<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, 2000

                                      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.

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


<PAGE>

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

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

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

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

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

     Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of August 14, 2000:

                    8,671,615 Common Stock
                    1,679,000 Warrants

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

     Yes   X     No
         -----      -----

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

Item 17           Item 18   X
        -----             -----

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)

     Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

     Not Applicable.

                                      -2-
<PAGE>

                                EXCHANGE RATES


     We have prepared our consolidated financial statements in accordance with
Hong Kong generally accepted accounting principles consistently applied and
publish such statements in Hong Kong dollars, which is the functional currency
of our subsidiaries and the legal tender currency of Hong Kong.  All references
to "Hong Kong dollars" or "HK$" are to Hong Kong dollars.  All references to
"U.S. Dollars," "dollars" or "$" are to United States dollars. Conversion of
amounts from Hong Kong dollars into United States dollars for the convenience of
the reader has been made at the exchange rate of US$1.00 = HK$7.73.

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

     Calendar Year                     Period End   Average   High    Low
     -------------                     ----------   -------   ----    ---
                                                  Noon Buying Rate
                                                  ----------------
                                                    (HK$per US$)
     1995                                 7.7323    7.7357  7.7665  7.7300
     1996                                 7.7347    7.7345  7.7440  7.7310
     1997                                 7.7495    7.7431  7.7550  7.7275
     1998                                 7.7476    7.7467  7.7595  7.7355
     1999                                 7.7740    7.7594  7.7814  7.7457
     2000 (through April 30, 2000)        7.7867    7.7818  7.7867  7.7765



                          FORWARD-LOOKING STATEMENTS


     This annual report contains certain forward-looking statements that are
based on beliefs and assumptions of our management.  Often, you can recognize
these statements because we use words such as "believe", "anticipate", "intend",
"estimate", "future", "plans", "will" and "expect" in the statements.  Our
actual performance after April 30, 2000 could differ materially from the
forward-looking statements contained in this annual report.  However, we are not
obligated to release publicly any revisions to the forward-looking statements
contained in this annual report.

                                      -3-
<PAGE>

                                    PART I


ITEM 1.  DESCRIPTION OF BUSINESS.
---------------------------------

     We are a totally vertically integrated producer of finished semi-precious
gemstones and fine quality gemstone jewelry.  We primarily cut and polish semi-
precious gemstones and design, manufacture, market and distribute gem set
jewelry to fine jewelers, department stores, national jewelry chains and
electronic and specialty retailers throughout North America and Western Europe.
Our product line includes all major categories that are sought by major
retailers, including earrings, necklaces, pendants, rings and bracelets.  Our
jewelry is crafted in gold, platinum and sterling silver and is set with semi-
precious and precious stones, including diamonds.  The average wholesale price
of our jewelry is approximately $100, which equates to average retail prices
between $100 and $499.

     We believe that our vertically integrated structure provides significant
advantages over our competitors.  All profits from value added processes are
captured internally, rather than shared with third party manufacturers.  This
results in very competitive pricing for the retailer and enhanced profits for
us.  Innovative processes in stone cutting and manufacturing further enhance our
competitive position.

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

     We organize our marketing and distribution strategies by retail
distribution channel. Concepts are developed for the specific needs of different
market segments.  We have identified the following as prime retail targets:

 .    fine jewelers;
 .    national jewelry chains;
 .    department stores;
 .    electronic retailers; and
 .    specialty.

     For the fiscal years ended April 30, 1999 and 2000, approximately 92% and
77% of sales were in North America.

                                      -4-
<PAGE>

Background and Organization

     We were incorporated as an international business company under the
International Business Companies Act of the British Virgin Islands on January
30, 1997.  We own all of the issued share capital in:

  .  Lorenzo Jewelry Mfg. (H.K.) Limited, a company incorporated in Hong Kong on
     February 20, 1987.  Lorenzo Jewelry owns all of the equity in:
     .    Shantou SEZ Lorenzo Gems & Craft Factory Co., Ltd.
     .    Shantou Lorenzo Jewelry Mfg., and
     .    Lorenzo Marketing Co. Limited.

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

  .  Precious Gems Trading Ltd., which owns all of the equity in:
     .    Lorenzo Gems Manufacturing (Shenzhen) Co., Ltd.
  .  Golden Horizon Trading Ltd., which owns all of the equity in:
     .    Lorenzo Jewellery (Shenzhen) Co., Ltd.
  .  Fine Gift Enterprises Ltd., which owns all of the issued share capital in:
     .    Lorenzo Diamond Jewelry Mfg. Co. Limited.

                                      -5-
<PAGE>

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

                             LJ INTERNATIONAL INC.
                           (British Virgin Islands)

<TABLE>
<CAPTION>

<S>                               <C>                 <C>                     <C>
     100%                              100%                 100%                   100%


Lorenzo Jewelry Mfg.              Precious Gems          Fine Gift            Golden Horizon
  (H.K.) Limited                   Trading Ltd.       Enterprises Ltd.         Trading Ltd.
   (Hong Kong)                      (B.V.I.)             (B.V.I.)               (B.V.I.)


                                       100%                 100%                   100%

100%  Shantou SEZ Lorenzo         Lorenzo Gems        Lorenzo Diamond       Lorenzo Jewellery
      Gems & Craft Factory       Manufacturing          Jewelry Mfg.       (Shenzhen) Co., Ltd.
          Co., Ltd.           (Shenzhen) Co., Ltd.      Co. Limited              (P.R.C.)
          (P.R.C.)                  (P.R.C.)            (Hong Kong)


100%  Shantou Lorenzo
        Jewelry Mfg.
         (P.R.C.)


100%  Lorenzo Marketing
        Co. Limited
        (Hong Kong)

</TABLE>

                                      -6-
<PAGE>

Our Industry

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

 .    a small number of 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.

     We believe that vertically integrated companies which control costs by
performing all value added processes enjoy a distinct competitive advantage over
wholesalers and distributors who pay premium acquisition prices for items that
they intend to resell.  We further believe that large retailers want to rely
upon prime manufacturers because they trust that prime manufacturers are
reliable, low cost producers who can accommodate the large quantities of
production that large retailers commonly purchase.

Our Business Strategy

     Our business strategy is to:

 .    increase our market share of moderately priced high-quality gem-set jewelry
     by capitalizing on our unique vertically integrated manufacturing processes
     to produce high volume, high-quality products;
 .    further develop our existing customer relationships with our specialized
     services; and
 .    aggressively expand into new distribution channels, particularly in the
     United States and throughout Western Europe, Japan, Taiwan and China.

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

 .    marketing a line of sterling silver jewelry.  These are typically
     merchandised with a retail price range of $30 to $150.
 .    offering a new branded collection of sterling silver and 18 karat gold
     jewelry with a retail price range of $199 to $999.
 .    offering diamond jewelry and expanding this business to our current client
     base by adding diamonds to some of our settings as well as offering newly
     designed jewelry.

Our Manufacturing Capability

     We have established two sophisticated factories located in China that
perform stone cutting and polishing and jewelry manufacturing.  The factories
are located in the cities of Shantou and Shenzhen in Guangdong Province, China.
Each manufacturing operation is

                                      -7-
<PAGE>

separated to allow for the specialized needs of each process. The Shantou
facility is the older of the two facilities. It consists of 45,000 square feet
and has been operating for nine years. The Shenzhen facility has been operating
for less than two years and has 50,000 square feet of manufacturing space. We
currently employ over 2,500 skilled gemstone cutters and manufacturing personnel
and are producing over four million carats of cut gemstones and two million
pieces of finished fine jewelry annually.

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

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

Sales and Marketing

     Our merchandising strategy is to provide unique and differentiated products
that are enhanced by the favorable pricing that results from our vertically
integrated structure.  We invest significant effort in design and model making
to produce items which are distinctly different from our competitors.  We intend
to devote our efforts towards brand development and utilize marketing concepts
to enhance the saleability of our production.  We recognize that retailers favor
certain price points.  As part of our product development strategy, we attempt
to align our wholesale prices to match retailers' target prices as a means of
achieving these popular price targets.

     Our sales and marketing team is located in our executive offices in Hong
Kong.  Our marketing and distribution strategy is to identify the strongest
retail customers in each distribution channel and to focus design and sales
efforts towards the largest and fastest growing retailers.  We maintain a broad
base of customers and concentrate our efforts on five major jewelry market
segments:

 .    fine jewelers;
 .    national jewelry chains;
 .    department stores;
 .    electronic retailers; and
 .    specialty retailers.

                                      -8-
<PAGE>

     Our single largest customer is QVC, Inc. which accounted for approximately
48% of our sales during fiscal 2000 and 57% of our sales during fiscal 1999.  We
do not sell to QVC, Inc. pursuant to any formal or long-term contracts but only
on a purchase order basis.  Although we have developed and maintained a good and
longstanding relationship with QVC, Inc., the loss of QVC, Inc. as a customer or
a significant reduction in its orders would have a materially adverse effect on
us.

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

     In addition to direct sales to QVC, Inc. and other retailers, we also sell
our products to retailers through International Jewelry Connection.  The
principal focus of IJC is on major U.S. department stores and jewelry retailers,
who require specialized levels of marketing, service and training.  These sales
representatives are paid on a commission-only basis.

     Our sales promotion efforts include attendance by our representatives at
U.S. and international trade shows and conventions, including Las Vegas,
Orlando, New York, Basel, Switzerland, Hong Kong and Japan.  In addition, we
actively advertise in trade journals and related industry publications.

Design and Product Development

     We have seven internationally trained designers who work from our Hong Kong
executive office and a growing team of twelve designers who work in a designated
area within the Shenzhen manufacturing facility.  The Hong Kong design director
and the most experienced Hong Kong design staff closely supervises the China-
based designers.  The China-based designers create designs that have been
accepted by our various clients worldwide.  The Hong Kong design team attends
trade fairs worldwide to gather product ideas and monitor the latest product
trends.  We produce over 250 new models per month to support our business growth
objectives.

     We seek to provide our customers with a broad selection of high-quality 10,
14 and 18 karat gold, platinum and sterling silver jewelry products that
incorporate traditional yet fashionable styles and designs.  We currently offer
approximately 5,000 different styles of rings, bracelets, necklaces, earrings,
pendants and matching sets that are contemporary and desirable in the market.

                                      -9-
<PAGE>

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

Manufacturing Process

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

 .    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.

     We have developed a process of cost-effectively producing quality, gem-set
jewelry.  We believe that we have a substantial competitive advantage due to our
unique, vertically integrated manufacturing process.  We utilize the lost-wax
method of jewelry manufacturing to produce high-quality gold rings, earrings,
pendants and bracelets.

Supply

     We manufacture and cut our own semi-precious stones.  We import most of our
rough gemstones from South America, Africa and China.  South America is the
major source of ametrine, amethyst, aquamarine, imperial topaz, tourmaline and
white topaz, whereas Africa is the main source of tanzanite, mandarine garnet,
garnet aquamarine and topaz.  We also import aquamarine, peridot and topaz from
China.  We buy the rough gemstones directly from a number of miners based on
quality, pricing and available quantities.  We believe that we have good
relationships with our suppliers, most of whom have supplied us for many years.
The stones are delivered to us either by air or by sea depending on volume and
types of rough stones.

     We purchase our gold from banks, gold refiners and commodity dealers who
supply substantially all of our gold needs which we believe is sufficient to
meet our requirements.

     Gold acquired for manufacture is at least .995 fine and is combined with
other metals to produce 10, 14 and 18 karat gold.  The term "karat" refers to
the gold content of alloyed gold, measured from a maximum of 24 karats, which is
100% fine gold.  Varying quantities of metals such as silver, copper, nickel and
zinc are combined with fine gold to produce 14 karat gold of different colors.
These alloys are in abundant supply and are readily available to us.

                                     -10-
<PAGE>

     We do not presently engage in hedging activities with respect to possible
fluctuations in the price of gold.  We believe the risk of not engaging in such
activities is minimal, since we purchase our gold requirements after each
significant purchase order is received.  We believe that a downward trend in the
price of gold would have little, if any, impact on the valuation of our
inventories.

     We purchase supplies and raw materials from a variety of suppliers and we
do not believe the loss of any of the suppliers would have a material adverse
effect on our business.  Alternative sources of supply for raw materials for
production of jewelry are readily available.

Security

     We have installed certain measures at our Shantou and Shenzhen, China
manufacturing and our Hong Kong administrative facilities to protect against
loss, including multiple alarm systems, infrared motion detectors and a system
of closed circuit television cameras which provide surveillance of all critical
areas of our premises.

     We carefully inspect all materials sent and received from outside
suppliers, monitor the location and status of all inventory, and have strict
internal control procedures of all jewelry as it proceeds through the
manufacturing process.  A complete physical inventory of gold and gemstones is
taken at our manufacturing and administrative facilities on an annual basis.

Insurance

     We maintain primary all-risk insurance, with limits in excess of our
current inventory levels, to cover thefts and damage to inventory located on our
premises.  We also maintain insurance covering thefts and damage to our owned
inventory located off-site.  The amount of coverage available under such
policies is limited and may vary by location, but generally is in excess of the
value of the gold and gemstones supplied by us.  We carry transit insurance
which coverage includes the transportation of jewelry outside of our office.

Competition

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

                                     -11-
<PAGE>

     We believe that few competitors have the capacity and manufacturing skill
to be effective competitors.  We believe that our vertically integrated
manufacturing capabilities distinguish us from most of our competitors and
enables us to produce very competitively priced, high quality and consistent
products.

     In North America, the market, although highly fragmented, does contain a
number of major competitors, many of whom import much of their product from the
Far East and many of whom sell higher priced items.  The key United States
competitors include:

 .    E.E.A.C. Inc.;
 .    Aurafin; and
 .    PACE Enterprises.

     International competitors include Pranda International and Beauty Gems
Limited.  Most of these manufacturers/wholesalers have been successful vendors
for many years and enjoy good relations with their clients. Although it may be
difficult for a newcomer to break into established relationships, we already
have made substantial inroads in the North American jewelry market and we
believe we can remain competitive based on our vertically integrated low-cost,
high-volume and high-quality manufacturing process.

Employees

     As of August 31, 2000, we employed over 2,500 persons on a full-time basis,
of whom approximately 1,500 are involved in manufacturing of jewelry and 883 are
engaged in gemstone cutting and polishing.  The remaining 117 persons include
our management and executive staff in Hong Kong and China.  None of our
employees is represented by a labor union and we believe that our employees'
relations are good.

Enforceability of Civil Liabilities and Certain Foreign Issuer Considerations

     We are a British Virgin Islands holding company, and substantially all of
our assets are located in China and/or Hong Kong.  In addition, all but two of
our directors and officers are non-residents of the United States, and all or a
substantial portion of their assets are located outside the United States.  As a
result, investors may be unable to effect service of process within the United
States upon these non-residents or to enforce against them judgments obtained in
United States courts, including judgments based upon the civil liability
provisions of the securities laws of the United States or any state.  There is
uncertainty as to whether courts of China, the British Virgin Islands or Hong
Kong would enforce:

 .    judgments of United States courts obtained against us or these non-
     residents based on the civil liability provisions of the securities laws of
     the United States or any state; or

                                     -12-
<PAGE>

 .    in original actions brought in China, the British Virgin Islands or Hong
     Kong, liabilities against us or these non-residents based on the securities
     laws of the United States or any state.

     We have designated CT Corporation, 111 Eighth Avenue, New York, New York
10011 as our agent for service of process in the United States with respect to
this offering.

