<PAGE>   1
                     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, 2001

                                       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.


<Table>
<Caption>
                 Title of each              Name of each exchange
                     class                   on which registered
                 -------------              ---------------------
<S>                                         <C>
                     None                            N/A
</Table>

<PAGE>   2

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, 2001:

                                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>   3

                           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>   4

                                     PART I


ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

         Not applicable.


ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE

         Not applicable.


ITEM 3.  KEY INFORMATION

A.       SELECTED FINANCIAL DATA.

                      SELECTED CONSOLIDATED FINANCIAL DATA
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

         The following selected consolidated financial data with respect to each
of the years in the five-year period ended April 30, 2001 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.


                                      -4-

<PAGE>   5

CONSOLIDATED STATEMENTS OF OPERATIONS DATA:

<Table>
<Caption>
                                                                              Year ended April 30,
                                                   ------------------------------------------------------------------------------
                                                     1997          1998          1999          2000          2001          2001
                                                      HK$           HK$           HK$           HK$           HK$           US$
<S>                                                <C>           <C>           <C>           <C>           <C>           <C>
AMOUNT IN ACCORDANCE WITH HONG
    KONG GAAP
Operating revenues ...........................       92,258       124,199       195,219       300,901       357,785        46,285
                                                   ========      ========      ========      ========      ========      ========

Operating income .............................       21,930        31,540        39,723        38,725        36,472         4,718
Interest expense, net ........................       (3,999)       (6,964)       (5,186)       (2,980)       (2,781)         (360)
                                                   --------      --------      --------      --------      --------      --------
Income before income taxes ...................       17,931        24,576        34,537        35,745        33,691         4,358
Income taxes .................................       (2,210)       (2,120)         (380)          (25)       (1,637)         (211)
                                                   --------      --------      --------      --------      --------      --------
Net income ...................................       15,721        22,456        34,157        35,720        32,054         4,147
                                                   ========      ========      ========      ========      ========      ========
Dividends per share ..........................           --            --            --            --            --            --
                                                   --------      --------      --------      --------      --------      --------

NUMERATOR:
Net income used in computing basic
    earnings per share .......................       15,721        22,456        34,157        35,720        32,054         4,147
Interest on 3% convertible debentures ........           --            --            --           251           127            16
                                                   --------      --------      --------      --------      --------      --------
Adjusted net income used in
    computing diluted earnings per
    share ....................................       15,721        22,456        34,157        35,971        32,181         4,163
                                                   ========      ========      ========      ========      ========      ========
DENOMINATOR:
Weighted average number of shares
    outstanding - basic (thousands) ..........        4,387         4,539         6,347         6,589         8,567         8,567
Effect of dilutive potential ordinary
    shares:
    3% convertible debentures ................           --            --            --           337            49            49
    Warrants .................................           --             5            --             7            --            --
    Options ..................................           --            --             1            --             6             6
                                                   --------      --------      --------      --------      --------      --------
Weighted average number of shares
    outstanding - diluted (thousands) ........        4,387         4,544         6,348         6,933         8,622         8,622
                                                   ========      ========      ========      ========      ========      ========

Earnings per share - basic ...................         3.58          4.95          5.38          5.42          3.74          0.48
                                                   ========      ========      ========      ========      ========      ========

Earnings per share - diluted .................         3.58          4.94          5.38          5.19          3.73          0.48
                                                   ========      ========      ========      ========      ========      ========
</Table>


                                      -5-

<PAGE>   6

<Table>
<Caption>
                                                                               Year ended April 30,
                                                       -------------------------------------------------------------------
                                                         1997       1998        1999        2000        2001        2001
                                                          HK$        HK$         HK$         HK$         HK$         US$
<S>                                                    <C>         <C>         <C>         <C>         <C>         <C>
AMOUNT IN ACCORDANCE WITH US
    GAAP
Operating revenues ...............................      92,258     124,199     195,219     300,901     357,785      46,285
                                                       =======     =======     =======     =======     =======     =======
Operating income before income taxes .............      16,599      14,325      33,738      34,989      33,918       4,388
                                                       -------     -------     -------     -------     -------     -------
Net income per US GAAP ...........................      14,389      12,205      33,358      34,964      32,281       4,177
                                                       -------     -------     -------     -------     -------     -------

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

NUMERATOR:
Net income used in computing basic
    earnings per share ...........................      14,389      12,205      33,358      34,964      32,281       4,177
Interest on 3% convertible debentures ............          --          --          --         251         127          16
                                                       -------     -------     -------     -------     -------     -------
Adjusted net income used in
    computing diluted earnings per
    share ........................................      14,389      12,205      33,358      35,215      32,408       4,193
                                                       =======     =======     =======     =======     =======     =======


DENOMINATOR:
Weighted average number of shares
    outstanding under
    HK GAAP - basic (thousands) ..................       4,387       4,539       6,347       6,589       8,567       8,567
Shares for Deen Merger ...........................         143          62          --          --          --          --
                                                       -------     -------     -------     -------     -------     -------
Weighted average number of shares
    outstanding under
    US GAAP - basic (thousands) ..................       4,530       4,601       6,347       6,589       8,567       8,567
Effect of dilutive potential ordinary
    shares:
    3% convertible debentures ....................          --          --          --         337          49          49
    Warrants .....................................          --           5          --          18          --          --
    Options ......................................          --          --           1          --           1           1
                                                       -------     -------     -------     -------     -------     -------
Weighted average number of shares
    outstanding under
    US GAAP - diluted (thousands) ................       4,530       4,606       6,348       6,944       8,617       8,617
                                                       =======     =======     =======     =======     =======     =======


Earnings per share - basic .......................        3.18        2.65        5.26        5.31        3.77        0.49
                                                       =======     =======     =======     =======     =======     =======

Earnings per share - diluted .....................        3.18        2.65        5.26        5.07        3.76        0.49
                                                       =======     =======     =======     =======     =======     =======
</Table>


                                      -6-
<PAGE>   7

CONSOLIDATED BALANCE SHEET DATA:

<Table>
<Caption>
                                                                              As of April 30,
                                                   -------------------------------------------------------------------
                                                    1997         1998        1999       2000        2001        2001
                                                     HK$         HK$          HK$       HK$         HK$          US$
<S>                                                <C>         <C>         <C>         <C>         <C>          <C>
AMOUNT IN ACCORDANCE WITH
    HONG KONG GAAP
    Working capital .........................      (2,757)      39,090      75,645     158,795     155,787      20,153
    Total assets ............................      82,879      154,616     222,875     310,539     367,379      47,528
    Long-term obligations ...................      13,006       10,544       9,028      29,472       2,216         287
    Total shareholders' equity ..............      16,981       90,257     128,428     188,179     242,635      31,389

AMOUNT IN ACCORDANCE WITH
    US GAAP
    Working capital .........................      (2,757)      39,090      75,645     162,201     166,532      21,543
    Total assets ............................      78,533      142,307     213,020     306,879     365,614      47,300
    Long-term obligations ...................      13,006       10,544       9,028      29,472       2,216         287
    Total shareholders' equity ..............      12,635       77,948     118,573     184,518     240,870      31,161
</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. 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.


                                      -7-
<PAGE>   8

<Table>
<Caption>
                                                      AVERAGE
                                                     NOON BUYING
                                                        RATE
CALENDAR YEAR                                       (HK$ PER US$)
-------------                                       -------------
<S>                                                 <C>
1996                                                   7.7345
1997                                                   7.7431
1998                                                   7.7467
1999                                                   7.7594
2000                                                   7.7924
</Table>

<Table>
<Caption>
    CALENDAR MONTH                           HIGH                    LOW
    --------------                           ----                    ---
<S>                                         <C>                     <C>
March 2001                                  7.8003                  7.7994
April 2001                                  7.8000                  7.7983
May 2001                                    7.8003                  7.7991
June 2001                                   7.8000                  7.7990
July 2001                                   7.8003                  7.7996
August 2001                                 7.8000                  7.7992
</Table>


B.       CAPITALIZATION AND INDEBTEDNESS.

         Not applicable.


C.       REASONS FOR THE OFFER AND USE OF PROCEEDS.

         Not applicable.


D.       RISK FACTORS.

WE DEPEND UPON QVC, INC. FOR A LARGE PORTION OF OUR SALES AND WE CANNOT BE
CERTAIN THAT THESE SALES WILL CONTINUE. IF THEY DO NOT, OUR REVENUES WILL LIKELY
DECLINE.

         Although we sell to a large number of customers in a variety of
markets, a substantial portion of our sales involve rings to one volume
customer, QVC, Inc. For the fiscal years ended April 30, 2000 and 2001, QVC,
Inc. accounted for approximately 45% and 47% 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


                                      -8-
<PAGE>   9

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 DEPEND UPON CERTAIN KEY PERSONNEL TO MANAGE OUR COMPANY.

         Our ability to successfully carry out our business plans continues to
be largely dependent upon the efforts of our current management, particularly:

         o        our Chairman and President, Yu Chuan Yih;

         o        our Executive Vice President, Ka Man Au;

         o        our Senior Vice President, Joseph Tuszer; and

         o        our Chief Financial Officer, Hon Tak Ringo Ng.

         We have entered into an employment agreement only with Mr. Yih, since
the loss of his services could have an adverse effect on our ability to achieve
our business objectives. We maintain key-person life insurance in the amount of
US$5,000,000 on Mr. Yih's life, with the proceeds of such insurance payable to
us.

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

         Our largest shareholder currently beneficially owns or controls
approximately 36.5% of our outstanding shares. 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. While we
believe that our vertically integrated low-cost, high-volume and quality
manufacturing process provides us with a competitive edge, 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.


                                      -9-
<PAGE>   10

MATERIAL FACTORS RELATING TO THE OPERATIONS OF THE BUSINESS COULD AFFECT OUR
SUCCESS.

         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;

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

         o        the market acceptance of our customers' jewelry.

         Further factors impacting the success of our operations are:

         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 be sustained 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. Based on the current political
conditions and our understanding of the Basic Law, we do not believe that the
transfer of sovereignty over Hong Kong will have an adverse impact on our
financial and operating environment. We cannot assure, however, that changes in
political or other conditions will not result in such an adverse impact.


                                      -10-
<PAGE>   11

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. Our
management believes that the basic principles underlying the reforms will
continue to provide an acceptable framework for China's political and economic
systems. This is because of the broad support for the reform process and the
fact that the economic system in China has already undergone extensive changes
as a result of the success of such reforms.

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 $8.5 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 47% of our sales during the fiscal year ended April
30, 2001 to our largest customer, QVC, Inc., were not seasonal in nature. It has
been our management's experience that the remaining 53% of our total sales are
seasonally sensitive.

ALTHOUGH OUR SALES AND NET INCOME HAVE BEEN STEADILY GROWING, RETAIL JEWELRY
SALES ARE SENSITIVE TO FLUCTUATIONS IN THE ECONOMIC CYCLE.

         Unfavorable general economic conditions have an adverse effect on
consumer spending and, therefore, on our business. We believe our growth and
products are less sensitive to economic downturns due to our mass manufacturing
capabilities, merchandising, and low-cost


                                      -11-
<PAGE>   12

products that are more impulse purchase items. Unfavorable general economic
conditions or a downturn in consumer confidence may in the future have an
adverse effect on consumer spending preferences and, therefore, on our business.

WE LACK PATENT PROTECTION FOR OUR MANUFACTURING PROCESS.

         We believe that one of our most competitive advantages is our
vertically integrated manufacturing structure that produces high quality jewelry
in large quantities and at favorable prices. However, the general concepts of
such high volume production are known in the industry and the ability of others
to build upon the basic processes and develop similar, if not better,
applications to high volume production could have an adverse competitive impact.

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 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

         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.


                                      -12-
<PAGE>   13

NON-REGISTRATION OF OUR IPO WARRANTS AND THE UNDERLYING COMMON STOCK IN CERTAIN
JURISDICTIONS MAY MAKE THEM WORTHLESS.

         Our IPO warrants are not exercisable unless, at the time of the
exercise, we have a current prospectus covering the shares of common stock
issuable upon exercise of the warrants, and such shares are registered,
qualified or deemed to be exempt under the securities laws of the states of
residence of the exercising holders of the warrants. For the life of the
warrants, we will attempt to maintain a current effective registration statement
relating to the shares of common stock issuable upon exercise of the warrants.
If we are unable to maintain a current registration statement because the costs
render it uneconomical, or because the value of the shares of common stock
underlying the warrants is less than the exercise price, or any number of other
reasons, the warrant holders will be unable to exercise the warrants and the
warrants may become valueless.

         Although the warrants will not knowingly be sold to purchasers in
jurisdictions in which the securities are not registered or otherwise qualified
for sale, purchasers may buy warrants in the after-market or may move to
jurisdictions in which the shares underlying the warrants are not registered or
qualified during the period that the warrants are exercisable. In this event, we
would be unable to issue shares of common stock to those persons desiring to
exercise their warrants, whether in response to a redemption notice or
otherwise, unless and until the shares could be qualified for sale in the
jurisdictions in which such purchasers reside, or exemptions exist in such
jurisdictions from such qualification. Warrant holders would have no choice but
to attempt to sell the warrants or allow them to expire unexercised.

