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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  OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 
 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   Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of each
    
    Name of each exchangeclass
    
    on which registeredNone
    
    N/A
 Securities registered or to be registered pursuant to Section 12(g) of the Act. $.01 Par Value Common Stock (Common Stock)
(Title of Class) Warrants to Purchase Common Stock (Warrants)
(Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None
(Title of Class) Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report: 12,304,658 Common Stock
1,679,000 Warrants Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o Item 18 þ (APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS) Indicate by check mark whether the registrant has filed all documents and reports required to
be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Not Applicable.




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SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS This annual report contains forward-looking statements that involve risks and uncertainties.
These include statements about our expectations, plans, objectives, assumptions or future events.
In some cases, you can identify forward-looking statements by terminology such as anticipate,
estimate, plans, potential, projects, continuing, ongoing, expects, management
believes, we believe, we intend and similar expressions. These statements involve estimates,
assumptions and uncertainties that could cause actual results to differ materially from those
expressed for the reasons described in this annual report. You should not place undue reliance on
these forward-looking statements. You should be aware that our actual results could differ materially from those contained in
the forward-looking statements due to a number of factors:  
    dependence upon certain customers
    dependence on key personnel
    control by principal shareholder
    competitive factors
    the operation of our business
    general economic conditions You should also consider carefully the statements under Risk Factors and other sections of
this annual report, which address additional factors that could cause our actual results to differ
from those set forth in the forward-looking statements and could materially and adversely affect
our business, operating results and financial condition. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the applicable cautionary statements. The forward-looking statements speak only as of the date on which they are made, and, except
to the extent required by federal securities laws, we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date on which the statement
is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the
impact of each factor on our business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any forward-looking
statements. We use data and industry forecasts in this annual report which we have obtained from internal
surveys, market research, publicly available information and industry publications. Industry
publications generally state that the information they provide has been obtained from sources
believed to be reliable but that the accuracy and completeness of such information is not
guaranteed. Similarly, we believe that the surveys and market research we or others have performed
are reliable, but we have not independently verified this information. -2-




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TABLE OF CONTENTS  PART IITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERSITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLEITEM 3. KEY INFORMATIONITEM 4. INFORMATION ON THE COMPANYITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTSITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEESITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONSITEM 8. FINANCIAL INFORMATIONITEM 9. THE OFFER AND LISTINGITEM 10. ADDITIONAL INFORMATIONITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIESPART IIITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIESITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDSITEM 15. CONTROLS AND PROCEDURESITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERTITEM 16B. CODE OF ETHICSITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICESITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.PART IIIITEM 17. FINANCIAL STATEMENTSITEM 18. FINANCIAL STATEMENTSSIGNATURESEXHIBIT INDEXSignificant SubsidiariesCertification of CEOCertification of CFOCertification of CEOCertification of CFO    Table of Contents  
 PART I 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. 
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. 
 ITEM 3. KEY INFORMATION A. SELECTED FINANCIAL DATA. SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share amounts) The following selected consolidated financial data with respect to the year ended April 30,
2002, the eight-month period ended December 31, 2002 and each of the two-year period ended December
31, 2004 have been derived from our audited consolidated financial statements. The following
selected consolidated financial data should be read in conjunction with Managements Discussion
and Analysis of Financial Condition and Results of Operations and the Consolidated Financial
Statements and Notes included elsewhere in this annual report. Selected Financial DataYear ended
    
    
    
    
    
    
    
    
    Eight-month period ended
    
    
    
    
    
    
    
    
    
    
    
    

Year endedApril 30,
    
    
    
    
    
    
    
    
    December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    December 31,2001
    
    
    2002
    
    
    
    
    
    
    
    
    2001
    
    
    2002
    
    
    
    
    
    
    
    
    2002
    
    
    2003
    
    
    
    
    
    2004(Unaudited)
    
    
    
    
    
    
    
    
    
    
    
    

(Unaudited)Statement of Operations Data:Revenues
    
    
    
    46,285
    
    
    
    39,240
    
    
    
    
    
    
    
    
    
    25,042
    
    
    
    31,809
    
    
    
    
    
    
    
    
    
    46,007
    
    
    
    58,167
    
    
    
    
    
    
    
    77,379Cost of Goods sold
    
    
    
    31,540
    
    
    
    35,731
    
    
    
    
    
    
    
    
    
    18,602
    
    
    
    22,820
    
    
    
    
    
    
    
    
    
    39,951
    
    
    
    44,947
    
    
    
    
    
    
    
    61,265Gross profit
    
    
    
    14,745
    
    
    
    3,509
    
    
    
    
    
    
    
    
    
    6,440
    
    
    
    8,989
    
    
    
    
    
    
    
    
    
    6,056
    
    
    
    13,220
    
    
    
    
    
    
    
    16,114Operating expensesSelling, general and
administrative
    
    
    
    (9,398
    )
    
    
    (8,963
    )
    
    
    
    
    
    
    
    
    (5,905
    )
    
    
    (6,433
    )
    
    
    
    
    
    
    
    
    (9,525
    )
    
    
    (9,133
    )
    
    
    
    
    
    
    (11,578
    )Unrealized gain (loss) on
derivatives
    
    
    
    44
    
    
    
    (660
    )
    
    
    
    
    
    
    
    
    (119
    )
    
    
    (435
    )
    
    
    
    
    
    
    
    
    (975
    )
    
    
    (162
    )
    
    
    
    
    
    
    (482
    )Depreciation
    
    
    
    (808
    )
    
    
    (1,031
    )
    
    
    
    
    
    
    
    
    (565
    )
    
    
    (863
    )
    
    
    
    
    
    
    
    
    (1,328
    )
    
    
    (1,184
    )
    
    
    
    
    
    
    (1,032
    )Impairment on property,
plant and equipment
    
    
    
    
    
    
    
    (345
    )
    
    
    
    
    
    
    
    
    
    
    
    
    (108
    )
    
    
    
    
    
    
    
    
    (417
    )
    
    
    (84
    )
    
    
    
    
    
    
    Amortization and
impairment loss on
goodwill
    
    
    
    (27
    )
    
    
    (242
    )
    
    
    
    
    
    
    
    
    (18
    )
    
    
    (400
    )
    
    
    
    
    
    
    
    
    (624
    )
    
    
    (200
    )
    
    
    
    
    
    
    Income (loss) from operations
    
    
    
    4,556
    
    
    
    (7,732
    )
    
    
    
    
    
    
    
    
    (167
    )
    
    
    750
    
    
    
    
    
    
    
    
    
    (6,814
    )
    
    
    2,457
    
    
    
    
    
    
    
    3,022Other revenues
    
    
    
    570
    
    
    
    352
    
    
    
    
    
    
    
    
    
    265
    
    
    
    205
    
    
    
    
    
    
    
    
    
    291
    
    
    
    453
    
    
    
    
    
    
    
    844Interest expenses
    
    
    
    (1,780
    )
    
    
    (652
    )
    
    
    
    
    
    
    
    
    (424
    )
    
    
    (441
    )
    
    
    
    
    
    
    
    
    (668
    )
    
    
    (753
    )
    
    
    
    
    
    
    (902
    )Issuance costs for convertible
debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Impairment loss on investment
security
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (200
    )
    
    
    
    
    
    
    
    
    (200
    )
    
    
    
    
    
    
    
    
    
    
    Operating income (loss) before
income taxes and minority
    
    
    
    3,346
    
    
    
    (8,032
    )
    
    
    
    
    
    
    
    
    (326
    )
    
    
    314
    
    
    
    
    
    
    
    
    
    (7,391
    )
    
    
    2,157
    
    
    
    
    
    
    
    2,964Incomes taxes (expense) credit
    
    
    
    (211
    )
    
    
    101
    
    
    
    
    
    
    
    
    
    (39
    )
    
    
    (101
    )
    
    
    
    
    
    
    
    
    39
    
    
    
    (352
    )
    
    
    
    
    
    
    (277
    )Income (Loss) before minority
interests
    
    
    
    3,135
    
    
    
    (7,931
    )
    
    
    
    
    
    
    
    
    (365
    )
    
    
    213
    
    
    
    
    
    
    
    
    
    (7,352
    )
    
    
    1,805
    
    
    
    
    
    
    
    2,687Minority interests in
consolidated subsidiaries
    
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    
    
    120
    
    
    
    
    
    
    
    
    
    150
    
    
    
    8
    
    
    
    
    
    
    
    Net income (loss)
    
    
    
    3,135
    
    
    
    (7,901
    )
    
    
    
    
    
    
    
    
    (365
    )
    
    
    333
    
    
    
    
    
    
    
    
    
    (7,202
    )
    
    
    1,813
    
    
    
    
    
    
    
    2,687Net income (loss) per share:Basic
    
    
    
    0.37
    
    
    
    (0.91
    )
    
    
    
    
    
    
    
    
    (0.04
    )
    
    
    0.04
    
    
    
    
    
    
    
    
    
    (0.84
    )
    
    
    0.21
    
    
    
    
    
    
    
    0.24Diluted
    
    
    
    0.37
    
    
    
    (0.91
    )
    
    
    
    
    
    
    
    
    (0.04
    )
    
    
    0.04
    
    
    
    
    
    
    
    
    
    (0.84
    )
    
    
    0.19
    
    
    
    
    
    
    
    0.22Pro forma basic
    
    
    
    0.13
    
    
    
    (0.91
    )
    
    
    
    
    
    
    
    
    (0.04
    )
    
    
    0.04
    
    
    
    
    
    
    
    
    
    (0.84
    )
    
    
    0.19
    
    
    
    
    
    
    
    0.23Pro forma diluted
    
    
    
    0.13
    
    
    
    (0.91
    )
    
    
    
    
    
    
    
    
    (0.04
    )
    
    
    0.04
    
    
    
    
    
    
    
    
    
    (0.84
    )
    
    
    0.17
    
    
    
    
    
    
    
    0.21Weighted
average number of sharesBasic
    
    
    
    8,567
    
    
    
    8,672
    
    
    
    
    
    
    
    
    
    8,672
    
    
    
    8,493
    
    
    
    
    
    
    
    
    
    8,551
    
    
    
    8,757
    
    
    
    
    
    
    
    11,119Diluted
    
    
    
    8,617
    
    
    
    8,779
    
    
    
    
    
    
    
    
    
    8,832
    
    
    
    8,493
    
    
    
    
    
    
    
    
    
    8,551
    
    
    
    9,706
    
    
    
    
    
    
    
    12,107Pro forma basic
    
    
    
    8,567
    
    
    
    8,672
    
    
    
    
    
    
    
    
    
    8,672
    
    
    
    8,493
    
    
    
    
    
    
    
    
    
    8,551
    
    
    
    8,757
    
    
    
    
    
    
    
    11,119Pro forma diluted
    
    
    
    8,617
    
    
    
    8,779
    
    
    
    
    
    
    
    
    
    8,832
    
    
    
    8,493
    
    
    
    
    
    
    
    
    
    8,551
    
    
    
    9,706
    
    
    
    
    
    
    
    12,107Balance Sheet Data:Working capital
    
    
    
    20,153
    
    
    
    12,115
    
    
    
    
    
    
    
    
    
    18,537
    
    
    
    11,896
    
    
    
    
    
    
    
    
    
    11,896
    
    
    
    17,053
    
    
    
    
    
    
    
    23,617Total assets
    
    
    
    48,094
    
    
    
    43,523
    
    
    
    
    
    
    
    
    
    51,062
    
    
    
    48,888
    
    
    
    
    
    
    
    
    
    48,888
    
    
    
    60,686
    
    
    
    
    
    
    
    75,039Long-term obligation
    
    
    
    287
    
    
    
    8
    
    
    
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    58Total stockholders equity
    
    
    
    31,161
    
    
    
    23,557
    
    
    
    
    
    
    
    
    
    30,943
    
    
    
    23,294
    
    
    
    
    
    
    
    
    
    23,294
    
    
    
    27,902
    
    
    
    
    
    
    
    34,156
 Note: Pro forma information has been prepared as if compensation expense for stock options be
determined based on the fair value at the date of grant and been amortized over the period from the
date of grant to the date that the award is vested, consistent with the provisions of SFAS No. 123. -3-




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B.
    CAPITALIZATION AND INDEBTEDNESS. Not applicable.  C.
    REASONS FOR THE OFFER AND USE OF PROCEEDS. Not applicable.  D.
    RISK FACTORS. We depend upon one customer for at least 10% of our sales and we cannot be certain that these sales
will continue. If they do not, our revenues will likely decline. Although we sell to a large number of customers in a variety of markets, at least 10% of our
sales involves offerings to one customer. For the fiscal years ended December 31, 2003 and 2004,
this customer accounted for approximately 9% and 11% of our sales. Although we have maintained a
good and longstanding relationship with this customer, we do not have any long-term contracts with
it, who orders only on a purchase order basis. The loss of this customer or a significant
reduction in its orders would have a materially adverse effect. We are controlled by one of our existing shareholders, whose interests may differ from other
shareholders. Our largest shareholder beneficially owns or controls approximately 27.7% of our outstanding
shares as of December 31, 2004. Accordingly, he has controlling influence in determining the
outcome of any corporate transaction or other matter submitted to the shareholders for approval,
including mergers, consolidations and the sale of all, or substantially all, of our assets,
election of directors, and other significant corporate actions. He also has the power to prevent
or cause a change in control. In addition, without the consent of this shareholder, we could be
prevented from entering into transactions that could be beneficial to us. The interests of this
shareholder may differ from the interests of the other shareholders. -4-




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We face significant competition from larger competitors. The making and distribution of jewelry is a highly competitive industry characterized by the
diversity and sophistication of the product. We compete with major domestic and international
companies with substantially greater financial, technical and marketing resources and personnel
than us. There can be no assurance other jewelry makers will not similarly develop low-cost,
high-volume production capability or an even better process, providing greater competition for us
and materially affecting our business prospects. There are numerous factors relating to the operations of our business that could adversely affect
our success and results. As a maker and merchandiser of low-cost, high-quality gem-set jewelry, our existing and future
operations are and will be influenced by several factors, including:  
    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 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;
    our capacity to develop and manage the introduction of new designed products; and
    our ability to compete. Quality control is also essential to our operations since customers demand compliance with
design and product specifications and consistency of production. We cannot assure that revenue
growth will occur on a quarterly or annual basis. Our 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. Since 1978, the Chinese government has been reforming, and is expected to continue to reform,
Chinas economic and political systems. Such reforms have resulted in significant social progress.
Other political, economic and social factors could also lead to further readjustment of the reform
measures. This refinement and readjustment process may not always have a positive effect on our
operations in China. At times, we may also be adversely affected by changes in policies of the
Chinese government such as changes in laws and regulations or their interpretation, the
introduction of additional measures to control inflation, changes in the rate or -5-




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method of taxation and imposition of additional restrictions on currency conversion and remittances
abroad. 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. We have obtained fire, casualty and theft insurance aggregating approximately $35.0 million,
covering several of our stock in trade, goods and merchandise, furniture and equipment and
production facility in China. The proceeds of such insurance may not be sufficient to cover
material damage to, or the loss of, our production facility due to fire, severe weather, flood or
other cause, and such damage or loss would have a material adverse effect on our financial
condition, business and prospects. Consistent with the customary practice among enterprises in
China and due to the cost in relation to the benefit, we do not carry any business interruption
insurance in China. Sales of our jewelry to retailers are generally stronger during the quarter ending December 31 of
each year due to the importance of the holiday selling season. The approximately 34% of our sales during the fiscal year ended December 31, 2004 to our TV
shopping channel customers was not seasonal in nature. It has been our managements experience
that the remaining 66% of our total sales is seasonally sensitive and is greater during the quarter
ending December 31 of each year. Our holding company structure creates restrictions on the payment of dividends. We have no direct business operations, other than the ownership of our subsidiaries. While we
have no current intention of paying dividends, should we, as a holding company, decide in the
future to do so, our ability to pay dividends and meet other obligations depends upon the receipt
of dividends or other payments from our operating subsidiaries and other holdings and investments.
In addition, our operating subsidiaries are subject to restrictions on their ability to make
distributions to us, including as a result of restrictive covenants and minimum net worth
requirements in loan agreements, restrictions on the conversion of local currency into U.S. dollars
or other hard currency and other regulatory restrictions. It may be difficult to serve us with legal process or enforce judgments against us or our
management. We are a British Virgin Islands holding company, and all or a substantial portion of our
assets are located in China and Hong Kong. In addition, all but one of our directors and officers
are non-residents of the United States, and all or substantial portions of the assets of such
non-residents are located outside the United States. As a result, it may not be possible to effect
service of process within the United States upon such persons. Moreover, there is doubt as to
whether the courts of the British Virgin Islands, China or Hong Kong would enforce: -6-




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
    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. We are a foreign private issuer within the meaning of the rules under the Exchange Act. As
such, we are exempt from certain provisions applicable to United States public companies,
including:  
    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 in respect of a security registered under the Exchange Act; and
    the sections of the Exchange Act requiring insiders to file public reports of their
stock ownership and trading activities and establishing insider liability for profits
realized from any short-swing trading transaction. Because of these exemptions, investors are not provided with the same information which is
generally available about public companies organized in the United States. 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. Under the laws of most jurisdictions in the United States, majority and controlling
shareholders generally have certain fiduciary responsibilities to the minority shareholders.
Shareholder action must be taken in good faith, and actions by controlling shareholders which are
obviously unreasonable may be declared null and void. British Virgin Island law protecting the
interests of minority shareholders may not be as protective in all circumstances as the law
protecting minority shareholders in U.S. jurisdictions. In addition, the circumstances in which a
shareholder of a BVI company may sue the company derivatively, and the procedures and defenses that
may be available to the company, may result in the rights of shareholders of a BVI company being
more limited than those of shareholders of a company organized in the U.S. Furthermore, our directors have the power to take certain actions without shareholder approval
which would require shareholder approval under the laws of most U.S. jurisdictions. The directors
of a BVI corporation, subject in certain cases to court approval but without shareholder approval,
may implement a reorganization, merger or consolidation, the sale of any -7-




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assets, property, part of the business, or securities of the corporation. Our ability to amend our
Memorandum of Association and Articles of Association without shareholder approval could have the
effect of delaying, deterring or preventing a change in our control without any further action by
the shareholders, including a tender offer to purchase our common stock at a premium over then
current market prices. -8-




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ITEM 4. INFORMATION ON THE COMPANY A. HISTORY AND DEVELOPMENT OF THE COMPANY. LJ International Inc. (we) was incorporated as an international business company under the
International Business Companies Act of the British Virgin Islands on January 30, 1997. We own all
of the issued share capital in the following significant subsidiaries:  
    Lorenzo Jewelry Limited (Lorenzo Jewelry), a company incorporated in Hong Kong
on February 20, 1987.
    Lorenzo Gems Manufacturing (Shenzhen) Co., Ltd.
    Lorenzo Jewellery (Shenzhen) Co., Ltd.
    Shenzhen PGS Jewelry Mfg.
    Lorenzo (Shenzhen) Co., Ltd. Due to the restrictions on foreign ownership on the retail business of jewelries, the Company,
through loans to the agents, established Lorenzo (Shenzhen) Co., Ltd (LSC) to carry out the retail
business of jewelries in the PRC. LSC is a variable interest entity (VIE) owned by two
individuals, who are acting as agents. Pursuant to various agreements entered into between the
Company, the agents and LSC on May 21, 2004, the Company generally has control of LSC and is
considered the primary beneficiary of LSC. Our principal place of business and our executive offices are located at Units #09-#12, 12/F,
Block A, Focal Industrial Centre, 21 Man Lok Street, Hung Hom, Kowloon, Hong Kong, telephone: (011)
852-2764-3622. We have designated CT Corporation, 111 Eighth Avenue, New York, New York 10011 as
our agent for service of process in the United States. During our last three fiscal years, we have made the following significant capital
expenditures:  
    we purchased 68.8% of the common shares of iBBC Inc. for $2,460,000 during the
fiscal year ended April 30, 2002
    we made a capital contribution of $670,000 for our 95% equity interest in Lorenzo
Giftware Inc. during the fiscal year ended December 31, 2002
    we invested $721,000 for the purchase of 3,502 square meters of production space in
our Shenzhen, China facility during the fiscal year ended December 31, 2002
    we invested $390,000 for the purchase of 1,751 square meters of production space in
our Shenzhen, China facility during the fiscal year ended December 31, 2003 B. BUSINESS OVERVIEW. We are a totally vertically integrated company that designs, brands, markets and distributes a
complete range of fine jewelry. While we specialize in the semi-precious jewelry segment, we also
offer high-end pieces set in yellow gold, white gold, platinum or sterling silver -9-