     There are no treaties between China and the United States, between the
British Virgin Islands and the United States, nor between Hong Kong and the
United States providing for the reciprocal enforcement of foreign judgments.
However, the courts of China, the British Virgin Islands and Hong Kong may
accept a foreign judgment as evidence of a debt due.  An action may be commenced
in China, the British Virgin Islands or Hong Kong for recovery of this debt.
However, a Chinese, British Virgin Islands or Hong Kong court will only accept a
foreign judgment as evidence of a debt due, if:

 .    the judgment is for a liquidated amount in a civil matter;
 .    the judgment is final and conclusive and has not been stayed or satisfied
     in full;
 .    the judgment is not directly or indirectly for the payment of foreign
     taxes, penalties, fines or charges of a like nature.  In this regard, a
     Chinese, British Virgin Islands or Hong Kong court is unlikely to accept a
     judgment of an amount obtained by doubling, trebling or otherwise
     multiplying a sum assessed as compensation for the loss or damages
     sustained by the person in whose favor the judgment is given;
 .    the judgment was not obtained by actual or constructive fraud or duress;
 .    the foreign court has taken jurisdiction on grounds that are recognized by
     the private international law rules in China as to conflict of laws in
     China or common law rules as to conflict of laws in the British Virgin
     Islands or Hong Kong;
 .    the proceedings in which the judgment was obtained were not contrary to the
     concept of fair adjudication;
 .    the proceedings in which the judgment was obtained, the judgment itself and
     the enforcement of the judgment are not contrary to the public policy of
     China, the British Virgin Islands or Hong Kong;
 .    the person against whom the judgment is given is subject to the
     jurisdiction of the Chinese, the British Virgin Islands or the Hong Kong
     courts; and
 .    the judgment is not on a claim for contribution in respect of damages
     awarded by a judgment that does not satisfy the above requirements.

     Enforcement of a foreign judgment in China, the British Virgin Islands or
Hong Kong also may be limited or otherwise affected by applicable bankruptcy,
insolvency, liquidation, arrangement, moratorium or similar laws relating to or
affecting creditors' rights generally and will be subject to a statutory
limitation of time within which proceedings may be brought.

     Under United States law, majority and controlling shareholders generally
have certain fiduciary responsibilities to minority shareholders.  Shareholder
action must be taken in good

                                     -13-
<PAGE>

faith and actions by controlling shareholders that are obviously unreasonable
may be declared null and void. We believe there are no material differences
between the protection afforded to minority shareholders of a company organized
as an international business company under the law of the British Virgin Islands
from those generally available to shareholders of corporations organized in the
United States. However, there may be circumstances where the British Virgin
Islands law protecting the interests of minority shareholders may not be as
protective as the law protecting minority shareholders in United States
jurisdictions. Under British Virgin Islands law, a shareholder of a company
organized as an international business company under the laws of the British
Virgin Islands may bring an action against a company, even if other shareholders
do not wish to bring an action and even though no wrong has been done to the
shareholder personally. This is a representative action, that is, an action on
the shareholder's own behalf and on behalf of other persons in his class, or
similarly situated. Instances where representative actions may be brought
include to:

 .    compel a company to act in a manner consistent with its Memorandum of
     Association and Articles of Association;
 .    restrain directors from acting on resolutions, where notice of a
     shareholders' meeting failed adequately to inform shareholders of a
     resolution proposed at the meeting;
 .    restrain a company, where it proposes to perform an act not authorized by
     the Memorandum of Association and the Articles of Association or to seek
     damages from a director to compensate a company from the consequences of
     such an unauthorized act, or to recover property of a company disposed of
     due to such unauthorized act;
 .    restrain a company from acting upon a resolution that was not made in good
     faith and for the benefit of shareholders as a whole;
 .    redress where a resolution passed at a shareholders' meeting was not
     properly passed, for instance, if it was not passed with the necessary
     majority;
 .    restrain a company from performing an act which is contrary to law; and
 .    restrain a company from taking any action in the name and for the benefit
     of a company.

     Such an action also may be brought against directors and promoters who have
breached their fiduciary duties to a company, although acts amounting to a
breach of a fiduciary duty can be ratified by a general meeting of shareholders,
in the absence of fraud.  Such actions against directors and promoters only may
be taken, however, if such directors and promoters have power to influence the
action taken by a general meeting by means of, for instance, their votes as
shareholders, which would prevent a company from suing them in the company's
name.  Although British Virgin Islands law does permit a shareholder of a
British Virgin Islands company to sue its directors representatively or
derivatively, the circumstances in which any such action may be brought as set
forth above may result in the rights of shareholders of a British Virgin Islands
company being more limited than those of shareholders in a United States
company.

                                     -14-
<PAGE>

ITEM 2.  DESCRIPTION OF PROPERTY.
---------------------------------

     Our 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.  We own approximately 4,800 square feet of office, showroom and
manufacturing space at this location.

     Our jewelry production facility in Shantou, China consists of 10,000 square
feet of building space which we own in the Yubao Industrial Building, Longhu
District, Shantou Special Economic Zone, Guangdong Province, China.  We lease
the adjacent 35,000 square feet on the same floor of that building as one of our
gem cutting facilities at a rental rate of HK$39,000 (US$5,000) per month until
July 2002.

     Our second production facility in Shenzhen, China consists of 50,000 square
feet of building space.  This facility is located in the Shatoujiao Free Trade
Zone, Shenzhen.  We lease this space from an unaffiliated third party at a
rental rate of HK$74,120 (US$9,500) per month until August 2002.

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

     We lease an office sharing facility, which includes related office
services, in Scottsdale, Arizona, on a quarterly basis at an annual rate of
HK$92,600 (US$12,000).


ITEM 3.  LEGAL PROCEEDINGS.
---------------------------

     We are not a party to any material legal proceedings and there are no
material legal proceedings pending with respect to our property.  We are not
aware of any legal proceedings contemplated by any governmental authorities
involving either us or our property.  None of our directors, officers or
affiliates is an adverse party in any legal proceedings involving us or our
subsidiaries, or has an interest in any proceeding which is adverse to us or our
subsidiaries.


ITEM 4.  CONTROL OF REGISTRANT.
-------------------------------

     (a) Except as set forth in (b) below, as far as is known to our management,
we are 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 shares of our common stock as of August 14, 2000 by:

                                     -15-
<PAGE>


 .    each person who is known by us to own beneficially more than 10% of the
     outstanding common stock,
 .    each of our executive officers and directors, and
 .    all directors and executive officers as a group.

<TABLE>
<CAPTION>

Name of Beneficial Holder                                             Number         Percent
-------------------------                                             ------         -------
                                                                     Shares Beneficially Owned
                                                                     -------------------------
<S>                                                                  <C>                 <C>
Yu Chuan Yih.......................................................  4,684,200(1)(2)     48.4%
Ka Man Au..........................................................    200,000(3)         2.3%
Joseph Tuszer......................................................    300,000(4)         3.3%
Hon Tak Ringo Ng...................................................    200,000(5)         2.3%
Michael S. Gilburd.................................................          0              0%
Po Yee Elsa Yue....................................................      6,000(6)         0.1%
Lionel C. Wang.....................................................          0              0%
All directors and executive officers as a group (7 persons)........  5,390,200           51.9%
</TABLE>
___________
(1)  Of Mr. Yih's 4,684,200 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 British Virgin Islands corporations which own
     shares of our common stock as follows: Welgram International Limited -
     236,000 shares and Sunflower Gold Holdings Limited - 252,000 shares.

(2)  Includes options currently exercisable to acquire 775,000 shares of common
     stock held by Mr. Yih and options currently exercisable to acquire 230,000
     shares of common stock held by Mr. Yih's wife.

(3)  Includes options currently exercisable to acquire 200,000 shares of common
     stock.

(4)  Includes options currently exercisable to acquire 300,000 shares of common
     stock.

(5)  Includes options currently exercisable to acquire 200,000 shares of common
     stock.

(6)  Includes options currently exercisable to acquire 6,000 shares of common
     stock.

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

                                     -16-
<PAGE>

ITEM 5.  NATURE OF TRADING MARKET.
----------------------------------

     Our common stock is traded in the over-the-counter market and is quoted on
The Nasdaq National Market under the symbol "JADE."  The following table sets
forth, on a quarterly basis, the high and low sales prices for the common stock
for the last two fiscal years:

     Quarter ended:            High    Low
     --------------           ------  -----

     July 31, 1998            $ 7.50  $4.50
     October 31, 1998         $ 6.00  $3.88
     January 31, 1999         $ 7.00  $4.00
     April 30, 1999           $11.50  $4.31

     July 31, 1999            $ 7.13  $4.00
     October 31, 1999         $ 5.00  $2.50
     January 31, 2000         $ 8.00  $2.75
     April 30, 2000           $ 6.25  $3.00

     The warrants are traded in the over-the-counter market and are quoted on
The Nasdaq National Market under the symbol "JADEW."  The following table sets
forth, on a quarterly basis, the high and low sales prices for the warrants for
the last two fiscal years:

     Quarter ended:            High    Low
     --------------           ------  ------

     July 31, 1998            $1.656  $0.625
     October 31, 1998         $1.516  $0.563
     January 31, 1999         $2.813  $ 1.00
     April 30, 1999           $ 8.25  $ 1.75

     July 31, 1999            $3.938  $ 1.75
     October 31, 1999         $ 2.00  $ 1.00
     January 31, 2000         $ 2.50  $1.063
     April 30, 2000           $ 2.50  $1.125

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

                                     -17-
<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 us or that affect our payment of dividends, interest or
other payments to nonresident holders of our capital stock.  British Virgin
Islands law and our Memorandum of Association and Articles of Association impose
no limitations on the right of nonresident or foreign owners to hold or vote the
common stock.


ITEM 7.  TAXATION.
------------------

     The following is a summary of 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 non-U.S. and non-British Virgin
Islands tax laws.  Accordingly, each prospective investor should consult its own
tax advisor regarding the particular tax consequences to it of an investment in
the common stock.  The discussion below is based upon laws and relevant
interpretations in effect as of the date of this annual report, all of which are
subject to change.

United States Federal Income Taxation

     The following discussion addresses only the material U.S. federal income
tax consequences to a U.S. person, defined as a U.S. citizen or resident, a U.S.
corporation, or an estate or trust subject to U.S. federal income tax on all of
its income regardless of source, making an investment in the common stock.  For
taxable years beginning after December 31, 1996, a trust will be a U.S. person
only if:

 .    a court within the United States is able to exercise primary supervision
     over its administration; and
 .    one or more United States persons have the authority to control all of its
     substantial decisions.

     In addition, the following discussion does not address the tax consequences
to a person who holds or will hold, directly or indirectly, 10% or more of the
common stock, which we refer to as a "10% Shareholder".  Non-U.S. persons and
10% Shareholders are advised to consult their own tax advisors regarding the tax
considerations incident to an investment in the common stock.

     A U.S. investor receiving a distribution of the common stock will be
required to include such distribution in gross income as a taxable dividend, to
the extent of our current or

                                     -18-
<PAGE>

accumulated earnings and profits as determined under U.S. federal income tax
principles. Any distributions in excess of our earnings and profits will first
be treated, for U.S. federal income tax purposes, as a nontaxable return of
capital, to the extent of the U.S. investor's adjusted tax basis in 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 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.

     A holder of common stock may be subject to "backup withholding" at the rate
of 31% with respect to dividends paid on our common stock if the dividends are
paid by a paying agent, broker or other intermediary in the United States or by
a U.S. broker or certain United States-related brokers to the holder outside the
United States.  In addition, the proceeds of the sale, exchange or redemption of
common stock may be subject to backup withholding, if such proceeds are paid by
a paying agent, broker or other intermediary in the United States.

     Backup withholding may be avoided by the holder of common stock if such
holder:

 .    is a corporation or comes within other exempt categories; or
 .    provides a correct taxpayer identification number, certifies that such
     holder is not subject to backup withholding and otherwise complies with the
     backup withholding rules.

     In addition, holders of common stock who are not U.S. persons are generally
exempt from backup withholding, although they may be required to comply with
certification and identification procedures in order to prove their exemption.

     Any amounts withheld under the backup withholding rules from a payment to a
holder will be refunded or credited against the holder's U.S. federal income tax
liability, if any, provided that amount withheld is claimed as federal taxes
withheld on the holder's U.S. federal income tax return relating to the year in
which the backup withholding occurred.  A holder who is not otherwise required
to file a U.S. income tax return must generally file a claim for refund or, in
the case of non-U.S. holders, an income tax return in order to claim refunds of
withheld amounts.

British Virgin Islands Taxation

     Under the International Business Companies Act of the British Virgin
Islands as currently in effect, a holder of common stock who is not a resident
of BVI is exempt from BVI income tax on dividends paid with respect to the
common stock and all holders of common stock are not liable for BVI income tax
on gains realized during that year on sale or disposal of such shares;

                                     -19-
<PAGE>

BVI does not impose a withholding tax on dividends paid by a company
incorporated under the International Business Companies Act.

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

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

                                     -20-
<PAGE>

ITEM 8.  SELECTED FINANCIAL DATA.
---------------------------------

                     SELECTED CONSOLIDATED FINANCIAL DATA
               (Dollars in thousands, except per share amounts)

     The following selected consolidated financial data with respect to each of
the years in the five-year period ended April 30, 2000 have been derived from
our audited consolidated financial statements.  The following selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes included elsewhere in this
annual report.

     We prepare our consolidated financial statements in accordance with Hong
Kong GAAP, which differs in certain material respects from US GAAP. For a
discussion of the significant differences between Hong Kong GAAP and US GAAP,
see Note 17 of Notes To And Forming Part Of The Financial Statements.

Consolidated Statements of Operations Data:
<TABLE>
<CAPTION>

                                                                 Year ended April 30,
<S>                                          <C>        <C>       <C>         <C>          <C>          <C>
                                               1996      1997       1998       1999         2000        2000
                                               HK $      HK $       HK $       HK $         HK $        US $
Amount in accordance with Hong
  Kong GAAP
Operating revenues......................     87,318     92,258    124,199     195,219      300,901      38,926
                                             ======     ======    =======     =======      =======      ======

Operating income........................     13,828     21,930     31,540      39,723       38,725       5,010
Interest expense, net...................     (5,693)    (3,999)    (6,964)     (5,186)      (2,980)       (386)
                                             ------     ------    -------     -------      -------      ------
Income before income taxes..............      8,135     17,931     24,576      34,537       35,745       4,624
Income taxes............................       (620)    (2,210)    (2,120)       (380)         (25)         (3)
                                             ------     ------    -------     -------      -------      ------
Net income .............................      7,515     15,721     22,456      34,157       35,720       4,621
                                             ======     ======    =======     =======      =======      ======
Dividends per share ....................       0.57          -          -           -            -           -
                                             ------     ------    -------     -------      -------      ------

Numerator:
Net income used in computing basic
 earnings per share ....................      7,515     15,721     22,456      34,157       35,720       4,621
Interest on 3% convertible debentures             -          -          -           -          251          32
                                             ------     ------    -------     -------      -------      ------
Adjusted net income used in
 computing diluted earnings per
 share .................................      7,515     15,721     22,456      34,157       35,971       4,653
                                             ======     ======    =======     =======      =======      ======
</TABLE>


                                     -21-
<PAGE>
<TABLE>
<CAPTION>

<S>                                         <C>       <C>        <C>         <C>          <C>          <C>
Denominator:
Weighted average number of shares
 outstanding - basic (thousands)              4,387      4,387      4,539       6,347        6,589       6,589
Effect of dilutive potential ordinary
 shares:
 3% convertible debentures .............          -          -          -           -          337         337
 Warrants ..............................          -          -          5           -            7           7
 Options ...............................          -          -          -           1            -           -
                                            -------   --------   --------    --------     --------     -------
Weighted average number of shares
 outstanding - diluted (thousands)            4,387      4,387      4,544       6,348        6,933       6,933
                                            =======   ========   ========    ========     ========     =======

Earnings per share - basic .............       1.71       3.58       4.95        5.38         5.42        0.70
                                            =======   ========   ========    ========     ========     =======

Earnings per share - diluted ...........       1.71       3.58       4.94        5.38         5.19        0.67
                                            =======   ========   ========    ========     ========     =======



                                                                    Year ended April 30,
                                             1996       1997       1998        1999         2000        2000
                                             HK  $     HK   $     HK   $      HK   $       HK   $       US  $
Amount in accordance with US
 GAAP
Operating revenues......................     87,318     92,258    124,199     195,219      300,901      38,926
                                            =======   ========   ========    ========     ========     =======
Operating income before income taxes          7,563     16,599     14,325      33,738       34,989       4,526
                                            -------   --------   --------    --------     --------     -------
Net income per US GAAP .................      6,943     14,389     12,205      33,358       34,964       4,523
                                            -------   --------   --------    --------     --------     -------

