<PAGE>
                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 20-F

           [ ] 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 1934
                    FOR THE FISCAL YEAR ENDED APRIL 30, 2002

                                       OR

          [ ] 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.
             ------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

                              LJ INTERNATIONAL INC.
                 -----------------------------------------------
                 (Translation of Registrant's name into English)

                             BRITISH VIRGIN ISLANDS
                 -----------------------------------------------
                 (Jurisdiction of incorporation or organization)

                             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.


               Title of each                              Name of each exchange
                   class                                   on which registered
              ---------------                            ---------------------
                   None                                            N/A


<PAGE>

Securities registered or to be registered pursuant to Section 12(g) of the Act.

                  $.01 Par Value Common Stock ("Common Stock")
                  --------------------------------------------
                                (Title of Class)

                 Warrants to Purchase Common Stock ("Warrants")
                 ----------------------------------------------
                                (Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.

                                      None
                                ----------------
                                (Title of Class)

         Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of April 30, 2002:

                             8,671,615 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
              -----       -----

         Indicate by check mark which financial statement item the registrant
has elected to follow.

Item 17           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-
<PAGE>
                           FORWARD-LOOKING STATEMENTS

         The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Annual Report on Form 20-F and other materials filed or to be filed by us with
the Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by us) contains
statements that are forward-looking, such as statements relating to plans for
future expansion and other business development activities as well as other
capital spending, financing sources and the effects of competition. Such
forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on our behalf. These risks and uncertainties include, but are not
limited to, those relating to dependence upon certain customers, dependence upon
key personnel, control by principal shareholder, competition from larger
competitors, material factors relating to the operations of the business,
People's Republic of China ("PRC") and Hong Kong political considerations,
dependence on factories in China, and general economic conditions.



                                      -3-
<PAGE>
                                     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.


                                       -4-
<PAGE>
                      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 five- year period ended April 30, 2002 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.

         We prepare our consolidated financial statements in accordance with
Hong Kong GAAP, which differs in certain material respects from US GAAP. For a
discussion of the significant differences between Hong Kong GAAP and US GAAP,
see Note 19 of Notes To And Forming Part Of The Financial Statements.

CONSOLIDATED STATEMENTS OF OPERATIONS DATA:

<Table>
<Caption>
                                                                         Year ended April 30,
                                              --------------------------------------------------------------------
                                                  1998        1999        2000        2001        2002        2002
                                                   HK$         HK$         HK$         HK$         HK$         US$
                                              --------    --------    --------    --------    --------    --------
<S>                                           <C>         <C>         <C>         <C>         <C>         <C>
AMOUNT IN ACCORDANCE WITH HONG
    KONG GAAP
Operating revenues ........................    124,199     195,219     300,901     357,785     303,326      39,240
                                              ========    ========    ========    ========    ========    ========

Operating income (loss) ...................     31,540      39,723      38,725      36,472     (57,868)     (7,487)
Interest expense, net .....................     (6,964)     (5,186)     (2,980)     (2,781)     (3,364)       (435)
                                              --------    --------    --------    --------    --------    --------
Income (loss) before income taxes .........     24,576      34,537      35,745      33,691     (61,232)     (7,922)
Income taxes (charge) credit ..............     (2,120)       (380)        (25)     (1,637)        784         101
                                              --------    --------    --------    --------    --------    --------
Net income (loss) .........................     22,456      34,157      35,720      32,054     (60,448)     (7,821)
                                              ========    ========    ========    ========    ========    ========
Dividends per share .......................         --          --          --          --          --          --
                                              --------    --------    --------    --------    --------    --------

NUMERATOR:
Net income (loss) used in computing basic
    earnings (loss) per share .............     22,456      34,157      35,720      32,054     (60,448)     (7,821)
Interest on 3% convertible debentures .....         --          --         251         127          --          --
                                              --------    --------    --------    --------    --------    --------
Adjusted net income (loss) used in
    computing diluted earnings (loss) per
    share .................................     22,456      34,157      35,971      32,181     (60,448)     (7,821)
                                              ========    ========    ========    ========    ========    ========
DENOMINATOR:
Weighted average number of shares
    outstanding - basic (thousands) .......      4,539       6,347       6,589       8,567       8,672       8,672
Effect of dilutive potential ordinary
    shares:
    3% convertible debentures .............         --          --         337          49          --          --
    Warrants ..............................          5          --           7          --          --          --
    Options ...............................         --           1          --           6          --          --
                                              --------    --------    --------    --------    --------    --------
Weighted average number of shares
    outstanding - diluted (thousands) .....      4,544       6,348       6,933       8,622       8,672       8,672
                                              ========    ========    ========    ========    ========    ========

Earnings (loss) per share - basic .........       4.95        5.38        5.42        3.74       (6.97)      (0.90)
                                              ========    ========    ========    ========    ========    ========

Earnings per share - diluted ..............       4.94        5.38        5.19        3.73       (N/A)       (N/A)
                                              ========    ========    ========    ========    ========    ========
</Table>





                                      -5-
<PAGE>

<Table>
<Caption>
                                                                    Year ended April 30,
                                               ----------------------------------------------------------------
                                                   1998       1999       2000       2001       2002        2002
                                                    HK$        HK$        HK$        HK$        HK$         US$
                                               --------   --------   --------   --------   --------    --------
                                                         (Restated) (Restated) (Restated)
<S>                                             <C>       <C>        <C>        <C>        <C>          <C>
AMOUNT IN ACCORDANCE WITH US
    GAAP
Operating revenues .........................    124,199    195,219    300,901    357,785    303,326      39,240
                                               ========   ========   ========   ========   ========    ========
Operating income (loss) before
    income taxes (as restated for
    1999, 2000 and 2001) ...................     14,325     32,347     29,698     25,868    (61,853)     (8,002)
                                               --------   --------   --------   --------   --------    --------
Net income (loss) per US GAAP
    (as restated for 1999, 2000
    and 2001) ..............................     12,205     31,967     29,673     24,231    (61,069)     (7,901)
                                               --------   --------   --------   --------   --------    --------

Dividends per share ........................         --         --         --         --         --          --
                                               --------   --------   --------   --------   --------    --------

NUMERATOR:
Net income (loss) used in computing basic
    earnings (loss) per share (as restated
    for 1999, 2000 and 2001) ...............     12,205     31,967     29,673     24,231    (61,069)     (7,901)
Interest on 3% convertible debentures ......         --         --        251        127         --          --
                                               --------   --------   --------   --------   --------    --------
Adjusted net income (loss) used in
    computing diluted earnings (loss) per
    share (as restated for 1999, 2000
     and 2001) .............................     12,205     31,967     29,924     24,358    (61,069)     (7,901)
                                               ========   ========   ========   ========   ========    ========
DENOMINATOR:
Weighted average number of shares
    outstanding under
    HK GAAP - basic (thousands) ............      4,539      6,347      6,589      8,567      8,672       8,672
Shares for Deen Merger .....................         62         --         --         --         --          --
                                               --------   --------   --------   --------   --------    --------
Weighted average number of shares
    outstanding under
    US GAAP - basic (thousands) ............      4,601      6,347      6,589      8,567      8,672       8,672
Effect of dilutive potential ordinary
    shares:
    3% convertible debentures ..............         --         --        337         49         --          --

    Warrants ...............................          5         --         18         --         --          --
    Options ................................         --          1         --          1        107         107
                                               --------   --------   --------   --------   --------    --------
Weighted average number of shares
    outstanding under
    US GAAP - diluted (thousands) ..........      4,606      6,348      6,944      8,617      8,779       8,779
                                               ========   ========   ========   ========   ========    ========
Earnings (loss) per share - basic
    (as restated for 1999, 2000
      and 2001) ............................       2.65       5.04       4.50       2.83      (7.04)      (0.91)
                                               ========   ========   ========   ========   ========    ========

Earnings (loss) per share - diluted
    (as restated for 1999, 2000
      and 2001) ............................       2.65       5.04       4.31       2.83      (7.04)      (0.91)
                                               ========   ========   ========   ========   ========    ========
</Table>



                                      -6-
<PAGE>

CONSOLIDATED BALANCE SHEET DATA:

<Table>
<Caption>
                                                              As of April 30,
                                    ---------------------------------------------------------------
                                        1998       1999       2000       2001       2002       2002
                                         HK$        HK$        HK$        HK$        HK$        US$
                                                            (Restated)
<S>                                  <C>       <C>        <C>        <C>        <C>        <C>
AMOUNT IN ACCORDANCE WITH
    HONG KONG GAAP
    Working capital .............     39,090     75,645    158,795    155,787     93,652     12,115
    Total assets ................    154,616    222,875    310,539    367,379    332,177     42,972
    Long-term obligations .......     10,544      9,028     29,472      2,216         61          8
    Total shareholders' equity ..     90,257    128,428    188,179    242,635    182,187     23,568

AMOUNT IN ACCORDANCE WITH
    US GAAP
    Working capital .............     39,090     75,645    158,937    155,787     93,652     12,115
    Total assets ................    142,307    213,020    306,881    365,614    332,088     42,961
    Long-term obligations .......     10,544      9,028     22,755      2,216         61          8
    Total shareholders' equity ..     77,948    118,573    191,235    240,870    182,098     23,557
</Table>

EXCHANGE RATE INFORMATION

         We have prepared our consolidated financial statements in accordance
with Hong Kong generally accepted accounting principles consistently applied and
publish such statements in Hong Kong dollars, which is the functional currency
of our subsidiaries and the legal tender currency of Hong Kong. All references
to "Hong Kong dollars" or "HK$" are to Hong Kong dollars. All references to
"U.S. Dollars," "dollars" or "$" are to United States dollars.



                                      -7-
<PAGE>

Conversion of amounts from Hong Kong dollars into United States dollars for the
convenience of the reader has been made at the exchange rate of US$1.00 =
HK$7.73.

         The following table sets forth certain information concerning exchange
rates between Hong Kong dollars and U.S. dollars for the periods indicated. It
represents the noon buying rate in New York for cable transfers payable in
foreign currencies as certified for customs purposes by the Federal Reserve Bank
of New York. The average noon buying rate is determined by averaging the rates
on the last business day of each month during the relevant period.

<Table>
<Caption>
   CALENDAR YEAR                         AVERAGE NOON
   -------------                         ------------
                                         BUYING RATE
                                         -----------
                                        (HK$ PER US$)
<S>                                     <C>
       1997                                7.7431
       1998                                7.7467
       1999                                7.7594
       2000                                7.7924
       2001                                7.7997
</Table>

<Table>
<Caption>
      CALENDAR MONTH            HIGH                     LOW
      --------------            ----                     ---
<S>                             <C>                      <C>
     February 2002              7.7999                   7.7991
     March 2002                 7.8000                   7.7993
     April 2002                 7.8095                   7.7992
     May 2002                   7.8001                   7.7990
     June 2002                  7.8005                   7.7993
     July 2002                  7.8005                   7.7999
</Table>

As of August 9, 2002, being the latest practicable date, the exchange rate was
US$1.00 = HK$7.8000.

B.       CAPITALIZATION AND INDEBTEDNESS.

         Not applicable.

C.       REASONS FOR THE OFFER AND USE OF PROCEEDS.

         Not applicable.


                                      -8-
<PAGE>
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 substantial portion of our sales involve rings to one volume
customer, QVC, Inc. For the fiscal years ended April 30, 2001 and 2002, QVC,
Inc. accounted for approximately 47% and 28% 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 cannot assure that QVC,
Inc. will continue to use us for the design and manufacture of a portion of
their jewelry requirements.

WE ARE CONTROLLED BY ONE OF OUR EXISTING SHAREHOLDERS, WHOSE INTERESTS MAY
DIFFER FROM OTHER SHAREHOLDERS.

         Our largest shareholder beneficially owns or controls approximately
36.5% of our outstanding shares as of July 31, 2002. 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.

         The manufacture and distribution of jewelry is a highly competitive
industry characterized by a diversity and sophistication of 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 manufacturers 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 manufacturer and merchandiser of low-cost, high-quality gem-set
jewelry, our existing and future operations are and will be influenced by
several factors, including:

         o    technological developments in the mass production of jewelry;




                                      -9-
<PAGE>

         o    our ability to efficiently meet the design and production
              requirements of our customers;

         o    the market acceptance of our customers' jewelry;

         o    increases in expenses associated with continued sales growth;

         o    our ability to control costs;

         o    our management's ability to evaluate the public's taste and new
              orders to target satisfactory profit margins;

         o    our capacity to develop and manage the introduction of new
              designed products; and

         o    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 SALES AND MARKETING OPERATIONS ARE PERFORMED PRINCIPALLY AT OUR EXECUTIVE
OFFICES WHICH ARE LOCATED IN HONG KONG. AS A RESULT, OUR RESULTS OF OPERATIONS
AND FINANCIAL CONDITION MAY BE INFLUENCED BY THE POLITICAL SITUATION IN HONG
KONG AND BY THE GENERAL STATE OF THE HONG KONG ECONOMY.

         On July 1, 1997, sovereignty over Hong Kong was transferred from the
United Kingdom to China, and Hong Kong became a Special Administrative Region of
China, an SAR. As provided in the Sino-British Joint Declaration on the Question
of Hong Kong, referred to as the Joint Declaration, and the Basic Law of the
Hong Kong SAR of China, referred to as the Basic Law, the Hong Kong SAR is to
have a high degree of autonomy except in foreign and defense affairs. Under the
Basic Law, the Hong Kong SAR is to have its own legislature, legal and judicial
system and full economic autonomy for 50 years. We cannot assure, however, that
changes in political or other conditions will not result in an adverse impact on
our financial and operating condition.

OUR MANUFACTURING 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.



                                      -10-
<PAGE>
OUR PRODUCTS ARE CURRENTLY MANUFACTURED AT OUR FACTORIES LOCATED IN SHANTOU AND
SHENZHEN, CHINA. HOWEVER, FIREFIGHTING AND DISASTER RELIEF OR ASSISTANCE IN
CHINA ARE PRIMITIVE BY WESTERN STANDARDS.

         We have obtained fire, casualty and theft insurance aggregating
approximately $10.9 million covering several of our stock in trade, goods and
merchandise, furniture and equipment and factory buildings in China. The
proceeds of such insurance may not be sufficient to cover material damage to, or
the loss of, our factories 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 BETWEEN JUNE AND
JANUARY OF EACH YEAR DUE TO THE IMPORTANCE OF THE HOLIDAY SELLING SEASON.

         The approximately 28% of our sales during the fiscal year ended April
30, 2002 to our largest customer, QVC, Inc., were not seasonal in nature. It has
been our management's experience that the remaining 72% of our total sales are
seasonally sensitive.

OUR HOLDING COMPANY STRUCTURE CREATES RESTRICTIONS ON THE PAYMENT OF DIVIDENDS.

         We have no direct business operations, other than our ownership of our
subsidiaries. While we have no current intention of or restriction on paying
dividends, should we decide in the future to do so, as a holding company, 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, from time to time, may
be subject to restrictions on their ability to make distributions to us,
including as a result of restrictive covenants 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:

         o    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



                                      -11-
<PAGE>

         o    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:

         o    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;

         o    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

         o    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 the same information
which is generally available about public companies organized in the United
States.


                                      -12-
<PAGE>
ITEM 4.     INFORMATION ON THE COMPANY

A.       HISTORY AND DEVELOPMENT OF THE COMPANY.

         LJ International Inc. ("we") were 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:

  o      Lorenzo Jewelry Limited ("Lorenzo Jewelry"), a company incorporated in
         Hong Kong on February 20, 1987.  Lorenzo Jewelry owns all of the
         equity in:

         o        Shantou SEZ Lorenzo Gems & Craft Factory Co., Ltd.; and

         o        Shantou Lorenzo Jewelry Mfg.

  o      Lorenzo Gems Manufacturing (Shenzhen) Co., Ltd.

  o      Lorenzo Jewellery (Shenzhen) Co., Ltd.

  o      Lorenzo Diamond Jewelry Mfg. Co. Limited.

  o      iBBC, Inc.

         Under a cooperative joint venture agreement between Lorenzo Jewelry
and Guangdong Province Shantou Artcrafts Imports and Exports Co., we control the
operating and financial activities of Shantou Lorenzo Jewelry Mfg. and are
responsible for all of its profits and losses.

         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.

         We have not made any significant capital expenditures or divestitures
during our last three fiscal years, nor are any currently in progress. Our
purchases of property, plant and equipment consisted of the following, presented
in HK$ in thousands:

<Table>
<Caption>
                                                         Year ended April 30,
                                                  ----------------------------------
                                                   2000          2001           2002
<S>                                             <C>           <C>            <C>
     Leasehold improvement                        1,041         2,654          1,664
     Furniture, fixtures & equipment              1,219         2,442          1,397
     Plant and machinery                          1,364         1,374            187
                                                -------       -------        -------
     Total                                        3,624         6,470          3,248
</Table>

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




                                      -13-
<PAGE>

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.

         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 manufacturing
further enhance our competitive position.

         We employ an international design team and all of our designs and
merchandising strategies are proprietary. Our 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 who
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:

         o    fine jewelers;

         o    national jewelry chains;

         o    department stores;

         o    electronic retailers; and

         o    specialty retailers.

         For the fiscal years ended April 30, 2001 and 2002, approximately 83%
and 73% 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 last three financial years:

<Table>
<Caption>
                                                   Year ended April 30,
                                      ---------------------------------------------
                                           2000        2001        2002        2002
                                      ---------   ---------   ---------   ---------
                                            HK$         HK$         HK$         US$
<S>                                     <C>         <C>         <C>          <C>
         United States and Canada       231,751     297,321     222,704      28,810
         Hong Kong                       20,395       4,631      37,855       4,897
         Europe and other countries      45,330      54,330      42,653       5,518
         China                            2,413         569          49           6
         Japan                            1,012         934          65           9
                                      ---------   ---------   ---------   ---------
                                        300,901     357,785     303,326      39,240
</Table>



                                      -14-
<PAGE>
         Approximately 28% of our sales during the fiscal year ended April 30,
2002 were to our largest customer, QVC, Inc., and were not seasonal in nature.
It has been our management's experience that the remaining 72% of our total
sales are seasonally sensitive and occur primarily during August to January of
each year.

OUR INDUSTRY

         The jewelry industry is comprised of two major groups that distribute
finished jewelry to retailers in the United States:

         o    a small number of manufacturers that make and distribute their own
              jewelry directly to retailers; and

         o    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 manufacturers because they believe that prime manufacturers 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:

         o    increase our market share of moderately priced high-quality
              gem-set semi-precious and precious jewelry by capitalizing on our
              unique vertically integrated manufacturing processes to produce
              diamond and high-end precious stone jewelry in addition to high
              volume, high- quality semi-precious products;

         o    further develop our existing customer relationships with our
              specialized services; and

         o    aggressively expand into new distribution channels, particularly
              in the United States and throughout Western Europe, Japan, and
              China.

         We are aggressively developing new product lines in exotic stones,
which have high perceived values in semi-precious stones. We have recently
expanded into new product categories by:

         o    marketing a line of sterling silver jewelry. These are typically
              merchandised with a retail price range of $30 to $150;

         o    offering a new branded collection of sterling silver and 18 karat
              gold jewelry with a retail price range of $199 to $999; and



                                      -15-
<PAGE>

         o    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.

         We intend to implement our business strategy by:

         o    developing a new 18,000 square feet CAD/CAM enabled production
              facility devoted to diamonds and high-end precious stones, with
              technology to fully integrate computer design from prototype to
              sample

         o    promoting visits with customers to coordinate and develop their
              particular promotional sales needs and monitoring their on-hand
              inventory in order to promote more active sell-through

         o    expanding our distribution channels to include all major TV
              shopping programs in North America, Japan and Korea and further
              developing business with top-20 discount department store chains
              and one prominent warehouse club in the U.S.

         o    acquiring an electronic supply and replenish module for
              independent jewelry stores in the U.S., and building a European
              platform in Paris, France to network with key supersellers.

OUR MANUFACTURING CAPABILITY

         We have established two sophisticated factories located in China that
perform stone cutting and polishing and jewelry manufacturing. The factories are
located in the cities of Shantou and Shenzhen in Guangdong Province, China. The
Shantou facility is the older of the two facilities. It consists of 45,000
square feet and has been operating for ten years. The Shenzhen facility has been
operating for five years and has 50,000 square feet of manufacturing space. We
currently employ approximately 2,000 skilled gemstone cutters and manufacturing
personnel and are producing approximately two million carats of cut gemstones
and two million pieces of finished fine jewelry annually.

         We purchase imported choice gemstone material which are from mines
located in Africa, China and South America, especially concentrated in Brazil.
Gemstone craftsmen are trained and managed by our Hong Kong personnel to insure
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.

         We employ specialized manufacturing processes that deliver large
quantities of high quality finished jewelry. We are currently producing
approximately 160,000 pieces of finished jewelry per month from our two
facilities. Each piece of jewelry receives hand made attention, resulting in
fine quality finishing at popular prices.



                                      -16-
<PAGE>
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 intend to devote our efforts towards brand development and
utilize marketing concepts to enhance the saleability of our production. We
recognize that retailers favor certain price points. As part of our product
development strategy, we attempt 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. Our marketing and distribution strategy is to identify the strongest
retail 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:

         o    fine jewelers;

         o    national jewelry chains;

         o    department stores;

         o    electronic retailers; and

         o    specialty retailers.

         Our single largest customer is QVC, Inc. which accounted for
approximately 47% of our sales during fiscal 2001 and 28% of our sales during
fiscal 2002. We do not sell to QVC, Inc. pursuant to any formal or long-term
contracts but only on a purchase order basis. Although we have developed and
maintained a good and longstanding relationship with QVC, Inc., the loss of QVC,
Inc. as a customer or a significant reduction in its orders would have a
materially adverse effect on us.

         In March 2000, our wholly-owned subsidiary Lorenzo Jewelry Mfg. (H.K.)
Limited (n/k/a Lorenzo Jewelry Limited) entered into a three-year agreement with
QVC, Inc. Under the terms of the agreement, QVC has the exclusive right to
promote, market, sell and distribute all of the jewelry and watches which we
manufacture, develop or sell through direct response television programs in
North America, the United Kingdom and Germany. Upon expiration of the initial
three-year term, the agreement automatically renews for additional three-year
terms if QVC issued purchase orders to us of at least $80 million during the
initial term, with certain minimum increases in purchase orders for each
succeeding three-year term. The agreement does not, however, obligate QVC to
issue any purchase orders to us.

         In addition to direct sales to QVC, Inc. and other retailers, we also
sell our products to retailers through International Jewelry Connection. The
principal focus of IJC is on major U.S.



                                      -17-
<PAGE>

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
actively advertise 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 a growing team of twelve designers who work in a
designated area within the Shenzhen manufacturing facility. The Hong Kong design
director and the most experienced Hong Kong design staff closely supervises the
China-based designers. The China-based designers create designs that have been
accepted by our various clients worldwide. The Hong Kong design team attends
trade fairs worldwide to gather product ideas and monitor the latest product
trends.

         We seek to 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 desirable 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.

MANUFACTURING PROCESS

         We manufacture our products at our facilities in Shantou and Shenzhen,
China. Our manufacturing processes combine vertical integration, modern
technology, mechanization and handcraftsmanship to produce contemporary and
fashionable jewelry. Our manufacturing operations basically involve:

         o    cutting and polishing semi-precious gemstones;

         o    combining pure gold, platinum and sterling silver with other
              metals to produce jewelry; and

         o    finishing operations such as cleaning, polishing and setting,
              resulting in high quality finished jewelry.


                                      -18-
<PAGE>
         We have developed a process of cost-effectively producing quality,
gem-set jewelry. We believe that we have a substantial competitive advantage due
to our unique, vertically integrated manufacturing process.

