<PAGE>

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



                                    FORM 20-F

           [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                                       OR

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                    FOR THE FISCAL YEAR ENDED APRIL 30, 1998

                                       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 CENTER
                                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>



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, 1998:

                             6,365,646 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>



                            EXCHANGE RATE INFORMATION

         The Company has prepared its consolidated financial statements in
accordance with Hong Kong generally accepted accounting principles consistently
applied and publishes such statements in Hong Kong dollars, the functional
currency of the Company's subsidiaries and the legal tender currency of Hong
Kong. All references to "Hong Kong dollars" or "HK$" are to Hong Kong dollars.
All references to "U.S. Dollars," "US$" 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:

<TABLE>
<CAPTION>

CALENDAR YEAR                                        PERIOD END    AVERAGE(2)         HIGH        LOW
-------------                                        ----------    ----------         ----        ---
                                                                    NOON BUYING RATE(1)
                                                                    -------------------
                                                                        (HK$PER US$)
<S>                                                  <C>           <C>                <C>        <C>
1993                                                     7.7280            7.7348     7.7650     7.7230
1994                                                     7.7375            7.7290     7.7530     7.7225
1995                                                     7.7323            7.7357     7.7665     7.7300
1996                                                     7.7332            7.7345     7.7440     7.7310
1997                                                     7.7456            7.7431     7.7550     7.7275
1998 (through July 31, 1998)                             7.7483            7.7462     7.7497     7.7412

</TABLE>

-----------

(1)  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.

(2)  Determined by averaging the rates on the last business day of each month
     during the relevant period.

                              CURRENCY TRANSLATIONS

         The Company's published consolidated financial statements are presented
in Hong Kong dollars ("HK$"), the lawful currency of Hong Kong. In this Annual
Report, references to "U.S. dollars", "US$" or "$" are to U.S. currency and
references to "Hong Kong dollars" or "HK$" are to Hong Kong currency. Solely for
the convenience of the reader, this Annual Report contains translations of
certain Hong Kong dollar amounts into U.S. dollars at specified rates. These
translations should not be construed as representations that the Hong Kong
dollar amounts actually represent such U.S. dollar amounts or could be converted
into U.S. dollars at the rate indicated. Unless otherwise stated, the
translations of Hong Kong dollars into U.S. dollars have been made at the rate
of HK$7.73 to US$1.00.

                                       -3-

<PAGE>



                           FORWARD-LOOKING STATEMENTS


         The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 20-F and other materials filed or to be filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
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 behalf of the Company. These risks and uncertainties include, but
are not limited to, those relating to dependence on major customer, dependence
upon key personnel, control by principal shareholder, competition, material
factors relating to the operations of the business, the transfer of Hong Kong's
sovereignty, PRC considerations, dependence on China factories, limited
seasonality, general economic conditions, and lack of patent protection for
manufacturing process.

                                       -4-

<PAGE>



                                     PART I


ITEM 1.  DESCRIPTION OF BUSINESS.

         LJ International Inc. (the "Company") is a totally vertically
integrated producer of finished gemstones and fine quality gemstone jewelry. It
is engaged in cutting and polishing semi-precious gemstones and designing,
manufacturing, marketing and distributing gem set jewelry to fine jewelers,
department stores, national jewelry chains and electronic and specialty
retailers throughout North America and Western Europe. The Company's product
line includes all major categories that are sought by major retailers, including
earrings, necklaces, pendants, rings and bracelets. The jewelry produced by the
Company is crafted in gold, platinum and sterling silver and is set with
semi-precious stones. The average wholesale price of the jewelry produced by the
Company is approximately $100, which equates to retail prices between $100 and
$499.

         The Company believes that its vertically integrated structure provides
significant advantages over its competitors. All profits from value added
processes are captured internally, rather than shared with third party
manufacturers. The result is very competitive pricing for the retailer and
enhanced profits for the Company. Innovative processes in stone cutting and
manufacturing further enhance the Company's competitive position.

         The Company employs an international design team and all of its designs
and merchandising strategies are proprietary. The exclusive and innovative
concepts that are created offer brand potential. The Company's primary marketing
focus has been in North America where it has sold directly to certain high
volume customers who need specialized product development services and through a
marketing relationship with International Jewelry Connection for those customers
that need higher levels of service and training.

         The Company organizes its marketing and distribution strategies by
retail distribution channel. Concepts are developed for the specific needs of
different market segments. The Company has identified fine jewelers (Ben Bridge
and Carlyle), national jewelry chains (Sterling Inc.), department stores (Macys
and J C Penney), direct mail and electronic retailers (QVC Network, Inc.) as
prime retail targets. For the fiscal years ended April 30, 1997 and 1998,
approximately 87% and 89% of sales, respectively, were in North America.

         For the past three fiscal years ended April 30, the breakdown of sales
and revenue of the Company (in thousand Hong Kong Dollars) based upon geographic
markets is summarized as follows:

<TABLE>
<CAPTION>

                                        1996        %        1997         %         1998         %
                                        ----        -        ----         -         ----         -
                                     (HK$'000)             (HK$'000)             (HK$'000)
<S>                                  <C>         <C>       <C>          <C>      <C>           <C>
USA............................         73,941    84.6        80,481     87.2      111,274      89.6
Hong Kong......................          2,856     3.3         2,020      2.2        7,915       6.4
PRC............................            143     0.2           570      0.6           58       0.0
Japan..........................         10,378    11.9         9,187     10.0        4,952       4.0
                                        ------    ----        ------    -----      -------     -----
                                        87,318   100.0        92,258    100.0      124,199     100.0
                                        ------    ----        ------    -----      -------     -----
                                        ------    ----        ------    -----      -------     -----

</TABLE>

                                       -5-

<PAGE>

BACKGROUND AND ORGANIZATION

         The Company was incorporated as an international business company under
the International Business Companies Act of the British Virgin Islands on
January 30, 1997. The Company owns all of the issued share capital in Lorenzo
Jewelry Manufacturing (Hong Kong) Limited ("Lorenzo"), a company incorporated in
Hong Kong on February 20, 1987. Lorenzo owns all of the issued share capital in
Shantou S.E.Z. Lorenzo Gems & Craft Factory Co., Limited, Shantou Lorenzo
Jewelry Manufacturing, and 60% of the issued share capital in Lorenzo Marketing
Co., Limited. Pursuant to a cooperative joint venture agreement between Lorenzo
and Guangdong Province Shantou Artcrafts Imports and Exports Co., the Company
controls the operating and financial activities of Shantou Lorenzo Jewelry
Manufacturing and is responsible for all of its profits and losses. In addition,
the Company owns all of the issued share capital in Precious Gem Trading Limited
(which owns all of the issued share capital in Lorenzo Gems (Shenzhen) Co.,
Limited) and all of the issued share capital in Golden Horizon Trading Limited
(which owns all of the issued share capital in Lorenzo Jewelry (Shenzhen) Co.,
Limited).

         The following diagram illustrates the Company's corporate structure.
The respective country of organization/incorporation is shown in brackets.

<TABLE>
<CAPTION>
<S><C>
                                        LJ INTERNATIONAL INC.
                                      (British Virgin Islands)
       --------------------------------------------------------------------------

      100%                                      100%                           100%


LORENZO JEWELRY MFG.                        PRECIOUS GEM                 GOLDEN HORIZON
   (H.K.) LTD.                              TRADING LTD.                  TRADING LTD.
   (Hong Kong)                                (B.V.I.)                      (B.V.I.)

                                                100%                           100%

100%        SHANTOU S.E.Z. LORENZO          LORENZO GEMS             LORENZO JEWELRY
              GEMS & CRAFT FACTORY      (SHENZHEN) CO., LTD.       (SHENZHEN) CO., LTD.
                       CO., LTD.              (P.R.C.)                    (P.R.C.)
                       (P.R.C.)


100%          SHANTOU LORENZO
                   JEWELRY MFG.
                    (P.R.C.)


60%           LORENZO MARKETING
                    CO., LTD.
                   (Hong Kong)

</TABLE>

                                       -6-
<PAGE>

INDUSTRY OVERVIEW

         The jewelry industry is comprised of two major groups that distribute
finished jewelry to retailers in the United States: a small number of
manufacturers that make and distribute their production directly to retailers
and a large number of wholesalers and distributors who purchase products or
portions of products from third parties and resell those items to retailers.
Management believes 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. Management further believes 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.

BUSINESS STRATEGY

         The Company's business strategy is to increase its market share of
moderately priced high-quality gem-set jewelry by capitalizing on its unique
vertically integrated manufacturing processes to produce high volume,
high-quality products. The Company also intends to further develop its existing
customer relationships with its specialized services and to aggressively expand
into new distribution channels, particularly in the United States and throughout
Western Europe.

         The Company is aggressively developing new product lines in exotic
stones, which have high perceived values in semi-precious stones. They include
tanzanite, aquamarine, imperial topaz, green tourmaline, pink tourmaline and
mandarine garnet.

         Management also plans to expand into new product categories. The
Company believes that there is an opportunity to manufacture and sell and has
begun test-marketing a brand of sterling silver. These are typically
merchandised with a retail price range of $30.00 to $150.00. The Company will
also offer a new branded collection of cultured pearl jewelry with a retail
price range of $99.00 to $999.00.

MANUFACTURING CAPABILITY

         The Company has established two sophisticated factories located in the
PRC that perform stone cutting and polishing and jewelry manufacturing. The
factories are located in the cities of Shantou and Shenzhen in Guangdong
Province. 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 26,000 square feet and has been operating for eight years. The
Shenzhen facility has been operating for less than one year and has 50,000
square feet of manufacturing space. The Company currently employs over 1,700
skilled gemstone cutters and manufacturing personnel and is producing over 4
million carats of cut gemstones and 1 million pieces of finished fine jewelry
annually.

         The Company imports choice rough gemstone material from mines located
in Africa, China and South America, especially concentrated in Brazil. Gemstone
craftsmen are trained and managed by Hong Kong personnel to insure that the
highest levels of cutting and polishing quality are achieved. The professional
skills possessed by the Company's cutters are applied to a wide variety of
shapes and sizes, maximizing the yield and value of the rough material that the
Company purchases. By performing internally the value added processes of cutting
and polishing, the Company maximizes quality control and dramatically increases
its profitability. The Company specializes in a wide range of popular and exotic
semi-precious gemstones ranging from amethyst, aquamarine and peridot to
tanzanite and tourmaline.

                                       -7-

<PAGE>

         The Company employs specialized manufacturing processes that deliver 
large quantities of high quality finished jewelry. The Company is currently 
producing over 60,000 pieces of finished jewelry per month from its two 
facilities and employs in excess of 800 skilled craftsmen in jewelry 
manufacturing. Each piece of jewelry receives hand made attention, resulting 
in fine quality finishing at popular prices.

SALES AND MARKETING

         The Company's merchandising strategy is to provide unique and 
differentiated products that are enhanced by the favorable pricing that 
results from its vertically integrated structure. The Company invests 
significant effort in design and model making to produce items which are 
distinctly different from its competitors. The Company intends to devote its 
effort towards brand development and utilize marketing concepts to enhance 
the saleability of its production. The Company recognizes that certain retail 
price points are favored by retailers. As part of its product development 
strategy, the Company attempts to align its wholesale prices to match 
retailers' target prices as a means of achieving these popular price targets.

         The Company's sales and marketing team is located in the Company's 
executive offices in Hong Kong. The Company's 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. The Company maintains a broad base of customers and 
concentrates its efforts on five major jewelry market segments: fine jewelers 
like Ben Bridge and Carlyle; national jewelry chains like Helzberg and Fred 
Meyer; department stores like Macys; electronic retailers like QVC Network, 
Inc.; and specialty retailers like Fortunoff's. The Company will introduce 
new product divisions selling cultured pearls and sterling silver during the 
Fall 1998 season.

         The Company's single largest customer is QVC Network, Inc. which 
accounted for approximately 55% of the Company's sales during fiscal 1998. 
The Company does not sell to QVC Network, Inc. pursuant to any formal or 
long-term contracts but only on a purchase order basis. Although the Company 
has developed and maintained a good and longstanding relationship with QVC 
Network, Inc., the loss of QVC Network, Inc. as a customer or a significant 
reduction in its orders would have a materially adverse effect on the Company.

         In addition to its direct sales to QVC Network, Inc. and other 
retailers, the Company also sells its products to retailers through 
International Jewelry Connection, a national network of independent sales 
representatives who sell jewelry through direct contact with retail accounts. 
The principal focus of International Jewelry Connection 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.

         Sales promotion efforts by the Company include attendance by Company 
representatives at U.S. and international trade shows and conventions, 
including Las Vegas, Orlando, New York, Basel, Switzerland, Hong Kong and 
Japan. In addition, the Company actively advertises in trade journals and 
related industry publications.

DESIGN AND PRODUCT DEVELOPMENT

         The Company has seven internationally trained designers who work 
from the Hong Kong executive office and a growing team of six designers who 
work in a designated area within the Shenzhen 

                                  -8-
<PAGE>

manufacturing facility. The PRC-based designers are closely supervised by the 
Hong Kong design director and the most experienced Hong Kong design staff. 
The PRC designers have already begun to create designs that have been 
accepted by the Company's various clients worldwide. The Hong Kong design 
team attends trade fairs worldwide to gather product ideas and monitor the 
latest product trends. The Company produces over 250 new models per month to 
support its business growth objectives.

         The Company seeks to provide its customers with a broad selection of 
high-quality 10 and 14 karat gold, platinum and sterling silver jewelry 
products that incorporate traditional yet fashionable styles and designs. The 
Company currently offers approximately 5,000 different styles of rings, 
bracelets, necklaces, earrings, pendants and matching sets that are 
contemporary and desirable in the market.

         The Company studies product trends that are emerging in the 
international market and adapts these trends to the needs of its retail 
customers. The jewelry offered for sale considers color, fabric and fashion 
trends which are projected over a two year period. The Company markets its 
products as lifestyle inspired.

MANUFACTURING PROCESS

         The Company manufactures its products at its facilities in Shantou and
Shenzhen, PRC. Its manufacturing processes combine vertical integration, modern
technology, mechanization and handcraftsmanship to produce contemporary and
fashionable jewelry. Its manufacturing operations basically involve cutting and
polishing semi-precious gemstones from rough, combining pure gold, platinum and
sterling silver with other metals to produce jewelry, and finishing operations
such as cleaning, polishing and setting, resulting in high quality finished
jewelry.

         The Company has developed a process of cost-effectively producing 
quality, gem-set jewelry. The Company believes it has a substantial 
competitive advantage due to its unique, vertically integrated manufacturing 
process. The Company utilizes the lost-wax method of jewelry manufacturing to 
produce high-quality gold rings, earrings, pendants and bracelets. This is 
based on an investment casting process used in the jewelry manufacturing 
industry. It entails creating wax duplicates of the items which are encased 
in a plaster mold. The plaster is hardened in an oven while the heat melts 
away the wax, leaving a hollow mold which is then injected with gold. After 
the casting process, the stones are mounted in the jewelry and the jewelry 
undergoes a series of cleaning and polishing stages before being labeled with 
the retailer's price tag and bar codes and shipped.

         The gem cutting process generally starts with cobbing and sawing of 
large rough gemstones into smaller pieces. The gemstones are then preformed 
and semi-calibrated to required sizes and shapes. The final procedures 
include fine cutting and polishing of the gemstones. The finished faceted 
gemstones are then sent to the jewelry factory for assembling. The jewelry 
manufacturing process includes waxing, casting, filing (assembling of gold 
parts), cleaning, gem setting, trimming and polishing.