Dividends per share ....................       0.55          -          -           -            -           -
                                            -------   --------   --------    --------     --------     -------

Numerator:
Net income used in computing basic
 earnings per share ....................      6,943     14,389     12,205      33,358       34,964       4,523
Interest on 3% convertible debentures             -          -          -           -          251          32
                                            -------   --------   --------    --------     --------     -------
Adjusted net income used in
 computing diluted earnings per
 share .................................      6,943     14,389     12,205      33,358       35,215       4,555
                                            =======   ========   ========    ========     ========     =======
</TABLE>





                                     -22-
<PAGE>

<TABLE>
<CAPTION>

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

Earnings per share - basic .............       1.53       3.18       2.65        5.26         5.31        0.69
                                            =======   ========   ========    ========     ========     =======

Earnings per share - diluted ...........       1.53       3.18       2.65        5.26         5.07        0.66
                                            =======   ========   ========    ========     ========     =======
</TABLE>


Consolidated Balance Sheet Data:

<TABLE>
<CAPTION>

                                                                 As of April 30,

                                             1996        1997       1998        1999        2000        2000
                                             HK  $       HK $       HK $        HK $        HK $        US $
<S>                                    <C>           <C>         <C>         <C>         <C>          <C>
Amount in accordance with
  Hong Kong GAAP
  Working capital ......................    (15,092)    (2,757)    39,090      75,645      158,795      20,543
  Total assets .........................     64,763     82,879    154,616     222,875      310,539      40,173
  Long-term obligations ................     13,913     13,006     10,544       9,028       29,472       3,813
  Total shareholders' equity ...........      1,260     16,981     90,257     128,428      188,179      24,344

Amount in accordance with
  US GAAP
  Working capital ......................    (15,092)    (2,757)    39,090      75,645      158,795      20,543
  Total assets .........................     63,544     78,533    142,307     213,020      303,473      39,259
  Long-term obligations ................     13,913     13,006     10,544       9,028       29,472       3,813
  Total shareholders' equity ...........         41     12,635     77,948     118,573      181,112      23,430
</TABLE>



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

Overview

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

     .    Lorenzo Jewelry Mfg. (H.K.) Limited,
     .    Shantou SEZ Lorenzo Gems & Craft Factory Co., Ltd.,
     .    Shantou Lorenzo Jewelry Mfg.,
     .    Precious Gems Trading Ltd.,
     .    Lorenzo Gems Manufacturing (Shenzhen) Co., Ltd.,
     .    Golden Horizon Trading Ltd.,
     .    Lorenzo Jewellery (Shenzhen) Co., Ltd.,
     .    Fine Gift Enterprises Ltd.,
     .    Lorenzo Diamond Jewelry Mfg. Co., Limited, and
     .    Lorenzo Marketing Co. Limited, which was 60% owned until March 22,
          2000, when the remaining 40% was acquired.

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

     We are a totally vertically integrated producer of finished semi-precious
gemstones and fine quality gemstone jewelry.  We primarily cut and polish semi-
precious gemstones and design, manufacture, market and distribute gem set
jewelry to fine jewelers, department stores, national jewelry chains and
electronic and specialty retailers throughout North America and Western Europe.
Our product line includes all major categories that are sought by major
retailers, including earrings, necklaces, pendants, rings and bracelets.  Our
jewelry is crafted in gold, platinum and sterling silver and is set with semi-
precious and precious stones, including diamonds.  The average wholesale price
of the jewelry produced by us is approximately $100, which equates to average
retail prices between $100 and $499.

     During fiscal year ended 1998, we completed our initial public offering and
raised gross proceeds of HK$58,051,000 (US$7,510,000) from the sale of common
stock and warrants.

                                     -24-
<PAGE>

Additional amounts were received during the year ended April 30, 1999 from the
exercise of the over-allotment of common stock in the offering. The completion
of this offering was a very significant development for us and required
substantial management time away from our normal operations. In fiscal year
ended 1999, we re-focused all of our energy to the operation of our primary
business with the goal of further increasing sales and the operating
performance. In fiscal year ended 2000, we raised gross proceeds of
HK$50,245,000 (US$6,500,000) from an issue of 3% convertible debentures. The
proceeds were allocated to working capital for general corporate purposes.

Fiscal 2000 compared to Fiscal 1999

Net Sales

     Net sales increased 54% to HK$300,901,000 (US$38,926,000) in fiscal year
ended 2000 from HK$195,219,000 (US$25,255,000) in fiscal year ended 1999.  This
increase is primarily driven by volume increases in sales to new and existing
customers, including QVC, Sterling Inc. and Mervyn's.  We also expanded our gem
lines during the year in order to provide a complete range of jewelry to our
existing and new customers.  The diamond jewelry sales accounted for 5.7% of the
total net sales in fiscal year 2000.

Gross Profit

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

     .    a change in the product mix. Previously, most of our sales are jewelry
          set with semi-precious stones; in 2000, more sales are made with
          precious stones and diamonds. Diamond jewelry generally has higher
          sales value but much lower profit margin;
     .    additional model making charges incurred and expensed to build up the
          diamond jewelry sample lines; and
     .    discounts given on certain volume sales programs for existing
          customers and discounts given to new customers to induce businesses.

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

Selling, General and Administrative Expenses

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

                                     -25-
<PAGE>

     The decrease of 2% is the net effect of :

     .    more contributions to the fixed cost even though the profit margin is
          lower; and
     .    increased personnel in sales and marketing, design and logistics to
          cope with the significant sales growth. As a result, we have leased an
          additional office space of around 2,000 square feet in our Hong Kong
          headquarters.

Other Income/Expenses

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

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

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

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

Income Taxes

     We were incorporated in the British Virgin Islands and, under current law
of the British Virgin Islands, are not subject to tax on income or on capital
gains.

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

     Our subsidiaries in China are registered to qualify as Foreign Investment
Enterprises in China and are eligible for certain tax holidays and concessions.
Accordingly, certain of our Chinese subsidiaries are exempt from Chinese income
tax for two years starting from their first profit making year, followed by a
50% reduction of tax for the next three years.  Certain subsidiaries initiated
their first year of tax holidays during 2000.  As a result, we have not recorded
any Chinese income tax expense.  Chinese income tax in the future will be
calculated at the applicable rates relevant to the Chinese subsidiaries, which
currently are 15%.

     Net income tax decreased 93% to HK$25,000 (US$3,000) in 2000 from
HK$380,000 (US$49,000) in 1999. This is the net effect of a current year Hong
Kong tax provision of

                                     -26-
<PAGE>

HK$1,207,000 (US$156,000) and the previous years' over provision of HK$1,182,000
(US$153,000).

Fiscal 1999 compared to Fiscal 1998

Net Sales

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

Gross Profit

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

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

Selling, General and Administrative Expenses

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

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

Other Income/Expenses

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

                                     -27-
<PAGE>

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

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

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

Income Taxes

     We were incorporated in the British Virgin Islands and, under current law
of the British Virgin Islands, are not subject to tax on income or on capital
gains.

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

     Our subsidiaries in China are registered to qualify as Foreign Investment
Enterprises in China and are eligible for certain tax holidays and concessions.
Accordingly, certain of our Chinese subsidiaries are exempt from Chinese income
tax for two years starting from their first profit making year, followed by a
50% reduction of tax for the next three years.  These subsidiaries have
sustained losses for the Chinese income tax purposes.  As a result, we have not
recorded any Chinese income tax expense.  Chinese income tax in the future will
be calculated at the applicable rates relevant to the Chinese subsidiaries,
which currently are 15%.

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

Fiscal 1998 compared to Fiscal 1997

Net Sales

     Net sales for the fiscal year ended April 30, 1998 totaled HK$124,199,000
(US$16,067,000), compared to HK$92,258,000 (US$11,935,000) in fiscal year 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
in the United States from HK$1,392,000

                                     -28-
<PAGE>

(US$180,000) in fiscal 1997 to HK$14,152,000 (US$1,831,000) in fiscal 1998.
Sales to our largest customer, QVC, Inc., also rose by 8%, and represented 55%
of sales in fiscal 1998 compared to 69% in fiscal 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 our 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%.  We liquidate the inventory by selling to other
companies while it is not a regular occurrence.  We may periodically utilize
this strategy to reduce excess gems stone inventory when it is considered
beneficial to us.

Selling, General and Administrative Expenses

     Selling, general 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 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 commissions, overseas travelling
expenses, bonus payments for contracted sales force, and increased marketing and
promotional expenses associated with increase in sales.

     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, and 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.

                                     -29-
<PAGE>

     Net 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.

     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, we 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.

Income Taxes

     We were incorporated in the British Virgin Islands and, under current law
of the British Virgin Islands, are not subject to tax on income or on capital
gains.

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

     Our subsidiaries in China are registered to qualify as Foreign Investment
Enterprises in China and are eligible for certain tax holidays and concessions.
Accordingly, certain of the Chinese subsidiaries are exempted from Chinese
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 Chinese income tax purpose.  As a result, we have not
recorded any Chinese income tax expense.  Chinese income tax in the future will
be calculated at the applicable rates relevant to the Chinese subsidiaries which
currently are 15%.

     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 our Chinese subsidiaries, income tax actually decreased as the
result of restructuring of our intra-group pricing policy.

Liquidity and Capital Resources

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

                                     -30-
<PAGE>

Cash:
----

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

     For the fiscal year ended April 30, 2000, as a result of HK$30,161,000
(US$3,902,000)  cash provided by financing activities and HK$8,738,000
(US$1,131,000) and HK$5,162,000 (US$668,000) used by operating and investing
activities, as well as HK$2,804,000 (US$363,000) net cash used for returns on
investments and servicing of finance and HK$93,000 (US$12,000) paid for income
taxes, cash and cash equivalents increased by HK$13,364,000 (US$1,728,000).

     Net cash used by operating activities in fiscal 2000 was HK$8,738,000
(US$1,131,000) as compared with net cash provided of HK$1,898,000 (US$245,500)
in fiscal 1999.  Negative cash flows from operating activities are principally
the result of improved operating results, offset by increased working capital
requirement attributable to the increase in accounts receivable and inventory
levels.

     For the fiscal year ended April 30, 2000, net cash used in investing
activities was HK$5,162,000 (US$668,000) , a decrease of HK$2,640,000
(US$341,000) as compared with HK$7,802,000 (US$1,009,000)  in fiscal 1999.  The
net cash used in investing activities during fiscal 2000 was mainly for the
acquisition of the remaining 40% of the share capital of Lorenzo Marketing Co.,
Ltd., and the purchase of office equipment and decoration of the additional
office space rented in Hong Kong.

Accounts Receivable:
-------------------

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

Inventory:
---------

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

                                     -31-
<PAGE>

Prepayment and Other Current Assets:
-----------------------------------

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

Letters of Credit:
-----------------

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

Gold Loan Facilities:
--------------------

     We have also secured "gold loan" facilities with various banks in Hong Kong
which typically bear a below-market interest rate.  At the close of each
reporting period, the gold loan is "marked to market" with changes reflected on
the income statement.  Due to lower interest rates charged for gold loans and
declining prices of gold, our cost through our gold loan program has been
substantially less than the costs that would be incurred if we were to finance
the purchase of all of our gold requirements with borrowings under our letter of
credit facility or other credit arrangements.  The gold loan, however, does
expose us to certain market risks associated with potential future increases in
the price of gold, and we currently do not hedge against such risks. Under the
gold loan arrangements, we may defer the purchase until such time as we decide
appropriate, the price being paid will be the current market price at time of
payment.  We had outstanding loans to purchase 4,300 and 4,850 ounces of gold as
of April 30, 1999 and 2000, with the related balances being HK$9,500,000
(US$1,229,000) and HK$10,259,000 (US$1,327,000).  Interest rates for these loans
were 3.15% to 3.45% as of April 30, 2000 (1999: 3.1% to 3.3%).  Unrealized gain
on the unsettled gold loans as of April 30, 1999 and 2000 were HK$630,000
(US$82,000) and HK$338,000 (US$44,000).

Notes Payable:
-------------

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

                                     -32-
<PAGE>

Promissory Notes:
----------------

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

Initial Public Offering - 1998:
------------------------------

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

Convertible Debentures - 2000:
-----------------------------

     On October 29, 1999, we entered into a Securities Purchase Agreement with
an accredited investor pursuant to which we agreed to issue and the investor
agreed to purchase up to HK$81,165,000 (US$10,500,000) of 3% convertible
debentures, as well as common stock purchase warrants.  During the fiscal year
ended April 30, 2000, we received gross proceeds of HK$50,245,000 (US$6,500,000)
from the issue of the 3% convertible debentures to that investor. HK$27,055,000
(US$3,500,000) of the gross proceeds and related interest expenses have been
converted into 1,072,412 shares of our common stock as at April 30, 2000.  The
remaining HK$23,190,000 (US$3,000,000) was subsequently converted into 1,233,557
shares of our common stock after the fiscal year ended April 30, 2000.

Looking Forward:
---------------

     We anticipate that cash flow from operations, proceeds from the issue of
the convertible debentures, borrowings available under our existing credit line
and our gold loan arrangement will be sufficient to satisfy our capital needs
for the next twelve months.

                                     -33-
<PAGE>

Reconciliation to US GAAP

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

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

     Under US GAAP, for the fiscal year ended April 30, 2000, HK$472,000
(US$61,000) would be recorded as depreciation expenses on properties and
investment properties and HK$275,000 (US$36,000) would be recorded as
amortization of financial consulting fee for the IPO.  In addition, HK$136,000
(US$18,000) of compensation cost in connection with the fair value of warrants
granted to a consultant;  HK$238,000 (US$31,000) for the amortization of
discount on convertible debentures and HK$328,000 (US$42,000) of compensation
cost of the fair value of warrants granted to the convertible debentures
placement agent, would be expensed. In addition, HK$7,000 (US$1,000) in relation
to the amortization of goodwill would also be credited.  As a result, our net
income for the year ended April 30, 2000 under US GAAP would be HK$34,964,000
(US$4,523,000).

     Under US GAAP, for the fiscal year ended April 30, 1999, HK$472,000
(US$61,000) would be recorded as depreciation expenses on properties and
investment properties and HK$417,000 (US$54,000) would be recorded as
amortization of financial consulting fee for the IPO.  In addition, HK$83,000
(US$10,000) in relation to the amortization of certain offering costs and
HK$7,000 (US$1,000) in relation to the amortization of goodwill and HK$686,000
(US$89,000) in relation to the amortization of certain offering costs in which
the related deferred costs were expensed under US GAAP in previous years would
also be credited since the related deferred costs were expensed under US GAAP in
previous years.  As a result, our net income for the year ended April 30, 1999
under US GAAP would be HK$33,358,000 (US$4,315,000).

     Under US GAAP, for the fiscal year ended April 30, 1998, HK$547,000
(US$71,000) would be recorded as depreciation expense on investment properties.
Also, certain deferred costs with total amount of HK$898,000 (US$116,000) and
amortization of costs for shares issuable to noteholders of HK$6,049,000
(US$783,000) would be expensed based on US GAAP.  In October 1997, we sold an
investment property to our major shareholder and recognized a gain of
HK$2,904,000 (US$376,000).  Under US GAAP, such gain would be recorded as a
capital contribution while HK$76,000 (US$10,000) in relation to the depreciation
previously charged on

                                     -34-
<PAGE>

this investment property would be credited as additional income for fiscal 1998.
In addition, HK$64,000 (US$8,000) for the amortization of certain offering costs
and HK$7,000 (US$1,000) in relation to the amortization of goodwill would also
be credited since the related deferred costs had already been expensed under US
GAAP in the previous year. As a result, our net income for the year ended April
30, 1998 under US GAAP would be HK$12,205,000 (US$1,578,000).

Stock-based compensation

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

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


                                         Year ended April 30
                                       1999         2000       2000
                                       HK $         HK $       US $

Pro forma net income             11,009,000   34,124,000  4,414,000
                                ===========  ===========  =========
Pro forma earnings per share
 Basic                                 1.73         5.18       0.67
                                ===========  ===========  =========
 Diluted                               1.73         4.95       0.64
                                ===========  ===========  =========




                                     -35-
<PAGE>

     The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:

                                               Year ended April 30
                                           1999                  2000
     Expected dividend yield                Nil                   Nil
     Expected stock price volatility        60%                   19%
     Risk-free interest rate              5.85%                 6.49%
     Expected life of options           3 years               3 years

     The weighted average fair value of options granted during the year ended
April 30, 1999 and 2000 was US$2.25 and US$0.41 per share, respectively.

