U.S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ______________ to _______________
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report _______________
 Commission file number 0-29620
 LJ INTERNATIONAL INC.
 
  LJ INTERNATIONAL INC.
 
  British Virgin Islands
 
  Unit #12, 12/F, Block A
Focal Industrial Centre
21 Man Lok Street  Hung Hom, Kowloon, Hong Kong
 
  Hon Tak Ringo NG, CFO
011-852-2764-3622 (telephone)  ringong@ljintl.com (email)  011-852-2764-3783 (facsimile)
 Unit #12, 12/F, Block A
Focal Industrial Centre
21 Man Lok Street  Hung Hom, Kowloon, Hong Kong
 
 (Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
  Title of each class
    
    Name of each exchange
on which registered$.01 Par Value Common Stock
(Common Stock)
    
    NASDAQ
   
    
     o þ
 15(d)
 o þ
  þ o
  o o
  o o þ
  þ
    
    U.S. GAAPo
    
    International Financial Reporting Standards as issued by the International
Accounting Standards Boardo
    
    Other
  o
    
    Item 17o
    
    Item 18
  o þ




---



##### 



SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
   
    
    dependence upon certain customers
    
    dependence on key personnel
    
    control by principal shareholder
    
    competitive factors
    
    the operation of our business
    
    general economic conditions
    -2-




---



##### 



PART I
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  ITEM 3. KEY INFORMATION
 -3-




---



##### 



A.
    
    SELECTED FINANCIAL DATA.
 SELECTED CONSOLIDATED FINANCIAL DATA
(US Dollars in thousands, except per share amounts)
  Selected Financial Data
 Year ended December 31,2010
    
    2009
    
    2008
    
    2007
    
    2006Statement of Operations Data:Revenues
    
    
    140,548
    
    
    
    110,523
    
    
    
    136,268
    
    
    
    152,037
    
    
    
    123,791Cost of Goods sold
    
    
    (85,737
    )
    
    
    (72,173
    )
    
    
    (97,031
    )
    
    
    (112,508
    )
    
    
    (88,867
    )Gross profit
    
    
    54,811
    
    
    
    38,350
    
    
    
    39,237
    
    
    
    39,529
    
    
    
    34,924Operating expensesSelling, general and administrative
    
    
    (37,303
    )
    
    
    (31,039
    )
    
    
    (34,815
    )
    
    
    (30,399
    )
    
    
    (23,114
    )Net loss on derivatives
    
    
    (476
    )
    
    
    (503
    )
    
    
    (86
    )
    
    
    (4
    )
    
    
    (29
    )Depreciation
    
    
    (2,779
    )
    
    
    (2,197
    )
    
    
    (3,373
    )
    
    
    (3,095
    )
    
    
    (2,039
    )Operating income
    
    
    14,253
    
    
    
    4,611
    
    
    
    963
    
    
    
    6,031
    
    
    
    9,742Other income and expenseInterest income
    
    
    69
    
    
    
    147
    
    
    
    199
    
    
    
    273
    
    
    
    282Gain on currency translation
    
    
    643
    
    
    
    
    
    
    
    1,473
    
    
    
    
    
    
    
    Gain on sales of securities
    
    
    258
    
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    Gain on disposal of property held for lease
    
    
    1,635
    
    
    
    
    
    
    
    2,210
    
    
    
    
    
    
    
    Interest expenses
    
    
    (978
    )
    
    
    (842
    )
    
    
    (1,789
    )
    
    
    (3,103
    )
    
    
    (3,258
    )Operating income before income taxes and
noncontrolling interest
    
    
    15,880
    
    
    
    3,916
    
    
    
    3,105
    
    
    
    3,201
    
    
    
    6,766Income taxes expense
    
    
    (2,877
    )
    
    
    (231
    )
    
    
    (569
    )
    
    
    (1,711
    )
    
    
    (1,403
    )Income before noncontrolling interest
    
    
    13,003
    
    
    
    3,685
    
    
    
    2,536
    
    
    
    1,490
    
    
    
    5,363Net (income) loss attributable to noncontrolling interest
    
    
    (9
    )
    
    
    4
    
    
    
    (6
    )
    
    
    (1
    )
    
    
    (38
    )Net income attributable to LJ International Inc.
common shareholders
    
    
    12,994
    
    
    
    3,689
    
    
    
    2,530
    
    
    
    1,489
    
    
    
    5,325Net income per share:Basic
    
    
    0.51
    
    
    
    0.16
    
    
    
    0.11
    
    
    
    0.07
    
    
    
    0.31Diluted
    
    
    0.49
    
    
    
    0.15
    
    
    
    0.11
    
    
    
    0.07
    
    
    
    0.29Weighted average number of sharesBasic
    
    
    25,344
    
    
    
    23,230
    
    
    
    22,246
    
    
    
    21,064
    
    
    
    17,390Diluted
    
    
    26,657
    
    
    
    24,102
    
    
    
    22,449
    
    
    
    22,289
    
    
    
    18,303Balance Sheet Data:Working capital
    
    
    100,584
    
    
    
    77,614
    
    
    
    72,059
    
    
    
    62,786
    
    
    
    50,134Total assets
    
    
    175,757
    
    
    
    133,757
    
    
    
    131,190
    
    
    
    134,144
    
    
    
    124,522Long-term obligation
    
    
    1,651
    
    
    
    2,322
    
    
    
    2,219
    
    
    
    1,335
    
    
    
    1,640Total LJ International Inc. shareholders equity
    
    
    110,921
    
    
    
    83,872
    
    
    
    78,329
    
    
    
    72,668
    
    
    
    59,739
 -4-




---



##### 



B. CAPITALIZATION AND INDEBTEDNESS.Not applicable.C. REASONS FOR THE OFFER AND USE OF PROCEEDS.Not applicable.D. RISK FACTORS.
 We do not have any long-term contracts with our customers and, therefore, we cannot be certain that
all of our sales will continue; if not, our revenues will likely decline.
  We face significant competition from larger competitors in our wholesale and retail operations.
  There are numerous factors relating to the operations of our business that could adversely affect
our success and results.
  
    
    technological developments in the mass production of jewelry
    
    our ability to meet the design and production requirements of our customers
efficiently
    
    the market acceptance of our and our customers jewelry
    
    increases in expenses associated with continued sales growth
    
    our ability to control costs
    
    our managements ability to evaluate the publics taste and new orders to target
satisfactory profit margins
 -5-




---



##### 




    
    our capacity to develop and manage the introduction of new designed products
    
    our ability to compete
  Our production facilities are located in China. Our results of operations and financial condition
may, therefore, be influenced by the economic, political, legal and social conditions in China.
  Changes to PRC tax laws may adversely affect our financial condition and results of operations in
the future.
    -6-




---



##### 



Our products are currently made at our production facility located in Shenzhen, China. However,
our insurance may not adequately cover any losses due to fire, casualty or theft.
  Sales of our jewelry at both the retail and wholesale levels are seasonally sensitive and are
generally strongest during the quarter ending December 31 of each year due to the importance of the
holiday selling season.
  The success of our retail store expansion program in China is dependent upon numerous factors over
which we have limited control.
  We rely on short-term financing from banks for our daily operation.
   -7-




---



##### 



Our holding company structure creates restrictions on the payment of dividends.
  As a foreign private issuer, we are not subject to certain rules promulgated by Nasdaq that other
Nasdaq-listed issuers are required to comply with.
  
    
    our independent directors do not hold regularly scheduled meetings in executive
session
    
    the compensation of our executive officers is not determined by an independent
committee of the board or by the independent members of the board of directors, and our
CEO may be present and participate in the deliberations concerning his compensation
    
    related party transactions are not required to be reviewed or approved by our audit
committee or other independent body of the board of directors
    
    we are not required to solicit shareholder approval of stock plans, including those
in which our officers or directors may participate; stock issuances that will result in
a change in control; the issuance of our stock in related party transactions or other
transactions in which we may issue 20% or more of our outstanding shares; or, below
market issuances of 20% or more of our outstanding shares to any person
  It may be difficult to serve us with legal process or enforce judgments against us or our
management.
  -8-




---



##### 




    
    judgments of United States courts against us, our directors or our officers based on
the civil liability provisions of the securities laws of the United States or any
state; or
    
    in original actions brought in the British Virgin Islands, China or Hong Kong,
liabilities against us or non-residents based upon the securities laws of the United
States or any state.
 Some information about us may be unavailable due to exemptions under the Exchange Act for a foreign
private issuer.
  
    
    the rules under the Exchange Act requiring the filing with the Securities and
Exchange Commission of quarterly reports on Form 10-Q or current reports on Form 8-K
    
    the provisions of Regulation FD aimed at preventing issuers from making selective
disclosures of material information
    
    the sections of the Exchange Act regulating the solicitation of proxies, consents or
authorizations applicable to a security registered under the Exchange Act
    
    the sections of the Exchange Act requiring insiders to file public reports of their
stock ownership and trading activities and establishing insider liability for profits
realized from any short-swing trading transaction
  Since
we are a British Virgin Islands company, the rights of our shareholders may be more limited than those of shareholders of a company organized in the United States.
   -9-




---



##### 



We may need to raise capital in the future. Such funds may not be available on acceptable terms or
at all, and, without additional funds, we may not be able to expand our retail business in China.
   
    
    We cannot be certain that additional capital will be available on favorable terms,
if at all;
    
    Any available additional financing may not be adequate to meet our goals; and
    
    Any equity financing would result in dilution to stockholders.
  We are dependent on certain key personnel and the loss of these key personnel could have a material
adverse effect on our business, financial condition and results of operations.
  Risks Related to Doing Business in the Peoples Republic of China
  -10-




---



##### 



Anti-inflation measures could harm the economy generally and could harm our business.
  ITEM 4. INFORMATION ON THE COMPANY
 A. HISTORY AND DEVELOPMENT OF THE COMPANY.
  -11-




---



##### 




    
    Lorenzo Jewelry Limited (Lorenzo Jewelry), a company incorporated in Hong Kong on
February 20, 1987
    
    ENZO International Holdings Ltd.
    
    ENZO Jewelry Inc.
    
    Lorenzo Crystal Ltd.
    
    Lorenzo (Shenzhen) Co., Ltd.
    
    Wonderful (Shenzhen) Ltd.
    
    Shanghai Enzo Diamond Co., Ltd.
   
    
    we spent $2,650,000 on capital expenditures, excluding inventory, for ENZO retail
store openings during the fiscal year ended December 31, 2010
    
    we spent $1,415,000 on capital expenditures, excluding inventory, for ENZO retail
store openings during the fiscal year ended December 31, 2009
    
    we spent $1,199,000 on capital expenditures, excluding inventory, for ENZO retail
store openings during the fiscal year ended December 31, 2008
 B. BUSINESS OVERVIEW.
    -12-




---



##### 



LJI continues its expansion strategy in Chinas retail market.
   LJI continues to focus in North America for our wholesale business.
   
    
    fine jewelers
    
    national jewelry chains
    
    department stores
    
    TV shopping channels
    
    discount chain stores
  -13-




---



##### 



Our Retail Business Strategy
  
    
    expand our market share by having a total of 200 points of sale in operation by the
end of 2011
    
    improve the performance of our existing stores by making appropriate adjustments on
product mix and by stepping up our marketing and promotional activities
    
    further expand our product range by introducing new collections for both colored
gemstones and diamonds to capture different market segments
    
    expand customers base by opening of new shops and through effective marketing and
promotional campaigns
 Our Wholesale Business Strategy
  
    
    increase our market share of moderately priced high-quality gem-set colored and
precious jewelry by capitalizing on our vertically integrated production processes to
produce high-end precious stone jewelry in addition to high volume, high-quality
colored products
    
    further develop our existing customer relationships with our specialized services
    
    expand into new distribution channels, particularly in the United States, China,
Western Europe, Japan and Australia
    -14-




---



##### 



Year ended December 31,(in thousands)
    
    2010
    
    
    2009
    
    
    2008US$
    
    US$
    
    US$US & Canada
    
    
    42,400
    
    
    
    39,225
    
    
    
    69,232Europe and other countries
    
    
    16,752
    
    
    
    18,110
    
    
    
    27,455Japan
    
    
    1,291
    
    
    
    1,115
    
    
    
    989PRC (including Hong Kong and Macau)
    
    
    80,105
    
    
    
    52,073
    
    
    
    38,592140,548
    
    
    
    110,523
    
    
    
    136,268
 Our Production Capability
   Sales and Marketing
 Retail
   -15-




---



##### 




    
    Continuous macro marketing and PR programs to deliver the brand messages, using
channels such as national magazines, weekly magazines, newspaper, outdoor advertising
space, and MTR advertisement.
    
    Localized marketing programs to fit local markets of different cities. Trunk shows
and workshops are arranged for building up close relationship with the media and
customers, letting them know more about the brand and doing business at the same time.
    
    Participating in jewelry shows, both for brand building and business development. In
2010, for instance, we had a high-profile presence at the June and September Jewellery
Fair in Hong Kong
    
    Seasonal promotional programs based on the festival seasons - e.g. Chinese New
Year, Valentines Day etc.
    
    Working closely with malls in organizing various localized promotional programs.
 Wholesale
    Show Name
    
    Show DateThe First, Vicenzaoro Fair
    
    Jan 16 - 21, 2010Tucson Gem & Mineral Show
    
    Feb 11 - 14, 2010JA Intl Jewelry (Winter) Show
    
    Feb 28 - Mar 03, 2010Hong Kong Intl Jewellery Show
    
    Mar 05 - 09, 2010Basel 2010
    
    Mar 18 - 25, 2010The Charm, Vicenzaoro Fair
    
    May 22 - 26, 2010JCK Las Vegas 2010
    
    Jun 04 - 07, 2010JA Intl Jewelry Show
    
    Jul 25 - 28, 2010The Choice, Vicenzaoro Fair
    
    Sep 11 - 15, 2010September HK Jewellery & Gem Fair
    
    Sep 14 - 18, 2010JA Intl Jewelry Show
    
    Oct 24 - 26, 2010
 -16-




---



##### 



Design and Product Development
    Production Process
  
    
    cutting and polishing colored gemstones
    
    combining pure gold or sterling silver with gemstones or diamonds to produce jewelry
    
    finishing operations such as cleaning and polishing, resulting in high quality
finished jewelry
  Supply
    -17-




---



##### 



Security
   Insurance
  Competition
 Retail
  -18-




---



##### 



Wholesale
   C. ORGANIZATIONAL STRUCTURE AS OF DECEMBER 31, 2010.
  LJ
INTERNATIONAL INC.
 100%
 
    
    Lorenzo Jewelry Limited(HK)
    
    ENZO International Holdings Ltd. (BVI)
    
    ENZO Jewelry Inc. (BVI)
    
    Lorenzo Crystal Ltd. (HK)
    
    Lorenzo (Shenzhen) Co., Ltd. (PRC)
    
    Wonderful (Shenzhen) Ltd. (PRC)
    
    Shanghai Enzo Diamond Co., Ltd.(PRC)
 -19-




---



##### 



D. PROPERTY, PLANTS AND EQUIPMENT.
   
    
    18,848 square feet for a term of five years expiring June 30, 2011 from an
unaffiliated third party at a rental rate of $3,817 per month;
    
    18,848 square feet for a term of two years expiring August 31, 2010 from an
unaffiliated third party at a rental rate of $5,811 per month;
    
    19,364 square feet for a term of three years expiring March 31, 2012 from an
unaffiliated third party at a rental rate of $4,883 per month; and
    
    20,301 square feet for a term of three years expiring March 31, 2012 from an
unaffiliated third party at a rental rate of $5,119 per month.
   -20-




---



##### 



ITEM
4A. UNRESOLVED STAFF COMMENTS
  -21-




---



##### 



ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
         -22-




---



##### 



Critical Accounting Policies and Estimates
   Collectability of Accounts Receivable.
  Stock-based Compensation.
 -23-




---



##### 



Goodwill Impairment.
   