         The manufacturing process in the jewelry industry results in great 
volumes of gold scrap. The Company has strict controls to minimize waste. 
Management believes that its manufacturing processes reduce the handling of 
the end jewelry product and accordingly, the quantity of jewelry scrap is 
greatly reduced. The scrap in the form of chips, filings, grindings and 
sweepings are recovered by the Company and sent to refiners to recover the 
gold content.

                                  -9-
<PAGE>


SUPPLY

         The Company manufactures and cuts its own semi-precious stones. The
Company imports most of its rough gemstones from South America, Africa and the
PRC. 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. The Company also
imports aquamarine, peridot and topaz from the PRC. The Company buys the rough
gemstones directly from a number of miners based on quality, pricing and
available quantities. The Company believes it has good relationships with its
suppliers, most of whom have supplied the Company for many years. The stones are
either delivered by air or by sea to the Company depending on volume and types
of rough stones.

         The Company purchases its gold from banks, gold refiners and commodity
dealers who supply substantially all of its gold needs which management believes
is sufficient to meet the Company's requirements.

         Gold acquired for manufacture is at least .995 fine and is combined
with other metals to produce 10 and 14 karat gold. The term "karat" refers to
the gold content of alloyed gold, measured from a maximum of 24 karats (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 the Company.

         The Company does not presently engage in hedging activities with
respect to possible fluctuations in the price of gold. The Company believes the
risk of not engaging in such activities is minimal, since the Company purchases
its gold requirements after each significant purchase order is received. The
Company believes that a downward trend in the price of gold would have little,
if any, impact on the valuation of the Company's inventories.

         The Company purchases supplies and raw materials from a variety of
suppliers and it does not believe the loss of any of the suppliers would have a
material adverse effect on its business. Alternative sources of supply for raw
materials for production of jewelry are readily available.

SECURITY

         The Company has installed certain measures at its Shantou and Shenzhen,
PRC manufacturing as well as its Hong Kong administrative facilities to protect
against loss, including multiple alarm systems, infrared motion detectors and a
system of closed circuit television cameras which provide surveillance of all
critical areas of the Company's premises.

         The Company carefully inspects all materials sent and received from
outside suppliers, monitors the location and status of all inventory, and has
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 the Company's manufacturing and administrative facilities on an annual
basis.

INSURANCE

         The Company maintains primary all-risk insurance, with limits in 
excess of the Company's current inventory levels, to cover thefts and damage 
to inventory located on the Company's premises. The Company also maintains 
insurance covering thefts and damage to Company owned inventory located

                                  -10-
<PAGE>

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 the Company. The Company carries transit insurance 
which coverage includes the transportation of jewelry outside of the 
Company's office.

COMPETITION

         The jewelry manufacturing industry is highly competitive, and the 
Company's competitors include domestic and foreign jewelry manufacturers, 
wholesalers, and importers who may operate on a national, regional and local 
scale. The Company's competitive strategy is to provide competitively priced, 
high-quality products to the high volume retail jewelry market. According to 
management, competition is based on pricing, quality, service and established 
customer relationships. The Company believes that it has positioned itself as 
a low cost producer without compromising its quality. The Company's ability 
to conceive, design and develop products consistent with the requirements of 
each retail distribution channel represents a competitive advantage.

         The Company believes that few competitors have the capacity and 
manufacturing skill to be effective competitors. Management believes that its 
vertically integrated manufacturing capabilities distinguish it from most of 
its competitors and enables it 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 PAJ, Inc., Aurafin, I. Kurgin, Andin 
International Inc., Oroamerica, Inc., and Michael Anthony Jewelers Inc. 
International competitors include Pranda International and Beauty Gems 
Limited. Most of these manufacturers/wholesalers have been successful vendors 
for many years and enjoy good relations with their clients. Although it may 
be difficult for a newcomer to break into established relationships, the 
Company already has made substantial inroads in the North American jewelry 
market and it believes it can remain competitive based on its vertically 
integrated low-cost, high-volume and high-quality manufacturing process.

EMPLOYEES

         At August 1, 1998, the Company employed over 1,500 persons on a 
full-time basis, of whom approximately 830 are involved in manufacturing of 
jewelry and 610 are engaged in gemstone cutting and polishing. The remaining 
60 persons, including the Company's management and executive staff, work in 
the Company's Hong Kong office. None of the Company's employees is 
represented by a labor union and the Company believes that its employees' 
relations are good.

ITEM 2.  DESCRIPTION OF PROPERTY.

         The Company's principal executive offices are located at Units #11 
and #12, 12/F, Block A, Focal Industrial Center, 21 Man Lok Street, Hung Hom, 
Kowloon, Hong Kong. The Company owns approximately 4,800 square feet of 
office, showroom and manufacturing space at this location.

         The Company's first jewelry production facility consists of 10,000 
square feet of building space which it owns in the Yubao Industrial Building, 
Longhu, Shantou Special Economic Zone, Guangdong 

                                  -11-
<PAGE>


Province, PRC. The Company leases the adjacent 16,000 square feet on the same 
floor of that building as one of its gem cutting facilities at a rental rate 
of HK$24,085 (US$3,116) per month until July 2002.

         The Company's recently completed second production facility in 
Shenzhen, PRC consists of 50,000 square feet of building space. This facility 
is located in the Shatoujiao Free Trade Zone, Shenzhen. The Company leases 
this space from an unaffiliated third party at a rental rate of HK$59,120 
(US$7,648) per month until November 2002.

         The Company owns two warehouse facilities in Kowloon, Hong Kong 
consisting of 5,432 square feet and 2,897 square feet, respectively. The 
Company also owns additional properties in Sai Kung, Hong Kong and Aberdeen, 
Hong Kong which it leases to non-affiliated third parties.

ITEM 3.  LEGAL PROCEEDINGS.

         The Company is not a party to any material legal proceedings, nor 
are there any material legal proceedings pending with respect to any property 
of the Company, and the Company is not aware of any legal proceedings 
contemplated by any governmental authorities involving either the Company or 
its property. No director, officer or affiliate of the Company, or any 
associate of a director, officer or affiliate of the Company, is an adverse 
party in any legal proceedings involving the Company or its subsidiaries, or 
has an interest in any such proceeding which is adverse to the Company or its 
subsidiaries.

ITEM 4.  CONTROL OF REGISTRANT.

         (a) As far as is known to management of the Company, the Company is 
not directly or indirectly owned or controlled by another corporation or by 
any foreign government.

         (b) The following table sets forth certain information regarding the 
beneficial ownership of the shares of Common Stock as of September 1, 1998 
(i) by each person who is known by the Company to own beneficially more than 
10% of the outstanding Common Stock, (ii) by each executive officer and 
director of the Company and (iii) by all directors and executive officers as 
a group. Except as set forth below, to the knowledge of the Company, the 
Company is not directly or indirectly owned or controlled by any other 
corporation or by any foreign government.

<TABLE>
<CAPTION>
NAME OF BENEFICIAL HOLDER                                           NUMBER          PERCENT
-------------------------                                          SHARES BENEFICIALLY OWNED
                                                                 ---------------------------
<S>                                                              <C>                <C>
Yu Chuan Yih...................................................   3,787,200(1)      59.5%
Jeffrey W. Taraschi............................................              0
Debora Mu Yong Yih(2)..........................................        600,000       9.4%
Ka Man Au......................................................              0      
Joseph Tuszer..................................................              0     
Hon Tak Ringo Ng...............................................              0     
Kui Shing Andy Lai.............................................              0     
Lionel C. Wang.................................................              0     
All directors and executive officers as a group (7 persons)....      3,787,200      59.5%
</TABLE>
-----------

                                    -12-
<PAGE>


(1)      Of these 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%). In addition, Mr. Yih is 
         the sole shareholder of the following three British Virgin Islands 
         corporations which own shares of the Company as follows: Welgram 
         International Limited 236,000 shares; Sunflower Gold Holdings 
         Limited 235,000 shares; and Panama Gold Holdings Limited 235,000 
         shares.

(2)      Debora Mu Yong Yih is an adult daughter of Mr. Yih.


         (c) To the knowledge of the Company, there are no arrangements known to
the Company, the operation of which may at a subsequent date result in a change
of control of the Company.


ITEM 5.  NATURE OF TRADING MARKET.

         The Common Stock is traded in the over-the-counter market and is quoted
on The Nasdaq National Market under the symbol "JADEF." The following table sets
forth, on a quarterly basis, the high and low sales prices for the Common Stock
since its listing on The Nasdaq National Market on April 15, 1998:

<TABLE>
<CAPTION>
         QUARTER ENDED:                     HIGH              LOW
         -------------                     -----             -----
         <S>                               <C>               <C>
         April 30, 1998                    $7.50             $5.75
         July 31, 1998                     $7.50             $4.50
</TABLE>

         The Warrants are traded in the over-the-counter market and are 
quoted on The Nasdaq National Market under the symbol "JADWF." The following 
table sets forth, on a quarterly basis, the high and low sales prices for the 
Warrants since their listing on The Nasdaq National Market on April 15, 1998:

<TABLE>
<CAPTION>
         QUARTER ENDED:                     HIGH              LOW
         -------------                     -----             -----
         <S>                               <C>               <C>
         April 30, 1998                   $1.625            $0.625
         July 31, 1998                    $1.656            $0.625
</TABLE>

         The Company does not believe that there is any principal non-United 
States trading market for the Common Stock or the Warrants. The Company 
believes that a substantial majority of the outstanding Common Stock and 
Warrants are held in the United States by Cede & Co. as record holder.

                                   -13-
<PAGE>


ITEM 6.  EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.

         There are no material British Virgin Islands laws that impose foreign
exchange controls on the Company or that affect the payment of dividends,
interest or other payments to nonresident holders of the Company's capital
stock. British Virgin Islands law and the Company's Memorandum of Association
and Articles of Association impose no limitations on the right of nonresident or
foreign owners to hold or vote the Common Stock.


ITEM 7.  TAXATION.

         The following is a summary of certain anticipated material U.S. 
federal income and British Virgin Islands tax consequences of an investment 
in the Common Stock. The summary does not deal with all possible tax 
consequences relating to an investment in the 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 
national (e.g., non-U.S. and non-British Virgin Islands) tax laws. 
Accordingly, each prospective investor should consult its own tax advisor 
regarding the particular tax consequences to it of an investment in the 
Common Stock. The following discussion is based upon laws and relevant 
interpretations thereof in effect as of the date of this Prospectus, 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 (i.e., 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
(a "U.S. Investor"). For taxable years beginning after December 31, 1996, a
trust will be a U.S. person only if (i) a court within the United States is able
to exercise primary supervision over its administration and (ii) 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 the Common Stock (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 the Common Stock.

         A U.S. Investor receiving a distribution with respect to the Common
Stock will be required to include such distribution in gross income as a taxable
dividend, to the extent of the Company's current or accumulated earnings and
profits as determined under U.S. federal income tax principles. Any
distributions in excess of such earnings and profits of the Company 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 the Common
Stock, and then as gain from the sale or exchange of a capital asset, provided
that the 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 the Common Stock.

         Gain or loss on the sale or exchange of the Common Stock will be
treated as capital gain or loss if the Common Stock is held as a capital asset
by the U.S. Investor. Such capital gain or loss will be 

                                -14-
<PAGE>

long-term capital gain or loss if the U.S. Investor has held the Common Stock 
for more than one year at the time of the sale or exchange, and will be taxed 
at the lowest rates applicable to capital gains if the U.S. Investor has held 
the Common Stock for more than eighteen months at such time.

         A holder of Common Stock may be subject to "backup withholding" at the
rate of 31% with respect to dividends paid on such Common Stock if such
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 such
holder outside the United States. In addition, the proceeds of the sale,
exchange or redemption of Common Stock may be subject to backup withholding, if
such proceeds are paid by a paying agent, broker or other intermediary in the
United States.

         Backup withholding may be avoided by the holder of Common Stock if such
holder (i) is a corporation or comes within certain other exempt categories or
(ii) 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 ("non-U.S. holders") are generally exempt from backup withholding,
although such holders 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 ("BVI") as currently in effect, a holder of Common Stock who is not a
resident of the 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 to BVI income
tax on gains realized during that year on sale or disposal of such shares; the
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 the 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 BVI.

                                -15-
<PAGE>


ITEM 8.  SELECTED FINANCIAL DATA.

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

         The following selected consolidated financial data with respect to each
of the years in the three-year period ended April 30, 1998 have been derived
from the Company's audited consolidated financial statements. The data with
respect to the year ended April 30, 1994 have been derived from the Company's
unaudited 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 thereto included elsewhere in this Prospectus.

         The Company prepares its Consolidated Financial Statements in
accordance with Hong Kong GAAP, which differs in certain significant respects
from US GAAP. For a discussion of the significant differences between Hong Kong
GAAP and US GAAP, see Note 15 of Notes To And Forming Part Of The Financial
Statements.

CONSOLIDATED STATEMENTS OF OPERATIONS DATA:

<TABLE>
<CAPTION>

                                                          YEAR ENDED APRIL 30,
                                                        -----------------------
                                               1994         1995         1996         1997         1998        1998
                                             --------    --------     ---------    --------     ---------   -----------
                                                HK$          HK$          HK$          HK$          HK$         US$
<S>                                         <C>          <C>          <C>          <C>          <C>         <C>
Amounts in accordance with 
   Hong Kong GAAP
Operating revenues.......................     45,968       48,365       87,318       92,258       124,199      16,067
                                            --------     --------     --------     --------      --------    --------
                                            --------     --------     --------     --------      --------    --------
   Operating income......................        400        1,863       13,828       21,930        31,540       4,080
   Other income (expense)................    (3,905)      (5,930)      (5,693)      (3,999)       (6,964)       (901)
                                            --------     --------     --------     --------      --------    --------
   Income (loss) before income taxes.....     (3,505)      (4,067)       8,135       17,931        24,576       3,179
   Income taxes..........................      (613)         (27)        (620)      (2,210)       (2,120)       (274)
                                            --------     --------     --------     --------      --------    --------
   Net income (loss).....................    (4,118)      (4,094)        7,515       15,721        22,456       2,905
                                            --------     --------     --------     --------      --------    --------
                                            --------     --------     --------     --------      --------    --------
   Dividends per share...................                                 0.57                                       
   Earnings (loss) per share.............      (0.94)       (0.93)        1.71         3.58          4.95        0.64
   Weighted average number of shares     
     outstanding (thousands).............      4,387        4,387        4,387        4,387         4,539       4,539



                                                         -16-
<PAGE>

Amounts in accordance with US GAAP       
Operating revenues.......................     45,968       48,365       87,318       92,258       124,199      16,067
                                            --------     --------     --------     --------      --------    --------
                                            --------     --------     --------     --------      --------    --------
   Operating income (loss) before        
     income taxes........................    (3,505)      (4,639)        7,563       16,599        14,325       1,852
                                            --------     --------     --------     --------      --------    --------
                                            --------     --------     --------     --------      --------    --------
   Net income (loss).....................    (4,118)      (4,666)        6,943       14,389        12,205       1,578
                                            --------     --------     --------     --------      --------    --------
                                            --------     --------     --------     --------      --------    --------
   Dividends per share...................                                 0.55                                       
   Earnings (loss) per shar..............      (0.91)       (1.03)        1.53         3.18          2.65        0.34
   Weighted average number of shares     
      outstanding (thousands)............      4,530        4,530        4,530        4,530         4,601       4,601


BALANCE SHEET DATA:

<CAPTION>
                                                             AS OF APRIL 30,
                                                          --------------------
                                               1994         1995         1996         1997         1998        1998
                                             --------    --------     ---------    --------     ---------   -----------
                                                HK$          HK$          HK$          HK$          HK$         US$
<S>                                         <C>          <C>          <C>          <C>          <C>         <C>
Amounts in accordance with 
   Hong Kong GAAP
   Working capital.......................    (15,793)     (22,877)     (15,092)      (2,757)       39,090       5,056
   Total assets..........................     67,681       65,160       64,763       82,879       154,616      20,002
   Long-term obligations.................     14,383        9,338       13,913       13,006        10,544       1,364
   Total shareholders' equity............        296      (3,750)        1,260       16,981        90,257      11,676
Amounts in accordance with US GAAP       
   Working capital.......................    (15,793)     (22,877)     (15,092)      (2,757)       39,090       5,056
   Total assets..........................     67,606       64,513       63,544       78,533       142,307      18,410
   Long-term obligations.................     14,383        9,338       13,913       13,006        10,544       1,364
   Total shareholders' equity............        221       (4,403)          41       12,635        77,948      10,084
</TABLE>


                                                         -17-


<PAGE>


ITEM 9.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS.