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##### Table of Contents



and adorned with semi-precious stones, diamonds, pearls and precious stones. We distribute mainly
to fine jewelers, department stores, national jewelry chains and electronic and specialty retailers
throughout North America and Western Europe. Our product lines incorporate all major categories
sought by major retailers, including earrings, necklaces, pendants, rings and bracelets. We believe that our vertically integrated structure provides significant advantages over our
competitors. All profits from value added processes are captured internally, rather than shared
with third party manufacturers. This results in very competitive pricing for the retailer and
enhanced profits for us. Innovative processes in stone cutting and production further enhance our
competitive position. We employ an international design team and all of our designs and merchandising strategies are
proprietary. The exclusive and innovative concepts that we create offer brand potential. Our
primary marketing focus has been in North America where we have sold directly to certain high
volume customers that need specialized product development services, and through a marketing
relationship with International Jewelry Connection (IJC) for those customers that need higher
levels of service and training. We organize our marketing and distribution strategies by retail distribution channels.
Concepts are developed for the specific needs of different market segments. We have identified the
following as prime retail targets:  
    fine jewelers;
    national jewelry chains;
    department stores;
    TV shopping channels; and
    discount chain stores. For the years ended December 31, 2003 and 2004, approximately 74% and 73% of our sales were in
North America. The following is a breakdown of our total revenues (in thousands) by geographic market for
each of our past three financial years: Year endedApril 30,
    
    
    8 Months ended December 31,
    
    
    Year ended December 31,2002
    
    
    2001
    
    
    2002
    
    
    2002
    
    
    2003
    
    
    2004(Unaudited)
    
    
    
    
    
    
    (Unaudited)US$
    
    US$
    
    US$
    
    US$
    
    US$
    
    US$US & Canada
    
    
    28,810
    
    
    
    19,373
    
    
    
    24,545
    
    
    
    33,275
    
    
    
    42,851
    
    
    
    56,186Hong Kong
    
    
    4,897
    
    
    
    1,383
    
    
    
    1,451
    
    
    
    4,379
    
    
    
    1,961
    
    
    
    3,765Europe and other countries
    
    
    5,518
    
    
    
    4,167
    
    
    
    3,469
    
    
    
    4,832
    
    
    
    8,017
    
    
    
    13,062PRC
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    208Japan
    
    
    9
    
    
    
    119
    
    
    
    2,344
    
    
    
    2,801
    
    
    
    5,338
    
    
    
    4,15839,240
    
    
    
    25,042
    
    
    
    31,809
    
    
    
    45,287
    
    
    
    58,167
    
    
    
    77,379
 -10-




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Our Industry The jewelry industry is comprised of two major groups that distribute finished jewelry to
retailers in the United States:  
    a small number of producers that make and distribute their own jewelry directly to
retailers; and
    a large number of wholesalers and distributors who purchase products or portions of
products from third parties and resell those items to retailers. We believe that vertically integrated companies that control costs by performing all value
added processes enjoy a distinct competitive advantage over wholesalers and distributors who pay
premium acquisition prices for items that they intend to resell. We further believe that large
retailers want to rely upon prime producers because they believe that prime producers are reliable,
low cost producers who can accommodate the large quantities of production that large retailers
commonly purchase. Our Business Strategy Our business strategy is to:  
    increase our market share of moderately priced high-quality gem-set semi-precious
and precious jewelry by capitalizing on our unique vertically integrated production
processes to produce diamond and high-end precious stone jewelry in addition to high
volume, high-quality semi-precious products;
    further develop our existing customer relationships with our specialized services;
and
    expand aggressively into new distribution channels, particularly in the United
States and throughout Western Europe, Japan, China, and Australia. We are aggressively developing new product lines in exotic stones, which have high perceived
values among semi-precious stones. We continue to expand into new product categories by:  
    marketing a line of sterling silver jewelry which are typically merchandised with a
retail price range of $30 to $150
    adding more lines into our  Lorenzo branded products with a retail price range of
$199 to $999
    offering diamond jewelry and expanding this business to our current client base by
adding diamonds to some of our settings, as well as offering newly designed jewelry
    launching Lorenzo Gold, our new gold jewelry product line -11-




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We intend to implement our business strategy by:  
    expanding our retail jewelry market in China
    promoting visits with customers to coordinate and cater to their particular
promotional sales needs and monitoring their on-hand inventory in order to promote more
active sell-through
    expanding our distribution channels to include all major TV shopping programs in
North America, Japan, Korea and Australia and further developing business with top-40
Retail Jewelry Chains in the U.S. Our Production Capability We have established a sophisticated facility in China that performs stone cutting and
polishing and jewelry production. The facility is located in the city of Shenzhen in Guangdong
Province, China. Our production facility in Shenzhen has been operating for six years and has
9,232 square meters of production space. We currently employ approximately 2,500 skilled gemstone
cutters and production personnel and turned out approximately two million pieces of finished fine
jewelry during the fiscal year ended December 31, 2004. We purchase imported choice gemstone material, which are from mines located in Africa, China
and South America, especially those concentrated in Brazil. We source our diamonds mainly from
suppliers in India. Gemstone craftsmen are trained and managed by our Hong Kong personnel to
ensure that the highest levels of cutting and polishing quality are achieved. The professional
skills possessed by our cutters are applied to a wide variety of shapes and sizes, maximizing the
yield and value of the gemstone material that we purchase. By performing internally the
value-added processes of cutting and polishing our semi-precious gemstones, we maximize quality
control and improve our profitability. We specialize in a wide range of popular and exotic
semi-precious gemstones ranging from amethyst, aquamarine and peridot to tanzanite and tourmaline. Sales and Marketing Our merchandising strategy is to provide unique and differentiated products that are enhanced
by the favorable pricing that results from our vertically integrated structure. We invest
significant effort in design and model making to produce items which are distinctly different from
our competitors. We continue to devote our efforts towards brand development and utilize marketing
concepts to enhance the saleability of our products. We recognize that retailers favor certain
price points. As part of our product development strategy, we strive to align our wholesale prices
to match retailers target prices as a means of achieving these popular price targets. -12-




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Our sales and marketing team is located in our executive offices in Hong Kong and Los
Angeles, California. Our marketing and distribution strategy is to identify the strongest retail
customers in each distribution channel and to focus design and sales efforts towards the largest
and fastest growing retailers. We maintain a broad base of customers and concentrate our efforts
on five major jewelry market segments:  
    fine jewelers;
    national jewelry chains;
    department stores;
    TV shopping channels; and
    discount chain stores. In addition to direct sales to retailers, we also sell our products to retailers through
International Jewelry Connection. The principal focus of IJC is on major U.S. department stores
and jewelry retailers, who require specialized levels of marketing, service and training. These
sales representatives are paid on a commission-only basis. Our sales promotion efforts include attendance by our representatives at U.S. and
international trade shows and conventions, including Las Vegas, Orlando, New York, Basel,
Switzerland, Hong Kong and Japan. In addition, we advertise actively in trade journals and related
industry publications. Design and Product Development We have 20 internationally trained designers who work from our Hong Kong, U.S. and China
offices. Our designers create styles that have been accepted by our various clients worldwide.
Our design teams attend trade fairs worldwide to gather product ideas and monitor the latest
product trends. We provide our customers with a broad selection of high-quality 10, 14 and 18 karat gold,
platinum and sterling silver jewelry products that incorporate traditional yet fashionable styles
and designs. We currently offer more than 40,000 different styles of rings, bracelets, necklaces,
earrings, pendants and matching sets that are contemporary and desired in the market. We study product trends that are emerging in the international market and adapt these trends
to the needs of our retail customers. The jewelry offered for sale considers color, fabric and
fashion trends, which are projected over a two-year period. We market our products as lifestyle
inspired. Production Process We make our jewelry at our facility in Shenzhen, China. Our production processes combine
vertical integration, modern technology, mechanization and handcraftsmanship to turn out
contemporary and fashionable jewelry. Our production operations basically involve: -13-




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
    cutting and polishing semi-precious gemstones;
    combining pure gold, platinum or sterling silver with gemstones or diamonds to
produce jewelry; and
    finishing operations such as cleaning and polishing, resulting in high quality
finished jewelry. Supply We cut our own semi-precious stones. We purchase imported gemstones which are from South
America, Africa and China. South America is the major source of ametrine, amethyst, aquamarine,
imperial topaz, tourmaline and white topaz, and Africa is the main source of tanzanite, mandarine
garnet, aquamarine and topaz. We also purchase imported aquamarine, peridot and topaz from China.
We source our diamonds mainly from suppliers in India. We believe that we have good relationships
with our suppliers, most of whom have supplied us for many years. We maintain our supply of inventory at our warehouse. The amount of our inventory of a
particular gemstone determines the extent and size of our marketing program for that product. We
purchase our gemstones and diamonds in advance and in anticipation of orders resulting from our
marketing programs. We purchase our gold from banks, gold refiners and commodity dealers who supply substantially
all of our gold needs, which we believe is sufficient to meet our requirements. Gold acquired for production is at least .995 fine and is combined with other metals to
produce 10, 14 and 18 karat gold. The term karat refers to the gold content of alloyed gold,
measured from a maximum of 24 karats, which is 100% fine gold. Varying quantities of metals such
as silver, copper, nickel and zinc are combined with fine gold to produce 14 karat gold of
different colors. These alloys are in abundant supply and are readily available to us. We purchase our gold requirements within a reasonable period after each significant purchase
order is received. We believe that any change in the price of gold would have had little, if any,
impact on the valuation of our inventories. We purchase supplies and raw materials from a variety of suppliers and we do not believe the
loss of any of the suppliers would have a material adverse effect on our business. Alternative
sources of supply for raw materials for production of jewelry are readily available. Security We have installed certain measures at our Shenzhen, China, production and our Hong Kong
administrative facilities to protect against loss, including multiple alarm systems, infrared
motion detectors and a system of closed circuit television cameras, which provide surveillance of
all critical areas of our premises. -14-




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We inspect carefully all materials sent and received from outside suppliers, monitor the
location and status of all inventory, and have strict internal control procedures of all jewelry as
it
proceeds through the production process. A complete physical inventory of gold and gemstones is
taken at our production and administrative facilities on a quarterly basis. Insurance We maintain primary all-risk insurance, with limits in excess of our current inventory levels,
to cover thefts and damage to inventory located on our premises. We also maintain insurance
covering thefts and damage to our owned inventory located off-site. The amount of coverage
available under such policies is limited and may vary by location, but is generally in excess of
the value of the gold and gemstones supplied by us. We carry transit insurance, the coverage of
which includes the transportation of jewelry outside of our office. Competition The jewelry production industry is highly competitive, and our competitors include domestic
and foreign jewelry manufacturers, wholesalers, and importers who may operate on a national,
regional and local scale. Our competitive strategy is to provide competitively priced,
high-quality products to the high-volume retail jewelry market. According to our management,
competition is based on pricing, quality, service and established customer relationships. We
believe that we have positioned ourselves as a low-cost producer without compromising our quality.
Our ability to conceive, design and develop products consistent with the requirements of each
retail distribution channel represents a competitive advantage. We believe that few competitors have the capacity and production skills to be effective
competitors. We believe that our vertically integrated production capabilities distinguish us from
most of our competitors and enable us to produce very competitively priced, high quality and
consistent products. In North America, the market, although highly fragmented, does contain a number of major
competitors, many of whom import much of their product from the Far East and many of whom sell
higher priced items. The key United States competitors include E.E.A.C. Inc. and Fabrikant. International competitors include Pranda International and Beauty Gems Limited. Most of these
manufacturers/wholesalers have been successful vendors for many years and enjoy good relations with
their clients. Although it may be difficult for a newcomer to break into established
relationships, we have already made substantial inroads in the North American jewelry market and we
believe we can remain competitive, based on our vertically integrated, low-cost, high-volume and
high-quality production process. -15-




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Private Placement Offering On September 1, 2004, we entered into securities purchase agreements with a group of investors
for issuance of common stock and five-year warrants to purchase shares of common stock. We sold to
the investors 1,614,082 units at a price of $2.20 per unit, each unit consisting of one share of
common stock and one warrant to acquire up to 30% of the common stock so issued at an exercise
price of $2.98 per share, which expires on September 3, 2009. At the
closing, we issued an aggregate of 1,614,082 shares and 484,221 warrants and received net proceeds
after expenses of the transaction of approximately $2.8 million. We also entered into registration rights agreements with the investors. Pursuant to the terms
of the registration rights agreements, we agreed to register the shares of common stock and the
shares underlying the warrants for resale on behalf of the investors. The registration of the
common stock and the shares underlying the warrants became effective on October 12, 2004. -16-




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##### Table of Contents



C. ORGANIZATIONAL STRUCTURE AS OF DECEMBER 31, 2004: The following diagram provides a listing of our significant subsidiaries. The respective
country of organization/incorporation is shown in brackets. LJ INTERNATIONAL INC.
(British Virgin Islands)  100%-
    Lorenzo Jewelry Limited
(Hong Kong)-
    Lorenzo Gems Manufacturing (Shenzhen) Co., Ltd.
(P.R.C.)-
    Lorenzo Jewellery (Shenzhen) Co., Ltd.
(P.R.C.)-
    Shenzhen PGS Jewelry Mfg.
(P.R.C.) D. PROPERTY, PLANTS AND EQUIPMENT. Our principal executive offices are located at Units #9-#12, 12/F, Block A, Focal Industrial
Centre, 21 Man Lok Street, Hung Hom, Kowloon, Hong Kong. We own approximately 4,800 square feet of
office and showroom at this location. Our jewelry production facility in Shenzhen, China consists of 9,232 square meters of building
space located in the Shatoujiao Free Trade Zone, Shenzhen. We own approximately 5,254 square
meters of this space. We also currently lease:  
    1,751 square meters for a term of five years expiring August 31, 2007 from an
unaffiliated third party at a rental rate of $3,817 per month;
    1,751 square meters for a term of two years expiring June 30, 2006, at a rental rate of
$3,567 per month; and
    475 square meters for a term of one year expiring December 31, 2005, at a rental rate of
$854 per month. We own two warehouse facilities in Hung Hom and Aberdeen consisting of 5,432 square feet and
5,200 square feet. We also own additional properties in Sai Kung and Hung Hom. We -17-




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lease all four of these properties to non-affiliated third parties. We have pledged all of our
land and buildings to collateralize general banking facilities granted to us. Our production facilities are currently utilized for one shift per day but are capable of
being expanded to accommodate three shifts per day as necessary. -18-




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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS The following discussion and analysis should be read in conjunction with our financial
statements and notes to the financial statements appearing elsewhere in this Form 20-F. See
Special Note Regarding Forward-looking Statements. All amounts shown for the eight-month period
ended December 31, 2001 and for the year ended December 31, 2002 are unaudited. A. OPERATING RESULTS. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. Revenues % changeEight-Eight-month period ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    month
    
    
    Years ended
    
    
    Years endedDecember 31,
    
    
    Year ended December 31,
    
    
    period
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    2001
    
    
    2002
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2001-2002
    
    
    2002-2003
    
    
    2003-2004Unaudited
    
    
    
    
    
    
    UnauditedRevenues
    
    $
    25,042
    
    
    $
    31,809
    
    
    $
    46,007
    
    
    $
    58,167
    
    
    $
    77,379
    
    
    
    27
    %
    
    
    26
    %
    
    
    33
    %
 The increase in revenue for the year ended December 31, 2004, compared with the year
ended December 31, 2003, and the increases for the year ended December 31, 2003 compared the year
ended December 31, 2002 were attributable to the acceptance of new products, the rise in orders
from existing customers and new customers. The increase in revenue for the eight-month period ended December 31, 2002, compared with the
same period in 2001,was due to our successful marketing efforts in winning new, major blue chip
customers, as well as the positive reception of our new products. -19-




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Cost of Sales and Gross Profit % changeEight-Eight-month period ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    month
    
    
    Years ended
    
    
    Years endedDecember 31,
    
    
    Year ended December 31,
    
    
    period
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    2001
    
    
    2002
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2001-2002
    
    
    2002-2003
    
    
    2003-2004Unaudited
    
    
    
    
    
    
    UnauditedCost of sales
    
    $
    18,602
    
    
    $
    22,820
    
    
    $
    34,241
    
    
    $
    44,947
    
    
    $
    61,265
    
    
    
    23
    %
    
    
    31
    %
    
    
    36
    %% of revenues
    
    
    74
    %
    
    
    72
    %
    
    
    75
    %
    
    
    77
    %
    
    
    79
    %Cost of sales -
write down of
inventory
    
    $
    0
    
    
    $
    0
    
    
    $
    5,710
    
    
    $
    0
    
    
    $
    0
    
    
    
    N/A
    
    
    
    -100
    %
    
    
    N/A% of revenues
    
    
    0
    %
    
    
    0
    %
    
    
    12
    %
    
    
    0
    %
    
    
    0
    %Gross profit
    
    $
    6,440
    
    
    $
    8,989
    
    
    $
    6,056
    
    
    $
    13,220
    
    
    $
    16,114
    
    
    
    40
    %
    
    
    118
    %
    
    
    22
    %% of revenues
    
    
    26
    %
    
    
    28
    %
    
    
    13
    %
    
    
    23
    %
    
    
    21
    %
 The gross profit margin dropped to 21% for the year ended December 31, 2004 from 23% for
the year ended December 31, 2003. The decrease in gross profit margin was due to the rise in
diamond price which we could not pass to customer for orders accepted before the rise in price and
also the sales to discount chain stores. The gross profit margin increased to 23% for the year ended December 31, 2003 from 13% for the
year ended December 31, 2002. It was due to the following adjustments on inventory made for the
year ended December 31, 2002.  
    $5,394,000 for the write-down of cut stones for orders in relation to special
programs that were later postponed or cancelled;
    $316,000 for the write-down of fine jewelry cost. Excluding the above special charge on inventory, the gross profit margin was 25% for the year
ended December 31, 2002. The gross profit margin increased to 28% for the eight-month periods ended December 31, 2002
from 26% for the same period ended December 31, 2001. -20-




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Selling, General and Administrative Expenses % changeEight-Eight-month period ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    month
    
    
    Years ended
    
    
    Years endedDecember 31,
    
    
    Year ended December 31,
    
    
    period
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    2001
    
    
    2002
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2001-2002
    
    
    2002-2003
    
    
    2003-2004Unaudited
    
    
    
    
    
    
    UnauditedSelling,
general and
administrative
expenses
    
    $
    5,905
    
    
    $
    6,433
    
    
    $
    9,525
    
    
    $
    9,133
    
    
    $
    11,578
    
    
    