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 to investors about public companies organized in
the United States.


                                      -13-
<PAGE>   14

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:

o        Lorenzo Jewelry Mfg. (H.K.) Limited, 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.

         o        Shantou Lorenzo Jewelry Mfg., and

         o        Lorenzo Marketing Co. Limited.

o        Precious Gems Trading Ltd., which owns all of the equity in:

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

o        Golden Horizon Trading Ltd., which owns all of the equity in:

         o        Lorenzo Jewellery (Shenzhen) Co., Ltd.

o        Fine Gift Enterprises Ltd., which owns all of the issued share capital
         in:

         o        Lorenzo Diamond Jewelry Mfg. Co. Limited.

o        Excel Gold Industries, Ltd.

o        LJ Jewelery (Japan) Ltd.

         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 #11 and #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.


B.       BUSINESS OVERVIEW.

         We are a totally vertically integrated producer of finished
semi-precious gemstones and fine quality gemstone jewelry. We primarily cut and
polish semi-precious gemstones and design, manufacture, market and distribute
gem set jewelry to fine jewelers, department stores, national jewelry chains and
electronic and specialty retailers throughout North America and Western Europe.
Our product line includes all major categories that are sought by major
retailers, including earrings, necklaces, pendants, rings and bracelets. Our
jewelry is crafted in gold, platinum and sterling silver and is set with
semi-precious and precious stones, including diamonds.


                                      -14-
<PAGE>   15

         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 are created 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 channel. 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.

         For the fiscal years ended April 30, 2000 and 2001, approximately 77%
and 83% of sales were in North America.

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
                  production 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 which 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 trust that prime manufacturers are reliable,
low cost producers who can accommodate the large quantities of production that
large retailers commonly purchase.


                                      -15-
<PAGE>   16

OUR BUSINESS STRATEGY

         Our business strategy is to:

         o        increase our market share of moderately priced high-quality
                  gem-set jewelry by capitalizing on our unique vertically
                  integrated manufacturing processes to produce high volume,
                  high-quality 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

         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.

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. Each
manufacturing operation is separated to allow for the specialized needs of each
process. The Shantou facility is the older of the two facilities. It consists of
45,000 square feet and has been operating for nine years. The Shenzhen facility
has been operating for three 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 over four million carats of cut
gemstones and two million pieces of finished fine jewelry annually.

         We purchase imported choice rough gemstone material 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 rough material that we purchase. By
performing internally the value added processes of cutting and polishing, we
maximize quality control and dramatically increase 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.


                                      -16-
<PAGE>   17

         We employ specialized manufacturing processes that deliver large
quantities of high quality finished jewelry. We are currently producing over
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.

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 45% of our sales during fiscal 2000 and 47% of our sales during
fiscal 2001. 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 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


                                      -17-
<PAGE>   18

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. 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 from rough; o


                                      -18-
<PAGE>   19

         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.

         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. We utilize the
lost-wax method of jewelry manufacturing to produce high-quality gold rings,
earrings, pendants and bracelets.

SUPPLY

         We manufacture and cut our own semi-precious stones. We purchase
imported rough gemstones from South America, Africa and China. South America is
the major source of ametrine, amethyst, aquamarine, imperial topaz, tourmaline
and white topaz, whereas 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. The stones are
delivered to us either by air or by sea depending on volume and types of rough
stones.

         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 a downward trend 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


                                      -19-
<PAGE>   20

systems, infrared motion detectors and a system of closed circuit television
cameras which provide surveillance of all critical areas of our premises.

         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


                                      -20-
<PAGE>   21

relationships, we already have made substantial inroads in the North American
jewelry market and we believe we can remain competitive based on our vertically
integrated low-cost, high-volume and high-quality manufacturing process.


                                      -21-
<PAGE>   22

C.       ORGANIZATIONAL STRUCTURE.

         The following diagram illustrates our corporate structure. The
respective country of organization/incorporation is shown in brackets.

                              LJ INTERNATIONAL INC.
                            (British Virgin Islands)

<Table>
<Caption>
   100%                                        100%
   ----                                        ----
<S>                                          <C>
-  LORENZO JEWELRY MFG. (H.K.) LIMITED       - SHANTOU SEZ LORENZO GEMS & CRAFT FACTORY CO., LTD.
   (Hong Kong)                                 (P.R.C.)

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

                                             - LORENZO MARKETING CO. LIMITED (Hong Kong)

-  PRECIOUS GEMS TRADING LTD.                - LORENZO GEMS MANUFACTURING (SHENZHEN) CO., LTD.
   (B.V.I.)                                    (P.R.C.)

-  FINE GIFT ENTERPRISES LTD.                - LORENZO DIAMOND JEWELRY MFG. CO. LIMITED
   (B.V.I.)                                    (Hong Kong)

-  GOLDEN HORIZON TRADING LTD.               - LORENZO JEWELLERY (SHENZHEN) CO., LTD.
   (B.V.I.)                                    (P.R.C.)

-  EXCEL GOLD INDUSTRIES, LTD.
   (B.V.I.)

-  LJ JEWELERY (JAPAN) LTD.
   (B.V.I.)
</Table>


                                      -22-
<PAGE>   23

D.       PROPERTY, PLANS AND EQUIPMENT.

         Our principal executive offices are located at Units #11 and #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
lease the adjacent 35,000 square feet on the same floor of that building as one
of our gem cutting facilities at a rental rate of approximately HK$37,000
(US$4,800) per month until July 2002.

         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 lease this space from an unaffiliated third party at a
rental rate of HK$74,120 (US$9,500) per month until August 2002.

         We own two warehouse facilities in Kowloon, Hong Kong consisting of
5,432 square feet and 2,897 square feet. We also own additional properties in
Sai Kung, Hong Kong and Aberdeen, Hong Kong which we lease to non-affiliated
third parties.


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.

OVERVIEW

         We are a holding company, owning directly or indirectly 100% of the
equity of:

         o        Lorenzo Jewelry Mfg. (H.K.) Limited,

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

         o        Shantou Lorenzo Jewelry Mfg.,

         o        Lorenzo Marketing Co. Limited,

         o        Precious Gems Trading Ltd.,

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

         o        Golden Horizon Trading Ltd.,

         o        Lorenzo Jewellery (Shenzhen) Co., Ltd.,

         o        Fine Gift Enterprises Ltd.,


                                      -23-
<PAGE>   24

         o        Lorenzo Diamond Jewelry Mfg. Co., Limited,

         o        Excel Gold Industries, Ltd., and

         o        LJ Jewelery (Japan) Ltd.

         Collectively, these entities are referred to as us. Substantially all
of our operating assets are held by our subsidiaries, which are located in Hong
Kong and/or China. While Lorenzo Jewelry has operated since 1987, we were
incorporated in January 1997, and subsequently merged with Lorenzo Jewelry and
its subsidiaries.

         We are a totally vertically integrated producer of finished
semi-precious gemstones and fine quality gemstone jewelry. We primarily cut and
polish semi-precious gemstones and design, manufacture, market and distribute
gem set jewelry to fine jewelers, department stores, national jewelry chains and
electronic and specialty retailers throughout North America and Western Europe.
Our product line includes all major categories that are sought by major
retailers, including earrings, necklaces, pendants, rings and bracelets. Our
jewelry is crafted in gold, platinum and sterling silver and is set with
semi-precious and precious stones, including diamonds.

         During fiscal year ended 1998, 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. Additional amounts were received during the year
ended April 30, 1999 from the exercise of the over-allotment of common stock in
the offering. The completion of this offering was a very significant development
for us and required substantial management time away from our normal operations.
In fiscal year ended 1999, we re-focused all of our energy to the operation of
our primary business with the goal of further increasing sales and the operating
performance. In 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.


                                      -24-
<PAGE>   25

A.       OPERATING RESULTS.

FISCAL 2001 COMPARED TO 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 to the same period in fiscal 2000, but the fourth fiscal quarter in
this year recorded a reduction of 35% compared to the same fiscal quarter in
previous year.

GROSS PROFIT

         The gross profit margin dropped from 41% in 2000 to 38% 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 incurred and expensed to build
                  up the European jewelry sample lines; and

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

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
more lucrative compared to US market, the profit margin is expected to stabilize
at around 35% to 38% in the next few years.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling, general and administrative expenses increased 20% to
HK$99,807,000 (US$12,911,000) or 28% of net sales in 2001, compared with
HK$81,617,000 (US$10,558,000) or 27% of net sales in 2000.

         Selling expenses increased from HK$18,754,000 (US$2,426,000) in fiscal
2000 to HK$25,634,000 (US$3,316,000) in fiscal 2001, or in term of percentage to
sales, increased from 6.2% in fiscal 2000 to 7.2% in fiscal 2001. The change in
the percentage is mainly due to commission paid to salesmen or agents to induct
businesses and additional freight charges and import duties incurred.


                                      -25-
<PAGE>   26

OTHER INCOME/EXPENSES

         Other expenses, net of income, which principally consisted of interest
expenses, interest income and rental income, decreased from HK$6,224,000
(US$805,000) in fiscal 2000 to HK$2,301,000 (US$298,000) in fiscal 2001.

         Net interest expenses decreased from HK$2,980,000 (US$386,000) in
fiscal 2000 to HK$2,781,000 (US$360,000) in fiscal 2001. The decrease is mainly
due to the consecutive cuts of interest rate during the year.

         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.

         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.

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
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. All of our
subsidiaries in China are currently enjoying the tax holidays or concessions in
fiscal 2001. 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.


                                      -26-
<PAGE>   27


FISCAL 2000 COMPARED TO 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. The diamond jewelry sales accounted for 5.7% of
the total net sales in fiscal year 2000.

GROSS PROFIT

         The gross profit margin dropped from 49% in 1999 to 41% in 2000 due to:

         o        a change in the product mix. Previously, most of our sales are
                  jewelry set with semi-precious stones; in 2000, more sales are
                  made with precious stones and diamonds. Diamond jewelry
                  generally has higher sales value but 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 the diamond jewelry sales is expected to rise, the profit
margin is expected to drop and stabilize at around 38% in the next few years.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling, general and administrative expenses increased 43% to
HK$81,617,000 (US$10,558,000) or 27% of net sales in 2000, compared with
HK$56,880,000 (US$7,358,000) or 29% of net sales in 1999.

         The decrease of 2% 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.


                                      -27-
<PAGE>   28

OTHER INCOME/EXPENSES

         Other expenses, net of income, which principally consisted of interest
expenses, interest income, rental income and issuing cost for convertible
debentures, increased to HK$6,224,000 (US$805,000) in 2000 from HK$4,439,000
(US$575,000) in 1999.

         Net interest expenses decreased 42.5% to HK$2,980,000 (US$386,000) in
2000 from HK$5,186,000 (US$671,000) in 1999. The proceeds from the issuance of
the convertible debentures during fiscal 2000 provided us with working capital
and level of borrowings dropped during 2000.

         Rental income increased 84.6% to HK$875,000 (US$113,000) in 2000 from
HK$474,000 (US$61,000) in 1999, which is mainly due to a short-term lease of one
of the investment properties 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%.

         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. Certain
subsidiaries initiated their first year of tax holidays during 2000. 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).


                                      -28-
<PAGE>   29

FISCAL 1999 COMPARED TO FISCAL 1998

NET SALES

         Net sales increased 57% to HK$195,219,000 (US$25,255,000) in the fiscal
year ended April 30, 1999 from HK$124,199,000 (US$16,067,000) in the fiscal year
ended 1998. This increase was primarily driven by volume increases in sales to
existing customers, including QVC, Inc. and International Jewelry Connection, a
national network of independent sales representatives who sell jewelry through
direct contact with retail accounts. In addition, our new sterling silver
product line was introduced to the market during fiscal 1999.

GROSS PROFIT

         The gross profit margin remained at 49% in 1999 and 1998 as our
vertical integration assures tight controls over the quality of the whole
manufacturing processes, including cutting and processing, and minimizes wastage
during the manufacturing processes. There was no material fluctuation in the
sales price of our products during 1999.

         We intentionally purchased more rough gem stone in 1999 to take
advantage of the expected rise in selling price.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling, general and administrative expenses increased 70% to
HK$56,880,000 (US$7,358,000) or 29% of net sales in 1999 compared with
HK$33,545,000 (US$4,340,000) or 27% of net sales in 1998.

         The increase was mainly attributable to the operation of our newly
set-up Shenzhen factory in February 1998, which has over 50,000 square feet
floor area with over 1,500 staff and workers employed. In addition, our
management and administrative staff in our Hong Kong headquarters also increased
to cope with our increased sales volume and to provide us with administrative
support.

OTHER INCOME/EXPENSES

         Other expenses, net of income, which principally consisted of interest
expenses, rental income and gain on disposal of property, plant and equipment,
increased to HK$4,439,000 (US$575,000) in 1999 from HK$2,785,000 (US$360,000) in
1998.

         Net interest expenses decreased 25.5% to HK$5,186,000 (US$671,000) in
1999 from HK$6,964,000 (US$901,000) in 1998. The proceeds from the IPO and
issuance of warrants during the year provided us with working capital and the
level of borrowings dropped during the year.