    
    Five-year discounted cash flow is projected. Basic assumptions in the cash flow projection
include, among others, an estimated 10% annual growth in turnover in the coming 5 years with
reference to the stabilizing growth rate in the last quarter of 2009 after a sharp hit from
the economic downturn in North America, and gross profit of around 15%, which is similar to
the level in 2010. Any projection beyond 5 years by the Company cannot be forecast with
reasonable accuracy, since the business environment is rapidly changing;
    
    A discount rate is set at 30%, was based on the subsidiarys weighted average cost of
capital;
    
    The EBITDA multiple is set at 5x.
  -24-




---



##### 



Allowance for Obsolete Inventories.
 Fair Value of Financial Instruments.
 -25-




---



##### 



A. OPERATING RESULTS.
 Reclassifications
  Revenues
 % ChangeYears ended
    
    
    Years endedYear ended December 31
    
    

December
31,
    
    
    December 31,(in thousands)
    
    2010
    
    
    2009
    
    
    2008
    
    
    2010-2009
    
    
    2009-2008RevenuesWholesale
    
    $
    61,682
    
    
    $
    59,733
    
    
    $
    99,840
    
    
    
    3
    %
    
    
    -40
    %Retail
    
    $
    78,866
    
    
    $
    50,790
    
    
    $
    36,428
    
    
    
    55
    %
    
    
    39
    %$
    140,548
    
    
    $
    110,523
    
    
    $
    136,268
    
    
    
    27
    %
    
    
    -19
    %
     -26-




---



##### 



Cost of Sales and Gross Profit
 % ChangeYears ended
    
    
    Years endedYear ended December 31,
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    2010
    
    
    2009
    
    
    2008
    
    
    2010-2009
    
    
    2009-2008Cost of sales and gross profitCost of salesWholesale
    
    $
    48,679
    
    
    $
    47,799
    
    
    $
    79,729
    
    
    
    2
    %
    
    
    -40
    %% of revenues
    
    
    79
    %
    
    
    80
    %
    
    
    80
    %Retail
    
    $
    37,058
    
    
    $
    24,374
    
    
    $
    17,302
    
    
    
    52
    %
    
    
    41
    %% of revenues
    
    
    47
    %
    
    
    48
    %
    
    
    47
    %Total
    
    $
    85,737
    
    
    $
    72,173
    
    
    $
    97,031
    
    
    
    19
    %
    
    
    -26
    %% of revenues
    
    
    61
    %
    
    
    65
    %
    
    
    71
    %Gross profitWholesale
    
    $
    13,003
    
    
    $
    11,934
    
    
    $
    20,111
    
    
    
    9
    %
    
    
    -41
    %% of revenues
    
    
    21
    %
    
    
    20
    %
    
    
    20
    %Retail
    
    $
    41,808
    
    
    $
    26,416
    
    
    $
    19,126
    
    
    
    58
    %
    
    
    38
    %% of revenues
    
    
    53
    %
    
    
    52
    %
    
    
    53
    %Total
    
    $
    54,811
    
    
    $
    38,350
    
    
    $
    39,237
    
    
    
    43
    %
    
    
    -2
    %% of revenues
    
    
    39
    %
    
    
    35
    %
    
    
    29
    %
     -27-




---



##### 



Selling, General and Administrative Expenses
 % ChangeYears ended
    
    
    Years endedYear ended December 31,
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    2010
    
    
    2009
    
    

2008
    
    
    2010-2009
    
    
    2009-2008Selling,
general and
administrative
expensesWholesale
    
    $
    7,449
    
    
    $
    8,629
    
    
    $
    14,087
    
    
    
    -14
    %
    
    
    -39
    %Retail
    
    $
    28,010
    
    
    $
    20,633
    
    
    $
    17,820
    
    
    
    36
    %
    
    
    16
    %Corporate
    
    $
    1,844
    
    
    $
    1,777
    
    
    $
    2,908
    
    
    
    4
    %
    
    
    -39
    %$
    37,303
    
    
    $
    31,039
    
    
    $
    34,815
    
    
    
    20
    %
    
    
    -11
    %% of revenues
    
    
    27
    %
    
    
    28
    %
    
    
    26
    %
   -28-




---



##### 



Net gain (loss) on derivatives
 % ChangeYears ended
    
    
    Years endedYear ended December 31,
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    2010
    
    
    2009
    
    
    2008
    
    
    2010-2009
    
    
    2009-2008Realized loss on
derivatives
    
    $
    0
    
    
    $
    0
    
    
    $
    (483
    )
    
    
    N/A
    
    
    
    -100
    %0
    %
    
    
    0
    %
    
    
    0
    %Unrealized loss on
derivatives
    
    $
    (476
    )
    
    $
    0
    
    
    $
    0
    
    
    
    N/A
    
    
    
    N/A0
    %
    
    
    0
    %
    
    
    0
    %(With the hedging mechanism in place, we have the realized gain on hedging activities)Realized (loss) gain on hedging activities
    
    $
    0
    
    
    $
    (503
    )
    
    $
    397
    
    
    
    -100
    %
    
    
    -227
    %% of revenues
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Net loss on derivatives and hedging activities
    
    $
    (476
    )
    
    $
    (503
    )
    
    $
    (86
    )
    
    
    -5
    %
    
    
    485
    %% of revenues
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    -29-




---



##### 



Depreciation
 % ChangeYears ended
    
    
    Years endedYear ended December 31,
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    2010
    
    
    2009
    
    
    2008
    
    
    2010-2009
    
    
    2009-2008DepreciationWholesale
    
    $
    1,029
    
    
    $
    914
    
    
    $
    1,877
    
    
    
    13
    %
    
    
    -51
    %% of revenues
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %Retail
    
    $
    1,750
    
    
    $
    1,283
    
    
    $
    1,496
    
    
    
    36
    %
    
    
    -14
    %% of revenues
    
    
    2
    %
    
    
    3
    %
    
    
    4
    %Total
    
    $
    2,779
    
    
    $
    2,197
    
    
    $
    3,373
    
    
    
    26
    %
    
    
    -35
    %% of revenues
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %
   -30-




---



##### 



Interest cost
 % ChangeYears ended
    
    
    Years endedYear ended December 31,
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    2010
    
    
    2009
    
    
    2008
    
    
    2010-2009
    
    
    2009-2008Interest expenses
    
    $
    978
    
    
    $
    842
    
    
    $
    1,789
    
    
    
    16
    %
    
    
    -53
    %% of revenues
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %
   Income taxes
 % ChangeYears ended
    
    
    Years endedYear ended December 31,
    
    

December 31,
    
    
    December 31,(in thousands)
    
    2010
    
    
    2009
    
    
    2008
    
    
    2010-2009
    
    
    2009-2008Income taxes expenseWholesales
    
    $
    886
    
    
    $
    171
    
    
    $
    569
    
    
    
    418
    %
    
    
    -70
    %% of revenues
    
    
    1
    %
    
    
    0
    %
    
    
    1
    %Retail
    
    $
    1,991
    
    
    $
    60
    
    
    $
    0
    
    
    
    3218
    %
    
    
    N/A% of revenues
    
    
    3
    %
    
    
    0
    %
    
    
    0
    %Total
    
    $
    2,877
    
    
    $
    231
    
    
    $
    569
    
    
    
    1145
    %
    
    
    -59
    %% of revenues
    
    
    2
    %
    
    
    0
    %
    
    
    0
    %
    -31-




---



##### 



Inflation
  Foreign Exchange
  -32-




---



##### 



Governmental economic and political policies and factors
  B. LIQUIDITY AND CAPITAL RESOURCES
  Cash Flows
 Years ended December 31,(in thousands)
    
    2010
    
    2009
    
    2008Net cash (used in) provided by
operating activities
    
    $
    (16,131
    )
    
    $
    2,061
    
    
    $
    8,746Net cash used in investing activities
    
    
    (9,088
    )
    
    
    (1,628
    )
    
    
    (801
    )Net cash provided by (used in)
financing activities
    
    
    25,355
    
    
    
    (2,883
    )
    
    
    (533
    )Effect of foreign exchange rate change
    
    
    1,630
    
    
    
    384
    
    
    
    985Net increase (decrease) in cash
and cash equivalents
    
    
    1,766
    
    
    
    (2,066
    )
    
    
    8,397
 -33-




---



##### 



Operating Activities
 Years ended December 31,(in thousands)
    
    2010
    
    2009
    
    2008Cash flows from operating activities:Net income
    
    $
    13,003
    
    
    $
    3,685
    
    
    $
    2,536Adjustments to reconcile income to net cash
provided by (used in) operating activities:Depreciation of property, plant and equipment
and properties held for lease
    
    
    2,779
    
    
    
    2,197
    
    
    
    3,373Unrealized loss on derivatives
    
    
    476
    
    
    
    
    
    
    
    Gain on sales of securities
    
    
    (258
    )
    
    
    
    
    
    
    (49
    )Gain on disposal of property held for lease
    
    
    (1,635
    )
    
    
    
    
    
    
    (2,210
    )(Gain) loss on disposal and write-off of
property, plant and equipment
    
    
    (35
    )
    
    
    (5
    )
    
    
    45Gain on currency translation
    
    
    (643
    )
    
    
    
    
    
    
    (1,473
    )(Reversal of) allowance for doubtful debts
    
    
    (7
    )
    
    
    (231
    )
    
    
    1,223Stock-based compensation costs for warrants granted
    
    
    
    
    
    
    
    
    
    
    39Stock-based compensation
expenses
    
    
    442
    
    
    
    1,043
    
    
    
    361Changes in operating assets and liabilities:Trade receivables
    
    
    (4,203
    )
    
    
    (878
    )
    
    
    1,401Inventories
    
    
    (26,265
    )
    
    
    (4,764
    )
    
    
    5,375Prepayments and other current assets
    
    
    (1,774
    )
    
    
    165
    
    
    
    496Trade payables
    
    
    627
    
    
    
    620
    
    
    
    (775
    )Accrued expenses and other payables
    
    
    296
    
    
    
    552
    
    
    
    (1,318
    )Income taxes payable and deferred taxation
    
    
    1,066
    
    
    
    (323
    )
    
    
    (278
    )Net cash (used in) provided by operating
activities
    
    
    (16,131
    )
    
    
    2,061
    
    
    
    8,746
    Significant changes in assets and liabilities were as follows:
  -34-




---



##### 



Investing Activities:
    Years ended December 31,(in thousands)
    
    2010
    
    
    2009
    
    
    2008Leasehold improvement
    
    $
    2,399
    
    
    $
    1,376
    
    
    $
    1,199Furniture, fixtures and equipment
    
    $
    370
    
    
    $
    129
    
    
    $
    294Plant and machinery
    
    $
    3,801
    
    
    $
    62
    
    
    $
    81Motor vehicles
    
    $
    44
    
    
    $
    143
    
    
    $
    61Total
    
    $
    6,614
    
    
    $
    1,710
    
    
    $
    1,635
 -35-




---



##### 



Financing Activities:
    Financing Sources
 Banking Facilities and Notes Payable
   Years ended December 31,(in thousands)
    
    2010
    
    
    2009
    
    
    2008Granted:Letters of credit
    
    $
    25,150
    
    
    $
    23,170
    
    
    $
    24,085Overdraft
    
    $
    2,923
    
    
    $
    2,923
    
    
    $
    2,92328,073
    
    
    
    26,093
    
    
    
    27,008Utilized:Letters of credit utilized
    
    $
    18,878
    
    
    $
    13,481
    
    
    $
    13,384Overdraft utilized
    
    $
    2,879
    
    
    $
    2,908
    
    
    $
    2,72421,757
    
    
    
    16,389
    
    
    
    16,108
   -36-




---



##### 



Years ended December 31,(in thousands)
    
    2010
    
    
    2009
    
    
    2008Notes payable, current portion
    
    $
    10,720
    
    
    $
    5,551
    
    
    $
    9,194Notes payable, non-current portion
    
    $
    1,621
    
    
    $
    2,244
    
    
    $
    2,11512,341
    
    
    
    7,795
    
    
    
    11,309
  Gold Loan Facilities
 Years ended December 31,(in thousands)
    
    2010
    
    2009
    
    
    2008Gold loans outstanding (in $)
    
    $
    2,661
    
    
    $
    
    
    
    $
    Gold loans outstanding (in troy ounces)
    
    
    2,283
    
    
    
    
    
    
    
    Gold loan interest rate
    
    
    2.8
    %
    
    
    
    
    
    
    
  Looking Forward
  -37-




---



##### 



Impact of recently issued US GAAP accounting standards
     -38-




---



##### 



-39-




---



##### 



C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
  D. TREND INFORMATION.
  E. OFF-BALANCE SHEET ARRANGEMENTS.
  F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS.
  Payments due by periodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsUS$
    
    
    US$
    
    
    US$
    
    
    US$
    
    
    US$Long-Term Debt Obligations
    
    
    12,341
    
    
    
    10,720
    
    
    
    1,236
    
    
    
    385
    
    
    
    Capital (Finance) Lease Obligations
    
    
    83
    
    
    
    52
    
    
    
    31
    
    
    
    
    
    
    
    Operating Lease Obligations
    
    
    3,618
    
    
    
    2,772
    
    
    
    846
    
    
    
    
    
    
    
    Purchase Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    16,042
    
    
    
    13,544
    
    
    
    2,113
    
    
    
    385
    
    
    
    
  -40-




---



##### 



.
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 A. DIRECTORS AND SENIOR MANAGEMENT.
  Name
    
    Age
    
    PositionYu Chuan Yih
    
    71
    
    Chairman of the Board of Directors, President and Chief Executive OfficerKa Man Au
    
    46
    
    Chief Operating Officer, Secretary and DirectorHon Tak Ringo Ng
    
    51
    
    Chief Financial Officer and DirectorAndrew N. Bernstein
    
    58
    
    Independent Non-Executive DirectorXiang Xiong Deng
    
    46
    
    Independent Non-Executive DirectorJin Wang
    
    40
    
    Independent Non-Executive DirectorJieyun Yu
    
    45
    
    Independent Non-Executive Director
  Mr. Yih
 Ms. Au
 Mr. Ng
 -41-




---



##### 



Mr. Bernstein
 Mr. Deng
 Mr. Wang
 Ms. Yu
 B. COMPENSATION.
   -42-




---



##### 




    
    Mr. Yih  500,000;
    
    Ms. Au  200,000;
    
    Mr. Ng  200,000;
    
    Mr. Bernstein  50,000;
    
    Mr. Deng  50,000;
    
    Mr. Wang  50,000; and
    
    Ms. Yu  50,000.
  
    
    Mr. Yih  900,000;
    
    Ms. Au  200,000;
    
    Mr. Ng  200,000; and
    
    Mr. Deng  40,000.
  C. BOARD PRACTICES.
  Audit Committee
  
    
    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
    
    review the adequacy of our financial organization
 -43-




---



##### 




    
    review our managements procedures and policies relative to the adequacy of our
internal accounting controls and compliance with US federal and state laws relating to
financial reporting
 Nominating Committee
  
    
    assess the size and composition of the board of directors in light of our operating
requirements and existing social attitudes and trends
    
    develop membership qualifications for the board of directors and all board
committees
    
    monitor compliance with board of director and board committee membership criteria
    
    review and recommend directors for continued service as required based on our
evolving needs
    
    coordinate and assist management and the board of directors in recruiting new
members to the board of directors
    
    investigate suggestions for candidates for membership on the board of directors and
recommend prospective directors, as required, to provide an appropriate balance of
knowledge, experience and capability on the board of directors, including stockholder
nominations for the board of directors
 Compensation Committee
  
    
    review and approve corporate goals and objectives relevant to the compensation of
the chief executive officer and other executive officers
    
    evaluate the chief executive officers performance in light of such goals and
objectives at least annually and communicate the results to the chief executive officer
and the board of directors
    
    set the chief executive officers compensation levels based on the foregoing
evaluation (including annual salary, bonus, stock options and other direct and indirect
benefits), with ratification by the independent directors of the full board of
directors
    
    set the other executive officers compensation levels (including annual salary,
bonus, stock options and other direct and indirect benefits)
 Nasdaq Requirements
  -44-




---



##### 




    
    our independent directors do not hold regularly scheduled meetings in executive
session (Rule 5605(b)(2));
    
    the compensation of our executive officers is not determined by an independent
committee of the board or by the independent members of the board of directors, and our
CEO may be present and participate in the deliberations concerning his compensation
(Rule 5605(d));
    
    related party transactions are not required to be reviewed or approved by our audit
committee or other independent body of the board of directors (Rule 5630); and
    
    we are not required to solicit shareholder approval of stock plans, including those
in which our officers or directors may participate; stock issuances that will result in
a change in control; the issuance of our stock in related party transactions or other
transactions in which we may issue 20% or more of our outstanding shares; or, below
market issuances of 20% or more of our outstanding shares to any person (Rule 5635).
  D. EMPLOYEES.
  E. SHARE OWNERSHIP.
  
    
    each person who is known by us to own beneficially more than 5% of our outstanding
common stock;
    
    each of our current executive officers and directors; and
    
    all executive officers and directors as a group.
 -45-




---



##### 



Number
    
    PercentName of Beneficial Holder
    
    Shares Beneficially OwnedYu Chuan Yih
    
    
    3,434,353
    (1)
    
    
    11.2Ka Man Au
    
    
    535,629
    (2)
    
    
    1.8Hon Tak Ringo Ng
    
    
    575,000
    (3)
    
    
    1.9Andrew N. Bernstein
    
    
    0
    
    
    
    0Xiang Xiong Deng
    
    
    10,000
    (4)
    
    
    *Jin Wang
    
    
    0
    
    
    
    0Jieyun Yu
    
    
    0
    
    
    
    0All directors and executive officers as a group (7 persons)
    