     Our stock option activities and related information for the years ended
April 30, 1998, 1999 and 2000 are summarized as follows:
<TABLE>
<CAPTION>

                                              Year ended April 30
                              ------------------------------------------------
                                     1998                     1999                   2000
                                     Weighted                 Weighted               Weighted
                                      average                  average                average
                                     exercise                 exercise               exercise
                          Options       price    Options         price    Options       price
                                          US$                      US$                    US$
<S>                    <C>         <C>         <C>         <C>          <C>        <C>
    Outstanding and
      exercisable,
      beginning of year         -           -          -             -  1,285,000         5.0
    Granted                     -           -  1,285,000           5.0    265,000         5.0
    Exercised                   -           -          -             -          -           -
    Forfeited                   -           -          -             -          -           -
                          -------              ---------                ---------
    Outstanding and
      exercisable,
      end of year               -           -  1,285,000           5.0  1,550,000         5.0
                          -------              ---------                ---------

    Weighted average
      remaining
      contractual life          -               10 years                9.13 years
                          -------              ---------                 ---------
</TABLE>

     During the year we issued 265,000 incentive stock options to our employees
at an exercise price of US$5.0 per share for a term of ten years.

                                     -36-
<PAGE>

     In addition, we issued to a consultant a warrant to purchase 35,000 shares
of our common stock as part of the consultancy fee.  We also issued to a
placement agent two warrants to purchase 65,000 shares of our common stock for
arranging the issue of our convertible debentures during the year.  Under HK
GAAP, there are no specific requirements to recognize the compensation cost
arising from these transactions.  Under US GAAP, the costs associated with these
transactions are accounted for based on the fair value of the warrants at the
date of issue.  Using the Black-Scholes option pricing model with the same
weighted-average assumptions as employees' stock options, the fair value of
these warrants to the consultant and the convertible debenture placement agent
are estimated as HK$136,000 (US$18,000) and HK$328,000 (US$42,000), which have
been amortized as an additional expense during the year ended April 30, 2000.

Impact of recently issued US GAAP accounting standards.

Financial Instruments

     In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 137, "Accounting for derivative
instruments and hedging activities" which delayed the effective date of SFAS No.
133 "Accounting for derivative instruments and hedging activities" for one year.
SFAS No. 133 provides guidance for the recognition and measurement of
derivatives and hedging activities. It requires an entity to record, at fair
value, all derivatives as either assets or liabilities in the balance sheet, and
it establishes specific accounting rules for certain types of hedges. SFAS No.
133 is now effective for fiscal years beginning after June 15, 2000 and will be
adopted by us when required, if not earlier.  We currently do not hold or issue
derivative financial instruments in the normal course of business. Accordingly,
adoption of SFAS No. 133 is not expected to affect our financial statements.

Revenue Recognition

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue recognition in financial statements",
which provides guidance on applying generally accepted accounting principles for
recognizing revenue. SAB 101 is effective for fiscal years beginning after
December 15, 1999. The impact, if any, of adopting SAB 101 on our consolidated
financial position, results of operations and cash flows, has not been
determined.

Inflation

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

                                     -37-
<PAGE>

Foreign Exchange

     More than 89% of our sales are denominated in U.S. Dollars whereas the
other sales are basically denominated in Hong Kong Dollars.  The largest portion
of our expenses are denominated in Hong Kong Dollars, followed by U.S. Dollars
and Renminbi.  The exchange rate of the Hong Kong Dollar is currently pegged to
the U.S. Dollar, but during the past several years the market exchange rate has
fluctuated within a narrow range.  The Chinese government principally sets the
exchange rate between the Renminbi and all other currencies.  As a result, the
exchange rates between the Renminbi and the U.S. Dollar and the Hong Kong Dollar
have fluctuated in the past and may fluctuate in the future.  If the value of
the Renminbi or the Hong Kong Dollar decreases relative to the U.S. Dollar, such
fluctuation may have a positive effect on our results of operations.  If the
value of the Renminbi or the Hong Kong Dollar increases relative to the U.S.
Dollar, such fluctuation may have a negative effect on our results of
operations.  We do not currently hedge our foreign exchange positions.

Year 2000 Issue

     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.

     We revised our existing business interruption contingency plans to address
internal and external issues specific to the Year 2000 problem, to the extent
practicable.  Such revisions were completed by October 1999.  All of our and our
subsidiaries' accounting, financial, functional and operational applications
were fully Year 2000 compliant.  Accordingly, the Year 2000 compliance issue did
not create any material adverse impact on our business operations in any of our
functional areas.


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

     Not applicable.

                                     -38-
<PAGE>

ITEM 10.  DIRECTORS AND OFFICERS OF REGISTRANT.
-----------------------------------------------

     Our executive officers and directors are as follows:

Name                       Age           Position
----                       ---           --------

Yu Chuan Yih.............   61  Chairman of the Board of Directors, President
                                and Chief Executive Officer
Ka Man Au................   36  Executive Vice President, Secretary and Director
Joseph Tuszer............   54  Senior Vice President
Hon Tak Ringo Ng.........   40  Chief Financial Officer
Michael S. Gilburd.......   56  Vice President, Corporate Development
Po Yee Elsa Yue..........   36  Non-Executive Director
Lionel C. Wang...........   44  Non-Executive Director


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

     Mr. Yih established the business of Lorenzo Jewelry Mfg. (HK) Ltd. and has
served as president and managing director since 1987.  Mr. Yih is primarily
responsible for business development and overall company management.  He has
over 20 years of experience in semi-precious stone production and marketing.
Mr. Yih has been a gemstone trader in Brazil and has extensive experience and
relationships in gem sourcing and jewelry design.  Mr. Yih is also president of
the Hong Kong branch of the Gemological Institute of America (GIA), the
nonprofit educational organization for the jewelry industry.

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

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

     Mr. Ng has served as our chief financial officer since September 1997.  He
received his Bachelor of Science degree in civil engineering from the University
of London in 1984 and his

                                     -39-
<PAGE>

Master of Commerce in Accounting and Commercial Administration from the
University of New South Wales in 1994. From July 1994 through September 1997, he
was an audit senior with Moores Rowland C.A., Certified Public Accountants. Mr.
Ng is a certified practicing accountant of the Australian Society of CPAs.

     Mr. Gilburd became our vice president, corporate development in August
2000.  Mr. Gilburd, who is based in the U.S., was the chairman and CEO of
Earnhardt Co., Inc., an investment banking and securities firm.  From 1995 to
1999, he was managing director of corporate finance for two American Express
companies, and previously he was national director of corporate finance and a
member of the international corporate finance committee for BDO Seidman.  Mr.
Gilburd received a Bachelor of Science degree in Accounting from Long Island
University and a Masters of Science in Taxation from Bentley College.  He is a
NASD General Securities Principal, a SEC Registered Investment Advisor, an
Accredited Senior Appraiser (Business Valuation Specialty), and a CPA (New York
State - inactive).  Mr. Gilburd also serves as a director of Freedom Golf
Corporation (OTC BB: FGLC).

     Ms. Yue has served as a non-executive director since December 1999.  She is
a graduate gemologist from the Gemology Institute of America and has served as
vice president of GIA, Hong Kong since August 1994.

     Mr. Wang has served as a non-executive director since June 1998.  He
received his Bachelor of Commerce from Tamkung University, Taipei, Taiwan in
1978, his Master of Business Administration from California State Polytechnic
University in 1980 and his Master of Science from Stanford University in 1981.
From 1984 to 1990, Mr. Wang served as marketing research analyst and senior
strategic planning analyst for The Gillette Company, Boston, Massachusetts.
From 1990 to 1995, he served as associate director and then director of product
development for Information Resources, Inc., Waltham, Massachusetts.  From 1995
to 1996, Mr. Wang served as vice-president as Nielsen North America with
responsibility for analytical and modeling projects on Kraft Foods/White Plains
account.  Since 1996, Mr. Wang has served as director of analytical services for
The NPD Group, Inc., Port Washington, New York.

Audit Committee

     We have established an audit committee, which consists of Messrs. Yih and
Wang and Ms. Yue.  Its functions are to:

 .    recommend annually to the board of directors the appointment of our
     independent public accountants;
 .    discuss and review the scope and the fees of the prospective annual audit
     and review the results with the independent public accountants;
 .    review and approve non-audit services of the independent public
     accountants;
 .    review compliance with our existing accounting and financial policies;

                                     -40-
<PAGE>

 .    review the adequacy of our financial organization; and

 .    review our management's procedures and policies relative to the adequacy of
     our internal accounting controls and compliance with federal and state laws
     relating to financial reporting.


ITEM 11.  COMPENSATION OF DIRECTORS AND OFFICERS.
-------------------------------------------------

     The aggregate compensation paid by us to all of our directors and executive
officers as a group for the fiscal year ended April 30, 2000 on an accrual
basis, for services in all capacities, was HK$7,122,000 (US$921,000). During the
fiscal year ended April 30, 2000, we contributed an aggregate amount of
HK$107,000 (US$14,000) toward the pension plans of our directors and executive
officers.

Executive Service Contract

     We entered into an employment agreement with Mr. Yu Chuan Yih effective
October 1, 1997 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
an automobile. 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 our operating results and the performance of Mr. Yih during the
relevant financial year. The amount payable to Mr. Yih will be decided by
majority decision of the members of the board present in the meeting called for
that purpose.  Mr. Yih shall abstain from voting and not be counted in the
quorum in respect of the resolution regarding the amount payable to him.


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

The 1998 Stock Compensation Plan

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

 .    encourage ownership of our common stock by our officers, directors,
     employees and advisors;
 .    provide additional incentive for them to promote our success and our
     business; and
 .    encourage them to remain in our employ by providing them an opportunity to
     benefit from any appreciation of our common stock through the issuance of
     stock options.

                                     -41-
<PAGE>

     Options constitute either incentive stock options within the meaning of
Section 422 of the United States Internal Revenue Code of 1986, as amended, or
options which constitute nonqualified options at the time of issuance of such
options.  The plan provides that incentive stock options and/or nonqualified
stock options may be granted to our officers, directors, employees and advisors
selected by the compensation committee.  A total of 4,000,000 shares of common
stock are authorized and reserved for issuance during the term of the plan which
expires in June 2008.  The compensation committee has the sole authority to
interpret the plan and make all determinations necessary or advisable for
administering the plan.  The exercise price for any incentive option must be at
least equal to the fair market value of the shares as of the date of grant.
Upon the exercise of the option, the exercise price must be paid in full either
in cash, shares of our stock or a combination.  If any option is not exercised
for any reason, such shares shall again become available for the purposes of the
plan.

     As of August 31, 2000, the following options to purchase shares of our
common stock under the Plan were outstanding:

 .    stock options to purchase 1,285,000 shares at $5.00 per share through
     April 11, 2009, of which 431,000 are held by our directors and officers as
     a group
 .    stock options to purchase 265,000 shares at $5.00 per share through
     January 13, 2010, of which none are held by our directors and officers as a
     group
 .    stock options to purchase 1,770,000 shares at $3.00 per share through May
     7, 2010, of which 1,050,000 are held by our directors and officers as a
     group

Other Options and Warrants Outstanding

     As of August 31, 2000, the following additional options and warrants to
purchase shares of our common stock were outstanding:

 .    1,679,000 common stock purchase warrants which are publicly traded and
     which we issued in our April 1998 initial public offering to purchase
     1,679,000 shares of common stock at $5.75 per share through April 15, 2003
 .    146,000 stock purchase options to purchase 146,000 shares of common stock
     at $8.25 per share through April 15, 2003 which we sold to the IPO
     underwriter and/or persons related to the underwriter
 .    146,000 warrant purchase options to purchase 146,000 warrants at $0.20625
     per warrant to purchase shares of common stock at $8.25 per share through
     April 15, 2003 which we sold to the IPO underwriter and/or persons related
     to the underwriter
 .    options to purchase 35,000 shares at $5.00 per share through July 30, 2004
     which we granted to our former financial consultant
 .    warrants to purchase 75,000 shares at $3.75 per share through November
     30,2004 and warrants to purchase 87,500 shares at $6.9375 per share through
     March 31, 2005 which we sold to two investors and our placement agent

                                     -42-
<PAGE>

ITEM 13.  INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
---------------------------------------------------------

     Yu Chuan Yih, our chairman and president, is a director and principal
shareholder of Gemological Institute of America, Hong Kong Limited; and Hong
Kong Brasil Lapidary Limited. During the fiscal years ended April 30, 1998, 1999
and 2000, Mr. Yih and these affiliated companies received unsecured advances
from, and made unsecured advances to, us which were interest free and repayable
on demand.

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

     During the fiscal year ended April 30, 1999, we sold finished goods of
HK$74,000 (US$10,000) to Gemological Institute of America, Hong Kong Limited and
Hong Kong Brasil Lapidary Limited, which were made according to the published
prices and conditions offered to our major customers.  In addition, we provided
a guarantee to a bank in respect of mortgage loans granted to Yu Chuan Yih to
the extent of HK$4,882,000 (US$632,000).

                                     -43-
<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)  Not applicable.


                                    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.

                                     -44-
<PAGE>

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 Auditors
     Consolidated statements of operations for the years ended April 30, 1998,
      1999 and 2000
     Consolidated balance sheets at April 30, 1999 and 2000
     Consolidated statements of shareholders' equity for the years ended
      April 30, 1998, 1999 and 2000
     Consolidated statements of cash flows for the years ended April 30, 1998,
      1999 and 2000
     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:

          (i)  Agreement with QVC, Inc. - incorporated by reference to the
               exhibits to Post Effective Amendment No. 3 to the Registration
               Statement on Form F-1, File No. 333-7912.

                                     -45-
<PAGE>
LJ INTERNATIONAL INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                            Page
<S>                                                                                                         <C>

Report of Independent Auditors                                                                              F-2

Consolidated statements of operations for the years ended April 30, 1998,
  1999 and 2000                                                                                             F-3

Consolidated statements of recognized gains and losses for the years ended
  April 30, 1998, 1999 and 2000                                                                             F-4

Consolidated balance sheets as of April 30, 1999 and 2000                                                   F-5

Consolidated statements of shareholders'equity for the years ended
  April 30, 1998, 1999 and 2000                                                                             F-6

Consolidated statements of cash flows for the years ended
  April 30, 1998, 1999 and 2000                                                                             F-7

Notes to and forming part of the financial statements                                                F-8 - F-42

</TABLE>

                                      F-1
<PAGE>

                        Report of Independent Auditors



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


     We have audited the accompanying consolidated balance sheets of LJ
International Inc. and its subsidiaries as of April 30, 1999 and 2000 and the
related consolidated statements of operations, recognized gains and losses,
shareholders' equity and cash flows for each of the years in the three year
period ended April 30, 2000. 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, 1999 and 2000 and the consolidated results of its
operations and cash flows for each of the years in the three year period ended
April 30, 2000, 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 17).