SUPPLY

         We manufacture 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, garnet aquamarine and topaz. We also purchase imported
aquamarine, peridot and topaz from China. 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 preformed and semi-finished cut
gemstones 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 manufacture 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 do not presently engage in hedging activities with respect to
possible fluctuations in the price of gold. We believe the risk of not engaging
in such activities is minimal, since we purchase our gold requirements after
each significant purchase order is received. We believe that any change in the
price of gold would have 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

         We have installed certain measures at our Shantou and Shenzhen, China
manufacturing 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.



                                      -19-
<PAGE>
         We carefully inspect 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
manufacturing process. A complete physical inventory of gold and gemstones is
taken at our manufacturing and administrative facilities on an annual 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 generally is in excess of the value of
the gold and gemstones supplied by us. We carry transit insurance which coverage
includes the transportation of jewelry outside of our office.

COMPETITION

         The jewelry manufacturing 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 manufacturing
skill to be effective competitors. We believe that our vertically integrated
manufacturing capabilities distinguish us from most of our competitors and
enables 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:

         o    E.E.A.C. Inc.;

         o    Aurafin; and

         o    PACE Enterprises.

         International competitors include Pranda International and Beauty Gems
Limited. Most of these manufacturers/wholesalers have been successful vendors
for many years and enjoy good relations with their clients. Although it may be
difficult for a newcomer to break into established relationships, we already
have made substantial inroads in the North American jewelry market



                                      -20-
<PAGE>

and we believe we can remain competitive based on our vertically integrated
low-cost, high-volume and high-quality manufacturing process.




                                      -21-
<PAGE>
C.       ORGANIZATIONAL STRUCTURE AS OF JUNE 30, 2002:

         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%                                  100%
   ----                                  ----

-  LORENZO JEWELRY LIMITED             - SHANTOU SEZ LORENZO GEMS & CRAFT
   (Hong Kong)                           FACTORY CO., LTD.
                                         (P.R.C.)

                                       - SHANTOU LORENZO JEWELRY MFG.
                                         (P.R.C.)


-  LORENZO GEMS MANUFACTURING (SHENZHEN) CO., LTD.
   (P.R.C.)

-  LORENZO DIAMOND JEWELRY MFG. CO. LIMITED
   (Hong Kong)

-  LORENZO JEWELLERY (SHENZHEN) CO., LTD.
   (P.R.C.)


85.59%
------

-  iBBC, INC.
   (USA.)


                                      -22-
<PAGE>
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, showroom and
manufacturing space at this location.

         Our jewelry production facility in Shantou, China consists of 10,000
square feet of building space which we own in the Yubao Industrial Building,
Longhu District, Shantou Special Economic Zone, Guangdong Province, China. We
currently lease on a month-to-month basis the adjacent 16,000 square feet on the
same floor of that building as one of our gem cutting facilities at a rental
rate of approximately HK$18,000 (US$2,200) per month.

         Our second production facility in Shenzhen, China consists of 50,000
square feet of building space. This facility is located in the Shatoujiao Free
Trade Zone, Shenzhen. We currently lease on a month-to-month basis this space
from an unaffiliated third party at a rental rate of HK$74,120 (US$9,500) per
month.

         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 by one shift per day
and are capable of expanding to three shifts per day as necessary.




                                      -23-
<PAGE>
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. The amounts reflected in the following discussion are in Hong Kong
Dollars, the functional currency of our subsidiaries and the legal tender
currency of Hong Kong Special Administrative Region of China. The average
exchange rate adopted for the periods presented is US$1 = HK$7.73 and unless
otherwise indicated is the rate used in this discussion.

         In fiscal 2002, amid a generally depressed retail market worldwide, we
initiated several measures to maintain our position as one of the world's
largest publicly traded designer, marketer and distributor of a full range of
fine jewelry.

         As consumers tightened their belts, the retail market suffered
accordingly, in particular, luxury sectors such as jewelry. The horrific events
in the U.S. on Sept. 11, 2001 put a further damper on consumer confidence and as
a result, LJ International, like all others in our industry, faced enormous
challenges.

         We moved quickly to take stock of the changed situation and to
introduce the appropriate measures to face the still uncertain economic climate
in 2002. First, we made provisions for inventory that was built up to meet
previously anticipated orders from our biggest client, one of the major TV home
shopping networks. Because of an agreement signed with this client in March 2000
when the global economy was rosier, we undertook not to sell to other TV
retailers in the U.S. for three years, and, if the client produced total orders
of US$80 million in the period up to March 2003, this exclusive agreement would
be extended for another three years. As a result, we had forecast sales orders
of about US$30 million from this major customer in fiscal 2002, up from US$22
million in 2001 and nearly US$18 million in 2000.

         Based on the projected sales order and pattern, we kept a significant
inventory of the stock needed to fulfil large-quantity orders of between 5,000
and 10,000 pieces per style per design. However, due to the downturn and a
change in the client's marketing focus and strategy, orders for our fiscal 2002
only totaled US$11 million in value, leaving us with a rather huge stock,
largely of jade, fancy-cut stones and stones in particular color grading, which
were exclusively for this client. As these are natural stones, available not to
order but only when found, we needed to keep an ample level of inventory.

         With these developments, we knew we had to reduce our reliance on this
key customer and increase our market share instead. And, to do so, we had to
step up our marketing efforts with the Top40 jewelry retailers, whom we were
already selling to. Servicing the Top40 involved increasing our range and
inventory of sample styles for trials with them, which meant crafting 50 to 500
pieces for each style in each color. As part of our efforts to enhance our
market share, we are also giving these Top40 customers more favorable terms by
accepting



                                      -24-
<PAGE>

limited consignment orders from them. This also entails keeping larger inventory
levels of finished jewelry.

         Meanwhile, the depressed global retail scene prompted us to review our
corporate strategy and we carried out a re-engineering exercise within our
organizational structure so we have a leaner and even nimbler team. The
re-engineering exercise extended to our sales and operations and we have now
succeeded in decreasing our inventory levels, not only by keeping orders
optimal, but also by selling surplus stocks of cut stones at market value to
manufacturers, a practice we previously avoided. With better inventory
management we are seeing improved cash flows.

         To be more cost efficient, we have consolidated our gemstone cutting
and polishing processes in our Shantou factory to our Shenzhen factory.

         We completed our initial public offering and raised gross proceeds of
HK$58,051,000 (US$7,510,000) from the sale of common stock and warrants during
fiscal year ended 1998. Additional amounts were received during the year ended
April 30, 1999 from the exercise of the over- allotment of common stock in the
offering. In the fiscal year ended 2000, we raised gross proceeds of
HK$50,245,000 (US$6,500,000) from an issue of 3% convertible debentures. The
proceeds were allocated to working capital for general corporate purposes.

         Given the measures we took in fiscal 2002, which will start to show
results in the first half of fiscal 2003, we are confident that we are
well-positioned to seize the opportunities a rebound in the jewelry industry
will bring. And there are already signs that things have started to look up.
Since Sept.11, we are witnessing clients' increasing acceptance of new products,
additions to our client list and rises in orders from existing customers.

         Another important initiative we adopted recently is giving the first
guidance in the company's history on our last quarter results for fiscal 2002.
Although we are a foreign company technically exempt from some key U.S.
reporting requirements, we have decided to bring our reporting and accounting as
close in line as possible with U.S. GAAP reporting and U.S. investor
expectations. Taking this step is part of our strategy to maintain our position
as the world's largest publicly traded designer, marketer and distributor of a
full range of fine jewelry. It is also a reflection of our unwavering commitment
to shareholders, clients and staff alike.





                                      -25-
<PAGE>
A.       OPERATING RESULTS.

FISCAL 2002 COMPARED WITH FISCAL 2001

NET SALES

         Net sales decreased 15% to HK$303,326,000 (US$39,240,000) in fiscal
year ended 2002 from HK$357,785,000 (US$46,285,000) in fiscal year ended 2001.
We experienced a decline of 23% in sales in the first three fiscal quarters in
2002 compared with the same period in fiscal 2001. But in the fourth fiscal
quarter in this year we recorded a growth of 17% compared with the same fiscal
quarter in the previous year.

         The decrease in first three quarters, as expected, was mainly
attributable to the global economic downturn since the beginning of the year
2001 and was accelerated by the September 11 attacks in the US. The increase of
sales in the fourth quarter was due to the acceptance of our new products, the
addition of new customers and the large incremental increases in orders from
existing customers.

GROSS PROFIT

         The gross profit margin dropped from 36% in 2001 to 15% in 2002. The
decrease, as explained above, was due to various adjustments on inventory in the
fourth quarter, which are largely related to the reduced orders from our key
customers during fiscal year 2002.

         o    HK$41,701,000 (US$5,395,000) for write-down of cut stones for
              orders in relation to special programs that were later postponed
              or cancelled;

         o    HK$2,443,000 (US$316,000) for write-down of fine jewelry cost.

         Excluding the above special charge on inventory, the gross profit
margin was 30% for fiscal 2002.

OTHER REVENUE

         Interest income decreased from HK$3,929,000 (US$508,000) in fiscal 2001
to HK$1,674,000 (US$217,000) in fiscal 2002. The decrease was mainly due to the
consecutive cuts of interest rate from early 2001 and stabilized in early 2002.

         Rental income increased 118% from HK$480,000 (US$62,000) in fiscal 2001
to HK$1,047,000 (US$135,000) in fiscal 2002. Additional investment property was
rented out in fiscal 2002.




                                      -26-
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling, general and administrative (SG&A) expenses increased 13% to
HK$105,195,000 (US$13,609,000) or 35% of net sales in 2002, compared with
HK$93,182,000 (US$12,055,000) or 26% of net sales in 2001. The increase was
mainly attributable to the following charges, two of which are non-recurring:

         Non-recurring:

         o    HK$1,697,000 (US$220,000) as severance payment on cost-cutting
              program; and

         o    HK$5,330,000 (US$690,000) for impairment loss and write off of
              property, plant & equipment as a result of the consolidation of
              manufacturing facilities.

         Recurring :

         o    HK$3,518,000 (US$455,000) for impairment and amortization of
              goodwill of investments; and

         o    HK$5,102,000 (US$660,000) for unrealized loss on the unsettled
              gold loan.

         Excluding the above charges, SG&A expenses was HK$89,548,000
(US$11,584,000) or 30% of net sales, which was a decrease of HK$3,627,000
(US$469,000) compared with fiscal 2001.

FINANCE COST

         Interest expenses decreased from HK$6,710,000 (US$868,000) in fiscal
2001 to HK$5,038,000 (US$652,000) in fiscal 2002. The decrease was due to the
consecutive cuts of interest rate from early 2001 to early 2002.

INCOME TAXES

         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 16%.

         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.

         Two of our subsidiaries in China are currently enjoying the tax
holidays or concessions which will expire in fiscal 2005 and 2006 respectively.
Other subsidiaries in China either no



                                      -27-
<PAGE>

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%.

         Net income tax decreased from HK$1,637,000 (US$211,000) in fiscal 2001
to a net tax credit of HK$784,000 (US$101,000) in fiscal 2002. There were Hong
Kong tax over provision of HK$208,000 (US$27,000) in fiscal 2001 and HK$800,000
(US$103,000) in fiscal 2002, after the finalization of tax assessment for
previous years.

NET INCOMES/(LOSS)

         There was a net loss of HK$60,448,000 (US$7,821,000), or HK$6.97
(US$0.90) per share on 8.7 million shares outstanding for fiscal 2002, compared
with net income of HK$32,054,000 (US$4,147,000), or HK$3.74 (US$0.48) per share
on 8.6 million shares outstanding in fiscal 2001.


FISCAL 2001 COMPARED WITH FISCAL 2000

NET SALES

         Net sales increased 19% to HK$357,785,000 (US$46,285,000) in fiscal
year ended 2001 from HK$300,901,000 (US$38,926,000) in fiscal year ended 2000.
We experienced a 38% growth in sales in the first three fiscal quarters in 2001
compared with the same period in fiscal 2000, but the fourth fiscal quarter in
this year recorded a reduction of 35% compared with the same fiscal quarter in
the previous year.

         The overall increase in sales is primarily attributable to increased
diamond jewelry sales and higher sales to existing customers of jewelry from the
Lorenzo-branded line.

GROSS PROFIT

         The gross profit margin dropped from 38% in 2000 to 36% in 2001 due to:

         o    A change in the product mix. Increasingly more sales are made with
              precious stones and diamonds and diamonds alone. Diamond jewelry
              generally has higher sales value but much lower profit margin;

         o    Additional model-making charges were incurred and expensed to
              build up the European jewelry sample lines; and

         o    Discounts were given on certain volume sale programs for existing
              customers and discounts given to new customers to induce
              businesses.




                                      -28-
<PAGE>
As the proportion of the diamond jewelry sales is expected to rise, while on the
other hand the profit margin for the European jewelry market is traditionally
higher compared with the US market, the profit margin is expected to stabilize
at around 35% to 38% in the next few years.

OTHER REVENUE

         Interest income increased from HK$2,668,000 (US$345,000) in fiscal 2000
to HK$3,929,000 (US$508,000) in fiscal 2001. The increase was mainly due to the
increase in restricted cash as security deposit for banking facilities.

         Rental income decreased 45% from HK$875,000 (US$113,000) in fiscal 2000
to HK$480,000 (US$62,000) in fiscal 2001. One of the investment properties was
left vacant during the year after the expiry of a short-term lease. The said
property is being rented to a new tenant for a period of 2 years.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling, general and administrative expenses increased 27% to
HK$93,182,000 (US$12,055,000) or 26% of net sales in 2001, compared with
HK$73,174,000 (US$9,466,000) or 24% of net sales in 2000. The increase was
mainly due to commission paid to salesmen or agents to attract new (or induce)
businesses.

FINANCE COST

         Finance cost consisted of interest expenses and issuing costs for
convertible debentures, decreased from HK$10,172,000 (US$1,316,000) in fiscal
2000 to HK$6,710,000 (US$868,000) in fiscal 2001.

         Interest expenses increased from HK$5,648,000 (US$731,000) in fiscal
2000 to HK$6,710,000 (US$868,000) in fiscal 2001 due to higher utilization rate
of credit line facilities.

         During 2000, we issued convertible debentures with gross proceeds of
HK$50,245,000 (US$6,500,000) and incurred HK$4,524,000 (US$585,000) in issuing
expenses.

INCOME TAXES

         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 16%.

         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



                                      -29-
<PAGE>

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.

         Two of our subsidiaries in China are currently enjoying the tax
holidays or concessions in fiscal 2001, with one of which commenced its first
profit-making year. Accordingly, their entitlements will expire in fiscal 2005
and 2006 respectively. Other subsidiaries in China either no longer enjoy the
tax holiday and concession or have not yet commenced its first profit-making
year. As a result, HK$18,000 (US$2,000) of Chinese income tax expense was
recorded. Chinese income tax is calculated at the applicable rate relevant to
the Chinese subsidiaries, which currently is 15%.

         Net income tax increased from HK$25,000 (US$3,000) in fiscal 2000 to
HK$1,637,000 (US$211,000) in fiscal 2001. There were Hong Kong tax overprovision
of HK$1,207,000 (US$156,000) in fiscal 2000 and HK$208,000 (US$27,000) in fiscal
2001, after the finalization of tax assessment for previous years.

FISCAL 2000 COMPARED WITH FISCAL 1999

NET SALES

         Net sales increased 54% to HK$300,901,000 (US$38,926,000) in fiscal
year ended 2000 from HK$195,219,000 (US$25,255,000) in fiscal year ended 1999.
This increase is primarily driven by volume increases in sales to new and
existing customers, including QVC, Sterling Inc. and Mervyn's. We also expanded
our gem lines during the year in order to provide a complete range of jewelry to
our existing and new customers. Our diamond jewelry sales accounted for 6% of
the total net sales in fiscal year 2000.

GROSS PROFIT

         The gross profit margin dropped from 48% in 1999 to 38% in 2000 due to:

         o    a change in the product mix. Previously, most of our sales were
              made with jewelry set with semi-precious stones; in 2000, more
              sales were made with precious stones and diamonds. Diamond jewelry
              generally has a higher sales value but a much lower profit margin;

         o    additional model-making charges incurred and expensed to build up
              the diamond jewelry sample lines; and

         o    discounts given on certain volume-sales programs for existing
              customers and discounts given to new customers to induce
              businesses.

As the proportion of our diamond jewelry sales is expected to rise, the profit
margin is expected to drop and stabilize at around 38% in the next few years.





                                      -30-
<PAGE>
OTHER REVENUE

         Interest income increased from HK$1,690,000 (US$219,000) in fiscal 1999
to HK$2,668,000 (US$345,000) in fiscal 2000. The increase was mainly due to the
increase in restricted cash as security deposit for banking facilities.

         Rental income increased 85% to HK$875,000 (US$113,000) in 2000 from
HK$474,000 (US$61,000) in 1999, due mainly to the short-term lease of one of the
investment properties during 2000.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling, general and administrative expenses increased 33% to
HK$73,174,000 (US$9,466,000) or 24% of net sales in 2000, compared with
HK$55,003,000 (US$7,116,000) or 28% of net sales in 1999.

         The decrease of 4% is the net effect of :

         o    more contributions to the fixed cost even though the profit margin
              is lower; and

         o    increased personnel in sales and marketing, design and logistics
              to cope with the significant sales growth. As a result, we have
              leased an additional office space of around 2,000 square feet in
              our Hong Kong headquarters.

FINANCE COST

         Finance cost is principally consisted of interest expenses, and issuing
cost for convertible debentures, increased to HK$10,172,000 (US$1,316,000) in
2000 from HK$6,876,000 (US$890,000) in 1999.

         Interest expenses decreased 18% to HK$5,648,000 (US$731,000) in 2000
from HK$6,876,000 (US$890,000) in 1999. The proceeds from the issuance of the
convertible debentures during fiscal 2000 provided us with working capital and
our level of borrowings dropped during 2000.

         During 2000, we issued convertible debentures with gross proceeds of
HK$50,245,000 (US$6,500,000) and incurred HK$4,524,000 (US$585,000) issuing
expenses.

INCOME TAXES

         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 16%.



                                      -31-
<PAGE>
         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 the subsidiaries initiated its first year of tax holidays during
2000 and the entitlement will therefore expire 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. As a result, we have not recorded any
Chinese income tax expense. Chinese income tax in the future will be calculated
at the applicable rates relevant to the Chinese subsidiaries, which currently
are 15%.

         Net income tax decreased 93% to HK$25,000 (US$3,000) in 2000 from
HK$380,000 (US$49,000) in 1999. This is the net effect of a current-year Hong
Kong tax provision of HK$1,207,000 (US$156,000) and the previous years' over
provision of HK$1,182,000 (US$153,000).


B.       LIQUIDITY AND CAPITAL RESOURCES.

FISCAL 2002 COMPARED WITH FISCAL 2001

         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. There are currently no
known restrictions on our subsidiaries and investment securities to pay
dividends to us; however, we do not currently intend to pay dividends to our
shareholders.

Cash:

         For the fiscal year ended April 30, 2002, as a result of HK$20,652,000
(US$2,673,000) provided by financing activities and HK$919,000 (US$120,000) and
HK$14,843,000 (US$1,920,000) used by operating and investing activities, as well
as HK$3,258,000 (US$421,000) used in returns on investments and servicing of
finance and HK$1,642,000 (US$212,000) paid for incomes taxes, cash and cash
equivalents decreased by HK$10,000 (US$1,000).

         Net cash used by operating activities in fiscal 2002 was HK$919,000
(US$120,000) as compared with net cash provided of HK$31,033,000 (US$4,015,000)
in fiscal 2001. The negative cash flows from operating activities in fiscal 2002
was primarily due to decrease in sales and gross profit margin.



                                      -32-
<PAGE>
         For the fiscal year ended April 30, 2002, net cash outflow from
investing activities was HK$14,843,000 (US$1,920,000) as compared with
HK$31,740,000 (US$4,106,000) in fiscal 2001. The net cash used in investing
activities during fiscal 2002 were HK$18,406,000 (US$2,381,000) for the further
acquisition of 68.8% of a subsidiary, iBBC Inc. which engaged in marketing
jewelry from its display cases in retail shops, HK$3,248,000 (US$420,000) for
the acquisition of property, plant and equipment, and less proceed of HK$91,000
(US$12,000) on disposal of plant and equipment, and HK$6,720,000 (US$869,000)
from related parties.

         Net cash provided by financing activities in fiscal 2002 was
HK$20,652,000 (US$2,672,000) as compared with net cash used in HK$399,000
(US$52,000) in fiscal 2001. There was HK$24,658,000 (US$3,190,000) received in
respect of new gold loan arrangement in fiscal 2002.

Accounts Receivable:

         As of April 30, 2002, net accounts receivable increased by
HK$13,529,000 (US$1,750,000) to HK$61,944,000 (US$8,013,000) from HK$48,415,000
(US$6,263,000) as of April 30, 2001. The increase in net accounts receivable was
due to some customers have prolonged the credit period. The sales-to-customers
accounts receivable are generally offered a 60-day credit period.

Inventory:

         Inventory decreased by HK$38,807,000 (US$5,020,000) from HK$160,955,000
(US$20,822,000) as of April 30, 2001 to HK$122,148,000 (US$15,802,000). During
the year, special charge of HK$44,144,000 (US$5,711,000) has been made on
inventory largely related to reduced orders from key customers. Excluding this
special charge, and in view of the possible sluggish market, the rate of growth
in inventory was 3% in fiscal 2002 as compared with 8% in fiscal 2001.

Letters of Credit:

         As of April 30, 2002, we had various letters of credit under banking
facilities which totaled HK$90,000,000 (US$11,643,000). We had HK$43,642,000
(US$5,646,000) and HK$28,206,000 (US$3,649,000) outstanding under letters of
credit as of April 30, 2002 and 2001. Under the banking facilities arrangement,
we are required to maintain certain cash balances which totaled HK$41,000,000
(US$5,304,000) as of April 30, 2002 and 2001.

Gold Loan Facilities:

         We have also secured "gold loan" facilities with various banks in Hong
Kong, which typically bear a below-market interest rate. At the close of each
reporting period, the gold loan is



                                      -33-
<PAGE>

"marked to market" with changes reflected on the income statement. 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, and we currently do not hedge against such
risks. 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. We had outstanding loans to purchase 14,850 and 6,950
ounces of gold as of April 30, 2002 and 2001, with the related balances being
HK$44,038,000 (US$5,697,000) and HK$14,278,000 (US$1,847,000) respectively.
Interest rates for these loans were 1.7% to 3.4% as of April 30, 2002 (2001: 2%
to 2.9%). Unrealized loss on the unsettled gold loans for the year ended April
30, 2002 was HK$5,102,000 (US$660,000) compared with unrealised gain of
HK$343,000 (US$44,000) for the year ended April 30, 2001.

Notes Payable:

         Long-term mortgage loans on our properties totaled HK$2,180,000
(US$282,000) and HK$5,971,000 (US$773,000) as of April 30, 2002 and 2001. All of
our properties are pledged substantially as collateral for our banking
facilities.

FISCAL 2001 COMPARED WITH FISCAL 2000

         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. There are currently no
known restrictions on our subsidiaries and investment securities to pay
dividends to us; however, we do not currently intend to pay dividends to our
shareholders.

Cash:

         The primary sources of our cash flow for working capital and capital
expenditure for fiscal 2001 had been the net cash inflows from operating
revenue. Seasonal working capital needs have been met through short-term
borrowing under revolving lines of credit.

         For the fiscal year ended April 30, 2001, as a result of HK$31,033,000
(US$4,015,000) provided by operating activities and a tax refund of HK$363,000
(US$47,000), less HK$31,740,000 (US$4,106,000) used in investing activities,
HK$399,000 (US$52,000) used by financing activities, as well as HK$2,737,000
(US$354,000) used in returns on investments and servicing of finance, cash and
cash equivalents decreased by HK$3,480,000 (US$450,000).