         The following discussion and analysis should be read in conjunction
with the financial statements and notes to the financial statements appearing
elsewhere herein. The amounts reflected in the following discussion are in Hong
Kong Dollars (HK$), the functional currency of the Company's 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 the discussion herein.

OVERVIEW

         LJ International Inc. ("LJI" or the "Company") owns 100% of the equity
of Lorenzo Jewelry Manufacturing (Hong Kong) Limited ("Lorenzo"), Shantou S.E.Z.
Lorenzo Gems & Craft Factory Co., Ltd., Shantou Lorenzo Jewelry Manufacturing,
Precious Gem Trading Ltd., Lorenzo Gems (Shenzhen) Co., Ltd., Golden Horizon
Trading Ltd., Lorenzo Jewelry (Shenzhen) Co., Ltd. and 60% of the issued share
capital in Lorenzo Marketing Co., Ltd. Collectively, these entities are referred
to as "the Company." LJI is a British Virgin Islands ("BVI") holding company and
substantially all of LJI's operating assets are held by its subsidiaries, which
are located in Hong Kong and/or China. While Lorenzo has operated since 1987,
LJI was incorporated in January 1997, and had subsequently merged with Lorenzo
and its subsidiaries.

         LJ International Inc. is a totally vertically integrated producer of
finished gemstones and fine quality gemstone jewelry. It is engaged in cutting
and polishing semi-precious gemstones and designing, manufacturing, marketing
and distributing gem set jewelry to fine jewelers, department stores, national
jewelry chains and electronic and specialty retailers throughout North America
and Western Europe. The Company's product line includes all major categories
that are sought by major retailers, including earrings, necklaces, pendants,
rings and bracelets. The jewelry produced by the Company is crafted in gold,
platinum and sterling silver and is set with semi-precious stones. The average
wholesale price of the jewelry produced by the Company is approximately $100,
which equates to retail prices between $100 and $499.

         The Company believes that its vertically integrated structure 
provides significant advantages over its competitors. All profits from value 
added processes are captured internally, rather than shared with third party 
manufacturers. The result is very competitive pricing for the retailer and 
enhanced profits for the Company. Innovative processes in stone cutting and 
manufacturing further enhance the Company's competitive position.

         The Company employs an international design team and all of its 
designs and merchandising strategies are proprietary. The exclusive and 
innovative concepts that are created offer brand potential. The Company's 
primary marketing focus has been in North America where it has sold directly 
to certain high volume customers who need specialized product development 
services and through a marketing relationship with IJC (International Jewelry 
Connection) for those customers that need higher levels of service and 
training.

         The Company organizes its marketing and distribution strategies by 
retail distribution channel. Concepts are developed for the specific needs of 
different market segments. The Company has identified fine jewelers (Ben 
Bridge and Caryle), national jewelry chains (Sterling Inc.), department 
stores (Macys and J C Penney), direct mail and electronic retailers (QVC 
Network, Inc.) as prime retail targets. For 

                              -18-
<PAGE>

the fiscal years ended April 30, 1997 and 1998, approximately 87% and 89% of 
sales, respectively, were in North America.

         During fiscal 1998, the Company completed its 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 after 
year-end from the exercise of the over-allotment in the offering. The 
completion of this offering was a very significant development for the 
Company and required substantial management time away from the normal 
operations of the Company. In 1999, management is looking forward to 
re-focusing all its energy to the operation of the Company's primary business 
with the goal of further increasing sales and operating performance.

FISCAL 1998 COMPARED TO FISCAL 1997

NET SALES

         Net sales for fiscal 1998 totaled HK$124,199,000 (US$16,067,000), 
compared to HK$92,258,000 (US$11,935,000) in fiscal 1997, an increase of 
HK$31,941,000 (US$4,132,000) or 34.6%. This increase resulted from an 
increase of over 900% in sales through International Jewelry Connection 
("IJC") in the United States from HK$1,392,000 (US$180,000) in fiscal 1997 to 
HK$14,152,000 (US$1,831,000) in fiscal 1998. IJC is a network of sales 
professionals which sell LJI products to fine jewelry retailers, national 
jewelry chains and department stores (see "Business-Sales and Marketing"). 
Sales to the Company's largest customer, QVC Network, Inc., also rose by 8%, 
and represented 55% of sales in fiscal 1998 compared to 69% in 1997.

GROSS PROFIT

         Gross profit for fiscal 1998 was HK$60,906,000 (US$7,879,000), 
compared to HK$44,205,000 (US$5,719,000) in fiscal 1997, an increase of 
HK$16,701,000 (US$2,161,000) or 37.8%, whereas gross profit margin increased 
to 49.0% from 47.9% in fiscal 1997. This increase was mainly due to increased 
sales of higher margin products and better production efficiency and control 
linked to utilization of new production equipment in the Shantou facility.

         The increase in gross margin was impacted by the sales of 
HK$10,142,000 (US$1,312,000) in gems stone rough inventory to another 
company. Gross margin on this sale was only 10%. The Company liquidates the 
inventory by selling to other companies while it is not a regular occurrence. 
The Company may periodically utilize this strategy to reduce excess gems 
stone inventory when it is considered beneficial to the Company.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling and administrative expenses for fiscal 1998 were 
HK$33,545,000 (US$4,340,000), an increase of 41.8% as compared with 
HK$23,657,000 (US$3,060,000) in fiscal 1997. HK$4,255,000 (US$550,000) was 
directly related to startup costs associated with the new Shenzhen factory 
which included personnel and training costs.

         Selling expenses were increased by HK$2,464,000 (US$319,000) from 
HK$6,484,000 (US$839,000) or 7% of sales in fiscal 1997 to HK$8,948,000 
(US$1,158,000) or 7% of sales in fiscal 1998 basically due to commission, 
overseas travelling expenses and bonus payment for contracted sales force as 
well as increased marketing and promotional expenses associated with increase 
in sales.

                                  -19-
<PAGE>

         General and administrative expenses increased by HK$7,424,000 
(US$960,000) from HK$17,173,000 (US$2,221,600) in fiscal 1997 to 
HK$24,597,000 (US$3,182,000) in fiscal 1998. The increase was mainly due to 
expansion in management and administrative staff, increase in wage level, as 
well as various office and administrative expenses associated with increase 
in sales.

OTHER INCOME/EXPENSES

         Net other expenses totaled HK$2,785,000 (US$360,000) during fiscal 
1998 as compared to a net other expense of HK$2,617,000 (US$339,000) in 
fiscal 1997 and consisted principally of interest expense and rental income.

         Interest expenses increased by HK$2,965,000 (US$384,000) from 
HK$3,999,000 (US$517,000) in fiscal 1997 to HK$6,964,000 (US$901,000) in 
fiscal 1998. This 74% increase was principally due to general increase in 
interest rate level and additional borrowings to fund business growth and 
establish a new jewelry factory in Shenzhen.

         Net rental income for fiscal 1998 was HK$1,273,000 (US$165,000) as 
compared with net rental income of HK$1,280,000 (US$166,000) in fiscal 1997. 
There was no material change between the two periods.

         During fiscal 1998, the Company sold an investment property 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").

INCOME TAXES

         The Company was incorporated in the British Virgin Islands and, 
under current law of the British Virgin Islands, is not subject to tax on 
income or on capital gains.

         For the Company's subsidiaries in Hong Kong, prevailing corporate 
income tax rate is 16%.

         The Company's subsidiaries in the PRC are registered to qualify as 
Foreign Investment Enterprises in the PRC and are eligible for certain tax 
holidays and concessions. Accordingly, certain of the PRC subsidiaries are 
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. These 
subsidiaries have sustained losses for the PRC income tax purpose. As a 
result, the Company has not recorded any PRC income tax expense. PRC income 
tax in the future will be calculated at the applicable rates relevant to the 
PRC subsidiaries which currently are 15%.

         For fiscal 1998, income taxes decreased by HK$90,000 (US$12,000) to 
HK$2,120,000 (US$274,000) from HK$2,210,000 (US$286,000) in fiscal 1997. 
Despite increase in profit during the year which is attributable to the full 
operation of the PRC subsidiaries, income tax actually decreased as the 
result of restructuring of the intra-group pricing policy.

                                  -20-
<PAGE>

FISCAL 1997 COMPARED TO FISCAL 1996

NET SALES

         Net sales increased by HK$4,940,000 (US$639,000), or 5.7% from 
HK$87,318,000 (US$11,296,000) in fiscal year 1996, to HK$92,258,000 
(US$11,935,000) in fiscal year 1997. This increase was due to increased sales 
to existing customers, a moderate shift in the Company's product mix toward 
high value- added products and improved pricing.

GROSS PROFIT

         In fiscal year 1997, total gross profit increased by 40.6% to 
HK$44,205,000 (US$5,719,000) from HK$31,423,000 (US$4,065,000) in fiscal 1996 
while gross profit margin increased to 47.9% from 36% in fiscal 1996. This 
increase was basically due to increased sales and improved production 
efficiency as a result of improvement in the Shantou facility in the aspects 
of fully-trained skilled craftsman and well developed production technology. 
Since mid-1996, all jewelry products were assembled by the Company which also 
improved gross margins.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling and administrative expenses for the fiscal year ended April 
30, 1997 were HK$23,657,000 (US$3,060,000), an increase of 21.7% as compared 
with HK$19,433,000 (US$2,514,000) in fiscal year 1996.

         Selling expenses increased by HK$1,201,000 (US$155,000) from 
HK$5,283,000 (US$683,000) in fiscal year 1996 to HK$6,484,000 (US$839,000) in 
fiscal year 1997 basically due to commission and bonus payment to contracted 
sales force who referred customers to the Company on a commission basis. 
Other marketing expenses also increased with the increase in sales.

         General and administrative expenses increased by HK$3,023,000 
(US$391,000) from HK$14,150,000 (US$1,831,000) in fiscal year 1996 to 
HK$17,173,000 (US$2,222,000) in fiscal year 1997. The increase was 
principally due to expansion in workforce, an increase in wage levels, as 
well as various office and administrative expenses associated with increase 
in sales.

OTHER INCOME/EXPENSES

         Other income/expenses during fiscal 1997 consisted of interest 
expenses, rental income and minority interest. Net other expense totaled 
HK$2,617,000 (US$339,000) during the year as compared to HK$3,855,000 
(US$499,000) in fiscal 1996.

         Interest expenses decreased by HK$1,694,000 (US$219,000) from 
HK$5,693,000 (US$736,000) in fiscal 1996 to HK$3,999,000 (US$517,000) in 
fiscal 1997. This 29.8% decrease was basically due to reduction in general 
interest rate levels, better trade financing terms and increased use of gold 
loans for financing gold purchases which cost was substantially less than 
normal financing (see "Liquidity and Capital Resources").

         Net rental income decreased by HK$544,000 (US$70,000) from 
HK$1,824,000 (US$236,000) in fiscal 1996 to HK$1,280,000 (US$166,000) in 
fiscal 1997. This 30% decrease in net rental income 

                                  -21-
<PAGE>

was principally attributable to the several months' vacant period for the 
Company's investment properties when the original tenancy agreements expired 
and the Company was seeking new tenants.

         Minority interest for the Company, which was HK$102,000 (US$13,000) 
in fiscal 1997, reflected the loss of Lorenzo Marketing Co., Ltd. as a result 
of unfavorable market conditions in Japan.

INCOME TAXES

         Income taxes increased by 256% from approximately HK$620,000 
(US$80,000) in fiscal 1996 to HK$2,210,000 (US$286,000) in fiscal 1997. The 
increase in income taxes was attributable to the increase in the taxable 
earnings of the Company.

LIQUIDITY AND CAPITAL RESOURCES

         LJI has no direct business operations other than its ownership of 
its subsidiaries. Its ability to pay dividends and meet other obligations 
depends upon the receipt of dividends or other payments from its operating 
subsidiaries. There currently are no known restrictions on LJI's subsidiaries 
to pay dividends to LJI; however, LJI does not have current intent of paying 
dividends to its shareholders.

         The primary sources of the Company's cash for working capital and 
capital expenditure have been net cash flows from operating activities, 
capital lease financing and borrowings. Seasonal working capital needs have 
been met through short-term borrowing under a revolving line of credit.

         For the fiscal year ended April 30, 1998, as a result of 
HK$31,455,000 (US$4,069,000) cash provided by financing activities and 
HK$1,545,000 (US$200,000) and HK$19,454,000 (US$2,517,000) used by operating 
and investing activities, respectively, cash and cash equivalents increased 
by HK$10,456,000 (US$1,353,000) during the year.

         Net cash used by operating activities in fiscal 1998 was 
HK$1,545,000 (US$200,000) as compared with net cash of HK$1,361,000 
(US$176,000) provided by operating activities in fiscal 1997. 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.

         As of April 30, 1998, accounts receivable increased by HK$22,615,000 
(US$2,926,000) to HK$31,068,000 (US$4,019,000) from HK$8,453,000 
(US$1,094,000) as of April 30, 1997. The increase is mainly due to increase 
in sales for the period, in particular the sales to new customers who are 
generally offered a 60-day credit period. Based upon the historical 
collectability of its receivables and the nature of the companies with which 
it engages, the Company has experienced excellent collection history.

         Inventory increased by HK$9,801,000 (US$1,268,000) from 
HK$37,193,000 (US$4,812,000) as of April 30, 1997 to HK$46,994,000 
(US$6,079,000) as of April 30, 1998. The increase was due to management's 
anticipation of significant increase in sales for the first and second 
quarters of the new fiscal year.

         For the fiscal year ended April 30, 1998, net cash used in 
investment activities was HK$19,454,000 (US$2,517,000), an increase of 
HK$18,219,000 (US$2,357,000) as compared with HK$1,235,000 (US$160,000) in 
fiscal 1997. The net cash used in investment activities during fiscal 1998 

                                  -22-
<PAGE>

included HK$22,728,000 (US$2,940,000) for the establishment of the new 
manufacturing facility in Shenzhen and the purchase of new machinery for the 
Shenzhen and Shantou facilities; HK$525,000 (US$68,000) of organization 
costs, offset by net proceeds of HK$3,800,000 (US$492,000) received from the 
sale of an investment property to a related party.