    
    4,554,982
    
    
    
    14.9
 
 *
    
    Represents less than 1% beneficial ownership(1)
    
    Includes options currently exercisable to acquire: 
    
    450,000 shares of common stock at $0.60 per share at any time through February 16,
2012
 
 (2)
    
    Includes options currently exercisable to acquire: 
    
    150,000 shares of common stock at $2.00 per share at any time until June 30, 2013
    
    50,000 shares of common stock at $0.60 per share at any time through February 16,
2012
 
 (3)
    
    Includes options currently exercisable to acquire: 
    
    150,000 shares of common stock at $2.00 per share at any time until June 30, 2013
    
    50,000 shares of common stock at $0.60 per share at any time through February 16,
2012
 
 (4)
    
    Represents options currently exercisable to acquire: 
    
    10,000 shares of common stock at $0.60 per share at any time through February 16,
2012
 -46-




---



##### 



The 1998 Stock Compensation Plan
  
    
    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
    
    encourage them to remain in our employ by providing them with an opportunity to
benefit from any appreciation of our common stock through the issuance of stock options
    
    
    a total of 10,000 stock options to purchase 10,000 shares at $2.00 per share through
June 30, 2013, none of which stock options are held by our directors and executive
officers as a group.
 The 2003 Stock Compensation Plan
  
    
    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
    
    encourage them to remain in our employ by providing them with an opportunity to
benefit from any appreciation of our common stock through the issuance of stock options
 -47-




---



##### 




    
    a total of 387,500 stock options to purchase 387,500 shares at $2.00 per share
through June 30, 2013, of which 300,000 stock options are held by our directors and
executive officers as a group.
 The 2005 Stock Compensation Plan
  
    
    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
    
    encourage them to remain in our employ by providing them with an opportunity to
benefit from any appreciation of our common stock through the issuance of stock options
   -48-




---



##### 




    
    a total of 170,000 stock options to purchase 170,000 shares at $0.40 per share
through various expiration dates, none of which stock options are held by our directors
and executive officers as a group.
 The 2008 Stock Compensation Plan
  
    
    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
    
    encourage them to remain in our employ by providing them with an opportunity to
benefit from any appreciation of our common stock through the issuance of stock options
   
    
    a total of 2,578,000 stock options to purchase 2,578,000 shares at $0.60 per share
through various expiration dates, of which 780,000 stock options are held by our
directors and executive officers as a group.
 Other Options and Warrants Outstanding
  
    
    On September 25, 2006, we issued, and 11 institutional investors purchased, an
aggregate of 1,466,668 shares of our common stock at $3.75 per share, as well as an
aggregate of 236,909 warrants to purchase 236,909 shares at an exercise price of $4.221
per share (the Short Term Warrants) and 366,668 warrants to purchase 366,668 shares
at an exercise price of $4.50 per share (the Long Term Warrants). In addition, our
placement agent received 29,333 Long Term
 -49-




---



##### 



Warrants with identical terms to the Long
Term Warrants issued to the investors (the Placement Agent Warrants). The Short Term
Warrants were exercisable at any time through February 5, 2007. The Long Term Warrants
are exercisable at any time on or after March 25, 2007 for a term of five years
thereafter.
  
    
    300,001 Long Term Warrants
    
    29,333 Placement Agent Warrants
   ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 A. MAJOR SHAREHOLDERS.
     B. RELATED PARTY TRANSACTIONS.
   -50-




---



##### 



C. INTERESTS OF EXPERTS AND COUNSEL.
  ITEM 8. FINANCIAL INFORMATION
 A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION.
   B. SIGNIFICANT CHANGES.
  ITEM 9. THE OFFER AND LISTING
 A. OFFER AND LISTING DETAILS.
  Period
    
    High
    
    LowYear ended December 31, 2006
    
    $
    4.60
    
    
    $
    3.08Year ended December 31, 2007
    
    $
    12.86
    
    
    $
    2.18Year ended December 31, 2008
    
    $
    5.45
    
    
    $
    0.37Year ended December 31, 2009
    
    $
    3.94
    
    
    $
    0.47Year ended December 31, 2010
    
    $
    5.64
    
    
    $
    2.22Quarter ended March 31, 2009
    
    $
    0.81
    
    
    $
    0.47Quarter ended June 30, 2009
    
    $
    2.15
    
    
    $
    0.64Quarter ended September 30, 2009
    
    $
    2.74
    
    
    $
    1.69
 -51-




---



##### 



Period
    
    High
    
    LowQuarter ended December 31, 2009
    
    $
    3.94
    
    
    $
    2.04Quarter ended March 31, 2010
    
    $
    3.03
    
    
    $
    2.22Quarter ended June 30, 2010
    
    $
    3.00
    
    
    $
    2.45Quarter ended September 30, 2010
    
    $
    3.87
    
    
    $
    2.46Quarter ended December 31, 2010
    
    $
    5.64
    
    
    $
    3.53Quarter ended March 31, 2011
    
    $
    4.17
    
    
    $
    3.39Month ended September 30, 2010
    
    $
    3.87
    
    
    $
    3.32Month ended October 31, 2010
    
    $
    5.10
    
    
    $
    3.86Month ended November 30, 2010
    
    $
    5.64
    
    
    $
    3.57Month ended December 31, 2010
    
    $
    4.04
    
    
    $
    3.53Month ended January 31, 2011
    
    $
    3.97
    
    
    $
    3.65Month ended February 28, 2011
    
    $
    4.15
    
    
    $
    3.43Month ended March 31, 2011
    
    $
    4.17
    
    
    $
    3.39
 B. PLAN OF DISTRIBUTION.
  C. MARKETS.
  D. SELLING SHAREHOLDERS.
  E. DILUTION.
  F. EXPENSES OF THE ISSUE.
  ITEM 10. ADDITIONAL INFORMATION
 A. SHARE CAPITAL.
  -52-




---



##### 



B. MEMORANDUM AND ARTICLES OF ASSOCIATION.
 Corporate Powers
 Directors
 Share Rights, Preferences and Restrictions
 Changing Share Rights
 Shareholder Meetings
 Restrictions on Rights to Own Securities
 Change in Control Provisions
 -53-




---



##### 



Disclosure of Share Ownership
 Applicable Law
     -54-




---



##### 



Changes in Capital
 C. MATERIAL CONTRACTS.
  D. EXCHANGE CONTROLS.
  E. TAXATION.
  -55-




---



##### 



United States Federal Income Taxation
  
    
    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.
      
    
    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.
  -56-




---



##### 



British Virgin Islands Taxation
    F. DIVIDENDS AND PAYING AGENTS.
  G. STATEMENT BY EXPERTS.
  H. DOCUMENTS ON DISPLAY.
  I. SUBSIDIARY INFORMATION.
  -57-




---



##### 



ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  -58-




---



##### 



PART II
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
  ITEM 15. CONTROLS AND PROCEDURES
 (a) Disclosure Controls and Procedures.
   (b) Managements annual report on internal control over financial reporting.
 Internal Control-Integrated Framework
   -59-




---



##### 



(c) Not applicable
 (d) Changes in internal control over financial reporting.
  ITEM 16. [RESERVED]
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  ITEM 16B. CODE OF ETHICS
  ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 (a) Audit Fees.
   -60-




---



##### 



(b) Audit-Related Fees.
  (c) Tax Fees.
  (d) All Other Fees.
  (e) Audit Committee Pre-Approval Policies and Procedures.
     (f)
Not applicable.
 -61-




---



##### 



ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
   ITEM 16F. CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
  ITEM 16G. CORPORATE GOVERNANCE
   
    
    our independent directors do not hold regularly scheduled meetings in executive
session (Rule 5605(b)(2));
    
    the compensation of our executive officers is not determined by an independent
committee of the board or by the independent members of the board of directors, and our
CEO may be present and participate in the deliberations concerning his compensation
(Rule 5605(d));
 -62-




---



##### 




    
    related party transactions are not required to be reviewed or approved by our audit
committee or other independent body of the board of directors (Rule 5630); and
    
    we are not required to solicit shareholder approval of stock plans, including those
in which our officers or directors may participate; stock issuances that will result in
a change in control; the issuance of our stock in related party transactions or other
transactions in which we may issue 20% or more of our outstanding shares; or, below
market issuances of 20% or more of our outstanding shares to any person (Rule 5635).
  PART III
 ITEM 17. FINANCIAL STATEMENTS
  ITEM 18. FINANCIAL STATEMENTS
         -63-




---



##### 



PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Statements of Operations
    
    
    F-3Consolidated Balance Sheets
    
    
    F-4Consolidated Statement of Shareholders Equity and Comprehensive Income
    
    
    F-5 F-6Consolidated Statements of Cash Flows
    
    
    F-7F-8Notes to and Forming Part of the Financial Statements
    
    
    F-9F-46Schedule II
    
    
    F-47
  F-1




---



##### 



Report of Independent Registered Public Accounting Firm
 
      
  F-2




---



##### 



LJ INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,Notes
    
    
    2010
    
    
    2009
    
    
    2008US$
    
    
    US$
    
    
    US$Operating revenue
    
    
    2
    (c)
    
    
    140,548
    
    
    
    110,523
    
    
    
    136,268Costs of goods sold (Exclusive of depreciation
shown separately below)
    
    
    
    
    
    
    (85,737
    )
    
    
    (72,173
    )
    
    
    (97,031
    )Gross profit
    
    
    
    
    
    
    54,811
    
    
    
    38,350
    
    
    
    39,237Operating expensesSelling, general and administrative expenses
    
    
    
    
    
    
    (37,303
    )
    
    
    (31,039
    )
    
    
    (34,815
    )Net loss on derivatives
    
    
    
    
    
    
    (476
    )
    
    
    (503
    )
    
    
    (86
    )Depreciation
    
    
    
    
    
    
    (2,779
    )
    
    
    (2,197
    )
    
    
    (3,373
    )Operating income
    
    
    
    
    
    
    14,253
    
    
    
    4,611
    
    
    
    963Other income and expenseInterest income
    
    
    
    
    
    
    69
    
    
    
    147
    
    
    
    199Gain on currency translation
    
    
    
    
    
    
    643
    
    
    
    
    
    
    
    1,473Gain on sales of securities
    
    
    
    
    
    
    258
    
    
    
    
    
    
    
    49Gain on disposal of property held for lease
    
    
    
    
    
    
    1,635
    
    
    
    
    
    
    
    2,210Interest expenses
    
    
    
    
    
    
    (978
    )
    
    
    (842
    )
    
    
    (1,789
    )Income before income taxes and noncontrolling
interest
    
    
    
    
    
    
    15,880
    
    
    
    3,916
    
    
    
    3,105Income taxes expense
    
    
    9
    
    
    
    (2,877
    )
    
    
    (231
    )
    
    
    (569
    )Net income
    
    
    
    
    
    
    13,003
    
    
    
    3,685
    
    
    
    2,536Net (income) loss attributable to
noncontrolling interest
    
    
    
    
    
    
    (9
    )
    
    
    4
    
    
    
    (6
    )Net income attributable to LJ International
Inc. common shareholders
    
    
    
    
    
    
    12,994
    
    
    
    3,689
    
    
    
    2,530Numerator:Net income used in computing basic earnings
per share
    
    
    
    
    
    
    12,994
    
    
    
    3,689
    
    
    
    2,530Denominator:Weighted average number of shares used in
calculating basic earnings per share
    
    
    
    
    
    
    25,343,557
    
    
    
    23,229,987
    
    
    
    22,245,626Effect of dilutive potential ordinary shares:Warrants
    
    
    
    
    
    
    31,021
    
    
    
    
    
    
    
    6,131Stock options
    
    
    
    
    
    
    1,282,417
    
    
    
    871,867
    
    
    
    196,838Weighted average number of shares used in
calculating diluted earnings per share
    
    
    
    
    
    
    26,656,995
    
    
    
    24,101,854
    
    
    
    22,448,595Earnings per share:Basic
    
    
    2
    (g)
    
    
    0.51
    
    
    
    0.16
    
    
    
    0.11Diluted
    
    
    2
    (g)
    
    
    0.49
    
    
    
    0.15
    
    
    
    0.11
  F-3




---



##### 



LJ INTERNATIONAL INC.
 
 CONSOLIDATED BALANCE SHEETS
  As of December 31,Notes
    
    
    2010
    
    
    2009US$
    
    
    US$ASSETSCurrent assetsCash and cash equivalents
    
    
    
    
    
    
    13,048
    
    
    
    11,282Restricted cash
    
    
    8
    (a)
    
    
    11,009
    
    
    
    6,425Trade receivables, net of allowance for doubtful accounts
(December 31, 2010: US$1,439; December 31, 2009: US$1,446)
    
    
    
    
    
    
    25,889
    
    
    
    21,679Available-for-sale securities
    
    
    2
    (n)
    
    
    2,344
    
    
    
    2,360Inventories
    
    
    4
    
    
    
    107,666
    
    
    
    81,401Prepayments and other current assets
    
    
    2
    (ab)
    
    
    3,635
    
    
    
    1,861Total current assets
    
    
    
    
    
    
    163,591
    
    
    
    125,008Properties held for lease, net
    
    
    5
    
    
    
    419
    
    
    
    717Property, plant and equipment, net
    
    
    6
    
    
    
    10,115
    
    
    
    6,400Deferred tax assets
    
    
    
    
    
    
    111
    
    
    
    111Goodwill, net
    
    
    7
    
    
    
    1,521
    
    
    
    1,521Total assets
    
    
    
    
    
    
    175,757
    
    
    
    133,757LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesBank overdrafts
    
    
    8
    
    
    
    2,879
    
    
    
    2,908Notes payable
    
    
    8
    
    
    
    10,720
    
    
    
    5,551Capitalized lease obligation, current portion
    
    
    10
    
    
    
    48
    
    
    
    98Letters of credit, gold loans and others
    
    
    8
    
    
    
    21,539
    
    
    
    13,481Derivatives
    
    
    
    
    
    
    571
    
    
    
    Trade payables
    
    
    
    
    
    
    19,172
    
    
    
    18,545Accrued payroll and staff benefits
    
    
    
    
    
    
    3,999
    
    
    
    2,199Accrued expenses and other payables
    
    
    
    
    
    
    1,556
    
    
    
    3,155Income taxes payable
    
    
    
    
    
    
    2,255
    
    
    
    1,147Deferred taxation
    
    
    9
    
    
    
    268
    
    
    
    310Total current liabilities
    
    
    
    
    
    
    63,007
    
    
    
    47,394Notes payable, non-current portion
    
    
    
    
    
    
    1,621
    
    
    
    2,244Capitalized lease obligation, non-current portion
    
    
    10
    
    
    
    30
    
    
    
    78Total liabilities
    
    
    
    
    
    
    64,658
    
    
    
    49,716Commitments and contingencies
    
    
    11EquityCommon stocks, par value US$0.01 each,Authorized 100 million shares;Issued 29,153,672 shares as of December 31, 2010 and
23,768,672 shares as of December 31, 2009
    
    
    12
    
    
    
    292
    
    
    
    238Additional paid-in capital
    
    
    
    
    
    
    69,941
    
    
    
    56,675Accumulated other comprehensive income
    
    
    
    
    
    
    837
    
    
    
    102Retained earnings
    
    
    
    
    
    
    39,851
    
    
    
    26,857Total LJ International Inc. shareholders equity
    
    
    
    
    
    
    110,921
    
    
    
    83,872Noncontrolling interest
    
    
    
    
    
    
    178
    
    
    
    169Total equity
    
    
    
    
    
    
    111,099
    
    
    
    84,041Total liabilities and equity
    
    
    
    
    
    
    175,757
    
    
    
    133,757
  F-4




---



##### 



LJ INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
  LJ International Inc. Shareholders EquityAccumulatedCommon stock
    
    
    Additional
    
    
    otherNumber
    
    
    Par
    
    
    paid-in
    
    
    comprehensive
    
    
    Retained
    
    
    NoncontrollingNotes
    
    
    of shares
    
    
    value
    
    
    capital
    
    
    income (loss)
    
    
    earnings
    
    
    interest
    
    
    TotalUS$
    
    
    US$
    
    
    US$
    
    
    US$
    
    
    US$
    
    
    US$(Note 2(x))Balance as of January 1, 2008
    
    
    
    
    
    
    21,437,172
    
    
    
    214
    
    
    
    51,495
    
    
    
    321
    
    
    
    20,638
    
    
    
    167
    
    
    
    72,835Sales of subsidiary shares to noncontrolling interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    583
    
    
    
    583Comprehensive income, net of tax:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,530
    
    
    
    6
    
    
    
    2,536Exchange translation difference
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (375
    )
    
    
    
    
    
    
    
    
    
    
    (375
    )Unrealized holding gain on investment in
available-for-sale securities
    
    
    2
    (n)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (251
    )
    
    
    
    
    