    9
    %
    
    
    -4
    %
    
    
    27
    %% of revenues
    
    
    24
    %
    
    
    20
    %
    
    
    21
    %
    
    
    16
    %
    
    
    15
    %
 Selling, general and administrative (SG&A) expenses maintained at 15% of revenue for the
year ended December 31, 2004, compared with 16% of revenue for the year ended December 31, 2003. Selling, general and administrative (SG&A) expenses decreased by 5% of revenue for the year
ended December 31, 2003, compared with the year ended December 31, 2002. Between 2002 and 2003, our
SG&A expenses fell as a direct result of the corporate reengineering exercise we had undertaken
right after the 9/11 terrorist attacks in the US. The measures we instituted led to substantial
cost savings and administrative, sales and operational efficiencies. Unrealized loss (gain) on derivatives % changeEight-Eight-month period ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    month
    
    
    Years ended
    
    
    Years endedDecember 31,
    
    
    Year ended December 31,
    
    
    period
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    2001
    
    
    2002
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2001-2002
    
    
    2002-2003
    
    
    2003-2004Unaudited
    
    
    
    
    
    
    UnauditedUnrealised
loss (gain) on
derivatives
    
    $
    119
    
    
    $
    435
    
    
    $
    975
    
    
    $
    162
    
    
    $
    482
    
    
    
    266
    %
    
    
    -83
    %
    
    
    198
    %% of revenues
    
    
    0
    %
    
    
    1
    %
    
    
    2
    %
    
    
    0
    %
    
    
    1
    %(with the hedging mechanism in
place since 2003, we have the realized gain on hedging activities
included in Other Revenues.)Realized
gain on hedging
activities
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    249
    
    
    $
    681
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    173
    %% of revenues
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    1
    %
 We have secured gold loan facilities with various banks in Hong Kong, which typically
bear a below-market interest rate. Under the gold loan arrangements, we may defer the purchase
until such time as we decide appropriate, the price to be paid being the current market price at
time of payment. The gold loan, however, does expose us to certain market risks associated with -21-




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potential future increases in the price of gold. In the past, we did not hedge against such risks
and at the close of each reporting period, the gold loan was valued at fair value with changes
reflected on the income statement. However, the volatility of prices in the lead-up to the war in
Iraq prompted us to make unrealized loss on derivatives of $119,000 and $435,000 for the eight
months periods ended December 31, 2001 and December 31, 2002 respectively and to cover possible
losses resulting from price fluctuations. Since 2003, we have commenced hedging the fluctuations in the price of gold related to the
gold loans by entering into contracts with financial institutions for the future purchase of gold.
As a result, we have reduced the unrealized loss to $162,000 for the year ended December 31, 2003,
compared with the unrealized loss of $975,000 for the year ended December 31, 2002 and have
realized gain of $249,000 before the hedging activities were in place. With the hedging mechanism in place, we have incurred an unrealized loss of $482,000 and
realized gain of $681,000 on derivatives, which has been included in Other Revenues of $844,000,
for the year ended December 31, 2004. Depreciation % changeEight-Eight-month period ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    month
    
    
    Years ended
    
    
    Years endedDecember 31,
    
    
    Year ended December 31,
    
    
    period
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    2001
    
    
    2002
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2001-2002
    
    
    2002-2003
    
    
    2003-2004Unaudited
    
    
    
    
    
    
    UnauditedDepreciation
    
    $
    565
    
    
    $
    863
    
    
    $
    1,328
    
    
    $
    1,184
    
    
    $
    1,032
    
    
    
    53
    %
    
    
    -11
    %
    
    
    -13
    %% of revenues
    
    
    2
    %
    
    
    3
    %
    
    
    3
    %
    
    
    2
    %
    
    
    1
    %
 Depreciation decreased 13% to $1,032,000 for the year ended December 31, 2004 from
$1,184,000 for the year ended December 31, 2003. It was due to a portion of furniture, fixtures and
equipment acquired were fully depreciated during the year. Depreciation decreased 11% to $1,184,000 for the year ended December 31, 2003 from $1,328,000
for the year ended December 31, 2002, as depreciation of $158,000 on leasehold improvements in
production facilities was included in April 2002 that we ceased to use before the expiry of their
leases. The increase in depreciation costs primarily represents the impact of on-going capital
expenditures and assets acquired for the eight months ended December 2002. It also incorporated a
provision of $158,000 for the depreciation on leasehold improvements to production facilities we
ceased to use before the expiry of their leases. -22-




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##### Table of Contents



Impairment on property, plant and equipment % changeEight-Eight-month period ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    month
    
    
    Years ended
    
    
    Years endedDecember 31,
    
    
    Year ended December 31,
    
    
    period
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    2001
    
    
    2002
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2001-2002
    
    
    2002-2003
    
    
    2003-2004Unaudited
    
    
    
    
    
    
    UnauditedImpairment
on property,
plant and
equipment
    
    $
    0
    
    
    $
    108
    
    
    $
    417
    
    
    $
    84
    
    
    $
    0
    
    
    
    N/A
    
    
    
    -80
    %
    
    
    -100
    %% of revenues
    
    
    0
    %
    
    
    0
    %
    
    
    1
    %
    
    
    0
    %
    
    
    0
    %
 The impairment loss represents the write-off of property, plant and equipment as a result
of the consolidation of production facilities. Amortization and impairment loss on goodwill % changeEight-Eight-month period ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    month
    
    
    Years ended
    
    
    Years endedDecember 31,
    
    
    Year ended December 31,
    
    
    period
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    2001
    
    
    2002
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2001-2002
    
    
    2002-2003
    
    
    2003-2004Unaudited
    
    
    
    
    
    
    UnauditedAmortization
and impairment
loss on goodwill
    
    $
    18
    
    
    $
    400
    
    
    $
    624
    
    
    $
    200
    
    
    $
    0
    
    
    
    2122
    %
    
    
    -68
    %
    
    
    -100
    %% of revenues
    
    
    0
    %
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
    
    
    0
    %
 In July 2001, Financial Accounting Standards Board issued SFAS No. 142, Goodwill and
Other Intangible Assets, which provides that goodwill and intangible assets with indefinite useful
lives will not be amortized but rather will be tested at least annually for impairment. In March 2002, goodwill is attributed to the acquisition of a jewelry retail company.
Impairment loss of the related goodwill was charged for the eight-month period ended December 31,
2002 and for the year ended December 31, 2002 and for the year ended December 31, 2003. -23-




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##### Table of Contents



Interest cost % changeEight-Eight-month period ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    month
    
    
    Years ended
    
    
    Years endedDecember 31,
    
    
    Year ended December 31,
    
    
    period
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    2001
    
    
    2002
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2001-2002
    
    
    2002-2003
    
    
    2003-2004Unaudited
    
    
    
    
    
    
    UnauditedInterest expenses
    
    $
    424
    
    
    $
    441
    
    
    $
    668
    
    
    $
    753
    
    
    $
    902
    
    
    
    4
    %
    
    
    13
    %
    
    
    20
    %% of revenues
    
    
    2
    %
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %
 Interest expenses increased for the years ended December 31, 2003 and 2004 was due to a
higher utilization rate of credit line facilities as working capital. Impairment loss on investment % changeEight-Eight-month period ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    month
    
    
    Years ended
    
    
    Years endedDecember 31,
    
    
    Year ended December 31,
    
    
    period
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    2001
    
    
    2002
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2001-2002
    
    
    2002-2003
    
    
    2003-2004Unaudited
    
    
    
    
    
    
    UnauditedImpairment
loss on
investment
securities
    
    $
    0
    
    
    $
    200
    
    
    $
    200
    
    
    $
    0
    
    
    $
    0
    
    
    
    N/A
    
    
    
    -100
    %
    
    
    N/A% of revenues
    
    
    0
    %
    
    
    1
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 Impairment loss on investment was related to the acquisition in April 2001 for 20% equity
interests in a company whose principal activities are the manufacturing and trading of rough and
pre-formed gemstones (the Investee). Pursuant to the purchase agreement dated January 1, 2005, the Company would pay US$2,827,500
to the Investee for the issuance of 3,900 new shares therein (Acquisition). The Acquisition was
completed on January 1, 2005. The Company then became the major stockholder holding 98% equity
interests in the Investee, which became a subsidiary of the Company. -24-




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##### Table of Contents



Income taxes % changeEight-Eight-month period ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    month
    
    
    Years ended
    
    
    Years endedDecember 31,
    
    
    Year ended December 31,
    
    
    period
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    2001
    
    
    2002
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2001-2002
    
    
    2002-2003
    
    
    2003-2004Unaudited
    
    
    
    
    
    
    UnauditedIncomes
taxes expense
(credit)
    
    $
    39
    
    
    $
    101
    
    
    $
    (39
    )
    
    $
    352
    
    
    $
    277
    
    
    
    159
    %
    
    
    -1003
    %
    
    
    -21
    %% of revenues
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    1
    %
    
    
    0
    %
 We were incorporated in the British Virgin Islands and, under current law of the British
Virgin Islands, are not subject to tax on income or on capital gains. For our subsidiaries in Hong Kong, the prevailing corporate income tax rate is 17.5%. Two of our subsidiaries in China are registered to qualify as Foreign Investment Enterprises
in China and are eligible for certain tax holidays and concessions. Accordingly, certain of our
Chinese subsidiaries are exempt from Chinese income tax for two years starting from their first
profit-making year, followed by a 50% reduction of tax for the next three years. One of our subsidiaries in China is currently enjoying the tax concessions which will expire
in fiscal 2005. Another subsidiary in China is enjoying the tax holiday as its first profit-making
year in 2004. PRC income tax is calculated at the applicable rates relevant to these subsidiaries
which currently are 15%. For other subsidiaries in China, the prevailing corporate income tax rate is 15%. During the years ended December 31, 2003 and 2004, there included tax overprovision adjustment
of $92,000 and $22,000 respectively, after the finalization of tax assessment for prior year. Inflation We do not consider inflation to have had a material impact on our results of operations over
the last three years. Foreign Exchange More than 99% of our sales are denominated in U.S. Dollars whereas the other sales are
basically denominated in Hong Kong Dollars. The largest portion of our expenses are denominated in
Hong Kong Dollars, followed by U.S. Dollars and Renminbi. The exchange rate -25-




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##### Table of Contents



of the Hong Kong
Dollar is currently pegged to the U.S. Dollar, but during the past several years the market
exchange rate has fluctuated within a narrow range. The Chinese government principally sets the
exchange rate between the Renminbi and all other currencies. As a result, the exchange rates
between the Renminbi and the U.S. Dollar and the Hong Kong Dollar have fluctuated in the past and
may fluctuate in the future. If the value of the Renminbi or the Hong Kong Dollar decreases
relative to the U.S. Dollar, such fluctuation may have a positive effect on the results of our
operations. If the value of the Renminbi or the Hong Kong Dollar increases relative to the U.S.
Dollar, such fluctuation may have a negative effect on the results of our operations. We do not
currently hedge our foreign exchange positions. Governmental economic and political policies and factors For information regarding governmental economic, fiscal, monetary and political policies that
could materially affect our operations, directly or indirectly, please refer to the Risk Factors
section on pages 7 to 10. B. LIQUIDITY AND CAPITAL RESOURCES. We have no direct business operations other than the ownership of our subsidiaries and
investment securities. Our ability to pay dividends and meet other obligations depends upon our
receipt of dividends or other payments from our operating subsidiaries and investment securities. Cash Flows Eight-month period ended December31,
    
    
    Years ended December 31,(in thousands)
    
    2001
    
    
    2002
    
    
    2002
    
    
    2003
    
    
    2004(Unaudited)
    
    
    
    
    
    
    (Unaudited)Net cash
provided by (used
in) operating
activities
    
    $
    (787
    )
    
    $
    3,374
    
    
    $
    4,276
    
    
    $
    1,489
    
    
    $
    (5,690
    )Net cash provided
by (used in)
investing
activities
    
    
    (384
    )
    
    
    (2,207
    )
    
    
    (4,941
    )
    
    
    (468
    )
    
    
    (1,179
    )Net cash provided
by (used in)
financing
activities
    
    
    185
    
    
    
    (824
    )
    
    
    1,009
    
    
    
    704
    
    
    
    7,375Effect of foreign
exchange rate
change
    
    
    
    
    
    
    (68
    )
    
    
    (68
    )
    
    
    
    
    
    
    Net increase
(decrease) in cash
and cash
equivalents
    
    
    (986
    )
    
    
    275
    
    
    
    276
    
    
    
    1,725
    
    
    
    506
 -26-




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##### Table of Contents



Operating Activities: The negative cash flow from operating activities for the year ended December 31, 2004 and the
decrease in net cash provided by operating activities in the year ended December 31, 2003 compared
with the year ended December 31, 2002 reflected our accumulation of inventory of cut stones,
diamond in anticipation of significant increase in sales for the new fiscal year, and the build up
of inventory for retail business in Hong Kong and China. The rise in the cost of rough gemstones,
the build-up of more sample lines of jewelry and the maintaining of sufficient inventory for
block-orders also accentuated the negative cash flow. The increase in cash flow in the eight-month period ended December 31, 2002 compared with the
same period in 2001 resulted from growth in revenues and improved working capital management. Investing Activities: For the year ended December 31, 2004, net cash used in investing activities was for the
capital expenditures, mainly for renovation and improvement of the existing production facilities
in Shenzhen and renovation of shops for the new retail business and other on-going business
necessities, and for increase in restricted cash deposits for securing new banking facilities. For the year ended December 31, 2003, net cash used in investing activities was for the
capital expenditures, mainly for new production facilities in Shenzhen, and for other on-going
business necessities, reduced by the release of restricted cash deposits from the bank. In addition to on-going capital expenditures and restricted cash deposits, we undertook
various one-off investments that contributed to changes in our net cash positions for the various
reporting periods. The increase in cash used in investing activities for the years ended December
31, 2002, 2003 and 2004 and for the eight-month period ended December 31, 2002, was due to new
manufacturing facilities in China, as well as an increase in restricted cash deposits for securing
banking facilities. Our capital expenditure by category for the periods presented were: Capital expenditure Eight-month period endedDecember 31,
    
    
    Years ended December 31,(in thousands)
    
    2001
    
    
    2002
    
    
    2002
    
    
    2003
    
    
    2004(Unaudited)
    
    
    
    
    
    
    (Unaudited)Land & buildings
    
    $
    
    
    
    $
    721
    
    
    $
    721
    
    
    $
    330
    
    
    $
    Leasehold improvement
    
    $
    95
    
    
    $
    159
    
    
    $
    279
    
    
    $
    190
    
    
    $
    487Furniture, fixtures
and equipment
    
    $
    239
    
    
    $
    382
    
    
    $
    324
    
    
    $
    250
    
    
    $
    189Plant and machinery
    
    $
    21
    
    
    $
    282
    
    
    $
    285
    
    
    $
    93
    
    
    $
    51Motor vehicles
    
    $
    
    
    
    $
    12
    
    
    $
    12
    
    
    $
    133
    
    
    $
    Total
    
    $
    355
    
    
    $
    1,556
    
    
    $
    1,621
    
    
    $
    996
    
    
    $
    727
 -27-




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##### Table of Contents



Financing Activities: Net cash provided by financing activities for the year ended December 31, 2004 was $7,375,000,
which included proceeds of $2,746,000 from private placement of common stock, $810,000 from
issuance of shares upon exercise of stock options, increase of new loans and offset by the
repayment of matured bank loans, and reduction of bank overdrafts utilization level. Net cash provided by financing activities for the year ended December 31, 2003 was $704,000.
It was represented by the proceeds from issuance of shares upon exercise of stock options of
$2,245,000 and sales of treasury stock of $541,000, raise of new bank loans, reduced by repayment
of matured bank loans, and decrease in utilization of bank overdraft facilities. The negative net cash from financing activities for the eight-month period ended December 31,
2002, compared with the same period in 2001, reflected the repayment of gold loan of $2,474,000 and
the repurchase of common stock of the Company at an aggregate consideration of $391,000. The
positive net cash provided by financing activities in each of the other periods mainly reflected
our gold loan arrangement and the utilization of overdraft facilities. Our cash and cash equivalents are mainly held in U.S. dollars and HK dollars. Financing Sources Banking Facilities and Notes Payables We have various letters of credit, factoring facilities and overdrafts under banking
facilities. The banking facilities are collateralized by land and buildings, investment properties,
restricted cash deposits, factored receivables and personal guarantees of and properties owned by
one of our directors. Letters of Credit, overdrafts and others: As of December 31,(in thousands)
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004(Unaudited)Letters of credit
    
    $
    14,424
    
    
    $
    12,985
    
    
    $
    19,005
    
    
    $
    26,833Overdraft
    
    $
    3,532
    
    
    $
    3,244
    
    
    $
    3,397
    
    
    $
    3,46117,956
    
    
    
    16,229
    
    
    
    22,402
    
    
    
    30,294Utilized :Letters of credit utilized
    
    $
    8,197
    
    
    $
    8,559
    
    
    $
    13,619
    
    
    $
    15,423Overdraft utilized
    
    $
    2,313
    
    
    $
    3,107
    
    
    $
    1,312
    
    
    $
    60710,510
    
    
    
    11,666
    
    
    
    14,931
    
    
    
    16,030
 -28-




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##### Table of Contents



The letters of credit and bank overdrafts are denominated in H.K. dollars and U.S.
dollars, bear interest at the floating commercial bank lending rates in Hong Kong, and are
renewable annually with the consent of the relevant banks. The factoring facilities granted are limited to the extent of accounts receivable
collateralized to the banks. Notes payable: As of December 31,(in thousands)
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004(Unaudited)Notes payable
    
    $
    447
    
    
    $
    1,073
    
    
    $
    1,516
    
    
    $
    2,487
 We have term loans classified under notes payable which are related to the Groups
properties. These loans are denominated in H.K. dollars and Renminbi, bear interest at pre-fixed
rates in Hong Kong and China upon renewal. Gold Loan Facilities: As of December 31,(in thousands)
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004(Unaudited)Gold loans outstanding (in $)
    
    $
    3,627
    
    
    $
    3,700
    
    
    $
    3,118
    
    
    $
    6,488Gold loans outstanding (in troy
ounces)
    
    
    12,450
    
    
    
    12,950
    
    
    
    10,900
    
    
    
    17,920Gold loan interest rate
    
    
    1.65%-4.1
    %
    
    
    1.5%-2.4
    %
    
    
    1.6%-2.4
    %
    
    
    2.1%-2.5
    %
 We have also secured gold loan facilities with various banks in Hong Kong, which bear a
below-market interest rate. Due to lower interest rates charged for gold loans, our cost through
our gold loan program has been substantially less than the costs that would have been incurred if
we were to finance the purchase of all of our gold requirements with borrowings under our letter of
credit facility or other credit arrangements. The gold loan, however, does expose us to certain
market risks associated with potential future increases in the price of gold, so in 2003, we have
put in place mechanisms to hedge against such risks. Under the gold loan arrangements, we may
defer the purchase until such time as we deem appropriate, the price to be paid being the current
market price at time of payment. At the close of each reporting period, the gold loan is valued at
fair value with changes reflected on the income statement. -29-




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##### Table of Contents



Looking Forward: We anticipate that cash flow from operations, borrowings available under our existing credit
line and our gold loan arrangement will be sufficient to satisfy our capital needs for the next
twelve months. Impact of recently issued US GAAP accounting standards See Note 2(y) to the Consolidated Financial Statements in this Form
20-F for a summary of recently issued accounting pronouncements. C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC. During each of the last three fiscal years, we did not spend any significant amounts on
company-sponsored research and development activities. -30-