/s/ Moores Rowland
---------------------------------------
Moores Rowland
Chartered Accountants
Certified Public Accountants, Hong Kong

Dated: August 28, 2000

                                      F-2
<PAGE>

                             LJ INTERNATIONAL INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

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



<TABLE>
<CAPTION>


                                                                Year ended April 30
                                          Notes          1998         1999         2000         2000
                                                         HK $         HK $         HK $         US $

<S>                                       <C>         <C>          <C>          <C>           <C>
Operating revenue                         2(o)        124,199      195,219      300,901       38,926
 Costs of goods sold                                  (63,293)     (99,363)    (177,315)     (22,938)
                                                    ---------   ----------   ----------   ----------
Gross profit                                           60,906       95,856      123,586       15,988

Other revenue:                            2(o)
 Interest income                                          212        1,690        2,668          345
 Rental income                                          1,273          474          875          113

Selling, general and administrative
 expenses                                             (33,545)     (56,880)     (81,617)     (10,558)
Other income and expenses:
 Gain on disposal of land and
  building to related party                 10          2,904            -            -            -
                                                    ---------   ----------   ----------   ----------
Operating income                                       31,750       41,140       45,512        5,888

 Finance costs                              15         (7,176)      (6,876)     (10,172)      (1,316)
 Minority interests                                         2          273          405           52
                                                    ---------   ----------   ----------   ----------
Income before income taxes                             24,576       34,537       35,745        4,624
 Income taxes                               13         (2,120)        (380)         (25)          (3)
                                                    ---------   ----------   ----------   ----------
Net income                                             22,456       34,157       35,720        4,621
                                                    =========   ==========   ==========   ==========


Numerator:
 Net income used in computing basic
  earnings per share                                   22,456       34,157       35,720        4,621
 Interest on 3% convertible debentures                      -            -          251           32
                                                    ---------   ----------   ----------   ----------
 Adjusted net income used in computing
  diluted earnings per share                           22,456       34,157       35,971        4,653
                                                    =========   ==========   ==========   ==========

Denominator:
 Weighted average number of shares
  used in calculating basic earnings
  per share                                         4,539,128    6,347,046    6,589,415    6,589,415
 Effect of dilutive potential ordinary
  shares:
  3% convertible debentures                                 -            -      337,239      337,239
  Warrants                                              4,854            -        6,324        6,324
  Stock options                                             -          514            -            -
                                                    ---------   ----------   ----------   ----------
 Weighted average number of shares
  used in calculating diluted earnings
  per share                                         4,543,982    6,347,560    6,932,978    6,932,978
                                                    =========   ==========   ==========   ==========

Earnings per share:
 Basic                                    2(r)           4.95         5.38         5.42         0.70
                                                    =========   ==========   ==========   ==========
 Diluted                                  2(r)           4.94         5.38         5.19         0.67
                                                    =========   ==========   ==========   ==========
</TABLE>

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

                                      F-3
<PAGE>

                             LJ INTERNATIONAL INC.

            CONSOLIDATED STATEMENTS OF RECOGNIZED GAINS AND LOSSES

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

<TABLE>
<CAPTION>


                                                                      Year ended April 30
                                                        1998        1999             2000      2000
                                                        HK $        HK $             HK $      US $

<S>                                                    <C>        <C>              <C>        <C>
Net gains (losses) not recognized in
 the statements of operations
   Surplus (Deficit) arising on
    revaluation of investment
    properties                                          7,465       (3,350)          (3,200)     (414)

Net income for the year                                22,456       34,157           35,720     4,621
                                                       ------     --------         --------   -------

Total recognized gains                                 29,921       30,807           32,520     4,207
                                                       ======     ========         ========   =======

</TABLE>


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

                                      F-4
<PAGE>
                             LJ INTERNATIONAL INC.

                          CONSOLIDATED BALANCE SHEETS

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

<TABLE>
<CAPTION>

                                                                             As of April 30
                                                       Notes        1999             2000      2000
                                                                    HK $             HK $      US $
                                                                  --------         --------   -------
ASSETS
<S>                                                    <C>        <C>              <C>        <C>
Current assets:
 Cash and cash equivalents                                           1,626           12,888     1,667
 Restricted cash                                                    15,185           26,000     3,363
 Trade receivables, net of allowance for doubtful
  accounts (1999: HK$1,919, 2000: HK$2,497)                         34,172           42,689     5,523
 Inventories                                            2(g)        93,636          148,442    19,203
 Prepayments and other current assets                               16,287           21,664     2,803
                                                                  --------         --------   -------
 Total current assets                                              160,906          251,683    32,559
Property, plant and equipment, net                       4          35,737           34,216     4,426
Investment properties, net                                          22,300           19,100     2,471
Due from related parties                               10(b)         2,752            3,406       440
Due from director                                      10(b)            31                -         -
Organization costs, net of accumulated amortization
 (1999: HK$288, 2000: HK$Nil)                                        1,085                -         -
Goodwill, net of accumulated amortization
 (1999: HK$14, 2000: HK$21)                                             61            2,131       276
Other investments                                                        3                3         1
                                                                  --------         --------   -------
Total assets                                                       222,875          310,539    40,173
                                                                  ========         ========   =======
Liabilities and shareholders' equity
Current liabilities:
 Bank overdraft                                          5           8,447            6,345       821
 Notes payable, current portion                          5           5,569            4,070       526
 Letters of credit, gold and other loans                 5          44,858           36,200     4,683
 Trade payables                                                     20,757           27,004     3,493
 Accrued expenses and other payables                                 4,417           10,370     1,342
 Trade deposits received                                               153            7,842     1,014
 Due to director                                       10(b)             -               12         2
 Capitalized lease obligations, current                  6             540              593        77
 Income taxes payable                                   13             520              452        58
                                                                  --------         --------   -------
 Total current liabilities                                          85,261           92,888    12,016
Notes payable, non-current portion                       5           8,354            6,069       785
Capitalized leased obligations, non-current              6             674              213        28
3% convertible debentures                                                -           23,190     3,000
                                                                  --------         --------   -------
Total liabilities                                                   94,289          122,360    15,829
                                                                  --------         --------   -------
Minority interests                                                     158                -         -
                                                                  --------         --------   -------
Shareholders' equity
 Common stocks, par value US$0.01 each,
  Authorized - 100 million shares,
  Issued and outstanding -
  6,365,646 shares as of April 30, 1999
  7,438,058 shares as of April 30, 2000                  8             492              575        74
 Share premium                                           8          48,944           76,092     9,844
 Warrant reserve                                         8           1,622            1,622       210
 Investment property revaluation reserve                             4,115              915       118
 Retained earnings                                                  73,255          108,975    14,098
                                                                  --------         --------   -------
 Total shareholders' equity                                        128,428          188,179    24,344
                                                                  --------         --------   -------
Total liabilities, minority interests and
 shareholders' equity                                              222,875          310,539    40,173
                                                                  ========         ========   =======
</TABLE>

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


                                      F-5
<PAGE>

                             LJ INTERNATIONAL INC.

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

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

<TABLE>
<CAPTION>


                                                                                      Investment
                                            Common stock                                property
                                                            Par    Share    Warrant  revaluation   Retained
                                   Notes          Shares  value  premium    reserve      reserve   earnings     Total     Total
                                                           HK $     HK $       HK $         HK $       HK $      HK $      US $
                                               ---------  -----  -------    -------  -----------   --------  --------   -------
<S>                                <C>         <C>        <C>    <C>        <C>      <C>           <C>        <C>        <C>
Balance as of April 30, 1997                   4,387,200    339        -          -            -     16,642    16,981     2,197
New issue of shares                8(a)        1,460,000    113   41,620          -            -          -    41,733     5,398
Shares issued in Deen Merger       8(a)          142,946     11      (11)         -            -          -         -         -
Shares issued to note holders      8(a)          156,500     12      (12)         -            -          -         -         -
New issue of warrants              8(b)                -      -        -      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   41,597      1,622        7,465     39,098    90,257    11,676
Over-allotment of shares           8(d)          219,000     17    7,347          -            -          -     7,364       953
Deficit arising on revaluation                         -      -        -          -       (3,350)         -    (3,350)     (434)
Net income                                             -      -        -          -            -     34,157    34,157     4,419
                                               ---------  -----  -------    -------  -----------   --------  --------   -------
Balance as of April 30, 1999                   6,365,646    492   48,944      1,622        4,115     73,255   128,428    16,614
Shares issued on conversion
  of convertible debentures        8(e)        1,072,412     83   27,148          -            -          -    27,231     3,523
Deficit arising on revaluation                         -      -        -          -       (3,200)         -    (3,200)     (414)
Net income                                             -      -        -          -            -     35,720    35,720     4,621
                                               ---------  -----  -------    -------  -----------   --------  --------   -------
Balance as of April 30, 2000                   7,438,058    575   76,092      1,622          915    108,975   188,179    24,344
                                               =========  =====  =======    =======  ===========   ========  ========   =======
</TABLE>
Share premium has been set up and is dealt with as disclosed in note 8 to the
financial statements.

Warrant reserve is represented by the proceeds from the issue of the 1,679,000
warrants in the Initial Public Offering (see note 8(b)).

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


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

                                      F-6
<PAGE>

                             LJ INTERNATIONAL INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

            (Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
                                                                            Year ended April 30

                                                                         1998       1999       2000      2000
                                                             Note        HK $       HK $       HK $      US $
<S>                                                          <C>       <C>        <C>        <C>        <C>
Cash flows from operating activities:
 Income before income taxes                                            24,576     34,537     35,745     4,624
 Adjustments to reconcile income before income taxes
  to net cash provided by (used in) operating activities:
   Net interest expenses                                                6,964      5,186      2,980       386
   Depreciation of property, plant and equipment                        1,345      4,493      4,978       643
   Amortization of organization costs                                      85        160      1,085       140
   Amortization of goodwill                                                 7          7          7         1
   Issuing costs for convertible debentures                                 -          -      4,524       585
   Loss on disposal of property, plant and equipment                        -        562         22         3
   Gain on disposal of land and building                               (2,904)         -          -         -
   Allowance for doubtful debts                                             -      1,121        578        75
   Minority interests                                                      (2)      (273)      (405)      (52)
 Changes in operating assets and liabilities:
  Trade receivables                                                   (22,615)    (4,225)    (9,095)   (1,176)
  Inventories                                                          (9,801)   (46,642)   (54,806)   (7,090)
  Prepayments and other current assets                                    175    (15,738)    (5,377)     (696)
  Due from related parties                                               (860)       (97)      (654)      (85)
  Due from director                                                         -        (31)        31         4
  Trade payables                                                       11,359      1,884      6,247       808
  Accrued expenses and other payables                                      47      3,304     13,642     1,765
  Due to director                                                           -          -         12         2
  Letters of credit                                                    (1,127)    17,698     (8,252)   (1,068)
  Due to related parties                                                   48        (48)         -         -
                                                                      -------   --------   --------   -------
 Net cash provided by (used in) operating activities                    7,297      1,898     (8,738)   (1,131)
                                                                      -------   --------   --------   -------

Returns on investments and servicing of finance:
 Cash received from interest                                              212      1,690      2,668       345
 Cash paid for interest                                                (7,176)    (6,876)    (5,472)     (708)
                                                                      -------   --------   --------   -------
 Net cash used in returns on
  investments and servicing of finance                                 (6,964)    (5,186)    (2,804)     (363)
                                                                      -------   --------   --------   -------

Taxation
 Cash paid for income taxes                                            (1,878)    (2,932)       (93)      (12)
                                                                      -------   --------   --------   -------

Cash flows from investing activities:
 Organization costs                                                      (525)         -          -         -
 Purchase of bonds                                                         (1)         -          -         -
 Purchase of property, plant and equipment                            (22,728)    (7,802)    (3,477)     (450)
 Purchase of subsidiary                                        14(a)        -          -     (1,830)     (237)
 Proceeds on disposals of property, plant and equipment                 3,800          -        145        19
                                                                      -------   --------   --------   -------
 Net cash used in investing activities                                (19,454)    (7,802)    (5,162)     (668)
                                                                      -------   --------   --------   -------

Net cash used before financing activities                             (20,999)   (14,022)   (16,797)   (2,174)
                                                                      -------   --------   --------   -------

Cash flows from financing activities:                          14(b)
 Net proceeds from issue of 3% convertible debentures                       -          -     45,721     5,915
 Deferred offering costs                                              (14,095)         -          -         -
 Net proceeds from issue of shares/warrants                            58,051      7,364          -         -
 Net proceeds from sale of promissory notes                             2,184     (2,184)         -         -
 Loans acquired                                                         1,434      9,856      8,759     1,133
 Repayment of loans                                                    (8,016)    (4,925)   (12,949)   (1,675)
 Repayment of capitalized leases                                         (438)      (539)      (555)      (72)
 Restricted cash                                                          (75)   (12,074)   (10,815)   (1,399)
                                                                      -------   --------   --------   -------
 Net cash provided by (used in) financing activities                   39,045     (2,502)    30,161     3,902
                                                                      -------   --------   --------   -------

Net increase (decrease) in cash and cash equivalents                   18,046    (16,524)    13,364     1,728
Cash and cash equivalents, as of beginning of year                     (8,343)     9,703     (6,821)     (882)
                                                                      -------   --------   --------   -------
Cash and cash equivalents, as of end of year                            9,703     (6,821)     6,543       846
                                                                      =======   ========   ========   =======
Analysis of balances of cash and cash equivalents
 Cash                                                                  10,752      1,626     12,888     1,667
 Bank overdrafts                                                       (1,049)    (8,447)    (6,345)     (821)
                                                                      -------   --------   --------   -------
                                                                        9,703     (6,821)     6,543       846
                                                                      =======   ========   ========   =======
Non-cash transactions:
 Purchase of equipment under capitalized leases                           320        469        147        19
                                                                      =======   ========   ========   =======
</TABLE>

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

                                      F-7
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


1.   PRINCIPAL ACTIVITIES AND BASIS OF FINANCIAL STATEMENTS

     LJ International Inc. (the Company) and its subsidiaries (collectively the
     Group) are involved in the design, manufacture, marketing and sale of
     precious and semi-precious gemstones jewelry as well as diamond jewelry.
     While the Company is based in Hong Kong, its manufacturing operations are
     in the People's Republic of China (PRC) and most of its sales are currently
     in the United States.  The Group also owns certain commercial and
     residential properties located in Hong Kong, which are held primarily for
     investment purposes.

     During the year ended April 30, 1998, the Company merged with Lorenzo
     Jewelry Mfg. (H.K.) Limited (Lorenzo).  The Company was incorporated as a
     British Virgin Islands (BVI) company on January 30, 1997 and prior to the
     merger it had no significant operations, but had incurred certain
     organization and deferred offering costs.  The merger had been accounted
     for by the purchase method of accounting under generally accepted
     accounting principles in Hong Kong (HK GAAP) and reflects operations for
     each period presented herein on the basis that the merger took place at
     April 30, 1994.  In connection with this reorganization, HK$75 was recorded
     as goodwill.  Under generally accepted accounting principles in the United
     States (US GAAP) such reorganization would be accounted for as if it 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 17.  The
     capital structure reflected in the financial statements is that of the
     Company, which is a holding company after the merger.



2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     (a)  Basis of accounting
          The financial statements are presented in Hong Kong dollars and have
          been prepared in accordance with Statements of Standard Accounting
          Practice (SSAP) and Interpretations issued by the Hong Kong Society of
          Accountants and HK GAAP which have been applied consistently
          throughout the relevant periods. These requirements differ in certain
          material respects from US GAAP - see note 17.

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

                                      F-8
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     (c)  Presentation of financial statements
          SSAP 1 (Revised) "Presentation of financial statements" which has been
          adopted for the first time in the current year, is concerned with the
          presentation and disclosure of financial information. The format of
          the statement of operations and the balance sheet has been revised in
          accordance with the SSAP, and a statement of recognized gains and
          losses, not previously required, is included. Certain comparative
          amounts have been restated in order to achieve a consistent
          presentation.

     (d)  Principles of combination and consolidation
          The consolidated financial statements mainly include the financial
          information of the Company and Lorenzo, Precious Gems Trading Limited
          (Precious Gems), Golden Horizon Trading Limited (Golden Horizon) and
          Fine Gift Enterprises Limited (Fine Gift). Lorenzo has three
          subsidiaries, two of which are incorporated in the PRC, Shantou
          Lorenzo Jewelry Mfg. and Shantou SEZ Lorenzo Gems & Craft Factory Co.,
          Ltd. Lorenzo also has a subsidiary, Lorenzo Marketing Co. Limited
          (Lorenzo Marketing) which is incorporated in Hong Kong, and was 60%
          owned by Lorenzo as of April 30 1999. It became a 100% owned
          subsidiary of Lorenzo on March 22, 2000. Precious Gems is incorporated
          in BVI and has one subsidiary which is incorporated in the PRC,
          Lorenzo Gems Manufacturing (Shenzhen) Co., Ltd. Golden Horizon is
          incorporated in BVI and has one subsidiary which is incorporated in
          the PRC, Lorenzo Jewellery (Shenzhen) Co., Ltd. Fine Gift is
          incorporated in BVI and has one subsidiary which is incorporated in
          Hong Kong, Lorenzo Diamond Jewelry Mfg. Co., Limited. As of April 30,
          2000, all subsidiaries are 100% owned.