                                      -29-
<PAGE>   30

         Rental income decreased 62.7% to HK$474,000 (US$61,000) in 1999 from
HK$1,273,000 (US$165,000) in 1998, which was mainly due to using one of the
properties as an office to provide administrative support instead of being
sub-let out for rental.

         In addition, we sold an investment property in 1998 for HK$3,800,000
(US$492,000) to Mr. Yu Chuan Yih and had a gain of HK$2,904,000 (US$376,000).
The consideration of the property was based on a valuation report prepared by an
independent professional appraiser. Accounting treatment for this transaction is
different under US GAAP (see "Reconciliation to US GAAP"). No disposal of
property was made in 1999.

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. These subsidiaries
have sustained losses for the Chinese income tax purposes. 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%.

         Income tax decreased 82% to HK$380,000 (US$49,000) in 1999 from
HK$2,120,000 (US$274,000) in 1998. Despite increase in profit during the year
which is attributable to the full operation of the Chinese subsidiaries, income
tax actually decreased as a result of the restructuring of the intra-group
pricing policy.


                                      -30-
<PAGE>   31

B.       LIQUIDITY AND CAPITAL RESOURCES.

FISCAL 2001 COMPARED TO FISCAL 2000

         We have no direct business operations other than our 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 currently are 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$31,376,000
(US$4,058,000) provided by operating activities and tax refund of HK$363,000
(US$47,000), less HK$31,740,000 (US$4,106,000) used by investing activities,
HK$15,831,000 (US$2,048,000) used by financing activities, as well as
HK$2,737,000 (US$353,000) used in returns on investments and servicing of
finance, cash and cash equivalents decreased by HK$18,569,000 (US$2,402,000).

         Net cash provided by operating activities in fiscal 2001 was
HK$31,376,000 (US$4,058,000) as compared with net cash used of HK$8,738,000
(US$1,131,000) 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 to
HK$5,162,000 (US$668,000) in fiscal 2000. The net cash used in investing
activities during fiscal 2001 was mainly used for the acquisition of investment
securities and property, plant and equipment during the year.

         Net cash used in financing activities in fiscal 2001 was HK$15,831,000
(US$2,048,000) as compared with net cash provided of HK$30,161,000
(US$3,902,000), 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 are generally offered a 60-day credit
period.


                                      -31-
<PAGE>   32

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 has been
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 aggregated 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 our letters of credit, we are
required to maintain certain cash balance 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.

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 be 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 being paid will be 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 aggregated HK$10,139,000
(US$1,311,000) and HK$5,971,000 (US$773,000) as of April 30, 2000 and 2001.
Substantially all of our properties are pledged as collateral for our banking
facilities.


                                      -32-
<PAGE>   33

FISCAL 2000 COMPARED TO 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 currently are 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$30,161,000
(US$3,902,000) cash provided by financing activities and HK$8,738,000
(US$1,131,000) and HK$5,162,000 (US$668,000) used by operating and investing
activities, as well as HK$2,804,000 (US$363,000) 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$13,364,000 (US$1,728,000).

         Net cash used by operating activities in fiscal 2000 was HK$8,738,000
(US$1,131,000) as compared with net cash provided of HK$1,898,000 (US$245,500)
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) as compared with HK$7,802,000 (US$1,009,000) in fiscal 1999. The
net cash used in investing activities during fiscal 2000 was mainly for the
acquisition of the remaining 40% of the share capital of Lorenzo Marketing Co.,
Ltd., and the purchase of office equipment and decoration of the additional
office space rented in Hong Kong.

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. The sales to customers are generally offered a 60-day
credit period.


                                      -33-
<PAGE>   34

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 gem stone, more sample lines of jewelry built up, and to maintain
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 gem
stone suppliers to secure the first right and steady gem stone 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.

Letters of Credit:

         As of April 30, 2000, we had various letters of credit under banking
facilities which aggregated 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 our letters of credit, we are
required to maintain certain cash balance 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 be 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 being paid will be 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).


                                      -34-
<PAGE>   35

Notes Payable:

         Long-term mortgage loans on our properties aggregated HK$13,923,000
(US$1,801,000) and HK$10,139,000 (US$1,311,000) as of April 30, 1999 and 2000.
Substantially all of our properties are 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.

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 at April 30,
2000. The remaining HK$23,190,000 (US$3,000,000) was subsequently converted into
1,233,557 shares of our common stock after the fiscal year ended April 30, 2000.

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.


                                      -35-
<PAGE>   36

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.

         In connection with the bridge financing associated with our public
offering, we were required under SEC accounting rules to record for US GAAP
purposes additional costs associated with the issuance of 156,500 shares of our
common stock to the holders of the promissory notes for no additional
consideration. The value associated with these shares is HK$6,049,000
(US$783,000) based on the common stock price associated with the offering, which
was amortized as an additional interest expense for the period from October 1997
to April 1998. Similar costs are not expected to be re-occurring in the future.

         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. As a result, our net income for the year ended April 30,
2001 under US GAAP would be HK$32,281,000 (US$4,177,000).

         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. As a result,
our net income for the year ended April 30, 2000 under US GAAP would be
HK$34,964,000 (US$4,523,000).

         Under US GAAP, for the fiscal year ended April 30, 1999, HK$472,000
(US$61,000) would be recorded as depreciation expenses on properties and
investment properties and HK$417,000 (US$54,000) would be recorded as
amortization of financial consulting fee for the IPO. In addition, HK$83,000
(US$10,000) in relation to the amortization of certain offering costs and
HK$7,000 (US$1,000) in relation to the amortization of goodwill would also be


                                      -36-
<PAGE>   37

credited since the related deferred costs were expensed under US GAAP in
previous years. As a result, our net income for the year ended April 30, 1999
under US GAAP would be HK$33,358,000 (US$4,315,000).

         Under US GAAP, for the fiscal year ended April 30, 1998, HK$547,000
(US$71,000) would be recorded as depreciation expense on investment properties.
Also, certain deferred costs with total amount of HK$898,000 (US$116,000) and
amortization of costs for shares issuable to noteholders of HK$6,049,000
(US$783,000) would be expensed based on US GAAP. In October 1997, we sold an
investment property to our major shareholder and recognized a gain of
HK$2,904,000 (US$376,000). Under US GAAP, such gain would be recorded as a
capital contribution while HK$76,000 (US$10,000) in relation to the depreciation
previously charged on this investment property would be credited as additional
income for fiscal 1998. In addition, HK$64,000 (US$8,000) for the amortization
of certain offering costs and HK$7,000 (US$1,000) in relation to the
amortization of goodwill would also be credited since the related deferred costs
had already been expensed under US GAAP in the previous year. As a result, our
net income for the year ended April 30, 1998 under US GAAP would be
HK$12,205,000 (US$1,578,000).

STOCK-BASED COMPENSATION

         Under HK GAAP, there are no specific requirements to recognize the
compensation cost arising from stock options granted to employees on the
financial statements.

         Under US GAAP, we adopted the provisions of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS
123). As permitted by SFAS 123, we have chosen to account for stock-based
compensation using the intrinsic value method. Accordingly, because the exercise
price of our stock options is the same as or higher than the market price of the
underlying stock on the date of grant, no compensation expense has been
recognized for our stock-based compensation plan. Had compensation expense for
the stock option plan been determined based on the fair value at the date of
grant, consistent with the provisions of SFAS 123, our net income and earnings
per share would have been reported as follows:

<Table>
<Caption>
                                              Year ended April 30
                                 ----------------------------------------------
                                     2000              2001             2001
                                     HK$               HK$              US$
<S>                              <C>              <C>              <C>
Pro forma net income               34,124,000       21,094,000        2,729,000
                                 ============     ============     ============
Pro forma earnings per share
  Basic                                  5.18             2.46             0.32
                                 ============     ============     ============
  Diluted                                4.95             2.46             0.32
                                 ============     ============     ============
</Table>


                                      -37-
<PAGE>   38

         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 of options granted during the year
ended April 30, 2000 and 2001 was US$0.41 and US$0.45 per share, respectively.

         Our stock option activities and related information for the years ended
April 30, 1999, 2000 and 2001 are summarized as follows:

<Table>
<Caption>
                                                              Year ended April 30
                         -------------------------------------------------------------------------------------
                                    1999                          2000                         2001
                                          Weighted                      Weighted                      Weighted
                                           average                       average                      average
                                           exercise                      exercise                     exercise
                                            price                         price                         price
                          Options            US$       Options              US$       Options            US$
<S>                      <C>              <C>         <C>               <C>         <C>               <C>
Outstanding and
  exercisable,
  beginning of year             --             --      1,285,000            5.0      1,550,000             5.0
Granted                  1,285,000            5.0        265,000            5.0      5,226,000            2.35
Exercised                       --             --             --             --             --              --
Cancelled                       --             --             --             --     (3,400,000)           3.91
                         ---------                    ----------                    ----------
Outstanding and
  exercisable,
  end of year            1,285,000            5.0      1,550,000            5.0      3,376,000            2.00
                         =========                    ==========                    ==========

Weighted average
  remaining
  contractual life        10 years                    9.13 years                    7.06 years
                         =========                    ==========                    ==========
</Table>


         On May 8, 2000, we issued 1,770,000 incentive stock options to our
employees at an exercise price of US$3.00 per share for a term of ten years.


                                      -38-
<PAGE>   39

         Totally, 3,400,000 stock options previously issued were voluntarily
cancelled on October 17, 2000. An aggregate of 3,296,000 stock options were
issued at an exercise price of US$2.00 on April 30, 2001. In addition, we issued
to two consultants stock options to purchase 80,000 shares each (a total of
160,000) of our common stock as part of the consultancy fees. Under HK GAAP,
there are no specific requirements to recognize the compensation cost arising
from these transactions. Under US GAAP, the costs associated with these
transactions are accounted for based on the fair value of these options at the
date of issue. Using the Black-Scholes option pricing model with the same
weighted-average assumptions as employees' stock options, the fair value of
these options to the consultants is estimated as HK$754,000 (US$98,000), which
have been amortized as an additional expense during the year ended April 30,
2001.

IMPACT OF RECENTLY ISSUED US GAAP ACCOUNTING STANDARDS.

CONSOLIDATION

         In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other
Intangible Assets". The adoption of SFAS No. 141 would not have affected the
accounting for the reorganization of the Group completed on May 6, 1997.

         SFAS No. 142 changes the accounting treatment for goodwill from an
amortization method to an impairment-only approach. Thus, amortization of
goodwill, including goodwill recorded in past business combinations, will cease
upon adoption of this SFAS, which for companies with calendar year ends, will be
January 1, 2002.

DERIVATIVES

         In June 1998, FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". The standard, as amended by SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
effective date of FASB Statement no. 133 and amendment of FASB Statement no.
133", and SFAS No. 138, "Accounting for certain Derivative Instruments and
certain Hedging Activities, an amendment of FASB Statement no. 133", is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000 (May 1, 2001 for the Group). SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or in
other comprehensive income, depending on whether a derivative is designated as
part of a hedging relationship and, if it is, depending on the type of hedging
relationship.

         The Group will adopt SFAS No. 133 on May 1, 2001. As the use of
derivative financial instruments by the Group is limited, the impact of the
adoption of SFAS No. 133 on the consolidated financial statements of the Group
is not expected to be material.


                                      -39-
<PAGE>   40

TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES

         In September 2000, FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of FASB no. 125". This statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. Under these standards, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. This statement is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. The Group does not expect that the
adoption of SFAS No. 140 will have a material impact on its results of
operations, financial position or cash flows.

INFLATION

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

FOREIGN EXCHANGE

         More than 89% 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 spent the following
amounts on company-sponsored research and development activities:

<Table>
<S>                                                           <C>
                  Year ending April 30, 2001                  US$0
                  Year ending April 30, 2000                  US$0
                  Year ending April 30, 1999                  US$0
</Table>


                                      -40-
<PAGE>   41

D.       TREND INFORMATION.

Production

         According to unaudited statistics, the total production for the first
quarter of 2002 was 290,230 pieces compared to 426,438 pieces for the same
quarter of 2001. The total production for the second quarter of 2002 was
estimated to be about 310,000 pieces.

Sales

         Due to weak demand in the U.S. market, the sales for the first quarter
of 2002 is estimated at $8.3 million, compared to $10.7 million for the same
quarter of 2001.

         The gross profit margin for the first quarter of 2002 is estimated to
stay at the same level as the fourth quarter of 2001.

Inventory

         Inventory for July 2001 is estimated to stay at the same level as the
April 2001, which approximately amounted to US$21 million.


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.........................     62         Chairman of the Board of Directors, President
                                                          and Chief Executive Officer
Ka Man Au............................     37         Executive Vice President, Secretary and Director
Joseph Tuszer........................     55         Senior Vice President
Hon Tak Ringo Ng.....................     41         Chief Financial Officer and Director
Po Yee Elsa Yue......................     37         Non-Executive Director
Lionel C. Wang.......................     45         Non-Executive Director
</Table>


                                      -41-
<PAGE>   42

         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 Mfg. (HK) 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 Mfg. (HK) Ltd. since
its incorporation in 1987. Ms. Au is primarily responsible for our general
administration, human resources, operations and management.