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##### Table of Contents



D. TREND INFORMATION. The total production for fiscal year ending December 31, 2005 is estimated to be at least 10%
greater than the level for fiscal year 2004. The sales for fiscal year 2005 are estimated at
approximately US$85 million, compared to US$77 million for the fiscal year ended December 31, 2004.
The gross profit margin for fiscal year 2005 is estimated to stay at the same 21% level as fiscal
year 2004. E. OFF-BALANCE SHEET ARRANGEMENTS. Except for those disclosed in the Consolidated Financial Statements, we do not have any
off-balance sheet arrangements that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital resources that
is material to investors. F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS. As of the December 31, 2004, we had the following known contractual obligations: Contractual Obligations
As of December 31, 2004 Payments due by periodTotal
    
    
    Less than 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    More than 5 yearsUS$
    
    
    US$
    
    
    US$
    
    
    US$
    
    
    US$Capital (Finance) Lease Obligations
    
    
    77
    
    
    
    19
    
    
    
    39
    
    
    
    19
    
    
    
    Operating Lease Obligations
    
    
    1,201
    
    
    
    625
    
    
    
    489
    
    
    
    87
    
    
    
    Total
    
    
    1,278
    
    
    
    644
    
    
    
    528
    
    
    
    106
    
    
    
    
 We had entered into finance lease agreements for the purchase of motor vehicles in 2003. The
financed amount was $95,000, bearing interest at 5%-6% per annum, and repayable in 60 monthly
installments beginning in 2003. A minimum finance charge may be charged if we pay off all the
balance early. -31-




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##### Table of Contents



ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. DIRECTORS AND SENIOR MANAGEMENT. Our senior management and directors are as follows: Name
    
    Age
    
    PositionYu Chuan Yih
    
    
    65
    
    
    Chairman of the Board of Directors, President and
Chief Executive OfficerKa Man Au
    
    
    40
    
    
    Chief Operating Officer, Secretary and DirectorHon Tak Ringo Ng
    
    
    45
    
    
    Chief Financial Officer and DirectorPo Yee Elsa Yue
    
    
    40
    
    
    Non-Executive DirectorLionel C. Wang
    
    
    49
    
    
    Non-Executive Director
 None of our directors and officers was selected due to any agreement or understanding with any
other person. There is no family relationship between any of our directors or executive officers
and any other director or executive officer. Mr. Yihestablished the business of Lorenzo Jewelry Ltd. and has served as president and
managing director since 1987. Mr. Yih is primarily responsible for business development and
overall company management. He has over 20 years of experience in semi-precious stone production
and marketing. Mr. Yih had been a gemstone trader in Brazil and has extensive experience and
relationships in gem sourcing and jewelry design. Mr. Yih is also the Founding Sponsor of the Hong
Kong branch of the Gemological Institute of America (GIA), the nonprofit educational organization
for the jewelry industry. Ms. Auhas served as a director of Lorenzo Jewelry Ltd. since its incorporation in 1987. Ms.
Au has been our chief operating officer since January 1, 2002 and is primarily responsible for our
general administration, human resources, operations and management. Mr. Nghas served as our chief financial officer since September 1997 and as one of our
directors since May 1, 2001. He received his Bachelor of Science degree in civil engineering from
the University of London in 1984 and his Master of Commerce in accounting and commercial
administration from the University of New South Wales in 1994. From July 1994 through September
1997, he was an audit senior with Moores Rowland C.A., Certified Public Accountants. Mr. Ng is a
certified practising accountant of the Australian Society of CPAs. Ms. Yuehas served as a non-executive director since December 1999. She is a graduate
gemologist from the Gemological Institute of America and served as vice president of GIA, Hong
Kong, from August 1994 to December 2002. Her responsibilities included managing the Hong Kong
office and administering their education programs, marketing and related activities. Since
December 2002, Ms. Yue has served as a manager for a colored gems import and export trading
company. -32-




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##### Table of Contents



Mr. Wanghas served as a non-executive director since June 1998. He received his Bachelor of
Commerce from Tamkung University, Taipei, Taiwan in 1978, his Master of Business Administration
from California State Polytechnic University in 1980, and his Master of Science from Stanford
University in 1981. From 1984 to 1990, Mr. Wang was a marketing research analyst and senior
strategic planning analyst for The Gillette Company, Boston, Massachusetts. From 1990 to 1995, he
served as associate director and then director of product development for Information Resources,
Inc., Waltham, Massachusetts. From 1995 to 1996, Mr. Wang was vice-president at Nielsen North
America, with responsibility for analytical and modeling projects on the Kraft Foods/White Plains
account. From 1996 until June 2000, Mr. Wang served as director of analytical services for The NPD
Group, Inc., Port Washington, New York. From June 2000 until June 2001, he was vice president of
product development for NFO Interactive, Greenwich, Connecticut. Since June 2001, Mr. Wang has
been president of his own firm, Marketing and Innovation, LLC., Greenwich, Connecticut. B. COMPENSATION. The aggregate compensation paid by us to all of our directors and executive officers as a
group for the fiscal year ended December 31, 2004 on an accrual basis, for services in all
capacities, was $918,000. During the fiscal year ended December 31, 2004, we contributed an
aggregate amount of $22,000 toward the pension plans of our directors and executive officers. Executive Service Contract We entered into an employment agreement with Mr. Yu Chuan Yih, effective October 1, 2003, for
a period of three years at an annual salary of $233,000. Mr. Yihs remuneration package includes
benefits with respect to an automobile. In addition, Mr. Yih is entitled to an annual management
bonus of a sum to be determined by the board at its absolute discretion, having regard for our
operating results and the performance of Mr. Yih during the relevant financial year. The amount
payable to Mr. Yih will be decided by majority decision of the members of the board present in the
meeting called for that purpose. Mr. Yih shall abstain from voting and not be counted in the
quorum in respect of the resolution regarding the amount payable to him. On July 1, 2003, we granted Mr. Yih options exercisable to acquire 800,000 shares of common
stock at $2.00 per share at any time through June 30, 2013. C. BOARD PRACTICES. Each of our five current directors was elected at our last annual meeting of shareholders held
June 25, 2004 to serve a one-year term or until their successor is elected and qualified. -33-




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There are no directors service contracts with us or any of our subsidiaries providing for
benefits upon termination of employment. Our board of directors has established an audit committee, which currently consists of Messrs.
Yih and Wang and Ms. Yue. Its functions are to:  
    recommend annually to the board of directors the appointment of our independent
public accountants;
    discuss and review the scope and the fees of the prospective annual audit and review
the results thereof 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; and
    review our managements procedures and policies relative to the adequacy of our
internal accounting controls and compliance with federal and state laws relating to
financial reporting. We do not have a remuneration committee of the board of directors. D. EMPLOYEES. As of December 31, 2004, we employed approximately 2,500 persons on a full-time basis for our
production of jewelry and gemstone cutting and polishing. Approximately 100 of these people
include our management and executive staff in Hong Kong and China. None of our employees is
represented by a labor union and we believe that our employee relations are good. E. SHARE OWNERSHIP. The following table sets forth certain information regarding the beneficial ownership of our
shares of common stock as of December 31, 2004 by:  
    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. As of December 31, 2004, we had 12,304,658 shares of our common stock issued and outstanding. This information gives effect to securities deemed outstanding pursuant to Rule 13d-3(d)(l)
under the Securities Exchange Act of 1934, as amended. -34-




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The address for each person named below is c/o LJ International Inc., Unit #12, 12/F, Block A,
Focal Industrial Centre, 21 Man Lok Street, Hung Hom, Kowloon, Hong Kong. Name of Beneficial Holder
    
    Number
    
    
    PercentShares Beneficially OwnedYu Chuan Yih
    
    
    3,842,853
    (1)(2)
    
    
    27.7
    %Ka Man Au
    
    
    77,500
    (3)
    
    
    *Hon Tak Ringo Ng
    
    
    62,500
    (4)
    
    
    *Po Yee Elsa Yue
    
    
    4,000
    
    
    
    *Lionel C. Wang
    
    
    0
    
    
    
    *All directors and executive officers as a group (5 persons)
    
    
    3,986,853
    
    
    
    28.4
    %
   *
    
    Represents less than 1% beneficial ownership(1)
    
    Of Mr. Yihs 2,267,853 shares, 1,500,000 shares are owned of record by Pacific Growth
Developments Ltd., a British Virgin Islands corporation, which is owned by Mr. Yih (60%), his
wife Tammy Yih (20%) and an adult daughter, Bianca Tzu Hsiu Yih (20%).(2)
    
    Includes options currently exercisable by Mr. Yih to acquire 775,000 shares of common stock
at $2.00 per share at any time until April 30, 2008 and 800,000 shares of common stock at
$2.00 per share at any time until June 30, 2013.(3)
    
    Represents options currently exercisable to acquire 40,000 shares of common stock at $2.00
per share at any time until April 30, 2008 and 37,500 shares of common stock at $2.00 per
share at any time until June 30, 2013.(4)
    
    Represents options currently exercisable to acquire 25,000 shares of common stock at $2.00
per share at any time until April 30, 2008 and 37,500 shares of common stock at $2.00 per
share at any time until June 30, 2013. The 1998 Stock Compensation Plan Effective June 1, 1998, we adopted and approved the 1998 Stock Compensation Plan. The purpose
of the plan is to:  
    encourage ownership of our common stock by our officers, directors, employees and
advisors;
    provide additional incentive for them to promote our success and our business; and -35-




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
    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. Options constitute either incentive stock options within the meaning of Section 422 of the
United States Internal Revenue Code of 1986, as amended, or options which constitute nonqualified
options at the time of issuance of such options. The plan provides that incentive stock options
and/or nonqualified stock options may be granted to our officers, directors, employees and advisors
selected by the compensation committee. A total of 4,000,000 shares of common stock are authorized
and reserved for issuance during the term of the plan, which expires in June 2008. The
compensation committee has the sole authority to interpret the plan and make all determinations
necessary or advisable for administering the plan. The exercise price for any incentive option
must be at least equal to the fair market value of the shares as of the date of grant. Upon the
exercise of the option, the exercise price must be paid in full either in cash, shares of our stock
or a combination. If any option is not exercised for any reason, such shares shall again become
available for the purposes of the plan. On October 17, 2000, the Company offered each option holder the opportunity to cancel all or
some of the stock options previously granted in exchange for the granting on April 30, 2001 of
options to acquire an equal number of shares with an exercise price equal to the then last sale
price of the stock on April 30, 2001, for a new term of seven years expiring April 30, 2008. As of December 31, 2004, 1,507,500 options had been exercised and the following options to
purchase shares of our common stock under the plan remained outstanding:  
    stock options to purchase 1,429,000 and 872,000 shares at $2.00 per share through
April 30, 2008 and June 30, 2013, respectively, of which 1,640,000 are held by our
directors and officers as a group. The 2003 Stock Compensation Plan Effective July 1, 2003, we adopted and approved the 2003 Stock Compensation Plan, which our
shareholders approved on December 5, 2003. The purpose of the plan is to:  
    encourage ownership of our common stock by our officers, directors, employees and
advisors;
    provide additional incentive for them to promote our success and our business; and
    encourage them to remain in our employ by providing them with an opportunity to
benefit from any appreciation of our common stock through the issuance of stock
options. Options constitute either incentive stock options within the meaning of Section 422 of the
United States Internal Revenue Code of 1986, as amended, or options which constitute nonqualified
options at the time of issuance of such options. The plan provides that incentive -36-




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stock options
and/or nonqualified stock options may be granted to our officers, directors, employees and advisors
selected by the compensation committee. A total of 4,000,000 shares of
common stock are authorized and reserved for issuance during the term of the plan, which expires in
June 2013. The compensation committee has the sole authority to interpret the plan and make all
determinations necessary or advisable for administering the plan. The exercise price for any
incentive option or 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 our stock or a combination. If any option is not exercised for any reason, such
shares shall again become available for the purposes of the plan. As of December 31, 2004, 20,000 options had been exercised and the following options to
purchase shares of our common stock under the plan remained outstanding:  
    stock options to purchase 1,258,000 shares at $2.00 per share and 200,000 shares at
$2.35 per share through June 30, 2013, of which 312,000 are held by our directors and
officers as a group. Other Options and Warrants Outstanding As of December 31, 2004, the following additional options and warrants to purchase shares of
our common stock were outstanding:  
    1,679,000 common stock purchase warrants which are publicly traded and which we
issued in our April 1998 initial public offering to purchase 1,679,000 shares of common
stock at $5.75 per share through April 15, 2005 (as amended)
    146,000 stock purchase options to purchase 146,000 shares of common stock at $8.25
per share through April 15, 2005 (as amended), which we sold to the IPO underwriter
and/or persons related to the underwriter
    warrants to purchase 87,500 shares at $6.9375 per share through March 31, 2005 which
we granted to two investors and a placement agent in connection with a tranche of our
3% Convertible Debentures on March 22, 2000
    warrants to purchase 80,000 shares at $4.57 per share through May 31, 2005 which we
granted to a former financial consultant on June 1, 2001 for services rendered in
connection with corporate development
    warrants to purchase 200,000 shares at $3.00 per share through August 15, 2006 which
we granted to The Bauer Partnership, Inc. on August 16, 2001, in connection with a
proposed debt placement which was never completed
    warrants to purchase 484,221 shares at $2.98 per share through September 3, 2009
which we sold to a group of investors pursuant to a private placement offering on
September 1, 2004 -37-




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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. MAJOR SHAREHOLDERS. Please see Item 6.E. for share ownership information regarding our major shareholders. Our
major shareholders do not have different voting rights. As of December 31, 2004, we had 280 record holders of our common stock. Of the 12,304,658
shares outstanding as of December 31, 2004, 8,935,917 shares were held by CEDE & Co. To the extent known to us, we are not directly or indirectly owned or controlled by another
corporation, by any foreign government or by any other natural or legal persons severally or
jointly. To our knowledge, there are no arrangements the operation of which may at a subsequent date
result in a change in control of our company. B. RELATED PARTY TRANSACTIONS. Certain of our banking facilities are collateralized by properties owned by Yu Chuan Yih and
his personal guarantee to the extent of $8,311,000, $9,147,000 and $12,971,000 as of December 31,
2002, 2003 and 2004. Mr. Yih has not received any additional compensation or consideration from us
in return for his personal guarantees. During the fiscal year ended April 30, 1999, we provided a guarantee to a bank in respect of
mortgage loans granted to Yu Chuan Yih to the extent of $632,000. As of December 31, 2004, the
balance of the mortgage loans amounted to $307,000. C. INTERESTS OF EXPERTS AND COUNSEL. Not applicable. -38-




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ITEM 8. FINANCIAL INFORMATION A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION. The Consolidated Financial Statements are filed in this Annual Report as Item 18. Export sales constitute significantly all of our total sales volume. There are no legal or arbitration proceedings, including those relating to bankruptcy,
receivership or similar procedures and those involving any third party, which may have, or have had
in the recent past, significant effects on our financial position or profitability. We are not
aware of any governmental proceedings pending or known to be contemplated. We have no direct business operations, other than the ownership of our subsidiaries. While we
have no current intention of paying dividends, should we, as a holding company, decide in the
future to do so, our ability to pay dividends and meet other obligations depends upon the receipt
of dividends or other payments from our operating subsidiaries and other holdings and investments.
In addition, our operating subsidiaries are subject to restrictions on their ability to make
distributions to us, including as a result of restrictive covenants and minimum net worth
requirements in loan agreements, restrictions on the conversion of local currency into U.S. dollars
or other hard currency and other regulatory restrictions. B. SIGNIFICANT CHANGES. We believe that no significant changes have occurred since the date of the annual financial
statements included in this annual report. -39-




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ITEM 9. THE OFFER AND LISTING A. OFFER AND LISTING DETAILS. Our common stock is listed and quoted for trading on The Nasdaq National Market under the
symbol JADE. The following table sets forth, during the periods indicated, the high and low last
sale prices for the common stock as reported by Nasdaq: Period
    
    High
    
    
    LowYear ended April 30, 2000
    
    $
    6.69
    
    
    $
    3.00Year ended April 30, 2001
    
    $
    3.88
    
    
    $
    1.63Year ended April 30, 2002
    
    $
    2.79
    
    
    $
    1.18Year ended December 31, 2002
    
    $
    1.56
    
    
    $
    1.11Year ended December 31, 2003
    
    $
    5.00
    
    
    $
    1.14Year ended December 31, 2004
    
    $
    5.74
    
    
    $
    2.21Quarter ended March 31, 2003
    
    $
    1.30
    
    
    $
    1.14Quarter ended June 30, 2003
    
    $
    1.85
    
    
    $
    1.17Quarter ended September 30, 2003
    
    $
    5.00
    
    
    $
    1.85Quarter ended December 31, 2003
    
    $
    4.89
    
    
    $
    3.44Quarter ended March 31, 2004
    
    $
    5.74
    
    
    $
    3.75Quarter ended June 30, 2004
    
    $
    4.23
    
    
    $
    3.14Quarter ended September 30, 2004
    
    $
    3.79
    
    
    $
    2.25Quarter ended December 31, 2004
    
    $
    3.36
    
    
    $
    2.21Month ended September 30, 2004
    
    $
    2.80
    
    
    $
    2.25Month ended October 31, 2004
    
    $
    2.34
    
    
    $
    2.21Month ended November 30, 2004
    
    $
    2.82
    
    
    $
    2.59Month ended December 31, 2004
    
    $
    3.36
    
    
    $
    2.85Month ended January 31, 2005
    
    $
    3.15
    
    
    $
    2.68Month ended February 28, 2005
    
    $
    3.46
    
    
    $
    2.85
 -40-




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Our warrants are listed and quoted for trading on The Nasdaq National Market under the symbol
JADEW. The following table sets forth, during the periods indicated, the high and low last sale
prices for the warrants as reported by Nasdaq: Period
    
    High
    
    
    LowYear ended April 30, 2000
    
    $
    3.25
    
    
    $
    1.00Year ended April 30, 2001
    
    $
    1.38
    
    
    $
    0.22Year ended April 30, 2002
    
    $
    0.55
    
    
    $
    0.02Year ended December 31, 2002
    
    $
    0.15
    
    
    $
    0.01Year ended December 31, 2003
    
    $
    1.13
    
    
    $
    0.02Year ended December 31, 2004
    
    $
    1.30
    
    
    $
    0.17Quarter ended March 31, 2003
    
    $
    0.12
    
    
    $
    0.04Quarter ended June 30, 2003
    
    $
    0.12
    
    
    $
    0.02Quarter ended September 30, 2003
    
    $
    1.13
    
    
    $
    0.12Quarter ended December 31, 2003
    
    $
    1.08
    
    
    $
    0.54Quarter ended March 31, 2004
    
    $
    1.30
    
    
    $
    0.61Quarter ended June 30, 2004
    
    $
    0.83
    
    
    $
    0.60Quarter ended September 30, 2004
    
    $
    0.70
    
    
    $
    0.23Quarter ended December 31, 2004
    
    $
    0.53
    
    
    $
    0.17Month ended September 30, 2004
    
    $
    0.46
    
    
    $
    0.23Month ended October 31, 2004
    
    $
    0.44
    
    
    $
    0.19Month ended November 30, 2004
    
    $
    0.53
    
    
    $
    0.17Month ended December 31, 2004
    
    $
    0.35
    
    
    $
    0.20Month ended January 31, 2005
    
    $
    0.29
    
    
    $
    0.16Month ended February 28, 2005
    
    $
    0.19
    
    
    $
    0.07
 We do not believe that there is any principal non-United States trading market for our common
stock or our warrants. We believe that Cede & Co. holds a substantial majority of the outstanding
common stock and warrants as record holder. -41-