         As of April 30, 1998, the Company had various letters of credit 
under banking facilities which aggregated HK$32,100,000 (US$4,153,000) as of 
April 30, 1998. The Company had HK$17,622,000 (US$2,280,000) and 
HK$16,495,000 (US$2,134,000) outstanding under its letters of credit as of 
April 30, 1997 and 1998, respectively. Under its letters of credit, the 
Company is required to maintain certain cash balance which totaled 
HK$3,036,000 (US$393,000) and HK$3,111,000 (US$402,000) as of April 30, 1997 
and 1998, respectively.

         The Company has also secured gold loan facilities with various banks 
in Hong Kong. Due to lower interest rates charged for gold loans and 
declining prices of gold, the cost to the Company through its gold loan 
program has been substantially less than the costs that would be incurred if 
the Company were to finance the purchase of all of its gold requirements with 
borrowings under its letter of credit facility or other credit arrangements. 
The gold loan, however, does expose the Company to certain market risks 
associated with potential future increases in the price of gold, and the 
Company currently does not hedge against such risks. Under the gold loan 
arrangements, the Company may defer the purchase until such time as the 
Company decides appropriate, the price being paid will be the current market 
price at time of payment. The Company had outstanding loans to purchase 2,300 
ounces of gold as of April 30, 1997 and 1998, with the related balances being 
HK$6,376,000 (US$825,000) and HK$5,810,000 (US$752,000), respectively. 
Interest rates for these loans were 3.3% to 3.6% as of April 30, 1998. 
Unrealized gain on the unsettled gold loans as of April 30, 1997 and 1998 
were HK$474,000 (US$61,000) and HK$566,000 (US$73,000), respectively.

         Long-term mortgage loans on the Company's investment properties 
aggregated HK$15,217,000 (US$1,969,000) and HK$13,847,000 (US$1,791,000) as 
of April 30, 1997 and 1998, respectively. Substantially all properties of the 
Company are pledged as collateral for its banking facilities.

         On October 17, 1997, the Company completed the sale of promissory 
notes amounting to HK$6,049,000 (US$783,000). These notes beared interest of 
7% and the note holders were repaid in full from the proceeds of the initial 
public offering of the Company and, in addition, received 156,500 shares of 
the Company's common stock upon completion of the public offering. As of 
April 30, 1998, the Company had outstanding promissory notes amounting to 
HK$2,184,000 (US$283,000), which were repaid after year end.

         In April 1998, the Company completed an initial public offering in 
which it sold 1,460,000 shares of common stock and 1,679,000 warrants. The 
Company realized gross proceeds of HK$58,051,000 (US$7,510,000) from this 
offering. The Company may realize additional proceeds from the exercise of 
the warrants, although there can be no assurance that such warrants will be 
exercised. After year end, the Company 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.

         The Company anticipates that cash flow from operations, as well as 
borrowings available under the Company's existing credit line and gold loan 
arrangement, will be sufficient to satisfy the Company's capital needs for 
the next twelve months.

                                  -23-
<PAGE>

RECONCILIATION TO US GAAP

         The Company prepares its financial statements under Generally 
Accepted Accounting Principles (GAAP) as practiced in Hong Kong (HK GAAP). 
There are certain differences between HK GAAP and GAAP as practiced in the 
United States (US GAAP). In consideration of US GAAP, certain adjustments 
would have been provided.

         In connection with the bridge financing associated with the 
Company's public offering, the Company was required under SEC accounting 
rules to record for US GAAP purposes additional costs associated with the 
issuance of 156,500 shares of the Company's 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, 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) would be expensed based on US GAAP. In October 1997, the Company 
sold an investment property to its 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, net income of the Company for the year ended 
April 30, 1998 under US GAAP would be HK$12,205,000 (US$1,578,000).

         For the fiscal year ended April 30, 1997, depreciation on investment 
properties would be increased by HK$572,000 (US$74,000) and certain deferred 
costs with total amount of HK$760,000 (US$98,000) would have been expensed 
based on US GAAP. As a result, net income of the Company for the fiscal year 
ended April 30, 1997 under US GAAP would be HK$14,389,000 (US$1,862,000).

IMPACT OF RECENTLY ISSUED US GAAP ACCOUNTING STANDARDS.

         Statement of Financial Accounting Standards 130, "Reporting 
Comprehensive Income", and Statement of Financial Accounting Standards 131, 
"Disclosures About Segments of an Enterprise and Related Information." 
Statement 130 establishes standards for reporting and display of 
comprehensive income, its components and accumulated balances. Comprehensive 
income is defined to include all changes in equity except those resulting 
from investments by owners and distributions to owners. Among other 
disclosures, Statement 130 requires that all items that are required to be 
recognized under current accounting standards as components of comprehensive 
income be reported in a financial statement that displays with the same 
prominence as other financial statements. Statement 131 supersedes Statement 
of Financial Accounting Standards 14, "Financial Reporting for Segments of a 
Business Enterprise". Statement 131 establishes standards on the way that 
public companies report financial information about operating segments in 
annual financial statements and requires reporting of selected information 
about operating segments in interim financial statements issued to the 
public. It also establishes standards for disclosures regarding products and 
services, geographic areas and major customers. Statement 131 defines 
operating segments as components of a company about which separate financial 
information is available 

                                  -24-
<PAGE>

that is evaluated regularly by the chief operating decision maker in deciding 
how to allocate resources and in assessing performance.

         Statements 130 and 131 are effective for financial statements for 
periods beginning after December 15, 1997 and require comparative information 
for earlier years to be restated. Because of the recent issuance of these 
standards, management has been unable to fully evaluate the impact, if any, 
that the standards may have on the future financial statement disclosures. 
Results of operations and financial position, however, will be unaffected by 
implementation of these standards.

INFLATION

         The Company does not consider inflation to have had a material 
impact on its results of operations over the last three years.

FOREIGN EXCHANGE

         More than 89% of the Company's sales are denominated in U.S. Dollars 
whereas the other sales are basically denominated in Hong Kong Dollars. The 
largest portion of the Company's 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 PRC government principally sets the exchange rate between the Renminbi 
and all other currencies. As a result, the exchange rates between the 
Renminbi and the U.S. Dollar and the Hong Kong Dollar have fluctuated in the 
past and may fluctuate in the future. If the value of the Renminbi or the 
Hong Kong Dollar decreases relative to the U.S. Dollar, such fluctuation may 
have a positive effect on the Company's 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 the Company's results 
of operations. The Company does not currently hedge its foreign exchange 
positions.

YEAR 2000 ISSUE

         The Company has begun to address possible remedial efforts in 
connection with computer software that could be affected by the Year 2000 
problem. The Year 2000 problem is the result of computer programs being 
written using two digits rather than four to define the applicable year. Any 
programs that have time-sensitive software may recognize a date using "00" as 
the year 1900 rather than the year 2000. This could result in a major system 
failure or miscalculations. The Company has been informed by the suppliers of 
substantially all of the Company's software that all of those suppliers' 
software that is used by the Company is Year 2000 compliant. The software 
from these suppliers is used in major areas of the Company's operations such 
as for financial, sales, warehousing and administrative purposes. The Company 
has no internally generated software. After reasonable investigation, the 
Company has not yet identified any Year 2000 problem but will continue to 
monitor the issue. However, there can be no assurances that Year 2000 problem 
will not occur with respect to the Company's computer systems. The Year 2000 
problem may impact other entities with which the Company transacts business, 
and the Company cannot predict the effect of the Year 2000 problem on such 
entities.

                                  -25-
<PAGE>


ITEM 9A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         Not applicable.


ITEM 10.  DIRECTORS AND OFFICERS OF REGISTRANT.

         The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME                                AGE          POSITION
----                                ---          -------- 
<S>                                 <C>  <C>
Yu Chuan Yih......................   59  Chairman of the Board of Directors
Jeffrey W. Taraschi...............   46  President, Chief Executive Officer and Director
Ka Man Au.........................   34  Executive Vice President, Secretary and Director
Joseph Tuszer.....................   52  Vice President Product Development
Hon Tak Ringo Ng..................   38  Chief Financial Officer
Kui Shing Andy Lai................   49  Non-Executive Director
Lionel C. Wang....................   42  Non-Executive Director
</TABLE>

         None of the directors and officers was selected pursuant to any 
agreement or understanding with any other person. There is no family 
relationship between any director or executive officer and any other director 
or executive officer.

         MR. YIH established the business of Lorenzo Jewelry Mfg. (HK) Ltd. 
and has served as its 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.

         MR. TARASCHI has served as a director of the Company since September 
1997 and as President and Chief Executive Officer of the Company since June 
1998. He received his Bachelor of Arts degree in economics from Rutgers 
University in 1974. From 1986 to 1996, Mr. Taraschi has served in senior 
executive positions at Town & Country, QVC Inc. and R.H. Macy Inc. with 
responsibilities for business marketing and product development. In December 
1996, he formed International Business Partners, a consulting company which 
formulates and administers business, marketing and product plans for major 
manufacturers and retailers worldwide.

         MS. AU has served as a director of Lorenzo Jewelry Mfg. (HK) Ltd. 
since its incorporation in 1987. Ms. Au is primarily responsible for the 
general administration, human resources, operations and management of the 
Company.

         MR. TUSZER has served as vice president - product development of the
Company 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, 

                                    -26-
<PAGE>

including manufacturing and production, knowledge of colored stones, product 
development and marketing.

         MR. NG has served as chief financial officer of the Company since
September 1997. 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 1992 to 1994, Mr. Ng was employed by Perfect Data Pty. Ltd. Sydney as a
technician. 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.

         MR. LAI has served as a non-executive director of the Company since
September 1997. He received his Bachelor of Arts degree and his Masters of
Business Administration from The Chinese University of Hong Kong. From 1988 to
1992, Mr. Lai served as president of Toplus Development Ltd., a company engaged
in investment and business development. Since 1993, he has served as president
of International Asset Management Ltd., an organization which focuses on project
and business development, investment opportunity and consultancy services to
major corporations in the U.S. and China.

         MR. WANG has served as a non-executive director of the Company 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. Since 1996, Mr. Wang has served as director of
analytical services for The NPD Group, Inc., Port Washington, New York.

AUDIT COMMITTEE

         The Board of Directors has established an Audit Committee, which
consists of Messrs. Yih, Lai and Wang. The functions of the Audit Committee are
to recommend annually to the Board of Directors the appointment of the
independent public accountants of the Company, discuss and review the scope and
the fees of the prospective annual audit and review the results thereof with the
independent public accountants, review and approve non-audit services of the
independent public accountants, review compliance with existing accounting and
financial policies of the Company, review the adequacy of the financial
organization of the Company and review management's procedures and policies
relative to the adequacy of the Company's internal accounting controls and
compliance with federal and state laws relating to financial reporting.


ITEM 11.  COMPENSATION OF DIRECTORS AND OFFICERS.

         The aggregate compensation paid by the Company to all directors and
executive officers of the Company as a group with respect to its fiscal year
ended April 30, 1998 on an accrual basis, for services in all capacities, was
HK$2,582,000 (US$334,000). During the fiscal year ended April 30, 1998, the
Company contributed an aggregate amount of HK$31,000 (US$4,000) toward the
pension plans of the directors and executive officers.

                                  -27-

<PAGE>

EXECUTIVE SERVICE CONTRACT

         The Company had entered into an employment agreement with Mr. Yu Chuan
Yih effective October 1, 1997 pursuant to which he serves the Company for a
period of three years at an annual salary of HK$1,600,000 (US$207,000). Mr.
Yih's remuneration package includes benefits with respect to a motor car. In
addition, Mr. Yih will be entitled to an annual management bonus of a sum to be
determined by the Board at its absolute discretion having regard for the
operating results of the Company 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, provided that Mr. Yih shall abstain from voting and not be counted
in the quorum in respect of the resolution regarding the amount so payable to
him.


ITEM 12.  OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.

         Effective June 1, 1998, the Board of Directors adopted and approved the
1998 Stock Compensation Plan (the "1998 Plan"). The purpose of the 1998 Plan is
to encourage ownership of the Common Stock of the Company by officers,
directors, employees and advisors of the Company in order to provide additional
incentive for such persons to promote the success and the business of the
Company and to encourage them to remain in the employ of the Company by
providing such persons an opportunity to benefit from any appreciation of the
Common Stock of the Company through the issuance of stock options to such
persons in accordance with the terms of the 1998 Plan. Options granted pursuant
to the 1998 Plan constitute either incentive stock options within the meaning of
Section 422 of the United States Internal Revenue Code of 1986, as amended (the
"Code"), or options which constitute nonqualified options at the time of
issuance of such options. The 1998 Plan provides that incentive stock options
and/or nonqualified stock options may be granted to certain officers, directors,
employees and advisors of the Company or its subsidiaries, if any, selected by
the Compensation Committee. Approval of the 1998 Plan is subject to shareholder
approval. If approved, a total of 2,000,000 shares of Common Stock will be
authorized and reserved for issuance under the 1998 Plan, subject to adjustment
to reflect changes in the Company's capitalization in the case of a stock split,
stock dividend or similar event. The 1998 Plan is administered by the
Compensation Committee which has the sole authority to interpret the 1998 Plan
and make all determinations necessary or advisable for administering the 1998
Plan. The exercise price for any incentive option must be at least equal to the
fair market value of the shares covered thereby as of the date of grant of such
option. Upon the exercise of the option, the exercise price thereof must be paid
in full either in cash, shares of stock of the Company or a combination thereof.
If and to the extent that any option to purchase reserved shares shall not be
exercised by an optionee for any reason or if such option to purchase shall
terminate as provided by the 1998 Plan, such shares which have not been so
purchased thereunder shall again become available for the purposes of the 1998
Plan unless the 1998 Plan shall have been terminated.

         As of this date, the Company has not granted any options under the 1998
Plan.


ITEM 13.  INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.

         Yu Chuan Yih, President and Chairman of the Company, is a director and
principal shareholder of Gemological Institute of America, Hong Kong Limited;
Italon Limited; Lorenzo Consultant & Investment (China) Limited; and Hong Kong
Brasil Lapidary Limited. During the fiscal years ended April 30, 1996, 1997 and
1998, Mr. Yih and the foregoing affiliated companies received unsecured advances

                                      -28-

<PAGE>

from, and made unsecured advances to, the Company which were interest free and
repayable on demand. In addition, the Company purchased gold from Mr. Yih at a
fixed price of HK$93/gram. As of April 30, 1996 and 1997, the market price of
gold was HK$96.06/gram and HK$84.17/gram, respectively. Subsequent to the fiscal
year ended April 30, 1997, this arrangement has been terminated. Further, the
Company had subcontracted with Italon Limited for the manufacture of the
Company's jewelry pending completion of the Company's new manufacturing plant.
During the fiscal year ended April 30, 1997, the Company completed construction
of its manufacturing plant in the PRC, and all further subcontracting with
Italon Limited was discontinued thereafter. For further information, please see
the Financial Statements.

         During the fiscal year ended April 30, 1998, the Company sold an
investment property to Mr. Yih at its appraised value of HK$3,800,000
(US$492,000), resulting in a gain to the Company 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 valuer.