         MR. TUSZER has served as our senior vice president since November 1997.
From 1989 to 1991, he served as executive vice president - product development
for M. Fabrikant & Sons, New York. From 1992 to 1993, Mr. Tuszer served as a
consultant for product development for William Schneider, Inc., Miami. From 1993
to 1996, he served as vice president - product development for Samuel Aaron &
Sons, New York. Mr. Tuszer has substantial experience in the jewelry trade,
including manufacturing and production, knowledge of colored stones, product
development and marketing.

         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 has served
as vice president of GIA, Hong Kong since August 1994.

         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


                                      -42-
<PAGE>   43

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, 2001 on an
accrual basis, for services in all capacities, was HK$8,787,000 (US$1,137,000).
During the fiscal year ended April 30, 2001, we contributed an aggregate amount
of HK$175,000 (US$23,000) 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 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.

         Four of our five current directors were elected at our last annual
meeting of shareholders held December 6, 2000 to serve a one-year term or until
their successor is elected and qualified. Ringo Ng was appointed to serve as a
director effective as of May 1, 2001.


                                      -43-
<PAGE>   44

         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 August 31, 2001, 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 August 31, 2001 by:

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

         o        each of our executive officers and directors; and

         o        all directors and executive officers as a group.

As of August 31, 2001, 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.


                                      -44-
<PAGE>   45

<Table>
<Caption>
                                                                                                NUMBER        PERCENT
NAME OF BENEFICIAL HOLDER                                                                   SHARES BENEFICIALLY OWNED
-------------------------                                                                   -------------------------
<S>                                                                                         <C>               <C>
Yu Chuan Yih                                                                                 3,529,553(1)(2)   36.5%
Ka Man Au                                                                                      200,000(3)       2.3%
Joseph Tuszer                                                                                  300,000(4)       3.3%
Hon Tak Ringo Ng                                                                               200,000(5)       2.3%
Po Yee Elsa Yue                                                                                  6,000(6)         *
Lionel C. Wang                                                                                       0            *
Debora Mu Yong Yih                                                                           1,260,000(7)      13.9%
All directors and executive officers as a group (6 persons)                                  4,235,553         40.8%
</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 300,000 shares of
         common stock at $2.00 per share at any time until April 30, 2008.

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

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

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

The 1998 Stock Compensation Plan

         Effective June 1, 1998, we adopted and approved the 1998 Stock
Compensation Plan. The purpose of the plan is to:


                                      -45-
<PAGE>   46

         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 August 31, 2001, 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 3,376,000 shares at $2.00 per share
                  through April 30, 2008, of which 1,711,000 are held by our
                  directors and officers as a group.

Other Options and Warrants Outstanding

         As of August 31, 2001, 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

         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


                                      -46-
<PAGE>   47

         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 our former financial
                  consultant

         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 sold to two
                  investors and our placement agent

         o        warrants to purchase 100,000 shares at $2.79 per share
                  exercisable through May 26, 2002 which we granted to our
                  financial consultant

         o        warrants to purchase shares which we granted to another
                  financial consultant 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;

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


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.

         We do not have available information as to the portion of our common
stock held in the host country and the number of record holders in the host
country.

         To the extent known to us, we are not directly or indirectly owned or
controlled by another corporation, by any foreign government or by any other
natural or legal persons severally or jointly.

         To our knowledge, there are no arrangements the operation of which may
at a subsequent date result in a change in control of our company.


B.       RELATED PARTY TRANSACTIONS.

         Yu Chuan Yih, our chairman and president, is a director and principal
shareholder of Gemological Institute of America, Hong Kong Limited; and Hong
Kong Brasil Lapidary Limited. Mr. Yih is also a director of iBBC Inc. which has
a subsidiary, iBBC (H.K.) Ltd. During the fiscal years ended April 30, 1999,
2000 and 2001, Mr. Yih and these affiliated companies received unsecured
advances from, and made unsecured advances to, us which were interest free and
repayable on demand.


                                      -47-
<PAGE>   48

         During the fiscal year ended April 30, 1998, we sold an investment
property to Mr. Yih at its appraised value of HK$3,800,000 (US$492,000),
resulting in a gain to us of HK$2,904,000 (US$376,000). The sale price of the
property was based on a valuation report prepared by an independent professional
property appraiser.

         During the fiscal year ended April 30, 1999, we sold finished goods of
HK$74,000 (US$10,000) to Gemological Institute of America, Hong Kong Limited and
Hong Kong Brasil Lapidary Limited, which were made according to the published
prices and conditions offered to our major customers. In addition, 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).

         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 iBBC (H.K.) Ltd, which were made according to the
published prices and conditions offered to our major customers. We also received
from iBBC (H.K.) Ltd 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.

         For additional information, refer to Footnote 12 to the Financial
Statements.


C.       INTERESTS OF EXPERTS AND COUNSEL.

         Not applicable.


                                      -48-
<PAGE>   49

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.


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, 2000             $6.688        $ 3.00
Year ended April 30, 2001             $3.875        $1.625

Quarter ended July 31, 1999           $6.688        $4.125
Quarter ended October 31, 1999        $ 4.50        $ 3.00
Quarter ended January 31, 2000        $5.375        $ 3.00
Quarter ended April 30, 2000          $ 6.00        $3.063
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

Month ended May 31, 2001              $ 2.79        $ 2.00
Month ended June 30, 2001             $ 2.50        $ 2.23
Month ended July 31, 2001             $ 2.38        $ 2.04
Month ended August 31, 2001           $ 2.11        $ 1.81
</Table>


                                      -49-
<PAGE>   50

         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, 2000             $ 3.25        $ 1.00
Year ended April 30, 2001             $1.375        $ 0.50

Quarter ended July 31, 1999           $ 3.25        $1.813
Quarter ended October 31, 1999        $ 2.00        $ 1.00
Quarter ended January 31, 2000        $ 2.00        $1.063
Quarter ended April 30, 2000          $ 2.50        $1.125
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

Month ended May 31, 2001              $ 0.49        $ 0.35
Month ended June 30, 2001             $ 0.55        $ 0.30
Month ended July 31, 2001             $ 0.44        $ 0.30
Month ended August 31, 2001           $ 0.44        $ 0.18
</Table>


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.


D.       SELLING SHAREHOLDERS.

         Not applicable.


E.       DILUTION.

         Not applicable.


                                      -50-
<PAGE>   51

F.       EXPENSES OF THE ISSUE.

         Not applicable.


ITEM 10. ADDITIONAL INFORMATION

A.       SHARE CAPITAL.

         Not applicable.


B.       MEMORANDUM AND ARTICLES OF ASSOCIATION.

         This information is incorporated by reference to the subsection
entitled "Description of Securities" contained on pages 44-45 of our
Registration Statement on Form F-1, File No. 333-7912, declared effective on
April 15, 1998.


C.       MATERIAL CONTRACTS.

         None.


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


                                      -51-
<PAGE>   52

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 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.


                                      -52-
<PAGE>   53

         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 on dividends paid with respect to the
common stock and all holders of common stock are not liable for BVI income tax
on gains realized during that year on sale or disposal of such shares; BVI does
not impose a withholding tax on dividends paid by a company incorporated under
the International Business Companies Act.

         There are no capital gains, gift or inheritance taxes levied by BVI on
companies incorporated under the International Business Companies Act. In
addition, the common stock is not subject to transfer taxes, stamp duties or
similar charges.

         There is no income tax treaty or convention currently in effect between
the United States and the British Virgin Islands.


F.       DIVIDENDS AND PAYING AGENTS.

         Not applicable.


                                      -53-
<PAGE>   54

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.


ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

         Not applicable.


                                      -54-
<PAGE>   55

                                     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


                                      -55-
<PAGE>   56

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,
         1999, 2000 and 2001
         Consolidated balance sheets at April 30, 2000 and 2001
         Consolidated statements of shareholders' equity for the years ended
         April 30, 1999, 2000 and 2001
         Consolidated statements of cash flows for the years ended April 30,
         1999, 2000 and 2001
         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:

Exhibit 1.1       Memorandum of Association of the Company - incorporated by
                  reference to the Exhibits to our Registration Statement on
                  Form F-1, SEC File No. 333-7912, declared effective on April
                  15, 1998.

Exhibit 1.2       Articles of Association of the Company - incorporated by
                  reference to the Exhibits to our Registration Statement on
                  Form F-1, SEC File No. 333-7912, declared effective on April
                  15, 1998.

Exhibit 2.1       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.

Exhibit 4.1       Agreement with QVC, Inc. - incorporated by reference to the
                  Exhibits to our Post Effective Amendment No. 3 to the
                  Registration Statement on Form F-1, SEC File No. 333-7912.

Exhibit 4.2       Employment Agreement between the Company and Yu Chuan Yih
                  effective October 1, 2000.

Exhibit 8.1       List of Subsidiaries of the Company - incorporated by
                  reference to the Exhibits to our Post Effective Amendment No.
                  3 to the Registration Statement on Form F-1, SEC File No.
                  333-7912.


                                      -56-
<PAGE>   57
                                 LJ INTERNATIONAL INC.
                                 REPORTS AND FINANCIAL STATEMENTS
                                 FOR THE YEAR ENDED
                                 APRIL 30, 2001



<PAGE>   58


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, 1999,
  2000 and 2001                                                                                                 F-3

Consolidated statements of recognized gains and losses for the years ended
  April 30, 1999, 2000 and 2001                                                                                 F-4

Consolidated balance sheets as of April 30, 2000 and 2001                                                       F-5

Consolidated statements of shareholders' equity for the years ended
  April 30, 1999, 2000 and 2001                                                                                 F-6

Consolidated statements of cash flows for the years ended
  April 30, 1999, 2000 and 2001                                                                                 F-7

Notes to and forming part of the financial statements                                                    F-8 - F-45
</Table>


                                      F-1
<PAGE>   59

                         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, 2000 and 2001 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, 2001. 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 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, 2000 and 2001 and the consolidated results of its
operations and cash flows for each of the years in the three-year period ended
April 30, 2001, 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: 16 August 2001


                                      F-2
<PAGE>   60

                              LJ INTERNATIONAL INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

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

<Table>
<Caption>
                                                                                          Year ended April 30
                                                                      ----------------------------------------------------------
                                                             Notes       1999            2000            2001           2001
                                                                      ----------      ----------      ----------      ----------
                                                                          HK$            HK$              HK$            US$
<S>                                                          <C>      <C>             <C>             <C>             <C>
OPERATING REVENUE                                            2(n)        195,219         300,901         357,785          46,285
      Costs of goods sold                                                (99,363)       (177,315)       (221,986)        (28,718)
                                                                      ----------      ----------      ----------      ----------
Gross profit                                                              95,856         123,586         135,799          17,567

Other revenue:                                               2(n)
      Interest income                                                      1,690           2,668           3,929             508
      Rental income                                                          474             875             480              62

Selling, general and administrative expenses                             (56,880)        (81,617)        (99,807)        (12,911)
                                                                      ----------      ----------      ----------      ----------
OPERATING INCOME                                                          41,140          45,512          40,401           5,226

      Finance costs                                            17         (6,876)        (10,172)         (6,710)           (868)
      Minority interests                                                     273             405              --              --
                                                                      ----------      ----------      ----------      ----------
                                                                          34,537          35,745          33,691           4,358
INCOME BEFORE INCOME TAXES
      Income taxes                                             14           (380)            (25)         (1,637)           (211)
                                                                      ----------      ----------      ----------      ----------

NET INCOME                                                                34,157          35,720          32,054           4,147
                                                                      ==========      ==========      ==========      ==========


Numerator:
      Net income used in computing basic
        earnings per share                                                34,157          35,720          32,054           4,147
      Interest on 3% convertible debentures                                   --             251             127              16
                                                                      ----------      ----------      ----------      ----------

      Adjusted net income used in computing
        diluted earnings per share                                        34,157          35,971          32,181           4,163
                                                                      ==========      ==========      ==========      ==========


Denominator:
      Weighted average number of shares used
         in calculating basic earnings per share                       6,347,046       6,589,415       8,567,366       8,567,366
      Effect of dilutive potential ordinary
      shares:
        3% convertible debentures                                             --         337,239          48,753          48,753
        Warrants                                                              --           6,324              --              --
        Stock options                                                        514              --           6,139           6,139
                                                                      ----------      ----------      ----------      ----------

      Weighted average number of shares used
         in calculating diluted earnings per share                     6,347,560       6,932,978       8,622,258       8,622,258
                                                                      ==========      ==========      ==========      ==========

Earnings per share:
      Basic                                                  2(q)           5.38            5.42            3.74            0.48
                                                                      ==========      ==========      ==========      ==========

      Diluted                                                2(q)           5.38            5.19            3.73            0.48
                                                                      ==========      ==========      ==========      ==========
</Table>

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


                                      F-3
<PAGE>   61

                              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
                                                 ----------------------------------------------
                                                  1999         2000         2001         2001
                                                 -------      -------      -------      -------
                                                   HK$          HK$          HK$          US$
<S>                                              <C>          <C>          <C>          <C>
NET GAINS (LOSSES) NOT RECOGNIZED IN THE
   STATEMENTS OF OPERATIONS
Deficit arising on revaluation of investment
   properties                                     (3,350)      (3,200)        (915)        (118)

NET INCOME FOR THE YEAR                           34,157       35,720       32,054        4,147
                                                 -------      -------      -------      -------
TOTAL RECOGNIZED GAINS                            30,807       32,520       31,139        4,029
                                                 =======      =======      =======      =======
</Table>


                                      F-4
<PAGE>   62

                              LJ INTERNATIONAL INC.