                                      -34-
<PAGE>
         Net cash provided by operating activities in fiscal 2001 was
HK$31,033,000 (US$4,015,000) as compared with net cash used of HK$9,076,000
(US$1,174,000) in fiscal 2000. Negative cash flows from operating activities in
previous year was principally due to deliberate accumulation of cut stones
inventory.

         For the fiscal year ended April 30, 2001, net cash outflow from
investing activities was HK$31,740,000 (US$4,106,000) as compared with
HK$5,162,000 (US$668,000) in fiscal 2000. The net cash used in investing
activities during fiscal 2001 were used for the acquisition of investment
securities for HK$25,386,000 (US$3,284,000), and purchase of property, plant and
equipment for HK$6,429,000 (US$832,000), and less proceed of HK$75,000
(US$10,000) on disposal of property, plant and equipment. During fiscal year
2001, we acquired 20% equity interests in a company whose principle activities
are the manufacturing and trading of rough and pre-formed gemstones, and 16.8%
equity interests in a jewelry retail company, for further expansion through
vertical integration and the development of distribution channel in the United
States. We had no significant control and influence over both companies'
operating and financial policies.

         Net cash used in financing activities in fiscal 2001 was HK$399,000
(US$52,000) as compared with net cash provided of HK$41,314,000 (US$5,345,000),
There was HK$45,721,000 (US$5,915,000) received in respect of convertible loans
issued in previous year.

Accounts Receivable:

         As of April 30, 2001, net accounts receivable increased by HK$5,726,000
(US$741,000) to HK$48,415,000 (US$6,264,000) from HK$42,689,000 (US$5,523,000)
as of April 30, 2000. The increase in net accounts receivable is in line with
increase in sales. The sales-to-customers accounts receivable are generally
offered a 60-day credit period.

Inventory:

         Inventory increased by HK$12,513,000 (US$1,619,000) from HK$148,442,000
(US$19,203,000) as of April 30, 2000 to HK$160,955,000 (US$20,822,000). In view
of the possible sluggish market, the rate of growth in inventory was dropped
from 58% in fiscal 2000 to 8% in fiscal 2001.

Letters of Credit:

         As of April 30, 2001, we had various letters of credit under banking
facilities which totaled HK$86,000,000 (US$11,125,000). We had HK$25,941,000
(US$3,356,000) and HK$28,206,000 (US$3,649,000) outstanding under letters of
credit as of April 30, 2000 and 2001. Under the banking facilities arrangement,
we are required to maintain certain cash balances which totaled HK$26,000,000
(US$3,363,000) and HK$41,000,000 (US$5,304,000) as of April 30, 2000 and 2001.



                                      -35-
<PAGE>
Gold Loan Facilities:

         We have also secured "gold loan" facilities with various banks in Hong
Kong, which typically bear a below-market interest rate. At the close of each
reporting period, the gold loan is "marked to market" with changes reflected on
the income statement. Due to lower interest rates charged for gold loans and
declining prices of gold, 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, and we currently do not hedge against such
risks. 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. We had outstanding loans to purchase 4,850 and 6,950
ounces of gold as of April 30, 2000 and 2001, with the related balances being
HK$10,259,000 (US$1,327,000) and HK$14,278,000 (US$1,847,000) respectively.
Interest rates for these loans were 2% to 2.9% as of April 30, 2001 (2000: 3.15%
to 3.45%). Unrealized gain on the unsettled gold loans as of April 30, 2000 and
2001 were HK$338,000 (US$44,000) and HK$343,000 (US$44,000).

Notes Payable:

         Long-term mortgage loans on our properties totaled HK$10,139,000
(US$1,311,000) and HK$5,971,000 (US$773,000) as of April 30, 2000 and 2001. All
of our properties are pledged substantially as collateral for our banking
facilities.


FISCAL 2000 COMPARED WITH FISCAL 1999

         We have no direct business operations other than our ownership of our
subsidiaries. Our ability to pay dividends and meet other obligations depends
upon our receipt of dividends or other payments from our operating subsidiaries.
There are currently no known restrictions on our subsidiaries to pay dividends
to us; however, we do not currently intend to pay dividends to our shareholders.

Cash:

         The primary sources of our cash for working capital and capital
expenditure for fiscal 2000 had been the net cash inflows from operating revenue
and the issue of the 3% convertible debentures. Seasonal working capital needs
have been met through short-term borrowing under revolving lines of credit.

         For the fiscal year ended April 30, 2000, as a result of HK$41,314,000
(US$5,345,000) cash provided by financing activities and HK$9,076,000
(US$1,174,000) and HK$5,162,000 (US$668,000) used by operating and investing
activities, as well as HK$2,804,000 (US$363,000)




                                      -36-
<PAGE>

net cash used for returns on investments and servicing of finance and HK$93,000
(US$12,000) paid for income taxes, cash and cash equivalents increased by
HK$24,179,000 (US$3,128,000).

         Net cash used by operating activities in fiscal 2000 was HK$9,076,000
(US$1,174,000) as compared with net cash provided of HK$1,269,000 (US$164,000)
in fiscal 1999. Negative cash flows from operating activities are principally
the result of improved operating results, offset by increased working capital
requirement attributable to the increase in accounts receivable and inventory
levels.

         For the fiscal year ended April 30, 2000, net cash used in investing
activities was HK$5,162,000 (US$668,000), a decrease of HK$2,640,000
(US$341,000) compared with HK$7,802,000 (US$1,009,000) in fiscal 1999. The net
cash used in investing activities during fiscal 2000 were used for the
acquisition of the remaining 40% of the share capital of Lorenzo Giftware Ltd.
(f/k/a Lorenzo Marketing Co., Ltd.) for HK$1,830,000 (US$237,000) for further
expansion of market share in Japan and Europe; and purchase of property, plant
and equipment for HK$3,477,000 (US$450,000) and less proceed of HK$145,000
(US$19,000) on disposal of property, plant and equipment.

Accounts Receivable:

         As of April 30, 2000, net accounts receivable increased by HK$8,517,000
(US$1,102,000) to HK$42,689,000 (US$5,523,000) from HK$34,172,000 (US$4,421,000)
as of April 30, 1999. The increase in net accounts receivable is in line with
the increase in sales. Receivables for sales to customers are generally offered
a 60-day credit period.

Inventory:

         Inventory increased by HK$54,806,000 (US$7,090,000) from HK$93,636,000
(US$12,113,000) as of April 30, 1999 to HK$148,442,000 (US$19,203,000) as of
April 30, 2000. The increase was due to our management's anticipation of
significant increase in sales for the new fiscal year, increase in the cost of
rough gemstones, more sample lines of jewelry built up, and maintaining
sufficient inventory for block-orders, especially for QVC.

Prepayment and Other Current Assets:

         We advanced HK$15,460,000 (US$2,000,000) to one of our principal
gemstone suppliers to secure the first right to, and steady gemstone supplies.
The advance was included in the balance of the accounts receivable as of April
30, 1999, and has been reclassified retrospectively to prepayment and other
current assets in fiscal 1999 and 2000.



                                      -37-
<PAGE>
Letters of Credit:

         As of April 30, 2000, we had various letters of credit under banking
facilities which totaled HK$66,500,000 (US$8,603,000). We had HK$34,193,000
(US$4,423,000) and HK$25,941,000 (US$3,356,000) outstanding under letters of
credit as of April 30, 1999 and 2000. Under the banking facilities arrangement,
we are required to maintain certain cash balances which totaled HK$15,185,000
(US$1,964,000) and HK$26,000,000 (US$3,363,000) as of April 30, 1999 and 2000.

Gold Loan Facilities:

         We have also secured "gold loan" facilities with various banks in Hong
Kong, which typically bear a below-market interest rate. At the close of each
reporting period, the gold loan is "marked to market" with changes reflected on
the income statement. Due to lower interest rates charged for gold loans and
declining prices of gold, 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, and we currently do not hedge against such
risks. Under the gold loan arrangements, we may defer the purchase until such
time as we decide appropriate, the price paid to be paid being the current
market price at time of payment. We had outstanding loans to purchase 4,300 and
4,850 ounces of gold as of April 30, 1999 and 2000, with the related balances
being HK$9,500,000 (US$1,229,000) and HK$10,259,000 (US$1,327,000). Interest
rates for these loans were 3.15% to 3.45% as of April 30, 2000 (1999: 3.1% to
3.3%). Unrealized gain on the unsettled gold loans as of April 30, 1999 and 2000
were HK$630,000 (US$82,000) and HK$338,000 (US$44,000).

Notes Payable:

         Long-term mortgage loans on our properties totaled HK$13,923,000
(US$1,801,000) and HK$10,139,000 (US$1,311,000) as of April 30, 1999 and 2000.
All of our properties are substantially pledged as collateral for our banking
facilities.

Promissory Notes:

         On October 17, 1997, we completed the sale of promissory notes
amounting to HK$6,049,000 (US$783,000). These notes provided for interest of 7%
and the note holders were repaid in full from the proceeds of our initial public
offering. In addition, they received 156,500 shares of our common stock upon
completion of the public offering. As of April 30, 1998, we had outstanding
promissory notes amounting to HK$2,184,000 (US$283,000), which were repaid
during the year ended April 30, 1999.



                                      -38-
<PAGE>
Initial Public Offering - 1998:

         In April 1998, we completed an initial public offering in which we sold
1,460,000 shares of common stock and 1,679,000 warrants. We realized gross
proceeds of HK$58,051,000 (US$7,510,000) from this offering. We may realize
additional proceeds from the exercise of the warrants, although there can be no
assurance that such warrants will be exercised. During the fiscal year ended
April 30, 1999, we received gross proceeds of HK$8,464,000 (US$1,095,000) from
the sale of 219,000 shares of common stock pursuant to an over-allotment option
granted in the offering.

Convertible Debentures - 2000:

         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 HK$81,165,000 (US$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 HK$50,245,000
(US$6,500,000) from the issue of the 3% convertible debentures to that investor.
HK$27,055,000 (US$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 HK$23,190,000 (US$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 HK$7,000,000 (US$906,000) and HK$15,000,000
(US$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, proceeds from the issue
of the convertible debentures, 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.

RECONCILIATION TO US GAAP

         We prepare our financial statements under Generally Accepted Accounting
Principles as practiced in Hong Kong, which we refer to as HK GAAP. There are
certain differences between HK GAAP and GAAP as practiced in the United States,
which we refer to as US GAAP. In consideration of US GAAP, certain adjustments
would have been provided.

         Under US GAAP, for the fiscal year ended April 30, 2002, HK$472,000
(US$61,000) would be recorded as depreciation expenses on properties and
investment properties, HK$2,297,000 (US$297,000) of compensation cost in
connection with the fair value of options granted to consultants would be
expensed. Furthermore, HK$1,648,000 (US$213,000) in



                                      -39-
<PAGE>

relation to the amortization of goodwill and HK$500,000 (US$65,000) in relation
to the deficit on revaluation of investment properties would also be credited.
As a result, our net loss for the year ended April 30, 2002 under US GAAP would
be HK$61,069,000 (US$7,901,000).

         Under US GAAP, for the fiscal year ended April 30, 2001, HK$472,000
(US$61,000) would be recorded as depreciation expenses on properties and
investment properties and HK$143,000 (US$18,000) would be recorded as
amortization of financial consulting fee for the IPO. In addition, HK$754,000
(US$98,000) of compensation cost in connection with the fair value of options
granted to consultants and HK$296,000 (US$38,000) for the amortization of
discount on convertible debentures would be expensed. Furthermore, HK$7,000
(US$1,000) in relation to the amortization of goodwill and HK$1,885,000
(US$244,000) in relation to the deficit on revaluation of investment properties
would also be credited. Adjustments were also made in respect of costs
associated with stock-based transactions and interest expenses arising from
beneficial conversion features of convertible debentures which amounted to
HK$1,299,000 (US$168,000) and HK$6,751,000 (US$873,000) respectively (see below
for details). As a result, our net income for the year ended April 30, 2001
under US GAAP would be HK$24,231,000 (US$3,136,000).

         Under US GAAP, for the fiscal year ended April 30, 2000, HK$472,000
(US$61,000) would be recorded as depreciation expenses on properties and
investment properties and HK$275,000 (US$36,000) would be recorded as
amortization of financial consulting fee for the IPO. In addition, HK$136,000
(US$18,000) of compensation cost in connection with the fair value of warrants
granted to a consultant, HK$238,000 (US$31,000) for the amortization of discount
on convertible debentures and HK$328,000 (US$42,000) of compensation cost of the
fair value of warrants granted to the convertible debentures placement agent,
would be expensed. Furthermore, HK$7,000 (US$1,000) in relation to the
amortization of goodwill and HK$686,000 (US$89,000) in relation to the
amortization of certain offering costs in which the related deferred costs were
expensed under US GAAP in previous years would also be credited. Adjustments
were also made in respect of interest expense arising from beneficial conversion
features of convertible debentures which amounted to HK$5,291,000 (US$684,000)
(see below for details). As a result, our net income for the year ended April
30, 2000 under US GAAP would be HK$29,673,000 (US$3,839,000).

STOCK-BASED COMPENSATION (IN RELATION TO THE 1998 STOCK COMPENSATION PLAN)

         In 1998, we adopted The 1998 Stock Compensation Plan which allows the
Board of Directors to grant stock options to individuals to purchase common
stock of the Company. Under HK GAAP, there are no specific requirements to
recognize the compensation cost arising from stock options granted to these
individuals on the financial statements.

         Under US GAAP, we adopted the provisions of SFAS No. 123 "Accounting
for Stock-Based Compensation" in respect of options granted to employees. As
permitted by SFAS No. 123, we have chosen to account for stock-based
compensation using the



                                      -40-
<PAGE>


intrinsic value method. Accordingly, because the exercise price of our incentive
stock options is same as or higher than the market price of the underlying stock
on the date of grant, no compensation expense has been recognized for its
stock-based compensation plan. Had compensation expense for the incentive stock
option plan 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, our net income and
earnings per share would have been reported as follows:

<Table>
<Caption>
                                                          Year ended April 30
                                                      ---------------------------
                                                              2000           2001
                                                      ------------   ------------
                                                               HK$            HK$
<S>                                                   <C>            <C>
         Pro forma net income (as restated)             28,833,000      8,567,000
                                                      ============   ============
         Pro forma earnings per share (as restated)
            Basic                                             4.38           1.00
                                                      ============   ============
            Diluted                                           4.19           1.00
                                                      ============   ============
</Table>

         There were no stock options granted to employees during the year ended
April 30, 2002, and all previously granted options were immediately exercisable,
and accordingly no pro forma net loss and loss per share for 2002 are presented.

         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:

<Table>
<Caption>
                                                   Year ended April 30
                                                  ---------------------
                                                       2000        2001
                                                  ---------   ---------
<S>                                               <C>         <C>
         Expected dividend yield                        Nil         Nil
         Expected stock price volatility                 19%         22%
         Risk-free interest rate                       6.49%       5.34%
         Expected life of options                   3 years     3 years
</Table>

         The weighted average fair value per option granted during the year
ended April 30, 2000 and 2001 was US$0.41 and US$0.45 respectively.

         Our stock option activities and related information for the years ended
April 30, 2000, 2001 and 2002 are summarized as follows:



                                      -41-
<PAGE>
<Table>
<Caption>
                                                                          As of April 30
                                  -------------------------------------------------------------------------------------------
                                               2000                             2001                           2002
                                               ----                             ----                           ----

                                                    Weighted                         Weighted                        Weighted
                                                     Average                          average                         average
                                                    Exercise                         exercise                        exercise
                                     Options           Price           Options          price         Options           price
                                                         US$                              US$                             US$
<S>                                <C>              <C>            <C>               <C>           <C>              <C>
Outstanding and
  exercisable,
  beginning of year                1,285,000            5.00         1,550,000           5.00       3,376,000            2.00
Granted                              265,000            5.00         5,226,000           2.35              --              --
Cancelled                                 --              --        (3,400,000)          3.91        (458,000)           2.00
                                 -----------                       -----------                    -----------
Outstanding and
  exercisable, end of
  year                             1,550,000            5.00         3,376,000           2.00       2,918,000            2.00
                                 ===========                       ===========                    ===========

Weighted average
  remaining
  contractual life                9.13 years                        7.06 years                     6.06 years
                                 ===========                       ===========                    ===========
</Table>

STOCK-BASED TRANSACTIONS

         We issued to a consultant a warrant to purchase 35,000 shares of common
stock as part of the consultancy fee on July 31, 1999. In addition, we 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. During the
financial year 2002, we further issued to consultants, agents or investor
warrants to purchase an aggregate of 860,000 shares of our common stock. Under
HK GAAP, there are no specific requirements to recognize the compensation costs
arising from these transactions. Under US GAAP, the costs associated with these
transactions are accounted for based on fair value of the warrants at the date
of issue.

         In addition, options were issued to consultants/advisers under The 1998
Stock Compensation Plan to purchase our common stock as part of their fees
during the year ended April 30, 2001. Under US GAAP, 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:



                                      -42-
<PAGE>
<Table>
<Caption>
                                                     Year ended April 30
                                           ------------------------------------
                                                 2000         2001         2002
                                           ----------   ----------   ----------
<S>                                        <C>          <C>          <C>
         Expected dividend yield                  Nil          Nil          Nil
         Expected stock price volatility           19%          22%          23%
         Risk-free interest rate                 6.49%        5.34%        4.23%
         Expected life of options             3 years      3 years   3.21 years
</Table>

         The fair value of these warrants and options was estimated as
HK$464,000, HK$2,053,000 and HK$2,297,000 respectively for the years ended April
30, 2000, 2001 and 2002. The additional expense was recognized in the statement
of operations under US GAAP and the same amount was recorded in our reserve
account. Effectively, there was no net effect on the shareholders' equity under
US GAAP.

         In respect of the fair value of HK$2,053,000 estimated for options
granted in financial year 2001, as only HK$754,000 was reported in the previous
year's financial statements, the profit for 2001 previously reported under US
GAAP has been restated for the amount undercharged.

BENEFICIAL CONVERSION FEATURES OF CONVERTIBLE DEBENTURES

         Under US GAAP, the embedded beneficial conversion feature associated
with the issue of a convertible debt security should be 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
feature is amortized to the statement of operations over the life of the
convertible debentures. There is no such requirement under HK GAAP. The
beneficial conversion feature charged to income as interest expense amounted to
HK$5,291,000 and HK$6,751,000 for the year ended April 30, 2000 and 2001
respectively. As of April 30, 2000, the unamortized portion of beneficial
conversion feature was HK$6,717,000. Accordingly, the shareholders' equity under
US GAAP was increased by that amount. As these amounts were not reported in
previous years' financial statements, the profit for the year of 2000 and 2001
and the shareholders' equity as of April 30, 2000 have been restated in this
respect.

IMPACT OF RECENTLY ISSUED US GAAP ACCOUNTING STANDARDS.

         Effective July 1, 2001, we adopted Statement of Financial Accounting
Standard ("SFAS") No. 141 "Business Combinations". In accordance with SFAS No.
141, all business combinations initiated after June 30, 2001 are to be accounted
for using the purchase method; the pooling of interest method of accounting is
prohibited. The acquisition of the jewelry retail


                                      -43-
<PAGE>

company on March 21, 2002 (see note 17 (a)) was accounted for by purchase method
of accounting.

         In July 2001, Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 provides that
goodwill and intangible assets which have indefinite useful lives will not be
amortized but rather will be tested at least annually for impairment.
Consequently, the goodwill arisen from the acquisition of the jewelry retail
company on March 21, 2002 is not amortized and subject to impairment test in
this financial year. We adopted SFAS No. 142 effective on May 1, 2002, the first
day of our fiscal year 2003. Other than the goodwill arisen from the acquisition
on March, 21, 2002, we have no other goodwill and intangible assets as of April
30, 2002. We do not believe that the adoption of the statement will have a
material impact on our financial position or results of operations.

         In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement is effective for financial
years beginning after June 15, 2002. The impact of the adoption of SFAS No. 143
on the Group's financial statements is not expected to be material.

         In October 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 replaces SFAS No.
121, "Accounting for the impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". SFAS No. 144 requires long-lived assets be measured
at the lower of selling amount or fair value less cost to sell, whether reported
in continuing operations or discontinued operations. SFAS No. 144 also broadens
the reporting of discontinued operations to include all components of an entity
with operations that can be distinguished from the rest of the entity and that
will be eliminated from the ongoing operations of the entity in a disposal
transaction. The provisions of SFAS No. 144 are effective for consolidated
financial statements issued for financial years beginning after December 15,
2001. The Group does not expect that the adoption of SFAS No. 144 will have a
material impact on the Group's financial statements.

         In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB
Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". This statement made revisions to the accounting for gains and
losses from the extinguishment of debt, rescinded SFAS No. 44, and required
certain lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
The Group is required to and will adopt SFAS No. 145 on May 1, 2002. The
adoption of SFAS No. 145 is not expected to have a material impact on the
Group's financial statements.

INFLATION

         We do not consider inflation to have had a material impact on our
results of operations over the last three years.



                                      -44-
<PAGE>

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 our results of operations. If the
value of the Renminbi or the Hong Kong Dollar increases relative to the U.S.
Dollar, such fluctuation may have a negative effect on our results of
operations. We do not currently hedge our foreign exchange positions.

C.       RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.

         During each of the last three fiscal years, we did not spend any
amounts on company- sponsored research and development activities.

D.       TREND INFORMATION.

Production

         The total production for fiscal year 2003 is estimated at 1,400,000
pieces compared to 1,200,000 pieces for fiscal year 2002.

Sales

         Due to weak demand in the U.S. market, the sales for fiscal year 2003
is estimated at US$46 million, compared to US$39 million for the fiscal year
2002.

         The gross profit margin for the fiscal year 2003 is estimated to be
approximately 30%, which is the same level as the fiscal year 2002 before giving
effect to special charges.

Inventory

         The average inventory level for fiscal year 2003 is estimated to be
approximately US$16 million compared with the fiscal year 2002, which
approximately amounted to US$21 million.




                                      -45-
<PAGE>
ITEM 6.     DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.       DIRECTORS AND SENIOR MANAGEMENT.

         Our senior management and directors are as follows:

<Table>
<Caption>
NAME                                      AGE        POSITION
----                                      ---        --------
<S>                                       <C>        <C>
Yu Chuan Yih.........................     63         Chairman of the Board of Directors, President and
                                                     Chief Executive Officer
Ka Man Au............................     38         Chief Operating Officer, Secretary and Director
Hon Tak Ringo Ng.....................     42         Chief Financial Officer and Director
Po Yee Elsa Yue......................     38         Non-Executive Director
Lionel C. Wang.......................     46         Non-Executive Director
</Table>

         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. YIH established 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 has been a
gemstone trader in Brazil and has extensive experience and relationships in gem
sourcing and jewelry design. Mr. Yih is also president of the Hong Kong branch
of the Gemological Institute of America (GIA), the nonprofit educational
organization for the jewelry industry.

         MS. AU has 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. NG has 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 practicing accountant of the Australian Society of CPAs.

         MS. YUE has served as a non-executive director since December 1999. She
is a graduate gemologist from the Gemology Institute of America and serves as
vice president of GIA, Hong Kong since August 1994. Her responsibilities include
managing the Hong Kong office and administering their education programs,
marketing and related activities.