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B. PLAN OF DISTRIBUTION. Not applicable. C. MARKETS. Our common stock and our warrants have been listed and quoted for trading on The Nasdaq
National Market System since April 15, 1998. D. SELLING SHAREHOLDERS. Not applicable. E. DILUTION. Not applicable. F. EXPENSES OF THE ISSUE. Not applicable. 
 ITEM 10. ADDITIONAL INFORMATION A. SHARE CAPITAL. Not applicable. B. MEMORANDUM AND ARTICLES OF ASSOCIATION. Corporate Powers. We have been registered in the British Virgin Islands since January 30,
1997, under British Virgin Islands International Business Companies number 216796. Clause 4 of our
Memorandum of Association states that the objects for which we are established are to engage in any
businesses which are not prohibited by law in force in the British Virgin Islands. -42-




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Directors. A director who is materially interested in any transaction with us shall declare the
material facts of and nature of his interest at the meeting of the Board of Directors. A director
may vote or be counted as the quorum on any resolution of the Board in respect of any transaction
in which he is materially interested. With the prior or subsequent approval by a resolution of
members, the directors may, by a resolution of directors, fix the emoluments of directors with
respect to services to be rendered in any capacity to us. The directors may, by a resolution of
directors, exercise all the powers of the Company to borrow money. There is no age limit
requirement for retirement or non-retirement of directors. A director shall not require a share
qualification. Share Rights, Preferences and Restrictions. Our authorized share capital is US$1 million
divided into 100 million shares of par value US$0.01 per share. All dividends unclaimed for three
years after having been declared may be forfeited by resolution of the directors for our benefit.
All shares vote as one class and each whole share has one vote. Directors stand for reelection on
an annual basis. Cumulative voting for directors is not authorized. We may redeem any of our own
shares for such fair value as we by a resolution of directors determine. All shares have the same
rights with regard to dividends and distributions upon our liquidation. Changing Share Rights. The rights of each class and series of shares that we are authorized
to issue shall be fixed by the resolution of directors. If the authorized capital is divided into
different classes, the rights attached to any class may be varied with the consent in writing of
the holders of not less than three-fourths of the issued shares of that class and of the holders of
not less than three-fourths of the issued shares of any other class which may be affected by such
variation. Shareholder Meetings. The directors may convene meetings of our members at such times and in
such manner and places as the directors consider necessary or desirable. The directors shall
convene such a meeting upon the written request of members holding 10 percent or more of our
outstanding voting shares. At least seven days notice of the meeting shall be given to the
members whose names appear on the share register. Restrictions on Rights to Own Securities. There are no limitations on the rights to own our
securities. Change in Control Provisions. There are no provisions of our Memorandum of Association and
Articles of Association that would have an effect of delaying, deferring or preventing a change in
our control and that would have operate only with respect to a merger, acquisition or corporate
restructuring involving us. Disclosure of Share Ownership. There are no bylaw provisions governing the ownership
threshold above which shareholder ownership must be disclosed. Applicable Law. Under the laws of most jurisdictions in the US, majority and controlling
shareholders generally have certain fiduciary responsibilities to the minority shareholders. -43-




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Shareholder action must be taken in good faith and actions by controlling shareholders which are
obviously unreasonable may be declared null and void. BVI law protecting the interests of minority shareholders may not be as protective in all circumstances as the law protecting minority
shareholders in US jurisdictions. While BVI law does permit a shareholder of a BVI company to sue its directors derivatively,
that is, in the name of, and for the benefit of, our company and to sue a company and its directors
for his benefit and for the benefit of others similarly situated, the circumstances in which any
such action may be brought, and the procedures and defenses that may be available in respect of any
such action, may result in the rights of shareholders of a BVI company being more limited than
those of shareholders of a company organized in the US. Our directors have the power to take certain actions without shareholder approval, including
an amendment of our Memorandum of Association or Articles of Association or an increase or
reduction in our authorized capital, which would require shareholder approval under the laws of
most US jurisdictions. In addition, the directors of a BVI corporation, subject in certain cases
to court approval but without shareholder approval, may, among other things, implement a
reorganization, certain mergers or consolidations, the sale, transfer, exchange or disposition of
any assets, property, part of the business, or securities of the corporation, or any combination,
if they determine it is in the best interests of the corporation, its creditors, or its
shareholders. Our ability to amend our Memorandum of Association and Articles of Association
without shareholder approval could have the effect of delaying, deterring or preventing a change in
our control without any further action by the shareholders, including a tender offer to purchase
our common stock at a premium over then current market prices. The International Business Companies Act of the British Virgin Islands permits the creation in
our Memorandum and Articles of Association of staggered terms of directors, cumulative voting,
shareholder approval of corporate matters by written consent, and the issuance of preferred shares.
Currently, our Memorandum and Articles of Association only provide for shareholder approval of
corporate matters by written consent, but not for staggered terms of directors, cumulative voting
or the issuance of preferred shares. As in most US jurisdictions, the board of directors of a BVI corporation is charged with the
management of the affairs of the corporation. In most US jurisdictions, directors owe a fiduciary
duty to the corporation and its shareholders, including a duty of care, under which directors must
properly apprise themselves of all reasonably available information, and a duty of loyalty, under
which they must protect the interests of the corporation and refrain from conduct that injures the
corporation or its shareholders or that deprives the corporation or its shareholders of any profit
or advantage. Many US jurisdictions have enacted various statutory provisions which permit the
monetary liability of directors to be eliminated or limited. Under BVI law, liability of a corporate director to the corporation is primarily limited to
cases of willful malfeasance in the performance of his duties or to cases where the director has
not acted honestly and in good faith and with a view to the best interests of the corporation. -44-




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However, under our Articles of Association, we are authorized to indemnify any director or officer
who is made or threatened to be made a party to a legal or administrative proceeding by virtue of
being one of our directors or officers, provided such person acted honestly and in good faith and
with a view to our best interests and, in the case of a criminal proceeding, such person had no
reasonable cause to believe that his conduct was unlawful. Our Articles of Association
also enable us to indemnify any director or officer who was successful in such a proceeding against
expense and judgments, fines and amounts paid in settlement and reasonably incurred in connection
with the proceeding. The above description of certain differences between BVI and US corporate laws is only a
summary and does not purport to be complete or to address every applicable aspect of such laws.
However, we believe that all material differences are disclosed above. Changes in Capital. Requirements to effect changes in capital are not more stringent than is
required by law. C. MATERIAL CONTRACTS. None. D. EXCHANGE CONTROLS. There are no material British Virgin Islands laws, decrees, regulations or other legislation
that impose foreign exchange controls on us or that affect our payment of dividends, interest or
other payments to non-resident holders of our capital stock. British Virgin Islands law and our
Memorandum of Association and Articles of Association impose no limitations on the right of
non-resident or foreign owners to hold or vote our common stock. E. TAXATION. The following is a summary of anticipated material U.S. federal income and British Virgin
Islands tax consequences of an investment in our common stock. The summary does not deal with all
possible tax consequences relating to an investment in our common stock and does not purport to
deal with the tax consequences applicable to all categories of investors, some of which, such as
dealers in securities, insurance companies and tax-exempt entities, may be subject to special
rules. In particular, the discussion does not address the tax consequences under state, local and
other non-U.S. and non-British Virgin Islands tax laws. Accordingly, each prospective investor
should consult its own tax advisor regarding the particular tax consequences to it of an investment
in the common stock. The discussion below is based upon laws and relevant interpretations in
effect as of the date of this annual report, all of which are subject to change. -45-




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United States Federal Income Taxation The following discussion addresses only the material U.S. federal income tax consequences to a
U.S. person, defined as a U.S. citizen or resident, a U.S. corporation, or an estate or trust
subject to U.S. federal income tax on all of its income regardless of source, making an investment
in the common stock. For taxable years beginning after December 31, 1996, a trust will be a U.S.
person only if:  
    a court within the United States is able to exercise primary supervision over its
administration; and
    one or more United States persons have the authority to control all of its
substantial decisions. In addition, the following discussion does not address the tax consequences to a person who
holds or will hold, directly or indirectly, 10% or more of our common stock, which we refer to as a
10% Shareholder. Non-U.S. persons and 10% Shareholders are advised to consult their own tax
advisors regarding the tax considerations incident to an investment in our common stock. A U.S. investor receiving a distribution of our common stock will be required to include such
distribution in gross income as a taxable dividend, to the extent of our current or accumulated
earnings and profits as determined under U.S. federal income tax principles. Any distributions in
excess of our earnings and profits will first be treated, for U.S. federal income tax purposes, as
a nontaxable return of capital, to the extent of the U.S. investors adjusted tax basis in our
common stock, and then as gain from the sale or exchange of a capital asset, provided that our
common stock constitutes a capital asset in the hands of the U.S. investor. U.S. corporate
shareholders will not be entitled to any deduction for distributions received as dividends on our
common stock. Gain or loss on the sale or exchange of our common stock will be treated as capital gain or
loss if our common stock is held as a capital asset by the U.S. investor. Such capital gain or
loss will be long-term capital gain or loss if the U.S. investor has held our common stock for more
than one year at the time of the sale or exchange. A holder of common stock may be subject to backup withholding at the rate of 31% with
respect to dividends paid on our common stock if the dividends are paid by a paying agent, broker
or other intermediary in the United States or by a U.S. broker or certain United States-related
brokers to the holder outside the United States. In addition, the proceeds of the sale, exchange
or redemption of common stock may be subject to backup withholding, if such proceeds are paid by a
paying agent, broker or other intermediary in the United States. Backup withholding may be avoided by the holder of common stock if such holder:  
    is a corporation or comes within other exempt categories; or -46-




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
    provides a correct taxpayer identification number, certifies that such holder is not
subject to backup withholding and otherwise complies with the backup withholding rules. In addition, holders of common stock who are not U.S. persons are generally exempt from backup
withholding, although they may be required to comply with certification and identification
procedures in order to prove their exemption. Any amounts withheld under the backup withholding rules from a payment to a holder will be
refunded or credited against the holders U.S. federal income tax liability, if any,
provided that amount withheld is claimed as federal taxes withheld on the holders U.S. federal
income tax return relating to the year in which the backup withholding occurred. A holder who is
not otherwise required to file a U.S. income tax return must generally file a claim for refund or,
in the case of non-U.S. holders, an income tax return in order to claim refunds of withheld
amounts. British Virgin Islands Taxation Under the International Business Companies Act of the British Virgin Islands as currently in
effect, a holder of common stock who is not a resident of BVI is exempt from BVI income tax on
dividends paid with respect to the common stock and all holders of common stock are not liable for
BVI income tax on gains realized during that year on sale or disposal of such shares; BVI does not
impose a withholding tax on dividends paid by a company incorporated under the International
Business Companies Act. There are no capital gains, gift or inheritance taxes levied by BVI on companies incorporated
under the International Business Companies Act. In addition, the common stock is not subject to
transfer taxes, stamp duties or similar charges. There is no income tax treaty or convention currently in effect between the United States and
the British Virgin Islands. F. DIVIDENDS AND PAYING AGENTS. Not applicable. G. STATEMENT BY EXPERTS. Not applicable. -47-




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H. DOCUMENTS ON DISPLAY. The documents concerning our company, which are referred to in this annual report, may be
inspected at our principal executive offices at Unit #12, 12/F, Block A, Focal Industrial Centre,
21 Man Lok Street, Hung Hom, Kowloon, Hong Kong. I. SUBSIDIARY INFORMATION. Not applicable. 
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not believe that we have any material exposures to market risk associated with
activities in derivative financial instruments, other financial instruments, derivative commodity
instruments, and other market risk sensitive instruments, positions and transactions. 
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 
 PART II 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. 
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS Effective December 5, 2002, we announced a two-year extension of the exercise term to April
15, 2005 for our 1,679,000 outstanding registered common stock purchase warrants (Nasdaq: JADEW).
Each warrant remains exercisable to purchase one share of common stock at $5.75 per share. -48-




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ITEM 15. CONTROLS AND PROCEDURES (a) Disclosure Controls and Procedures. We carried out an evaluation, under the supervision and with the participation of our
chairman, chief financial officer and chief operating officer, of the effectiveness of the design
and operation of our disclosure controls and procedures as of the end of our fiscal year. Based on
this evaluation, which will be used as input for further improvement actions, they concluded that
our disclosure controls and procedures are effective to timely alerting them to material
information about LJ International Inc. and its consolidated subsidiaries. There have been no significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of this evaluation. (b) Managements annual report on internal control over financial reporting. Not applicable. 
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT Our Board of Directors has determined that we currently do not have at least one audit
committee financial expert serving on our audit committee. We intend to identify and retain an
audit committee financial expert no later than July 31, 2005. 
 ITEM 16B. CODE OF ETHICS We have adopted a code of ethics that applies to all of our employees, including our chief
executive officer and our chief financial officer. 
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES (a) Audit Fees. The aggregate fees billed for each of the last two fiscal years for professional services
rendered by our principal accountant for the audit of our annual financial statements or services
that are normally provided by the accountant in connection with statutory and regulatory filings or
engagements for those fiscal years were $120,000 for the fiscal year ended December 31, 2003 and
$140,000 for the fiscal year ended December 31, 2004. -49-




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(b) Audit  Related Fees. No fees were billed in each of the last two fiscal years for assurance and related services by
our principal accountant that are reasonably related to the performance of the audit or review of
our financial statements and are not reported under paragraph (a) of this Item for the fiscal year
ended December 31, 2003 and for the fiscal year ended December 31, 2004. (c) Tax Fees. The aggregate fees billed in each of the last two fiscal years for professional services
rendered by our principal accountant for tax compliance, tax advice, and tax planning were $8,000
for the fiscal year ended December 31, 2003 and $8,000 for the fiscal year ended December 31, 2004.
The nature of the services comprising these fees included data gathering for preparation, review
and submission as agent of tax filing. (d) All Other Fees. No fees were billed in each of the last two fiscal years for products and services provided by
our principal accountant, other than the services reported in paragraphs (a) through (c) of this
Item for the fiscal year ended December 31, 2003 and for the fiscal year ended December 31, 2004. (e) Audit Committee Pre-Approval Policies and Procedures. To ensure continuing auditor objectivity and to safeguard the independence of our auditors,
our audit committee has determined a framework for the type and authorization of non-audit services
which our auditors, Moores Rowland Mazars, may provide. The audit committee has adopted policies for the pre-approval of specific services that may be
provided by our principal auditors. These policies are kept under review and amended as necessary
to meet the dual objectives of ensuring that we benefit in a cost effective manner from the
cumulative knowledge and experience of our auditors whilst also ensuring that the auditors maintain
the necessary degree of independence and objectivity. Our audit committee approved the engagement of Moores Rowland Mazars as our auditors to render
audit and non-audit services before Moores Rowland Mazars was engaged by us. All of the services described in each of paragraphs (b) through (d) of this Item were approved
by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. (f).Not applicable. -50-




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ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES. Not applicable. 
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS. In September 2001, we announced a common stock repurchase program pursuant to which we may
repurchase up to 1,000,000 shares of common stock from time to time in the open market and in
negotiated transactions, including block transactions, and may be discontinued at any time without
prior notice. We did not repurchase any of our shares of common stock during the fiscal year ended December
31, 2004. -51-




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PART III 
 ITEM 17. FINANCIAL STATEMENTS Not applicable. 
 ITEM 18. FINANCIAL STATEMENTS The following financial statements are being filed as part of this Annual Report on Form 20-F: Report of Independent Auditors Consolidated statements of operations for the year ended April 30, 2002 and for the
eight-month period ended December 31, 2002 and for the years ended December 31, 2003 and 2004. Consolidated balance sheets as of December 31, 2002, 2003 and 2004. Consolidated statements of shareholders equity for the year ended April 30, 2002 and for the
eight-month period ended December 31, 2002 and for the years ended December 31, 2003 and 2004. Consolidated statements of cash flows for the year ended April 30, 2002 and for the
eight-month period ended December 31, 2002 and for the years ended December 31, 2003 and 2004. Notes to and forming part of the financial statements -52-




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LJ INTERNATIONAL INC. INDEX TO FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Statements of Operations
    
    
    F-3Consolidated Balance Sheets
    
    
    F-4Consolidated Statements of Shareholders Equity
    
    
    F-5Consolidated Statements of Cash Flows
    
    
    F-6  F-7Notes to and Forming Part of the Financial Statements
    
    
    F-8  F-36
 F-1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To The Shareholders and The Board of Directors ofLJ International Inc. We have audited the accompanying consolidated balance sheets of LJ International Inc. and its
subsidiaries as of December 31, 2004, December 31, 2003 and December 31, 2002 and the related
consolidated statements of operations, shareholders equity and cash flows for each of the years in
the two-year period ended December 31, 2004, for the eight-month period ended December 31, 2002 and
for the year ended April 30, 2002. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of LJ International Inc. and its subsidiaries as of
December 31, 2004, December 31, 2003 and December 31, 2002, and the consolidated results of their
operations and their cash flows for each of the years in the two-year period ended December 31,
2004, for the eight-month period ended December 31, 2002 and for the year ended April 30, 2002, in
conformity with U.S. generally accepted accounting principles. As discussed in note 2 to the consolidated financial statements, the Company adopted Financial
Accounting Standards Boards (FASB) Interpretation No. 46 (Revised December 2003), Consolidation of
Variable Interest Entities, an Interpretation of ARB
No. 51 (FIN 46(R)) and, accordingly, began
consolidating a variable interest entity as of May 21, 2004. /s/ Moores Rowland Mazars Moores Rowland MazarsChartered Accountants
Certified Public Accountants, Hong Kong Dated: March 24, 2005 F-2




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LJ INTERNATIONAL INC.CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except share and per share data) 8 monthsYear ended
    
    
    Year ended
    
    
    ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    April 30,Notes
    
    2004
    
    
    2003
    
    
    2002
    
    
    2002US$
    
    
    US$
    
    
    US$
    
    
    US$Operating revenue
    
    
    2
    (c)
    
    
    77,379
    
    
    
    58,167
    
    
    
    31,809
    
    
    
    39,240Costs of goods sold
    
    
    
    
    
    
    (61,265
    )
    
    
    (44,947
    )
    
    
    (22,820
    )
    
    
    (35,731
    )Gross profit
    
    
    
    
    
    
    16,114
    
    
    
    13,220
    
    
    
    8,989
    
    
    
    3,509Operating expensesSelling, general and administrative expenses
    
    
    
    
    
    
    (11,578
    )
    
    
    (9,133
    )
    
    
    (6,433
    )
    
    
    (8,963
    )Unrealized loss on derivatives
    
    
    
    
    
    
    (482
    )
    
    
    (162
    )
    
    
    (435
    )
    
    
    (660
    )Depreciation
    
    
    
    
    
    
    (1,032
    )
    
    
    (1,184
    )
    
    
    (863
    )
    
    
    (1,031
    )Impairment on property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    (84
    )
    
    
    (108
    )
    
    
    (345
    )Amortization and impairment loss on goodwill
    
    
    8
    
    
    
    
    
    
    
    (200
    )
    
    
    (400
    )
    
    
    (242
    )Operating income (loss)
    
    
    
    
    
    
    3,022
    
    
    
    2,457
    
    
    
    750
    
    
    
    (7,732
    )Other revenue and expenseOther revenues
    
    
    2
    (c)
    
    
    844
    
    
    
    453
    
    
    
    205
    
    
    
    352Interest expenses
    
    
    
    
    
    
    (902
    )
    
    
    (753
    )
    
    
    (441
    )
    