    
    
    
    
    
    (251
    )Realized gain on sale of available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (49
    )
    
    
    
    
    
    
    
    
    
    
    (49
    )1,861Issuance of common stock upon exercise of stock options
    
    
    12
    (a)(ii)
    
    
    1,324,000
    
    
    
    13
    
    
    
    3,393
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,406Issuance of common stock for services rendered
    
    
    12
    (a)(iii)
    
    
    150,000
    
    
    
    2
    
    
    
    141
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    143Compensation costs for warrants granted
    
    
    14
    (b)(i)
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39Stock-based compensation
    
    
    2
    (q)
    
    
    
    
    
    
    
    
    
    
    218
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    218Balance as of December 31, 2008
    
    
    
    
    
    
    22,911,172
    
    
    
    229
    
    
    
    55,286
    
    
    
    (354
    )
    
    
    23,168
    
    
    
    756
    
    
    
    79,085Forfeiture of subsidiary shares sold to noncontrolling
interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (583
    )
    
    
    (583
    )Comprehensive income, net of tax:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,689
    
    
    
    (4
    )
    
    
    3,685Exchange translation difference
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    384
    
    
    
    
    
    
    
    
    
    
    
    384Unrealized holding gain on investment in
available-for-sale securities
    
    
    2
    (n)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72
    
    
    
    
    
    
    
    
    
    
    
    724,141Issuance of common stock upon exercise of stock options
    
    
    12
    (a)(iv)
    
    
    857,500
    
    
    
    9
    
    
    
    346
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    355Stock-based compensation
    
    
    2
    (q)
    
    
    
    
    
    
    
    
    
    
    1,043
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,043Balance as of December 31, 2009
    
    
    
    
    
    
    23,768,672
    
    
    
    238
    
    
    
    56,675
    
    
    
    102
    
    
    
    26,857
    
    
    
    169
    
    
    
    84,041
  F-5




---



##### 



LJ INTERNATIONAL INC.
 CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
  LJ International Inc. Shareholders EquityAccumulatedCommon stock
    
    
    Additional
    
    
    otherNumber
    
    
    Par
    
    
    paid-in
    
    
    comprehensive
    
    
    Retained
    
    
    NoncontrollingNotes
    
    
    of shares
    
    
    value
    
    
    capital
    
    
    income (loss)
    
    
    earnings
    
    
    interest
    
    
    TotalUS$
    
    
    US$
    
    
    US$
    
    
    US$
    
    
    US$
    
    
    US$(Note 2(x))Balance as of December 31, 2009
    
    
    
    
    
    
    23,768,672
    
    
    
    238
    
    
    
    56,675
    
    
    
    102
    
    
    
    26,857
    
    
    
    169
    
    
    
    84,041Comprehensive income, net of tax:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,994
    
    
    
    9
    
    
    
    13,003Exchange translation difference
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,010
    
    
    
    
    
    
    
    
    
    
    
    1,010Unrealized holding gain on investment in
available-for-sale securities
    
    
    2
    (n)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17
    )
    
    
    
    
    
    
    
    
    
    
    (17
    )Realized gain on sale of available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (258
    )
    
    
    
    
    
    
    
    
    
    
    (258
    )13,738Issuance of common stock on private placement
    
    
    12
    (a)(v)
    
    
    4,000,000
    
    
    
    40
    
    
    
    12,170
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,210Issuance of common stock upon exercise of stock options
    
    
    12
    (a)(vi)
    
    
    1,385,000
    
    
    
    14
    
    
    
    654
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    668Stock-based compensation
    
    
    2
    (q)
    
    
    
    
    
    
    
    
    
    
    442
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    442Balance as of December 31, 2010
    
    
    
    
    
    
    29,153,672
    
    
    
    292
    
    
    
    69,941
    
    
    
    837
    
    
    
    39,851
    
    
    
    178
    
    
    
    111,099
  F-6




---



##### 



LJ INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2008US$
    
    
    US$
    
    
    US$Cash flows from operating activities:Net income
    
    
    13,003
    
    
    
    3,685
    
    
    
    2,536Adjustments to reconcile income to net cash
provided by (used in) operating activities:Depreciation of property, plant and equipment
and properties held for lease
    
    
    2,779
    
    
    
    2,197
    
    
    
    3,373Unrealized loss on derivatives
    
    
    476
    
    
    
    
    
    
    
    Gain on sales of securities
    
    
    (258
    )
    
    
    
    
    
    
    (49
    )Gain on disposal of property held for lease
    
    
    (1,635
    )
    
    
    
    
    
    
    (2,210
    )(Gain) Loss on disposal and write-off of property,
plant and equipment
    
    
    (35
    )
    
    
    (5
    )
    
    
    45Gain on currency translation
    
    
    (643
    )
    
    
    
    
    
    
    (1,473
    )(Reversal of) Allowance for doubtful debts
    
    
    (7
    )
    
    
    (231
    )
    
    
    1,223Stock-based compensation costs for warrants granted
    
    
    
    
    
    
    
    
    
    
    39Stock-based compensation expenses
    
    
    442
    
    
    
    1,043
    
    
    
    361Changes in operating assets and liabilities:Trade receivables
    
    
    (4,203
    )
    
    
    (878
    )
    
    
    1,401Inventories
    
    
    (26,265
    )
    
    
    (4,764
    )
    
    
    5,375Prepayments and other current assets
    
    
    (1,774
    )
    
    
    165
    
    
    
    496Trade payables
    
    
    627
    
    
    
    620
    
    
    
    (775
    )Accrued expenses and other payables
    
    
    296
    
    
    
    552
    
    
    
    (1,318
    )Income taxes payable and deferred taxation
    
    
    1,066
    
    
    
    (323
    )
    
    
    (278
    )Net cash (used in) provided by operating activities
    
    
    (16,131
    )
    
    
    2,061
    
    
    
    8,746Cash flows from investing activities:Change in restricted cash
    
    
    (4,584
    )
    
    
    68
    
    
    
    (2,332
    )Proceeds
from sales of available-for-sale
securities, net of purchases
    
    
    
    
    
    
    
    
    
    
    434Purchase of property, plant and equipment
    
    
    (6,614
    )
    
    
    (1,710
    )
    
    
    (1,635
    )Proceeds from disposals of property held for lease,
and property, plant and equipment
    
    
    2,110
    
    
    
    14
    
    
    
    2,732Net cash used in investing activities
    
    
    (9,088
    )
    
    
    (1,628
    )
    
    
    (801
    )
  F-7




---



##### 



LJ INTERNATIONAL INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2008US$
    
    
    US$
    
    
    US$Cash flows from financing activities:Change in bank overdrafts
    
    
    (29
    )
    
    
    184
    
    
    
    (253
    )Proceeds from issuance of shares upon exercise of
stock options
    
    
    668
    
    
    
    355
    
    
    
    3,406Net proceeds from issuance of shares in private
placement
    
    
    12,210
    
    
    
    
    
    
    
    Loans acquired
    
    
    24,592
    
    
    
    30,956
    
    
    
    21,286Repayment of loans
    
    
    (17,385
    )
    
    
    (34,366
    )
    
    
    (24,558
    )Repayment of capitalized lease obligation
    
    
    (98
    )
    
    
    (109
    )
    
    
    (92
    )Letter of credit and factoring
    
    
    5,397
    
    
    
    97
    
    
    
    (3,269
    )Proceeds from sale of derivatives net of
retirement of embedded derivatives
    
    
    
    
    
    
    
    
    
    
    2,947Net cash provided by (used in) financing activities
    
    
    25,355
    
    
    
    (2,883
    )
    
    
    (533
    )Effect of foreign exchange rate change
    
    
    1,630
    
    
    
    384
    
    
    
    985Net increase (decrease) in cash and cash
equivalents
    
    
    1,766
    
    
    
    (2,066
    )
    
    
    8,397Cash and cash equivalents, as of beginning of year
    
    
    11,282
    
    
    
    13,348
    
    
    
    4,951Cash and cash equivalents, as of end of year
    
    
    13,048
    
    
    
    11,282
    
    
    
    13,348Supplemental disclosure information:Interest expenses
    
    
    978
    
    
    
    842
    
    
    
    1,789Income taxes paid
    
    
    1,811
    
    
    
    555
    
    
    
    847Non-cash transactions:Purchase of property, plant and equipment under
capitalized leases
    
    
    
    
    
    
    104
    
    
    
    
  F-8




---



##### 



1. NATURE OF BUSINESS AND BASIS OF FINANCIAL STATEMENTS
  2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 (a)
    
    Basis of accountingThe financial statements are prepared in accordance with US generally accepted
accounting principles (US GAAP).(b)
    
    Principles of consolidation and goodwillThe consolidated financial statements include the financial information of LJI, its
subsidiaries and VIEs for which the Company is the primary beneficiary. The results of
subsidiaries and VIEs 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.The Company adopted Financial Accounting Standards Board (FASB) ASC Topic
810, Consolidation of Variable Interest Entities. This ASC requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of a
controlling financial interest nor do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial support
from other parties. As of December 31, 2010, the Company did not hold any VIE.The application of the consolidation provisions of ASC 810 resulted in
US$nil increase in assets and liabilities as of December 31, 2010 as the remaining
one VIE had transferred the ownership back to the Company and was closed during
2010, and an increase in assets and an increase in liabilities as of December 31,
2009 by US$1,065 and US$396 respectively, and increase in net income of US$16 for
the year ended December 31, 2010 and increase in net loss of US$93 for the years
ended December 31, 2009 and increase in net income of US$326 for the year ended
December 31, 2008.
 F-9




---



##### 



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (b)
    
    Principles of consolidation and goodwill (continued)Goodwill represents the excess of the aggregate purchase price over the fair value of
the net assets acquired in a purchase businesses combination. Goodwill is reviewed for
impairment at least annually in accordance with the provisions of ASC Topic 323,
Goodwill and Other Intangible Assets. The goodwill impairment test is a two-step test.
Under the first step, the fair value of the reporting unit is compared to its carrying
value (including goodwill). If the fair value of the reporting unit is less than its
carrying value, an indication of goodwill impairment exists for the reporting unit and
the enterprise must perform step two of the impairment test (measurement). Under step
two, an impairment loss is recognized for any excess of the carrying amount of the
reporting units goodwill over the implied fair value of that goodwill. The implied
fair value of goodwill is determined by allocating the fair value of the reporting unit
in a manner similar to a purchase price allocation, in accordance with ASC Topic 805,
Business Combinations. The residual fair value after this allocation is the implied
fair value of the reporting unit goodwill. Fair value of the reporting unit is
determined using a discounted cash flow analysis. If the fair value of the reporting
unit exceeds its carrying value, step two does not need to be performed.The Company performed its annual impairment review of goodwill, and
resulting in US$nil included in statement of operations for the years ended
December 31, 2010, 2009 and 2008.(c)
    
    Revenue recognitionOperating revenue represents:
 Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2008US$
    
    
    US$
    
    
    US$Product sales
    
    
    144,879
    
    
    
    115,599
    
    
    
    145,372Rental income
    
    
    79
    
    
    
    100
    
    
    
    98144,958
    
    
    
    115,699
    
    
    
    145,470Less: Sales return allowance
    
    
    (4,410
    )
    
    
    (5,176
    )
    
    
    (9,202
    )140,548
    
    
    
    110,523
    
    
    
    136,268
 F-10




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##### 



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (c)
    
    Revenue recognition (continued)
 (i)
    
    Product salesProduct sales represent the invoiced value of products sold, net of value added taxes
(VAT). The Company recognizes revenue from the sale of products when the following
criteria are met: 1) persuasive evidence of an arrangement exists (sales agreements
and customer purchase orders are used to determine the existence of an arrangement);
2) delivery of the product has occurred and risks and benefits of ownership have been
transferred, which is when the product is received by the customer at its or a
designated location in accordance with the sales terms; 3) the sales price is fixed
or determinable; and 4) collectibility is probable.In the PRC, VAT at a general rate of 17% on invoice amount is collected on behalf of
tax authorities in respect of the sales of products and is not recorded as revenue.
VAT collected from customers, net of VAT paid for purchases, is recorded as a
liability in the consolidated balance sheets until it is paid to the authorities.(ii)
    
    Rental incomeRental income under operating lease is recognized in the consolidated
statements of income in equal installments over the period covered by the lease
term.(iii)
    
    Other income represents:Interest income is accrued on a time proportion basis on the principal outstanding
and at the interest rate applicable.Gain on currency translation is recognized on conversion of loans
made to the PRC subsidiaries which are denominated in US dollars and HK
dollars, short-term in nature and are repayable in full on demand. Upon the
appreciation of Renminbi, gain on currency translation is recognized.Gain on sales of available-for-sale securities is realized and
recognized in the consolidated statements of income when the securities are
sold.Gain on disposal of property held for lease is realized and
recognized in the consolidated statements of income when the property is sold.
 (d)
    
    Sales return reserveThe Company has allowed sales returns and its sales generally include specified return
policy for certain customers. The Company reserves for sales returns as a reduction of
revenue at the time the operating revenue is recognized based on historical sales return
experience and agreed terms of sales return stated in the contracts with certain
specific customers.
 F-11




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##### 



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (e)
    
    Shipping and handling costsThe shipping and handling costs are included in cost of goods sold. Shipping and
handling costs were US$1,661, US$1,548 and US$2,384 for the years ended December 31,
2010, 2009 and 2008 respectively.(f)
    
    Advertising and promotion costsAdvertising and promotion expenses are generally expensed when incurred. Advertising
costs were US$1,376, US$815 and US$824 for the years ended December 31, 2010, 2009 and
2008 respectively.(g)
    
    Earnings per shareThe calculation of basic earnings per share is based on net income for the year
attributable to shareholders and on the weighted average number of ordinary shares
outstanding during the year.The calculation of diluted earnings per share is based on net income for the year
attributable to shareholders and on the weighted average number of ordinary shares
outstanding during the year, adjusted for the effects of all dilutive potential ordinary
shares. The dilutive effect of convertible securities is reflected in diluted earnings
per share by application of the if-converted method.(h)
    
    Fair value of financial instrumentsThe financial instruments used by the Company in the normal course of business,
including cash and cash equivalents, trade receivables, trade payables, notes payable
and letter of credit, gold and other loans, have fair values which approximate their
recorded value as the financial instruments are either short term in nature or carry
interest rate that approximate market rates.
 F-12




---



##### 



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (h)
    
    Fair value of financial instruments (continued)The categories of assets and liabilities recorded at fair value on our
consolidated balance sheet based upon the level of judgment associated with inputs
used to measure their fair value. The levels are as follows:
 Level 1
    
    Inputs are unadjusted, quoted prices in active markets for
identical assets or liabilities at the measurement date. An active
market for the asset or liability is a market in which
transactions for the asset or liability occur with sufficient
frequency and volume to provide pricing information on an ongoing
basis.Level 2
    
    Inputs (other than quoted market prices included in Level 1) are
either directly or indirectly observable for the asset or
liability through correlation with market data at the measurement
date and for the duration of the instruments anticipated life.Level 3
    
    Inputs reflect managements best estimate of what market
participants would use in pricing the asset or liability at the
measurement date. Consideration is given to the risk inherent in
the valuation technique and the risk inherent in the inputs to the
model.
 A financial instruments categorization within the valuation hierarchy is
based upon the lowest level of input that is significant to the fair value
measurement.The available-for-sale securities are at Level 1 since they are quoted on
the open market. The values determined under Level 1 for the available for sale
securities were US$2,344 and US$2,360 as of December 31, 2010 and 2009
respectively.
 (i)
    
    Accounts receivableTrade receivables are recorded at the invoiced amount and do not bear
interest. Amounts collected on trade receivables are included in net cash provided
by operating activities in the consolidated statements of cash flows. The Company
maintains an allowance for doubtful accounts for estimated losses inherent in its
trade receivable portfolio and purchases trade credit insurance to cover the risk
of collectibilities. In establishing the required allowance, management considers
historical losses, current receivables aging, and existing industry and national
economic data.The Company reviews its allowance for doubtful accounts regularly. Past
due balances over 120 days and over a specified amount are reviewed individually
for collectibility. All other balances are reviewed on a pooled basis by aging of
such balances. Account balances are charged off against the allowance after all
means of collection have been exhausted and the potential for recovery is
considered remote. The Company does not have any off-balance-sheet credit exposure
related to its customers, except for outstanding bills discounted with banks (see
note 8), that are subject to recourse for non-payment.
 F-13




---



##### 



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (j)
    