                                      -46-
<PAGE>
         MR. WANG has 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 served as 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 served as vice-president as Nielsen North America with
responsibility for analytical and modeling projects on 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 served as vice president of product development for NFO
Interactive, Greenwich, Connecticut. Since June 2001, Mr. Wang serves as
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 April 30, 2002 on an
accrual basis, for services in all capacities, was HK$5,909,000 (US$764,000).
During the fiscal year ended April 30, 2002, we contributed an aggregate amount
of HK$240,000 (US$31,000) 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, 2000 for a period of three years at an annual salary of HK$1,800,000
(US$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 May 8, 2000, we granted Mr. Yih options exercisable to acquire
600,000 shares of common stock at $3.00 per share at any time until May 7, 2010.

         On October 17, 2000, we offered all option holders the opportunity to
cancel all or some of their stock options in exchange for new options to be
granted on April 30, 2001 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. Mr. Yih has accepted the




                                      -47-
<PAGE>

offer and now holds an option to acquire an aggregate of 775,000 shares
exercisable at $2.00 per share at any time until April 30, 2008.

C.       BOARD PRACTICES.

         Each of our five current directors was elected at our last annual
meeting of shareholders held December 5, 2001 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:

         o    recommend annually to the board of directors the appointment of
              our independent public accountants;

         o    discuss and review the scope and the fees of the prospective
              annual audit and review the results thereof with the independent
              public accountants;

         o    review and approve non-audit services of the independent public
              accountants;

         o    review compliance with our existing accounting and financial
              policies;

         o    review the adequacy of our financial organization; and

         o    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.

D.       EMPLOYEES.

         As of July 31, 2002, we employed approximately 2,000 persons on a
full-time basis for our manufacturing 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 employees' 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 July 31, 2002 by:

         o    each person who is known by us to own beneficially more than 5% of
              our outstanding common stock;

         o    each of our current executive officers and directors; and



                                      -48-
<PAGE>

         o    all directors and executive officers as a group.

As of July 31, 2002, we had 8,671,615 shares of our common stock issued and
outstanding.

         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.

<Table>
<Caption>
NAME OF BENEFICIAL HOLDER                                              NUMBER            PERCENT
-------------------------                                              ------            -------
                                                                       SHARES BENEFICIALLY OWNED
                                                                       -------------------------
<S>                                                                  <C>                    <C>
Yu Chuan Yih                                                            3,529,553(1)(2)     36.5%
Ka Man Au                                                                 200,000(3)         2.3%
Hon Tak Ringo Ng                                                          200,000(4)         2.3%
Po Yee Elsa Yue                                                             6,000(5)           *
Lionel C. Wang                                                                  0              *
Debora Mu Yong Yih                                                      1,260,000(6)        13.9%
All directors and executive officers as a group (5 persons)             3,935,553           37.5%
</Table>

-----------

* Represents less than 1% of the outstanding common stock.

(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 to acquire 775,000 shares of
         common stock held by Mr. Yih 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)      Represents options currently exercisable to acquire 200,000 shares of
         common stock at $2.00 per share at any time until April 30, 2008.

(4)      Represents options currently exercisable to acquire 200,000 shares of
         common stock at $2.00 per share at any time until April 30, 2008.

(5)      Represents options currently exercisable to acquire 6,000 shares of
         common stock at $2.00 per share at any time until April 30, 2008.

(6)      Includes options currently exercisable to acquire 400,000 shares of
         common stock at $2.00 per share at any time until April 30, 2008.



                                      -49-
<PAGE>
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:

         o    encourage ownership of our common stock by our officers,
              directors, employees and advisors;

         o    provide additional incentive for them to promote our success and
              our business; and

         o    encourage them to remain in our employ by providing them 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 April 30, 2002, no options had been exercised and the following
exchanged options to purchase shares of our common stock under the Plan remained
outstanding:

         o    stock options to purchase 2,918,000 shares at $2.00 per share
              through April 30, 2008, of which 1,181,000 are held by our
              directors and officers as a group.

OTHER OPTIONS AND WARRANTS OUTSTANDING

         As of April 30, 2002, the following additional options and warrants to
purchase shares of our common stock were outstanding:

         o    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, 2003



                                      -50-
<PAGE>
         o    146,000 stock purchase options to purchase 146,000 shares of
              common stock at $8.25 per share through April 15, 2003 which we
              sold to the IPO underwriter and/or persons related to the
              underwriter

         o    146,000 warrant purchase options to purchase 146,000 warrants at
              $0.20625 per warrant to purchase shares of common stock at $8.25
              per share through April 15, 2003 which we sold to the IPO
              underwriter and/or persons related to the underwriter

         o    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

         o    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

         o    warrants to purchase 100,000 shares at $2.79 per share exercisable
              through May 26, 2002 which we granted to a former financial
              consultant on May 27, 2001 for services rendered in connection
              with financial advice

         o    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:

              o    100,000 shares at $2.29 per share exercisable through May
                   31, 2003;

              o    80,000 shares at $3.43 per share exercisable through May
                   31, 2004; and

              o    80,000 shares at $4.57 per share exercisable through May 31,
                   2005.

         o    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

         o    warrants to purchase 150,000 shares at $1.7892 per share through
              April 14, 2005 which we granted to Navigator Investments Holding
              IX Limited on April 15, 2002 as a commitment fee in connection
              with an equity line of credit facility

         o    warrants to purchase 150,000 shares at $1.7892 per share through
              April 14, 2005 which we granted to The Bauer Partnership, Inc. on
              April 15, 2002 as a placement fee in connection with an equity
              line of credit facility

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.

         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.



                                      -51-
<PAGE>

         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, 2000, 2001 and 2002, Mr. Yih and these
affiliated companies received unsecured advances from, and made unsecured
advances to us, which were interest free and repayable on demand. The maximum
amount due from Mr. Yih were HK$7,018,000 (US$908,000), HK$4,806,000
(US$622,000) and HK$1,882,000 (US$243,000) during the fiscal years ended April
30, 2000, 2001 and 2002. The closing balance due to Mr. Yih were HK$12,000
(US$2,000) and HK$1,913,000 (US$248,000) at April 30, 2000 and 2001. There was
no outstanding amount with Mr. Yih at April 30, 2002.

         Certain of our banking facilities are collateralized by properties
owned by Yih Yu Chuan and his personal guarantee to the extent of HK$59,390,000
(US$7,683,000) as of April 30, 2001 and HK$65,239,000 (US$8,440,000) as of April
30, 2002. 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
HK$4,882,000 (US$632,000). As of April 30, 2002, the guarantee amount was
HK$4,807,000 (US$622,000).

         During the fiscal year ended April 30, 2000, we received management fee
income of HK$282,000 (US$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
HK$1,219,000 (US$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
HK$161,000 (US$21,000) and HK$250,000 (US$32,000) respectively. In addition, we
received management fee income of HK$212,000 (US$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 HK$19,016,000 (US$2,460,000).

         For additional information, refer to Footnote 13 to the Consolidated
Financial Statements.



                                      -52-
<PAGE>
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.

B.       SIGNIFICANT CHANGES.

         We believe that no significant changes have occurred since the date of
the annual financial statements.




                                      -53-
<PAGE>
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:

<Table>
<Caption>
         PERIOD                                          HIGH          LOW
         ------                                         ------        ------
<S>                                                     <C>           <C>
         Year ended April 30, 1999                      $9.813        $ 4.00
         Year ended April 30, 2000                      $6.688        $ 3.00
         Year ended April 30, 2001                      $3.875        $1.625
         Year ended April 30, 2002                      $ 2.79        $ 1.18

         Quarter ended July 31, 2000                    $3.531        $2.438
         Quarter ended October 31, 2000                 $3.875        $2.156
         Quarter ended January 31, 2001                 $ 2.50        $1.625
         Quarter ended April 30, 2001                   $2.313        $1.656
         Quarter ended July 31, 2001                    $ 2.79        $ 2.00
         Quarter ended October 31, 2001                 $ 2.11        $ 1.48
         Quarter ended January 31, 2002                 $ 1.56        $ 1.22
         Quarter ended April 30, 2002                   $ 1.74        $ 1.18
         Quarter ended July 31, 2002                    $ 1.56        $ 1.11

         Month ended February 28, 2002                  $ 1.45        $ 1.18
         Month ended March 31, 2002                     $ 1.50        $ 1.18
         Month ended April 30, 2002                     $ 1.74        $ 1.52
         Month ended May 31, 2002                       $ 1.56        $ 1.21
         Month ended June 30, 2002                      $ 1.36        $ 1.12
         Month ended July 31, 2002                      $ 1.26        $ 1.11
</Table>



                                      -54-
<PAGE>
         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:

<Table>
<Caption>
         PERIOD                                      HIGH            LOW
         ------                                    --------        --------
<S>                                                <C>             <C>
         Year ended April 30, 1999                 $  5.375        $  0.625
         Year ended April 30, 2000                 $   3.25        $   1.00
         Year ended April 30, 2001                 $  1.375        $  0.219
         Year ended April 30, 2002                 $   0.55        $   0.02

         Quarter ended July 31, 2000               $  1.375        $   0.75
         Quarter ended October 31, 2000            $   1.25        $   0.50
         Quarter ended January 31, 2001            $  0.688        $  0.281
         Quarter ended April 30, 2001              $  0.625        $  0.219
         Quarter ended July 31, 2001               $   0.55        $   0.30
         Quarter ended October 31, 2001            $   0.44        $   0.06
         Quarter ended January 31, 2002            $   0.22        $   0.02
         Quarter ended April 30, 2002              $   0.20        $   0.06
         Quarter ended July 31, 2002               $   0.13        $   0.04

         Month ended February 28, 2002             $   0.12        $   0.09
         Month ended March 31, 2002                $   0.14        $   0.06
         Month ended April 30, 2002                $   0.20        $   0.11
         Month ended May 31, 2002                  $   0.13        $   0.10
         Month ended June 30, 2002                 $   0.13        $   0.08
         Month ended July 31, 2002                 $   0.05        $   0.04
</Table>

         We do not believe that there is any principal non-United States trading
market for the common stock or the warrants. We believe that Cede & Co. holds a
substantial majority of the outstanding common stock and warrants in the United
States as record holder.

B.       PLAN OF DISTRIBUTION.

         Not applicable.

C.       MARKETS.

         Our common stock and our warrants are listed and quoted for trading on
The Nasdaq National Market System since April 15, 1998.




                                      -55-
<PAGE>

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.

B.       MEMORANDUM AND ARTICLES OF ASSOCIATION.

         Corporate Powers. We are 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. We may redeem any of




                                      -56-
<PAGE>

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
name appears on the share register.

         Restrictions on Rights to Own Securities. There are no limitations on
the rights to own our securities.

         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 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




                                      -57-
<PAGE>

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.

         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 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.



                                      -58-
<PAGE>
D.       EXCHANGE CONTROLS.

         There are no material British Virgin Islands laws that impose foreign
exchange controls on us or that affect our payment of dividends, interest or
other payments to nonresident 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 nonresident 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 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:

         o    a court within the United States is able to exercise primary
              supervision over its administration; and

         o    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




                                      -59-
<PAGE>

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, 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:

         o    is a corporation or comes within other exempt categories; or

         o    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




                                      -60-
<PAGE>

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.


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.


ITEM 11.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not applicable.



                                      -61-
<PAGE>


ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     Not applicable.

                                     PART II

ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     Not applicable.

ITEM 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
          AND USE OF PROCEEDS

     Not applicable.

                                    PART III

ITEM 17.  FINANCIAL STATEMENTS

     Not applicable.


ITEM 18.  FINANCIAL STATEMENTS



                                      -62-
<PAGE>
LJ INTERNATIONAL INC.

INDEX TO FINANCIAL STATEMENTS

<Table>
<Caption>
                                                                                      Page
<S>                                                                             <C>
Report of Independent Auditors                                                         F-2

Consolidated statements of operations for the years ended April 30, 2000,
  2001 and 2002                                                                        F-3

Consolidated statements of recognized gains and losses for the years ended
  April 30, 2000, 2001 and 2002                                                        F-4

Consolidated balance sheets as of April 30, 2001 and 2002                              F-5

Consolidated statements of shareholders' equity for the years ended
  April 30, 2000, 2001 and 2002                                                        F-6

Consolidated statements of cash flows for the years ended
  April 30, 2000, 2001 and 2002                                                        F-7

Notes to and forming part of the financial statements                           F-8 - F-52
</Table>



                                      F-1
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS



To the Shareholders and Board of Directors of
LJ International Inc.

         We have audited the accompanying consolidated balance sheets of LJ
International Inc. and its subsidiaries as of April 30, 2001 and 2002 and the
related consolidated statements of operations, recognized gains and losses,
shareholders' equity and cash flows for each of the years in the three-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 Hong Kong and 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, such consolidated financial statements, prepared on the
basis of presentation as set out in notes 1 and 2 to the financial statements,
present fairly, in all material respects, the consolidated financial position of
the Company as of April 30, 2001 and 2002 and the consolidated results of its
operations and cash flows for each of the years in the three-year period ended
April 30, 2002, in conformity with accounting principles generally accepted in
Hong Kong (which differ in certain material respects from generally accepted
accounting principles in the United States of America - See note 19).





MOORES ROWLAND
Chartered Accountants
Certified Public Accountants, Hong Kong

Dated: August 21, 2002



                                      F-2
<PAGE>
                              LJ INTERNATIONAL INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

             (Amounts in thousands, except share and per share data)

<Table>
<Caption>
                                                                                Year ended April 30
                                                              --------------------------------------------------------
                                                  Notes             2000           2001            2002           2002
                                                              ----------     ----------      ----------     ----------
                                                                     HK$            HK$             HK$            US$
<S>                                               <C>         <C>            <C>             <C>             <C>
OPERATING REVENUE                                  2(f)          300,901        357,785         303,326         39,240
Costs of goods sold                                2(h)         (185,758)      (228,611)       (257,280)       (33,283)
                                                              ----------     ----------      ----------     ----------
Gross profit
                                                                 115,143        129,174          46,046          5,957
Other revenue:                                     2(f)
      Interest income                                              2,668          3,929           1,674            217
      Rental income                                                  875            480           1,047            135

Selling, general and administrative expenses       2(i)          (73,174)       (93,182)       (105,195)       (13,609)
                                                              ----------     ----------      ----------     ----------

OPERATING INCOME (LOSS)                                           45,512         40,401         (56,428)        (7,300)

Finance costs                                     2 (j)          (10,172)        (6,710)         (5,038)          (652)
Minority interests                                                   405             --             234             30
                                                              ----------     ----------      ----------     ----------
                                                                  35,745         33,691         (61,232)        (7,922)
INCOME (LOSS) BEFORE INCOME TAXES
Income taxes credit (expense)                       15               (25)        (1,637)            784            101
                                                              ----------     ----------      ----------     ----------
NET INCOME (LOSS)                                                 35,720         32,054         (60,448)        (7,821)
                                                              ==========     ==========      ==========     ==========


Numerator:
      Net income (loss) used in computing basic
        earnings (loss) per share                                 35,720         32,054         (60,448)        (7,821)
      Interest on 3% convertible debentures                          251            127              --             --
                                                              ----------     ----------      ----------     ----------

      Adjusted net income (loss) used in
       computing diluted earnings (loss) per share                35,971         32,181         (60,448)        (7,821)
                                                              ==========     ==========      ==========     ==========


Denominator:
      Weighted average number of shares used
         in calculating basic earnings (loss)
         per share                                             6,589,415      8,567,366       8,671,615      8,671,615
      Effect of dilutive potential ordinary
      shares:
        3% convertible debentures                                337,239         48,753              --             --
        Warrants                                                   6,324             --              --             --
        Stock options                                                 --          6,139              --             --
                                                              ----------     ----------      ----------     ----------

      Weighted average number of shares used
         in calculating diluted earnings
         (loss) per share                                      6,932,978      8,622,258       8,671,615      8,671,615
                                                              ==========     ==========      ==========     ==========

Earnings (loss) per share:
      Basic                                        2(k)             5.42           3.74           (6.97)         (0.90)
                                                              ==========     ==========      ==========     ==========

      Diluted                                      2(k)             5.19           3.73             N/A            N/A
                                                              ==========     ==========      ==========     ==========
</Table>



   The accompanying notes are an integral part of these financial statements.

                                      F-3
<PAGE>
                              LJ INTERNATIONAL INC.

             CONSOLIDATED STATEMENTS OF RECOGNIZED GAINS AND LOSSES

             (Amounts in thousands, except share and per share data)

<Table>
<Caption>
                                                                                Year ended April 30
                                                              --------------------------------------------------------
                                                                    2000           2001            2002           2002
                                                              ----------     ----------      ----------     ----------
                                                                     HK$            HK$             HK$            US$
<S>                                                           <C>            <C>             <C>            <C>
NET LOSSES NOT RECOGNIZED IN THE STATEMENTS OF
   OPERATIONS
   Deficit arising on revaluation of investment
      properties                                                  (3,200)          (915)             --             --

NET INCOME (LOSS) FOR THE YEAR                                    35,720         32,054         (60,448)        (7,821)
                                                              ----------     ----------      ----------     ----------

TOTAL RECOGNIZED GAINS (LOSSES)                                   32,520         31,139         (60,448)        (7,821)
                                                              ==========     ==========      ==========     ==========
</Table>



   The accompanying notes are an integral part of these financial statements.

                                      F-4
<PAGE>
                              LJ INTERNATIONAL INC.

                           CONSOLIDATED BALANCE SHEETS

             (Amounts in thousands, except share and per share data)


<Table>
<Caption>
                                                                                         As of April 30
                                                                         ----------------------------------------------
                                                            Notes                2001             2002             2002
                                                                         ------------     ------------     ------------
                                                                                  HK$              HK$              US$
<S>                                                       <C>            <C>              <C>              <C>
ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                                   13,187            5,583              722
   Restricted cash                                                             41,089           43,620            5,643
   Trade receivables, net of allowance for doubtful
    accounts (2001: HK$1,580; 2002: HK$1,741)                                  48,415           61,944            8,013
   Inventories                                               2(l)             160,955          122,148           15,802
   Prepayments and other current assets                                        14,669            9,299            1,203
                                                                         ------------     ------------     ------------
                                                                              278,315          242,594           31,383
   TOTAL CURRENT ASSETS
Property, plant and equipment, net                             4               34,715           34,208            4,425
Investment properties, net                                                     16,300           15,800            2,044
Due from related parties                                     13(b)             10,745            4,026              521
Goodwill, net of accumulated amortization and impairment
   loss                                                        5                1,915           14,798            1,914
Investment securities                                          6               25,386           20,748            2,684
Other investments                                                                   3                3                1
                                                                         ------------     ------------     ------------

TOTAL ASSETS                                                                  367,379          332,177           42,972
                                                                         ============     ============     ============

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
   Bank overdrafts                                             7               25,213           20,150            2,607
   Notes payable, current portion                              7                3,788            2,180              282
   Letters of credit, gold and other loans                     7               42,484           87,680           11,343
   Trade payables                                                              25,487           25,586            3,310
   Accrued expenses and other payables                                         18,785           12,813            1,658
   Trade deposits received                                                      2,226              151               19
   Due to a director                                         13(b)              1,913               --               --
   Capitalized lease obligations, current                      8                  180              356               46
   Income taxes payable                                                         2,452               26                3
                                                                         ------------     ------------     ------------
   TOTAL CURRENT LIABILITIES                                                  122,528          148,942           19,268
Notes payable, non-current portion                             7                2,183               --               --
Capitalized leased obligations, non-current                    8                   33               61                8
                                                                         ------------     ------------     ------------
                                                                              124,744          149,003           19,276
                                                                         ------------     ------------     ------------
TOTAL LIABILITIES

MINORITY INTEREST                                                                  --              987              128

SHAREHOLDERS' EQUITY
   Common stocks, par value US$0.01 each,
      Authorized - 100 million shares,
   Issued and outstanding -
      8,671,615 shares as of April 30, 2001 and 2002          11                  670              670               87
Share premium                                                 11               99,314           99,314           12,848
Warrant reserve                                              11(b)              1,622            1,622              209
Retained earnings                                                             141,029           80,581           10,424
                                                                         ------------     ------------     ------------
TOTAL SHAREHOLDERS' EQUITY                                                    242,635          182,187           23,568
                                                                         ------------     ------------     ------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                    367,379          332,177           42,972
                                                                         ============     ============     ============
</Table>


   The accompanying notes are an integral part of these financial statements.

                                      F-5
<PAGE>
                              LJ INTERNATIONAL INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

             (Amounts in thousands, except share and per share data)

<Table>
<Caption>
                                            Common stock                             Investment
                                         -------------------                           Property
                                                         Par      Share   Warrant   Revaluation      Retained
                                  Notes      Shares    value    premium   Reserve       Reserve      earnings      Total     Total
                                         ----------   ------   --------   -------   -----------    ----------   --------   -------
                                                         HK$        HK$       HK$           HK$           HK$        HK$       US$
<S>                               <C>    <C>          <C>      <C>        <C>       <C>            <C>          <C>        <C>
Balance as of April 30, 1999              6,365,646      492     48,944     1,622         4,115        73,255    128,428    16,614
Shares issued on conversion of
   convertible debentures         11(e)   1,072,412       83     27,148        --            --            --     27,231     3,523
Deficit arising on revaluation                   --       --         --        --        (3,200)           --     (3,200)     (414)
Net income                                       --       --         --        --            --        35,720     35,720     4,621
                                         ----------   ------   --------   -------   -----------    ----------   --------   -------

Balance as of April 30, 2000              7,438,058      575     76,092     1,622           915       108,975    188,179    24,344

Shares issued on conversion
   of convertible debentures      11(e)   1,233,557       95     23,222        --            --            --     23,317     3,016
Deficit arising on revaluation                   --       --         --        --          (915)           --       (915)     (118)
Net income                                       --       --         --        --            --        32,054     32,054     4,147
                                         ----------   ------   --------   -------   -----------    ----------   --------   -------

Balance as of April 30, 2001              8,671,615      670     99,314     1,622            --       141,029    242,635    31,389

Net loss                                         --       --         --        --            --      (60,448)    (60,448)   (7,821)
                                         ----------   ------   --------   -------   -----------    ----------   --------   -------

Balance as of April 30, 2002              8,671,615      670     99,314     1,622            --        80,581    182,187    23,568
                                         ==========   ======   ========   =======   ===========    ==========   ========   =======
</Table>

Share premium has been set up and is dealt with as disclosed in note 11 to the
financial statements.

Warrant reserve is represented by the proceeds from the issue of the 1,679,000
warrants in the Initial Public Offering (see note 11(b)).

The investment property revaluation reserve has been set up and is dealt with in
accordance with the accounting policies adopted for investment properties.




   The accompanying notes are an integral part of these financial statements.