                           CONSOLIDATED BALANCE SHEETS

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


<Table>
<Caption>
                                                                                         As of April 30
                                                                                  -------------------------------
                                                                        Notes       2000        2001        2001
                                                                                  -------     -------     -------
                                                                                    HK$         HK$         US$
<S>                                                                     <C>       <C>         <C>         <C>
ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                                       12,888      13,187       1,706
   Restricted cash                                                                 26,000      41,089       5,315
   Trade receivables, net of allowance for doubtful
    accounts (2000: HK$2,497; 2001: HK$1,580)                                      42,689      48,415       6,264
   Inventories                                                           2(f)     148,442     160,955      20,822
   Prepayments and other current assets                                            21,664      14,669       1,898
                                                                                  -------     -------     -------
                                                                                  251,683     278,315      36,005
   TOTAL CURRENT ASSETS
Property, plant and equipment, net                                       4         34,216      34,715       4,491
Investment properties, net                                                         19,100      16,300       2,109
Due from related parties                                                12(b)       3,406      10,745       1,390
Goodwill, net of accumulated amortization
   (2000: HK$21; 2001: HK$237)                                                      2,131       1,915         248
Investment securities                                                    5             --      25,386       3,284
Other investments                                                                       3           3           1
                                                                                  -------     -------     -------

TOTAL ASSETS                                                                      310,539     367,379      47,528
                                                                                  =======     =======     =======

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
   Bank overdrafts                                                       6          6,345      25,213       3,262
   Notes payable, current portion                                        6          4,070       3,788         490
   Letters of credit, gold and other loans                               6         36,200      42,484       5,496
   Trade payables                                                                  27,004      25,487       3,297
   Accrued expenses and other payables                                             10,370      18,785       2,430
   Trade deposits received                                                          7,842       2,226         288
   Due to a director                                                    12(b)          12       1,913         248
   Capitalized lease obligations, current                                7            593         180          24
   Income taxes payable                                                               452       2,452         317
                                                                                  -------     -------     -------
TOTAL CURRENT LIABILITIES                                                          92,888     122,528      15,852
Notes payable, non-current portion                                       6          6,069       2,183         283
Capitalized leased obligations, non-current                              7            213          33           4
3% convertible debentures                                                          23,190          --          --
                                                                                  -------     -------     -------
TOTAL LIABILITIES                                                                 122,360     124,744      16,139
                                                                                  -------     -------     -------

SHAREHOLDERS' EQUITY
   Common stocks, par value US$0.01 each, Authorized -
   100 million shares,
   Issued and outstanding -
   7,438,058 shares as of April 30, 2000
   8,671,615 shares as of April 30, 2001                                10            575         670          87
Share premium                                                           10         76,092      99,314      12,848
Warrant reserve                                                         10          1,622       1,622         209
Investment property revaluation reserve                                               915          --          --
Retained earnings                                                                 108,975     141,029      18,245
                                                                                  -------     -------     -------

TOTAL SHAREHOLDERS' EQUITY                                                        188,179     242,635      31,389
                                                                                  -------     -------     -------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                        310,539     367,379      47,528
                                                                                  =======     =======     =======
</Table>

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


                                      F-5
<PAGE>   63

                              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, 1998               6,146,646        475      41,597       1,622       7,465      39,098    90,257    11,676
Over-allotment of shares            10(d)    219,000         17       7,347          --          --          --     7,364       953
Deficit arising on revaluation                    --         --          --          --      (3,350)         --    (3,350)     (434)
Net income                                        --         --          --          --          --      34,157    34,157     4,419
                                           ---------  ---------   ---------   ---------   ---------   ---------   -------   -------

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        10(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           10(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
                                           =========  =========   =========   =========   =========   =========   =======   =======
</Table>

Share premium has been set up and is dealt with as disclosed in note 10 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 10(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>   64

                              LJ INTERNATIONAL INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOW

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

<Table>
<Caption>
                                                                                       Year ended April 30
                                                                         ----------------------------------------------
                                                                          1999          2000         2001         2001
                                                                         -------      -------      -------      -------
                                                               Note        HK$          HK$          HK$           US$
<S>                                                            <C>       <C>          <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before income taxes                                                34,537       35,745       33,691        4,358
Adjustments to reconcile income before income taxes
   to net cash provided by (used in) operating
   activities:
   Net interest expenses                                                   5,186        2,980        2,792          361
   Depreciation of property, plant and equipment                           4,493        4,978        5,775          746
   Amortization of organization costs                                        160        1,085           --           --
   Amortization of goodwill                                                    7            7          216           28
   Issuing costs for convertible debentures                                   --        4,524           --           --
   Loss on disposal of property, plant and equipment                         562           22           80           10
   Deficit on revaluation of investment properties                            --           --        1,885          244
   Allowance for doubtful debts                                            1,121          578         (917)        (118)
   Minority interests                                                       (273)        (405)          --           --
Changes in operating assets and liabilities:
   Trade receivables                                                      (4,225)      (9,095)      (4,809)        (622)
   Inventories                                                           (46,642)     (54,806)     (12,513)      (1,619)
   Prepayments and other current assets                                  (15,738)      (5,377)       6,995          905
   Due from related parties                                                  (97)        (654)      (7,339)        (949)
   Due from director                                                         (31)          31           --           --
   Trade payables                                                          1,884        6,247       (1,517)        (196)
   Accrued expenses and other payables                                     3,304       13,642        2,871          371
   Due to director                                                            --           12        1,901          246
   Letters of credit                                                      17,698       (8,252)       2,265          293
   Due to related parties                                                    (48)          --           --           --
                                                                         -------      -------      -------      -------

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                        1,898       (8,738)      31,376        4,058
                                                                         -------      -------      -------      -------

RETURNS ON INVESTMENTS AND SERVICING OF FINANCE:
Cash received from interest                                                1,690        2,668        3,916          507
Cash paid for interest                                                    (6,876)      (5,472)      (6,653)        (860)
                                                                         -------      -------      -------      -------
NET CASH USED IN RETURNS ON INVESTMENTS AND
   SERVICING OF FINANCE                                                   (5,186)      (2,804)      (2,737)        (353)
                                                                         -------      -------      -------      -------

TAXATION
Cash refunded (paid) for income taxes                                     (2,932)         (93)         363           47
                                                                         -------      -------      -------      -------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities                                             --           --      (25,386)      (3,284)
Purchase of property, plant and equipment                                 (7,802)      (3,477)      (6,429)        (832)
Purchase of subsidiary                                         16(a)          --       (1,830)          --           --
Proceeds on disposals of property, plant and
   equipment                                                                  --          145           75           10
                                                                         -------      -------      -------      -------

NET CASH USED IN INVESTING ACTIVITIES                                     (7,802)      (5,162)     (31,740)      (4,106)
                                                                         -------      -------      -------      -------

NET CASH USED BEFORE FINANCING ACTIVITIES                                (14,022)     (16,797)      (2,738)        (354)
                                                                         -------      -------      -------      -------

CASH FLOWS FROM FINANCING ACTIVITIES:                          16(b)
Net proceeds from issue of 3% convertible debentures                          --       45,721           --           --
Net proceeds from issue of shares/warrants                                 7,364           --           --           --
Net proceeds from sale of promissory notes                                (2,184)          --           --           --
Loans acquired                                                             9,856        8,759        4,019          520
Repayment of loans                                                        (4,925)     (12,949)      (4,168)        (539)
Repayment of capitalized leases                                             (539)        (555)        (593)         (77)
Restricted cash                                                          (12,074)     (10,815)     (15,089)      (1,952)
                                                                         -------      -------      -------      -------

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                       (2,502)      30,161      (15,831)      (2,048)
                                                                         -------      -------      -------      -------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                     (16,524)      13,364      (18,569)      (2,402)
CASH AND CASH EQUIVALENTS, AS OF BEGINNING OF YEAR                         9,703       (6,821)       6,543          846
                                                                         -------      -------      -------      -------

CASH AND CASH EQUIVALENTS, AS OF END OF YEAR                              (6,821)       6,543      (12,026)      (1,556)
                                                                         =======      =======      =======      =======

ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS
Cash                                                                       1,626       12,888       13,187        1,706
Bank overdrafts                                                           (8,447)      (6,345)     (25,213)      (3,262)
                                                                         -------      -------      -------      -------

                                                                          (6,821)       6,543      (12,026)      (1,556)
                                                                         =======      =======      =======      =======
NON-CASH TRANSACTIONS:
Purchase of equipment under capitalized leases                               469          147           --           --
                                                                         =======      =======      =======      =======
Conversion of convertible debentures                           16(c)          --       27,231       23,317        3,016
                                                                         =======      =======      =======      =======
</Table>


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


                                      F-7
<PAGE>   65

                              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 (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 (SSAP) 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.

         (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.


                                      F-8
<PAGE>   66

                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         (c)  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) and Excel Gold Industries Ltd (Excel Gold).
              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
              Marketing Co. Limited (Lorenzo Marketing) 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. As of April 30, 2001, all
              subsidiaries are 100% owned.

              The consolidated financial statements have been prepared on the
              assumption that the current corporate structure was in existence
              throughout the relevant periods where applicable after making such
              adjustments as were considered necessary.

              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

              Goodwill arising on consolidation being the excess of the purchase
              consideration payable at the time of acquisition of the
              subsidiaries over the fair values of the net underlying assets
              acquired, is amortized over a period of 10 years commencing from
              the year of acquisition. Goodwill is periodically reviewed for
              impairment based on an assessment of future operations to ensure
              they are appropriately valued.

         (e)  Statement of cash flows

              Cash equivalents in the statement of cash flow 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.


                                      F-9
<PAGE>   67

                              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)

         (f)  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
                                                  ------------------------------------------
                                                    2000             2001             2001
                                                  --------         --------         --------
                                                     HK$              HK$              US$
<S>                                               <C>              <C>              <C>
Raw materials                                       44,687           40,465            5,235
Work-in-progress                                    77,354           93,148           12,050
Finished goods                                      27,601           28,542            3,692
Less: Provision for slow moving inventories         (1,200)          (1,200)            (155)
                                                  --------         --------         --------

                                                   148,442          160,955           20,822
                                                  ========         ========         ========
</Table>

              Work-in-progress consists primarily of cut-stones, which generally
              could be sold to third parties, however, it is the Group's intent
              to manufacture these stones into finished jewelry.

              The amount of inventories carried at net realizable value is
              HK$9,319 (2000: HK$6,795).

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

              PPE is stated at cost less accumulated depreciation. 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. Expenditure incurred
              after the assets have been put into operation, such as repairs and
              maintenance and overhaul costs, is charged to the statement of
              operations in the period in which it is incurred. In situations
              where 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 assets, the expenditure is
              capitalized as an additional cost of the asset.


                                      F-10
<PAGE>   68

                              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)

         (g)  Property, plant and equipment (PPE) and depreciation (Continued)

              When the recoverable amount of an asset has declined below its
              carrying amount, the carrying amount is reduced to reflect the
              decline in value. In determining the recoverable amount of assets,
              expected future cash flows are not discounted to their present
              values.

              When assets are sold or retired, their costs or valuation and
              accumulated depreciation are removed from the accounts and any
              gain or loss resulting from their disposal is included 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 the retirement or disposal of the asset, the frozen
              revaluation reserve is transferred directly to retained earnings.

              Depreciation is calculated to write off the cost of PPE over their
              estimated useful lives from the date on which they become fully
              operational 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%
Motor vehicles                                                              20%
Plant and machinery                                                         10%
Leasehold improvement                                                       10%
</Table>

         (h)  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.


                                      F-11
<PAGE>   69

                              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)

         (h)  Investment properties (Continued)

              The investment properties were revalued close at the end of April
              2001 by Memfus Wong Surveyors Limited and Jones Lang LaSalle
              Limited, independent firms of qualified surveyors, on an open
              market value basis. During the year April 30, 2001, a deficit of
              HK$2,800 arising on revaluation has been recorded, of which HK$915
              has 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 has been charged to statement of
              operations under selling, general and administrative expenses.

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

              Investment properties include gross amount of HK$19,100 and
              HK$16,300 with no accumulated depreciation in respect of assets
              held for use under operating leases as of April 30, 2000 and 2001
              respectively.

         (i)  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.

              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.

         (j)  Deferred taxation

              Deferred taxation is provided, using the liability method, on all
              significant timing differences to the extent it is probable that
              the liability will crystallize in the foreseeable future. A
              deferred tax asset is not recognized unless its realization is
              assured beyond reasonable doubt.

         (k)  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.