    InventoriesInventories are stated at the lower of cost and market. Cost, which comprises all costs
of purchase and, where applicable, costs of conversion and other costs that have
been incurred in bringing the inventories to their present location and condition,
including inbound freight charges, purchasing and receiving cost, inspection costs
and internal transfer costs, is calculated using the weighted average costing
method. Estimated losses on inventories represent reserves for obsolescence,
excess quantities, irregulars and slow moving inventory, and which are charged to
cost of goods sold. In case of inventory which has been written down below cost at
the close of a fiscal year, such reduced amount forms a new cost basis that
subsequently cannot be marked up based on changes in underlying facts and
circumstances. The Company estimates the loss/write-down on the basis of its
assessment of the inventorys net realizable value based upon current market
conditions and historical experience.(k)
    
    Properties held for leaseProperties held for lease are carried at cost, less accumulated depreciation, which
is computed using the straight-line method over the estimated useful lives of the
assets. Rental income from these properties is recorded on a monthly basis in
accordance with the lease terms.(l)
    
    Property, plant and equipment (PPE) and depreciationPPE are stated at cost less accumulated depreciation and accumulated impairment
loss, and include expenditure that substantially increases the useful lives of existing
assets. Maintenance and repairs are charged to current operations as incurred. Upon
sale, retirement, or other disposition of these assets, the cost and related accumulated
depreciation and accumulated impairment loss are removed from the respective accounts,
and any gain or loss is included in the consolidated statement of operations. Plant and
equipment under capital leases are stated at the present value of minimum lease
payments.Depreciation on PPE is calculated by using the straight-line method (after taking
into account their respective estimated residual values) over the estimated useful lives
of the related assets at the following annual rates:
 Leasehold land and buildings
    
    2% or over the unexpired term of leasesLeasehold improvement
    
    shorter of 10% or the unexpired term of leasesFurniture, fixtures and equipment
    
    20% to 50%Plant and machinery
    
    5% to 10%Motor vehicles
    
    10% to 20%
 Depreciation on PPE attributable to manufacturing activities is capitalized as part
of inventory, and expensed to cost of goods sold as inventory is sold. Depreciation
related to abnormal amounts from idle capacity is charged to cost of goods sold for the
period incurred. Total depreciation for the years ended December 31, 2010, 2009 and
2008 were US$2,779, US$2,197 and US$3,373 respectively.
 F-14




---



##### 



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (m)
    
    Impairment of long-lived assetsIn accordance with ASC Topic 360-10-20, Accounting for the Impairment or
Disposal of Long-Lived Assets, long-lived assets, such as property, plant and
equipment, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If
circumstances require a long-lived asset be tested for possible impairment, the
Company first compares undiscounted cash flows expected to be generated by an asset
to the carrying value of the asset. If the carrying value of the long-lived asset
is not recoverable on an undiscounted cash flow basis, impairment is recognized to
the extent that the carrying value exceeds it fair value. Fair value is determined
through various valuation techniques including discounted cash flow models, quoted
market values and third-party independent appraisals, as considered necessary.(n)
    
    Available-for-sale securitiesThe Company classifies its investment in capital guaranteed fund as available-for-sale
securities. The fund is restricted and secures obligations under trade credit banking
facilities. It is carried at market value which is quoted in active market with a
corresponding recognition of net unrealized holding gain or loss (net of tax) as a
separate component of shareholders equity until realized. Unrealized losses are charged
against net earnings when a decline in fair value is determined to be other than
temporary. Gains and losses on sales of securities are computed on a specific
identification basis. Available-for-sale securities comprise:
 As of December 31,2010
    
    
    2009US$
    
    
    US$Quoted capital guaranteed fund, at cost
    
    
    2,369
    
    
    
    2,111Gross unrealized (losses) gains
    
    
    (25
    )
    
    
    249Fair value of available-for-sale securities
    
    
    2,344
    
    
    
    2,360
 (o)
    
    Gold loans and embedded derivativeGold loans are commodity-indexed debts with an embedded derivative. The loan is
recorded at its original amount and adjusted for additional borrowings and repayments.
The embedded derivative component was valued at fair value, considering the market price
of gold, volatility of gold and the time value of money. Any changes in fair value of
embedded derivative are included in the consolidated statement of operations and an
asset or liability representing the value of the embedded derivative portion is included
in the consolidated balance sheets.(p)
    
    DerivativesThe Company enters into derivative contracts to hedge the future settlement of gold
loans in order to mitigate the risk of market price fluctuations. They consist of
contracts that are used to hedge against changes in the fair value of gold price when
the Company settles the gold loans.
 F-15




---



##### 



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (p)
    
    Derivatives (continue)The derivative contracts and the embedded derivative are valued at fair value. Changes
in fair value of derivative contracts are included in the consolidated statement of
operations, net of changes in fair value of embedded derivative set out in note 2(o).(q)
    
    Stock-based compensationASC Topic 718, Compensation-Stock Based compensation, requires the Company to measure
the cost of employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award. The Company records the cost as
expense over the offering period and vesting term in connection with compensation
expense for stock-based employee compensation plans.Effective January 1, 2006, the Company began recording compensation expense for
stock-based employee compensation plans in accordance with SFAS No. 123(R) as
interpreted by SEC Staff Accounting Bulletin No. 107. The Company adopted the modified
prospective transition method provided for under SFAS No. 123(R), and consequently has
not retroactively adjusted results from prior periods. Under this transition method,
compensation expense for stock-based employee compensation plans recognized for the year
ended December 31, 2006 included estimated expense for the portion of stock options
vesting in the period for options granted prior to, but not vested as of January 1,
2006, based on the grant date fair value estimated in accordance with the original
provisions of Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation(SFAS No. 123).As of December 31, 2010, the Company has four stock-based employee compensation plans,
details of which are set out in note 14(a).During the years ended December 31, 2010, 2009 and 2008, the Company has granted nil,
4,000,000 and 2,500,000 stock options to the employees. The fair value of these options
was estimated on the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions:
 Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,2009
    
    
    2008Expected dividend yield
    
    
    
    
    
    
    Expected stock price volatility
    
    
    95
    %
    
    
    108
    %Risk-free interest rate
    
    
    1.22
    %
    
    
    1.61
    %Expected life of options
    
    3.19 years
    
    0.91 year
 The weighted average fair value per option granted during the years ended December
31, 2009 and 2008 were US$0.35 and US$0.17 respectively.
 F-16




---



##### 



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (r)
    
    Income taxesIncome taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit carry
forwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date. The Company provides a valuation allowance, if necessary, to reduce
deferred tax assets to their estimated realizable value.The Company has adopted ASC Topic 740, Income Taxes which addresses how the benefit of
tax positions taken or expected to be taken on a tax return should be recorded in the
financial statements. Tax benefits associated with uncertain tax positions are
recognized in the period in which one of the following conditions is satisfied: (1) the
more likely than not recognition threshold is satisfied; (2) the position is ultimately
settled through negotiation or litigation; or (3) the statute of limitations for the
taxing authority to examine and challenge the position has expired. Tax benefits
associated with an uncertain tax position are derecognized in the period in which the
more likely than not recognition threshold is no longer satisfied.(s)
    
    Foreign currenciesLJIs functional currency is United States dollars. Transactions denominated in
currencies other than US dollars are translated into US dollars at the exchange rate
prevailing at the dates of transactions. Foreign currency transaction gains and losses
are included in the consolidated statement of operations. The assets and liabilities of
the Companys subsidiaries whose functional currencies are other than US dollars, are
translated at the exchange rates in effect at the balance sheets date and related
revenue and expenses are translated at average exchange rates during the year. Related
transaction gains or losses are reported as a separate component of accumulated other
comprehensive income (loss).As of December 31, 2010, the Company held non-deliverable forward contracts with a bank
with total notional amount of US$1,000 to hedge its RMB exposures of operating cost in
normal course of business. The aggregate forward gains from these contracts were
included in selling, general and administrative expenses which amounted to US$11, US$nil
and US$nil for the years ended December 31, 2010, 2009 and 2008 respectively.The aggregate transaction gain (loss) included in determining net income were
US$337, (US$691) and US$795 for the years ended December 31, 2010, 2009 and 2008
respectively.
 F-17




---



##### 



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (t)
    
    Cash equivalents and Pledged Bank DepositsCash consists of cash on hand, cash in bank accounts and interest-bearing savings
accounts. Cash deposits that are restricted as to withdrawal or pledged as security, are
disclosed separately on the face of the consolidated balance sheets, and not included in
the cash total for the purpose of the consolidated statements of cash flows.(u)
    
    Uses of estimatesThe preparation of the consolidated financial statements, in accordance
with US GAAP, requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financials statements and accompanying notes.
Significant items subject to such estimates and assumptions include the carrying
amount of property, plant and equipment and goodwill; valuation allowance for
receivables, inventories and deferred income tax asset; valuation of derivative
instruments; valuation of share-based compensation. Actual results could differ
from those estimates.(v)
    
    Related partiesParties are considered to be related if one party has the ability, directly or
indirectly, to control the other party, or exercise significant influence over the other
party in making financial and operating decisions. Parties are also considered to be
related if they are subject to common control or common significant influence.(w)
    
    DividendsThe Directors of the Company have never declared or paid any cash dividends on the
Companys capital stock and do not anticipate paying cash dividends in the foreseeable
future. The ability to pay dividends depends upon receipt of dividends or other
payments from subsidiaries and other holdings and investments. In addition, the
operating subsidiaries from time to time may be subject to restrictions on their ability
to make distributions to the Company, including as a result of restrictive covenants in
loan agreements, restrictions on the conversion of local currency into US dollars or
other currencies and other regulatory restrictions. Currently, none of the subsidiaries
has such restriction during the periods presented except for the covenants as set out in
note 8 to the financial statements.(x)
    
    Comprehensive incomeThe Company reports comprehensive income in accordance with ASC Topic 220, Reporting
Comprehensive Income. Accumulated other comprehensive gain represents exchange
translation adjustments and unrealised holding gains on investment, and is included in
the shareholders equity section of the balance sheets.
 F-18




---



##### 



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (y)
    
    New accounting pronouncementsIn January 2010, the FASB issued Accounting Standards Update (ASU) No.
2010-01, Accounting for Distributions to Shareholders with Components of Stock and
Cash , which clarifies that the stock portion of a distribution to shareholders
that allows them to elect to receive cash or stock with a potential limitation on
the total amount of cash that all shareholders can elect to receive in the
aggregate is considered a share issuance that is reflected in earnings per share
prospectively and is not a stock dividend for purposes of applying Topics 505 and
260 (Equity and Earnings Per Share). The amendments in this update are effective
for interim and annual periods ending on or after December 15, 2009, and should be
applied on a retrospective basis. The Companys adoption of this ASU did not have a
material impact on its consolidated financial statements.In January 2010, the FASB issued ASU No. 2010-02, Accounting and Reporting for
Decreases in Ownership of a Subsidiary  a Scope Clarification, which affects
accounting and reporting by an entity that experiences a decrease in ownership in a
subsidiary that is a business or nonprofit activity. This ASU also affects
accounting and reporting by an entity that exchanges a group of assets that
constitutes a business or nonprofit activity for an equity interest in another
entity. The amendments in this update are effective beginning in the period that an
entity adopts ASU 810-10, Consolidations. If an entity has previously
adopted ASC
810-10 as of the date the amendments in this update are included in the Accounting
Standards Codification, the amendments in this update are effective beginning in
the first interim or annual reporting period ending on or after December 15, 2009.
The amendments in this update should be applied retrospectively to the first period
that an entity adopted ASC 810-10. The Companys adoption of this ASU did not have
a material impact on its consolidated financial statements.In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures
about Fair Value Measurements. This update provides amendments to Subtopic 820-10
that requires new disclosure as follows: (1) transfers in and out of Levels 1 and
2: a reporting entity should disclose separately the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and describe
the reasons for the transfers; (2) activity in Level 3 fair value measurements in
the reconciliation for fair value measurements using significant unobservable
inputs (Level 3) a reporting entity should present separately information about
purchases, sales, issuances and settlements (that is, on a gross basis rather than
as one net number). This update provides amendments to Subtopic 820-10 that
clarifies existing disclosures as follows: (1) level of disaggregation: a reporting
entity should provide fair value measurement disclosures for each class of assets
and liabilities. A class is often a subset of assets or liabilities within a line
item in the statement of financial position. A reporting entity needs to use
judgment in determining the appropriate classes of assets and liabilities; (2)
Disclosures about inputs and valuation techniques: A reporting entity should
provide disclosures about the valuation techniques and inputs used to measure fair
value for both recurring and nonrecurring fair value measurements. Those
disclosures are required for fair value measurements that fall in either Level 2 or
Level 3.
 F-19




---



##### 



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (y)
    
    New accounting pronouncements (Continued)The new disclosures and clarifications of existing disclosures are
effective for interim and annual reporting periods beginning after December 15,
2009, except for the disclosures about purchases, sales, issuances and settlements
in the roll forward of activity in Level 3 fair value measurements, which are
effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. The Company is currently evaluating the impact
of this ASU, however, the Companys adoption of this ASU did not have a material
impact on its consolidated financial statements.In April 2010, the FASB issued ASU 2010-13, Compensation-Stock
Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades. This update provides amendments to Topic 718 to clarify
that an employee share-based payment award with an exercise price denominated in
currency of a market in which a substantial porting of the entitys equity
securities trades should not be considered to contain a condition that is not a
market, performance or service condition. Therefore, an entity would not classify
such an award as a liability if it otherwise qualifies as equity. The amendments in
this ASU are effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2010. The Companys adoption of this ASU
did not have a material impact on its consolidated financial statements.In September 2010, the FASB issued Accounting Standard Update 2010-25,
Plan AccountingDefined Contribution Pension Plans (Topic 962): Reporting Loans to
Participants by Defined Contribution Pension Plans . This ASU clarifies how loans
to participants should be classified and measured by defined contribution plans and
how International Financial Reporting Standards compare to these provisions. The
amendments in this update are effective for fiscal years ending after December 15
2010. The Companys adoption of this ASU did not have a material impact on its
consolidated financial statements.In December 2010, the FASB issued Accounting Standard Update 2010-28,
Intangibles-Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill
Impairment Test for Reporting Units with Zero or Negative Carrying Amounts . This
ASU modified Step 1 of the goodwill impairment test for reporting units with zero
or negative carrying amounts. For those reporting units, an entity is required to
perform Step 2 of the goodwill impairment test if it is more likely than not that a
goodwill impairment exists. For public entities, the amendments in the ASU are
effective for fiscal years, and interim periods within those years, beginning after
December 15, 2010. The Companys adoption of this ASU is not expected to have a
material impact on its consolidated financial statements.
 F-20




---



##### 



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (y)
    
    New accounting pronouncements (Continued)In December 2010, the FASB issued Accounting Standard Update 2010-29,
Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma
Information for
Business Combinations. This ASU specifies that, if a public entity presents comparative
financial statements, the entity should disclose revenue and earnings of the combined
entity as though the business combination(s) that occurred during the current year had
occurred as of the beginning of the comparable prior annual reporting period only. ASU
2010-29 is effective prospectively for business combinations where the acquisition date
is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2010. The Companys adoption of this ASU is not expected to have a material
impact on its consolidated financial statements.(z)
    
    Noncontrolling interestNoncontrolling Interest, formerly defined as minority interest, is recognized as equity
in the consolidated balance sheets, is reflected in net income attributable to
noncontrolling interests in consolidated net income and is captured within a
summary of changes in equity attributable to controlling and noncontrolling
interests. A noncontrolling interest emphasizes the Companys substantive control
over a subsidiary rather than a simple ownership percentage as with minority
interest.(aa)
    
    Store closure costsThe store closure costs are included in selling, general and administrative
expenses in the statement of operations. The store closure costs represent costs
associated with the closure of retail stores which is the ongoing and continuous
activities of the Company to consolidate its retail stores. Stores closure costs
relate to the amortization of store renovation work were US$25, US$137 and US$52
for the years ended December 31, 2010, 2009 and 2008 respectively, and there is no
cost related to one-time benefits to employees and early termination of lease
contracts for the years ended December 31, 2010, 2009 and 2008.(ab)
    
    Prepayments and other current assetsPrepayments and other current assets consist of the following:
 As of December 31,2010
    
    
    2009US$
    
    
    US$Rental, utilities and other deposits
    
    
    1,414
    
    
    
    1,001Deposits for purchases and services
    
    
    1,254
    
    
    
    152Prepaid expenses
    
    
    967
    
    
    
    7083,635
    
    
    
    1,861
 F-21




---



##### 



3. OPERATING RISKS
 (a)
    
    Concentrations of credit risksDetails of major customers from which the Company derived operating revenue are shown in
note 17(a).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 sheets) that arise from financial instruments
exist for groups of customers or counterparties when there are similar economic
characteristics that would cause their ability to meet contractual obligations to be
similarly affected by changes in economic or other conditions. The major concentration
of credit risk arises from the Companys receivables. Even though the Company does have
major customers, it does not consider itself to be exposed to significant credit risk
with regards to collection of the related receivables. Historical losses have not been
significant.(b)
    