    
    (652
    )Impairment loss on investment securities
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    (200
    )
    
    
    Income (loss) before income taxes and minority
interests
    
    
    
    
    
    
    2,964
    
    
    
    2,157
    
    
    
    314
    
    
    
    (8,032
    )Income taxes (expense) credit
    
    
    11
    
    
    
    (277
    )
    
    
    (352
    )
    
    
    (101
    )
    
    
    101Income (Loss) before minority interests
    
    
    
    
    
    
    2,687
    
    
    
    1,805
    
    
    
    213
    
    
    
    (7,931
    )Minority interests in consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    120
    
    
    
    30Net income (loss)
    
    
    
    
    
    
    2,687
    
    
    
    1,813
    
    
    
    333
    
    
    
    (7,901
    )Numerator:Net income (loss) used in computing
basic earnings (loss) per share
    
    
    
    
    
    
    2,687
    
    
    
    1,813
    
    
    
    333
    
    
    
    (7,901
    )Denominator:Weighted average number of shares used in
calculating basic earnings (loss) per share
    
    
    
    
    
    
    11,118,995
    
    
    
    8,757,266
    
    
    
    8,492,851
    
    
    
    8,671,615Effect of dilutive potential ordinary shares:Warrants
    
    
    
    
    
    
    55,693
    
    
    
    183,151
    
    
    
    
    
    
    
    7Stock options
    
    
    
    
    
    
    932,786
    
    
    
    765,267
    
    
    
    
    
    
    
    106,759Weighted average number of shares used in
calculating diluted earnings (loss) per share
    
    
    
    
    
    
    12,107,474
    
    
    
    9,705,684
    
    
    
    8,492,851
    
    
    
    8,778,381Earnings (loss) per share:Basic
    
    
    2
    (g)
    
    
    0.24
    
    
    
    0.21
    
    
    
    0.04
    
    
    
    (0.91
    )Diluted
    
    
    2
    (g)
    
    
    0.22
    
    
    
    0.19
    
    
    
    0.04
    
    
    
    (0.91
    )
 The accompanying notes are an integral part of these financial statements. F-3




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LJ INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share and per share data) As of December 31,Notes
    
    2004
    
    
    2003
    
    
    2002US$
    
    
    US$
    
    
    US$ASSETSCurrent assetCash and cash equivalents
    
    
    
    
    
    
    3,228
    
    
    
    2,722
    
    
    
    997Restricted cash
    
    
    
    
    
    
    6,393
    
    
    
    5,931
    
    
    
    6,358Trade receivables, net of allowance for
doubtful accounts (December 31, 2004: US$284;
December 31, 2003: US$159;
December 31, 2002: US$280)
    
    
    
    
    
    
    15,653
    
    
    
    15,243
    
    
    
    10,962Derivatives
    
    
    
    
    
    
    
    
    
    
    651
    
    
    
    Inventories
    
    
    5
    
    
    
    36,629
    
    
    
    21,487
    
    
    
    17,932Prepayments and other current assets
    
    
    
    
    
    
    2,539
    
    
    
    3,726
    
    
    
    1,233Total current assets
    
    
    
    
    
    
    64,442
    
    
    
    49,760
    
    
    
    37,482Properties held for lease, net
    
    
    6
    
    
    
    1,452
    
    
    
    1,506
    
    
    
    1,561Property, plant and equipment, net
    
    
    7
    
    
    
    4,673
    
    
    
    4,931
    
    
    
    5,153Due from related parties
    
    
    16
    (b)
    
    
    491
    
    
    
    508
    
    
    
    511Goodwill, net
    
    
    8
    
    
    
    1,521
    
    
    
    1,521
    
    
    
    1,721Investment securities, net
    
    
    9
    
    
    
    2,460
    
    
    
    2,460
    
    
    
    2,460Total assets
    
    
    
    
    
    
    75,039
    
    
    
    60,686
    
    
    
    48,888LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesBank overdrafts
    
    
    10
    
    
    
    607
    
    
    
    1,312
    
    
    
    3,107Notes payable
    
    
    10
    
    
    
    2,487
    
    
    
    1,516
    
    
    
    1,073Capitalized lease obligation, current portion
    
    
    
    
    
    
    19
    
    
    
    18
    
    
    
    23Letters of credit, gold and others
    
    
    10
    
    
    
    21,911
    
    
    
    16,737
    
    
    
    12,259Derivatives
    
    
    
    
    
    
    1,462
    
    
    
    1,430
    
    
    
    739Trade payables
    
    
    
    
    
    
    9,553
    
    
    
    8,417
    
    
    
    6,620Accrued expenses and other payables
    
    
    
    
    
    
    4,631
    
    
    
    2,864
    
    
    
    1,696Income taxes payable
    
    
    
    
    
    
    68
    
    
    
    326
    
    
    
    69Deferred taxation
    
    
    
    
    
    
    87
    
    
    
    87
    
    
    
    Total current liabilities
    
    
    
    
    
    
    40,825
    
    
    
    32,707
    
    
    
    25,586Capitalized lease obligation, non-current
    
    
    
    
    
    
    58
    
    
    
    77
    
    
    
    Total liabilities
    
    
    
    
    
    
    40,883
    
    
    
    32,784
    
    
    
    25,586Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Commitments and contingencies
    
    
    12Shareholders equityCommon stocks, par value US$0.01 each,
Authorized - 100 million shares,
Issued  12,304,658 shares as of
December 31, 2004; 9,890,006 shares as
of December 31, 2003 and 8,671,615
shares as of December 31, 2002
    
    
    13
    
    
    
    123
    
    
    
    99
    
    
    
    87Additional paid-in capital
    
    
    
    
    
    
    23,382
    
    
    
    19,802
    
    
    
    17,410Treasury stock
    
    
    13
    (b)
    
    
    
    
    
    
    
    
    
    
    (391
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (151
    )
    
    
    (151
    )
    
    
    (151
    )Unearned compensation
    
    
    2
    (q)
    
    
    (37
    )
    
    
    
    
    
    
    Retained earnings
    
    
    
    
    
    
    10,839
    
    
    
    8,152
    
    
    
    6,339Total shareholders equity
    
    
    
    
    
    
    34,156
    
    
    
    27,902
    
    
    
    23,294Total liabilities and shareholders equity
    
    
    
    
    
    
    75,039
    
    
    
    60,686
    
    
    
    48,888
 The accompanying notes are an integral part of these financial statements. F-4




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LJ INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Amounts in thousands, except share and per share data) AccumulatedCommon stock
    
    
    Additional
    
    
    Treasury stock
    
    
    otherNumber
    
    
    Par
    
    
    Paid-in
    
    
    Number
    
    
    
    
    
    
    comprehensive
    
    
    Unearned
    
    
    RetainedNotes
    
    of shares
    
    
    Value
    
    
    Capital
    
    
    of shares
    
    
    Cost
    
    
    loss
    
    
    compensation
    
    
    earnings
    
    
    TotalUS$
    
    
    US$
    
    
    
    
    
    
    US$
    
    
    US$
    
    
    US$
    
    
    US$
    
    
    US$Balance as of April 30, 2001
    
    
    
    
    
    
    8,671,615
    
    
    
    87
    
    
    
    17,167
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    13,907
    
    
    
    31,161Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,901
    )
    
    
    (7,901
    )Compensation costs for
stock-based transactions
    
    
    15
    (b)
    
    
    
    
    
    
    
    
    
    
    297
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    297Balance as of April 30, 2002
    
    
    
    
    
    
    8,671,615
    
    
    
    87
    
    
    
    17,464
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,006
    
    
    
    23,557Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    333
    
    
    
    333Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (151
    )
    
    
    
    
    
    
    
    
    
    
    (151
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    182Reversal of cancelled warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (54
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (54
    )Purchase of treasury stock
    
    
    13
    (b)(i)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (318,200
    )
    
    
    (391
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (391
    )Balance as of December 31, 2002
    
    
    
    
    
    
    8,671,615
    
    
    
    87
    
    
    
    17,410
    
    
    
    (318,200
    )
    
    
    (391
    )
    
    
    (151
    )
    
    
    
    
    
    
    6,339
    
    
    
    23,294Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,813
    
    
    
    1,813Issuance of common stock upon
exercise of stock options
    
    
    13
    (a)(i)
    
    
    1,122,500
    
    
    
    11
    
    
    
    2,234
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,245Issuance of common stock upon
exercise of warrants
    
    
    13
    (a)(i)
    
    
    95,891
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compensation costs for
stock-based transactions
    
    
    15
    (b)
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9Sales of treasury stock
    
    
    13
    (b)(i)
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    318,200
    
    
    
    391
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    541Balance as of December 31, 2003
    
    
    
    
    
    
    9,890,006
    
    
    
    99
    
    
    
    19,802
    
    
    
    
    
    
    
    
    
    
    
    (151
    )
    
    
    
    
    
    
    8,152
    
    
    
    27,902Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,687
    
    
    
    2,687Issuance of common stock on
private placement
    
    13(a)(ii)
    
    
    1,614,082
    
    
    
    16
    
    
    
    2,730
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,746Issuance of common stock upon
exercise of stock options
    
    13(a)(iii)
    
    
    405,000
    
    
    
    4
    
    
    
    806
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    810Issuance of common stock upon
exercise of warrants
    
    13(a)(iii)
    
    
    395,570
    
    
    
    4
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options granted
    
    

    2
    (q)
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48
    )
    
    
    
    
    
    
    Compensation expense
recognized during the year
    
    
    2
    (q)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    11Balance as of December 31, 2004
    
    
    
    
    
    
    12,304,658
    
    
    
    123
    
    
    
    23,382
    
    
    
    
    
    
    
    
    
    
    
    (151
    )
    
    
    (37
    )
    
    
    10,839
    
    
    
    34,156
 The accompanying notes are an integral part of these financial statements. F-5




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##### Table of Contents



LJ INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands, except share and per share data) 8 monthsYear ended
    
    
    Year ended
    
    
    ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    April 30,2004
    
    
    2003
    
    
    2002
    
    
    2002Notes
    
    US$
    
    
    US$
    
    
    US$
    
    
    US$Cash flows from operating activities:Net income (loss)
    
    
    
    
    
    
    2,687
    
    
    
    1,813
    
    
    
    333
    
    
    
    (7,901
    )Adjustments to reconcile income (loss) to
net cash (used in) provided by operating
activities:Depreciation of property, plant and
equipment and properties held for lease
    
    
    
    
    
    
    1,032
    
    
    
    1,184
    
    
    
    863
    
    
    
    1,031Impairment loss on property, plant and
equipment
    
    
    
    
    
    
    
    
    
    
    84
    
    
    
    108
    
    
    
    345Amortization and impairment loss on
goodwill
    
    
    
    
    
    
    
    
    
    
    200
    
    
    
    400
    
    
    
    242Impairment loss on investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200
    
    
    
    Unrealized loss on derivatives
    
    
    
    
    
    
    482
    
    
    
    162
    
    
    
    435
    
    
    
    660(Gain) Loss on disposal and write-off of
property, plant and equipment
    
    
    
    
    
    
    (3
    )
    
    
    2
    
    
    
    
    
    
    
    214Allowance for doubtful debts
    
    
    
    
    
    
    125
    
    
    
    5
    
    
    
    61
    
    
    
    82Write-down of inventories
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,710Minority interests
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (120
    )
    
    
    (30
    )Costs associated with stock-based
transactions
    
    
    
    
    
    
    11
    
    
    
    9
    
    
    
    (54
    )
    
    
    297Changes in operating assets and liabilities:Trade receivables
    
    
    
    
    
    
    (535
    )
    
    
    (4,286
    )
    
    
    (2,448
    )
    
    
    (1,873
    )Inventories
    
    
    
    
    
    
    (15,142
    )
    
    
    (3,555
    )
    
    
    (2,130
    )
    
    
    (647
    )Prepayments and other current assets
    
    
    
    
    
    
    1,187
    
    
    
    (2,493
    )
    
    
    (30
    )
    
    
    830Due from related parties
    
    
    
    
    
    
    17
    
    
    
    3
    
    
    
    10
    
    
    
    Trade payables
    
    
    
    
    
    
    1,136
    
    
    
    1,797
    
    
    
    3,310
    
    
    
    (120
    )Accrued expenses and other payables
    
    
    
    
    
    
    1,767
    
    
    
    1,168
    
    
    
    19
    
    
    
    (1,101
    )Due to a director
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (247
    )Letters of credit and others
    
    
    
    
    
    
    1,804
    
    
    
    5,060
    
    
    
    2,351
    
    
    
    2,069Income taxes payable and deferred taxation
    
    
    
    
    
    
    (258
    )
    
    
    344
    
    
    
    66
    
    
    
    (314
    )Net cash (used in) provided by operating
activities
    
    
    
    
    
    
    (5,690
    )
    
    
    1,489
    
    
    
    3,374
    
    
    
    (753
    )Cash flows from investing activities:Change in restricted cash
    
    
    
    
    
    
    (462
    )
    
    
    427
    
    
    
    (715
    )
    
    
    (328
    )Advance to related parties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,442
    )Purchase of property, plant and equipment
    
    
    
    
    
    
    (727
    )
    
    
    (897
    )
    
    
    (1,556
    )
    
    
    (420
    )Purchase of subsidiary
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,381
    )Proceeds on disposals of property, plant and
equipment
    
    
    
    
    
    
    10
    
    
    
    2
    
    
    
    64
    
    
    
    12Repayment from related parties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,311Net cash used in investing activities
    
    
    
    
    
    
    (1,179
    )
    
    
    (468
    )
    
    
    (2,207
    )
    
    
    (2,248
    )
 The accompanying notes are an integral part of these financial statements. F-6




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##### Table of Contents



LJ INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands, except share and per share data) 8 monthsYear ended
    
    
    Year ended
    
    
    ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    April 30,2004
    
    
    2003
    
    
    2002
    
    
    2002Notes
    
    
    US$
    
    
    US$
    
    
    US$
    
    
    US$Cash flows from financing activities:Change in bank overdrafts
    
    
    
    
    
    
    (705
    )
    
    
    (1,795
    )
    
    
    500
    
    
    
    (655
    )Proceeds from issuance of shares upon
exercise of stock options
    
    
    
    
    
    
    810
    
    
    
    2,245
    
    
    
    
    
    
    
    Net proceeds from issuance of shares in
private placement
    
    
    
    
    
    
    2,746
    
    
    
    
    
    
    
    
    
    
    
    Loans acquired
    
    
    
    
    
    
    7,624
    
    
    
    1,516
    
    
    
    1,695
    
    
    
    3,190Repayment of loans
    
    
    
    
    
    
    (3,082
    )
    
    
    (1,777
    )
    
    
    (2,597
    )
    
    
    (490
    )Repayment of capitalized lease obligation
    
    
    
    
    
    
    (18
    )
    
    
    (26
    )
    
    
    (31
    )
    
    
    (28
    )Sale (Purchase) of treasury stock
    
    
    
    
    
    
    
    
    
    
    541
    
    
    
    (391
    )
    
    
    Net cash provided by (used in) financing
activities
    
    
    
    
    
    
    7,375
    
    
    
    704
    
    
    
    (824
    )
    
    
    2,017Effect of foreign exchange rate change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (68
    )
    
    
    Net increase (decrease) in cash and cash
equivalents
    
    
    
    
    
    
    506
    
    
    
    1,725
    
    
    
    275
    
    
    
    (984
    )Cash and cash equivalents, as of
beginning of period
    
    
    
    
    
    
    2,722
    
    
    
    997
    
    
    
    722
    
    
    
    1,706Cash and cash equivalents, as of end of
period
    
    
    
    
    
    
    3,228
    
    
    
    2,722
    
    
    
    997
    
    
    
    722Supplemental disclosure information:Interest expense
    
    
    
    
    
    
    872
    
    
    
    728
    
    
    
    424
    
    
    
    638Income taxes paid
    
    
    
    
    
    
    535
    
    
    
    9
    
    
    
    31
    
    
    
    212Non-cash transactions:Purchase of property, plant and
equipment under capitalized leases
    
    
    
    
    
    
    
    
    
    
    98
    
    
    
    
    
    
    
    
 The accompanying notes are an integral part of these financial statements. F-7




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##### Table of Contents



LJ INTERNATIONAL INC.NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 1. NATURE OF BUSINESS AND BASIS OF FINANCIAL STATEMENTS  LJ International Inc. (LJI), its subsidiaries and variable interest entity (VIE)
(collectively referred as the Company) are principally involved in the design, manufacture,
marketing and sale of precious and semi-precious gemstones as well as diamond jewelry.
While the Company is based in Hong Kong, its manufacturing operations are in the Peoples
Republic of China (PRC) and most of its sales are currently in the United States of America
(US). The Company also owns certain commercial and residential properties located in Hong
Kong, which are held primarily for investment purposes.The Company changed to a calendar-year basis of reporting financial results effective May 1,
2002. As a requirement of the change in fiscal year, the Company is reporting consolidated
results of operations and cash flows for a special transition period for the eight months
ended December 31, 2002. The comparative consolidated balance sheets are as of December 31,
2003 and December 31, 2002. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (a)
    Basis of accountingThe financial statements are prepared in accordance with U.S. generally accepted
accounting principles.(b)
    Principles of consolidation and goodwillThe consolidated financial statements include the financial information of LJI, its
subsidiaries and VIE for which the Company is the primary beneficiary. The results of
subsidiaries and VIE acquired or disposed of during the year/period are consolidated
from or to their effective dates of acquisition or disposal respectively. All material
intercompany balances and transactions have been eliminated on consolidation.During 2004, the Company adopted Financial Accounting Standards Boards (FASB)
Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51 (FIN 46(R)). FIN 46(R) 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 or do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other parties.Lorenzo (Shenzhen) Co., Ltd. (LSC) is a VIE owned by 2 individuals, who are acting as
agents. The Company does not have any ownership interest in LSC. The Company is
incorporated in the BVI and is considered a foreign entity under the PRC laws. Due to
the restrictions on foreign ownership on the retail business of jewelries, the Company,
through loans to the agents, established LSC to carry out the retail business of
jewelries in the PRC. Pursuant to various agreements entered into between the Company,
the agents and LSC on May 21, 2004, the Company generally has control of LSC and is
considered the primary beneficiary of LSC. Accordingly, the results of LSC are consolidated in the financial statements of the
Company since May 21, 2004. F-8




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##### Table of Contents



LJ INTERNATIONAL INC.NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  (b)
    Principles of consolidation and goodwill (Continued)The application of the consolidation provisions of FIN 46(R) resulted in a decrease in
assets and an increase in liabilities as of December 31, 2004 by US$141 and US$82
respectively and an increase in net loss of US$223 for the year ended December 31, 2004.Goodwill represents the excess of cost over fair value of acquired net assets. Prior to
May 1, 2002, goodwill arising on acquisition of subsidiaries had been amortized on a
straight-line basis over 10 years. Following the adoption of Statement of Financial
Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets, issued by
the FASB, goodwill is no longer amortized but subject to annual impairment tests. As
part of an ongoing review of the valuation of goodwill, management assesses the fair
value of the reporting units to determine if changes in facts and circumstances suggest
that they may be impaired. If this review indicates that the goodwill is not
recoverable, as determined by a discounted cash flow analysis, the carrying value of the
Companys goodwill would be reduced to its estimated fair value.(c)
    Revenue recognitionOperating revenue represents sale of goods at invoiced value to customers, net of
returns and discounts, and is recognized when goods are delivered and title has passed
to customers.Other revenue is recognized on the following basis:  (i)
    Interest income is accrued on a time proportion basis on the
principal outstanding and at the interest rate applicable; and(ii)
    Rental income from investment properties under operating leases is
recognized in the period in which the properties are let out and on the
straight-line basis over the lease terms.  (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.(e)
    Shipping and handling costsThe shipping and handling costs are included in costs of goods sold. The amounts of
revenue received for shipping and handling are included in operating revenue.(f)
    Advertising and promotion costsAdvertising and promotion expenses are generally expensed when incurred. Advertising
costs included in costs of goods sold were US$364, US$871, US$316 and US$455 for the
years ended December 31, 2004 and 2003, for the eight-month period ended December 31,
2002 and for the year ended April 30, 2002 respectively. F-9