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

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

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

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

                                      F-9
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

     (g)  Inventories
          Inventories are stated at the lower of cost and net realizable value.
          Cost, which comprises all costs of purchase and, where applicable,
          costs of conversion and other costs that have been incurred in
          bringing the inventories to their present location and condition, is
          calculated using the first-in, first-out method. Net realizable value
          represents the estimated selling price in the ordinary course of
          business less the estimated costs of completion and the estimated
          costs necessary to make the sale. Inventories consisted of the
          following:
<TABLE>
<CAPTION>

                                                              As of April 30
                                                      1999       2000             2000
                                                      HK $       HK $             US $
<S>                                                  <C>        <C>              <C>
     Raw materials                                   24,253     44,687            5,781
     Work-in-progress                                57,338     77,354           10,007
     Finished goods                                  13,245     27,601            3,570
     Less: Provision for slow moving inventories     (1,200)    (1,200)            (155)
                                                    -------   --------           ------
                                                     93,636    148,442           19,203
                                                    -------   --------           ------
                                                    -------   --------           ------
</TABLE>

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

          The amount of inventories carried at net realizable value is HK$6,795
          (1999: HK$12,045), which is determined by the costs less a provision
          of slow moving items.

          Costs of inventories recognized as an expense for the years ended
          April 30, 1998, 1999 and 2000 were HK$44,799, HK$62,022 and HK$125,702
          respectively.

     (h)  Property, plant and equipment (PPE) and depreciation
          PPE is stated at cost less accumulated depreciation. The cost of an
          asset consists of its purchase price and any directly attributable
          costs of bringing the asset to its present working condition and
          location for its intended use. Expenditure incurred after the assets
          have been put into operation, such as repairs and maintenance and
          overhaul costs, is charged to the statement of operations in the
          period in which it is incurred. In situations where it can be clearly
          demonstrated that the expenditure has resulted in an increase in the
          future economic benefits expected to be obtained from the use of the
          assets, the expenditure is capitalized as an additional cost of the
          asset.

                                     F-10
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     (h)  Property, plant and equipment (PPE) and depreciation (Continued)
          When the recoverable amount of an asset has declined below its
          carrying amount, the carrying amount is reduced to reflect the decline
          in value. In determining the recoverable amount of assets, expected
          future cash flows are not discounted to their present values.

          When assets are sold or retired, their costs or valuation and
          accumulated depreciation are removed from the accounts and any gain or
          loss resulting from their disposal is included in the statement of
          operations.

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

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

   Land and buildings                   2% or over the unexpired term of leases
   Furniture, fixtures and equipment                                        20%
   Motor vehicles                                                           20%
   Plant and machinery                                                      10%
   Leasehold improvement                                                    10%

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

          The investment properties were revalued close at the end of April 2000
          by CB Richard Ellis and Jones Lang LaSalle Limited, independent firms
          of qualified surveyors, on an open market value basis. The deficit of
          HK$3,200 arising on revaluation has been debited to the investment
          property revaluation reserve.

                                     F-11
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     (i)  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$1,080 of accumulated depreciation had previously
          been recorded.

          Investment properties include gross amount of HK$22,300 and HK$19,100
          with no accumulated depreciation in respect of assets held for use
          under operating leases as of April 30, 1999 and 2000 respectively.

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

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

     (j)  Organization costs
          Organization costs comprise of professional fees paid to third parties
          in connection with the organization of the Group. In prior years, it
          was capitalized and amortized over 10 years using straight line basis.
          The adoption of SSAP 1 (Revised), had led to a reassessment of this
          accounting policy. In particular, organization costs which are not
          considered to give rise on an identifiable resource from which
          economic benefits are expected to flow to the Group is now recognized
          as an expense in the period in which it is incurred. As the amount of
          resulting adjustments relating to periods prior to May 1, 1999 was
          considered by the directors to be insignificant, this change in
          accounting policy has not been applied retrospectively. Accordingly,
          the opening retained earnings for 1998, 1999 and 2000 have not been
          restated.

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

                                     F-12
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     (l)  Operating leases
          Leases where substantially all the rewards and risks of ownership of
          assets remain with the leasing company are accounted for as operating
          leases. Rentals payable and receivable under operating leases are
          recorded in the statement of operations on a straight line basis over
          the lease terms.

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

     (n)  Related parties
          Parties are considered to be related if one party has the ability,
          directly or indirectly, to control the other party, or exercise
          significant influence over the other party in making financial and
          operating decisions. Parties are also considered to be related if they
          are subject to common control or common significant influence.

     (o)  Revenue recognition
          Revenue is recognized when it is probable that the economic benefits
          will flow to the Group and when the revenue can be measured reliably.

          Turnover and operating revenue represent sale of goods at invoiced
          value to customers, net of returns and discounts, and are recognized
          when goods are delivered and title is passed to customers.

          Other revenue is recognized on the following basis:
          (i)  Interest income is accrued on a time proportion basis on the
               principal outstanding and at the interest rate applicable; and
          (ii) Rental income relating to operating leases is recognized in the
               period in which the properties are let out and on the straight-
               line basis over the lease terms.

                                     F-13
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

          Assets and liabilities of overseas subsidiaries are translated at the
          applicable rates of exchange ruling at the balance sheet date. All
          exchange differences arising on the consolidation are recorded within
          equity. Historically, 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, 2000 has been made at HK$7.73 to US$1.00.

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

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

          The calculation of diluted EPS is based on net income for the year
          attributable to shareholders and on the weighted average number of
          ordinary shares outstanding during the year, adjusted for the effects
          of all dilutive potential ordinary shares. The dilutive effect of
          convertible securities is reflected in diluted EPS by application of
          the if-converted method.

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

                                     F-14
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


3.   OPERATING RISKS

     (a)  Concentrations of credit risks

          Details of major customers from which the Group derived operating
          revenue are shown in note 16(c).

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

     (b)  Country risks

          The Group may also be exposed to certain risks as a result of its
          manufacturing operation being located in the PRC and its investment
          properties in Hong Kong which are not typically associated with
          companies operating in North America and Western Europe. These include
          risks associated with, among others, the political, economic and legal
          environments and foreign currency exchange. The Group's results may be
          adversely affected by changes in the political and social conditions
          in the PRC, and by changes in governmental policies with respect to
          laws and regulations, anti-inflationary measures, currency conversion
          and remittance abroad, and rates and methods of taxation, among other
          things. The Company's management does not believe these risks to be
          significant. There can be no assurance, however, that changes in
          political, social and other conditions will not result in any adverse
          impact.

     (c)  Cash and time deposits

          The Group maintains its cash balances and investments in time deposits
          with various banks and financial institutions located in Hong Kong. In
          common with local practice, such amounts are not insured or otherwise
          protected should the financial institutions be unable to meet their
          liabilities. There has been no history of credit losses.

                                     F-15
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


4.   PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>


                                    Land                  Furniture,
                                     and    Leasehold  fixtures and   Plant and      Motor
                               buildings  improvement     equipment   machinery   vehicles    Total    Total
At cost                             HK $         HK $          HK $        HK $       HK $     HK $     US $
<S>                            <C>        <C>          <C>            <C>         <C>        <C>       <C>
     At May 1, 1999                4,970       16,273         8,945      13,973      2,675   46,836    6,059
     Addition                          -        1,041         1,083       1,364        136    3,624      469
     Disposal/written off              -            -           (22)       (159)         -     (181)     (24)
     Reclassification                  -          107           (10)        (97)         -        -        -
                                   -----      -------        ------     -------     ------  -------   ------
     At April 30, 2000             4,970       17,421         9,996      15,081      2,811   50,279    6,504
                                   -----      -------        ------     -------     ------  -------   ------
Accumulated depreciation
     At May 1, 1999                  716        2,322         4,481       2,647        933   11,099    1,437
     Charge for the year             140        1,657         1,303       1,364        514    4,978      643
     Disposal/written off              -            -             -         (14)         -      (14)      (2)
     Reclassification                  -           31             3         (34)         -        -        -
                                   -----      -------        ------     -------     ------  -------   ------
     At April 30, 2000               856        4,010         5,787       3,963      1,447   16,063    2,078
                                   -----      -------        ------     -------     ------  -------   ------

Net book value
     At April 30, 2000             4,114       13,411         4,209      11,118      1,364   34,216    4,426
                                   =====      =======        ======     =======     ======  =======   ======

     At April 30, 1999             4,254       13,951         4,464      11,326      1,742   35,737    4,622
                                   =====      =======        ======     =======     ======  =======   ======
</TABLE>

                                     F-16
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


4.   PROPERTY, PLANT AND EQUIPMENT (Continued)

     (a)  The net book value of the property, plant and equipment includes an
          amount of HK$1,471 and HK$1,205 in respect of assets held under
          capitalized leases as of April 30, 1999 and April 30, 2000
          respectively. Depreciation charge in respect of these assets for the
          years ended April 30, 1999 and 2000 amounted to HK$461 and HK$463
          respectively.

     (b)  The Group has pledged all land and buildings and investment properties
          to collaterize general banking facilities granted to the Group as of
          April 30, 1999 and April 30, 2000 (see note 5).

5.   BANKING FACILITIES AND OTHER LOANS
<TABLE>
<CAPTION>

                                                                     As of April 30
                                                           1999            2000         2000
                                                 Notes     HK $            HK $         US $
<S>                                              <C>     <C>            <C>           <C>
     Bank overdraft                               (a)     8,447           6,345          821
                                                         ======         =======       ======
     Notes payable:
      Current portion                                     5,569           4,070          526
      Non-current portion                                 8,354           6,069          785
                                                         ------         -------       ------
                                                  (b)    13,923          10,139        1,311
                                                         ======         =======       ======
     Letters of credit, gold and other loans:
      Letters of credit                           (a)    34,193          25,941        3,356
      Gold loan                                   (c)     9,500          10,259        1,327
      Other loans                                 (d)     1,165               -            -
                                                         ------         -------       ------
                                                         44,858          36,200        4,683
                                                         ======         =======       ======
</TABLE>

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

                                     F-17
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


5.   BANKING FACILITIES AND OTHER LOANS (Continued)

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

                                             As of April 30
                                     1999            2000    2000
                                     HK $            HK $    US $

          Facilities granted
           Letters of credit       38,125          66,500   8,603
           Overdrafts              10,000          36,500   4,722
                                   ------         -------  ------
                                   ------         -------  ------

          Utilized
           Letters of credit       34,193          25,941   3,356
           Overdrafts               8,447           6,345     821
                                   ------         -------  ------
                                   ------         -------  ------

          Unutilized facilities
           Letters of credit        3,932          40,559   5,247
           Overdrafts               1,553          30,155   3,901
                                   ------         -------  ------
                                   ------         -------  ------

          The bank overdrafts are denominated in Hong Kong dollars, bear
          interest at the floating commercial bank lending rates in Hong Kong,
          which ranged from 9.25% to 11% per annum as of April 30, 2000 (1999:
          8.6% to 11.5% per annum) and are renewable annually with the consent
          of the relevant banks.

          Under the banking facilities arrangements, the Group is required to
          maintain certain cash balances based on the amount of facilities
          granted. These balances are reflected as restricted cash in the
          balance sheet.

     (b)  The Group also had mortgage loans classified under notes payable which
          are related to the Group's investment properties.  These loans
          aggregated HK$13,923 and HK$10,139 as of April 30, 1999 and 2000
          respectively. Interest charges on these loans range from 10.75% to
          11.5% per annum as of April 30, 2000 (1999: 10.09% to 10.59% per
          annum).

                                     F-18
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


5.   BANKING FACILITIES AND OTHER LOANS (Continued)

     (b)  Expected maturities of notes payable are as follows:

                             As of April 30, 2000
                                  HK $    US $

          2001                   4,070     526
          2002                   3,920     507
          2003                   2,149     278
                                ------  ------
                                10,139   1,311
                                ------  ------
                                ------  ------

     (c)  The Group had outstanding loans to purchase 4.3 oz and 4.85 oz of gold
          as of April 30, 1999 and 2000 with the related balances being HK$9,500
          and HK$10,259 respectively.  These loans are due within the next year,
          however, have been historically renewed.  These loans bear interest at
          3.15% to 3.45% as of April 30, 2000 (1999: 3.1% to 3.3%).  These loans
          can be repaid in cash at the current exchange rate of gold any time
          prior to maturity.  The Group adjusts the outstanding loan balance to
          the current market rate of gold as of the balance sheet date.  Due to
          changing prices of gold, this adjustment has resulted in additional
          income of HK$630 and HK$338 for the years ended April 30, 1999 and
          2000 respectively.  As the Group does not hedge for changes in the
          future price of gold, the Group is exposed to certain market risks,
          which may result from potential future increases in the price of gold.

     (d)  The Group had a three month short-term loan of HK$1,165 due to a
          private company as of April 30, 1999.  The loan bears interest at 2.8%
          per month and has been fully repaid in June 1999.

                                     F-19
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


6.   CAPITALIZED LEASE OBLIGATIONS

                                                        As of April 30
                                                  1999      2000     2000
                                                  HK $      HK $     US $
     Capitalized lease obligations:
       Within one year                             540       593       77
       In the second to fifth years inclusive      674       213       28
                                                 -----     -----    -----
                                                 1,214       806      105
                                                 -----     -----    -----
                                                 -----     -----    -----

     The following is a schedule of future minimum lease payments under
     capitalized leases as of April 30, 2000:

                                                     HK $  US $

     Future minimum lease payments                  1,027   133
     Less: Amount representing interest               221    28
                                                    -----  ----

     Present value of net minimum lease payments      806   105
     Less: Current portion                            593    77
                                                    -----  ----
                                                      213    28
                                                    -----  ----
                                                    -----  ----

     Finance charges on capitalized lease obligations for the years ended 1998,
     1999 and 2000 were HK$92, HK$144 and HK$147 respectively.


7.   CONTINGENT LIABILITIES

     As of April 30, 1999 and 2000, the Group had contingent liabilities in
     respect of bills discounted with recourse amounting to HK$895 and HK$Nil
     respectively.

     As of April 30, 1999 and 2000, the Group provided guarantee in respect of
     the following:
     (a)  Bank mortgage loans granted to a director, Yih Yu Chuan to the extent
          of HK$4,882 (US$632) and HK$Nil respectively;
     (b)  Loan facility granted to a company, in which the Group has 18% equity
          interest as of April 30, 2000, to the extent of HK$Nil and HK$2,319
          (US$300) principal amount plus the related interests respectively.

                                     F-20
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


8.   SHARE CAPITAL, WARRANT RESERVE AND SHARE PREMIUM

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

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

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

     (b)  In the Initial Public Offering, the Company has issued 1,679,000
          warrants (including 219,000 over-allotment warrants).  Each warrant
          entitles the holders to purchase one share of common stock at a price
          of US$5.75 per share for a period of five years from the effective
          date of the offering.  The Company has received all proceeds from the
          issue totalling HK$1,622 and was recorded in the Company's warrant
          reserve account.

     (c)  In addition to note 8(b) above, the representative of the Initial
          Public Offering received warrants to purchase 146,000 shares of common
          stock at US$8.25 per share and options to purchase 146,000 warrants,
          each of which also entitles the holder to purchase one share of common
          stock at US$8.25 per share, at US$0.20625 per warrant.  These warrants
          and options are exercisable from April 15, 1998 and expire on April
          14, 2003.

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

     (e)  On October 29, 1999, the Company entered into a Securities Purchase
          Agreement with an accredited investor pursuant to which the Company
          agreed to issue and the investor agreed to purchase up to
          US$10,500,000 of 3% Convertible Debentures, as well as common stock
          purchase warrants. The Debenture is convertible into the shares of the
          Company's common stock, with an exercise price at the lesser of Fixed
          Conversion Price or the Variable Conversion Price. The Fixed
          Conversion Price is the greater of US$5.00 per share or 125% of the
          average closing bid price of the common stock for the 15 trading days
          ending on the trading day immediately before the respective Closing
          Dates. The Variable Conversion Price represents 92% of the average of
          the two lowest closing bid prices of the common stock during the 20
          trading days immediately prior to conversion.