    Country risksThe Company may also be exposed to certain risks as a result of its manufacturing
operation being located in the PRC and its properties held for lease in Hong Kong which
are not typically associated with companies operating in North America and Western
Europe. These include risks associated with, among others, the political, economic and
legal environments and foreign currency exchange. The Companys results may be
adversely affected by changes in the political and social conditions in the PRC, and by
changes in governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of taxation,
among other things. The Companys management believe these risks not to be significant.
There can be no assurance, however, that changes in political, social and other
conditions will not result in any adverse impact.(c)
    
    Cash and time depositsThe Company maintains majority of its cash balances and investments in time deposits
with various banks and financial institutions in Hong Kong and in the PRC. 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-22




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##### 



4. INVENTORIES
 Inventories consist of the following:
 As of December 31,2010
    
    
    2009US$
    
    
    US$Raw materials
    
    
    47,710
    
    
    
    40,057Work-in-progress
    
    
    1,284
    
    
    
    803Finished goods
    
    
    58,672
    
    
    
    40,541107,666
    
    
    
    81,401
 5. PROPERTIES HELD FOR LEASE, NET
 The Company owns leasehold land and buildings in Hong Kong and leases them out for lease
term of two years. Properties held for lease consist of the following:
 As of December 31,2010
    
    
    2009US$
    
    
    US$Leasehold land and buildings
    
    
    784
    
    
    
    1,246Less: Accumulated depreciation
    
    
    (365
    )
    
    
    (529
    )419
    
    
    
    717
 The Company pledged all properties held for lease as collateral for general banking
facilities granted to the Company as of December 31, 2010 and 2009 (see note 8).The future aggregate minimum rental receivables under non-cancellable operating leases are
as follows:
 As of December 31,2010
    
    
    2009US$
    
    
    US$2010
    
    
    
    
    
    
    792011
    
    
    73
    
    
    
    462012
    
    
    35
    
    
    
    9108
    
    
    
    134
 F-23




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##### 



6. PROPERTY, PLANT AND EQUIPMENT, NET
 Property, plant and equipment consist of the following:
 As of December 31,2010
    
    
    2009US$
    
    
    US$Leasehold land and buildings
    
    
    2,405
    
    
    
    2,405Leasehold improvement
    
    
    13,210
    
    
    
    10,968Furniture, fixtures and equipment
    
    
    5,862
    
    
    
    5,539Plant and machinery
    
    
    6,072
    
    
    
    2,543Motor vehicles
    
    
    1,053
    
    
    
    1,08028,602
    
    
    
    22,535Less: Accumulated depreciation
    
    
    (18,487
    )
    
    
    (16,135
    )10,115
    
    
    
    6,400
 The Company pledged leasehold land and buildings with net book values of US$1,558 and
US$1,656 as of December 31, 2010 and 2009 respectively as collateral for general banking
facilities granted to the Company (see note 8).
 7. GOODWILL, NET
 As of December 31, 2010, goodwill is attributed to wholesale segment of the acquisition of a
jewelry company in 2002.
 Year ended December 31,2010
    
    
    2009US$
    
    
    US$Carrying value, beginning of year
    
    
    1,521
    
    
    
    1,521Impairment loss
    
    
    
    
    
    
    Carrying value, end of year
    
    
    1,521
    
    
    
    1,521
 The Company conducts annual impairment tests. The testing included the determination
of each reporting units fair value using the market multiples and discounted cash flow
analysis. No goodwill impairment charge was necessary for the year ended December 31, 2010.
The accumulated amortization and impairment losses were US$869 and US$869 as of December
31, 2010 and 2009 respectively.
 F-24




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##### 



8. BANKING FACILITIES AND OTHER LOANS
 As of December 31,2010
    
    
    2009Notes
    
    
    US$
    
    
    US$Bank overdrafts
    
    
    (a)
    
    
    
    2,879
    
    
    
    2,908Notes payable:Current portion
    
    
    (b)
    
    
    
    10,720
    
    
    
    5,551Letters of credit, gold loans and others:Letters of credit
    
    
    (a)
    
    
    
    13,704
    
    
    
    11,816Factoring
    
    
    (a)
    
    
    
    5,174
    
    
    
    1,665Gold loan
    
    
    (c)
    
    
    
    2,661
    
    
    
    21,539
    
    
    
    13,481
 The Companys banking facilities are collateralized by leasehold land and buildings
(see notes 5 and 6), restricted cash deposits, factored receivables, and personal guarantees
of and properties owned by a director (see note 15(b)).The material provisions of indentures relating to the Companys various banking facility
agreements contain, among others, covenants pertaining to maintenance of the tangible net
worth of LJI and one of its subsidiaries amounting to US$25,000 and US$4,487 respectively.
In the event of default, the bank would at its discretion to cancel the facilities and
demand immediate repayment of all principal, interest, fees and other amount outstanding.
 (a)
    
    As of December 31, 2010, the Company had various revolving bank facilities of
overdrafts, letters of credit and factoring facilities granted by banks, amounting to
US$2,923 (2009: US$2,923), US$14,249 (2009:US$13,423) and US$10,901 (2009:US$9,747)
respectively.The bank overdrafts are denominated in Hong Kong dollars, bear interest at the
floating commercial bank lending rates in Hong Kong, which ranged from 2.3% to 5.5%
per annum as of December 31, 2010 and ranged from 2.4% to 5.5% per annum as of
December 31, 2009.The factoring facilities granted are limited to the extent of accounts receivable
collateralized to the banks.Under the banking facilities arrangements, the Company is required to maintain
certain cash balances and investment in capital guaranteed fund based on the amount
of facilities granted. The cash balances are reflected as restricted cash in the
balance sheets.
 F-25




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##### 



8. BANKING FACILITIES AND OTHER LOANS (Continued)
 (b)
    
    The Company also had term loans classified under notes payable which are
related to the Companys leasehold land and buildings (see note 6). These loans
aggregated to US$12,341 and US$7,795 as of December 31, 2010 and 2009 respectively.
The expected maturities of these notes payable are within 1-5 years. Interest charges
on these loans ranged from 2.3% to 5.8% per annum as of December 31, 2010 and ranged
from 2.1% to 10.6% per annum as of December 31, 2009.(c)
    
    The Company also had bank facilities of gold loan which are related to the
Companys leasehold land and buildings (see note 6). The Company had outstanding loans
to purchase 2,283 ounce of gold and nil as of December 31, 2010 and 2009 with the
related balances being US$2,661 and US$nil as of December 31, 2010 and 2009
respectively. These loans are due within the following year. These loans bear finance
charge of 2.8% per annum as of December 31, 2010.The weighted average interest rate for the year ended December 31,
2010 and 2009 were 3.4% and 2.6% per annum respectively.
 9. INCOME TAXES
 Income taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating losses and tax credit carry
forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.The Company is subject to income taxes on an entity basis on income arising in or derived
from the tax jurisdiction in which it is domiciled and operates.Prior to January 1, 2008, the Companys operating subsidiaries incorporated in the PRC, are
governed by the PRC income tax law and were subject to the PRC enterprise income tax rate of
33%, except for certain subsidiaries that are located in the Shenzhen Special Economic Zone
which were subject to a preferential tax rate of 15%.On March 16, 2007, the Fifth Plenary Session of the Tenth National Peoples Congress passed
the Corporate Income Tax Law of the PRC (new tax law) which became effective on January 1,
2008. According to the new tax law, the enterprise income tax rate for entities other than
certain high-tech enterprises or small-scale enterprises that earn small profit, as
defined in the new tax law, is 25%. In addition, from January 1, 2008, certain enterprises
that were previously taxed at preferential rates are subject to a five-year transition
period during which the income tax rate will gradually be increased to the unified rate of
25% (the transition rate).
 F-26




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##### 



9. INCOME TAXES (Continued)
 Accordingly, the income tax rate applicable to the Companys certain PRC subsidiaries is
reduced from 33% to 25% from January 1, 2008. According to a further notice issued by the
State Council on December 26, 2007, for entities operating in the Shenzhen Special Economic
Zone, their applicable tax rate is 18%, 20%, 22%, 24%, and 25%, for the years ending
December 31, 2008, 2009, 2010, 2011 and 2012 onwards, respectively.Income tax expense comprises of the following:
 Year ended December 31,2010
    
    
    2009
    
    
    2008US$
    
    
    US$
    
    
    US$Current taxes arising in foreign
subsidiaries:For the year
    
    
    (2,869
    )
    
    
    (315
    )
    
    
    (568
    )Over (under) provision in prior years
    
    
    (50
    )
    
    
    55
    
    
    
    (1
    )Total current tax
    
    
    (2,919
    )
    
    
    (260
    )
    
    
    (569
    )Deferred taxes arising in foreign
subsidiaries:For the year
    
    
    42
    
    
    
    29
    
    
    
    Income taxes expense
    
    
    (2,877
    )
    
    
    (231
    )
    
    
    (569
    )
 Reconciliation to the expected statutory tax rate in Hong Kong of 16.5% (2009: 16.5%
and 2008: 16.5%) is as follows:
 Year ended December 31,2010
    
    
    2009
    
    
    2008%
    
    
    %
    
    
    %Statutory rate
    
    
    16.5
    
    
    
    16.5
    
    
    
    16.5Tax effect of net operating losses
    
    
    
    
    
    
    5.5
    
    
    
    17.2Non taxable profits, net
    
    
    (1.2
    )
    
    
    (16.4
    )
    
    
    (21.9
    )Others
    
    
    2.8
    
    
    
    0.3
    
    
    
    6.5Effective rate
    
    
    18.1
    
    
    
    5.9
    
    
    
    18.3
 Deferred income taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components of the Companys deferred tax
assets and liabilities are as follows:
 F-27




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##### 



9. INCOME TAXES (Continued)
 As of December 31,2010
    
    
    2009US$
    
    
    US$Deferred tax assets:Net operating loss
    
    
    2,427
    
    
    
    2,789Depreciation
    
    
    68
    
    
    
    81Others
    
    
    116
    
    
    
    802,611
    
    
    
    2,950Valuation allowance
    
    
    (2,500
    )
    
    
    (2,839
    )Total deferred tax assets
    
    
    111
    
    
    
    111Deferred tax liabilities:Accelerated tax allowance
    
    
    (1
    )
    
    
    (44
    )Others
    
    
    (267
    )
    
    
    (266
    )Net deferred tax liabilities
    
    
    (268
    )
    
    
    (310
    )
 In assessing the realizability of deferred tax assets, management considers whether it
is more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become
deductible. The decrease in valuation allowance for the years ended December 31, 2010, 2009
and 2008 were US$339, US$837 and US$1,291 respectively.
 Based on the history of the Companys profitability, management believes that it is more
likely than not that the Company will realize the benefits of the deferred tax assets of
US$111 and US$111, net of valuation allowances as of December 31, 2010 and 2009.
 10. LEASES
 The Company is obligated under capital leases covering certain motor vehicles that
expire at various dates during the next two years. At December 31, 2010 and 2009, the gross
amount of motor vehicles and related accumulated amortization recorded under capital leases
were as follows:
 As of December 31,2010
    
    
    2009US$
    
    
    US$Motor vehicles
    
    
    451
    
    
    
    451Less: Accumulated amortization
    
    
    (342
    )
    
    
    (263
    )109
    
    
    
    188
 F-28




---



##### 



10. LEASES (Continued)
 Amortization of assets held under capital leases is included with depreciation expenses.The Company leases certain of its office and factory premises under various
operating leases which the rent payables are charged to statements of operations on a
straight-line basis over the term of the relevant leases including any periods of free
rent. In addition to the future minimum lease payments, the terms of the leases in
respect of the retail shops in the PRC and Hong Kong provide for the payment of
contingent rentals based on a percentage of sales in excess of a stipulated amount.
Rental expenses for operating leases for the years ended December 31, 2010, 2009 and
2008 consisted of the following:
 Year ended December 31,2010
    
    
    2009
    
    
    2008US$
    
    
    US$
    
    
    US$Minimum rentals
    
    
    4,072
    
    
    
    2,935
    
    
    
    3,756Contingent rentals
    
    
    11,026
    
    
    
    8,984
    
    
    
    6,197Rental expenses
    
    
    15,098
    
    
    
    11,919
    
    
    
    9,953
 Future minimum capital lease payments under capitalized leases and non-cancellable
operating leases are approximately as follows:
 As of December 31, 2010
    
    
    As of December 31, 2009Capitalized
    
    
    Operating
    
    
    Capitalized
    
    
    Operatingleases
    
    
    leases
    
    
    leases
    
    
    leasesUS$
    
    
    US$
    
    
    US$
    
    
    US$2010
    
    
    
    
    
    
    
    
    
    
    108
    
    
    
    1,5762011
    
    
    52
    
    
    
    2,772
    
    
    
    52
    
    
    
    4872012
    
    
    31
    
    
    
    688
    
    
    
    31
    
    
    
    812013
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    Thereafter
    
    
    
    
    
    
    111
    
    
    
    
    
    
    
    Total future
minimum lease
payments
    
    
    83
    
    
    
    3,618
    
    
    
    191
    
    
    
    2,144Less: Amount
representing
interest (at rates
ranging from 3.25%
to 3.5%)
    
    
    (5
    )
    
    
    
    
    
    
    (15
    )Present value of
net minimum capital
lease payments
    
    
    78
    
    
    
    
    
    
    
    176Less current
instalments of
obligations under
capital leases
    
    
    (48
    )
    
    
    
    
    
    
    (98
    )Obligations under
capital leases,
excluding current
instalments
    
    
    30
    
    
    
    
    
    
    
    78
 F-29




---



##### 



10. LEASES (Continued)
 The Company leases certain of its office and quarters from a related party with two years
lease terms expiring in 2011 and 2012. Rental expenses for operating leases paid to the
related party are included in the data presented above. Total rent expenses associated with these leases were
US$240, US$246 and US$246 for the years ended December 31, 2010, 2009 and 2008
respectively.
 11. COMMITMENTS AND CONTINGENCIES
 (a)
    
    CommitmentsAs of December 31, 2010, 2009 and 2008, the Company had capital expenditure
commitments of US$132, US$97 and US$66 respectively.(b)
    
    Legal ProceedingsThe Company is exposed to certain asserted and unasserted potential claims. There
can be no assurance that, with respect to potential claims made against the Company,
the Company could resolve such claims under terms and conditions that would not have
a material adverse effect on its business, its liquidity or financial results.
Periodically the Company reviews the status of each significant matter and assesses
its potential financial exposure. If the potential loss from any claim or legal
proceeding is considered probable and a range of possible losses can be estimated,
the Company then accrued a liability for the estimated loss. Any liability for
estimated loss is based on the criteria in  ASC
450-20-25-2, Accounting for Contingencies. Legal proceedings are subject to
uncertainties, and the outcomes are difficult to predict. Because of such
uncertainties, accruals are based only on the best information available at the time.
As additional information becomes available, the Company reassesses the potential
liability related to pending claims and litigation and may revise estimate.
Presently, no accrual has been estimated under ASC 450-20-25-2 for potential losses that
may or may not arise from the current lawsuits in which the Company is involved.
Accruals include billings for legal services performed to date and expected.
 F-30




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##### 



12. COMMON STOCK AND WARRANTS OTHER THAN STOCK-BASED COMPENSATION
 (a)
    
    Common stock
 (i)
    
    In September 2006, the Company entered into a securities purchase agreement
with certain institutional investors for the issuance of shares of common stock and
warrants to purchase shares of common stock. The Company sold to the investors an
aggregate of 1,466,668 units at a purchase price of $3.75 per unit, each unit
consisting of one share of common stock and a short-term warrant and a long-term
warrant (note 12(b)(i)).(ii)
    
    During the year ended December 31, 2008, 1,324,000 stock options (note
14(a)) were exercised. A total of 1,324,000 shares of common stock of the Company
were issued accordingly.(iii)
    
    On October 1, 2008, the Company entered into a consulting agreement with a
consultant for a period of 3 months commencing on October 1, 2008. Pursuant to the
agreement, the Company issued to the consultant 150,000 shares of restricted common
stock of the Company, which shares contained the customary restrictive legend
pursuant to the US Securities Act of 1933, as amended. The shares were valued at the
then current market price.(iv)
    
    During the year ended December 31, 2009, 857,500 stock options (notes 14(a))
were exercised. A total of 857,500 shares of common stock of the Company were issued
accordingly.(v)
    
    In October 2010, the Company entered into a securities purchase agreement with
certain institutional investors for the issuance of shares of common stock by the
Company and issuance of warrants by the Companys jewelry retail subsidiary which
operates under the brand ENZO (ENZO). The Company sold to the investors an
aggregate of 4,000,000 shares of common stock at a purchase price of US$3.25 per
share, raising US$12,210 after placement costs. The Companys ENZO subsidiary issued
warrants to the investors to acquire a number of shares of common stock of ENZO which
equal to 4.25% of the outstanding equity of ENZO when the market valuation of ENZO
upon completion of the offering and valued at the public offering price of ENZO
common stock is equal to or greater than US$300 million.(vi)
    