                                      F-6
<PAGE>
                              LJ INTERNATIONAL INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOW

             (Amounts in thousands, except share and per share data)

<Table>
<Caption>
                                                                                     Year ended April 30
                                                                   -------------------------------------------------------
                                                                         2000           2001           2002           2002
                                                                   ----------     ----------     ----------     ----------
                                                        Note              HK$            HK$            HK$            US$
<S>                                                    <C>             <C>            <C>           <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) before income taxes                                      35,745         33,691        (61,232)        (7,922)
Adjustments to reconcile income (loss) before income
   taxes to net cash provided by (used in) operating
   activities:
   Interest income                                                     (2,668)        (3,929)        (1,674)          (217)
   Interest expenses                                                    5,648          6,710          5,038            652
   Depreciation of property, plant and equipment                        4,978          5,775          7,498            970
   Impairment loss on property, plant and equipment                        --             --          2,669            345
   Amortization of organization costs                                   1,085             --             --             --
   Amortization and impairment loss on goodwill                             7            216          3,518            455
   Unrealized (gain) loss on gold loan                                   (338)          (343)         5,102            660
   Issuing costs for convertible debentures                             4,524             --             --             --
   Loss on disposal and write-off of property, plant
     and equipment                                                         22             80          1,658            214
   Deficit on revaluation of investment properties                         --          1,885            500             65
   Allowance for doubtful debts                                           578           (917)           634             82
   Write-down of inventories                                               --             --         44,144          5,710
   Minority interests                                                    (405)            --           (234)           (30)
Changes in operating assets and liabilities:
   Trade receivables                                                   (9,095)        (4,809)       (13,919)        (1,801)
   Inventories                                                        (54,806)       (12,513)        (5,008)          (647)
   Prepayments and other current assets                                (5,377)         6,995          6,417            830
   Due from related parties                                              (654)        (7,339)            --             --
   Due from director                                                       31             --             --             --
   Trade payables                                                       6,247         (1,517)          (926)          (120)
   Accrued expenses and other payables                                 13,642          2,882         (8,627)        (1,116)
   Due to director                                                         12          1,901         (1,913)          (247)
   Letters of credit                                                   (8,252)         2,265         15,436          1,997
                                                                   ----------     ----------     ----------     ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                    (9,076)        31,033           (919)          (120)
                                                                   ----------     ----------     ----------     ----------

RETURNS ON INVESTMENTS AND SERVICING OF FINANCE:
Cash received from interest                                             2,668          3,916          1,674            217
Cash paid for interest                                                 (5,472)        (6,653)        (4,932)          (638)
                                                                   ----------     ----------     ----------     ----------
NET CASH USED IN RETURNS ON INVESTMENTS AND
   SERVICING OF FINANCE                                                (2,804)        (2,737)        (3,258)          (421)
                                                                   ----------     ----------     ----------     ----------

TAXATION
Cash refunded (paid) for income taxes                                     (93)           363         (1,642)          (212)
                                                                   ----------     ----------     ----------     ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Advance to related parties                                                 --             --        (42,067)        (5,442)
Purchase of investment securities                                          --        (25,386)            --              -
Purchase of property, plant and equipment                              (3,477)        (6,429)        (3,248)          (420)
Purchase of subsidiary                                  17(a)          (1,830)            --        (18,406)        (2,381)
Proceeds on disposals of property, plant and
   equipment                                                              145             75             91             12
Repayment from related parties                                             --             --         48,787          6,311
                                                                   ----------     ----------     ----------     ----------
NET CASH USED IN INVESTING ACTIVITIES                                  (5,162)       (31,740)       (14,843)        (1,920)
                                                                   ----------     ----------     ----------     ----------

NET CASH USED BEFORE FINANCING ACTIVITIES                             (17,135)        (3,081)       (20,662)        (2,673)
                                                                   ----------     ----------     ----------     ----------

CASH FLOWS FROM FINANCING ACTIVITIES:                   17(b)
Proceeds from issue of 3% convertible debentures                       50,245             --             --             --
Issuing costs on 3% convertible debentures                             (4,524)            --             --             --
Loans acquired                                                          9,097          4,362         24,658          3,190
Repayment of loans                                                    (12,949)        (4,168)        (3,791)          (490)
Repayment of capitalized leases                                          (555)          (593)          (215)           (28)
                                                                   ----------     ----------     ----------     ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                    41,314           (399)        20,652          2,672
                                                                   ----------     ----------     ----------     ----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                   24,179         (3,480)           (10)            (1)
CASH AND CASH EQUIVALENTS, AS OF BEGINNING OF YEAR                      8,364         32,543         29,063          3,759
                                                                   ----------     ----------     ----------     ----------
CASH AND CASH EQUIVALENTS, AS OF END OF YEAR                           32,543         29,063         29,053          3,758
                                                                   ==========     ==========     ==========     ==========

ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS
Cash                                                                   12,888         13,187          5,583            722
Restricted cash                                                        26,000         41,089         43,620          5,643
Bank overdrafts                                                        (6,345)       (25,213)       (20,150)        (2,607)
                                                                   ----------     ----------     ----------     ----------
                                                                       32,543         29,063         29,053          3,758
                                                                   ==========     ==========     ==========     ==========
NON-CASH TRANSACTIONS:
Conversion of convertible debentures                     17(c)         27,231         23,317             --             --
                                                                   ==========     ==========     ==========     ==========
</Table>

   The accompanying notes are an integral part of these financial statements.



                                      F-7
<PAGE>

                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


1.       PRINCIPAL ACTIVITIES AND BASIS OF FINANCIAL STATEMENTS

         LJ International Inc. (the Company) and its subsidiaries (collectively
         the Group) are involved in the design, manufacture, marketing and sale
         of precious and semi-precious gemstones jewelry 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. The Group also owns certain
         commercial and residential properties located in Hong Kong, which are
         held primarily for investment purposes.

         During the year ended April 30, 1998, the Company merged with Lorenzo
         Jewelry Mfg. (H.K.) Limited, presently known as Lorenzo Jewelry Limited
         (Lorenzo). The Company was incorporated as a British Virgin Islands
         (BVI) company on January 30, 1997 and prior to the merger it had no
         significant operations, but had incurred certain organization and
         deferred offering costs. The merger had been accounted for by the
         purchase method of accounting under generally accepted accounting
         principles in Hong Kong (HK GAAP) and reflects operations for each
         period presented herein on the basis that the merger took place at
         April 30, 1994. In connection with this reorganization, HK$75 was
         recorded as goodwill. Under generally accepted accounting principles in
         the United States (US GAAP) such reorganization would be accounted for
         as if it was a pooling of interest as there exists common ownership
         between the companies. A reconciliation to this method of accounting is
         set out in note 19. The capital structure reflected in the financial
         statements is that of the Company, which is a holding company after the
         merger.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         (a)  Basis of accounting

              The financial statements are presented in Hong Kong dollars and
              have been prepared in accordance with Statements of Standard
              Accounting Practice (SSAPs) and Interpretations issued by the Hong
              Kong Society of Accountants (HKSA) and HK GAAP which have been
              applied consistently throughout the relevant periods. These
              requirements differ in certain material respects from US GAAP -
              see note 19.

              In the current year, the Group adopted the following SSAPs which
              are effective for the accounting periods commencing on or after
              January 1, 2001:

<Table>
                    <S>                 <C>  <C>
                    SSAP 9 (revised)    :    Events after the balance sheet date
                    SSAP 14 (revised)   :    Leases (effective for the periods commencing on or after
                                               July 1, 2000)
                    SSAP 26             :    Segment reporting
                    SSAP 28             :    Provisions, contingent liabilities and contingent assets
                    SSAP 30             :    Business combinations
                    SSAP 31             :    Impairment of assets
                    SSAP 32             :    Consolidated financial statements and accounting for
                                               investments in subsidiaries
</Table>

              The effect of adopting these new/revised accounting standards, if
              any, is set out in the relevant notes to the financial statements.



                                      F-8
<PAGE>

                              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)

         (b)  Basis of preparation

              The measurement basis used in the preparation of the financial
              statements is historical cost modified by the revaluation of
              investment properties as explained in the accounting policies set
              out below.

         (c)  Principles of combination and consolidation

              The consolidated financial statements mainly include the financial
              information of the Company and Lorenzo, Precious Gems Trading
              Limited (Precious Gems), Golden Horizon Trading Limited (Golden
              Horizon), Fine Gift Enterprises Limited (Fine Gift), LJ Jewelery
              (Japan) Ltd (LJ Japan), Excel Gold Industries Ltd (Excel Gold) and
              iBBC Inc. Lorenzo has three subsidiaries, two of which are
              incorporated in the PRC, Shantou Lorenzo Jewelry Mfg. and Shantou
              SEZ Lorenzo Gems & Craft Factory Co., Ltd. Lorenzo also has a
              subsidiary, Lorenzo Giftware Limited (Lorenzo Giftware), formerly
              known as Lorenzo Marketing Co. Limited, which is incorporated in
              Hong Kong. Precious Gems is incorporated in BVI and has one
              subsidiary which is incorporated in the PRC, Lorenzo Gems
              Manufacturing (Shenzhen) Co., Ltd. Golden Horizon is incorporated
              in BVI and has one subsidiary which is incorporated in the PRC,
              Lorenzo Jewellery (Shenzhen) Co., Ltd. Fine Gift is incorporated
              in BVI and has one subsidiary which is incorporated in Hong Kong,
              Lorenzo Diamond Jewelry Mfg. Co., Limited. Both LJ Japan and Excel
              Gold are incorporated in BVI. iBBC Inc., a company incorporated in
              BVI, became a subsidiary of the Company on March 21, 2002 (see
              notes 6 and 17(a)). iBBC Inc. has two wholly owned subsidiaries
              Gemriver Jewelry Limited (formerly known as iBBC (H.K.) Limited),
              which is incorporated in Hong Kong, and iBBC Inc. (California) dba
              Gallery Expressions, which is incorporated in the United States.
              As of April 30, 2002, all subsidiaries are 100% owned except for
              iBBC Inc., which is 85.6% owned by the Company.

              The results of subsidiaries acquired or disposed of during the
              year are consolidated from or to their effective dates of
              acquisition or disposal respectively.

              All material intercompany balances and transactions have been
              eliminated on consolidation.

         (d)  Goodwill on consolidation

              Positive goodwill arising on consolidation represents the excess
              of the purchase consideration payable at the time of acquisition
              of the subsidiaries over the Group's interest in the fair value of
              the identifiable assets and liabilities acquired at the date of
              acquisition. Positive goodwill is amortized on a straight-line
              basis over its economic useful life.

              Negative goodwill represents the excess of the Group's interest in
              the fair value of the identifiable assets and liabilities acquired
              at the date of acquisition over the cost of the acquisition.
              Negative goodwill arising on acquisitions is presented as a
              deduction from




                                      F-9
<PAGE>

                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


              assets and is released to income based on an analysis of the
              circumstances from which the balance resulted.



                                      F-10
<PAGE>
                              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)

         (d)  Goodwill on consolidation (Continued)

              On disposal of a subsidiary during the year, any attributable
              amount of purchased goodwill not previously amortized through the
              statement of operations is included in the calculation of the gain
              or loss on disposal.

         (e)  Subsidiaries

              A subsidiary, is an enterprise, in which the Company, directly or
              indirectly has control, which is the power to govern the financial
              and operating policies so as to obtain benefits from its
              activities.

         (f)  Revenue recognition

              Revenue is recognized when it is probable that the economic
              benefits will flow to the Group and when the revenue and cost, if
              applicable, can be measured reliably.

              Turnover and operating revenue represent sale of goods at invoiced
               value to customers, net of returns and discounts, and are
               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.

         (g)  Shipping and handling costs

              In order to be consistent with the application of Emerging Issues
              Task Force ("EITF") Issue 00-10 "Shipping and Handling Fees and
              Costs" under US GAAP, the shipping and handling costs, which were
              previously included in selling, general and administrative
              expenses, are included in costs of goods sold for the current
              year. The comparative information has been restated to conform to
              current year's presentation.

              The amounts of revenue received for shipping and handling are
              included in operating revenue.

         (h)  Costs of goods sold

              Costs of goods sold consist of amounts charged by suppliers for
              goods purchased and costs incurred for sub-contracting works,
              shipping and handling, direct labours and other direct overheads.




                                      F-11
<PAGE>
                              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)  Selling, general and administrative expenses

              Selling, general and administrative expenses, are expenses other
              than costs of goods sold and finance costs, which consist of
              personnel and related expenses of executive and administrative
              staff, marketing and promotional expenses, fees for legal and
              professional services and other general administrative expenses.

         (j)  Finance costs

              Included in the finance costs are interest expenses of HK$5,648,
              HK$6,710 and HK$5,038 for the years ended April 30, 2000, 2001 and
              2002 respectively.

         (k)  Earnings (loss) per share

              The calculation of basic earnings (loss) per share is based on net
              income (loss) for the year attributable to shareholders and on the
              weighted average number of ordinary shares outstanding during the
              year.

              The calculation of diluted earnings (loss) per share is based on
              net income for the year attributable to shareholders and on the
              weighted average number of ordinary shares outstanding during the
              year, 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.

         (l)  Inventories

              Inventories are stated at the lower of cost and net realizable
              value. 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. Net
              realizable value represents the estimated selling price in the
              ordinary course of business less the estimated costs of completion
              and the estimated costs necessary to make the sale. Inventories
              consisted of the following:

<Table>
<Caption>
                                                                                As of April 30
                                                                 ---------------------------------------------
                                                                        2001             2002             2002
                                                                 -----------      -----------       ----------
                                                                         HK$              HK$              US$
<S>                                                              <C>              <C>               <C>
               Raw materials                                         121,427           82,638           10,691
               Work-in-progress                                       12,186            4,123              533
               Finished goods                                         28,542           35,387            4,578
               Less: Provision for slow moving inventories            (1,200)              --               --
                                                                 -----------      -----------       ----------

                                                                     160,955          122,148           15,802
                                                                 ===========      ===========       ==========
</Table>

               The amounts of inventories included above carried at net
               realizable value are HK$9,319 and HK$52,268 as of April 30, 2001
               and 2002 respectively.




                                      F-12
<PAGE>
                              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)

         (l)  Inventories (continued)

              Cost of inventories recognized in the statement of operations for
              the years ended April 30, 2000, 2001 and 2002 was HK$125,702,
              HK$166,158 and HK$199,068 respectively.

              Included in the inventories as of April 30, 2002 above are
              certain gemstones and fine jewelry at a carrying value of
              HK$52,268, 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 has dropped dramatically in current year
              and is 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
              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
              HK$44,144 being recognized in costs of goods sold for the year
              ended April 30, 2002. Should demand for such gemstones and fine
              jewelry proved to be significantly less than anticipated, the
              ultimate realizable value of such products could be substantially
              less than the amount shown in the balance sheet.

         (m)  Property, plant and equipment (PPE) and depreciation

              PPE are stated at cost less accumulated depreciation and
              accumulated impairment loss. The cost of an asset consists of its
              purchase price and any directly attributable costs of bringing the
              asset to its present working condition and location for its
              intended use, which include the estimated cost for dismantling,
              removing the asset and restoring the site.

              Expenditure incurred to replace a separate component of an item of
              property, plant and equipment, including major inspection and
              overhaul expenditure, is capitalized and accounted for as a
              component of the asset. Other subsequent expenditure is
              capitalized as an additional cost of the asset only when it can be
              clearly demonstrated that the expenditure has resulted in an
              increase in the future economic benefits expected to be obtained
              from the use of the asset.

              The gain or loss arising from the retirement or disposal of
              property, plant and equipment is determined as the difference
              between the sales proceeds and the carrying amount of the assets
              and is recognised as an income or expense in the statement of
              operations.

              When assets are transferred between PPE and other classes of
              assets, the cost of such an asset on transfer is deemed to be the
              carrying amount of the asset as stated under its original
              classification. Any previous revaluation reserve on the asset is
              frozen upon the transfer until the retirement or disposal of the
              asset. On retirement or disposal of the asset, the frozen
              revaluation reserve is transferred directly to retained earnings.




                                      F-13
<PAGE>
                              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)  Property, plant and equipment (PPE) and depreciation (continued)

              Depreciation is calculated to write off the cost of PPE over their
              estimated useful lives from the date on which they become fully
              operational and after taking into account of their estimated
              residual values, using the straight line method, at the following
              annual rates:

<Table>
<S>                                                    <C>
              Land and buildings                              2% or over the unexpired term of leases
              Furniture, fixtures and equipment                                            20% to 50%
              Motor vehicles                                                                      20%
              Plant and machinery                                                                 10%
              Leasehold improvement                    shorter of 10% or the unexpired term of leases
</Table>

              Assets held under capitalized leases are depreciated over their
              expected useful lives on the same basis as owned assets or, where
              shorter, the terms of the leases.

         (n)  Investment properties

              Investment properties are interests in land and buildings in
              respect of which construction works and development have been
              completed and which are intended to be held on long-term basis for
              their investment potential. Investment properties are stated in
              the balance sheet at their open market values on basis of
              professional valuation.

              Changes in the values of investment properties are dealt with as
              movements in the investment property revaluation reserve. If the
              total of the attributable reserve is insufficient to cover a
              deficit, on a portfolio basis, the excess of the deficit is
              charged to the statement of operations. Where a deficit has
              previously been charged to the statement of operations and a
              revaluation surplus subsequently arises, this surplus is credited
              to the statement of operations to the extent of the deficit
              previously charged.

              Upon disposal of an investment property, the relevant surplus or
              deficit of the investment property revaluation reserve realized in
              respect of previous valuations is released to the statement of
              operations.

              The investment properties were revalued close at the end of April
              2001 and 2002 by Memfus Wong Surveyors Limited (for 2001), Jones
              Lang LaSalle Limited (for 2001 and 2002) and Vigers Hong Kong
              Limited (for 2002), independent firms of qualified surveyors, on
              an open market value basis. During the year ended April 30, 2001,
              a deficit of HK$2,800 arising on revaluation had been recorded, of
              which HK$915 had been debited to the investment property
              revaluation reserve and the remaining balance of HK$1,885, being
              the amount in excess of the revaluation reserve had been charged
              to the statement of operations under selling, general and
              administrative expenses. During the year ended April 30, 2002, an
              additional deficit of HK$500 arising on revaluation has been
              charged to the statement of operations under selling, general and
              administrative expenses.




                                      F-14
<PAGE>
                              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)

         (n)  Investment properties (continued)

              No amortization and depreciation is provided in respect of
              investment properties because their unexpired term of underlying
              land leases are over 20 years. Of properties acquired prior to
              1995, they were classified as land and buildings and an
              accumulated depreciation of HK$1,080 had previously been recorded.

              Investment properties include gross carrying amount of HK$16,300
              and HK$15,800 with no accumulated depreciation in respect of
              assets held for use under operating leases as of April 30, 2001
              and 2002 respectively.

         (o)  Impairment loss

              At each balance sheet date, the Group reviews the carrying amounts
              of goodwill and property, plant and equipment to determine whether
              there is any indication that those assets have suffered an
              impairment loss or impairment loss previously recognized no longer
              exists or may have decreased. If any such indication exists, the
              recoverable amount of the asset is estimated, based on the higher
              of its net selling price and value in use, in order to determine
              the extent of the impairment loss. Where it is not possible to
              estimate the recoverable amount of an individual asset, the Group
              estimates the smallest group of assets that generates cash flows
              independently (i.e. a cash-generating unit).

              If the recoverable amount of an asset or a cash-generating unit is
              estimated to be less than its carrying amount, the carrying amount
              of the asset or cash-generating unit is reduced to its recoverable
              amount. Impairment loss is recognized as an expense immediately.

              Where an impairment loss subsequently reverses, the carrying
              amount of the asset or cash-generating unit is increased to the
              revised estimate of its recoverable amount, but so that the
              increased carrying amount does not exceed the carrying amount that
              would have been determined had no impairment loss been recognized
              for the asset or cash-generating unit in prior years. A reversal
              of an impairment loss is recognized as income immediately.

         (p)  Investment securities

              Investment 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 provisions is recognized
              as an expense in the period in which the decline occurs.

              The profit or loss on disposal of investment securities is
              accounted for in the period in which the disposal occurs as the
              difference between net sales proceeds and the carrying amount of
              the securities.



                                      F-15
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


              Under US GAAP, Statement of Financial Accounting Standard (SFAS)
              No. 115 does not apply as the investment securities are unlisted
              equity securities which have no readily determinable fair value.




                                      F-16
<PAGE>
                              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)  Taxation

              The charge for taxation is based on the results for the year as
              adjusted for items which are non-assessable or disallowed. Timing
              differences arise from the recognition for tax purposes of certain
              items of income and expense in a different accounting period from
              that in which they are recognized in the financial statements. The
              tax effect of timing differences, computed using the liability
              method, is recognized as deferred taxation in the financial
              statements to the extent that it is probable that a liability or
              asset will crystallize in the foreseeable future. A deferred tax
              asset is not recognized unless its realization is assured beyond
              reasonable doubt.

         (r)  Foreign currencies

              Transactions in foreign currencies are translated at the
              applicable rates of exchange on the dates of transactions.
              Monetary assets and liabilities denominated in foreign currencies
              are translated at applicable rates ruling at the balance sheet
              date. Exchange differences are recorded within the statement of
              operations.

              Assets and liabilities of overseas subsidiaries are translated at
              the applicable rates of exchange ruling at the balance sheet date.
              All exchange differences arising on the consolidation are recorded
              within equity. Historically, no such foreign exchange transactions
              have been recorded in the financial statements.

              For the purpose of these financial statements, the exchange rate
              adopted for the presentations of financial information as of and
              for the year ended April 30, 2002 has been made at HK$7.73 to
              US$1.00. No representation is made that the US$ amounts could have
              been, or could be, converted into HK$ at that rate or at any other
              rates.

         (s)  Gold loans

              Gold loan balances are translated at the gold price prevailing at
              the close of business on the balance sheet date. Profits or losses
              arising on translation are dealt with in the statement of
              operations.

         (t)  Capitalized lease obligations

              Assets held under capitalized leases are recognized as assets of
              the Group at their fair value at the date of acquisition. The
              corresponding liability to the lessor is included in the balance
              sheet as a capitalized lease obligation. Finance costs, which
              represent the difference between the total leasing commitments and
              the fair value of the assets acquired, are charged to the
              statement of operations over the term of the relevant lease so as
              to produce a constant periodic rate of charge on the remaining
              balance of the obligations for each accounting period.




                                      F-17
<PAGE>
                              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)

         (u)  Operating leases

              Leases where substantially all the rewards and risks of ownership
              of assets remain with the leasing company are accounted for as
              operating leases. Rentals payable and receivable under operating
              leases are recorded in the statement of operations on a straight
              line basis over the lease terms. Lease incentives received are
              recognized in the statement of operations as an integral part of
              the net consideration agreed for the use of the leased asset.

         (v)  Cash equivalents

              Cash equivalents in the statement of cash flow under HKGAAP
              represent short-term highly liquid investments which are readily
              convertible into known amounts of cash and which were within three
              months of maturity when acquired, less advances from banks
              repayable within three months from the date of the advance.

         (w)  Segment reporting

              The Group has determined that business segments be presented as
              the primary reporting format because this is more relevant to the
              Group's internal financial reporting, and geographical segments as
              the secondary reporting format.

         (x)  Uses of estimates

              The preparation of the Group'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.

         (y)  Related parties

              Parties 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.

         (z)  Dividend

               The Directors of the Company did not declare interim dividend and
               propose final dividend for each of the years in the three-year
               period ended April 30, 2002. 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 U.S.
               dollars or other currencies and other regulatory restrictions.
               Currently, none of the subsidiaries has such restriction during
               the past three financial years except for the covenants as set
               out in note 7 to the financial statements.