                                     F-21
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


8.   SHARE CAPITAL, WARRANT RESERVE AND SHARE PREMIUM (Continued)

     (e)  (Continued)
          On November 5, 1999, the Company issued the first tranche of
          US$3,000,000 of 3% Convertible Debentures with the date of maturity on
          November 5, 2002; and Warrants for the Convertible Debenture holder to
          purchase 45,000 shares of the Company's common stock at an exercise
          price of US$3.75 per share with an expiration date of November 30,
          2004.  In addition, Warrants to purchase 30,000 shares of the
          Company's common stock were issued to the placement agent as partial
          compensation for its services, with the same terms as the detachable
          warrants.

          On March 22, 2000, the Company issued the second tranche of
          US$3,500,000 of 3% Convertible Debentures with the date of maturity on
          March 22, 2003; and Warrants for the Convertible Debenture holder to
          purchase 52,500 shares of the Company's common stock at an exercise
          price of US$6.94 per share with an expiration date of March 31, 2005.
          In addition, Warrants to purchase 35,000 shares of the Company's
          common stock were issued to the placement agent as partial
          compensation for its services, with the same terms as the detachable
          warrants.

          As of April 30, 2000, all the first tranche of US$3,000,000 and
          US$500,000 out of the US$3,500,000 second tranche Convertible
          Debentures and related interest up to the dates of conversion, have
          been exercised and converted, and 1,072,412 shares of common stock
          were issued in this respect.

          No other share of common stock was issued during the year.  The
          Company had 7,438,058 shares of common stock outstanding as of April
          30, 2000 (1999: 6,365,646 shares).

     (f)  On July 31, 1999 the Company entered into a consulting agreement with
          a consultant which providing investor relationship services to the
          Company, and the Company agreed to issue a 5-year common stock
          purchase warrant, with an expiration date of five years (July 30,
          2004). The consulting agreement was terminated on January 31, 2000 and
          a warrant to purchase 35,000 shares of common stock of the Company at
          an exercise price of US$5.00 was issued.

     None of the warrants as aforesaid was exercised for each of the years in
     the three year period ended April 30, 2000.

                                     F-22
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


9.   STOCK BASED COMPENSATION PLAN

     As of June 1, 1998, the Company adopted a stock option plan (the Plan)
     which was approved by the shareholders on December 9, 1998. The Plan allows
     the Board of Directors, or a committee thereof at the Board's discretion,
     to provide for a total of 2,000,000 stock options to officers, directors,
     key employees and advisors of the Company or its subsidiaries. Out of the
     stock options provided, 1,285,000 stock options were issued in accordance
     with the terms of the Plan on April 12, 1999 to certain officers,
     directors, key employees and advisors of the Group at an exercise price of
     US$5.0 (HK$38.65) per share (the fair market value of the common stock as
     of April 12, 1999) and are exercisable during the period from April 12,
     1999 to April 11, 2009.

     Pursuant to the 1999 Annual Meeting of the Shareholders on December 15,
     1999, the authorised number of stock options was increased from 2,000,000
     to 4,000,000. The purchase price of the shares of the Common Stock covered
     by the Plan shall be at least 100% of the fair market value per share of
     such shares on the Date of Grant, with a term of ten years.

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

     There were 1,285,000 and 1,550,000 incentive stock options issued and
     exercisable as of April 30, 1999 and 2000 respectively.


10.  RELATED PARTY TRANSACTIONS

     (a)  Names and relationship of related parties

<TABLE>
<CAPTION>
                                                                Existing relationships with the Group
                                                                -------------------------------------

<S>                                                             <C>
          Yih Yu Chuan                                          Director and major shareholder of the Company
          Gemological Institute of America,
            Hong Kong Limited                                   Common directors and major shareholders
          Lorenzo Consultant & Investment
            (China) Limited                                     Common directors and major shareholders
          Hong Kong Brasil Lapidary Limited                     Common director and major shareholder
          International Asset Management Limited                Common director
</TABLE>

                                     F-23
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


10.  RELATED PARTY TRANSACTIONS (Continued)

     (b)  Summary of related party transactions
<TABLE>
<CAPTION>
                                                                                As of April 30
                                                                     1999               2000               2000
                                                     Notes           HK $               HK $               US $
                                                                   ------             ------             ------
<S>                                                  <C>           <C>                <C>                <C>
          Due from related parties:
            Gemological Institute of America,
             Hong Kong Limited                        (i)           2,724              3,406                440
            Lorenzo Consultant & Investment
             (China) Limited                          (i)              25                  -                  -
            Hong Kong Brasil Lapidary Limited         (i)               3                  -                  -
                                                                   ------             ------             ------
                                                                    2,752              3,406                440
                                                                   ======             ======             ======


          Due (to) / from  related party:
            Yih Yu Chuan                              (i)              31                (12)                (2)
                                                                   ======             ======             ======

          Certain banking facilities granted to the
            Group collateralized by properties
            owned by Yih Yu Chuan and his
            personal guarantee to the extent of                    66,063             52,684              6,815
                                                                   ======             ======             ======
</TABLE>

<TABLE>
<CAPTION>
                                                                      Year ended April 30
                                                                1998        1999       2000      2000
                                                     Notes      HK $        HK $       HK $      US $

<S>                                                  <C>      <C>         <C>        <C>       <C>
          Directors' emoluments                        (ii)    1,518       2,083      4,977       644
                                                              ======      ======     ======    ======
          Sales:
            Hong Kong Brasil Lapidary Limited         (iii)      254           3          -         -
            Gemological Institute of
             America, Hong Kong Limited               (iii)        -          71          -         -
                                                              ------      ------     ------    ------
                                                                 254          74          -         -
                                                              ======      ======     ======    ======
          Rental/Management fee income:
            Gemological Institute of
             America, Hong Kong Limited                (iv)      275           -        282        36
                                                              ======      ======     ======    ======
          Gain on sale of building:
            Yih Yu Chuan                                (v)    2,904           -          -         -
                                                              ======      ======     ======    ======
          Consultancy and professional fees
            paid and payable:
            International Asset Management Limited     (vi)      438         283        873       113
                                                              ======      ======     ======    ======
</TABLE>

                                     F-24
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


10.  RELATED PARTY TRANSACTIONS (Continued)

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

     (ii)   The emoluments were determined by the directors.

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

     (iv)   During the year ended April 30, 1998, the Group had leased certain
            office space to a related party at HK$25 per month. The monthly
            charge was determined by the directors.

            During the year ended April 30, 2000, the Group has received
            management fee income from a related party. The fee was determined
            by the directors.

     (v)    During the year ended April 30, 1998, Yih Yu Chuan purchased for
            cash an investment property from the Group at appraised value. The
            Group recognized a gain in this sale of HK$2,904 (see note 17(k)).

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


11.  OPERATING LEASES COMMITMENTS

     As of April 30, 1999 and 2000, the Group had outstanding commitments not
     provided for under non-cancellable operating leases in respect of land and
     buildings, the portion of these commitments which are payable in the
     following year is as follows:

                                                         As of April 30
                                                   1999         2000      2000
                                                   HK $         HK $      US $
     Operating leases which expire:
        Within one year                             576        1,288       167
        In the second to fifth years inclusive    3,118        1,719       222
                                                  -----       ------     -----
                                                  3,694        3,007       389
                                                  -----       ------     -----
                                                  -----       ------     -----

     Total lease expense for the years ended April 30, 1998, 1999 and 2000 was
     HK$1,398, HK$3,281 and HK$3,759 respectively.

                                     F-25
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


12.  STAFF RELATED COSTS
                                                       Year ended April 30
                                               1998       1999      2000    2000
                                     Notes     HK $       HK $      HK $    US $

     Salaries, bonus and welfares            28,067     50,543    66,029   8,542
     Pension expense                 12(a)      248        446       483      62
                                             ------    -------   -------  ------
     Total Staff Cost                        28,315     50,989    66,512   8,604
                                             ======    =======   =======  ======

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

          The amount of forfeitures in respect of Retirement Plan for the years
          ended April 30, 1998, 1999 and 2000 was HK$16, HK$22 and HK$224
          respectively.


13.  INCOME TAXES

     Reconciliation to the expected statutory tax rate in Hong Kong of 16%
     (1999: 16% and 1998: 16%) is as follows:

                                                           Year ended April 30
                                                          1998    1999    2000
                                                             %       %       %
     Statutory rate                                       16.0    16.0    16.0
     Tax effect of net operating losses                    1.0     1.4     5.1
     Non taxable PRC profits                              (8.8)  (15.4)  (16.3)
     Others                                                0.4    (0.9)   (4.7)
                                                          ----   -----   -----
     Effective rate                                        8.6     1.1     0.1
                                                          ====   =====   =====

                                     F-26
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


13.  INCOME TAXES (Continued)

     Income tax expense is comprised of the following:

                                                     Year ended April 30
                                                1998   1999      2000    2000
                                                HK $   HK $      HK $    US $

     Current taxes:
      For the year                             2,094    520     1,207     156
      Under (Over) provision in prior years       26   (140)   (1,182)   (153)
                                               -----  -----   -------   -----
                                               2,120    380        25       3
     Deferred taxes                                -      -         -       -
                                               -----  -----   -------   -----
     Income tax expense                        2,120    380        25       3
                                               =====  =====   =======   =====

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

     The Company is incorporated under the International Business Companies Act
     of the British Virgin Islands and, accordingly, is exempted from payment of
     the British Virgin Islands income tax.  The Hong Kong subsidiaries are
     subject to Hong Kong profits tax at a rate of 16% (1999: 16% and 1998:
     16%).

     PRC subsidiaries are registered to qualify as Foreign Investment
     Enterprises in the PRC and are eligible for certain tax holidays and
     concessions.  Accordingly, certain PRC subsidiaries were exempted from PRC
     income tax for two years starting from their first profit-making years,
     followed by a 50% reduction of tax for next three years.  Certain
     subsidiaries have commenced the tax holidays during the year.  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 taxation has not been provided as the tax effect of timing
     difference is insignificant at the balance sheet date.

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

                                                         As of April 30
                                                   1999       2000      2000
                                                   HK $       HK $      US $

     Excess of tax allowances over depreciation     357        385        50
     Tax losses carried forward                    (830)      (923)     (119)
                                                   ----      -----     -----
                                                   (473)      (538)      (69)
                                                   ====      =====     =====

                                     F-27
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


14.  NOTES TO STATEMENTS OF CASH FLOWS

     (a)  Purchase of  subsidiary
          On March 22, 2000, Lorenzo acquired the remaining shareholding (i.e.
          40%) of Lorenzo Marketing for a consideration of HK$1,830.
<TABLE>
<CAPTION>

                                               Year ended April 30
                                                   2000    2000
                                                   HK $    US $
<S>                                               <C>     <C>
        Net liabilities acquired:
          Property, plant and equipment               4       1
          Trade receivables                         125      16
          Inventories                               512      66
          Cash and cash equivalents                  99      13
          Trade payables                            (68)     (9)
          Accrued expenses and other payables    (1,291)   (167)
                                                 ------   -----
                                                   (619)    (80)
        Interest attributable to the Group
          as of March 22, 2000                      372      48
        Goodwill arising from acquisition         2,077     269
                                                 ------   -----
        Total purchase consideration              1,830     237
                                                 ======   =====

        Satisfied by cash                         1,830     237
                                                 ======   =====

        There was no acquisition for each of the year ended April 30, 1998 and 1999.
</TABLE>

     (b)  Analysis of changes in financing
<TABLE>
<CAPTION>
                                                     Common stocks        Notes
                                                         (including     payable   Capitalized            3%
                                                        premium and   and other         lease   convertible
                                                    warrant reserve)      loans   obligations    debentures
                                                               HK $        HK $          HK $          HK $
                                                    ---------------   ---------   -----------   -----------
<S>                                                 <C>               <C>         <C>           <C>
        As of April 30, 1997                                    339      26,239         1,402             -
        Cash provided by (used in) financing                 43,355           -             -             -
        New (Repayment of) loans, net                             -      (6,582)         (438)            -
        Inception of capitalized lease contracts                  -           -           320             -
                                                    ---------------   ---------   -----------   -----------

        As of April 30, 1998                                 43,694      19,657         1,284             -
        Cash provided by (used in) financing                  7,364           -             -             -
        New (Repayment of) loans, net                             -       4,931          (539)            -
        Inception of capitalized lease contracts                  -           -           469             -
                                                    ---------------   ---------   -----------   -----------

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

        As of April 30, 2000                                 78,289      20,398           806        23,190
                                                    ===============   =========   ===========   ===========
</TABLE>

                                     F-28
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


15.  OTHER SUPPLEMENTARY INFORMATION

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

                                                           Year ended April 30

                                                       1998    1999     2000    2000
                                                       HK $    HK $     HK $    US $
<S>                                                   <C>    <C>     <C>      <C>
     Finance costs
      Interest expenses                               7,176   6,876    5,648     731
      Issuing costs for convertible debentures            -       -    4,524     585
                                                      -----  ------  -------  ------
                                                      7,176   6,876   10,172   1,316
                                                      -----  ------  -------  ------
                                                      -----  ------  -------  ------

     Direct expenses attributable to rental income       44       2       29       4
                                                      -----  ------  -------  ------
                                                      -----  ------  -------  ------
</TABLE>

                                     F-29
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


16.  REPORT ON SEGMENT INFORMATION

     (a)  The Group has operations in the following geographical areas:
<TABLE>
<CAPTION>

                                                       Year ended April 30
                                               1998       1999       2000      2000
                                               HK $       HK $       HK $      US $
                                            -------   --------   --------   -------
 Operating revenue:
   Sales to customers outside the Group:
<S>                                         <C>       <C>        <C>        <C>
    United States of America & Canada       111,274    178,930    231,751    29,981
    Hong Kong                                 2,248        630     20,395     2,638
    Europe and other countries                5,667     13,467     45,330     5,864
    PRC                                          58         37      2,413       312
    Japan                                     4,952      2,155      1,012       131
                                            -------   --------   --------   -------
                                            124,199    195,219    300,901    38,926
                                            -------   --------   --------   -------
                                            -------   --------   --------   -------

Income taxes:
   Hong Kong                                  2,120        380         25         3
   PRC                                            -          -          -         -
                                            -------   --------   --------   -------
                                              2,120        380         25         3
                                            -------   --------   --------   -------
                                            -------   --------   --------   -------

  Segment profit:
   Hong Kong                                 15,415      6,335      1,557       202
   PRC                                       14,005     33,008     37,143     4,805
 Interest expenses, net                      (6,964)    (5,186)    (2,980)     (386)
                                            -------   --------   --------   -------
 Net income                                  22,456     34,157     35,720     4,621
                                            -------   --------   --------   -------
                                            -------   --------   --------   -------
</TABLE>

<TABLE>
<CAPTION>

                                                         As of April 30
                                              1999            2000          2000
                                              HK $            HK $          US $
                                            -------       --------       -------
 Segment assets:
<S>                                         <C>           <C>            <C>
   Hong Kong                                 89,305        181,387        23,465
   PRC                                      133,570        129,152        16,708
                                            -------       --------       -------
                                            222,875        310,539        40,173
                                            -------       --------       -------
                                            -------       --------       -------
</TABLE>

                                     F-30
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


16.  REPORT ON SEGMENT INFORMATION (Continued)

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

                                                       Year ended April 30
                                                1998      1999      2000      2000
                                                HK $      HK $      HK $      US $
       Revenues:
<S>                                          <C>      <C>       <C>        <C>
         Manufacture of jewelry              124,199   195,219   300,901    38,926
         Holding of investment properties      1,273       474       875       113
                                             -------  --------  --------   -------
                                             125,472   195,693   301,776    39,039
                                             =======   =======   =======   =======
       Income tax provision (credit):
         Manufacture of jewelry                1,924       305      (110)      (14)
         Holding of investment properties        196        75       135        17
                                             -------  --------  --------   -------
                                               2,120       380        25         3
                                             -------  --------  --------   -------
       Segment profit:
         Manufacture of jewelry               21,227    33,685    34,874     4,512
         Holding of investment properties      1,229       472       846       109
                                             -------  --------  --------   -------
                                              22,456    34,157    35,720     4,621
                                             =======   =======   =======   =======
</TABLE>

          All of the Group's depreciation expense and capital expenditures
          during the three years ended April 30, 2000 relate to the manufacture
          of jewelry.