                                      F-12
<PAGE>   70

                              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)  Capitalized lease obligations

              Where assets are acquired under capitalized leases, the amounts
              representing the outright purchase price of such assets are
              included in PPE and the corresponding liabilities, net of finance
              charges, are recorded as obligations under capitalized lease
              obligations. Depreciation is provided on the cost of the assets on
              a straight line basis over their estimated useful lives as set out
              in note 2(g) above. Finance charges implicit in the purchase
              payments are charged to the statement of operations over the
              periods of the contracts so as to produce an approximately
              constant periodic rate of charge on the remaining balances of the
              obligations for each accounting period.

         (m)  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.

         (n)  Revenue recognition

              Revenue is recognized when it is probable that the economic
              benefits will flow to the Group and when the revenue 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 relating to operating leases is recognized in
                   the period in which the properties are let out and on the
                   straight-line basis over the lease terms.

         (o)  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, 2001 has been made at HK$7.73 to
              US$1.00.


                                      F-13
<PAGE>   71


                              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)

         (p)  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.

         (q)  Earnings per share

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

              The calculation of diluted EPS 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 EPS by
              application of the if-converted method.

         (r)  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.


3.       OPERATING RISKS

         (a)  Concentrations of credit risks

              Details of major customers from which the Group derived operating
              revenue are shown in note 18(c).

              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 exposed to significant credit risk with regards to
              collection of the related receivables. Historical losses have not
              been significant.


                                      F-14
<PAGE>   72


                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


3.       OPERATING RISKS (CONTINUED)

         (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 located in
              Hong Kong. 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-15
<PAGE>   73


                              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, 2000                   4,970        17,421         9,996         15,081          2,811         50,279          6,504
Addition                            --         2,654         2,322          1,374            120          6,470            837
Disposal                            --            --          (321)            (5)          (120)          (446)           (58)
                               -------       -------       -------        -------        -------        -------        -------

AT APRIL 30, 2001                4,970        20,075        11,997         16,450          2,811         56,303          7,283
                               -------       -------       -------        -------        -------        -------        -------

ACCUMULATED DEPRECIATION
At May 1, 2000                     856         4,010         5,787          3,963          1,447         16,063          2,078
Charge for the year                140         1,944         1,667          1,484            540          5,775            746
Disposal                            --            --          (249)            (1)            --           (250)           (32)
                               -------       -------       -------        -------        -------        -------        -------

AT APRIL 30, 2001                  996         5,954         7,205          5,446          1,987         21,588          2,792
                               -------       -------       -------        -------        -------        -------        -------

NET BOOK VALUE
AT APRIL 30, 2001                3,974        14,121         4,792         11,004            824         34,715          4,491
                               =======       =======       =======        =======        =======        =======        =======

At April 30, 2000                4,114        13,411         4,209         11,118          1,364         34,216          4,426
                               =======       =======       =======        =======        =======        =======        =======
</Table>


                                      F-16
<PAGE>   74


                              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 (CONTINUED)

         (a)      The net book value of the property, plant and equipment
                  includes an amount of HK$1,205 and HK$283 in respect of assets
                  held under capitalized leases as of April 30, 2000 and April
                  30, 2001 respectively. Depreciation charge in respect of these
                  assets for the years ended April 30, 2000 and 2001 amounted to
                  HK$463 and HK$489 respectively.

         (b)      The Group has pledged all land and buildings to collaterize
                  general banking facilities granted to the Group as of April
                  30, 2000 and April 30, 2001 (see note 6).


5.       INVESTMENT SECURITIES

<Table>
<Caption>
                                                 As of April 30
                                   -------------------------------------------
                                     2000             2001              2001
                                   --------        ---------          --------
                                     HK$              HK$               US$
<S>                                <C>             <C>                <C>
At Cost:
  Equity securities, unlisted            --           25,386             3,284
                                   ========        =========          ========
</Table>

         Investment securities represent equity interests in two private
         companies of which the Group has no significant influence over their
         operating and financial policies.


6.       BANKING FACILITIES AND OTHER LOANS

<Table>
<Caption>
                                                                                      As of April 30
                                                                             --------------------------------
                                                                              2000         2001         2001
                                                                             ------       ------       ------
                                                                   Note        HK$         HK$          US$
<S>                                                                <C>       <C>          <C>          <C>
BANK OVERDRAFTS                                                    (a)        6,345       25,213        3,262
                                                                             ======       ======       ======

NOTES PAYABLE:
    Current portion                                                           4,070        3,788          490
    Non-current portion                                                       6,069        2,183          283
                                                                             ------       ------       ------

                                                                   (b)       10,139        5,971          773
                                                                             ======       ======       ======

LETTERS OF CREDIT, GOLD AND OTHER LOANS:
    Letters of credit                                              (a)       25,941       28,206        3,649
    Gold loan                                                      (c)       10,259       14,278        1,847
                                                                             ------       ------       ------

                                                                             36,200       42,484        5,496
                                                                             ======       ======       ======
</Table>


                                      F-17
<PAGE>   75
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


6.       BANKING FACILITIES AND OTHER LOANS (CONTINUED)

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

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

<Table>
<Caption>
                                As of April 30
                          ----------------------------
                           2000       2001       2001
                          ------     ------     ------
                           HK$        HK$        US$
<S>                       <C>        <C>        <C>
FACILITIES GRANTED
Letters of credit         66,500     86,000     11,125
Overdrafts                36,500     48,500      6,274
                          ======     ======     ======

UTILIZED
Letters of credit         25,941     28,206      3,649
Overdrafts                 6,345     25,213      3,262
                          ======     ======     ======

UNUTILIZED FACILITIES
Letters of credit         40,559     57,794      7,476
Overdrafts                30,155     23,287      3,012
                          ======     ======     ======
</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 7.0% to 7.5% per annum as of April 30,
                  2001 (2000: 9.25% to 11% 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-18
<PAGE>   76
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


6.       BANKING FACILITIES AND OTHER LOANS (CONTINUED)

         (b)      The Group also had mortgage loans classified under notes
                  payable which are related to the Group's investment
                  properties. These loans aggregated to HK$10,139 and HK$5,971
                  as of April 30, 2000 and 2001 respectively. Interest charges
                  on these loans range from 9% to 9.5% per annum as of April 30,
                  2001 (2000: 10.75% to 11.5% per annum).


                  Expected maturities of notes payable are as follows:

<Table>
<Caption>
           As of April 30, 2001
           --------------------
            HK$           US$
<S>        <C>           <C>
2002       3,788           490
2003       2,183           283
           -----         -----

           5,971           773
           =====         =====
</Table>

         (c)      The Group had outstanding loans to purchase 4.85 and 6.95 oz
                  of gold as of April 30, 2000 and 2001 with the related
                  balances being HK$10,259 and HK$14,278 respectively. These
                  loans are due within the next year, however, have been
                  historically renewed. These loans bear interest at 2% to 2.9%
                  as of April 30, 2001 (2000: 3.15% to 3.45%) 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$338 and HK$343 for the years ended
                  April 30, 2000 and 2001 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-19
<PAGE>   77
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


7.       CAPITALIZED LEASE OBLIGATIONS

<Table>
<Caption>
                                                  As of April 30
                                                --------------------
                                                2000    2001    2001
                                                ----    ----    ----
                                                HK$     HK$     US$
<S>                                             <C>     <C>      <C>
Capitalized lease obligations:
    Within one year                             593     180      24
    In the second to fifth years inclusive      213      33       4
                                                ---     ---     ---

                                                806     213      28
                                                ===     ===     ===
</Table>

         The following is a schedule of future minimum lease payments under
         capitalized leases as of April 30, 2001:

<Table>
<Caption>
                                                HK$     US$
<S>                                             <C>     <C>
Future minimum lease payments                   278      36
Less: Amount representing interest               65       8
                                                ---     ---

Present value of net minimum lease payments     213      28
Less: Current portion                           180      24
                                                ---     ---

                                                 33       4
                                                ===     ===
</Table>

         Finance charges on capitalized lease obligations for the years ended
         1999, 2000 and 2001 were HK144, HK$147 and HK$157 respectively.


8.       CONTINGENT LIABILITIES

         As of April 30, 2000 and 2001, the Group had contingent liabilities in
         respect of bills discounted with recourse amounting to HK$Nil and
         HK$331 respectively.

         As of April 30, 2000 and 2001, the Group provided guarantee in respect
         of a loan facility granted to a company, to the extent of HK2,319
         (US$300) and HK$Nil plus the related interests respectively.


                                      F-20
<PAGE>   78

                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


9.       COMMITMENTS

         (a)      Capital expenditure commitments

                  As of April 30, 2000 and 2001, the Group had capital
                  expenditure commitments contracted but not provided for net of
                  deposit paid amounting to HK$Nil and HK$1,641 (US$212)
                  respectively.

         (b)      Operating leases commitments

                  As of April 30, 2000 and 2001, the Group had outstanding
                  commitments not provided for under non-cancellable operating
                  leases in respect of land and buildings, the portion of these
                  commitments which are payable in the following year is as
                  follows:

<Table>
<Caption>
                                                     As of April 30
                                                -------------------------
                                                2000      2001      2001
                                                -----     -----     -----
                                                HK$       HK$        US$
<S>                                             <C>       <C>       <C>
Operating leases which expire:
     Within one year                            1,288       277        36
     In the second to fifth years inclusive     1,719     3,414       442
                                                -----     -----     -----

                                                3,007     3,691       478
                                                =====     =====     =====
</Table>


10.      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.

                                      F-21
<PAGE>   79

                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


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

         (c)      In addition to note 10(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 14,
                  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.

                  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 year. The
                  Company had 7,438,058 shares and 8,671,615 shares of common
                  stock outstanding as of April 30, 2000 and 2001 respectively.


                                      F-22
<PAGE>   80
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


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

         (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 an
                  expiration date of five years (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.

         None of the warrants as aforesaid was exercised for each of the years
         in the three year period ended April 30, 2001.

11.      STOCK BASED COMPENSATION PLAN

         As of June 1, 1998, the Company adopted a stock option plan (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, 2000, 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-23
<PAGE>   81

                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


11.      STOCK BASED COMPENSATION PLAN (CONTINUED)

         (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.

         There were 1,550,000 and 3,376,000 incentive stock options issued and
         exercisable as of April 30, 2000 and 2001 respectively.


12.      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 shareholders
                Limited
              Hong Kong Brasil Lapidary Limited                   Common director and major shareholders
              International Asset Management Limited              Common director
              iBBC (H.K.) Limited                                 Common director and major shareholder
</Table>

         (b)      Summary of related party transactions

<Table>
<Caption>
                                                                                        As of April 30
                                                                          -------------------------------------
                                                                            2000          2001           2001
                                                                          -------        -------        -------
                                                              Note          HK$            HK$            US$
<S>                                                           <C>         <C>            <C>            <C>
Due from related parties:
    Gemological Institute of America,
      Hong Kong Limited                                                     3,406          3,619            468
    iBBC (H.K.) Limited                                                        --          7,126            922
                                                                          -------        -------        -------

                                                                (i)         3,406         10,745          1,390
                                                                          =======        =======        =======

Due to related party:
    Yih Yu Chuan                                                (i)           (12)        (1,913)          (248)
                                                                          =======        =======        =======


Certain banking facilities granted to
  the Group collateralized by properties
  owned by Yih Yu Chuan and his
  personal guarantee to the extent of                                      52,684         59,390          7,683
                                                                          =======        =======        =======
</Table>


                                      F-24
<PAGE>   82
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


12.      RELATED PARTY TRANSACTIONS (CONTINUED)

<Table>
<Caption>
                                                                                 Year ended April 30
                                                                     -----------------------------------------
                                                         Notes       1999        2000        2001        2001
                                                                     -----       -----       -----       -----
                                                                      HK$         HK$         HK$         US$
<S>                                                      <C>         <C>         <C>         <C>         <C>
Directors' emoluments                                     (ii)       2,083       4,977       7,369         953
                                                                     =====       =====       =====       =====

Sales:
    Gemological Institute of
      America, Hong Kong Limited                                        71          --          --          --
    iBBC (H.K.) Limited                                                 --          --       1,219         158
    Hong Kong Brasil Lapidary Limited                                    3          --          --          --
                                                                     -----       -----       -----       -----
                                                          (iii)         74          --       1,219         158
                                                                     =====       =====       =====       =====
Rental income:
    iBBC (H.K.) Limited                                   (iv)          --          --         161          21
                                                                     =====       =====       =====       =====

Management fee income:
    Gemological Institute of
      America, Hong Kong Limited                                        --         282         212          27
    iBBC (H.K.) Limited                                                 --          --         250          32
                                                                     -----       -----       -----       -----
                                                          (v)           --         282         462          59
                                                                     =====       =====       =====       =====
Advances to:
    iBBC (H.K.) Limited                                   (vi)          --          --       5,495         711
                                                                     =====       =====       =====       =====

Consultancy and professional fees paid
    and payable:
    International Asset Management
      Limited                                             (vii)        283         873          --          --
                                                                     =====       =====       =====       =====
</Table>

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

(ii)     The emoluments were determined by the directors.

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

(iv)     During the year ended April 30, 2001, the Group leased certain office
         space to a related party at HK$40 per month. The monthly charge was
         determined by the directors.