    During the year ended December 31, 2010, 1,385,000 stock options (note 14(a))
were exercised. A total of 1,385,000 shares of common stock of the Company were
issued accordingly.
 As of December 31, 2010, the Company had 29,153,672 shares of common stock
issued.
 F-31




---



##### 



12. COMMON STOCK AND WARRANTS OTHER THAN STOCK-BASED COMPENSATION (Continued)
 (b)
    
    Warrants other than stock-based compensation
 As of December 31,2010
    
    
    2009
    
    
    2008Number of
    
    
    Number of
    
    
    Number ofwarrants
    
    
    warrants
    
    
    warrantsOutstanding, beginning of year
    
    
    329,334
    
    
    
    499,785
    
    
    
    499,785Granted
    
    
    
    
    
    
    
    
    
    
    Adjusted (note (i))
    
    
    126,666
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    (170,451
    )
    
    
    Outstanding, end of year
    
    
    456,000
    
    
    
    329,334
    
    
    
    499,785
 The following table shows the warrants outstanding as of December 31, 2010.
 Number of warrantsDate of grant
    
    Notes
    
    outstanding
    
    
    Exercise price
    
    Expiration dateSeptember 25, 2006
    
    (i)
    
    
    456,000
    
    
    US$3.25 per share
    
    March 25, 2012September 25, 2006
    
    (i)
    
    


    
    
    US$4.221 per share
    
    February 5, 2007October 26, 2010
    
    (ii)
    
    
    
    
    
    US$21 million
    
    The earlier of (i)
October 26, 2014 or
(ii) the business
day immediately
preceding an
initial public
offering.
 (i)
    
    On September 25, 2006, the Company issued long-term and short-term warrants
to the investors of a private placement. The long-term warrants represent a
five-year option to purchase in the aggregate up to 366,668 shares of common
stock at $4.50 per share at any time during the period from March 25, 2007 until
March 25, 2012, and the short-term warrants represent an option to purchase in
the aggregate up to 236,909 shares of common stock at $4.221 per share at any
time during the period from September 25, 2006 until February 5, 2007.The Company has also issued warrants to the placement agent of the private
placement to purchase 29,333 shares of the Company. The warrants issued to the
placement agent are identical to the long-term warrants.
 F-32




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##### 



12. COMMON STOCK AND WARRANTS OTHER THAN STOCK-BASED COMPENSATION (Continued)
 (b)
    
    Warrants other than stock-based compensation (Continued)
 (i)
    
    (continued)The anti-dilutive provisions contained in the warrant agreements provides that
the exercise price of the outstanding warrants is subject to adjustment when the
Company issues common stock in certain circumstances at a price lower than the
exercise price of the warrants. Subsequent to the private placement completed in
October 2010 (note 12(a)(v)), the outstanding warrants of 329,334 at exercise price of US$4.5 per
share was adjusted to 456,000 at exercise price of US$3.25 per share.(ii)
    
    In October 2010, the Companys jewelry retail subsidiary which
operates under the brand ENZO (ENZO) issued warrants to the institutional
investors to purchase a number of shares of common stock of ENZO which equal to
4.25% of the outstanding equity of ENZO when the market valuation of ENZO upon
completion of the offering and valued at the public offering price of ENZO
common stock is equal to or greater than US$300 million (note 12(a)(v)). The
exercise price is a price per share which is determined as of the share
determination time equal to the quotient determined by dividing the holders pro
rata portion of US$12.75 million by the share quantity.The ENZO subsidiary has also issued warrants to the placement agent of the
private placement to purchase a number of shares of common stock of ENZO which
equal to 2.75% of the outstanding equity of ENZO when the market valuation of
ENZO upon completion of the offering and valued at the public offering price of
ENZO common stock is equal to or greater than US$300 million. The warrants issued
to the placement agent are identical to the warrants issued to the investors. The
exercise price is a price per share which is determined as of the share
determination time equal to the quotient determined by US$8.25 million by the
share quantity.The warrants expire at the earlier of (i) October 26, 2014 or (ii) the business
day immediately preceding an initial public offering.
 The fair value of warrants was valued using the Black-Scholes option pricing model
with resulting allocation of the aggregate proceeds from private placement between
common stock and the underlying warrants, and which have been included in the
additional paid-in capital.
 F-33




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##### 



13. EMPLOYEE RETIREMENT BENEFIT PLANS
 Following the introduction of the Mandatory Provident Fund (MPF) legislation in Hong Kong,
the Company has participated in the defined contribution mandatory provident fund since
December 1, 2000. Both the Company and its employees in Hong Kong make monthly
contributions to the fund at 5% of the employees earnings as defined under Mandatory
Provident Fund legislation. The 5% monthly contribution of the Company and the employees
are subject to a cap of US$0.128 per month and thereafter contributions are voluntary. When
employees leave the MPF scheme prior to vesting fully in voluntary contributions, the
contributions payable by the Company are reduced by the amount of forfeited contributions.The amount of forfeitures in respect of the MPF scheme, which was available to reduce the
Companys contribution payable, for the year ended December 31, 2010, 2009 and 2008 was
US$12, US$12 and US$221 respectively.The full-time employees of the PRC subsidiaries are entitled to staff welfare benefits,
including medical care, welfare subsidies, unemployment insurance and pension benefits.
These companies are required to accrue for these benefits based on certain percentages of
the employees salaries in accordance with the relevant regulations, and to make
contributions to the state-sponsored pension and medical plans out of the amounts accrued
for medical and pension benefits. The state-sponsored retirement plan was responsible for
the entire pension obligations for the actual pension payments or post-retirement benefits
beyond the annual contributions.The Company has adopted Profit Sharing Plan and Trust (Profit Sharing Plan) for the
benefit of substantially all employees in the US that satisfied the age and service
requirements. The Companys contributions are determined according to a discretionary
formula in an amount determined each year by the management and will be allocated to
each Qualifying Participants individual account using the pro rata formula. No profit
sharing expense made during all financial periods since its adoption.Contributions paid and payable by the Company in respect of the employee retirement benefit
plans charged to the consolidated statement of operations were US$2,135, US$1,771 and
US$2,234 for the years ended December 31, 2010, 2009 and 2008 respectively.
 14. STOCK-BASED COMPENSATION
 (a)
    
    Stock incentive planOn June 1, 1998, the Company adopted a stock option plan (The 1998 Plan) which was
approved by the shareholders on December 9, 1998. The 1998 Plan allows the Board of
Directors, or a committee thereof at the Boards discretion, to provide for a total
of 2,000,000 stock options to officers, directors, key employees and advisors of the
Company.
 F-34




---



##### 



14. STOCK-BASED COMPENSATION
(Continued)
 (a)
    
    Stock incentive plan (Continued)Out of the stock options provided, 1,285,000 stock options were issued in accordance
with the terms of The 1998 Plan on April 12, 1999 to certain officers, directors, key
employees and advisors of the Company at an exercise price of US$5.0 per share (the
fair market value of the common stock as of April 12, 1999) and are exercisable
during the period from April 12, 1999 to April 11, 2009.Pursuant to the 1999 Annual Meeting of the Shareholders on December 15, 1999, the
authorized number of stock options was increased from 2,000,000 to 4,000,000. The
purchase price of the shares of the Common Stock covered by The 1998 Plan shall be at
least 100% of the fair market value per share of such shares on the date of grant,
with a term of ten years.On July 1, 2003, the Company adopted the second stock option plan (The 2003 Plan)
which was approved by the shareholders on December 5, 2003. The 2003 Plan allows the
Board of Directors, or a committee thereof at the Boards discretion, to provide for
a total of 4,000,000 stock options to officers, directors, key employees and advisors
of the Company. The purchase price of the shares of the Common Stock covered by The
2003 Plan could be less than, equal to or greater than 100% of the fair market value
of the Common Stock at the time of grant, with a term of ten years.On July 1, 2005, the Company adopted and approved the third stock option plan (The
2005 Plan) which was approved by the shareholders on September 26, 2005. The Company
believes that a new plan is necessary since there are only a minimal number of
options remaining under The 1998 Plan and The 2003 Plan. The Company believes that
the grant of stock options is accomplishing its purposes, which is to promote the
Company and the shareholders interests by providing key employees with an opportunity
to acquire a proprietary interest in the Company and to develop a stronger incentive
to put forth maximum effort for the Companys continued success and growth. In
addition, the opportunity to acquire a propriety interest in the Company aids the
Company in attracting and retaining key personnel of outstanding ability.Options granted under The 2005 Plan will 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 2005 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 2005
Plan, which expires in June 2015. The compensation committee has the sole authority
to interpret The 2005 Plan and make all determinations necessary or advisable for
administering The 2005 Plan. The exercise price for any incentive option and
nonqualified option may be less than, equal to or greater than 100% and 110%
respectively of the fair market value of the shares as of the date of grant.
 F-35




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##### 



14. STOCK-BASED COMPENSATION (Continued)
 (a)
    
    Stock incentive plan (Continued)Upon the exercise of the option, the exercise price must be paid in
full either in cash, shares of the Companys stock or a combination. If any
option is not exercised for any reason, such shares shall again become available
for the purposes of The 2005 Plan. As of December 31, 2010, 3,830,000 options
had been exercised and 170,000 options to purchase the Companys shares of
common stock under The 2005 Plan were outstanding.On August 8, 2008, the Company adopted and approved the fourth stock option plan (The
2008 Plan) which was approved by the shareholders on November 14, 2008. The Company
believes that a new plan is necessary since there are only a minimal number of
options remaining under The 2003 Plan and The 2005 Plan. The Company believes that
the grant of stock options is accomplishing its purposes, which is to promote the
Company and the shareholders interests by providing key employees with an opportunity
to acquire a proprietary interest in the Company and to develop a stronger incentive
to put forth maximum effort for the Companys continued success and growth. In
addition, the opportunity to acquire a propriety interest in the Company aids the
Company in attracting and retaining key personnel of outstanding ability.Options granted under The 2008 Plan will 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 2008 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 2008
Plan, which expires in August 2018. The compensation committee has the sole
authority to interpret The 2008 Plan and make all determinations necessary or
advisable for administering The 2008 Plan. The exercise price for any incentive
option and nonqualified option may be less than the fair market value of the shares
as of the date of grant.Upon the exercise of the option, the exercise price must be paid in
full either in cash, shares of the Companys stock or a combination. If any
option is not exercised for any reason, such shares shall again become available
for the purposes of The 2008 Plan. As of December 31, 2010, 382,000 options had
been exercised and 3,618,000 options to purchase the Companys shares of common
stock under The 2008 Plan were outstanding.During fiscal years 2010, 2009 and 2008, the Company has granted nil, 4,000,000 and
2,500,000 stock options respectively, with a fair value of approximately US$nil,
US$1,417 and US$557 respectively. A charge of US$442, US$1,043 and US$218 was
recorded for the years ended December 31, 2010, 2009 and 2008 respectively, relating
to the amortization of the fair value associated with all option grants. The total
intrinsic value of options exercised during the years ended December 31, 2010, 2009
and 2008 was US$297, US$147 and US$721 respectively. As of December 31, 2010, the
aggregate intrinsic value of options outstanding was US$1,644, of which exercisable
was US$671.
 F-36




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##### 



14. STOCK-BASED COMPENSATION (Continued)
 (a)
    
    Stock incentive plan (Continued)The stock options activities and related information are summarized as follows:
 Year ended
    
    
    Year ended
    
    
    Year endedDecember 31, 2010
    
    
    December 31, 2009
    
    
    December 31, 2008Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageexercise
    
    
    
    
    
    
    exercise
    
    
    
    
    
    
    exerciseOptions
    
    
    price
    
    
    Options
    
    
    price
    
    
    Options
    
    
    PriceUS$
    
    
    
    
    
    
    US$
    
    
    
    
    
    
    US$Outstanding, beginning of year
    
    
    5,570,500
    
    
    
    0.66
    
    
    
    2,428,000
    
    
    
    0.68
    
    
    
    1,424,000
    
    
    
    2.07Granted
    
    
    
    
    
    
    
    
    
    
    4,000,000
    
    
    
    0.60
    
    
    
    2,500,000
    
    
    
    0.98Exercised (note 12(a)(vi))
    
    
    (1,385,000
    )
    
    
    0.48
    
    
    
    (857,500
    )
    
    
    0.41
    
    
    
    (1,324,000
    )
    
    
    2.57Cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (150,000
    )
    
    
    2.00Expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,000
    )
    
    
    2.25Outstanding, end of year
    
    
    4,185,500
    
    
    
    0.72
    
    
    
    5,570,500
    
    
    
    0.66
    
    
    
    2,428,000
    
    
    
    0.68Aggregate intrinsic value
(US$000) of:-Exercised options during
the year
    
    
    297
    
    
    
    
    
    
    
    147
    
    
    
    
    
    
    
    721-Outstanding options
    
    
    1,644
    
    
    
    
    
    
    
    1,941
    
    
    
    
    
    
    
    670Exercise price equals to
market price on date of grant
    
    
    3,618,000
    
    
    
    0.60
    
    
    
    4,000,000
    
    
    
    0.60
    
    
    
    
    
    
    
    Exercise price exceeds the
market price on date of grant
    
    
    567,500
    
    
    
    1.52
    
    
    
    1,570,500
    
    
    
    0.68
    
    
    
    2,428,000
    
    
    
    0.684,185,500
    
    
    
    0.72
    
    
    
    5,570,500
    
    
    
    0.66
    
    
    
    2,428,000
    
    
    
    0.68Range of exercise price- US$0.40
    
    
    170,000
    
    
    
    0.40
    
    
    
    1,150,000
    
    
    
    0.40
    
    
    
    2,000,000
    
    
    
    0.40- US$0.60
    
    
    3,618,000
    
    
    
    0.60
    
    
    
    4,000,000
    
    
    
    0.60
    
    
    
    
    
    
    
    - US$2.00
    
    
    397,500
    
    
    
    2.00
    
    
    
    420,500
    
    
    
    2.00
    
    
    
    428,000
    
    
    
    2.004,185,500
    
    
    
    0.72
    
    
    
    5,570,500
    
    
    
    0.66
    
    
    
    2,428,000
    
    
    
    0.68Exercisable, end of year- exercise price at US$0.40
    
    
    65,000
    
    
    
    0.40
    
    
    
    980,000
    
    
    
    0.40
    
    
    
    
    
    
    
    - exercise price at US$0.60
    
    
    1,040,000
    
    
    
    0.60
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    - exercise price at US$2.00
    
    
    397,500
    
    
    
    2.00
    
    
    
    420,500
    
    
    
    2.00
    
    
    
    428,000
    
    
    
    2.001,502,500
    
    
    
    0.55
    
    
    
    1,400,500
    
    
    
    0.88
    
    
    
    428,000
    
    
    
    2.00Aggregate intrinsic value of
exercisable options (US$000)
    
    
    671
    
    
    
    
    
    
    
    476
    
    
    
    
    
    
    
    325Weighted average remaining
contractual life- exercise price at US$0.40
    
    0.82 year
    
    
    
    
    
    0.21 year
    
    
    
    
    
    
    - exercise price at US$0.60
    
    0.13 year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    - exercise price at US$2.00
    
    2.49 years
    
    
    
    
    
    3.49 years
    
    
    
    
    
    4.49 years
 F-37




---



##### 



14. STOCK-BASED COMPENSATION (Continued)
 (a)
    
    Stock incentive plan (Continued)All options issued, other than 2,683,000 options, are immediately exercisable as of
December 31, 2010. The 2,683,000 options are issued and outstanding but only vested
in additional increments of 1,437,000 in 2011, 437,000 in each of 2012 and 2013,
327,000 in 2014 and 15,000 in each of 2015 to 2017.(b)
    
    Warrants
 (i)
    
    Pursuant to a media relation services agreement dated April 5,
2005, the Company issued to a consultant warrants to purchase 50,000 shares,
150,000 shares, 150,000 shares, 100,000 shares and 50,000 shares of common stock
of the Company at US$2.80, US$3.00, US$3.50, US$4.00 and US$4.50 respectively
per share exercisable through April 4, 2008. These warrants were exercised
during the year ended December 31, 2006 and 500,000 shares of common stock were
issued accordingly.(ii)
    
    In connection with private placement to investors completed
in September 2006, the Company issued to a consultant warrants to purchase
29,333 shares of common stock of the Company at US$4.50 per share exercisable
through March 25, 2012 (see note 12(b)(i)). The anti-dilutive provisions
contained in the warrant agreements provides that the exercise price of the
outstanding warrants is subject to adjustment when the Company issues common
stock in certain circumstances at a price lower than the exercise price of the
warrants. Subsequent to the private placement completed in October 2010 (note
12(a)(v)), the outstanding warrants of 29,333 at exercise price of US$4.5 per
share was adjusted to 40,615 at exercise price of US$3.25 per share.(iii)
    