                                      F-18
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


3.       OPERATING RISKS

         (a)   Concentrations of credit risks

               Details of major customers from which the Group derived operating
               revenue are shown in note 18(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 Group's receivables.
               Even though the Group 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 risks

               The Group 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 Group'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 does not believe these risks 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 deposits

               The Group 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-19
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


4.       PROPERTY, PLANT AND EQUIPMENT

<Table>
<Caption>

                                             LAND                      FURNITURE,
                                              AND       LEASEHOLD    FIXTURES AND     PLANT AND       MOTOR
                                        BUILDINGS     IMPROVEMENT       EQUIPMENT     MACHINERY    VEHICLES       TOTAL     TOTAL
                                              HK$             HK$             HK$           HK$         HK$         HK$       US$
<S>                                    <C>            <C>            <C>             <C>           <C>          <C>        <C>
        AT COST/CARRYING VALUE
        At May 1, 2001                      4,970          20,075          11,997        16,450       2,811      56,303     7,283
        Acquisition of a subsidiary            --             309           9,591            --          --       9,900     1,281
        Additions                              --           1,664           1,397           187          --       3,248       420
        Disposals                              --          (2,619)           (538)           --        (393)     (3,550)     (459)
                                       ----------     -----------    ------------    ----------    --------     -------    ------

        AT APRIL 30, 2002                   4,970          19,429          22,447        16,637       2,418      65,901     8,525
                                       ----------     -----------    ------------    ----------    --------     -------    ------

        ACCUMULATED DEPRECIATION AND
          IMPAIRMENT LOSS
        At May 1, 2001                        996           5,954           7,205         5,446       1,987      21,588     2,792
        Acquisition of a subsidiary            --              67           1,672            --          --       1,739       225
        Charge for the year                   140           3,375           2,140         1,603         240       7,498       970
        Impairment loss                       941              --              --         1,728          --       2,669       345
        Eliminated on disposals                --          (1,093)           (400)           --        (308)     (1,801)     (232)
                                       ----------     -----------    ------------    ----------    --------     -------    ------

        AT APRIL 30, 2002                   2,077           8,303          10,617         8,777       1,919      31,693     4,100
                                       ----------     -----------    ------------    ----------    --------     -------    ------

        NET BOOK VALUE
        AT APRIL 30, 2002                   2,893          11,126          11,830         7,860         499      34,208     4,425
                                       ==========     ===========    ============    ==========    ========     =======    ======

        At April 30, 2001                   3,974          14,121           4,792        11,004         824      34,715     4,491
                                       ==========     ===========    ============    ==========    ========     =======    ======
</Table>

(a)      Total depreciation expense for the years ended April 30, 2000, 2001 and
         2002 was HK$4,978, HK$5,776 and HK$7,498 respectively.

(b)      The net book value of the property, plant and equipment includes an
         amount of HK$283 and HK$638 in respect of assets held under capitalized
         leases as of April 30, 2001 and April 30, 2002 respectively.
         Depreciation expense in respect of these assets for the years ended
         April 30, 2000, 2001 and 2002 amounted to HK$463, HK$489 and HK$219
         respectively.

(c)      The Group has pledged all land and buildings as collateral for general
         banking facilities granted to the Group as of April 30, 2001 and April
         30, 2002 (see note 7).



                                      F-20
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


5.       GOODWILL

         A reconciliation of carrying amount of goodwill is as follows:

<Table>
<Caption>
                                                                 POSITIVE      POSITIVE
                                                                 GOODWILL      GOODWILL
                                                                      HK$           US$
<S>                                                              <C>           <C>
        AT MAY 1, 2001
        Cost                                                        2,152           278
        Accumulated amortization                                     (237)          (30)
                                                               ----------     ---------
        OPENING CARRYING AMOUNT                                     1,915           248
        Acquisition of a subsidiary                                16,401         2,121
        Amortization charges for the year                          (1,648)         (213)
        Impairment losses                                          (1,870)         (242)
                                                               ----------     ---------

        Closing carrying amount                                    14,798         1,914
                                                               ==========     =========

        AT APRIL 30, 2002
        Cost                                                       18,553         2,399
        Accumulated depreciation and impairment losses             (3,755)         (485)
                                                               ----------     ---------

        CLOSING CARRYING AMOUNT                                    14,798         1,914
                                                               ==========     =========
</Table>

         Acquisition of a subsidiary during the year refers to the acquisition
         of a jewelry retail company as detailed in notes 6 and 17(a) to the
         financial statements.

         Positive goodwill is amortized as expense on a straight-line basis over
         ten years.

         Amortization of positive goodwill for the years ended April 30, 2000,
         2001 and 2002 was HK$7, HK$215 and HK$1,648 respectively.

         Impairment loss recognized for the year ended April 30, 2002 was
         HK$1,870. There was no impairment loss recognized for the years ended
         April 30, 2000 and 2001.

         Both amortization and impairment loss of positive goodwill were
         recorded in the statement of operations under selling, general and
         administrative expenses.



                                      F-21
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)



6.       INVESTMENT SECURITIES

<Table>
<Caption>
                                                                  As of April 30
                                                  ----------------------------------------------
                                                         2001             2002              2002
                                                  -----------     ------------      ------------
                                                          HK$              HK$               US$
<S>                                               <C>              <C>                <C>
        At Cost:
            Equity securities, unlisted                25,386           20,748             2,684
                                                  ===========     ============      ============
</Table>

         During the financial year 2001, the Company acquired 20% equity
         interests in a company whose principal activities are the manufacturing
         and trading of rough and pre-formed gemstones, and 16.8% equity
         interests in a jewelry retail company, of which the Group had no
         significant control and influence over their operating and financial
         policies.

         On March 21, 2002, the Company acquired further 68.8% equity interest
         in the jewelry retail company, of which 16.8% equity interests were
         acquired in the previous year. The Group's ownership interest and
         control in this company rendered it become a subsidiary of the Company
         effective from March 21, 2002 since then it became an 85.6% owned
         subsidiary of the Company (see note 17(a)).

         The directors of the Company consider such acquisitions would enhance
         the Group by forward and backward vertical integration.

7.       BANKING FACILITIES AND OTHER LOANS

<Table>
<Caption>
                                                                                        As of April 30
                                                                        ----------------------------------------------
                                                                               2001             2002              2002
                                                                        -----------     ------------      ------------
                                                                Note            HK$              HK$               US$
<S>                                                             <C>          <C>              <C>                <C>
        BANK OVERDRAFTS                                          (a)         25,213           20,150             2,607
                                                                        ===========     ============      ============

        NOTES PAYABLE:
            Current portion                                                   3,788            2,180               282
            Non-current portion                                               2,183               --                --
                                                                        -----------     ------------      ------------

                                                                 (b)          5,971            2,180               282
                                                                        ===========     ============      ============

        LETTERS OF CREDIT, GOLD LOAN:
            Letters of credit                                    (a)         28,206           43,642             5,646
            Gold loan                                            (c)         14,278           44,038             5,697
                                                                        -----------     ------------      ------------

                                                                             42,484           87,680            11,343
                                                                        ===========     ============      ============
</Table>

         The Group's banking facilities are collaterized by land and buildings
         (see note 4(c)), investment properties, restricted cash deposits,
         factored receivables and personal guarantees of certain directors (see
         note 13(b)).


                                      F-22
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


7.       BANKING FACILITIES AND OTHER LOANS (CONTINUED)

         The provisions of indenture relating to the banking facility agreements
         contain various covenants pertaining to (i) maintenance of the net
         worths of the Company and one of its subsidiaries amounting to
         HK$123,680 and HK$35,000 respectively; and (ii) cross-default provision
         of not more than US$10,000. 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
         April 30, 2001 and 2002, both the Company and the subsidiary maintained
         the minimum net worth requirement, and the Group did not breach any
         cross-default provision.

         (a)   The Group had various letters of credit and overdrafts under
               banking facilities as follows:

<Table>
<Caption>
                                                                  As of April 30
                                               ----------------------------------------------------
                                                         2001               2002               2002
                                               --------------      -------------       ------------
                                                          HK$                HK$                US$
<S>                                            <C>                 <C>                 <C>
                 FACILITIES GRANTED
                 Letters of credit                     86,000             90,000             11,643
                 Overdrafts                            48,500             27,300              3,532
                                               ==============      =============       ============

                 UTILIZED
                 Letters of credit                     28,206             43,642              5,646
                 Overdrafts                            25,213             20,150              2,607
                                               ==============      =============       ============

                 UNUTILIZED FACILITIES
                 Letters of credit                     57,794             46,358              5,997
                 Overdrafts                            23,287              7,150                925
                                               ==============      =============       ============
</Table>

                  The bank overdrafts are denominated in Hong Kong dollars, bear
                  interest at the floating commercial bank lending rates in Hong
                  Kong, which ranged from 5.1% to 6.1% per annum as of April 30,
                  2002 (2001: 7.0% to 7.5% per annum) and are renewable annually
                  with the consent of the relevant banks.

                  Under the banking facilities arrangements, the Group 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.




                                      F-23
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


7.       BANKING FACILITIES AND OTHER LOANS (CONTINUED)

         (b)      The Group also had term loans classified under notes payable
                  which are related to the Group's investment properties. These
                  loans aggregated to HK$5,971 and HK$2,180 as of April 30, 2001
                  and 2002 respectively. Interest charges on these loans range
                  from 7.5% to 9.5% per annum as of April 30, 2002 (2001: 9% to
                  9.5% per annum).

                  Expected maturities of notes payable are as follows:

<Table>
<Caption>
                                                                                        As of April 30
                                                                        -----------------------------------------------
                                                                                2001              2002             2002
                                                                                 HK$               HK$              US$
<S>                                                                            <C>
                 2002                                                          3,788                --               --
                 2003                                                          2,183             2,180              282
                                                                        ------------      ------------      -----------

                                                                               5,971             2,180              282
                                                                        ============      ============      ===========
</Table>

         (c)      The Group had outstanding loans to purchase 6.95 oz and 18.45
                  oz of gold as of April 30, 2001 and 2002 with the related
                  balances being HK$14,278 and HK$44,038 respectively. These
                  loans are due within the following year, however, have been
                  historically renewed. These loans bear interest at 1.7% to
                  3.4% per annum as of April 30, 2002 (2001: 2% to 2.9% per
                  annum) and can be repaid in cash at the current exchange rate
                  of gold any time prior to maturity. The Group adjusts the
                  outstanding loan balance to the current market rate of gold as
                  of the balance sheet date. Due to changing prices of gold,
                  this adjustment has resulted in additional income of HK$343
                  and loss of HK$5,102 for the years ended April 30, 2001 and
                  2002 respectively. As the Group does not hedge for changes in
                  the future price of gold, the Group is exposed to certain
                  market risks, which may result from potential future increases
                  in the price of gold.



                                      F-24
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


8.       CAPITALIZED LEASE OBLIGATIONS

         The information disclosed below has been changed as a result of
         adoption of the revised SSAP 14 "Leases". The revised SSAP 14 requires
         disclosure of a reconciliation between the total of minimum lease
         payments at the balance sheet date and their present value, for each of
         the periods as presented below. The comparative information has been
         presented to conform to this change in disclosure requirement.

<Table>
<Caption>
                                                                                             Present value of
                                                 Minimum lease payments                   minimum lease payment
                                                     as of April 30                           as of April 30
                                           ----------------------------------      ------------------------------------
                                               2001         2002         2002           2001          2002         2002
                                           --------     --------     --------      ---------     ---------     --------
                                                HK$          HK$          US$            HK$           HK$          US$
<S>                                        <C>          <C>          <C>           <C>           <C>           <C>
        Amount payable:
        Within one year                         231          383           50            180           356           46
        In the second to  fifth years
        inclusive                                47           64            8             33            61            8
                                           --------     --------     --------      ---------     ---------     --------

                                                278          447           58            213           417           54
        Future finance charges                 (65)         (30)          (4)             --            --           --
                                           --------     --------     --------      ---------     ---------     --------

        Present value of lease
          obligations                           213          417           54            213           417           54
                                           ========     ========     ========      =========     =========     ========
</Table>

         Finance charges on capitalized lease obligations for the years ended
         April 30, 2000, 2001 and 2002 were HK147, HK$157 and HK$56
         respectively. The amounts were recorded in the statement of operations
         under finance costs.

9.       CONTINGENT LIABILITIES

         As of April 30, 2001 and 2002, the Group had contingent liabilities in
         respect of bills discounted with recourse amounting to HK$331 and
         HK$4,341 respectively.

         As of April 30, 2001 and 2002, the Group provided guarantee in respect
         of a loan facility granted to two companies, to the extent of HK$Nil
         and HK$10,000 plus the related interests respectively.





                                      F-25
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


10.      COMMITMENTS

         (a)      Capital expenditure commitments

                  As of April 30, 2001, the Group had capital expenditure
                  commitments contracted but not provided for net of deposit
                  paid amounting to HK$1,641. There was no such commitment as of
                  April 30, 2002.

         (b)      Operating lease commitments

                  The information disclosed below has been changed as a result
                  of adoption of the revised SSAP 14 "Leases". The revised SSAP
                  14 requires disclosure of the total amounts of minimum lease
                  payments to be made in future under non-cancellable operating
                  leases, not just the amount to be paid in the next financial
                  year. The revised standard also requires disclosure of future
                  aggregate minimum rental receivable under non-cancellable
                  operating leases. The comparative information has been
                  presented to conform to this change in disclosure requirement.

                  As of April 20, 2001 and 2002, the total future minimum lease
                  payments under non-cancellable operating leases for the Group
                  are payable as follows:

<Table>
<Caption>
                                                                                         As of April 30
                                                                          --------------------------------------------
                                                                                 2001            2002            2002
                                                                          -----------     -----------      ----------
                                                                                  HK$             HK$             US$
<S>                                                                       <C>             <C>              <C>
                 Within one year                                                3,837           2,540             329
                 In the second to fifth years inclusive                         3,404           2,312             299
                                                                          -----------     -----------      ----------

                                                                                7,241           4,852             628
                                                                          ===========     ===========      ==========
</Table>

                  Operating lease expense for the years ended April 30, 2000,
                  2001 and 2002 was HK$3,759, HK$4,267 and HK$4,630
                  respectively. Operating lease expense represents rentals
                  payable by the Group for certain of its office and factory
                  premises. Leases are negotiated for a term of 2 to 3 years and
                  rentals are fixed for 2 to 3 years.

                  The Company leases out its investment properties under
                  operating leases with lease terms of 1 to 2 years. The future
                  aggregate minimum rental receivable under non-cancellable
                  operating leases are as follows:

<Table>
<Caption>
                                                                                          As of April 30
                                                                           ---------------------------------------------
                                                                                  2001               2002          2002
                                                                           -----------     --------------     ---------
                                                                                   HK$                HK$           US$
<S>                                                                        <C>             <C>                <C>
                 Within one year                                                   634              2,132           276
                 In the second to fifth years inclusive                            286              1,693           219
                                                                           -----------     --------------     ---------
                                                                                   920              3,825           495
                                                                           ===========     ==============     =========
</Table>



                                      F-26
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


11.      SHARE CAPITAL, WARRANT RESERVE AND SHARE PREMIUM

         (a)      As of April 15, 1998, the Company issued 1,460,000 shares of
                  common stock to the public in the Initial Public Offering and
                  had raised HK$52,056.

                  The merger with the Deen Technology, Corp (Deen), which was
                  committed to in December 1996 was completed by the issue of
                  142,946 shares of its common stock at nil consideration on
                  October 6, 1997, with the Company being the legal surviving
                  entity. Deen had no significant assets or liabilities, but did
                  have a large number of U.S. shareholders.

                  As agreed with the US$783 promissory note holders in respect
                  of the bridge loan financing before the Initial Public
                  Offering, the Company issued 156,500 shares of common stock to
                  note holders on the effective date of the Initial Public
                  Offering, without any additional consideration.

         (b)      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.
                  The Company has received all proceeds from the issue totalling
                  HK$1,622 and was recorded in the Company's warrant reserve
                  account.

         (c)      In addition to note 11(b) 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. These warrants and options
                  are exercisable from April 15, 1998 and expire on April 15,
                  2003.

         (d)      During the year ended April 30,1999, 219,000 additional shares
                  were issued to cover the over-allotment for the initial public
                  offering completed in April 1998.

         (e)      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.



                                      F-27
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


11.      SHARE CAPITAL, WARRANT RESERVE AND SHARE PREMIUM (CONTINUED)

         (e)      On November 5, 1999, the Company issued the first tranche of
                  US$3,000 (HK$23,190) 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 (HK$27,055) 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 (HK$23,190) and US$500 (HK$3,865) out of the US$3,500
                  (HK$27,055) second tranche Convertible Debentures and related
                  interest 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 (HK$23,190) and the accrued interest thereof were
                  converted into 1,233,557 shares of common stock during the
                  year ended April 30, 2001.

                  No other share of common stock was issued during the
                  financial years of 2000, 2001 and 2002. The Company had
                  8,671,615 shares of common stock outstanding as of April 30,
                  2001 and 2002.

         (f)      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.



                                      F-28
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


11.      SHARE CAPITAL, WARRANT RESERVE AND SHARE PREMIUM (CONTINUED)

         (g)      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, and
                  would issue to the consultant the same number of warrants on
                  June 1, 2002. Of the warrants issued on June 1, 2001, the
                  warrantholder is entitled to:

                  (i)      purchase 100,000 shares at US$2.29 (HK$17.70) per
                           share exercisable through May 31, 2003;

                  (ii)     purchase 80,000 shares at US$3.43 (HK$26.51) per
                           share exercisable through May 31, 2004;

                  (iii)    purchase 80,000 shares at US$4.57 (HK$35.33) per
                           share exercisable through May 31, 2005.

         (h)      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 (HK$21.57) per share exercisable through May 26, 2002.

         (i)      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 (HK$23.19)
                  per share exercisable through August 15, 2006. In addition,
                  the Company entered into a consulting agreement with the same
                  agent. Pursuant to the agreement, the Company issued to the
                  agent warrants to purchase 150,000 shares of common stock of
                  the Company at US$1.79 (HK$13.84) per share exercisable
                  through April 14, 2005.

         (j)      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 (HK$13.84) per share exercisable through April 14,
                  2005.


         None of the warrants as aforesaid was exercised for each of the years
         in the three-year period ended April 30, 2002.



                                      F-29
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


12.      STOCK BASED COMPENSATION PLAN

         As of June 1, 1998, the Company adopted a stock option plan (The 1998
         Stock Compensation Plan or the Plan) which was approved by the
         shareholders on December 9, 1998. The 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 or its subsidiaries. Out of the
         stock options provided, 1,285,000 stock options were issued in
         accordance with the terms of the Plan on April 12, 1999 to certain
         officers, directors, key employees and advisors of the Group at an
         exercise price of US$5.0 (HK$38.65) 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 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. Since then, the Company has issued or cancelled incentive
         options as follows:

         (a)      265,000 incentive stock options were issued on January 14,
                  2000 at an exercise price of US$5.0 (HK$38.65) per share and
                  for a term of ten years.

         (b)      1,770,000 incentive stock options were issued on May 8, 2000
                  at an exercise price of US$3.0 (HK$23.19) per share and for a
                  term of ten years.

         (c)      80,000 incentive stock options were issued on September 25,
                  2000 at an exercise price of US$3.0 (HK$23.19) per share and
                  for a term of ten years.

         (d)      Totally 3,400,000 incentive stock options previously issued on
                  April 12, 1999, January 14, 2001, May 8, 2000 and September
                  25, 2000 were cancelled on October 17, 2000.

         (e)      80,000 incentive stock options were issued on December 6, 2000
                  at an exercise price of US$2.0 (HK$15.46) per share and for a
                  term of ten years.

         (f)      3,296,000 incentive stock options were issued on April 30,
                  2001 at an exercise price of US$2.0 (HK$15.46) per share (the
                  last sales prices of the common stock as of April 30, 2001)
                  and for a term of seven years.

         (g)      458,000 incentive stock options previously issued on April 30,
                  2001 were cancelled during the year ended April 30, 2002.

         There were 3,376,000 and 2,918,000 incentive stock options issued and
         exercisable as of April 30, 2001 and 2002 respectively.




                                      F-30
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


13.      RELATED PARTY TRANSACTIONS

         (a)  Names and relationship of related parties:

<Table>
<Caption>

                                                                  Existing relationships with the Group
                                                                  -------------------------------------
<S>                                                               <C>
              Yih Yu Chuan                                        Director and major shareholder of the Company

              Gemological Institute of America, Hong Kong         Common director and major shareholder
                  Limited

              iBBC Inc.                                           Common director

              International Asset Management Limited              Common director

              Gemriver Jewelry Limited                            Common directors

              Tanzanite (H.K.) Limited                            Common directors
</Table>


         (b)  Summary of balances with related parties:

<Table>
<Caption>

                                                                                        As of April 30
                                                                          ------------- ------------------- -----------
                                                                                  2001             2002            2002
                                                                          ------------     ------------     -----------
                                                                  Note             HK$              HK$             US$
<S>                                                               <C>                <C>              <C>             <C>
             Due from related parties:
                 Gemological Institute of America, Hong
                    Kong Limited                                                 3,619            3,619             468
                 Gemriver Jewelry Limited                                        7,126               --              --
                 Tanzanite (H.K.) Limited                                           --              407              53
                                                                          ------------     ------------     -----------

                                                                   (i)          10,745            4,026             521
                                                                          ============     ============     ===========

             Due to a director:
                 Yih Yu Chuan                                      (i)          (1,913)              --              --
                                                                          ============     ============     ===========

             Maximum outstanding balance during the
                 financial year                                                  4,806            1,882             243
                                                                          ============     ============     ===========


             Certain banking facilities granted to
               the Group collateralized by properties
               owned by Yih Yu Chuan and his
               personal guarantee to the extent of                              59,390           65,239           8,440
                                                                          ============     ============     ===========
</Table>



                                      F-31
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


13.      RELATED PARTY TRANSACTIONS (CONTINUED)

         (c)      Summary of related party transactions:

<Table>
<Caption>
                                                                                  Year ended April 30
                                                                --------------------------------------------------------
                                                       Notes          2000           2001            2002          2002
                                                                ----------     ----------      ----------     ---------
                                                                       HK$            HK$             HK$           US$
<S>                                                    <C>      <C>            <C>             <C>            <C>
                 Directors' emoluments                  (ii)         4,977          7,369           4,741           613
                                                                ==========     ==========      ==========     =========

                 Sales:
                     Gemriver Jewelry Limited          (iii)            --          1,219              --            --
                                                                ==========     ==========      ==========     =========

                 Purchase of equity interest in
                     iBBC Inc.:
                     Entities controlled by Yih Yu
                       Chuan                                            --             --          19,016         2,460
                                                                ==========     ==========      ==========     =========

                 Advances to:
                     Gemriver Jewelry Limited           (iv)            --          5,495           5,247           679
                     iBBC Inc.                                          --             --          36,820         4,763
                                                                ----------     ----------      ----------     ---------

                                                                        --          5,495          42,067         5,442
                                                                ==========     ==========      ==========     =========

                 Repayment from:
                     Gemriver Jewelry Limited                           --             --          10,510         1,360
                     iBBC Inc.                                          --             --          38,277         4,951
                                                                ----------     ----------      ----------     ---------

                                                                        --             --          48,787         6,311
                                                                ==========     ==========      ==========     =========

                 Consultancy and professional fees
                     paid and payable:
                     International Asset
                     Management Limited                 (v)            873             --              --            --
                                                                ==========     ==========      ==========     =========
</Table>

         (i)      The amounts due from/to related parties/director represent
                  unsecured advances which are interest free and repayable on
                  demand.

         (ii)     The emoluments were determined by the directors.

         (iii)    The sales to the related party are made according to the
                  published prices and conditions offered to the major customers
                  of the Group.

         (iv)     The advances were expenses paid on behalf of related parties
                  with terms set out in note 13(c)(i) above.

         (v)      The consultancy and professional fees were determined based on
                  normal commercial terms.

         The related party transactions with Gemriver Jewelry Limited as
         aforesaid relate to transactions made before it became a subsidiary of
         the Company.



                                      F-32
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


14.      STAFF RELATED COSTS

<Table>
<Caption>
                                                                                  Year ended April 30
                                                                  -----------------------------------------------------
                                                                        2000            2001          2002         2002
                                                                  ----------      ----------     ---------     --------
                                                                         HK$             HK$           HK$          US$
<S>                                                               <C>             <C>            <C>           <C>
        Salaries, bonus and welfares                                  66,029          71,857        59,278        7,669
        Pension expense                                                  483             809         1,120          145
                                                                  ----------      ----------     ---------     --------

        Total Staff Cost                                              66,512          72,666        60,398        7,814
                                                                  ==========      ==========     =========     ========
</Table>

         The Group operates a defined contribution retirement plan (Retirement
         Plan) which is optional for all qualified employees. The assets of the
         Retirement Plan are held separately from those of the Group in a
         provident fund managed by an independent trustee. The pension cost
         charge represents contributions payable to the fund by the Group 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 Group are reduced by the amount of
         forfeited contributions.