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##### Table of Contents



LJ INTERNATIONAL INC.NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  (g)
    Earnings (loss) per shareThe calculation of basic earnings (loss) per share is based on net income (loss) for the
year/period attributable to shareholders and on the weighted average number of ordinary shares outstanding during the year/period.The calculation of diluted earnings (loss) per share is based on net income (loss) for
the year/period attributable to shareholders and on the weighted average number of
ordinary shares outstanding during the year/period, adjusted for the effects of all
dilutive potential ordinary shares. The dilutive effect of convertible securities is
reflected in diluted earnings (loss) per share by application of the if-converted
method.(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.(i)
    Accounts receivableAccounts receivable are stated at the amount billed to customers, net of discounts. The
Company provides an allowance for doubtful accounts, which is based upon a review of
outstanding receivables, historical collection information and existing economic
conditions. No interest is chargeable to customers for accounts that are unpaid after
the due date. Accounts past due more than one year are considered delinquent.
Delinquent receivables are written off based on individual credit evaluation and
specific circumstances of the customer.(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, is
calculated using the first-in, first-out method. Estimated losses on inventories
represent reserves for obsolescence, excess quantities, irregulars and slow moving
inventory. 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.Specifically, gemstones built up, prior to the year ended April 30, 2002, which were
intended to meet orders in relation to special programs were stated at net realizable
value as those orders did not materialize. Slow moving fine jewelry inventories in
this respect were stated at net realizable value based on forecasts for close-out sales
in the ensuing years. The effect of such estimate has resulted in a write-down of
inventories amounting to US$5,710 being recognized in costs of goods sold for the year
ended April 30, 2002. F-10




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##### Table of Contents



LJ INTERNATIONAL INC.NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  (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.Depreciation is provided by using the straight-line method 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
    
    
    
    10%Motor vehicles
    
    
    
    20%
  (m)
    Impairment of long-lived assetsLong-lived assets are reviewed at least annually for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to undiscounted future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, impairment is
measured as the difference between the carrying amount and fair value of the asset.
Goodwill will not be allocated to long-lived assets, when tested for impairment.(n)
    Investment securitiesInvestment in non-marketable securities held for an identified long term purpose are
stated at cost and subject to impairment review at each reporting date to reflect any
diminution in their value, which is expected to be other than temporary. The amount of
impairment is recognized as an expense in the period in which the decline occurs. F-11




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##### Table of Contents



LJ INTERNATIONAL INC.NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  (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 sheet.(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.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 compensationThe Company records compensation expense for stock-based employee compensation plans
using the intrinsic value method pursuant to APB Opinion No. 25 in which compensation
expense is measured as the excess of the market price of the stock over the exercise
price of the award on the measurement date. Compensation expense is charged to income
as when incurred if the benefit was fully vested at the date of grant or is recognized
proportionately over the vesting period. Unearned compensation is shown separately as a
reduction of the stockholders equity.At December 31, 2004, the Company has two stock-based employee compensation plans,
details of which are set out in note 15(a). In 2004, the Company recorded an unearned
compensation of US$48 in the stockholders equity in relation to the option to purchase
150,000 shares of the common stock of the Company granted to an employee, for which the
exercise price was below the market price of the underlying stock at the date of grant.
This amount is accrued proportionately as compensation expense over the vesting
period. For the year ended December 31, 2004, the Company recognized compensation
expense of US$11 in its statement of operations. Other than the above, the exercise
price of the Companys incentive stock options was same as or higher than the market
price of the underlying stock on the date of grant, no compensation expense was
recognized for these stock options granted to employees.Had compensation expense for the same stock options been determined based on the fair
value on the date of grant and been amortized over the period from the date of grant to
the date that the award is vested, consistent with the provisions of SFAS No. 123, the
Companys net income and earnings per share would have been reported as follows: F-12




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##### Table of Contents



LJ INTERNATIONAL INC.NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  (q)
    Stock-based compensation (Continued) 8 monthsYear ended
    
    
    Year ended
    
    
    endedDecember 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002US$
    
    
    US$
    
    
    US$Net income, as reported
    
    
    2,687
    
    
    
    1,813
    
    
    
    333Add : Stock-based employee compensation
expenses included in reported net
income, net of tax
    
    
    11
    
    
    
    
    
    
    
    Deduct: Total stock-based employee
compensation expenses determined
under fair value based method for all
awards, net of tax
    
    
    (159
    )
    
    
    (160
    )
    
    
    Pro forma net income
    
    
    2,539
    
    
    
    1,653
    
    
    
    333
 8 monthsYear ended
    
    
    Year ended
    
    
    endedDecember 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002US$
    
    
    US$
    
    
    US$Earnings per share:Basic, as reported
    
    
    0.24
    
    
    
    0.21
    
    
    
    0.04Basic, pro forma
    
    
    0.23
    
    
    
    0.19
    
    
    
    0.04Diluted, as reported
    
    
    0.22
    
    
    
    0.19
    
    
    
    0.04Diluted, pro forma
    
    
    0.21
    
    
    
    0.17
    
    
    
    0.04
  There were no stock options granted to employees during the year ended April 30,
2002 and accordingly no pro forma net loss and loss per share for the same year is
presented. F-13




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##### Table of Contents



LJ INTERNATIONAL INC.NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  (q)
    Stock-based compensation (Continued)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 ended
    
    
    8 months endedDecember 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Expected stock price volatility
    
    
    61
    %
    
    
    9
    %
    
    
    7
    %Risk-free interest rate
    
    
    4.15
    %
    
    
    3.56
    %
    
    
    4.47
    %Expected life of options
    
    3 years
    
    
    3 years
    

    
    3 years
  The weighted average fair value per option granted during the years ended December
31, 2004 and 2003 and the eight-month period ended December 31, 2002 was US$1.06,
US$0.14 and US$Nil respectively.(r)
    Income taxesThe Company accounts for income taxes under the liability method. Deferred tax assets
and liabilities are determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The Company
provides a valuation allowance, if necessary, to reduce deferred tax assets to their
estimated realizable value.(s)
    Foreign currenciesLJIs functional currency is United States dollars. The functional currencies of
foreign subsidiaries are their respective local currencies. The assets and liabilities
of foreign subsidiaries are translated at the exchange rates in effect at the balance
sheet 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). Foreign currency
transaction gains and losses are included in the consolidated statement of operations.(t)
    Treasury StockThe Company applies the cost method of accounting for treasury stock. The cost method
requires the Company to record the cost of acquiring treasury stock as a deduction from
the total capital. The treasury stock account is debited for the cost of the shares
acquired and will be credited upon reissuance at cost on a first-in-first-out basis. If
the treasury stock is reissued at a price in excess of acquisition cost, the excess will
be credited to additional paid-in capital in excess of par value from treasury stock.
If the treasury stock is reissued at less than acquisition cost, the deficiency will be
treated first as a reduction of any capital in excess of par related to previous
reissuances or retirements. If the balance in capital in excess of par value from
treasury stock is insufficient to absorb the deficiency, the remainder is recorded as a
reduction of retained earnings. F-14




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LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  (u)
    Cash equivalents
The Company considers all short-term, highly liquid investments with maturities of three
months or less to be cash equivalents.(v)
    Uses of estimates
The preparation of the Companys financial statements in conformity with generally
accepted accounting principles requires the Companys management to make estimates and
assumptions that affect the amounts reported in these financial statements and
accompanying notes. Actual amounts could differ from those estimates.(w)
    Related parties
Parties are considered to be related if one party has the ability, directly or
indirectly, to control the other party, or exercise significant influence over the other
party in making financial and operating decisions. Parties are also considered to be
related if they are subject to common control or common significant influence.(x)
    Dividends
The 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 10 to the financial statements.(y)
    New accounting pronouncements
In November 2004, the FASB issued SFAS No. 151 Inventory Costs, an amendment of ARB No.
43, Chapter 4. This statement amends ARB No. 43, Chapter 4 to clarify that abnormal
amounts of idle facility expense, freight, handling costs, and spoilage should be
recognized as current-period charges regardless of whether they meet the criterion of
so abnormal and that fixed production overheads should be allocated to inventory based
on the normal capacity of the production facilities. The guidance is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005; however,
earlier application is permitted for inventory costs incurred during fiscal years
beginning after November 23, 2004. The provisions of SFAS No. 151 should be applied
prospectively. The Company considered that SFAS No. 151 does not have significant
impact on its financial statements when it is adopted. F-15




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LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  (y)
    New accounting pronouncements (Continued)
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment.
This statement provides investors and other users of financial statements with more
complete and neutral financial information by requiring that the compensation cost
relating to share-based payment transactions be recognized in financial statements.
That cost will be measured based on the fair value of the equity or liability
instruments issued. SFAS No. 123(R) covers a wide range of share-based compensation
arrangements including share options, restricted share plans, performance-based awards,
share appreciation rights, and employee share purchase plans. SFAS 123(R) replaces SFAS
No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Public entities (other than those filing as
small business issuers) will be required to apply this statement as of the first interim
or annual reporting period that begins after June 15, 2005. Management has not yet
determined whether the adoption of SFAS No. 123(R) will result in amounts that are
materially different from those currently provided under the pro forma disclosures under
SFAS No. 123 in note 2(q) to the consolidation financial statements. The adoption of
SFAS No. 123(R) is not expected to have a material impact on the financial condition,
results of operations, or cash flows of the Company.In December 2004, the FASB issued SFAS No. 153 Exchanges of Non-monetary Assets, an
amendment of APB Opinion No. 29 Accounting for Non-monetary Transactions. The
amendments made by SFAS No. 153 are based on the principle that exchanges on
non-monetary assets should be measured based on the fair value of the assets exchanged.
Further, the amendments eliminate the narrow exception for non-monetary exchanges of
similar productive assets and replace it with a broader exception for exchanges of
non-monetary assets that do not have commercial substance. A non-monetary exchange has
commercial substance if the future cash flows of the entity expected to change
significantly as a result of the exchange. SFAS No. 153 is effective for non-monetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for non-monetary asset exchanges occurring in fiscal periods
beginning after the date of issuance. The provisions of SFAS No. 153 should be applied
prospectively. The Company considered that SFAS No. 153 does not have significant
impact on its financial statements when it is adopted. F-16




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LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 3. ACQUISITIONS  During the year ended April 30, 2001, the Company acquired 12,000,000 common stocks (16.8%
equity interest) of iBBC Inc., a company engaged in marketing jewelry from its display cases
in retail shops, for the consideration of US$600. For further expansion through vertical
integration and the development of distribution channel, the Company further acquired
49,200,000 common stocks (68.8% equity interest) of iBBC Inc. from entities controlled by a
director for a consideration of US$2,460 on March 21, 2002. The objective of the
acquisition was to acquire the know-how of interactive showcase as well as the established
distribution retail network in the US and therefore increase shareholders value.Details of the identifiable assets and liabilities acquired at the date of acquisition are
as follows: 2002US$Net assets acquired:Property, plant and equipment
    
    
    1,056Trade receivables
    
    
    6Inventories
    
    
    43Other receivables
    
    
    160Cash and cash equivalents
    
    
    79Trade payables
    
    
    (133
    )Accrued expenses and other payables
    
    
    (115
    )1,096Minority interests
    
    
    (157
    )Goodwill arising from acquisition
    
    
    2,121Total purchase consideration
    
    
    3,060
 2002US$Satisfied by cash paid in the financial year:2001
    
    
    6002002
    
    
    2,4603,060
  None of the amount of goodwill is expected to be deductible for tax purposes.The Companys consolidated results of operations have incorporated iBBC Inc.s activity on a
consolidated basis from the date of acquisition, which was March 21, 2002. The following
unaudited consolidated results of operations reflect pro forma results of operations for the
year ended April 30, 2002, as if the
acquisition had occurred on May 1, 2001, and after giving effect to purchase accounting
adjustments. The pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of what operating results would have been had the acquisitions
actually taken place on May 1, 2001 and may not be indicative of future operating results. F-17




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LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 3. ACQUISITIONS (CONTINUED) Year endedApril 30,2002US$Pro forma:Operating revenue
    
    
    39,296Net income (loss)
    
    
    (9,900
    )Earnings (loss) per share:Basic
    
    
    (1.14
    )Diluted
    
    
    (1.14
    )
 4. OPERATING RISKS  (a)
    Concentrations of credit risksDetails of major customers from which the Company derived operating revenue are shown
in note 17(b).Credit risk represents the accounting loss that would be recognized at the reporting
date if counterparties failed completely to perform as contracted. Concentrations of
credit risk (whether on or off balance sheet) that arise from financial instruments
exist for groups of customers or counterparties when there are similar economic
characteristics that would cause their ability to meet contractual obligations to be
similarly affected by changes in economic or other conditions. The major concentration
of credit risk arises from the 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. F-18




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LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 4. OPERATING RISKS (CONTINUED)  (c)
    Cash and time depositsThe Company maintains its cash balances and investments in time deposits with various
banks and financial institutions. In common with local practice, such amounts are not
insured or otherwise protected should the financial institutions be unable to meet
their liabilities. There has been no history of credit losses. 5. INVENTORIES  Inventories consisted of the following: As of
    
    
    As of
    
    
    As ofDecember 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002US$
    
    
    US$
    
    
    US$Raw materials
    
    
    25,810
    
    
    
    14,774
    
    
    
    12,892Work-in-progress
    
    
    1,423
    
    
    
    742
    
    
    
    341Finished goods
    
    
    9,396
    
    
    
    5,971
    
    
    
    4,69936,629
    
    
    
    21,487
    
    
    
    17,932
 6. PROPERTIES HELD FOR LEASE, NET  The Company owns leasehold land and buildings in Hong Kong and leases them out for lease
terms of 2 years. Properties held for lease consists of the following: As of December 31,2004
    
    
    2003
    
    
    2002US$
    
    
    US$
    
    
    US$Leasehold land and buildings
    
    
    2,037
    
    
    
    2,037
    
    
    
    2,037Less: Accumulated depreciation
    
    
    (585
    )
    
    
    (531
    )
    
    
    (476
    )1,452
    
    
    
    1,506
    
    
    
    1,561
  The Company pledged all properties held for lease as collateral for general banking
facilities granted to the Company as of December 31, 2004, 2003 and 2002 (see note 10). F-19




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 6. PROPERTIES HELD FOR LEASE, NET (CONTINUED) The future aggregate minimum rental receivables under non-cancellable operating leases are
as follows: As ofDecember 31,2004US$2005
    
    
    882006
    
    
    22110
 7. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment consist of the following: As of December 31,2004
    
    
    2003
    
    
    2002US$
    
    
    US$
    
    
    US$Leasehold land and buildings
    
    
    1,995
    
    
    
    1,995
    
    
    
    1,665Leasehold improvement
    
    
    3,326
    
    
    
    2,839
    
    
    
    2,650Furniture, fixtures and equipment
    
    
    3,656
    
    
    
    3,475
    
    
    
    3,246Plant and machinery
    
    
    2,493
    
    
    
    2,442
    
    
    
    2,349Motor vehicles
    
    
    423
    
    
    
    455
    
    
    
    32211,893
    
    
    
    11,206
    
    
    
    10,232Less: Accumulated depreciation and
impairment losses
    
    
    (7,220
    )
    
    
    (6,275
    )
    
    
    (5,079
    )4,673
    
    
    
    4,931
    
    
    
    5,153
  The Company pledged leasehold land and buildings with net book values of US$1,495, US$1,232
and US$898 as of December 31, 2004, 2003 and 2002 respectively as collateral for general
banking facilities granted to the Company (see note 10). F-20




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LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 8. GOODWILL, NET  Following the adoption of SFAS No. 142, the Company discontinued amortization of goodwill
effective May 1, 2002. As of December 31, 2004, goodwill is attributed to the acquisition
of a jewelry retail company in 2002 (see note 3). Year ended
    
    
    Year ended
    
    
    8 Months endedDecember 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002US$
    
    
    US$
    
    
    US$Carrying value, beginning of
year/period
    
    
    1,521
    
    
    
    1,721
    
    
    
    2,121Impairment loss
    
    
    
    
    
    
    (200
    )
    
    
    (400
    )Carrying value, end of year/period
    
    
    1,521
    
    
    
    1,521
    
    
    
    1,721
  The Company conducts annual impairment tests. The testing included the determination of
each reporting units fair value using the market multiples and discount cash flow analysis.
The Companys reduced earnings and cash flow forecast, primarily due to the prolonged
downturn in the economy, uncertain demand, and competitive industry conditions, resulted in
the Company determining that no goodwill impairment charge was necessary. The accumulated
amortization and impairment losses were US$869, US$869, and US$669 as of December 31, 2004,
2003 and 2002 respectively. 9. INVESTMENT SECURITIES, NET As of December 31,2004
    
    
    2003
    
    
    2002US$
    
    
    US$
    
    
    US$Equity securities at cost, unlisted
    
    
    2,660
    
    
    
    2,660
    
    
    
    2,660Less: Accumulated impairment losses
    
    
    (200
    )
    
    
    (200
    )
    
    
    (200
    )2,460
    
    
    
    2,460
    
    
    
    2,460
  During the year ended April 30, 2001, the Company acquired 20% equity interests in a company
whose principal activities are the manufacturing and trading of rough and pre-formed
gemstones, of which the Company had no significant control and influence over its operating
and financial policies.The directors of the Company consider such acquisition would enhance the Company by forward
and backward vertical integration.No impairment loss was recognized for the years ended December 31, 2004 and 2003 and April
30, 2002. The amount of impairment loss charged to the consolidated statement of operations
for the eight-month period ended December 31, 2002 was US$200. F-21




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LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 10. BANKING FACILITIES AND OTHER LOANS As of December 31,2004
    
    
    2003
    
    
    2002Note
    
    
    US$
    
    
    US$
    
    
    US$Bank overdrafts
    
    
    (a)
    
    
    
    607
    
    
    
    1,312
    
    
    
    3,107Notes payable:Current portion
    
    
    (b)
    
    
    
    2,487
    
    
    
    1,516
    
    
    
    1,073Letters of credit, gold and
others:Letters of credit and others
    
    
    (a)
    
    
    
    15,423
    
    
    
    13,619
    
    
    
    8,559Gold loan
    
    
    (c)
    
    
    
    6,488
    
    
    
    3,118
    
    
    
    3,70021,911
    
    
    
    16,737
    
    
    
    12,259
  The Companys banking facilities are collateralized by leasehold land and buildings (see
notes 6 and 7), restricted cash deposits, factored receivables, and personal guarantees of
and properties owed by a director (see note 16(b)).The material provisions of indentures relating to the Companys various banking facility
agreements contain covenants pertaining to (i) maintenance of the net worth of LJI and one
of its subsidiaries amounting to US$25,000 and US$4,487 respectively; and (ii) cross-default
provisions of the subsidiary in the event of default in aggregate of at least US$10,000
under separate loan facilities. In the event of default, the bank would at its discretion
to cancel the facilities and demand immediate repayment of all principal, interest, fees and
other amount outstanding. As of December 31, 2004, both LJI and the subsidiary maintained
the minimum net worth requirement, and the subsidiary did not breach any cross-default
provision.  (a)
    As of December 31, 2004, the Company had various revolving bank facilities of
overdrafts, letters of credit and factoring facilities granted by banks, amounting to
US$3,461, US$14,487 and US$12,346 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 1.125% to
6.25% per annum as of December 31, 2004.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 based on the amount of facilities granted. These balances are
reflected as restricted cash in the balance sheet. F-22