(v)      During the years ended April 30, 2000 and 2001, the Group received
         management fee income from related parties. The management fees were
         determined by the directors.

(vi)     The advances were expenses paid on behalf of a related party with terms
         stated in note 12(i) above.

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


                                      F-25
<PAGE>   83

                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


13.      STAFF RELATED COSTS

<Table>
<Caption>
                                                                   Year ended April 30
                                                   ------------------------------------------------
                                       Notes        1999           2000         2001         2001
                                                   ------       ---------    ---------    ---------
                                                     HK$            HK$          HK$         US$
<S>                                    <C>         <C>          <C>          <C>          <C>
Salaries, bonus and welfares                       50,543          66,029       71,857        9,296
Pension expense                        13(a)          446             483          809          104
                                                   ------       ---------    ---------    ---------

Total Staff Cost                                   50,989          66,512       72,666        9,400
                                                   ======       =========    =========    =========
</Table>

         (a)   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, 1999, 2000 and 2001 was HK$22, HK$224 and
               HK$14 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 are charged to the statement of
               operations.


                                      F-26
<PAGE>   84

                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


14.      INCOME TAXES

         Reconciliation to the expected statutory tax rate in Hong Kong of 16%
         (2000: 16% and 1999: 16%) is as follows:

<Table>
<Caption>
                                              Year ended April 30
                                         ----------------------------
                                         1999        2000        2001
                                         ----        ----        ----
                                          %           %           %
<S>                                      <C>         <C>         <C>
Statutory rate                           16.0        16.0        16.0
Tax effect of net operating losses        1.4         5.1         6.1
Non taxable PRC profits                 (15.4)      (16.3)      (17.7)
Others                                   (0.9)       (4.7)        0.4
                                         ----        ----        ----
Effective rate                            0.1         4.8         1.1
                                         ====        ====        ====
</Table>

         Income tax expense is comprised of the following:

<Table>
<Caption>
                                                      Year ended April 30
                                        ------------------------------------------------
                                         1999          2000          2001          2001
                                        ------        ------        ------        ------
                                         HK$           HK$            HK$           US$
<S>                                     <C>           <C>           <C>           <C>
Current taxes:
    For the year                           520         1,207         1,845           238
    Over provision in prior years         (140)       (1,182)         (208)          (27)
                                        ------        ------        ------        ------

Income tax expense                         380            25         1,637           211
                                        ======        ======        ======        ======
</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%
         (2000: 16% and 1999: 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-27
<PAGE>   85
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


14.      INCOME TAXES (CONTINUED)

         At the balance sheet date, major components of the deferred taxation
         liabilities (assets) unprovided are as follows:

<Table>
<Caption>
                                                     As of April 30
                                               ------------------------
                                               2000      2001      2001
                                               ----      ----      ----
                                               HK$       HK$       US$
<S>                                            <C>       <C>       <C>
Excess of tax allowances over depreciation      385         7         1
Tax losses carried forward                     (923)     (332)      (43)
                                               ----      ----      ----

                                               (538)     (325)      (42)
                                               ====      ====      ====
</Table>


15.      POST BALANCE SHEET EVENT

         (a)      Subsequent to April 30, 2001, the Group has entered into a
                  sales and purchase agreement to acquire a property for an
                  aggregate consideration of approximately HK$1,430 (US$185)
                  (2000: HK$Nil).

         (b)      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
                  will 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.

         (c)      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 May 27, 2001,
                  the Company issued to the consultant the said warrants at
                  US$2.79 (HK$21.57) per share exercisable through May 26, 2002.
                  In addition, the Company is also required to place further
                  200,000 common stock purchase warrants in escrow saved for
                  delivery to the consultant in accordance with the terms of an
                  escrow agreement.


                                      F-28
<PAGE>   86
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


16.      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 for a consideration of
                  HK$1,830.


<Table>
<Caption>
                                             HK$
<S>                                        <C>
Net liabilities acquired:
   Property, plant and equipment                4
   Trade receivables                          125
   Inventories                                512
   Cash and cash equivalents                   99
   Trade payables                             (68)
   Accrued expenses and other payables     (1,291)
                                           ------
                                             (619)
Interest attributable to the Group
   as of March 22, 2000                       372
Goodwill arising from acquisition           2,077
                                           ------

Total purchase consideration                1,830
                                           ======

Satisfied by cash                           1,830
                                           ======
</Table>

         There was no acquisition for each of the years ended April 30, 1999 and
         2001.


                                      F-29
<PAGE>   87

                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


16.      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, 1998                            43,694        19,657          1,284             --
Cash provided by financing                       7,364            --             --             --
New (Repayment of) loans, net                       --         4,931           (539)            --
Inception of capitalized lease contracts            --            --            469             --
                                               -------       -------        -------        -------

As of April 30, 1999                            51,058        24,588          1,214             --
Cash provided by financing                      27,231            --             --             --
New (Repayment of) loans, net                       --        (4,190)          (555)        23,190
Inception of capitalized lease contracts            --            --            147             --
                                               -------       -------        -------        -------

As of April 30, 2000                            78,289        20,398            806         23,190
Conversion of convertible debenture
  (note c)                                      23,317            --             --        (23,190)
Repayment of loans, net                             --          (149)          (593)            --
                                               -------       -------        -------        -------

As of April 30, 2001                           101,606        20,249            213             --
                                               =======       =======        =======        =======
</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
                 Group's common stock respectively.


                                      F-30
<PAGE>   88

                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


17.      OTHER SUPPLEMENTARY INFORMATION

         The following items are included in the consolidated statements of
         operations in arriving at income before income taxes:

<Table>
<Caption>
                                                       Year ended April 30
                                          -------------------------------------------------
                                           1999          2000           2001          2001
                                          -------       -------       -------       -------
                                            HK$           HK$           HK$            US$
<S>                                       <C>           <C>           <C>           <C>
(a)   Finance costs:
      Interest expenses                     6,876         5,648         6,710           868
      Issuing costs for convertible
        debentures                             --         4,524            --            --
                                          -------       -------       -------       -------
                                            6,876        10,172         6,710           868
                                          =======       =======       =======       =======

(b)   Other items:
      Cost of inventories                  62,022       125,702       166,158        21,495
      Operating leases charges in
         respect of premises                3,281         3,759         4,267           552
      Direct expenses attributable
         to rental income                       2            29            18             2
                                          =======       =======       =======       =======
</Table>


                                      F-31
<PAGE>   89
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


18.      REPORT ON SEGMENT INFORMATION

         (a)      The Group has operations in the following geographical areas:

<Table>
<Caption>
                                                             Year ended April 30
                                            --------------------------------------------------------
                                              1999            2000            2001            2001
                                            --------        --------        --------        --------
                                              HK$             HK$              HK$           US$
<S>                                         <C>             <C>             <C>             <C>
Operating revenue:
Sales to customers outside the Group:
     United States of America
       & Canada                              178,930         231,751         297,321          38,463
     Hong Kong                                   630          20,395           4,631             599
     Europe and other countries               13,467          45,330          54,330           7,028
     PRC                                          37           2,413             569              74
     Japan                                     2,155           1,012             934             121
                                            --------        --------        --------        --------

                                             195,219         300,901         357,785          46,285
                                            ========        ========        ========        ========

Income taxes:
     Hong Kong                                   380              25           1,618             208
     PRC                                          --              --              19               3
                                            --------        --------        --------        --------

                                                 380              25           1,637             211
                                            ========        ========        ========        ========


Segment profit:
     Hong Kong                                 6,335           1,557           5,404             699
     PRC                                      33,008          37,143          29,431           3,808
Interest expenses, net                        (5,186)         (2,980)         (2,781)           (360)
                                            --------        --------        --------        --------

Net income                                    34,157          35,720          32,054           4,147
                                            ========        ========        ========        ========
</Table>

<Table>
<Caption>
                                  As of April 30
                      -----------------------------------
                       2000           2001          2001
                      -------       -------       -------
                        HK$           HK$           US$
<S>                   <C>           <C>            <C>
Segment assets:
     Hong Kong        181,387       235,874        30,516
     PRC              129,152       131,505        17,012
                      -------       -------       -------

                      310,539       367,379        47,528
                      =======       =======       =======
</Table>


                                      F-32
<PAGE>   90
                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


18.      REPORT ON SEGMENT INFORMATION (CONTINUED)

         (b)      The Group operates in two segments, the manufacture of jewelry
                  and holding of investment properties. Information regarding
                  these segments is as follows:

<Table>
<Caption>
                                                            Year ended April 30
                                           ------------------------------------------------------
                                             1999           2000            2001           2001
                                           --------       --------        --------       --------
                                              HK$            HK$            HK$             US$
<S>                                        <C>            <C>             <C>            <C>
Revenues:
    Manufacture of jewelry                  195,219        300,901         357,785         46,285
    Holding of investment properties            474            875             480             62
                                           --------       --------        --------       --------

                                            195,693        301,776         358,265         46,347
                                           ========       ========        ========       ========

Income tax provision (credit):
    Manufacture of jewelry                      305           (110)          1,563            202
    Holding of investment properties             75            135              74              9
                                           --------       --------        --------       --------

                                                380             25           1,637            211
                                           ========       ========        ========       ========

Segment profit:
    Manufacture of jewelry                   33,685         34,874          31,592          4,087
    Holding of investment properties            472            846             462             60
                                           --------       --------        --------       --------

                                             34,157         35,720          32,054          4,147
                                           ========       ========        ========       ========
</Table>

                  All of the Group's depreciation expenses and capital
                  expenditures during the three years ended April 30, 2001
                  relate to the manufacture of jewelry.

<Table>
<Caption>
                                                   As of April 30
                                       -----------------------------------
                                         2000          2001          2001
                                       -------       -------       -------
                                         HK$           HK$            US$
<S>                                    <C>           <C>           <C>
Segment assets:
Manufacture of jewelry                 289,308       349,164        45,171
Holding of investment properties        19,100        16,300         2,109
Unallocated - goodwill                   2,131         1,915           248
                                       -------       -------       -------

                                       310,539       367,379        47,528
                                       =======       =======       =======
</Table>


                                      F-33
<PAGE>   91

                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


18.      REPORT ON SEGMENT INFORMATION (CONTINUED)

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

<Table>
<Caption>
                                              Year ended April 30
                     -------------------------------------------------------------------
                              1999                    2000                    2001
                     -------------------     -------------------     -------------------
                        HK$           %        HK$            %        HK$            %
<S>                  <C>              <C>    <C>              <C>    <C>              <C>
QVC Network Inc.     112,170          57     136,077          45     168,882          47
QVC - Europe          12,832           7      40,769          14      45,308          13
</Table>

                  Accounts receivable related to these major customers were
                  HK$12,041 as of April 30, 2000 and HK$10,025 as of April 30,
                  2001.


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.


                                      F-34
<PAGE>   92

                              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

              Under HK GAAP, there are no specific requirements to recognize the
              compensation cost arising from stock options granted to employees
              on the financial statements.

              Under US GAAP, the Company adopted the provisions of SFAS No. 123
              "Accounting for Stock-Based Compensation". 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 to 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:

<Table>
<Caption>
                                         Year ended April 30
                                 ----------------------------------
                                   2000         2001         2001
                                 --------     --------     --------
                                    HK$          HK$          US$
<S>                                <C>          <C>           <C>
Pro forma net income               34,124       21,094        2,729
                                 ========     ========     ========

Pro forma earnings per share
   Basic                             5.18         2.46         0.32
                                 ========     ========     ========
   Diluted                           4.95         2.46         0.32
                                 ========     ========     ========
</Table>

              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>


                                      F-35
<PAGE>   93

                              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)

                  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, 1999, 2000 and 2001 are
                  summarized as follows:

<Table>
<Caption>
                                                               Year ended April 30
                           ---------------------------------------------------------------------------------------
                                       1999                        2000                           2001
                           --------------------------   ---------------------------   ----------------------------
                                             Weighted                      Weighted                       Weighted
                                              average                       average                        average
                                             exercise                      exercise                       exercise
                                               price                         price                          price
                            Options             US$      Options              US$      Options               US$
<S>                        <C>               <C>        <C>                <C>        <C>                 <C>
Outstanding and
  exercisable,
  beginning of year               --             --      1,285,000            5.0      1,550,000            5.00
Granted                    1,285,000            5.0        265,000            5.0      5,226,000            2.35
Cancelled                         --             --             --             --     (3,400,000)           3.91
                           ---------                    ----------                    ----------

Outstanding and
  exercisable, end of
  year                     1,285,000            5.0      1,550,000            5.0      3,376,000            2.00
                           =========                    ==========                    ==========

Weight average
  remaining
  contractual life          10 years                    9.13 years                    7.06 years
                           =========                    ==========                    ==========
</Table>


                                      F-36
<PAGE>   94

                              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 10(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 10(e)). During the year, the Company
               further issued to consultants 160,000 stock options to purchase
               shares of the Company's 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 or options at the date of issue. Using the Black-Scholes
               option pricing model with the same weighted-average assumptions
               as employees' stock options, the fair value of these warrants and
               options were estimated as HK$Nil and HK$754 respectively for the
               year ended April 30, 2001 (2000: HK$464 and HK$Nil respectively).
               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)). Accordingly, there
               was no effect on the shareholders' equity under US GAAP.