         The amount of forfeitures in respect of Retirement Plan for the years
         ended April 30, 2000, 2001 and 2002 was HK$224, HK$14 and HK$359
         respectively.

         In addition, the Group has set up a Mandatory Provident Fund (MPF)
         Scheme by participating in a master trust scheme provided by an
         independent MPF service provider to comply with the requirements under
         the MPF Ordinance in Hong Kong.

         Contributions paid and payable by the Group in respect of Retirement
         Plan and MPF Scheme are charged to the statement of operations.



                                      F-33
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


15.      INCOME TAXES

         Reconciliation to the expected statutory tax rate in Hong Kong of 16%
         (2001: 16% and 2000: 16%) is as follows:

<Table>
<Caption>
                                                                                        Year ended April 30
                                                                             ----------------------------------------
                                                                                 2000            2001            2002
                                                                             --------       ---------       ---------
                                                                                 %               %               %
<S>                                                                          <C>            <C>             <C>
        Statutory rate                                                           16.0            16.0            16.0
        Tax effect of net operating losses                                        5.1             6.1            (6.7)
        Non taxable PRC profits                                                 (16.3)          (17.7)             --
        Others                                                                   (4.7)            0.4            (8.0)
                                                                             --------       ---------       ---------
        Effective rate                                                            0.1             4.8             1.3
                                                                             ========       =========       =========
</Table>

         Income tax credit (expense) is comprised of the following:

<Table>
<Caption>
                                                                                Year ended April 30
                                                              -------------------------------------------------------
                                                                   2000          2001            2002            2002
                                                              ---------      ----------     ----------      ---------
                                                                     HK$           HK$             HK$            US$
<S>                                                           <C>            <C>            <C>             <C>
        Current taxes:
            For the year                                         (1,207)         (1,845)           (16)            (2)
            Over provision in prior years                         1,182             208            800            103
                                                              ---------      ----------     ----------      ---------
        Income tax credit (expense)                                 (25)         (1,637)           784            101
                                                              =========      ==========     ==========      =========
</Table>

         The Group 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.

         The Company is incorporated under the International Business Companies
         Act of the British Virgin Islands and, accordingly, is exempted from
         payment of the British Virgin Islands income tax. The Hong Kong
         subsidiaries are subject to Hong Kong profits tax at a rate of 16%
         (2001: 16% and 2000: 16%).

         PRC subsidiaries are registered to qualify as Foreign Investment
         Enterprises in the PRC and are eligible for certain tax holidays and
         concessions. Accordingly, certain PRC subsidiaries were exempted from
         PRC income tax for two years starting from their first profit-making
         years, followed by a 50% reduction of tax for next three years. PRC
         income tax is calculated at the applicable rates relevant to the PRC
         subsidiaries which currently are 15%.

         Deferred taxation has not been provided as the tax effect of timing
         difference is insignificant for the year and at the balance sheet date.




                                      F-34
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


16.      POST BALANCE SHEET EVENT

         Subsequent to April 30, 2002, the Company repurchased, through open
         market purchases, 176,600 shares of common stock of the Company at an
         aggregate consideration of US$220 (HK$1,700).


17.      NOTES TO STATEMENTS OF CASH FLOWS

         (a)   Purchase of subsidiary

               On March 22, 2000, Lorenzo acquired the remaining shareholding
               (i.e. 40%) of Lorenzo Marketing Co. Limited, presently known as
               Lorenzo Giftware Limited, for a consideration of HK$1,830.

               For further expansion through vertical integration and the
               development of distribution channel in the United States, the
               Company acquired 12,000,000 common stocks (16.8% equity interest)
               of iBBC Inc. (see note 6), a company engaged in marketing jewelry
               from its display cases in retail shops, for the consideration of
               HK$4,638 in the financial year 2001.

               On March 21, 2002, 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 HK$19,016. As the
               goodwill was arisen from acquisition after June 30, 2001, the
               goodwill is subject to impairment test (see note 19). Details of
               the identifiable assets and liabilities acquired at the date of
               acquisition are as follows:

<Table>
<Caption>
                                                                              Lorenzo            iBBC              iBBC
                                                                             Giftware            Inc.              Inc.
                                                                                 2000            2002              2002
                                                                        -------------     -----------      ------------
                                                                                  HK$             HK$               US$
<S>                                                                     <C>               <C>              <C>
               Net assets acquired:
                  Property, plant and equipment                                     4           8,161             1,056
                  Trade receivables                                               125              51                 6
                  Inventories                                                     512             329                43
                  Other receivables                                                --           1,240               160
                  Cash and cash equivalents                                        99             610                79
                  Trade payables                                                 (68)         (1,025)              (133)
                  Accrued expenses and other payables                         (1,291)           (892)              (115)
                                                                        -------------     -----------      ------------

                                                                                (619)           8,474             1,096
               Interest attributable to the Group as of March 22, 2000            372              --                --
               Minority interests                                                  --         (1,221)              (157)
               Goodwill arising from acquisition                                2,077          16,401             2,121
                                                                        -------------     -----------      ------------

               Total purchase consideration                                     1,830          23,654             3,060
                                                                        =============     ===========      ============

               Satisfied by cash paid in the financial year:
                 2000                                                           1,830              --                --
                 2001                                                              --           4,638               600
                 2002                                                              --          19,016             2,460
                                                                        -------------     -----------      ------------
                                                                                1,830          23,654             3,060
                                                                        =============     ===========      ============
</Table>



                                      F-35
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


17.      NOTES TO STATEMENTS OF CASH FLOWS (CONTINUED)

(b)      Analysis of changes in financing:

<Table>
<Caption>
                                                             Common
                                                             stocks
                                                         (including            Notes
                                                        premium and          payable      Capitalized                3%
                                                            warrant        and other            lease       convertible
                                                           reserve)            loans      obligations        debentures
                                                                HK$              HK$              HK$              HK$
<S>                                                    <C>               <C>             <C>               <C>
          As of April 30, 1999                               51,058           24,588            1,214               --
          Conversion of convertible debenture
            (note 17(c))                                     27,231               --               --               --
          New (Repayment of) loans, net                          --           (3,852)            (555)          23,190
          Inception of capitalized lease contracts               --               --              147               --
          Unrealized gain on gold loan                           --             (338)              --               --
                                                       ------------      -----------     ------------      -----------

          As of April 30, 2000                               78,289           20,398              806           23,190
          Conversion of convertible debenture
            (note 17(c))                                     23,317               --               --          (23,190)
          New (Repayment of) loans, net                          --              194             (593)              --
          Unrealized gain on gold loan                           --             (343)              --               --
                                                       ------------      -----------     ------------      -----------

          As of April 30, 2001                              101,606           20,249              213               --
          Acquisition of subsidiary                              --               --              419               --
          New (Repayment of) loans, net                          --           20,867             (215)              --
          Unrealized loss on gold loan                           --            5,102               --               --
                                                       ------------      -----------     ------------      -----------

          As of April 30, 2002                              101,606           46,218              417               --
                                                       ============      ===========     ============      ===========
</Table>

         (c)     Non-cash transactions

                 During the year ended April 30, 2000 and 2001, 3% convertible
                 debentures of US$3,500 (HK$27,055) and US$3,000 (HK$23,190),
                 together with interest accrued thereof amounting to HK$176 and
                 HK$127 were converted into 1,072,412 and 1,233,557 shares of
                 the Company's common stock respectively.




                                      F-36
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


18.      SEGMENT INFORMATION

         In the current year, the Group has followed the basis of identification
         of reportable segments required by SSAP 26 "Segment reporting". Segment
         disclosures for the year ended April 30, 2000 and 2001 have been
         amended to conform with current year's presentation.

         No segmental analysis by business is presented as over 90% of the
         Group'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 assets and capital expenditure are
         where the assets are located.

         (a)  Geographical segments:

<Table>
<Caption>
                                                                             For the year ended April 30
                                                              ---------------------------------------------------------
                                                                     2000            2001            2002          2002
                                                              -----------     -----------     -----------     ---------
                                                                      HK$             HK$             HK$           US$
<S>                                                           <C>             <C>             <C>            <C>
               Revenue from external customers
                    by location of customers:
                    United States of America & Canada             231,751         297,321         222,704        28,810
                    Hong Kong                                      20,395           4,631          37,855         4,897
                    Europe and other countries                     45,330          54,330          42,653         5,518
                    PRC                                             2,413             569              49             6
                    Japan                                           1,012             934              65             9
                                                              -----------     -----------     -----------     ---------
                                                                  300,901         357,785         303,326        39,240
                                                              ===========     ===========     ===========     =========

               Segment profit (loss):
                    United States of America                           --              --          (1,855)         (240)
                    Hong Kong                                       1,557           5,404         (18,681)       (2,417)
                    PRC                                            37,143          29,431         (36,548)       (4,729)
               Interest expenses, net                              (2,980)         (2,781)         (3,364)         (435)
                                                              -----------     -----------     -----------     ---------
               Net income (loss)                                   35,720          32,054         (60,448)       (7,821)
                                                              ===========     ===========     ===========     =========

               Income taxes credit (expenses):
                    Hong Kong                                         (25)         (1,618)            799           103
                    PRC                                                --             (19)            (15)           (2)
                                                              -----------     -----------     -----------     ---------
                                                                      (25)         (1,637)            784           101
                                                              ===========     ===========     ===========     =========


               Additions to property, plant and
                    equipment and intangible assets
                    by location of assets:
                    United States of America                           --              --           8,262         1,069
                    Hong Kong                                       3,109           3,687           2,654           343
                    PRC                                             2,592           2,783             493            63
                                                              -----------     -----------     -----------     ---------
                                                                    5,701           6,470          11,409         1,475
                                                              ===========     ===========     ===========     =========
</Table>



                                      F-37
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


18.      SEGMENT INFORMATION (CONTINUED)

         (a)  Geographical segments: (Continued)

<Table>
<Caption>

                                                                                           As per April 30
                                                                              -=---------------------------------------
                                                                                 2001            2002            2002
                                                                              -----------     -----------     ---------
                                                                                  HK$             HK$            US$
<S>                                                                           <C>             <C>             <C>
               Carrying amount of segment assets
                    by location of assets:
                    Hong Kong                                                     235,874         240,213        31,075
                    PRC                                                           131,505          82,783        10,709
                    United States of America                                           --           9,181         1,188
                                                                              -----------     -----------     ---------

                                                                                  367,379         332,177        42,972
                                                                              ===========     ===========     =========
</Table>

               Segment assets are before elimination of intra-group balances.

         (b)   The Group derived operating revenue from the following major
               customers, which accounted for over 10% of operating revenue.

<Table>
<Caption>
                                                                           Year ended April 30
                                                     ------------------------------------------------------------------
                                                         2000                 2001                   2002
                                                     --------------       --------------     --------------------------
                                                          HK$     %            HK$     %         HK$        US$       %
<S>                                                   <C>       <C>       <C>        <C>     <C>        <C>         <C>
               QVC Network Inc.                       136,077    45        168,882    47      84,744     10,963      28
               QVC - Europe                            40,769    14         45,308    13          --         --      --
               Goldleaves Trading Ltd.                     --    --             --    --      33,031      4,273      11
                                                     ========             ========           =======    =======
</Table>

               Accounts receivable related to these major customers were
               HK$10,025 and HK$24,723 as of April 30, 2001 and 2002
               respectively.



                                      F-38
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


19.      SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
         ACCEPTED ACCOUNTING PRINCIPLES

         The Group's financial statements are prepared in accordance with HK
         GAAP, which differ in certain material respects from US GAAP, including
         certain accounting interpretations of the Securities and Exchange
         Commission (SEC) as practised in the United States. The significant
         differences relate principally to the following items and the
         adjustments necessary to restate operating income and shareholders'
         equity in accordance with US GAAP are shown in the tables set out
         below.

         (a)  Business combinations

              Under HK GAAP, the reorganization of companies under common
              control involving the acquisition by the merger of the Company and
              Lorenzo was accounted for by the purchase method of accounting.
              The consideration given by the Company was recorded at fair value
              and the excess over the fair value of net assets acquired was
              treated as goodwill. The accompanying financial statements have
              been presented on a consolidated basis, which effectively reflect
              this reorganization as of April 30, 1994, even though the merger
              occurred on May 6, 1997. Under US GAAP this would be recorded as a
              reorganization of companies under common control similar to a
              pooling of interest. The effect of this difference is that no
              goodwill would be recorded on such combination.

         (b)  Share capital transactions

              In connection with the public offering, the Company paid the
              Representative HK$835 (US$108) for future financial consulting.
              Under HK GAAP such amount was offset against the proceeds of the
              offering. Under US GAAP such amount would be deferred and
              recognized as an expense over the period the services are expected
              to be performed on an accelerated basis over the next three years
              following the completion of the public offering.

         (c)  Stock-based compensation

              In 1998, the Company adopted The 1998 Stock Compensation Plan
              which allows the Board of Directors to grant stock options to
              individuals to purchase common stock of the Company (see note 12).
              Under HK GAAP, there are no specific requirements to recognize the
              compensation cost arising from stock options granted to these
              individuals on the financial statements.

              Under US GAAP, the Company adopted the provisions of SFAS No. 123
              "Accounting for Stock-Based Compensation" in respect of options
              granted to employees. As permitted by SFAS No. 123, the Company
              has chosen to account for stock-based compensation using the
              intrinsic value method. Accordingly, because 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, no
              compensation expense has been recognized for its stock-based
              compensation plan. Had compensation expense for the incentive
              stock option plan 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:





                                      F-39
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


19.      SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
         ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

         (c)      Stock-based compensation (continued)

<Table>
<Caption>
                                                                                               Year ended April 30
                                                                                          -----------------------------
                                                                                                 2000              2001
                                                                                          -----------        ----------
                                                                                                  HK$               HK$
<S>                                                                                       <C>                <C>
               Pro forma net income (as restated)                                              28,833             8,567
                                                                                          ===========        ==========
               Pro forma earnings per share (as restated)
                  Basic                                                                          4.38              1.00
                                                                                          ===========        ==========
                  Diluted                                                                        4.19              1.00
                                                                                          ===========        ==========
</Table>

               There were no stock options granted to employees during the year
               ended April 30, 2002, and all previously granted options were
               immediately exercisable, and accordingly no pro forma net loss
               and loss per share for 2002 are presented.

               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:


<Table>
<Caption>
                                                                                                 Year ended April 30
                                                                                              -------------------------
                                                                                                 2000              2001
                                                                                              -------           -------
<S>                                                                                           <C>               <C>
              Expected dividend yield                                                             Nil               Nil
              Expected stock price volatility                                                     19%               22%
              Risk-free interest rate                                                           6.49%             5.34%
              Expected life of options                                                        3 years           3 years
</Table>

               The weighted average fair value per option granted during the
               year ended April 30, 2000 and 2001 was US$0.41 and US$0.45
               respectively.

               The Company's stock option activities and related information for
               the years ended April 30, 2000, 2001 and 2002 are summarized as
               follows:

<Table>
<Caption>
                                                                 As of April 30
                                      ---------------------------------------------------------------------------------
                                                2000                        2001                        2002
                                                ----                        ----                        ----
                                                       Weighted                     Weighted                   Weighted
                                                        Average                      average                    average
                                                       Exercise                     exercise                   exercise
                                           Options        Price         Options        price       Options        price
                                                            US$                          US$                        US$
<S>                                      <C>           <C>       <C>                <C>       <C>              <C>
               Outstanding and
                 exercisable,
                 beginning of year       1,285,000         5.00      1,550,000          5.00     3,376,000         2.00
               Granted                     265,000         5.00      5,226,000          2.35            --           --
               Cancelled                        --           --     (3,400,000)         3.91      (458,000)        2.00
                                      ------------               --------------               ------------
               Outstanding and
                 exercisable, end
                 of year                 1,550,000         5.00       3,376,000         2.00     2,918,000         2.00
                                      ============               ==============               ============

               Weight average
                 remaining
                 contractual life       9.13 years                   7.06 years                 6.06 years
                                      ============               ==============               ============
</Table>




                                      F-40
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


19.      SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
         ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

         (d)   Stock-based transactions

               The Company issued to a consultant a warrant to purchase 35,000
               shares of common stock as part of the consultancy fee on July 31,
               1999 (see note 11(f)). In addition, 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 11(e)). During the financial year 2002,
               the Company further issued to consultants, agents or investor
               warrants to purchase an aggregate of 860,000 shares of the
               Company's common stock (see note 11(g) to (j)). Under HK GAAP,
               there are no specific requirements to recognize the compensation
               costs arising from these transactions. Under US GAAP, the costs
               associated with these transactions are accounted for based on
               fair value of the warrants at the date of issue.

               In addition, options were issued to consultants/advisers under
               The 1998 Stock Compensation Plan to purchase the common stock of
               the Company as part of their fees during the year ended April 30,
               2001. Under US GAAP, 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:

<Table>
<Caption>
                                                                                   Year ended April 30
                                                                      -------------------------------------------------
                                                                         2000                2001                  2002
                                                                      -------             -------            ----------
<S>                                                                   <C>                 <C>                <C>
               Expected dividend yield                                    Nil                 Nil                   Nil
               Expected stock price volatility                            19%                 22%                   23%
               Risk-free interest rate                                  6.49%               5.34%                 4.23%
               Expected life of options                               3 years             3 years            3.21 years
</Table>

               The fair value of these warrants and options was estimated as
               HK$464, HK$2,053 and HK$2,297 respectively for the years ended
               April 30, 2000, 2001 and 2002. The additional expense was
               recognized in the statement of operations under US GAAP and the
               same amount was recorded in the Company's reserve account (see
               note 19(m)). Effectively, there was no net effect on the
               shareholders' equity under US GAAP.

               In respect of the fair value of HK$2,053 estimated for options
               granted in financial year 2001, as only HK$754 was reported in
               the previous year's financial statements, the profit for 2001
               previously reported under US GAAP has been restated for the
               amount undercharged.





                                      F-41
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


19.      SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
         ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

         (e)  Discount on and beneficial conversion features of convertible
              debentures

              In connection with the convertible debentures issued with
              detachable warrants to debenture holders (see note 11(e)), there
              are no specific requirements under HK GAAP to allocate any of the
              proceeds from issuance of convertible debenture attributable to
              detachable warrants. Under US GAAP, the proceeds from issuance of
              convertible debenture with detachable warrants shall be 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 should be recorded as discount or premium. The discount
              or premium is amortized over the life of the debenture, using the
              interest method. During the year ended April 30, 2000, the Company
              recognized a sum of HK$534 as discount on convertible debentures.
              The amount of discount on convertible debentures amortized for the
              year ended April 30, 2000 and 2001 were HK$238 and HK$296
              respectively. As of April 30, 2000, the unamortized discount on
              convertible debentures was HK$296.

              Under US GAAP, the embedded beneficial conversion feature
              associated with the issue of a convertible debt security should be
              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 feature is amortized
              to the statement of operations over the life of the convertible
              debentures. There is no such requirement under HK GAAP. The
              beneficial conversion feature charged to income as interest
              expense amounted to HK$5,291 and HK$6,751 for the year ended April
              30, 2000 and 2001 respectively. As of April 30, 2000, the
              unamortized portion of beneficial conversion feature was HK$6,717.
              Accordingly, the shareholders' equity under US GAAP was increased
              by that amount. As these amounts were not reported in previous
              years' financial statements, the profit for the year of 2000 and
              2001 and the shareholders' equity as of April 30, 2000 have been
              restated in this respect.

         (f)  Capitalized deferred costs

              During the year ended April 30, 1998, the Company merged with
              Deen. Approximately HK$640 and HK$193 of costs were incurred in
              connection with the merger for each of the years ended April 30,
              1997 and 1998 respectively. In previous years under HK GAAP,
              these costs were capitalized as organization costs and amortized
              over ten years. Following the adoption of the SSAP 1 (Revised) in
              the financial year 1999, the carrying amount of such cost
              amounting to HK$686 was fully expensed in 2000. Under US GAAP, as
              Deen has no significant assets or substantive operations, other
              than a large shareholder base, these costs, would be expensed as
              incurred. The effect is that there is no more organization costs
              being capitalized under both HK and US GAAP as of April 30, 2000.
              During the year ended April 30, 2001 and 2002, there is no
              additional capitalized deferred cost incurred.




                                      F-42
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


19.      SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
         ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

         (g)  Earnings (loss) per share

              Under US GAAP shares issued in connection with Deen Merger (see
              note 11) are reflected as outstanding for all periods as they were
              issued for nominal consideration whereas under HK GAAP these
              shares are reflected as outstanding since the date of the issue
              (i.e., October 6, 1997).

              In addition, under HK GAAP the number of incremental shares
              included in the denominator in connection with the warrants and
              options (see notes 11 and 12) is the weighted average number of
              additional ordinary shares which would have been outstanding
              assuming the conversion of all dilutive potential ordinary shares
              whereas under US GAAP the number of incremental shares is
              determined by computing a year-to-date weighted average number of
              incremental shares included in each quarterly diluted earnings
              (loss) per share computation which is computed by using the
              average market prices during the three months included in the
              reporting period.

         (h)  Fair value of financial instruments

              The estimated fair values for financial instruments are determined
              at discrete points in time based on relevant market information.
              These estimates involve uncertainties and cannot be determined
              with precision. Under US GAAP the estimated fair values are to be
              disclosed if they are materially different from the underlying
              historical cost basis. The Group has the following financial
              instruments and investments, where the fair values may be
              different from historical costs.

               i)   Investment properties - The fair value of the investment
                    properties held by the Group as of April 30, 2002 was
                    estimated at HK$15,800 on the open market value basis
                    whereas the historical cost of such properties is HK$16,968
                    (with net book value of HK$15,888) under HK GAAP. The market
                    valuations were performed by independent qualified surveyors
                    at dates close to the balance sheet date.

              ii)   Related party transactions - The Group has receivables from
                    affiliated companies, which are non-interest bearing and
                    unsecured. The fair value of these financial instruments may
                    be different from the historical cost basis, but due to the
                    related party nature of the transaction, this difference
                    cannot be estimated.

              iii)  Cash and cash equivalents, trade receivables and trade
                    payables - The carrying amounts approximate fair value
                    because of the short maturity of those instruments.


                                      F-43
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


19.      SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
         ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

         (i)  Investment properties

              Under HK GAAP investment properties are included in the balance
              sheet at their open market values, based on a year end valuation
              (see note 2(n)). Under US GAAP investment properties are recorded
              at their historical costs. This would have reduced the carrying
              values by HK$1,885 and HK$500 as of April 30, 2001 and 2002
              respectively with no related income tax effect. In addition, under
              HK GAAP investment properties have not been depreciated since
              1995, at which time accumulated depreciation was HK$1,080 (see
              note 2(n)). Under US GAAP depreciation would have continued to be
              recorded over an estimated useful life of 40 years based on
              historical costs. This would have increased depreciation expense
              for each of the years in the three year period ended April 30,
              2002 by HK$424 with no related income tax effect.

         (j)  Property, plant and equipment

              During the year ended April 30, 1999, an investment property that
              had a carrying value of HK$2,500 was reclassified as land and
              buildings due to the change of its use. Under HK GAAP, the cost of
              such an asset upon transfer is deemed to be the carrying amount of
              the asset as stated under its original classification. Any
              previous revaluation reserve on the asset is frozen upon the
              transfer until the retirement or disposal of the assets. A debit
              revaluation reserve of HK$2,297 has been frozen in this respect
              and included in the investment property revaluation reserve.
              Depreciation is then provided to write off the carrying amount
              over the unexpired lease terms.

