBC
Inc., an entity
controlled by Yih
Yu Chuan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,460
    
    
    
    Advances to:Gemriver Jewelry
Limited
    
    (iii)
    
    
    
    
    
    
    
    
    
    
    679
    
    
    
    711iBBC Inc.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,763
    
    
    
    
    
    
    
    
    
    
    
    5,442
    
    
    
    711Repayment from:Gemriver Jewelry
Limited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,360
    
    
    
    iBBC Inc.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,951
    
    
    
    
    
    
    
    
    
    
    
    6,311
    
    
    
    
  (i)
    
    The amounts due from related parties represent
unsecured advances which are interest-free and repayable on
demand.(ii)
    
    The sales to the related party are made according
to the published prices and conditions offered to the major
customers of the Company.(iii)
    
    The advances were expenses paid on behalf of
related parties with terms set out in note 16(c)(i) above.  The related party transactions with Gemriver Jewelry Limited and
iBBC Inc. as aforesaid relate to transactions made before they
became subsidiaries of the Company. F-32




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  17.
    
    SEGMENT INFORMATIONThe management reported segment information on a geographical basis as
over 90% of the Companys turnover and contribution to operating results
are derived from the business segment of manufacture and sales of jewelry.
In respect of geographical segment reporting, revenues are based on the
country in which the customer is located. Total long-lived assets are
where the assets are located.  (a)
    
    Geographical segments: Year ended
    
    8 months ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    April 30,
    
    April 30,2003
    
    2002
    
    2002
    
    2001US$
    
    US$
    
    US$
    
    US$Revenue from external
customers:US & Canada
    
    
    42,851
    
    
    
    24,545
    
    
    
    28,810
    
    
    
    38,463Hong Kong
    
    
    1,961
    
    
    
    1,451
    
    
    
    4,897
    
    
    
    599Europe and other countries
    
    
    8,017
    
    
    
    3,469
    
    
    
    5,518
    
    
    
    7,028PRC
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    74Japan
    
    
    5,338
    
    
    
    2,344
    
    
    
    9
    
    
    
    12158,167
    
    
    
    31,809
    
    
    
    39,240
    
    
    
    46,285
 As of
    
    As of
    
    As ofDecember 31,
    
    December 31,
    
    April 30,2003
    
    2002
    
    2002US$
    
    US$
    
    US$Carrying amount of long-lived assets:Hong Kong
    
    
    5,564
    
    
    
    5,744
    
    
    
    6,224PRC
    
    
    3,030
    
    
    
    3,027
    
    
    
    2,318US
    
    
    303
    
    
    
    403
    
    
    
    394Total long-lived assets (excluding goodwill)
    
    
    8,897
    
    
    
    9,174
    
    
    
    8,936Reconciling items:Others
    
    
    51,789
    
    
    
    39,714
    
    
    
    34,587Total consolidated assets
    
    
    60,686
    
    
    
    48,888
    
    
    
    43,523
 F-33




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  17.
    
    SEGMENT INFORMATION (CONTINUED)  (b)
    
    The Company derived operating revenue from the following major
customers, which accounted for over 10% of operating revenue. Year ended
    
    8 months ended
    
    Year ended
    
    Year endedDecember 31, 2003
    
    December 31, 2002
    
    April 30, 2002
    
    April 30, 2001US$
    
    %
    
    US$
    
    %
    
    US$
    
    %
    
    US$
    
    %Sterling, Inc
    
    
    5,870
    
    
    
    10
    
    
    
    2,709
    
    
    
    9
    
    
    
    3,121
    
    
    
    8
    
    
    
    3,605
    
    
    
    8QVC Network Inc.
    
    
    5,869
    
    
    
    10
    
    
    
    8,021
    
    
    
    25
    
    
    
    10,963
    
    
    
    28
    
    
    
    21,848
    
    
    
    47Goldleaves Trading Ltd.
    
    
    1,858
    
    
    
    3
    
    
    
    1,418
    
    
    
    4
    
    
    
    4,273
    
    
    
    11
    
    
    
    
    
    
    
    
  Trade receivables related to these major customers were US$4,311,
US$4,885 and US$4,193, as of December 31, 2003, December 31, 2002 and
April 30, 2002 respectively.  18.
    
    RECLASSIFICATIONSCertain prior year amounts have been reclassified to conform to the
current year presentation. F-34




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##### Table of Contents



ITEM 19. EXHIBITS The following exhibits are being filed as part of this Annual Report on Form 20-F: 1.1
    
    
    Memorandum of Association of the Company*1.2
    
    
    Articles of Association of the Company*1.3
    
    
    Amendment to Articles of Association of the Company*4.1
    
    
    Employment Agreement of Yu Chuan Yih with the Registrant8.1
    
    
    List of Significant Subsidiaries of the Company11.1
    
    
    Code of Ethics12.1
    
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)12.2
    
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)13.1
    
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 135013.2
    
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350
   *
    
    Incorporated by reference to the Exhibits to our Registration Statement on
Form F-1 and pre-effective and post-effective amendments thereto, SEC File No.
333-7912, declared effective on April 15, 1998.




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##### Table of Contents



SIGNATURES The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf. LJ INTERNATIONAL INC.(Registrant)Date: March 30, 2004
    
    By:
    
    /s/ Yu Chuan Yih
Yu Chuan Yih
Chairman




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##### Table of Contents



EXHIBIT INDEX Exhibit
    
    
    
    PageNumber
    
    Description of Exhibit
    
    Number1.1
    
    Memorandum of Association of the Company *1.2
    
    Articles of Association of the Company *1.3
    
    Amendment to Articles of Association of the Company *4.1
    
    Employment Agreement of Yu Chuan Yih with the Registrant8.1
    
    List of Significant Subsidiaries of the Company11.1
    
    Code of Ethics12.1
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)12.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)13.1
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 135013.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350
   *
    
    Incorporated by reference to the Exhibits to our Registration Statement
on Form F-1 and pre-effective and post-effective amendments thereto, SEC
File No. 333-7912, declared effective on April 15, 1998.