         (e)   Discount on convertible debentures

               In connection with the convertible debentures issued with
               detachable warrants to a placement agent (see note 10(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.


                                      F-37
<PAGE>   95

                              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)


         (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
              last financial year, 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, 2000 and 2001, there is no
              additional capitalized deferred cost incurred.


         (g)  Earnings per share

              Under US GAAP shares issued in connection with Deen Merger (see
              note 10(a)) 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 note 10) 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 EPS computation which is
              computed by using the average market prices during the three
              months included in the reporting period.


                                      F-38
<PAGE>   96

                              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)

         (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, 2001 was
                    estimated at HK$16,300 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). 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.


         (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(h)). Under US GAAP investment properties are recorded
              at their historical costs. This would have reduced the carrying
              values by HK$3,212 and HK$1,885 as of April 30, 2000 and 2001
              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. 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 the years ended
              April 30, 1999, 2000 and 2001 by HK$424, HK$424 and HK$424
              respectively with no related income tax effect.


                                      F-39
<PAGE>   97

                              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)


         (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, 2001 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-40
<PAGE>   98

                              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
              note 19(d) and (e) in respect of the stock-based transactions and
              discount on convertible debentures, effects on the warrant reserve
              under US GAAP are as follows:

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

              -   the stock-based compensation costs of HK$464 and HK$754
                  arising from the issue of warrants and options to consultants
                  were recorded in the Company's warrant reserve for the year
                  ended April 30, 2000 and 2001 respectively.

              However, no adjustment would be required to total shareholders'
              equity.


         (n)  Operating income

              Under HK GAAP, interest income of HK$1,690, HK$2,668 and HK$3,929
              for each of the years in the three-year period ended April 30,
              2001 has been included in arriving at the operating income, while
              under US GAAP, such income is excluded. Accordingly, the
              operating income under US GAAP would be HK$39,450, HK$42,844 and
              HK$36,472 for each of the years in the three-year period ended
              April 30, 2001.


         (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 as defined by SFAS No. 130 for any of the periods
              presented.


         (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. In addition, under US GAAP, movements of
              advances from banks repayable within three months from the date of
              the advance are included under financing activities whereas under
              HK GAAP, such advances are included in cash and cash equivalents
              and their movements are shown as change in cash and cash
              equivalents.


                                      F-41
<PAGE>   99
                              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
                                                          ----------------------------------------------------------
                                                             1999            2000           2001            2001
                                                          ----------      ----------      ----------      ----------
                                                  Note        HK$             HK$             HK$             US$
<S>                                               <C>     <C>             <C>             <C>             <C>
Net income as reported under HK GAAP                          34,157          35,720          32,054           4,147
US GAAP material adjustments:
     Depreciation on investment properties        (i)           (424)           (424)           (424)            (55)
     Depreciation on property                     (j)            (48)            (48)            (48)             (6)
     Deficit on revaluation of investment
       property                                   (i)             --              --           1,885             244
     Amortization of Deen Merger costs            (f)             83             686              --              --
     Amortization of goodwill                     (a)              7               7               7               1
     Amortization of financial consulting
       fee paid to the representative in
       the public offering                        (b)           (417)           (275)           (143)            (18)
     Amortization of discount on
       convertible debentures                     (e)             --            (238)           (296)            (38)
     Compensation costs for consulting
       services                                   (d)             --            (136)           (754)            (98)
     Compensation costs for agency services       (d)             --            (328)             --              --
                                                          ----------      ----------      ----------      ----------

Net income under US GAAP                                      33,358          34,964          32,281           4,177
                                                          ==========      ==========      ==========      ==========

Numerator:
Net income used in computing basic earnings
  per share under US GAAP                                     33,358          34,964          32,281           4,177
Interest on 3% convertible debentures                             --             251             127              16
                                                          ----------      ----------      ----------      ----------

Net income used in computing diluted
  earnings per share under US GAAP                            33,358          35,215          32,408           4,193
                                                          ==========      ==========      ==========      ==========

Denominator:
Weighted average number of shares
  outstanding under US GAAP - basic                        6,347,046       6,589,415       8,567,366       8,567,366

Effect of dilutive potential ordinary shares:
     3% convertible debentures                                    --         337,239          48,753          48,753
     Warrants                                                     --          17,986              --              --
     Stock options                                               514              --             731             731
                                                          ----------      ----------      ----------      ----------

Weighted average number of shares
  outstanding under US GAAP - diluted                      6,347,560       6,944,640       8,616,850       8,616,850
                                                          ==========      ==========      ==========      ==========

Earnings per share under US GAAP
     - Basic                                                    5.26            5.31            3.77            0.49
                                                          ==========      ==========      ==========      ==========

     - Diluted                                                  5.26            5.07            3.76            0.49
                                                          ==========      ==========      ==========      ==========
</Table>


                                      F-42
<PAGE>   100

                              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 shareholders' equity of
         the differences between HK GAAP and US GAAP.

<Table>
<Caption>
                                                                            As of April 30
                                                                ------------------------------------
                                                                  2000          2001          2001
                                                                --------      --------      --------
                                                       Note        HK$           HK$           US$
<S>                                                    <C>      <C>           <C>           <C>
Shareholders' equity as reported under HK GAAP                   188,179       242,635        31,389
Cumulative effect of depreciation on investment
  properties                                            (i)       (2,546)       (2,970)         (384)
Cumulative effect of depreciation on property           (j)         (585)         (633)          (82)
Deferral of future financial consulting paid to the
  representative in the public offering                 (b)          143            --            --
Unamortized discount on convertible debentures          (e)          296            --            --
Reduction for goodwill recorded on the merger of
  the Company and Lorenzo                               (a)          (54)          (47)           (6)
Deficit (Surplus) arising on revaluation of
  investment properties                                 (i)       (3,212)        1,885           244
Deficit frozen upon transfer of an investment
  property to land and building                         (j)        2,297            --            --
                                                                --------      --------      --------

Shareholders' equity under US GAAP                      *        184,518       240,870        31,161
                                                                ========      ========      ========
</Table>

         *   The comparative information regarding the shareholders' equity
             under US GAAP has been restated to conform to the current year's
             presentation.

         Impact of recently issued US GAAP accounting standards

         Consolidation

         In July 2001, the Financial Accounting Standards Board ("FASB") issued
         SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and
         Other Intangible Assets". The adoption of SFAS No. 141 would not have
         affected the accounting for the reorganization of the Group completed
         on May 6, 1997.

         SFAS No. 142 changes the accounting treatment for goodwill from an
         amortization method to an impairment-only approach. Thus, amortization
         of goodwill, including goodwill recorded in past business combinations,
         will cease upon adoption of this SFAS, which for companies with
         calendar year ends, will be January 1, 2002.


                                      F-43
<PAGE>   101

                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


         Derivatives

         In June 1998, FASB issued SFAS No. 133 "Accounting for Derivative
         Instruments and Hedging Activities". The standard, as amended by SFAS
         No. 137 "Accounting for Derivative Instruments and Hedging Activities -
         Deferral of the effective date of FASB Statement no. 133 and amendment
         of FASB Statement no. 133", and SFAS No. 138, "Accounting for certain
         Derivative Instruments and certain Hedging Activities, an amendment of
         FASB Statement no. 133", is effective for all fiscal quarters of all
         fiscal years beginning after June 15, 2000 (May 1, 2001 for the Group).
         SFAS No. 133 requires that all derivative instruments be recorded on
         the balance sheet at their fair value. Changes in the fair value of
         derivatives are recorded each period in current earnings or in other
         comprehensive income, depending on whether a derivative is designated
         as part of a hedging relationship and, if it is, depending on the type
         of hedging relationship.

         The Group will adopt SFAS No. 133 on May 1, 2001. As the use of
         derivative financial instruments by the Group is limited, the impact of
         the adoption of SFAS No. 133 on the consolidated financial statements
         of the Group is not expected to be material.

         Transfers and servicing of financial assets and extinguishments of
         liabilities In September 2000, FASB issued SFAS No. 140, "Accounting
         for Transfers and Servicing of Financial Assets and Extinguishments of
         Liabilities, a replacement of FASB no. 125". This statement provides
         accounting and reporting standards for transfers and servicing of
         financial assets and extinguishments of liabilities. Under these
         standards, after a transfer of financial assets, an entity recognizes
         the financial and servicing assets it controls and the liabilities it
         has incurred, derecognizes financial assets when control has been
         surrendered, and derecognizes liabilities when extinguished. This
         statement provides consistent standards for distinguishing transfers of
         financial assets that are sales from transfers that are secured
         borrowings. This statement is effective for transfers and servicing of
         financial assets and extinguishments of liabilities occurring after
         March 31, 2001. The Group does not expect that the adoption of SFAS No.
         140 will have a material impact on its results of operations, financial
         position or cash flows.


         Impact of recently issued HK GAAP accounting standards

         During 2000 and 2001, HKSA issued and revised several SSAPs, the impact
         of these standards to the Group are summarized as follows:

         SSAP No. 14 "Leases" was revised in February 2000. It introduces some
         amendments to the basis of accounting for finance and operating leases,
         and to the disclosures specified for the Group's leasing arrangements,
         which is effective to the accounting periods beginning on or after July
         1, 2000. These changes have no material effect on the results for the
         current or prior accounting periods.


                                      F-44
<PAGE>   102

                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


         In January 2001, HKSA revised SSAP No. 9 "Events after the balance
         sheet date" and issued SSAP No. 28 "Provision, contingent liabilities
         and contingent assets", SSAP No. 29 "Intangible assets", SSAP No. 31
         "Impairment of assets" and SSAP No. 32 "Consolidated financial
         statements and accounting for investments in subsidiaries".

         The amendment of the new standard SSAP No. 9 is only the treatment of
         proposed dividends that if dividends are declared or proposed after the
         balance sheet date, the enterprise should not recognize those dividends
         as a liability at the balance sheet date.

         SSAP No. 28 was issued and set out the criteria to recognize the
         provision and is effective to the financial statements with accounting
         period beginning from 1 January 2001.

         SSAP No. 29 applies to all intangible assets that are not specifically
         dealt within other SSAPs. It requires that an intangible asset should
         be recognized if, and only if, it is probable that future economic
         benefits attributable to the asset will flow to the enterprise and the
         cost of the asset can be measured reliably.

         SSAP No. 31 requires all assets, other than inventories, construction
         contract assets, deferred assets, financial assets and investment
         properties, subject to an impairment test. The standard sets out
         factors to be considered at each balance sheet date which may indicate
         that the carrying amount of an asset is impaired. The standard is
         applicable for the financial statements beginning on or after January
         1, 2001.

         SSAP No. 32 adopts a wider definition of a subsidiary. The legal
         definition still use, when it conflict with the wider definition, but
         in such case, additional disclosures are required to enable the user of
         the consolidated financial statements to assess the effects as if this
         standard had been fully complied with.

         SSAP No. 17 was revised in April 2001. The principal issues in
         property, plant and equipment are the timing of recognition of the
         assets, the determination of their carrying amounts and the
         depreciation charges to be recognized in relation to them. The major
         impact to the Group is in determining the impairment loss of an item of
         property, plant and equipment. It should follow the requirements under
         SSAP No. 31, which is effective from the accounting period beginning
         from January 1, 2001.

         In June 2001, SSAP No. 30 "Business combinations" was issued. The main
         features of the new standard is the accounting treatment for business
         combination and goodwill arising from acquisition. The standard takes
         the view that an acquirer should always be identifiable in every
         business combination, accordingly an acquisition should be accounted
         for using purchase method.

         Other than as specifically described above, the Group does not expect
         that the adoption of these new standards will have a material impact on
         its results of operations, financial position or cash flows.


                                      F-45
<PAGE>   103



                                   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:         September 25, 2001             By: /s/ YU CHUAN YIH
       --------------------------------          -------------------------------
                                                 Yu Chuan Yih
                                                 Chairman


<PAGE>   104
                                INDEX TO EXHIBITS

<Table>
<Caption>
Exhibit Number    Description
--------------    -----------
<S>               <C>
   1.1             Memorandum of Association of the Company - incorporated by
                   reference to the Exhibits to our Registration Statement on
                   Form F-1, SEC File No. 333-7912, declared effective on April
                   15, 1998.

   1.2             Articles of Association of the Company - incorporated by
                   reference to the Exhibits to our Registration Statement on
                   Form F-1, SEC File No. 333-7912, declared effective on April
                   15, 1998.

   2.1             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.

   4.1             Agreement with QVC, Inc. - incorporated by reference to the
                   Exhibits to our Post Effective Amendment No. 3 to the
                   Registration Statement on Form F-1, SEC File No. 333-7912.

   4.2             Employment Agreement between the Company and Yu Chuan Yih
                   effective October 1, 2000.

   8.1             List of Subsidiaries of the Company - incorporated by
                   reference to the Exhibits to our Post Effective Amendment No.
                   3 to the Registration Statement on Form F-1, SEC File No.
                   333-7912.
</Table>