                                      -29-

<PAGE>



                                     PART II


ITEM 14.  DESCRIPTION OF SECURITIES TO BE REGISTERED.

         Not applicable.


                                    PART III

ITEM 15.  DEFAULTS UPON SENIOR SECURITIES.

         None.

ITEM 16.  CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES 
AND USE OF PROCEEDS.

         (a)      Not applicable.

         (b)      Not applicable.

         (c)      Not applicable.

         (d)      Not applicable.

         (e)      USE OF PROCEEDS

                  (1)      The effective date of the Securities Act registration
                           statement for which the use of proceeds is being
                           disclosed is April 15, 1998, Commission file number
                           333-7912.

                  (2)      The date of commencement of the offering was 
                           April 17, 1998.

                  (3)      The offering did not terminate before any 
                           securities were sold.

                  (4)      (i)      The offering has terminated and did not
                                    terminate before the sale of all securities
                                    registered.

                           (ii)     The managing underwriter was Barron Chase 
                                    Securities, Inc.

                           (iii)    The title of each class of securities
                                    registered is $.01 par value common stock
                                    ("Common Stock") and warrants to purchase
                                    Common Stock ("Warrants").

                           (iv)     The Company registered 1,679,000 shares of
                                    Common Stock and 1,679,000 Warrants for its
                                    account; the aggregate offering price of the
                                    Common Stock was $8,395,000 and the
                                    aggregate offering price of the Warrants was
                                    $209,875. All of the foregoing shares of
                                    Common Stock and Warrants were sold as of
                                    the date hereof, aggregating $8,604,875.

                                      -30-

<PAGE>

                           (v)      From the effective date of the Securities
                                    Act registration statement (April 15, 1998)
                                    through August 31, 1998, the actual amount
                                    of expenses incurred for the Company's
                                    account in connection with the issuance and
                                    distribution of the securities registered
                                    for underwriting discounts and commissions,
                                    finder's fees, expenses paid to or for
                                    underwriters, and other expenses were:

<TABLE>
                                           <S>                <C>
                                             $860,488         - Underwriting discounts and commissions
                                                    0         - Finders' fees
                                              258,146         - Expenses paid to or for underwriters
                                              927,128         - Other expenses - legal, accounting, printing,
                                                                travel, promotion, underwriter financial
                                                                advisory fee, etc.
                                              132,150         - Debt issuance costs
                                              -------------------------------------
                                           $2,177,912         - Total expenses

</TABLE>

                                    Of the above payments, $151,304 were direct
                                    or indirect payments to directors, officers,
                                    general partners or their associates,
                                    persons owning 10% or more of any class of
                                    equity securities of the Company and
                                    affiliates of the Company. The balance were
                                    direct or indirect payments to others.

                           (vi)     The net offering proceeds to the Company
                                    after deducting the total expenses of
                                    $2,177,912 described in (v) above were
                                    $6,426,963.

                           (vii)    From the effective date of the Securities
                                    Act registration statement (April 15, 1998)
                                    through August 31, 1998, the actual amount
                                    of net offering proceeds to the Company for
                                    which at least $100,000 has been used are as
                                    follows:

<TABLE>
<CAPTION>

                                            Direct/Indirect Payment     Direct/Indirect Payment
                                                  To Affiliates                To Others
                                            -----------------------     ------------------------
<S>                                         <C>                         <C>
Construction of plant, building
and facilities                              $        0                          $      1,534,146

Purchase and installation of
machinery and equipment                     $        0                          $      1,033,990

Purchases of real estate                    $        0                          $              0

Acquisition of other business(es)           $        0                          $              0

Repayment of indebtedness                   $        0                          $        814,396

Working capital - gold                      $        0                          $        776,197

Upgrading Shantou facility                  $        0                          $        450,000


                                      -31-
<PAGE>

Purchase computer equipment                 $        0                          $        147,043

Temporary investments                       $        0                          $      1,671,191
</TABLE>

                           (viii)   The Company does not believe that the use of
                                    proceeds set forth in (vii) above represents
                                    a material change in the use of proceeds
                                    described in the April 15, 1998 Prospectus.


                                     PART IV


ITEM 17.  FINANCIAL STATEMENTS.

         Not applicable.


ITEM 18.  FINANCIAL STATEMENTS.

         See the Consolidated Financial Statements listed in Item 19 hereof and
filed as a part of this Annual Report.


ITEM 19.  FINANCIAL STATEMENTS AND EXHIBITS.

         (a) The following financial statements are being filed as part of this
Annual Report on Form 20-F:

         Report of Independent Certified Public Accountants
         Consolidated statements of operations for the years ended April 30,
         1996, 1997 and 1998 Consolidated balance sheets at April 30, 1997 and
         1998 Consolidated statements of shareholders' equity for the years
         ended April 30, 1996, 1997
           and 1998
         Consolidated statements of cash flows for the years ended April 30,
         1996, 1997 and 1998 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:

                  none.

                                      -32-

<PAGE>

                             LJ INTERNATIONAL INC.

                         REPORTS AND FINANCIAL STATEMENTS

                               FOR THE YEAR ENDED

                                 30TH APRIL 1998

<PAGE>

LJ INTERNATIONAL INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

                                                                                                                Page
                                                                                                                ----
<S>                                                                                                          <C>
Report of Independent Certified Public Accountants                                                              F-2

Consolidated statements of operations for the years ended April 30, 1996, 1997  and 1998
                                                                                                                F-3

Consolidated balance sheets as of April 30, 1997 and 1998                                                       F-4

Consolidated statements of shareholders' equity for the years ended
    April 30, 1996, 1997 and 1998                                                                               F-5

Consolidated statements of cash flows for the years ended April 30, 1996, 1997 and 1998                         F-6

Notes to and forming part of the financial statements                                                        F-7 - F-29

</TABLE>

                                      F-1

<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



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 (the Company) as of April 30, 1997 
and 1998 and the related consolidated statements of operations, shareholders' 
equity and cash flows for each of the years in the three year period ended 
April 30, 1998. 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 which do not differ in any material respect from those in
the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement 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, 1997 and 1998 and the consolidated results of its
operations and cash flows for each of the years in the three year period ended
April 30, 1998, 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 - See note 15).






/s/ Moores Rowland

MOORES ROWLAND
CHARTERED ACCOUNTANTS
CERTIFIED PUBLIC ACCOUNTANTS, HONG KONG

Dated:  31 AUG 1998


                                     F-2

<PAGE>



                              LJ INTERNATIONAL INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                FOR THE YEARS ENDED APRIL 30, 1996, 1997 AND 1998

                (Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                                      Year Ended April 30
                                            -------------------------------------------------------------------------
                                                   1996                1997                 1998               1998
                                                   ----                ----                 ----               ----
                                                    HK$                 HK$                  HK$                US$
<S>                                          <C>                 <C>                  <C>                <C>
Operating revenue                                87,318              92,258              124,199             16,067
   Costs of goods sold                          (55,895)            (48,053)             (63,293)            (8,188)
                                              ---------           ---------            ---------          ---------

Gross profit                                     31,423              44,205               60,906              7,879

   Selling, general and administrative
     Expenses                                   (19,433)            (23,657)             (33,545)            (4,340)
                                              ---------           ---------            ---------          ---------
Operating income                                 11,990              20,548               27,361              3,539
Other income and expenses:
   Net interest expenses                         (5,693)             (3,999)              (6,964)              (901)
   Rental income, net                             1,824               1,280                1,273                165
   Minority interests                                14                 102                    2               -
   Gain on disposal of land and building
     to related party                              -                   -                   2,904                376
                                              ---------           ---------            ---------          ---------
Income before income taxes                        8,135              17,931               24,576              3,179
   Income taxes                                    (620)             (2,210)              (2,120)              (274)
                                              ---------           ---------            ---------          ---------
Net income                                        7,515              15,721               22,456              2,905
                                              ---------           ---------            ---------          ---------
                                              ---------           ---------            ---------          ---------

Earnings per share - Basic                         1.71                 3.58                4.95               0.64
                                              ---------           ---------            ---------          ---------
                                              ---------           ---------            ---------          ---------

Weighted average number of shares
   Outstanding - Basic                        4,387,200           4,387,200            4,539,128          4,539,128
                                              ---------           ---------            ---------          ---------
                                              ---------           ---------            ---------          ---------
</TABLE>


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


                                     F-3
<PAGE>



                              LJ INTERNATIONAL INC.

                           CONSOLIDATED BALANCE SHEETS
                          AS OF APRIL 30, 1997 AND 1998

                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                           As of April 30
                                                                     ------------------------------------------------------
                                                                          1997                  1998                  1998
                                                                          ----                  ----                  ----
                                                              Notes        HK$                   HK$                   US$
                                                      ASSETS
<S>                                                          <C>       <C>                 <C>                     <C>
CURRENT ASSETS:
    Cash and equivalents                                                   296               10,752                  1,391
    Restricted cash                                                      3,036                3,111                    402
    Accounts receivable, net of HK$798 allowance
       for doubtful accounts as of April 30, 1997 and 1998               8,453               31,068                  4,019
    Inventories                                               2(e)      37,193               46,994                  6,079
    Prepayments and other current assets                                   724                  549                     71
                                                                        ------              -------                 ------
       TOTAL CURRENT ASSETS                                             49,702               92,474                 11,962
Property, plant and equipment, net                              4        8,319               30,021                  3,884
Investment properties, net                                              21,580               28,150                  3,642
Due from related parties                                        9        1,795                2,655                    343
Deferred offering cost                                                     601                 -                      -
Organization costs, net                                                    805                1,245                    161
Goodwill                                                                    75                   68                      9
Other investments                                                            2                    3                      1
                                                                        ------              -------                 ------
       TOTAL ASSETS                                                     82,879              154,616                 20,002
                                                                        ------              -------                 ------
                                                                        ------              -------                 ------

                                          LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
    Bank overdraft                                                       8,639                 1,049                   136
    Notes payable, current portion                              5        7,854                 4,158                   538
    Letters of credit and gold loan                                     23,998                22,305                 2,886
    Promissory notes                                                      -                    2,184                   283
    Accounts payable                                                     7,514                18,873                 2,441
    Accrued expenses                                                     1,219                 1,266                   164
    Due to related party                                        9         -                       48                     6
    Capitalized lease obligations, current                      6          405                   429                    55
    Income taxes payable                                                 2,830                 3,072                   397
                                                                        ------              -------                 ------
       TOTAL CURRENT LIABILITIES                                        52,459                53,384                 6,906

Notes payable, non-current portion                              5       12,008                 9,689                 1,253
Capitalized leased obligations, non-current                     6          998                   855                   111
                                                                        ------              -------                 ------
       TOTAL LIABILITIES                                                65,465                63,928                 8,270
                                                                        ------              -------                 ------
                                                                        ------              -------                 ------
Minority interests                                                         433                   431                    56
                                                                        ------              -------                 ------
SHAREHOLDERS' EQUITY
    Common stocks, par value US$0.01 each, authorized - 100 million shares,
       issued and outstanding -
           4,387,200 shares as of April 30, 1997,
           6,146,646 shares as of April 30, 1998                8          339                   475                    61
     Share premium                                              8         -                   41,597                 5,381
     Warrant reserve                                            8         -                    1,622                   210
     Investment properties revaluation reserve                            -                    7,465                   966
    Retained earnings                                                   16,642                39,098                 5,058
                                                                        ------              -------                 ------
    TOTAL SHAREHOLDERS' EQUITY                                          16,981                90,257                11,676
                                                                        ------              -------                 ------
                                                                        ------              -------                 ------

    TOTAL LIABILITIES, MINORITY INTERESTS AND
       SHAREHOLDERS' EQUITY                                             82,879               154,616                20,002
                                                                        ------              -------                 ------
                                                                        ------              -------                 ------
</TABLE>


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

<PAGE>



                              LJ INTERNATIONAL INC.

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                FOR THE YEARS ENDED APRIL 30, 1996, 1997 AND 1998

                (Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                                                         
                                                                                         Investment
                                Common stock       Retained                              properties
                                ------------       earnings        Share    Warrant      revaluation
                             Shares    Par value   (deficit)      premium   reserve        reserve       Total        Total
                             ------    ---------   ---------      -------   -------      -----------     -----        -----
                                           HK$          HK$         HK$        HK$            HK$          HK$         US$

<S>                        <C>              <C>       <C>         <C>         <C>            <C>          <C>
Balance as of May 1, 1995   4,387,200        339       (4,094)       -           -              -          (3,755)       (486)
Net income                     -              -         7,515        -           -              -           7,515         972
Dividend                       -              -        (2,500)       -           -              -          (2,500)       (323)
                            ---------        ---       ------      ------      -----          -----        ------      ------

Balance as of April 30,
1996                        4,387,200        339          921        -           -              -           1,260         163
Net income                     -              -        15,721        -           -              -          15,721       2,034
                            ---------        ---       ------      ------      -----          -----        ------      ------

Balance as of April 30,
1997                        4,387,200        339       16,642        -           -              -          16,981       2,197
New issue of shares         1,460,000        113         -         41,620        -              -          41,733       5,398
Shares issued in Deen
    merger                    142,946         11         -            (11)       -              -            -           -
Shares issued to note
    holders                   156,500         12         -            (12)       -              -            -           -
New issue of warrants          -              -          -           -         1,622            -           1,622         210
Surplus arising on
  revaluation                  -              -          -           -           -            7,465         7,465         966
Net income                     -              -        22,456        -           -              -          22,456       2,905
                            ---------        ---       ------      ------      -----          -----        ------      ------

Balance as of April 30,
1998                        6,146,646        475       39,098      41,597      1,622          7,465        90,257      11,676
                            ---------        ---       ------      ------      -----          -----        ------      ------
                            ---------        ---       ------      ------      -----          -----        ------      ------
</TABLE>


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


                                     F-5

<PAGE>



                              LJ INTERNATIONAL INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED APRIL 30, 1996, 1997 AND 1998
   The accompanying notes are an integral part of these financial statements.