              Under US GAAP, the amounts transferred are its historical cost of
              HK$4,894 and respective accumulated depreciation of HK$586 as
              investment properties are recorded at their historical costs (see
              note 19(i)). The net effect arising from the different accounting
              treatment, as aforesaid, would have increased the depreciation
              charge of HK$48 for each of the years in the three year period
              ended April 30, 2002 with no related income tax effect.

         (k)  Deferred taxes

              Under HK GAAP provision for deferred taxes is calculated under the
              liability method for all material timing differences to the extent
              that it is probable that these will crystalize in the foreseeable
              future. Under US GAAP provision for deferred taxes requires the
              recognition of deferred tax assets and liabilities for the
              estimated future tax effects attributable to temporary differences
              without regard to the probability of future reversal. As the
              temporary differences are considered as not material, no provision
              for deferred taxes has been made under US GAAP.

         (l)  Share premium

              The Company has created a share premium of HK$48,944 following the
              public offering of 1,679,000 shares of common stocks. Under US
              GAAP these amounts would be termed additional paid-in capital,
              however, no adjustment would be required to total shareholders'
              equity.




                                      F-44
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


19.      SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
         ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

          (m) Warrant reserve

              As a result of the different accounting treatments as detailed in
              notes 19(d) and (e) in respect of the stock-based transactions and
              discount on and beneficial conversion features of convertible
              debentures, effects on the warrant reserve under US GAAP, which
              would be termed additional paid-in capital, are as follows:

              -   the costs associated with stock-based transactions of HK$464,
                  HK$2,053 and HK$2,297 arising from the issue of warrants and
                  options were recorded in the Company's warrant reserve for the
                  years ended April 30, 2000, 2001 and 2002 respectively;

              -   the portion allocable to the detachable warrants of HK$534 is
                  accounted for as warrant reserve;

              -   the beneficial conversion features associated with the issue
                  of convertible debentures of HK$12,008 and HK$34 were recorded
                  in the Company's warrant reserve for the years ended April 30,
                  2000 and 2001 respectively.

              However, no adjustment would be required for the total
              shareholders' equity except for the unamortized discount on
              convertible debentures and the unamortized portion of beneficial
              conversion feature as detailed in note 19(e).

         (n)  Operating income

              Under HK GAAP, interest income of HK$2,668, HK$3,929 and HK$1,674
              for each of the years in the three-year period ended April 30,
              2002 has been included in arriving at the operating income, while
              under US GAAP, such income is excluded. Accordingly, the
              operating income (loss) under US GAAP would be HK$42,844,
              HK$36,472 and HK$58,102 (loss) for each of the years in the
              three-year period ended April 30, 2002.

         (o)  Comprehensive income

              The Company has adopted SFAS No. 130, "Reporting Comprehensive
              Income" which establishes standards for reporting and display of
              comprehensive income and its components in a full set of general
              purpose financial statements. There were no items of
              comprehensive income other than net income (loss) for the year as
              defined by SFAS No. 130 for any of the periods presented.




                                      F-45
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


19.      SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
         ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

         (p)   Statement of cash flows

               Under US GAAP, interest income and expenses as well as net
               movements of income taxes payable are included in arriving at the
               net cash flows from operating activities while under HK GAAP,
               such items are excluded and the respective actual cash receipt
               and payment thereof are shown separately under "Returns on
               investments and servicing of finance " and "Taxation"
               respectively in the statement of cash flows. Under USGAAP,
               movement of "restricted cash" is included in investing activities
               while the balances of such item are included in cash and
               equivalents. In addition, under US GAAP, movements of bank
               overdrafts are included under financing activities whereas under
               HK GAAP, the balances of such item are included in cash and cash
               equivalents.

               The consolidated statement of cash flows prepared under HK GAAP
               presents substantially the same information as that required
               under US GAAP but they differ with regard to the classification
               of items within them and as regards the definition of cash and
               cash equivalents under HK GAAP and US GAAP.

               A reconciliation of cash and cash equivalents under HK GAAP to US
               GAAP is presented as follows:

<Table>
<Caption>
                                                                                 Year ended April 30
                                                               --------------------------------------------------------
                                                                     2000           2001            2002           2002
                                                               ----------     ----------      ----------     ----------
                                                                      HK$            HK$             HK$            US$
<S>                                                            <C>            <C>             <C>            <C>
               Cash and cash equivalents under HK GAAP             32,543         29,063          29,053          3,758
               Adjusted for:     Bank overdrafts                    6,345         25,213          20,150          2,607
                            Restricted cash                       (26,000)       (41,089)        (43,620)        (5,643)
                                                               ----------     ----------      ----------     ----------

               Cash and cash equivalents under US GAAP             12,888         13,187           5,583            722
                                                               ==========     ==========      ==========     ==========
</Table>

               The consolidated statements of cash flows under US GAAP can be
               summarized as follows:

<Table>
<Caption>
                                                                                 Year ended April 30
                                                               --------------------------------------------------------
                                                                     2000           2001            2002           2002
                                                               ----------     ----------      ----------     ----------
                                                                      HK$            HK$             HK$            US$
<S>                                                            <C>            <C>             <C>            <C>
               Net cash provided by (used in) operating
                 activities                                       (11,973)        28,659          (5,819)          (753)
               Net cash used in investing activities              (15,977)       (46,829)        (17,374)        (2,248)
               Net cash provided by financing activities           39,212         18,469          15,589          2,017
                                                               ----------     ----------      ----------     ----------

               Net increase (decrease) in cash and cash
                 equivalents                                       11,262            299          (7,604)          (984)
               Cash and cash equivalents as of beginning
                 of year                                            1,626         12,888          13,187          1,706
                                                               ----------     ----------      ----------     ----------

               Cash and cash equivalents as of end of year         12,888         13,187           5,583            722
                                                               ==========     ==========      ==========     ==========
</Table>



                                      F-46
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)

19.      SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
         ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

         (p)   Statement of cash flows

               Reconciliations of each line item above under HK GAAP to US GAAP
               are presented as follows:

<Table>
<Caption>
                                                                                 Year ended April 30
                                                               --------------------------------------------------------
                                                                     2000           2001            2002           2002
                                                               ----------     ----------      ----------     ----------
                                                                      HK$            HK$             HK$            US$
<S>                                                            <C>            <C>             <C>            <C>
               Net cash provided by (used in) operating
                 activities under HK GAAP                          (9,076)        31,033            (919)          (120)
               Adjusted for: Cash received from
                 interest                                           2,668          3,916           1,674            217
                             Cash paid for interest                (5,472)        (6,653)         (4,932)          (638)
                             Cash refunded (paid) for
                               income taxes                           (93)           363          (1,642)          (212)
                                                               ----------     ----------      ----------     ----------

               Net cash provided by (used in) operating
                 activities under US GAAP                         (11,973)        28,659          (5,819)          (753)
                                                               ==========     ==========      ==========     ==========


               Net cash used in investing activities
                 under HK GAAP                                     (5,162)       (31,740)        (14,843)        (1,920)
               Adjusted for: Change in restricted cash            (10,815)       (15,089)         (2,531)          (328)
                                                               ----------     ----------      ----------     ----------

               Net cash used in investing actives under
                 US GAAP                                          (15,977)       (46,829)        (17,374)        (2,248)
                                                               ==========     ==========      ==========     ==========


               Net cash provided by (used in) financing
                 activities under HK GAAP                          41,314           (399)         20,652          2,672
               Adjusted for: Change in bank overdrafts             (2,102)        18,868          (5,063)          (655)
                                                               ----------     ----------      ----------     ----------

               Net cash provided by financing activities
                 under US GAAP                                     39,212         18,469          15,589          2,017
                                                               ==========     ==========      ==========     ==========
</Table>

         (q)   Goodwill arising on consolidation

               Under HK GAAP, goodwill arising on the acquisition of
               subsidiaries is capitalized and amortized over its estimated
               useful life, which normally not exceeding 20 years. Under US
               GAAP, goodwill arising from acquisition after June 30, 2001, with
               the provision of SFAS No. 142, should not be amortized, but
               subject to annual impairment test (see "Impact of recently issued
               US GAAP accounting standards" below). The effect of this
               different accounting treatment is that no amortization has been
               recorded under US GAAP for the goodwill arising from the
               acquisition of iBBC Inc..



                                      F-47
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


19.      SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
         ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

         The following table summarized the effect on net income of differences
         between HK GAAP and US GAAP.

<Table>
<Caption>
                                                                                  Year ended April 30
                                                                --------------------------------------------------------
                                                                      2000           2001            2002           2002
                                                                ----------     ----------      ----------     ----------
                                                        Note           HK$            HK$             HK$            US$
                                                                (Restated)     (Restated)
<S>                                                     <C>     <C>            <C>             <C>            <C>
        Net income (loss) as reported under HK GAAP                 35,720         32,054         (60,448)        (7,821)
        US GAAP material adjustments:
             Amortization of goodwill on business       (a)              7              7               7              1
               combination
             Amortization of financial consulting fee
               paid to the representative in the
               public offering                          (b)           (275)          (143)             --             --
             Costs associated with stock-based
               transactions                             (d)           (464)        (2,053)         (2,297)          (297)
             Amortization of discount on convertible
               debentures                               (e)           (238)          (296)             --             --
             Interest expense arising from beneficial
               conversion features of convertible
               debentures                               (e)         (5,291)        (6,751)             --             --
             Amortization of Deen Merger costs          (f)            686             --              --             --
             Depreciation on investment properties      (i)           (424)          (424)           (424)           (55)
             Deficit on revaluation of investment
               property                                 (i)             --          1,885             500             65
             Depreciation on property                   (j)            (48)           (48)            (48)            (6)
             Amortization of goodwill on acquisition
               of a subsidiary                          (q)             --             --           1,641            212
                                                                ----------     ----------      ----------     ----------
        Net income (loss) under US GAAP (as restated
          for 2000 and 2001)                                        29,673         24,231         (61,069)        (7,901)
                                                                ==========     ==========      ==========     ==========

        Net income (loss) under US GAAP (as
          previously reported)                                      34,964         32,281
        Adjustments made for previous years:
             Compensation costs for stock-based         (c)             --         (1,299)
               compensation
             Interest expense arising from beneficial   (e)         (5,291)        (6,751)
               conversion features of convertible
               debentures
                                                                ----------     ----------
        Net income (loss) under US GAAP (as restated
          for 2000 and 2001)                                        29,673         24,231
                                                                ==========     ==========

        Numerator:
        Net income (loss) used in computing basic
          earnings per share under US GAAP (as
          restated for 2000 and 2001)                               29,673         24,231         (61,069)        (7,901)
        Interest on 3% convertible debentures                          251            127              --             --
                                                                ----------     ----------      ----------     ----------
        Net income (loss) used in computing diluted
          earnings per share under US GAAP (as
          restated for 2000 and 2001)                               29,924         24,358         (61,069)        (7,901)
                                                                ==========     ==========      ==========     ==========
</Table>




                                      F-48
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


19.      SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
         ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

<Table>
<Caption>
                                                                                  Year ended April 30
                                                                -------------------------------------------------------
                                                                      2000           2001            2002           2002
                                                                ----------     ----------      ----------     ----------
                                                        Note           HK$            HK$             HK$            US$
                                                                (Restated)     (Restated)
<S>                                                     <C>     <C>            <C>              <C>           <C>
        Denominator:
        Weighted average number of shares outstanding
          under US GAAP-- basic                                  6,589,415      8,567,366       8,671,615      8,671,615

        Effect of dilutive potential ordinary shares:
             3% convertible debentures                             337,239         48,753              --             --
             Warrants                                               17,986             --               7              7
             Stock options                                              --            731         106,759        106,759
                                                                ----------     ----------      ----------     ----------
        Weighted average number of shares outstanding
          under US GAAP-- diluted                                6,944,640      8,616,850       8,778,381      8,778,381
                                                                ==========     ==========      ==========     ==========
        Earnings (loss) per share under US GAAP (as
          restated for 2000 and 2001)
            -- Basic                                                  4.50           2.83           (7.04)         (0.91)
                                                                ==========     ==========      ==========     ==========
            -- Diluted                                                4.31           2.83           (7.04)         (0.91)
                                                                ==========     ==========      ==========     ==========
</Table>

         The following table summarized the effect on shareholders' equity of
         the differences between HK GAAP and US GAAP.

<Table>
<Caption>
                                                                                    As of April 30
                                                               --------------------------------------------------------
                                                                     2000           2001            2002           2002
                                                               ----------     ----------      ----------     ----------
                                                       Note           HK$            HK$             HK$            US$
                                                               (restated)
<S>                                                    <C>     <C>             <C>             <C>           <C>
        Shareholders' equity as reported under HK
          GAAP                                                    188,179        242,635         182,187         23,568
        Reduction for goodwill recorded on the
          merger of the Company and Lorenzo            (a)           (54)            (47)            (40)            (5)
        Cumulative effect of depreciation on
          investment properties                        (i)         (2,546)        (2,970)         (3,394)          (439)
        Deficit (Surplus) arising on revaluation of
          investment properties                        (i)         (3,212)         1,885           2,385            309
        Cumulative effect of depreciation on property  (j)           (585)          (633)           (681)           (88)
        Deferral of future financial consulting paid
          to the representative in the public
          offering                                     (b)            143             --              --             --
        Unamortized discount on convertible
          debentures                                   (e)            296             --              --             --
        Unamortized beneficial conversion feature      (e)          6,717             --              --             --
        Deficit frozen upon transfer of an
          investment property to land and building     (j)          2,297             --              --             --
        Reduction for goodwill recorded on
          acquisition of a subsidiary                  (q)             --             --           1,641            212
                                                               ----------     ----------      ----------     ----------

        Shareholders' equity under US GAAP
            (as restated for 2000)                                191,235        240,870         182,098         23,557
                                                               ==========     ==========      ==========     ==========

        Shareholders' equity under US GAAP
          (as previously reported)                                184,518
        Adjustment made for previous year:
          Unamortized beneficial conversion feature    (e)          6,717
                                                               ----------

        Shareholders' equity under US GAAP
          (as restated for 2000)                                  191,235
                                                               ==========
</Table>



                                      F-49
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)



         IMPACT OF RECENTLY ISSUED US GAAP ACCOUNTING STANDARDS

         Effective July 1, 2001, the Company adopted SFAS No. 141 "Business
         combinations". In accordance with SFAS No. 141, all business
         combinations initiated after June 30, 2001 are to be accounted for
         using the purchase method, the pooling of interest method of accounting
         is prohibited. The acquisition of the jewelry retail company on March
         21, 2002 (see note 17 (a)) was accounted for by purchase method of
         accounting.

         In July 2001, Financial Accounting Standards board ("FASB") issued SFAS
         No. 142, "Goodwill and Other Intangible Assets". The SFAS No. 142
         provides that goodwill and intangible assets which have indefinite
         useful lives will not be amortized but rather will be tested at least
         annually for impairment. Consequently, the goodwill arisen from the
         acquisition of the jewelry retail company on March 21, 2002 is not
         amortized and subject to impairment test in this financial year. The
         Company adopted SFAS No. 142 effective on May 1, 2002, the first day of
         its financial year 2003. Other than the goodwill arisen from the
         acquisition on March 21, 2002, the Company have no other goodwill and
         intangible assets as of April 30, 2002. The Company does not believe
         that the adoption of the statement will have a material impact on its
         financial position or result of operations.

         In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
         Retirement Obligations". The SFAS No. 143 addresses accounting and
         reporting for obligations associated with the retirement of tangible
         long-lived assets and the associated asset retirement costs. This
         statement is effective for financial years beginning after June 15,
         2002. The impact of the adoption of SFAS No. 143 on the Group's
         financial statements is not expected to be material.

         In October 2001, the FASB issued SFAS No. 144 "Accounting for the
         Impairment or Disposal of Long-Lived Assets". SFAS No. 144 replaces
         SFAS No. 121, "Accounting for the impairment of Long-Lived Assets and
         for Long-Lived Assets to Be Disposed Of". SFAS No. 144 requires
         long-lived assets be measured at the lower of selling amount or fair
         value less cost to sell, whether reported in continuing operations or
         discontinued operations. SFAS No. 144 also broadens the reporting of
         discontinued operations to include all components of an entity with
         operations that can be distinguished from the rest of the entity and
         that will be eliminated from the ongoing operations of the entity in a
         disposal transaction. The provisions of SFAS No. 144 are effective for
         consolidated financial statements issued for financial years beginning
         after December 15, 2001. The Group does not expect that the adoption of
         SFAS No. 144 will have a material impact on the Group's financial
         statements.

         In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB
         Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
         Technical Corrections". This statement made revisions to the accounting
         for gains and losses from the extinguishment of debt, rescinded SFAS
         No. 44, and required certain lease modifications that have economic
         effects similar to sale-leaseback transactions be accounted for in the
         same manner as sale-leaseback transactions. The Group is required to
         and will adopt SFAS No. 145 on May 1, 2002. The adoption of SFAS No.
         145 is not expected to have a material impact on the Group's financial
         statements.



                                      F-50
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


         IMPACT OF RECENTLY ISSUED HK GAAP ACCOUNTING STANDARDS

         A brief summary of the major new or revised standards, which are
         effective for accounting periods beginning on or after January 1, 2002,
         is set out below:

         SSAP 11 (Revised) "Foreign currency translation"

         The main change to this standard is eliminating the option of using the
         closing rate method in translating foreign enterprises' financial
         statements when preparing consolidated financial statements.
         Accordingly, the revised standard requires using the net investment
         method in translating the financial statements of foreign enterprises,
         and translating the statement of operations at an average rate for the
         period.

         SSAP 15 (Revised) "Cash flow statements"

         The revised standard classifies cash flows into operating, investing
         and financing activities. Interest and dividends which were previously
         presented under a separate heading will be classified under any of the
         operating, investing and financing headings, provided they are
         classified consistently from period to period. Cash flows arising on
         income taxes will be classified under operating activities, unless they
         can be separately identified with investing or financing activities.

         SSAP 33 "Discontinuing operations"

         The new standard supersedes the requirements of disclosing discontinued
         operations under SSAP 2 "Net profit or loss for the period, fundamental
         errors and changes in accounting policies". A discontinuing operation
         is a component of an enterprise that represents a separate major line
         of business or geographical area, which can be distinguished
         operationally and financially which the enterprise is disposing of or
         terminating.

         This standard requires the disclosures of discontinuance when the
         initial disclosure events occur. This event is the earlier of either
         the enterprise entering into a binding sale agreement, or the approval
         and announcement by the governing body of the enterprise of a detailed
         plan for the discontinuance.

         SSAP 34 "Employee benefits"

         The standard defines employee benefits as all forms of consideration
         given by an enterprise in exchange for service rendered by employees,
         which include short-term employee benefits, post-employment benefits,
         other long-term employee benefits, termination benefits and equity
         compensation benefits. It establishes the underlying principle that the
         cost of providing employee benefits are recognized in the period in
         which the benefit is earned by the employee, rather than when it is
         paid or payable.

         Short-term employee benefits (payable within twelve months) are
         recognized as an expense in the period in which the service is rendered
         by the employee. Profit-sharing and bonus payments are recognized only
         when the enterprise has a constructive obligation to pay them and the
         costs can be reliably estimated.



                                      F-51
<PAGE>
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

             (Amounts in thousands, except share and per share data)


         IMPACT OF RECENTLY ISSUED HK GAAP ACCOUNTING STANDARDS (CONTINUED)

         Post-employment benefit plans can be split into defined contribution
         plans and defined benefit plans. Under defined contribution plans,
         expenses are recognized in the period the contribution is payable. The
         payable is recognized in the exchange for services rendered by
         employees during the period. Under defined benefit plans, the amounts
         recognized in the balance sheet are the present value of the defined
         benefit obligation. This amount, reduced by the fair value of any plan
         assets at the balance sheet date, is then adjusted for unrecognized
         actuarial gains and losses and unrecognized past service costs.

         Other long-term employee benefits are recognized and measured the same
         way as post-employment benefits under a defined benefit plan except
         that deferral of actuarial gains or losses and past service costs is
         prohibited.

         Termination benefits are recognized when the enterprise is demonstrably
         committed to the termination of employment before the normal retirement
         date or to provide termination benefits as a result of an offer made to
         encourage voluntary redundancy.

         This standard does not specify recognition and measurement requirements
         for equity compensation benefits. However, extensive disclosure
         requirements are required.

         The Group does not expect that the adoption of these new standards will
         have a material impact on its financial position or results of
         operations.




                                      F-52
<PAGE>
ITEM 19.   EXHIBITS

         (a)  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,
         2000, 2001 and 2002

         Consolidated balance sheets at April 30, 2001 and 2002

         Consolidated statements of shareholders' equity for the years ended
         April 30, 2000, 2001 and 2002

         Consolidated statements of cash flows for the years ended April 30,
         2000, 2001 and 2002

         Notes to and forming part of the financial statements

         (b)  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
                           Registrant - incorporated by reference to the
                           Exhibits to our Annual Report on Form 20-F for the
                           fiscal year ended April 30, 2001, SEC File No.
                           0-29620.

                  4.2      Agreement with QVC, Inc.*

                  4.3      Securities Purchase Agreement dated as of October 29,
                           1999 and exhibits and amendments thereto -
                           incorporated by reference to the Exhibits to our
                           Registration Statement on Form F-3 and amendments
                           thereto, SEC File No. 333-11482, declared effective
                           on April 3, 2000.

                  4.4      Common Stock Purchase Agreement, dated as of April
                           15, 2002, between Navigator Investments Holding IX
                           Limited and the Registrant**

                  4.5      Registration Rights Agreement, dated as of April 15,
                           2002, between Navigator Investments Holding IX
                           Limited and the Registrant**

                  4.6      Warrant Agreement, dated as of April 15, 2002,
                           between Navigator Investments Holding IX Limited and
                           the Registrant**

                  8.1      List of Subsidiaries of the Company*

                  99.1     Certification of Chief Executive Officer

                  99.2     Certification of Chief Financial Officer

----------

*     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.

**    Incorporated by reference to the Exhibits to our pre-effective
      Registration Statement on Form F- 1, SEC File No. 333-90016, filed on June
      7, 2002



                                     -113-
<PAGE>
                                   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:  August 22, 2002                          By: /s/ YU CHUAN YIH
                                                    ---------------------------


                                                    Yu Chuan Yih
                                                    Chairman



                                      -114-
<PAGE>

                                  EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT                                                                                                     PAGE
NUMBER                              DESCRIPTION OF EXHIBIT                                                NUMBER
<S>               <C>                                                                                     <C>
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 Registrant                                  **

4.2               Agreement with QVC, Inc.                                                                  *

4.3               Securities Purchase Agreement dated as of October 29, 1999 and exhibits
                  and amendments thereto                                                                    ***

4.4               Common Stock Purchase Agreement, dated as of April 15, 2002,
                  between Navigator Investments Holding IX Limited and the Registrant                       ****

4.5               Registration Rights Agreement, dated as of April 15, 2002,
                  between Navigator Investments Holding IX Limited and the Registrant                       ****

4.6               Warrant Agreement, dated as of April 15, 2002, between Navigator
                  Investments, Ltd. and the Registrant                                                      ****

8.1               List of Subsidiaries of the Company                                                       *

99.1              Certification of Chief Executive Officer

99.2              Certification of Chief Financial Officer
</Table>

----------

*        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.

**       Incorporated by reference to the Exhibits to our Annual Report on Form
         20-F for the fiscal year ended April 30, 2001, SEC File No. 0-29620.

***      Incorporated by reference to the Exhibits to our Registration Statement
         on Form F-3 and amendments thereto, SEC File No. 333-11482, declared
         effective on April 3, 2000.

****     Incorporated by reference to the Exhibits to our pre-effective
         Registration Statement on Form F-1, SEC File No. 333-90016, filed on
         June 7, 2002.



                                      -115-