<TABLE>
<CAPTION>
                                                           As of April 30
                                                1999            2000          2000
                                                HK $            HK $          US $
      Segment assets:
<S>                                          <C>            <C>       <C>
         Manufacture of jewelry              200,514         289,308        37,426
         Holding of investment properties     22,300          19,100         2,471
         Unallocated - goodwill                   61           2,131           276
                                             -------        --------       -------
                                             222,875         310,539        40,173
                                             =======        ========       =======

</TABLE>

                                     F-31
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


16.  REPORT ON SEGMENT INFORMATION (Continued)

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

                                                 Year ended April 30
                                         1998          1999          2000
                                         HK $   %      HK $   %      HK $   %

        QVC Network Inc.               68,718  55   112,170  57   136,077  45
        QVC - Europe                    2,735   2    12,832   7    40,769  14
        Tocantins Minerals Mining &
         Science Corp.                 15,691  13         -   -         -   -

          Accounts receivable related to these major customers were HK$15,160 as
          of April 30, 1999 and HK$12,041 as of April 30, 2000.

                                     F-32
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


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

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

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

     (b)  Share capital transactions
          The Company completed a bridge loan financing on October 17, 1997,
          where it raised HK$6,049 (US$783). As of April 30, 1998, there still
          had an outstanding balance amounting to HK$2,280 (principal plus
          accrued interest) which had been repaid in May 1998. 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 based on the price associated with the offering,
          which has been amortized as an additional interest expense during the
          year ended April 30, 1998.

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

                                     F-33
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


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

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

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


                                            Year ended April 30
                                            1999     2000   2000
                                            HK $     HK $   US $
                                          -------  -------  -----
          Pro forma net income             11,009   34,124  4,414
                                          =======  =======  =====
          Pro forma earnings per share
           Basic                             1.73     5.18   0.67
                                          =======  =======  =====
           Diluted                           1.73     4.95   0.64
                                          =======  =======  =====

          The fair value of these options was estimated at the date of grant
          using a Black-Scholes option pricing model with the following
          weighted-average assumptions:

                                                          Year ended April 30
                                                             1999      2000
          Expected dividend yield                             Nil       Nil
          Expected stock price volatility                     60%       19%
          Risk-free interest rate                           5.85%     6.49%
          Expected life of options                        3 years   3 years

          The weighted average fair value per option granted during the year
          ended April 30, 1999 and 2000 was US$2.25 and US$0.41 respectively.

                                     F-34
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


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

     (c)  Stock-based compensation (Continued)
          The Company's stock option activities and related information for the
          years ended April 30, 1998, 1999 and 2000 are summarized as follows:
<TABLE>
<CAPTION>

                                                 Year ended April 30
                         --------------------------------------------------------------------
                                 1998                  1999                        2000
                                   Weighted              Weighted                    Weighted
                                    average               average                     average
                                   exercise              exercise                    exercise
                          Options     price    Options      price         Options       price
                                       US $                  US $                        US $
<S>                      <C>       <C>       <C>         <C>            <C>          <C>
Outstanding and
  exercisable,
  beginning of year             -         -          -          -       1,285,000         5.0
 Granted                        -         -  1,285,000        5.0         265,000         5.0
Exercised                       -         -          -          -               -           -
Forfeited                       -         -          -          -               -           -
                         --------            ---------                 ----------
Outstanding and
  exercisable,
  end of year                   -         -  1,285,000        5.0       1,550,000         5.0
                         ========            =========                 ==========
Weighted average
  remaining
  contractual life              -             10 years                 9.13 years
                         ========            =========                 ==========
</TABLE>

     (d)  Stock-based transactions
          The Company issued to a consultant a warrant to purchase 35,000 shares
          of common stock as part of the consultancy fee on July 31,1999 (see
          note 8(f)). In addition, the Company issued to a placement agent two
          warrants to purchase an aggregate of 65,000 shares of common stock for
          the services rendered in respect of the issue of the convertible
          debentures on November 5, 1999 and March 22, 2000 (see note 8(e)).
          Under HK GAAP, there are no specific requirements to recognize the
          compensation costs arising from these transactions. Under US GAAP, the
          costs associated with these transactions are accounted for based on
          fair value of the warrants at the date of issue. Using the Black-
          Scholes option pricing model with the same weighted-average
          assumptions as employees' stock options, the fair value of these
          warrants was estimated as HK$136 and HK$328 respectively and have been
          recoginzed as an additional expense during the year ended April 30,
          2000 and the same amount was recorded in the Company's warrant reserve
          account (see note 17 (n)). Accordingly, there is no effect on the
          shareholders' equity under US GAAP.

                                     F-35
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


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

     (e)  Discount on convertible debentures
          In connection with the convertible debentures issued with detachable
          warrants to a placement agent (see note 8(e)), there are no specific
          requirements under HK GAAP to allocate any of the proceeds from
          issuance of convertible debenture attributable to detachable warrants.
          Under US GAAP, the proceeds from issuance of convertible debenture
          with detachable warrants shall be allocated between the warrant and
          the convertible debenture based on their fair values at time of
          issuance. The difference between the proceeds allocated to the
          debentures and the face value of the debenture should be recorded as
          discount or premium. The discount or premium is amortized over the
          life of the debenture, using the interest method. During the year
          ended April 30, 2000, the Company recognized a sum of HK$534 as
          discount on convertible debentures. The amount of discount on
          convertible debentures amortized for the year ended April 30, 2000 and
          unamortized balance as at April 30, 2000 are HK$238 and HK$296
          respectively.

     (f)  Capitalized deferred costs
          During the year ended April 30, 1998, the Company merged with Deen.
          Approximately HK$640 and HK$193 of costs were incurred in connection
          with the merger for each of the years ended April 30, 1997 and 1998
          respectively. In previous years under HK GAAP, these costs were
          capitalized as organization costs and amortized over ten years.
          Following the adoption of the SSAP (Revised) in the current year, the
          carrying amount of such cost amounting to HK$686 has been fully
          expensed in the current year (see note 2(j)). Under US GAAP, as Deen
          has no significant assets or substantive operations, other than a
          large shareholder base, these costs, would be expensed as incurred.
          The effect is that there is no more organization costs being
          capitalized under both HK and US GAAP as of April 30, 2000.

          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 and HK$589 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 ended April 30, 1998, the Company has
          incurred indirect costs amounting to HK$116 with a consultant
          associated with its public offering. Under US GAAP these amounts would
          be expensed as incurred.

          During the year ended April 30, 1999 and 2000, there is no additional
          capitalized deferred cost incurred.

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

                                     F-36
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


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

     (g)  Earnings per share (Continued)
          In addition, under HK GAAP the number of incremental shares included
          in the denominator in connection with the warrants and options (see
          note 8) is the weighted average number of additional ordinary shares
          which would have been outstanding assuming the conversion of all
          dilutive potential ordinary shares whereas under US GAAP the number of
          incremental shares is determined by computing a year-to-date weighted
          average number of incremental shares included in each quarterly
          diluted EPS computation which is computed by using the average market
          prices during the three months included in the reporting period.

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

          i)   Investment properties - The fair value of the investment
               properties held by the Group as of April 30, 2000 is estimated to
               be HK$19,100 on the open market value basis whereas the
               historical cost of such properties is HK$16,968. The market
               valuations were performed by independent qualified surveyors at
               dates close to the balance sheet date.

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

     (i)  Investment properties
          Under HK GAAP investment properties are included in the balance sheet
          at their open market values, based on a year end valuation. Under US
          GAAP investment properties are recorded at their historical costs.
          This would have reduced the carrying values by HK$6,412 and HK$3,212
          as of April 30, 1999 and 2000 respectively with no related income tax
          effect. Under HK GAAP investment properties have not been depreciated
          since 1995, at which time accumulated depreciation was HK$1,080. Under
          US GAAP depreciation would have continued to be recorded over an
          estimated useful life of 40 years based on historical costs. This
          would have increased depreciation expense for the years

                                     F-37
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


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

     (i)  Investment properties (Continued)
          ended April 30, 1998, 1999 and 2000 by HK$547, HK$424 and HK$424
          respectively with no related income tax effect.

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

          Under US GAAP, the amounts transferred are its historical cost of
          HK$4,894 and respective accumulated depreciation of HK$586 as
          investment properties are recorded at their historical costs (see note
          17(i)). The net effect arising from the different accounting
          treatment, as aforesaid, would have increased the depreciation charge
          of HK$48 for each of the years in the two year period ended April 30,
          2000 with no related income tax effect.

     (k)  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 Group sold a building to its major shareholder
          and recognized a gain of HK$2,904. 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.

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

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

                                     F-38
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


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

     (n)  Warrant reserve
          As a result of the different accounting treatments as detailed in note
          17(d) and (e) in respect of the discount on convertible debentures and
          stock-based transactions, effects on the warrant reserve under US GAAP
          are as follows:
          -  the portion allocable to the detachable warrants of HK$534 is
             accounted for as warrant reserve;
          -  the stock-based compensation cost of HK$464 arising from the issue
             of warrants to a consultant was recorded in the Company's warrant
             reserve.
          However, no adjustment would be required to total shareholders'
          equity.

     (o)  Operating income
          Under HK GAAP, interest income of HK$212, HK$1,690 and HK$2,668 for
          each of the years in the three year period ended April 30, 2000 has
          been included in arriving at the operating income, while under US
          GAAP, such income is excluded. Accordingly, the operating income under
          US GAAP would be HK$31,538, HK$39,450 and HK$38,320 for each of the
          years in the three year period ended April 30, 2000.

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

     (q)  Statement of cash flows
          Under US GAAP, net movements of income taxes payable is included in
          arriving at the net cash flows from operating activities while under
          HK GAAP, such movements are excluded and the income taxes paid for the
          year is shown separately under taxation in the statement of cash
          flows. In addition, under US GAAP, movements of advances from banks
          repayable within three months from the date of the advance are
          included under financing activities whereas under HK GAAP, such
          advances are included in cash and cash equivalents and their movements
          are shown as change in cash and cash equivalents.

                                     F-39
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


17.  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

                                                             1998         1999         2000         2000
                                                             HK $         HK $         HK $         US $
<S>                                                     <C>         <C>          <C>          <C>
     Net income as reported under HK GAAP                  22,456       34,157       35,720        4,621
     US GAAP material adjustments:
      - Depreciation on investment properties                (547)        (424)        (424)         (55)
      - Depreciation on property                                -          (48)         (48)          (6)
      - Capitalized deferred costs                           (898)           -            -            -
      - Amortization of costs for shares issuable
          to note holders                                  (6,049)           -            -            -
      - Gain on disposal of an investment property
          to a related party                               (2,904)           -            -            -
      - Additional gain on disposal of an
          investment property                                  76            -            -            -
      - Amortization of Deen Merger costs                      64           83          686           89
      - Amortization of goodwill                                7            7            7            1
      - Amortization of financial consulting
          fee paid to the representative in the public
          offering                                              -         (417)        (275)         (36)
      - Amortization of discount on convertible
          debentures                                            -            -         (238)         (31)
      - Compensation costs for consulting services              -            -         (136)         (18)
      - Compensation costs for agency services                  -            -         (328)         (42)
                                                        ---------   ----------   ----------   ----------
     Net income under US GAAP                              12,205       33,358       34,964        4,523
                                                        ---------   ----------   ----------   ----------
                                                        ---------   ----------   ----------   ----------

     Numerator:
     Net income used in computing basic
          earnings per share under US GAAP                 12,205       33,358       34,964        4,523
     Interest on 3% convertible debentures                      -            -          251           32
                                                        ---------   ----------   ----------   ----------
     Net income used in computing diluted
          earnings per share under US GAAP                 12,205       33,358       35,215        4,555
                                                        ---------   ----------   ----------   ----------
                                                        ---------   ----------   ----------   ----------

     Denominator:
     Weighted average number of shares outstanding
          under HK GAAP - basic                         4,539,128    6,347,046    6,589,415    6,589,415
     Shares for Deen Merger                                61,878            -            -            -
                                                        ---------   ----------   ----------   ----------
     Weighted average number of shares outstanding
          under US GAAP - basic                         4,601,006    6,347,046    6,589,415    6,589,415
     Effect of dilutive potential ordinary shares:
          3% convertible debentures                             -            -      337,239      337,239
          Warrants                                          4,854            -       17,986       17,986
          Stock options                                         -          514            -            -
                                                        ---------   ----------   ----------   ----------
     Weighted average number of shares outstanding
          under US GAAP - diluted                       4,605,860    6,347,560    6,944,640    6,944,640
                                                        ---------   ----------   ----------   ----------
                                                        ---------   ----------   ----------   ----------

     Earnings per share under
          US GAAP
            - Basic                                          2.65         5.26         5.31         0.69
                                                        ---------   ----------   ----------   ----------
                                                        ---------   ----------   ----------   ----------

            - Diluted                                        2.65         5.26         5.07         0.66
                                                        ---------   ----------   ----------   ----------
                                                        ---------   ----------   ----------   ----------
</TABLE>

                                     F-40
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


17.  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
                                                          1999             2000      2000
                                                          HK $             HK $      US $
                                                       -------         --------   -------
<S>                                                    <C>             <C>        <C>
     Shareholders' equity as reported
       under HK GAAP                                   128,428          188,179    24,344
     Cumulative effect of depreciation
       on investment properties                         (2,122)          (2,546)     (329)
     Cumulative effect of depreciation
       on property                                        (537)            (585)      (76)
     Capitalized Deen Merger costs                        (686)               -         -
     Reduction for related company advance              (2,752)          (3,406)     (440)
     Deferral of future financial consulting paid
       to the representative in the public offering        418              143        18
     Unamortized discount on convertible
       debentures                                            -              296        38
     Reduction for goodwill recorded
       on the merger of the Company
       and Lorenzo                                         (61)             (54)       (7)
     Surplus arising on revaluation of
       investment properties                            (6,412)          (3,212)     (415)
     Deficit frozen upon transfer of an investment
       property to land and building                     2,297            2,297       297
                                                       -------         --------   -------

     Shareholders' equity under US GAAP                118,573          181,112    23,430
                                                       -------         --------   -------
                                                       -------         --------   -------
</TABLE>

                                     F-41
<PAGE>

                             LJ INTERNATIONAL INC.

             NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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


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

     Impact of recently issued US GAAP accounting standards

     Financial instruments
     In June 1999, the Financial Accounting Standards Board issued Statement of
     Financial Accounting Standards (SFAS) No. 137, "Accounting for derivative
     instruments and hedging activities" which delayed the effective date of
     SFAS No. 133 "Accounting for derivative instruments and hedging activities"
     for one year.  SFAS No. 133 provides guidance for the recognition and
     measurement of derivatives and hedging activities. It requires an entity to
     record, at fair value, all derivatives as either assets or liabilities in
     the balance sheet, and it establishes specific accounting rules for certain
     types of hedges. SFAS No. 133 is now effective for fiscal years beginning
     after June 15, 2000 and will be adopted by the Group when required, if not
     earlier.  The Group currently does not hold or issue derivative financial
     instruments in the normal course of business.  Accordingly, adoption of
     SFAS No. 133 is not expected to affect the Group's financial statements.

     Revenue recognition
     In December 1999, the Securities and Exchange Commission issued Staff
     Accounting Bulletin (SAB) 101, "Revenue recognition in financial
     statements", which provides guidance on applying generally accepted
     accounting principles for recognizing revenue. SAB 101 is effective for
     fiscal years beginning after December 15, 1999. The impact, if any, of
     adopting SAB 101 on the Group's consolidated financial position, results of
     operations and cash flows, has not been determined.

                                     F-42
<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 28, 2000                     By: /s/ YU CHUAN YIH
       ------------------------------            ----------------------------
                                                 Yu Chuan Yih
                                                 Chairman



<PAGE>

                                 EXHIBIT INDEX


Exhibit                                                         Page
Number             Description of Exhibit                       Number


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