                (Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>

                                                                             Year Ended April 30
                                                         ------------------------------------------------------------
                                                             1996              1997             1998            1998
                                                             ----              ----             ----            ----
                                                              HK$               HK$              HK$             US$
<S>                                                         <C>             <C>               <C>              <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                              7,515           15,721            22,456           2,905
    Adjustments to reconcile net income to net cash
       provided by (used in) operating activities:-
           Depreciation of property, plant and                928            1,049             1,345             174
           equipment
           Provision for slow moving inventory                160              (60)                -               -
           Amortization of deferred expenditures               10               10                85              11
           Amortization of goodwill                             -                -                 7               1
           Loss on disposal of fixed assets                     -              119                 -               -
           Gain on disposal of land and building                -                -            (2,904)           (376)
           Bad debt                                           866            1,295                 -               -
           Minority interests                                 (14)            (102)               (2)              -
    Changes in operating assets and liabilities:
       Accounts receivable, net                             8,380           (3,994)          (22,615)         (2,925)
       Inventories                                         (4,397)         (11,316)           (9,801)         (1,268)
       Prepayments and other current assets                   373              230               175              23
       Due from related parties                            (1,483)          (1,612)             (860)           (111)
       Accounts payable                                    (5,502)           1,409            11,359           1,469
       Accrued expenses                                    (1,016)            (583)               47               6
       Letters of credit                                   (4,804)            (599)           (1,127)           (146)
       Due to related parties                                  79           (2,462)               48               6
       Income tax receivables                                 (46)              46                 -               -
       Income tax payables                                    491            2,210               242              31
                                                         ---------        ----------       ----------       ---------
    NET CASH PROVIDED BY (USED IN) OPERATING
      ACTIVITIES                                            1,540            1,361            (1,545)           (200)
                                                         ---------        ----------       ----------       ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Organization costs                                          -             (746)             (525)            (68)
    Purchase of fixed assets                               (1,899)            (588)          (22,728)         (2,940)
    Proceeds on disposals of fixed assets                       -              100             3,800             492
    Purchase of bonds                                          (1)              (1)               (1)              -
                                                         ---------        ----------       ----------       ---------
    NET CASH PROVIDED BY (USED IN) INVESTING
      ACTIVITIES                                           (1,900)          (1,235)          (19,454)         (2,516)
                                                         ---------        ----------       ----------       ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Deferred offering costs                                     -             (601)          (14,095)         (1,822)
    Bank overdrafts                                           294              (44)           (7,590)           (982)
    Dividend paid                                          (2,500)               -                 -               -
    Net proceeds from issue of shares/warrants                  -                -            58,051           7,509
    Net proceeds from sale of promissory notes                  -                -             2,184             283
    Loan acquired                                          14,186            4,021             1,434             185
    Repayment of loan                                      (9,126)          (2,858)           (8,016)         (1,037)
    Repayment of capitalized leases                             -                -              (438)            (57)
    Restricted cash                                        (2,000)          (1,036)              (75)            (10)
                                                         ---------        ----------       ----------       ---------
    NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES       854             (518)           31,455           4,069
                                                         ---------        ----------       ----------       ---------


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS          494             (392)           10,456           1,353
CASH AND CASH EQUIVALENTS, AS OF BEGINNING OF YEAR            194              688               296              38
                                                         ---------        ----------       ----------       ---------
CASH AND CASH EQUIVALENTS, AS OF END OF YEAR                  688              296            10,752           1,391
                                                         ---------        ----------       ----------       ---------
                                                         ---------        ----------       ----------       ---------

ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS
    Cash and equivalents                                      688              296            10,752           1,391
                                                         ---------        ----------       ----------       ---------
                                                         ---------        ----------       ----------       ---------

OTHER CASH TRANSACTIONS:
    Cash paid for interest                                  5,723            4,137             7,176             928
                                                         ---------        ----------       ----------       ---------
                                                         ---------        ----------       ----------       ---------

    Cash paid(refunded) for taxes                             174              (46)            1,877             243
                                                         ---------        ----------       ----------       ---------
                                                         ---------        ----------       ----------       ---------
NON-CASH TRANSACTIONS:
    Purchase of equipment under capitalized leases              -            1,403               320              41
                                                         ---------        ----------       ----------       ---------
                                                         ---------        ----------       ----------       ---------

                          The accompanying notes are an integral part of these financial statements.
</TABLE>

<PAGE>



                              LJ INTERNATIONAL INC.

              NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS


1.       ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS

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

                  During the year, LJ International Inc. (LJI) merged with
         Lorenzo Jewelry Mfg. (H.K.) Limited (Lorenzo). LJI 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 has been accounted
         for by the purchase method of accounting under 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$75,000 was recorded as goodwill. Under US GAAP such
         reorganization would be accounted for as if it were a pooling of
         interest as there exists common ownership between the companies. A
         reconciliation to this method of accounting is set out in note 15. The
         capital structure reflected in the financial statements is that of LJI,
         which is 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 the requirements of the Hong
              Kong Companies Ordinance and the accounting principles generally
              accepted in Hong Kong which have been applied consistently
              throughout the relevant periods. These requirements differ in
              certain material respects from generally accepted accounting
              principles in the United States (US GAAP) - see note 15.

              The financial statements have been prepared under the historical
              cost convention. Cost in relation to assets represents the cash
              amount paid, the fair value of the asset or the shares given in
              exchange, as appropriate.

         (b)  PRINCIPLES OF COMBINATION AND CONSOLIDATION

              The consolidated financial statements include the financial
              information of LJI and Lorenzo, Precious Gems Trading Limited
              (Precious Gems) & Golden Horizon Trading Limited (Golden
              Horizon). Lorenzo has three subsidiaries, two of which are
              incorporated in the PRC, Shantou Lorenzo Jewelry Mfg. (Shantou
              Lorenzo Jewelry) and Shantou S.E.Z. Lorenzo Gems & Craft Factory
              Co., Ltd. (Shantou Lorenzo Gems). Lorenzo also has a 60% owned
              subsidiary, Lorenzo Marketing Co., Limited which is incorporated
              in Hong Kong. Precious Gems is incorporated in BVI and has one
              subsidiary which is incorporated in the PRC, Lorenzo Gems
              Manufacturing (Shenzhen) Co. Ltd. Golden Horizon is incorporated
              in BVI and has one subsidiary which is incorporated in the PRC,
              Lorenzo Jewellery (Shenzhen) Co. Ltd.


                                       F-7

<PAGE>



                              LJ INTERNATIONAL INC.
       NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)
2.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         (b)  PRINCIPLES OF COMBINATION AND CONSOLIDATION (CONTINUED)

              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.

         (c)  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.

         (d)  STATEMENT OF CASH FLOWS
              For the purposes of the statement of cash flows, the Company
              considers all highly liquid debt instruments with an original
              maturity within three months or less to be cash equivalents.

         (e)  INVENTORIES
              Inventories are stated at the lower of cost or net realizable
              value. Cost includes cost of purchase of materials, determined
              generally on the first-in, first-out basis, and in the case of
              work in progress and finished goods, direct labour and an
              appropriate proportion of production overheads. Net realizable
              value is determined on the basis of anticipated sales proceeds
              less estimated selling expenses or management estimates on
              prevailing market conditions. Inventories consisted of the
              following:

<TABLE>
<CAPTION>

                                                                                        As of April 30
                                                                  -------------------------------------------------------
                                                                                        (In Thousands)
                                                                        1997                   1998                 1998
                                                                        ----                   ----                 ----
                                                                         HK$                    HK$                  US$
                <S>                                                   <C>                    <C>                   <C>

                Raw materials                                         22,442                 22,140                2,864
                Work-in-progress                                       7,211                 14,281                1,847
                Finished goods                                         8,740                 11,773                1,523
                Less: Provision for slow moving stocks                (1,200)                (1,200)                (155)
                                                                  -----------            -----------          -----------
                                                                      37,193                 46,994                6,079
                                                                  -----------            -----------          -----------
                                                                  -----------            -----------          -----------
</TABLE>



                                                             F-8

<PAGE>



2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         (e)  INVENTORIES (CONTINUED)

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

         (f)  FIXED ASSETS AND DEPRECIATION
              Fixed assets are 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 fixed assets have been put into operation, such as
              repairs and maintenance, is charged to the profit and loss account
              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 fixed assets, the expenditure is capitalized.

              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
              profit and loss account.

              Depreciation is calculated on a straight line method at the
              following annual rates:

<TABLE>
<CAPTION>
                    Land and buildings                   2% or over the unexpired term of leases
                    <S>                                                                      <C>
                    Furniture, fixtures and equipment                                        20%
                    Motor vehicles                                                           20%
                    Plant and machineries                                                    10%
                    Leasehold improvements                                                   10%
</TABLE>
         (g)  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.

              As of April 30, 1998, investment properties are stated in the
              balance sheet at their open market values on basis of professional
              valuation carried out by CB Richard Ellis Limited and Prudential
              Surveyors International Ltd., independent property valuers. In
              prior years, investment properties were stated at historical cost.
              Under accounting principles practiced in Hong Kong, investment
              properties were adjusted to market value when the Company became a
              public reporting entity. This change had no effect on the profit
              and loss account, but did result in an increase to investment
              properties offset by an increase within shareholders' equity.




                                          F-9

<PAGE>



2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         (g)  INVESTMENT PROPERTIES (CONTINUED)

              No amortization and depreciation is provided in respect of
              investment properties because their unexpired term of underlying
              land leases are over 20 years. Prior to 1995, these properties
              were classified as land and buildings and HK$1,178,000 of
              accumulated depreciation had previously been recorded.

              Changes in the values of investment properties are dealt with as
              movements in the investment properties 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 profit and loss account. Where a deficit has
              previously been charged to the profit and loss account and a
              revaluation surplus subsequently arises, this surplus is credited
              to the profit and loss account 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 profit and loss
              account.

         (h)  DEFERRED OFFERING COSTS
              In connection with the private and public offerings, the Company
              incurred certain costs associated with these offerings. In
              connection with the private offering of debt, these costs were
              amortized as additional interest expenses during the year ended
              April 30, 1998.

              The costs associated with the public offering were offset against
              the proceeds of the offering.

         (i)  ORGANIZATION COSTS
              Organization costs comprise of professional fees paid to third
              parties in connection with the organization of the Company.
              Amortization is calculated over 10 years using straight line
              basis.

         (j)  DEFERRED TAXATION
              Provision for deferred taxation is calculated under the liability
              method for all material differences to the extent that there is a
              reasonable probability that these will be reversed within the
              foreseeable future.

         (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 under operating leases are
              recorded in operations on a straight line basis over the lease
              term.




                                            F-10

<PAGE>



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 fixed assets 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(f) above. Finance charges implicit in the
              purchase payments are charged to 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 COMPANY
              Parties are considered to be related if one party has the ability
              to control the other party or exercise significant influence over
              the other party in making financial and operating decisions.

         (n)  REVENUE RECOGNITION
              (i)   Sales of goods
                    Sales are recognized when goods are delivered and title
                    passed to customers.

              (ii)  Others
                    Interest income is recognized on a time proportion basis.
                    Rental income relating to operating leases is recognized on
                    a straight line basis over the lease term.

         (o)  FOREIGN CURRENCIES
              Transactions in foreign currencies are translated at the
              approximate rates of exchange on the dates of transactions.
              Monetary assets and liabilities denominated in foreign currencies
              are translated at approximate 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 approximate exchange rates ruling at the balance sheet date.
              All exchange differences arising on the consolidation are recorded
              within equity. Historically, foreign exchange transactions have
              not been material to 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, 1998 has been made at HK$7.73 to
              US$1.00.

         (p)   GOLD LOANS
               Gold loan balances are translated at the gold price prevailing at
               the close of business on the balance sheet date. Profits and
               losses arising on translation are dealt with in the profit and
               loss account.




                                          F-11

<PAGE>



2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         (q)  EARNINGS PER SHARE
              Earnings per share is based on net income attributable to
              shareholders and the weighted average number of ordinary shares
              outstanding during the year.

              Fully diluted earnings per share is not shown because the impact
              of any dilution is not material.

         (r)  USES OF ESTIMATES
              The preparation of the Company's financial statements in
              conformity with generally accepted accounting principles requires
              the Company's management to make estimates and assumptions that
              affect the amounts reported in these financial statements and
              accompanying notes. Actual amounts could differ from those
              estimates.


3.       OPERATING RISKS

         (a)   CONCENTRATIONS OF CREDIT RISKS

               The Company derived revenues from the following major customers,
               which accounted for over 10% of net revenues.

<TABLE>
<CAPTION>
                                                                      Year Ended April 30
                                                      ----------------------------------------------------
                Customer                                     1996               1997               1998
                --------                                     ----               ----               ----
                <S>                                         <C>                  <C>               <C>

                QVC Network Inc.                            56%                  69%               55%
                Tocantins Minerals Mining &
                 Science Corp.                               -                    -                13%
</TABLE>

               Accounts receivable related to the Company's major customers were
               HK$16,476,000 as of April 30, 1998.

               Credit risk represents the accounting loss that would be
               recognized at the reporting date if counterparties failed
               completely to perform as contracted. Concentrations of credit
               risk (whether on or off balance sheet) that arise from financial
               instruments exist for groups of customers or counterparties when
               there are similar economic characteristics that would cause their
               ability to meet contractual obligations to be similarly affected
               by changes in economic or other conditions. The major
               concentration of credit risk arises from the Company's
               receivables. Even though the Company does have major customers,
               it does not consider itself exposed to significant credit risk
               with regards to collection of the related receivables. Historical
               losses have not been significant.






                                          F-12

<PAGE>



3.       OPERATING RISKS (CONTINUED)

         (b)   COUNTRY RISKS

               The Company may also be exposed to certain risks as a result of
               its manufacturing operation being located in the PRC and its
               investment properties in Hong Kong which are not typically
               associated with companies operating in North America and Western
               Europe. These include risks associated with, among others, the
               political, economic and legal environments and foreign currency
               exchange. The Company's results may be adversely affected by
               changes in the political and social conditions in the PRC, and by
               changes in governmental policies with respect to laws and
               regulations, anti-inflationary measures, currency conversion and
               remittance abroad, and rates and methods of taxation, among other
               things. The Company's management 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 Company 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-13

<PAGE>

                          LJ INTERNATIONAL INC.
    NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

4.       PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>

                                                                            As of April 30
                                                       ---------------------------------------------------------
                                                                            (In Thousands)
                                                             1997                     1998                  1998
                                                             ----                     ----                  ----
                                                              HK$                      HK$                   US$
          <S>                                          <C>                      <C>                    <C>
          Land and buildings
              Cost                                          2,471                    2,470                   320
              Accumulated depreciation                       (486)                    (576)                  (75)
                                                       -----------              -----------            ----------

              Net book value                                1,985                    1,894                   245
                                                       -----------              -----------            ----------
                                                       -----------              -----------            ----------

          Leasehold improvements
              Cost                                          2,074                   14,218                 1,839
              Accumulated depreciation                       (665)                    (865)                 (112)
                                                       -----------              -----------            ----------

              Net book value                                1,409                   13,353                 1,727
                                                       -----------              -----------            ----------
                                                       -----------              -----------            ----------

          Furniture, fixtures and equipments
              Cost                                          3,803                    6,231                   806
              Accumulated depreciation                     (3,137)                  (3,525)                 (456)
                                                       -----------              -----------            ----------

              Net book value                                  666                    2,706                   350
                                                       -----------              -----------            ----------
                                                       -----------              -----------            ----------

          Plant and machineries
              Cost                                          3,819                   11,862                 1,535
              Accumulated depreciation                     (1,124)                  (1,471)                 (190)
                                                       -----------              -----------            ----------

              Net book value                                2,695                   10,391                 1,345
                                                       -----------              -----------            ----------
                                                       -----------              -----------            ----------

          Motor vehicles
              Cost                                          1,670                    2,101                   272
              Accumulated depreciation                       (106)                    (424)                  (55)
                                                       -----------              -----------            ----------

              Net book value                                1,564                    1,677                   217
                                                       -----------              -----------            ----------
                                                       -----------              -----------            ----------

          Total net property, plant and
              equipment                                     8,319                   30,021                 3,884
                                                       -----------              -----------            ----------
                                                       -----------              -----------            ----------

</TABLE>

                                      F-14

<PAGE>

                          LJ INTERNATIONAL INC.
    NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)


5.       BANKING FACILITIES AND OTHER LOANS

         The Company has various letters of credit under banking facilities
         which aggregated HK$32,100,000 as of April 30, 1998. The Company had
         HK$17,622,000 and HK$16,495,000 outstanding under its letters of credit
         as of April 30, 1997 and 1998 respectively. These letters of credit
         also collaterized the Company's gold loan discuss below. In addition,
         the Company had HK$13,500,000 of cash overdraft protection under its
         banking facilities as of April 30, 1998. The amount outstanding under
         this arrangement aggregated HK$8,639,000 and HK$1,049,000 as of April
         30, 1997 and 1998, respectively. Interest charges range from Hong Kong
         Dollars prime plus 1% to 3%. (11% to 13% as of April 30, 1998) on these
         loans. Under the Company's banking facilities arrangements, the Company
         is required to maintain certain cash balances based on the amount of
         cash overdraft protection given. These balances are reflected as
         restricted cash in the accompanying financial statements.