    In connection with private placement to investors completed in
October 2010 (note 12(a)(v)), the Companys jewelry retail subsidiary which
operates under the brand ENZO (ENZO) issued warrants to the institutional
investors to purchase a number of shares of common stock of ENZO which equal to
4.25% of the outstanding equity of ENZO when the market valuation of ENZO upon
completion of the offering and valued at the public offering price of ENZO
common stock is equal to or greater than US$300 million. The exercise price is
a price per share which is determined as of the share determination time equal
to the quotient determined by dividing the holders pro rata portion of US$12.75
million by the share quantity.
 F-38




---



##### 



14. STOCK-BASED COMPENSATION (Continued)
 (b)
    
    Warrants (Continued)
 (iii)
    
    (Continued)The ENZO subsidiary has also issued warrants to the placement
agent of the private placement to purchase a number of shares of common stock of
ENZO which equal to 2.75% of the outstanding equity of ENZO when the market
valuation of ENZO upon completion of the offering and valued at the public
offering price of ENZO common stock is equal to or greater than US$300 million.
The warrants issued to the placement agent are identical to the warrants issued
to the investors. The exercise price is a price per share which is determined as
of the share determination time equal to the quotient determined by US$8.25
million by the share quantity.The warrants expire at the earlier of (i) October 26, 2014 or (ii) the business
day immediately preceding an initial public offering.
 As disclosed above, none of the warrants as aforesaid was exercised for the
three years ended December 31, 2010, 2009 and 2008. The costs associated with these
transactions are accounted for based on fair value of the warrants on the date of
grant.
 F-39




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##### 



15. RELATED PARTY TRANSACTIONS
 (a)
    
    Names and relationship of related parties:
 Existing relationships with the CompanyYu Chuan Yih
    
    Director and major beneficial shareholder of the
CompanyTanzanite (H.K.) Limited
    
    Common directorsAndrew N. Bernstein
    
    Non-executive director
 (b)
    
    Summary of balances with related parties:
 As of December 31,2010
    
    
    2009US$
    
    
    US$Certain banking facilities granted to the
Company collateralized by properties owned
by Yu Chuan Yih and his personal guarantee
to the extent of
    
    
    40,155
    
    
    
    22,813
 (c)
    
    Summary of related party transactions:
 Year ended December 31,2010
    
    
    2009
    
    
    2008US$
    
    
    US$
    
    
    US$Expenses:Rental expense to Tanzanite (H.K.) Limited
    
    
    240
    
    
    
    246
    
    
    
    246Legal fee to Andrew N. Bernstein,P.C.
    
    
    189
    
    
    
    140
    
    
    
    185Directors fee to Andrew N. Bernstein
    
    
    12
    
    
    
    12
    
    
    
    12441
    
    
    
    398
    
    
    
    443
 The Company leases certain of its office and quarter from a related party. The leases
are for two years term expiring in 2011 and 2012. The Company may terminate these
tenancies at any time after the expiration of the first 12 months after the
commencement of the term of tenancies, by giving the landlord no less than two months
prior notice.
 F-40




---



##### 



16. SEGMENT INFORMATION
 The Company has adopted ASC Topic 280-10-50-20 through 280-10-50-32, Disclosures
about Segments of an Enterprise and Related Information, which establishes annual
reporting standards for enterprise business segments and related disclosures about its
products and services, geographic areas and major customers. The ASC defines operating
segments as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.The Company evaluates segment performance and allocates resources based on several
factors of which the primary financial measures are revenues from external customers
and operating income. As a result, the Company considers that it has two operating
segments, (i) manufacture and wholesale of jewelry products, and (ii) retail of jewelry
products.
 F-41




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##### 



16. SEGMENT INFORMATION (Continued)
  Manufactureandwholesale
    
    
    Retail
    
    
    Corporate
    
    
    TotalUS$
    
    
    US$
    
    
    US$
    
    
    US$Year ended December 31, 2010Segment revenue from external
customers
    
    
    61,682
    
    
    
    78,866
    
    
    
    
    
    
    
    140,548Income (loss) from operations
    
    
    4,525
    
    
    
    11,572
    
    
    
    (1,844
    )
    
    
    14,253Interest income
    
    
    62
    
    
    
    7
    
    
    
    
    
    
    
    69Gain on currency translation
    
    
    39
    
    
    
    604
    
    
    
    
    
    
    
    643Gain on sale securities
    
    
    258
    
    
    
    
    
    
    
    
    
    
    
    258Gain on disposal of property
held for lease
    
    
    1,635
    
    
    
    
    
    
    
    
    
    
    
    1,635Interest expenses
    
    
    (812
    )
    
    
    (166
    )
    
    
    
    
    
    
    (978
    )Income before income taxes and
noncontrolling interest
    
    
    5,707
    
    
    
    12,017
    
    
    
    (1,844
    )
    
    
    15,880Income taxes
    
    
    (886
    )
    
    
    (1,991
    )
    
    
    
    
    
    
    (2,877
    )Net income attributable to
noncontrolling interest
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    (9
    )Net income (loss)
    
    
    4,812
    
    
    
    10,026
    
    
    
    (1,844
    )
    
    
    12,994Significant non-cash items-Depreciation
    
    
    1,029
    
    
    
    1,750
    
    
    
    
    
    
    
    2,779-Noncontrolling interest
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    9-Stock-based compensation cost
    
    
    
    
    
    
    
    
    
    
    442
    
    
    
    442Segment assets
    
    
    87,183
    
    
    
    88,574
    
    
    
    
    
    
    
    175,757Total expenditures for
additions to long-lived assets
    
    
    3,964
    
    
    
    2,650
    
    
    
    
    
    
    
    6,614Depreciation and amortization
    
    
    1,029
    
    
    
    1,750
    
    
    
    
    
    
    
    2,779
 F-42




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##### 



16. SEGMENT INFORMATION (Continued)
 Manufactureandwholesale
    
    
    Retail
    
    
    Corporate
    
    
    TotalUS$
    
    
    US$
    
    
    US$
    
    
    US$Year ended December 31, 2009Segment revenue from external
customers
    
    
    59,733
    
    
    
    50,790
    
    
    
    
    
    
    
    110,523Income (loss) from operations
    
    
    1,846
    
    
    
    4,542
    
    
    
    (1,777
    )
    
    
    4,611Interest income
    
    
    137
    
    
    
    10
    
    
    
    
    
    
    
    147Interest expenses
    
    
    (811
    )
    
    
    (31
    )
    
    
    
    
    
    
    (842
    )Income before income taxes and
noncontrolling interest
    
    
    1,172
    
    
    
    4,521
    
    
    
    (1,777
    )
    
    
    3,916Income taxes
    
    
    (171
    )
    
    
    (60
    )
    
    
    
    
    
    
    (231
    )Net loss attributable to
noncontrolling interest
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Net income (loss)
    
    
    1,005
    
    
    
    4,461
    
    
    
    (1,777
    )
    
    
    3,689Significant non-cash items-Depreciation
    
    
    914
    
    
    
    1,283
    
    
    
    
    
    
    
    2,197-Noncontrolling interest
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (4
    )-Stock-based compensation cost
    
    
    
    
    
    
    
    
    
    
    1,043
    
    
    
    1,043Segment assets
    
    
    82,970
    
    
    
    50,787
    
    
    
    
    
    
    
    133,757Total expenditures for
additions to long-lived assets
    
    
    295
    
    
    
    1,415
    
    
    
    
    
    
    
    1,710Depreciation and amortization
    
    
    914
    
    
    
    1,283
    
    
    
    
    
    
    
    2,197
 F-43




---



##### 



16. SEGMENT INFORMATION (Continued)
 Manufactureandwholesale
    
    
    Retail
    
    
    Corporate
    
    
    TotalUS$
    
    
    US$
    
    
    US$
    
    
    US$Year ended December 31, 2008Segment revenue from external
customers
    
    
    99,840
    
    
    
    36,428
    
    
    
    
    
    
    
    136,268Income (loss) from operations
    
    
    4,061
    
    
    
    (190
    )
    
    
    (2,908
    )
    
    
    963Interest income
    
    
    192
    
    
    
    7
    
    
    
    
    
    
    
    199Gain on currency translation
    
    
    
    
    
    
    1,473
    
    
    
    
    
    
    
    1,473Gain on sale securities
    
    
    49
    
    
    
    
    
    
    
    
    
    
    
    49Gain on disposal of property
held for lease
    
    
    2,210
    
    
    
    
    
    
    
    
    
    
    
    2,210Interest expenses
    
    
    (1,789
    )
    
    
    
    
    
    
    
    
    
    
    (1,789
    )Income before income taxes and
noncontrolling interest
    
    
    4,723
    
    
    
    1,290
    
    
    
    (2,908
    )
    
    
    3,105Income taxes
    
    
    (569
    )
    
    
    
    
    
    
    
    
    
    
    (569
    )Net income attributable to
noncontrolling interest
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    (6
    )Net income (loss)
    
    
    4,148
    
    
    
    1,290
    
    
    
    (2,908
    )
    
    
    2,530Significant non-cash items-Depreciation
    
    
    1,877
    
    
    
    1,496
    
    
    
    
    
    
    
    3,373-Noncontrolling interest
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    6-Stock-based compensation cost
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    400Segment assets
    
    
    86,852
    
    
    
    44,338
    
    
    
    
    
    
    
    131,190Total expenditures for
additions to long-lived assets
    
    
    436
    
    
    
    1,199
    
    
    
    
    
    
    
    1,635Depreciation and amortization
    
    
    1,877
    
    
    
    1,496
    
    
    
    
    
    
    
    3,373
 F-44




---



##### 



16. SEGMENT INFORMATION (Continued)
 (a)
    
    Geographical areasThe following summarizes the Companys revenue from the following
geographic areas (based on the location of the customer).
 Year ended December 31,2010
    
    
    2009
    
    
    2008US$
    
    
    US$
    
    
    US$Revenue from external customers:US & Canada
    
    
    42,400
    
    
    
    39,225
    
    
    
    69,232Europe and other countries
    
    
    16,752
    
    
    
    18,110
    
    
    
    27,455Japan
    
    
    1,291
    
    
    
    1,115
    
    
    
    989PRC (including Hong Kong and
Macau)
    
    
    80,105
    
    
    
    52,073
    
    
    
    38,592140,548
    
    
    
    110,523
    
    
    
    136,268
 As of December 31,2010
    
    
    2009US$
    
    
    US$Carrying amount of long-lived assets:Hong Kong
    
    
    5,514
    
    
    
    2,713PRC
    
    
    5,019
    
    
    
    4,400US
    
    
    1
    
    
    
    4Total long-lived assets (excluding goodwill)
    
    
    10,534
    
    
    
    7,117Reconciling items:Others
    
    
    165,223
    
    
    
    126,640Total consolidated assets
    
    
    175,757
    
    
    
    133,757
 F-45




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##### 



17. SIGNIFICANT CONCENTRATIONS AND RISKS
 (a)
    
    Revenue concentrationsThe Company derived operating revenue from the following major customers,
which accounted for over 10% of operating revenue during three years period ended
December 31, 2010.
 Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2010
    
    2009
    
    2008US$
    
    %
    
    US$
    
    %
    
    US$
    
    %Customer A
    
    
    11,743
    
    
    
    8
    
    
    
    11,008
    
    
    
    10
    
    
    
    14,421
    
    
    
    11Customer B
    
    
    2,929
    
    
    
    2
    
    
    
    4,441
    
    
    
    4
    
    
    
    15,490
    
    
    
    11
 Trade receivables related to these major customers were US$2,353 and US$146 as of
December 31, 2010 respectively and US$713 and US$322 as of December 31, 2009
respectively.(b)
    
    Dependence on suppliersGold is the major raw material used in the production of the Companys Jewelry
products. The Company purchased gold from banks, gold refiners and commodity dealers
who supplied substantially all of the Companys gold needs, which the Company believed
was sufficient to meet its requirement.The following suppliers of gold, diamonds and gemstones accounted for 10% or more of
total purchases during three years period ended December 31, 2010:
 Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2010
    
    2009
    
    2008US$
    
    %
    
    US$
    
    %
    
    US$
    
    %Supplier A
    
    
    23,407
    
    
    
    24
    
    
    
    17,483
    
    
    
    34
    
    
    
    29,820
    
    
    
    45Supplier B
    
    
    12,296
    
    
    
    13
    
    
    
    4,676
    
    
    
    9
    
    
    
    
    
    
    
    Supplier C
    
    
    7,174
    
    
    
    7
    
    
    
    5,266
    
    
    
    10
    
    
    
    2,255
    
    
    
    4Supplier D
    
    
    5,333
    
    
    
    6
    
    
    
    7,930
    
    
    
    16
    
    
    
    8,625
    
    
    
    13
 Trade payables related to these suppliers were US$3,374 and US$4,603 as of
December 31, 2010 and 2009 respectively.
 18. RECLASSIFICATIONS
  F-46




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##### 



Schedule II  Valuation and Qualifying Accounts
 Balance at
    
    
    
    
    
    
    
    
    
    
    Balance atBeginning
    
    
    Charges to
    
    
    
    
    
    
    End ofof Year
    
    
    Earnings
    
    
    Deductions
    
    
    YearUS$
    
    
    US$
    
    
    US$
    
    
    US$2010Allowance for doubtful accounts
    
    
    1,446
    
    
    
    (7
    )
    
    
    
    
    
    
    1,439Sales return accruals
    
    
    1,060
    
    
    
    4,410
    
    
    
    (4,061
    )
    
    
    1,409Deferred tax valuation allowance
    
    
    2,839
    
    
    
    
    
    
    
    (339
    )
    
    
    2,5002009Allowance for doubtful accounts
    
    
    1,705
    
    
    
    (231
    )
    
    
    (28
    )
    
    
    1,446Sales return accruals
    
    
    1,647
    
    
    
    5,176
    
    
    
    (5,763
    )
    
    
    1,060Deferred tax valuation allowance
    
    
    3,676
    
    
    
    
    
    
    
    (837
    )
    
    
    2,8392008Allowance for doubtful accounts
    
    
    1
    
    
    
    1,223
    
    
    
    481
    
    
    
    1,705Sales return accruals
    
    
    1,553
    
    
    
    9,202
    
    
    
    (9,108
    )
    
    
    1,647Deferred tax valuation allowance
    
    
    4,967
    
    
    
    
    
    
    
    (1,291
    )
    
    
    3,676
 F-47




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##### 



ITEM 19. EXHIBITS
  1.1
    
    Memorandum of Association of the Company*1.2
    
    Articles of Association of the Company*1.3
    
    Amendment to Articles of Association of the Company*4.1
    
    Employment Agreement of Yu Chuan Yih with the Registrant**8.1
    
    List of Significant Subsidiaries of the Company11.1
    
    Code of Ethics***12.1
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)12.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)13.1
    
    Certification of Chief Executive Officer Pursuant to Rule
13a-14(b) and 18 U.S.C. Section 135013.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(b)
and 18 U.S.C. Section 135015.1
    
    Consent of Gruber & Company, LLC
 
 *
    
    Incorporated by reference to the Exhibits to our Registration Statement on Form F-1 and
pre-effective and post-effective amendments thereto, SEC File No. 333-7912, declared effective
on April 15, 1998.**
    
    Incorporated by reference to the Exhibits to our Annual Report on Form 20-F for the
fiscal year ended December 31, 2009.***
    
    Incorporated by reference to the Exhibits to our Annual Report on Form 20-F for the fiscal
year ended December 31, 2003. 111




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##### 



SIGNATURES
  LJ INTERNATIONAL INC.
(Registrant)Date:  April 11, 2011
    By:
    /s/ YU CHUAN YIHYu Chuan YihChairman




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##### 



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Exhibit1.1
    
    Memorandum of Association of the Company*1.2
    
    Articles of Association of the Company*1.3
    
    Amendment to Articles of Association of the Company*4.1
    
    Employment Agreement of Yu Chuan Yih with the Registrant**8.1
    
    List of Significant Subsidiaries of the Company11.1
    
    Code of Ethics***12.1
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)12.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)13.1
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) and 18
U.S.C. Section 135013.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(b)
and 18 U.S.C. Section 135015.1
    
    Consent of Gruber & Company, LLC
 
 *
    
    Incorporated by reference to the Exhibits to our Registration Statement on Form F-1 and
pre-effective and post-effective amendments thereto, SEC File No. 333-7912, declared effective
on April 15, 1998.**
    
    Incorporated by reference to the Exhibits to our Annual Report on Form 20-F for the
fiscal year ended December 31, 2009.***
    
    Incorporated by reference to the Exhibits to our Annual Report on Form 20-F for the
fiscal year ended December 31, 2003.