         The Company had outstanding loans to purchase 2,300 oz of gold as of
         April 30, 1997 and 1998 with the related balances being HK$6,376,000
         and HK$5,810,000 respectively. These loans are due within the next
         year, however, have been historically renewed. These loans bear
         interest at 3.30% to 3.60% as of April 30, 1998. These loans can be
         repaid in cash at the current exchange rate of gold any time prior to
         maturity. The Company 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$474,000 and HK$566,000 for the years ended April 30, 1997
         and 1998 respectively. As the Company does not hedge for changes in the
         future price of gold, the Company is exposed to certain market risks,
         which may result from potential future increases in the price of gold.

         The Company also had repaid all the unsecured loans from individuals of
         HK$4,645,000 as of April 30, 1998.

         The Company also had long-term mortgage loans which are related to the
         Company's investment properties. These loans aggregated HK$15,217,000
         and HK$13,847,000 as of April 30, 1997 and 1998 respectively. Interest
         charges on these loans range from Hong Kong Dollars prime plus 1.5% to
         2% (11.50% to 12.00% as of April 30, 1998).

         On October 17, 1997, the Company completed the sale of promissory notes
         amounting to HK$6,049,000. The proceeds from this private offering were
         used primarily to pay for the cost of the Initial Public Offering.
         These notes beared interest at 7% and note holders were partially
         repaid from proceeds of the Initial Public Offering and received
         156,500 shares of common stock upon the public offering. As of April
         30, 1998, the Company had outstanding promissory notes amounting to
         HK$2,184,000, which were repaid after year end. In connection with this
         loan, origination costs, totalling HK$765,000 were expensed during the
         year ended April 30, 1998.

                                      F-15

<PAGE>

                          LJ INTERNATIONAL INC.
    NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

5.       BANKING FACILITIES AND OTHER LOANS (CONTINUED)

         Expected maturities based on year end interest rate are as follows:

<TABLE>
<CAPTION>

                                                                         In Thousands                   In Thousands
                                                                         ------------                   ------------
                                                                            HK$                                  US$
          <S>                                                            <C>                            <C>
          1999                                                                  4,158                            538
          2000                                                                  3,054                            395
          2001                                                                  3,005                            388
          2002                                                                  3,011                            390
          2003                                                                    619                             80
                                                                            ----------                      ---------
                                                                               13,847                          1,791
                                                                            ----------                      ---------
                                                                            ----------                      ---------

</TABLE>

         The Company's banking facilities are collaterized by investment
         properties, restricted cash deposits and personal guarantees of certain
         directors.


6.       CAPITALIZED LEASE OBLIGATION

         The Company leases certain equipment under agreements classified as
         capital leases. Equipment under these leases has a cost of HK$1,785,000
         and accumulated amortization of approximately HK$314,000 as of April
         30, 1998. The following is a schedule of future minimum lease payments
         under capital leases as of April 30, 1998.

<TABLE>
<CAPTION>

                                                                         (In Thousands)                  (In Thousands)
                                                                               HK$                             US$
          <S>                                                            <C>                             <C>
          Future minimum lease payments                                           1,610                            208
          Less: Amount representing interest                                       (326)                           (42)
                                                                               ---------                       ---------

          Present value of net minimum lease payments                             1,284                            166
          Less: Current portion                                                    (429)                           (55)
                                                                               ---------                       ---------
                                                                                    855                            111
                                                                               ---------                       ---------
                                                                               ---------                       ---------

</TABLE>

7.       CONTINGENT LIABILITIES

         As of April 30, 1997 and 1998, the Company had sold a receivable with
         recourse amounting to HK$1,992,000 and HK$Nil respectively

                                      F-16

<PAGE>

                          LJ INTERNATIONAL INC.
    NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)


8.       SHARE CAPITAL, WARRANT RESERVE AND SHARE PREMIUM

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

         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$782,500 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.

         The Representative of the Initial Public Offering (Representative), has
         exercised their right to purchase 219,000 shares of common stock and
         219,000 redeemable common stock purchase warrant ("purchase warrants"
         or "warrants"). The Company received the net over-allotment shares
         proceeds of HK$7,364,000 subsequent to the year end.

         In the Initial Public Offering, the Company also issued 1,460,000
         warrants. Including the 219,000 over-allotment warrants discussed
         above, each purchase warrant entitles the holders to purchase one share
         of common stock at a price of US$5.75 per share through April 15, 2003.
         Prior to year end, the Company has received all proceeds from the issue
         of 1,679,000 warrants totalling HK$1,622,000 which was recorded in the
         Company's warrant reserve account. The Representative also received
         warrants to purchase 146,000 shares of common stock at US$8.25. These
         warrants are exercisable from April 15, 1998 and expire on April 14,
         2003.

9.       RELATED PARTY TRANSACTIONS

         (a)  Names and relationship of related parties

<TABLE>
<CAPTION>

                                                                     Existing relationships with the Company
                                                                     ---------------------------------------
               <S>                                                   <C>
               Yih Yu Chuan                                          Director and major shareholder of LJI
               Gemological Institute of America,                     Common directors and major shareholders
                   Hong Kong Limited
               Italon Limited                                        Common directors and major shareholders
               Lorenzo Consultant & Investment (China)               Common directors and major shareholders
                   Limited
               Hong Kong Brasil Lapidary Limited                     Common director and major shareholder

</TABLE>

                                      F-17

<PAGE>
                          LJ INTERNATIONAL INC.
    NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)


9.       RELATED PARTY TRANSACTIONS (CONTINUED)

         (b)  Summary of related party transactions

<TABLE>
<CAPTION>

                                                                                   As of April 30
                                                                ------------------------------------------------------
                                                                                   (In Thousands)
                                                                 Note         1997              1998             1998
                                                                              ----              ----             ----
                                                                               HK$               HK$              US$
               <S>                                               <C>     <C>               <C>               <C>
               Due from related parties:
                   Gemological Institute of America,
                       Hong Kong Limited                          (i)        1,776             2,418              313
                   Lorenzo Consultant & Investment
                       (China) Limited                            (i)           19                23                3
                    Hong Kong Brasil Lapidary Limited             (i)            -               214               27
                                                                         ----------        ----------        ---------
                                                                             1,795             2,655              343
                                                                         ----------        ----------        ---------
                                                                         ----------        ----------        ---------
               Due to related party:
                   Yih Yu Chuan - Director                       (ii)            -                48                6
                                                                         ----------        ----------        ---------
                                                                         ----------        ----------        ---------

</TABLE>

<TABLE>
<CAPTION>

                                                                                    Year Ended April 30
                                                                 ----------------------------------------------------------
                                                                                      (In Thousands)
                                                                     1996            1997             1998        1998
                                                                     ----            ----             ----        ----
                                                                      HK$             HK$              HK$        US$
               <S>                                       <C>     <C>             <C>            <C>               <C>
               Sales:
                   Hong Kong Brasil Lapidary Limited                    -               -              254         33
                   Yih Yu Chuan                                         -             197                -          -
                                                                 ----------      ---------      ------------      ---------
                                                                        -             197              254         33
                                                                 ----------      ---------      ------------      ---------
                                                                 ----------      ---------      ------------      ---------

               Purchases:
                   Italon Limited                                       -             861                -          -
                   Yih Yu Chuan                          (iii)      1,071           1,862                -          -
                                                                 ----------      ---------      ------------      ---------
                                                                    1,071           2,723                -          -
                                                                 ----------      ---------      ------------      ---------
                                                                 ----------      ---------      ------------      ---------

               Sub-contracting charge:
                   Italon Limited                        (iv)       3,122           1,394                -          -
                                                                 ----------      ---------      ------------      ---------
                                                                 ----------      ---------      ------------      ---------

               Rental income:
                   Gemological Institute of
                       America, Hong Kong Limited                     300             300              275         36
                   Italon Limited                                     300             275                -          -
                                                                 ----------      ---------      ------------      ---------
                                                                      600             575              275         36
                                                                 ----------      ---------      ------------      ---------
                                                                 ----------      ---------      ------------      ---------

               Gain on sale of building:
                   Yih Yu Chuan                          (v)            -               -            2,904        376
                                                                 ----------      ---------      ------------      ---------
                                                                 ----------      ---------      ------------      ---------

</TABLE>

                                      F-18

<PAGE>

                          LJ INTERNATIONAL INC.
    NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

10.      RELATED PARTY TRANSACTIONS (CONTINUED)

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

              (ii)   The amount due to related party represents unsecured
                     advances which is interest free and repayable on demand.

              (iii)  Prior to the year ended April 30, 1997, the Company had
                     purchased gold from Yih Yu Chuan at a fixed price of
                     HK$93/gram. During the year, such arrangement has been
                     terminated.

              (iv)   The Company subcontracted with Italon for the manufacture
                     of the Company's jewelry. During the year ended April 30,
                     1997, the Company completed construction of its
                     manufacturing plant in the PRC and subcontracting to Italon
                     has been discontinued.

              (v)    During the year, Yih Yu Chuan purchased for cash an
                     investment property from the Company at appraised value.
                     The Company recognized a gain in this sale of HK$2,904,000.

10.      OPERATING LEASES COMMITMENTS

         As of April 30, 1998, the Company had commitments under non-cancellable
         operating leases in respect of land and buildings of HK$2,540,000 which
         expires in 1999. Total lease expense for the years ended April 30,
         1996, 1997 and 1998 was HK$356,000, HK$490,000 and HK$1,398,000
         respectively.

11.      PENSION COSTS

         The Company operates a defined contribution retirement plan (Plan)
         which is optional for all qualified employees. The assets of the Plan
         are held separately from those of the Company in a provident fund
         managed by an independent trustee. The pension cost charge represents
         contributions payable to the fund by the Company at rates specified in
         the rules of the Plan. Where employees leave the Plan prior to vesting
         fully in the contribution payable by the Company is reduced by the
         amount of forfeited contribution.

         The pension expense for the years ended April 30, 1996, 1997 and 1998
         was HK$105,000, HK$148,000 and HK$248,000 respectively. The amount of
         forfeitures for the years ended April 30, 1996, 1997 and 1998 was
         HK$22,000, HK$14,000 and HK$16,000 respectively.

                                      F-19

<PAGE>

                          LJ INTERNATIONAL INC.
    NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

12.      INCOME TAXES

         Reconciliation to the expected statutory tax rate in Hong Kong of 
         16% (1997 and 1996: 16.5%) is as follows:

<TABLE>
<CAPTION>

                                                                       1996               1997                   1998
                                                                       ----               ----                   ----
                                                                          %                  %                      %
          <S>                                                       <C>               <C>                  <C>
          Statutory rate                                              16.5               16.5                   16.0
          Tax effect of net operating losses                          (7.4)               -                      1.0
          Non taxable PRC profit                                      (2.9)              (3.0)                  (8.8)
          Others                                                       1.4               (1.2)                   0.4
                                                                    --------          ---------            -----------
          Effective rate                                               7.6               12.3                    8.6
                                                                    --------          ---------            -----------
                                                                    --------          ---------            -----------

</TABLE>

         Income tax expense is comprised of the following:

<TABLE>
<CAPTION>

                                                                              Year Ended April 30
                                                       ------------------------------------------------------------------
                                                                                (In Thousands)
                                                             1996               1997              1998              1998
                                                             ----               ----              ----              ----
                                                              HK$                HK$               HK$               US$
               <S>                                     <C>                <C>                <C>               <C>
               Current taxes                                  620              2,210             2,120               274
               Deferred taxes                                   -                  -                 -                 -
                                                       -----------        -----------        ----------        ----------
               Income tax expense                             620              2,210             2,120               274
                                                       -----------        -----------        ----------        ----------
                                                       -----------        -----------        ----------        ----------

</TABLE>

         The Company is subject to income taxes on an entity basis on income
         arising in or derived from the tax jurisdiction in which it is
         domiciled and operates.

         LJI 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% (1997 and 1996 :
         16.5%).

         PRC subsidiaries are registered to qualify as Foreign Investment
         Enterprises in the PRC and are eligible for certain tax holidays and
         concessions. Accordingly, certain of the PRC subsidiaries were exempted
         from PRC income tax for two years starting from their first profit
         making years (which has not been occurred yet), followed by a 50%
         reduction of tax for next three years. These subsidiaries have
         sustained losses for the PRC income tax purpose. As a result, the
         Company has not recorded any PRC income tax expense. PRC income tax in
         the future will be calculated at the applicable rates relevant to the
         PRC subsidiaries which currently are 15%.

         Deferred taxes comprise of the excess of tax depreciation allowances
         over accounting depreciation expenses. The deferred tax liability as of
         April 30, 1997 and 1998 was not significant.

                                      F-20

<PAGE>

                              LJ INTERNATIONAL INC

         NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS(CONTINUED)

13.      REPORT ON SEGMENT INFORMATION

         The Company has operations in the following geographical area:
<TABLE>
<CAPTION>

                                                                               Year Ended April 30
                                                          --------------------------------------------------------------
                                                                                 (In Thousands)
                                                              1996             1997              1998              1998
                                                               HK$              HK$               HK$               US$
                                                         ----------        ---------        ----------        ----------
         <S>                                            <C>                <C>                <C>              <C>
          Operating revenues:
             Sales to customers outside the Company
                 - United States of America & Canada        73,941           80,481           111,274            14,395
                 - Hong Kong                                 1,991              919             2,248               291
                 - Europe and other countries                  865            1,101             5,667               733
                 - PRC                                         143              570                58                 7
                 - Japan                                    10,378            9,187             4,952               641
                                                         ----------        ---------        ----------        ----------
                                                            87,318           92,258           124,199            16,067
                                                         ----------        ---------        ----------        ----------
                                                         ----------        ---------        ----------        ----------
         Segment profit
             - Hong Kong                                    13,184           19,583            15,415             1,994
             - PRC                                              24              137            14,005             1,812
         Interest income (expenses), net                    (5,693)          (3,999)           (6,964)             (901)
                                                         ----------        ---------        ----------        ----------
         Net income                                          7,515           15,721            22,456             2,905
                                                         ----------        ---------        ----------        ----------
                                                         ----------        ---------        ----------        ----------
</TABLE>
<TABLE>
<CAPTION>

                                                                                      As of April 30
                                                                    ----------------------------------------------------
                                                                                      (In Thousands)
                                                                        1997                  1998                 1998
                                                                         HK$                   HK$                  US$
                                                                    ---------            ----------            ---------
          <S>                                                        <C>                <C>                    <C>
          Segment assets
              - Hong Kong                                             57,445                97,626               12,629
              - PRC                                                   25,434                56,990                7,373
                                                                    ---------            ----------            ---------
                                                                      82,879               154,616               20,002
                                                                    ---------            ----------            ---------
                                                                    ---------            ----------            ---------
</TABLE>

          The Company 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
                                                          ----------------------------------------------------------
                                                                               (In Thousands)
                                                              1996             1997             1998           1998
                                                               HK$              HK$              HK$            US$
                                                         ----------      -----------      -----------      ---------
         <S>                                            <C>                <C>                <C>              <C>
         Revenues
            -   Manufacture of jewelry                      87,318           92,258          124,199         16,067
            -   Holding of investment properties             1,824            1,280            1,273            165
                                                         ----------      -----------      -----------      ---------
                                                            89,142           93,538          125,472         16,232
                                                         ----------      -----------      -----------      ---------
                                                         ----------      -----------      -----------      ---------

         Segment profit
            -   Manufacture of jewelry                       5,800           14,570           18,394          2,379
            -   Holding of investment properties             1,715            1,151            4,062            526
                                                         ----------      -----------      -----------      ---------
                                                             7,515           15,721           22,456          2,905
                                                         ----------      -----------      -----------      ---------
                                                         ----------      -----------      -----------      ---------
</TABLE>
                                     F-21

<PAGE>

                              LJ INTERNATIONAL INC

         NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS(CONTINUED)


13.      REPORT ON SEGMENT INFORMATION (CONTINUED)

         All of the Company's depreciation expense and capital expenditures
         during the three years ended April 30, 1998 relate to the manufacture
         of jewelry.

<TABLE>
<CAPTION>
                                                                         As of April 30
                                                         -----------------------------------------------
                                                                         (In Thousands)
                                                               1997              1998              1998
                                                               ----              ----              ----
                                                                HK$               HK$               US$
          <S>                                             <C>                <C>                <C>
          Segment assets
            -   Manufacture of jewelry                       61,224           126,398            16,351
            -   Holding of investment properties             21,580            28,150             3,642
            -   Unallocated - goodwill                           75                68                 9
                                                          ----------       -----------      ------------
                                                             82,879           154,616            20,002
                                                          ----------       -----------      ------------
                                                          ----------       -----------      ------------
</TABLE>


14.      SUBSEQUENT EVENTS

         Subsequent to the Initial Public Offering of 1,460,000 shares of common
         stock on April 15, 1998, an 219,000 additional shares of common stock
         were issued on June 1, 1998 to cover the over-allotment. As of the date
         of this report, the Company totally has 6,365,646 shares of common
         stock.

         On June 1, 1998, the Board of Directors adopted and approved the 1998
         Stock Compensation Plan (the "1998 Plan"). The 1998 Plan provides that
         incentive stock options, which are within the meaning of Section 422 of
         the United States Internal Revenue Code of 1986, as amended (the
         "Code"), and/or nonqualified stock options may be granted to certain
         officers, directors, employees and advisors of the Company or its
         subsidiaries, if any, selected by the Compensation Committee. Approval
         of the Plan is subject to shareholder approval. If approved a total of
         2,000,000 shares of Common Stock will be authorized and reserved for
         issuance under the 1998 Plan, subject to adjustment to reflect changes
         in the Company's capitalization in the case of a stock split, stock
         dividend or similar event. The 1998 Plan shall be administered by the
         full Board of Directors or by a Compensation Committee ("Committee")
         appointed by the Board of Directors, which Committee shall consist
         solely of not less than two non-employee Directors. All options must be
         granted within ten years from the date the 1998 Plan is adopted. Each
         option granted shall in no event be exercisable either in whole or in
         part after the expiration of ten years from the date grant; provided,
         however, if an incentive option is granted to a 10% Shareholder, such
         incentive option shall not be exercisable more than five years from the
         date of grant thereof. The exercise price for any incentive option must
         be at least equal to the fair market value of the shares covered
         thereby as of the date of grant of such option. Upon the exercise of
         the option, the exercise price thereof must be paid in full either in
         cash, share of stock of the Company or a combination thereof.

         As of the date of this report, the Company has not granted any options
         under the 1998 Plan.

                                  F-22
<PAGE>

                              LJ INTERNATIONAL INC

         NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS(CONTINUED)



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

         The Company's financial statements are prepared in accordance with
         generally accepted accounting principles (GAAP) as practiced in Hong
         Kong (HK GAAP), which differ in certain significant respects from GAAP,
         including certain accounting interpretations of the Securities and
         Exchange Commission (SEC) as practiced in the United States (US GAAP).
         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 LJI 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
              The Company completed a bridge loan financing on October 17, 1997,
              where it raised HK$6,049,000 (US$782,500). As of April 30, 1998,
              there still had an outstanding balance amounting to HK$2,280,000
              (principal plus accrued interest) which had been repaid in the
              subsequent month after the year end. As agreed, the Company issued
              156,500 shares of its unregistered common stock at no additional
              cost to the note holders after the Company completed its public
              offering on April 15, 1998. Under US GAAP the Company is required
              to fair value such shares. The value associated with these shares
              is HK$6,049,000 based on the price associated with the offering,
              which has been amortized as an additional interest expense during
              the year.

              As of April 30, 1998, the Company did not have a common stock
              option plan nor any common stock options outstanding. To the
              extent the Company grants common stock options, common stock or
              other equity instrument to employees, it will be required under US
              GAAP to record compensation expense for any difference between the
              price at which the equity instrument is granted and then current
              market price of the Company's trading common stock. It will
              further be required to disclose in the footnotes to the financial
              statements certain fair value information and proforma effects of
              such issuances. Transaction in equity instruments with
              non-employees for goods and services must be accounted for at fair
              value as specified under US GAAP.

              In connection with the public offering, the Company paid the
              Representative HK$835,000 (US$108,000) 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. No expense would be recorded in 1998 as the offering
              closed near year-end.


                                      F-23
<PAGE>

                              LJ INTERNATIONAL INC

         NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS(CONTINUED)

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

         (c)   CAPITALIZED DEFERRED COSTS
              During the year, the Company merged with Deen. Approximately
              HK$640,000 and HK$193,000 of costs were incurred in connection
              with the merger for each of the years ended April 30, 1997 and
              1998 respectively. Under HK GAAP these costs have been capitalised
              as organization costs and will be amortized over ten years. As
              Deen has no significant assets or substantive operations, other
              than a large shareholder base, these costs, under US GAAP, would
              be expensed as incurred.

              The Company also has incurred certain indirect costs paid to
              current directors associated with its public offering. Under HK
              GAAP, these costs which totaled HK$120,000 and HK$589,000 for each
              of the years ended April 30, 1997 and 1998 have been deferred as
              offering costs and offset against share premium upon completion of
              the public offering. In addition, during the year, the Company has
              incurred indirect costs amounting to HK$116,000 with a consultant
              associated with its public offering. Under US GAAP these amounts
              would be expensed as incurred.

         (d)  EARNINGS  PER SHARE
              Under HK GAAP, basic earnings per share is based on the weighted
              average number of common shares on issue during each period. Fully
              diluted weighted average number of common shares are calculated on
              a time weighted basis and operating income is adjusted to include
              the assumed income, net of tax, from placing the proceeds from the
              exercise of outstanding share options.

              Under US GAAP, earnings per share is presented in accordance with
              the provisions of Statement of Financial Accounting Standards No.,
              128, EARNINGS PER SHARE (SFAS 128). SFAS 128 replaced the
              presentation of primary and fully diluted earnings per share
              (EPS), with a presentation of basic EPS and diluted EPS. Under
              SFAS 128, basic EPS excludes dilution for common stock equivalents
              and is computed by dividing income or loss available to common
              shareholders by the weighted average number common shares
              outstanding for the period. Diluted EPS reflects the potential
              dilution that could occur if securities or other contracts to
              issue common stock were exercised or converted into common stock
              and resulted in the issuance of common stock. Shares issued in
              connection with Deen merger, however, are reflected as outstanding
              for all periods as they were issued for nominal consideration. In
              accordance with SFAS 128 prior periods share have been restated in
              the US GAAP reconciliation table.

              Under US GAAP, fully diluted earnings per share for the year ended
              April 30, 1998 is not shown as common stock equivalents were
              anti-dilutive.

                                  F-24
<PAGE>

                              LJ INTERNATIONAL INC

         NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS(CONTINUED)


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

         (e)  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 estimated involve uncertainties and cannot be determined
              with precision. Under US GAAP the estimated fair value are to be
              disclosed if they are materially different from the underlying
              historical cost basis. The Company has the following financial
              instruments and investments, where the fair value may be different
              from historical costs.

              i)  Investment properties - The fair value of the investment
                  properties held by the Company as of April 30, 1998 is
                  estimated to be HK$28,150,000 on the market value basis. The
                  market valuations are generally performed by third parties at
                  varing dates during the year and adjusted internally by
                  management to year-end amounts.

              ii) Related party transactions - The Company 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. (As discussed below, there are other
                  differences between US GAAP and HK GAAP in the treatment and
                  classification of these related party advances).

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

         (f)  INVESTMENT PROPERTIES
              Under HK GAAP investment properties are included in the balance
              sheet at their open market values, based on a year end valuation.
              Under US GAAP investment properties are recorded at their
              historical costs. This would have reduced the carrying values by
              HK$7,465,000 as of April 30, 1998 with no related income tax
              effect. Under HK GAAP investment properties have not been
              depreciated since 1995, at which time accumulated depreciation was
              HK$1,178,000. Under US GAAP depreciation would have continued to
              be recorded over an estimated useful life of 40 years based
              historical costs. This would have increased depreciation expense
              for the years ended 1996, 1997 and 1998 by HK$572,000, HK$572,000
              and HK$547,000 (US$71,000) with no related income tax effect.

                                F-25

<PAGE>

                              LJ INTERNATIONAL INC

         NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS(CONTINUED)


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

         (g)  RELATED PARTY TRANSACTIONS
              Under US GAAP significant related party advances are recorded as a
              reduction to equity as opposed to an asset.

              In October 1997, the Company sold a building to its major
              shareholder and recognized a gain of HK$2,904,000. Under US GAAP,
              such gain would be recorded as a capital contribution.
              Accordingly, there would be no effect on the shareholders' equity
              under US GAAP.

         (h)  DEFERRED TAXES
              Under HK GAAP provision for deferred taxes is calculated under the
              liability method for all material differences to the extent that
              there is a reasonable probability that these will be reversed
              within 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 the
              US GAAP.

         (i)  SHARE PREMIUM
              The Company created a share premium of HK$41,597,000 following the
              public offering of 1,460,000 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-26
<PAGE>

15.  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
                                                       --------------------------------------------
                                                                     (In Thousands)
                                                       1996         1997         1998        1998
                                                       ----         ----         ----        ----
                                                       HK$          HK$          HK$         US$
<S>                                                    <C>         <C>          <C>          <C>
Net income  as reported under HK GAAP                  7,515       15,721       22,456       2,905
US GAAP material adjustments:
   - Depreciation on investment properties              (572)        (572)        (547)        (71)
   - Capitalized deferred costs                            -         (760)        (898)       (116)
   - Amortization of costs for shares issuable
       to note holders                                     -            -       (6,049)       (783)
   - Gain on disposal of an investment property
       to a related party                                  -            -       (2,904)       (376)
   - Additional gain on disposal of an
       investment property                                 -            -           76          10
   - Amortization of Deen Merger costs                     -            -           64           8
   - Amortization of goodwill                              -            -            7           1
   - Income tax effects                                    -            -            -           -
                                                       -----       ------       ------       -----
Net income under US GAAP                               6,943       14,389       12,205       1,578
                                                       -----       ------       ------       -----
                                                       -----       ------       ------       -----

Proforma earnings per share under
   US GAAP
     - Basic                                            1.53         3.18         2.65        0.34
                                                       -----       ------       ------       -----
                                                       -----       ------       ------       -----

Weighted average number of shares outstanding
  (thousand) under HK GAAP                             4,387        4,387        4,539       4,539

Affected weighted average number of shares
  Calculation                                              -            -           62          62

Shares (thousand) for Deen Merger                        143          143            -           -
                                                       -----       ------       ------       -----

Weighted average number of shares outstanding
  (thousand) under US GAAP                             4,530        4,530        4,601       4,601
                                                       -----       ------       ------       -----
                                                       -----       ------       ------       -----

</TABLE>


                                       F-27

<PAGE>

15.  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
                                                     ---------------------------------
                                                               (In Thousands)
                                                      1997         1998         1998
                                                      ----         ----         ----
                                                      HK$          HK$          US$
<S>                                                   <C>          <C>          <C>
Shareholders' equity as reported
  under HK GAAP                                      16,981       90,257       11,676
Cumulative effect of depreciation
  on investment properties                           (1,716)      (2,263)        (293)
Capitalized deferred costs                             (760)        (769)         (99)
Reduction for related company advance                (1,795)      (2,655)        (343)
Increase for future financial consulting
  paid to the Representative in the
  public offering                                         -          835          108
Reduction for goodwill recorded
  on the merger of LJI and Lorenzo                      (75)         (68)          (9)
Additional gain on disposal of an
  investment property                                     -           76           10
Amortization of costs for shares
  issuable to note holders                                -            -            -
Surplus arising on revaluation of
  investment properties                                   -       (7,465)        (966)
                                                     ------       ------       ------
Shareholders' equity under US GAAP                   12,635       77,948       10,084
                                                     ------       ------       ------
                                                     ------       ------       ------

</TABLE>


                                       F-28

<PAGE>

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

     IMPACT OF RECENTLY ISSUED US GAAP ACCOUNTING STANDARDS

     Statement of Financial Accounting Standards 130, reporting Comprehensive 
     Income" and Statement of Financial Accounting Standards 131 disclosures 
     About Segments of an Enterprise and Related Information". Statement 130 
     establishes standards for reporting and display of comprehensive income, 
     its components and accumulated balances. Comprehensive income is defined 
     to include all changes in equity except those resulting from investments 
     by owners and distributions to owners. Among other disclosures, 
     Statement 130 requires that all items that are required to be recognized 
     under current accounting standards as components of comprehensive income 
     be reported in a financial statement that displays with the same 
     prominence as other financial statements. Statement 131 supersedes 
     Statement of Financial Accounting Standards 14 financial Reporting for 
     Segments of a Business Enterprise". Statement 131 establishes standards 
     on the way that public companies report financial information about 
     operating segments in annual financial statements and requires reporting 
     of selected information about operating segments in interim financial 
     statements issued to the public. It also establishes standards for 
     disclosures regarding products and services, geographic areas and major 
     customers. Statement 131 defines operating segments as components of a 
     company about which separate financial information is available that is 
     evaluated regularly by the chief operating decision maker in deciding 
     how to allocate resources and in assessing performance.

     Statements 130 and 131 are effective for financial statements for 
     periods beginning after December 15, 1997 and require comparative 
     information for earlier years to be restated. Because of the recent 
     issuance of these standards, management has been unable to fully 
     evaluate the impact, if any, the standards may have on the future 
     financial statement disclosures. Results of operations and financial 
     position, however, will be unaffected by implementation of these 
     standards.


                                       F-29

<PAGE>

                                  SIGNATURES

     Pursuant to the requirements of Section 12 of the Securities Exchange 
Act of 1934, the registrant certifies that it meets all of the requirements 
for filing on Form 20-F and has duly caused this annual report to be signed 
on its behalf by the undersigned, thereunto duly authorized.


                                       LJ INTERNATIONAL INC.
                                           (Registrant)



Date:  September 25, 1998              By: /s/ Yu Chuan Yih
       ------------------                  --------------------------------
                                           Yu Chuan Yih
                                           Chairman