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 10. 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. These loans aggregated to
US$2,487 as of December 31, 2004. The expected maturities of these notes payable are
within one year. Interest charges on these loans ranged from 2.7% to 3.5% per annum as
of December 31, 2004.(c)
    The Company had outstanding loans to purchase 17.9 oz of gold as of December
31, 2004 with the related balances being US$6,488. These loans are due within the
following year, however, have been historically renewed. These loans bear interest at
2.1% to 2.5% per annum as of December 31, 2004 and can be repaid in cash at the current
exchange rate of gold any time prior to maturity. 11. INCOME TAXES  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 operated. Income tax (expense)
credit comprises of the following: 8 monthsYear ended
    
    
    Year ended
    
    
    ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    April 30,2004
    
    
    2003
    
    
    2002
    
    
    2002US$
    
    
    US$
    
    
    US$
    
    
    US$Current taxes arising in
foreign subsidiaries:For the year/period
    
    
    (299
    )
    
    
    (357
    )
    
    
    (101
    )
    
    
    (2
    )Over provision in prior years
    
    
    22
    
    
    
    92
    
    
    
    
    
    
    
    103Total current tax
    
    
    (277
    )
    
    
    (265
    )
    
    
    (101
    )
    
    
    101Deferred taxes arising in
foreign subsidiaries:For the year/period
    
    
    
    
    
    
    (87
    )
    
    
    
    
    
    
    Income taxes (expense) credit(277
    )
    
    
    (352
    )
    
    
    (101
    )
    
    
    101
 F-23




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LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 11. INCOME TAXES (CONTINUED)  Reconciliation to the expected statutory tax rate in Hong Kong of 17.5% (2003: 17.5% and
2002: 16%)is as follows: 8 monthsYear ended
    
    
    Year ended
    
    
    ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    April 30,2004
    
    
    2003
    
    
    2002
    
    
    2002%
    
    
    %
    
    
    %
    
    
    %Statutory rate
    
    
    17.5
    
    
    
    17.5
    
    
    
    16.0
    
    
    
    (16.0
    )Tax effect of net
operating losses
    
    
    19.9
    
    
    
    20.0
    
    
    
    106.2
    
    
    
    6.7Non taxable profits, net
    
    
    (25.3
    )
    
    
    (25.8
    )
    
    
    (147.9
    )
    
    
    Impairment loss on
goodwill and investment
securities
    
    
    
    
    
    
    1.6
    
    
    
    30.6
    
    
    
    Others
    
    
    (2.8
    )
    
    
    3.0
    
    
    
    27.3
    
    
    
    8.0Effective rate
    
    
    9.3
    
    
    
    16.3
    
    
    
    32.2
    
    
    
    (1.3
    )
  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: As of December 31,2004
    
    
    2003
    
    
    2002US$
    
    
    US$
    
    
    US$Deferred tax assets:Net operating loss
    
    
    2,826
    
    
    
    2,595
    
    
    
    1,789Depreciation
    
    
    98
    
    
    
    103
    
    
    
    47Start up costs
    
    
    23
    
    
    
    22
    
    
    
    322,947
    
    
    
    2,720
    
    
    
    1,868Valuation allowance
    
    
    (2,911
    )
    
    
    (2,658
    )
    
    
    (1,868
    )Total deferred tax assets
    
    
    36
    
    
    
    62
    
    
    
    Deferred tax liabilities:Accelerated tax allowance
    
    
    (123
    )
    
    
    (149
    )
    
    
    Net deferred tax liabilities
    
    
    (87
    )
    
    
    (87
    )
    
    
    
 F-24




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LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 11. INCOME TAXES (CONTINUED)  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 increase in valuation allowance for the years ended December 31, 2004 and
2003, the eight-month period ended December 31, 2002 and the year ended April 30, 2002
amounted to US$253, US$790, US$740 and US$1,074 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$36 and US$62, net of valuation allowances as of December 31, 2004 and 2003. 12. COMMITMENTS AND CONTINGENCIES  (a)
    CommitmentsThe Company leases certain of its office and factory premises under various operating
leases. Rent expenses under these leases totalled approximately US$717, US$657,
US$430 and US$599 for the years ended December 31, 2004 and 2003, for the eight-month
period ended December 31, 2002 and for the year ended April 30, 2002 respectively.Future minimum rental payments under capitalized leases and non-cancelable operating
leases are approximately as follows: As of December, 31 2004Capitalized
    
    
    Operatingleases
    
    
    leasesUS$
    
    
    US$2005
    
    
    22
    
    
    
    6252006
    
    
    22
    
    
    
    3582007
    
    
    22
    
    
    
    1312008
    
    
    20
    
    
    
    87Thereafter
    
    
    
    
    
    
    Total future minimum lease payments
    
    
    86
    
    
    
    1,201Less: Amount representing interest
    
    
    (9
    )77
  In addition to the above future minimum lease payments, the terms of the leases
in respect of the retail shops in the PRC provide for the payment of contingent
rentals based on a percentage of sales in excess of a stipulated amount.As of December 31, 2004, the Company had capital expenditure commitments of US$64. F-25




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LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 12. COMMITMENTS AND CONTINGENCIES (CONTINUED)  (b)
    Contingencies
As of December 31, 2004, 2003 and 2002, the Company provided guarantee in respect of
bank mortgage loans granted to a director, Mr. Yih Yu Chuan to the extent of US$307,
US$370 and US$437 respectively. 13. COMMON STOCK AND WARRANTS OTHER THAN STOCK-BASED COMPENSATION  (a)
    Common stock  (i)
    During the year ended December 31, 2003, warrants to purchase
150,000 shares of common stock and 1,122,500 stock options were exercised. As a
warrantholder elected to take the cashless exercise of 95,891 shares of common
stock, a total of 1,218,391 shares of common stock of the Company were issued
accordingly.(ii)
    In September 2004, the Company completed a private placement of
1,614,082 shares of common stock and 484,221 warrants at a price of US$2.20 per
share. The Company sold all of the shares and the placement raised US$2,746
after underwriting discounts and placement costs.(iii)
    During the year ended December 31, 2004, warrants to purchase
600,000 shares of common stock and 405,000 stock options were exercised. As a
warrant holder elected to take the cashless exercise of 395,570 shares of common
stock, a total of 800,570 shares of common stock of the Company were issued
accordingly.As of December 31, 2004, the Company had 12,304,658 shares of common stock issued.  (b)
    Treasury stock  (i)
    During the eight-month period ended December 31, 2002, the
Company repurchased, through open market purchases, 318,200 shares of common
stock of the Company at an aggregate consideration of US$391. In July 2003, the
Company sold all these shares to a non-affiliated party for a consideration of
US$541. F-26




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 13. COMMON STOCK AND WARRANTS OTHER THAN STOCK-BASED COMPENSATION (CONTINUED) (c) Warrants other than stock-based compensation As of December 31,2004
    
    
    2003
    
    
    2002Note
    
    
    Number of warrants
    
    
    Number of warrants
    
    
    Number of warrantsOutstanding, beginning of year
    
    
    
    
    
    
    1,922,500
    
    
    
    2,068,500
    
    
    
    2,068,500Granted
    
    
    (i
    )
    
    
    484,221
    
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    (45,000
    )
    
    
    (146,000
    )
    
    
    Outstanding, end of year
    
    
    
    
    
    
    2,361,721
    
    
    
    1,922,500
    
    
    
    2,068,500
  The following table shows the warrants outstanding as of December 31, 2004. Number of warrants
    
    
    ExerciseDate of grant
    
    outstanding
    
    
    price
    
    
    Expiration dateUS$April 15, 1998
    
    
    1,679,000
    
    
    
    5.75
    
    
    April 15, 2005April 15, 1998
    
    
    146,000
    
    
    
    8.25
    
    
    April 15, 2005March 22, 2000
    
    
    52,500
    
    
    
    6.94
    
    
    March 31, 2005September 1, 2004
    
    
    484,221
    
    
    
    2.98
    
    
    September 3, 20092,361,721
   (i)
    On September 1, 2004, the Company issued Warrants for the
investors of a private placement to purchase 484,221 shares of the Companys
common stock at an exercise price of US$2.98 per share with an expiration date
of September 3, 2009. (See also note 13(a)(ii)) F-27




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 14. EMPLOYEE RETIREMENT BENEFIT PLANS  Prior to December 1, 2000, the Company operated a defined contribution retirement plan
(Retirement Plan) which is optional for all qualified employees in Hong Kong. The assets of
the Retirement Plan are held separately from those of the Company in a provident fund
managed by an independent trustee. The pension cost charge represents contributions payable
to the fund by the Company at rates specified in the rules of the Retirement Plan. Where
employees leave the Retirement Plan prior to vesting fully in the contributions, the
contributions payable by the Company are reduced by the amount of forfeited contributions.Following the introduction of the Mandatory Provident Fund (MPF) legislation in Hong Kong,
the Company has also 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.No amount was forfeited in respect of Retirement Plan and MPF scheme for the year ended
December 31, 2004. The amounts of forfeitures for the year ended December 31, 2003, for the
eight-month period ended December 31, 2002, for the year ended April 30, 2002 were US$11,
US$17 and US$46 respectively which was available to reduce the Companys contribution
payable.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$616, US$543, US$290
and US$481 for the years
ended December 31, 2004 and 2003, for the eight-month period ended December 31, 2002 and for
the year ended April 30, 2002 respectively. F-28




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 15. 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. 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 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. F-29




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 15. STOCK-BASED COMPENSATION (CONTINUED)  (a)
    Stock incentive plan (Continued)  The stock options activities and related information are summarized as follows: Year ended
    
    
    Year ended
    
    
    8 months ended
    
    
    Year endedDecember 31, 2004
    
    
    December 31, 2003
    
    
    December 31, 2002
    
    
    April 30, 2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    average
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageexercise
    
    
    
    
    
    
    exercise
    
    
    
    
    
    
    exercise
    
    
    
    
    
    
    exerciseOptions
    
    
    price
    
    
    Options
    
    
    price
    
    
    Options
    
    
    Price
    
    
    Options
    
    
    priceUS$
    
    
    
    
    
    
    US$
    
    
    
    
    
    
    US$
    
    
    
    
    
    
    US$Outstanding,
beginning of
year/period
    
    
    3,814,000
    
    
    
    2.00
    
    
    
    3,025,500
    
    
    
    2.00
    
    
    
    2,918,000
    
    
    
    2.00
    
    
    
    3,376,000
    
    
    
    2.00Granted
    
    
    350,000
    
    
    
    2.20
    
    
    
    2,000,000
    
    
    
    2.00
    
    
    
    300,000
    
    
    
    2.00
    
    
    
    
    
    
    
    Exercised (note 13)
    
    
    (405,000
    )
    
    
    2.00
    
    
    
    (1,122,500
    )
    
    
    2.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    
    
    
    
    (89,000
    )
    
    
    2.00
    
    
    
    (192,500
    )
    
    
    2.00
    
    
    
    (458,000
    )
    
    
    2.00Outstanding, end of
year/period
    
    
    3,759,000
    
    
    
    2.02
    
    
    
    3,814,000
    
    
    
    2.00
    
    
    
    3,025,500
    
    
    
    2.00
    
    
    
    2,918,000
    
    
    
    2.00Exercise price less
than the market
price on date of
grant
    
    
    150,000
    
    
    
    2.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise price
equals to market
price on date of
grant
    
    
    1,369,000
    
    
    
    2.00
    
    
    
    1,739,000
    
    
    
    2.00
    
    
    
    2,838,000
    
    
    
    2.00
    
    
    
    2,918,000
    
    
    
    2.00Exercise price
exceeds to market
price on date of
grant
    
    
    2,240,000
    
    
    
    2.03
    
    
    
    2,075,000
    
    
    
    2.00
    
    
    
    187,500
    
    
    
    2.00
    
    
    
    
    
    
    
    3,759,000
    
    
    
    2.02
    
    
    
    3,814,000
    
    
    
    2.00
    
    
    
    3,025,500
    
    
    
    2.00
    
    
    
    2,918,000
    
    
    
    2.00Range of exercise
price- US$2.00
    
    
    3,559,000
    
    
    
    2.00
    
    
    
    3,814,000
    
    
    
    2.00
    
    
    
    3,025,500
    
    
    
    2.00
    
    
    
    2,918,000
    
    
    
    2.00- US$2.35
    
    
    200,000
    
    
    
    2.35
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,759,000
    
    
    
    2.02
    
    
    
    3,814,000
    
    
    
    2.00
    
    
    
    3,025,500
    
    
    
    2.00
    
    
    
    2,918,000
    
    
    
    2.00Exercisable, end of
year/period- exercise price
at US$2.00
    
    
    2,489,500
    
    
    
    2.00
    
    
    
    2,557,000
    
    
    
    2.00
    
    
    
    2,913,000
    
    
    
    2.00
    
    
    
    2,918,000
    
    
    
    2.00- exercise price
at US$2.35
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,489,500
    
    
    
    
    
    
    
    2,557,000
    
    
    
    
    
    
    
    2,913,000
    
    
    
    
    
    
    
    2,918,000Weighted average
remaining
contractual life- exercise price
at US$2.00
    
    6.42 years
    
    
    
    
    
    7.04 years
    
    
    
    
    
    5.33 years
    
    
    
    
    
    6.06 years- exercise price
at US$2.35
    
    8.50 years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 F-30




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 15. STOCK-BASED COMPENSATION (CONTINUED)  (a)
    Stock incentive plan (Continued)All options issued, other than 1,269,500 options, are immediately exercisable as of
December 31, 2004. The 1,269,500 options are issued and outstanding but only vest in
additional increments of 415,625, 387,500, 369,500 and 96,875 upon 2005, 2006, 2007
and 2008 respectively.(b)
    Warrants  (i)
    On March 22, 2000, the Company issued Warrants to a placement
agent to purchase 35,000 shares of the Companys common stock at an exercise
price of US$6.94 per share with an expiration date of March 31, 2005, as partial
compensation for its services.(ii)
    On July 31, 1999 the Company entered into a consulting agreement
with a consultant which providing investor relationship services to the Company,
and the Company agreed to issue a 5-year common stock purchase warrant, with the
expiry date on July 30, 2004. A warrant to purchase 35,000 shares of common
stock of the Company at an exercise price of US$5.00 was issued. The consulting
agreement was subsequently terminated on January 31, 2000.(iii)
    On May 26, 2001, the Company entered into a consulting agreement
with a consultant for a period of 24 months commencing on June 1, 2001.
Pursuant to the agreement, the Company issued to the consultant warrants to
purchase 260,000 shares of common stock of the Company on June 1, 2001. Of the
warrants issued on June 1, 2001, the warrantholder is entitled to:  
    purchase 100,000 shares at US$2.29 per share exercisable through May
31, 2003 (expired, as of December 31, 2004);
    purchase 80,000 shares at US$3.43 per share exercisable through May 31,
2004 (expired, as of December 31, 2004);
    purchase 80,000 shares at US$4.57 per share exercisable through May 31,
2005.  (iv)
    On August 16, 2001, the Company issued to an agent warrants to
purchase 200,000 shares of common stock of the Company in consideration for
consultancy services at US$3.00 per share exercisable through August 15, 2006. F-31




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 15. STOCK-BASED COMPENSATION (CONTINUED)  (b)
    Warrants (Continued)  (v)
    On April 15, 2002, in accordance with a common stock purchase
agreement, the Company issued to an investor warrants to purchase 150,000 shares
of common stock of the Company at US$1.79 per share exercisable through April
14, 2005. The warrants were exercised in July 2003 and 95,891 shares of common
stock were issued accordingly pursuant to the cashless exercise (see note
13(a)(i)).(vi)
    Pursuant to a strategic advisory services agreement dated July 1,
2003, the Company issued to a consultant warrants to purchase 600,000 shares of
common stock of the Company at US$2 per share exercisable through March 31,
2004. The warrants were exercised in January 2004 and 395,570 shares of common
stock were issued accordingly pursuant to the cashless exercise (see note 13
(a)(iii)). Save as disclosed above, none of the warrants as aforesaid was exercised for the two
years ended December 31, 2004 and 2003 for the eight-month period ended December 31,
2002 and for the year period ended April 30, 2002. The costs associated with these
transactions are accounted for based on fair value of the warrants on the date of
issue. In addition, incentive stock options were issued to consultants/advisers under The
1998 Plan (see note 15(a)) to purchase the common stock of the Company as part of
their fees during the year ended April 30, 2001. The costs associated with these
transactions are also accounted for based on the fair value of these options at the
date of issue. Using the Black-Scholes option pricing model with the following weighted-average
assumptions: Year endedDecember 31,
    
    
    April 30,2003
    
    
    2002Expected dividend yield
    
    
    
    
    
    
    Expected stock price volatility
    
    
    9
    %
    
    
    23
    %Risk-free interest rate
    
    
    1.07
    %
    
    
    4.23
    %Expected life of warrants
    
    0.75 years
    
   3.21 years
 The fair value of these warrants and options was estimated as US$9 and US$297,
respectively for the years ended December 31, 2003 and April 30, 2002. There were no
incentive stock options and warrants granted and issued to consultants/advisers
during the year ended December 31, 2004 and the eight-month period ended December 31,
2002, and accordingly no related costs arose. The additional expense was recognized
in the consolidated statement of operations and the same amount was recorded in the
Companys additional paid-in capital. F-32




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data)  16.
    RELATED PARTY TRANSACTIONS  (a)
    Names and relationship of related parties: Existing relationships with the CompanyYih Yu Chuan
    
    Director and major shareholder of the CompanyGemological Institute
of America, Hong Kong
Limited
    
    Common directoriBBC Inc.
    
    Common director (Became a subsidiary in March 2002)Gemriver Jewelry Limited
    
    Common directors (Became a subsidiary in March 2002)Tanzanite (H.K.) Limited
    
    Common directors
  (b)
    Summary of balances with related parties: As of December 31,2004
    
    
    2003
    
    
    2002Note
    
    
    US$
    
    
    US$
    
    
    US$Due from related parties:Gemological Institute of America,
Hong Kong Limited
    
    
    
    
    
    
    464
    
    
    
    464
    
    
    
    464Tanzanite (H.K.) Limited
    
    
    
    
    
    
    27
    
    
    
    44
    
    
    
    47(i
    )
    
    
    491
    
    
    
    508
    
    
    
    511Certain banking facilities
granted to the Company
collateralized by properties
owned by Yih Yu Chuan and his
personal guarantee to the extent
of
    
    
    
    
    
    
    12,971
    
    
    
    9,147
    
    
    
    8,311
 F-33




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 16. RELATED PARTY TRANSACTIONS (CONTINUED)  (c)
    Summary of related party transactions: 8 monthsYear ended
    
    
    Year ended
    
    
    ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    April 30,Notes
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2002US$
    
    
    US$
    
    
    US$
    
    
    US$Purchase of equity
interest in iBBC
Inc., an entity
controlled by Yih
Yu Chuan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,460Advances to:Gemriver Jewelry
Limited
    
    (ii)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    679iBBC Inc.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,763
    
    
    
    
    
    
    
    
    
    
    
    5,442Repayment from:Gemriver Jewelry
Limited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,360iBBC Inc.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,951
    
    
    
    
    
    
    
    
    
    
    
    6,311Rental expense to
Tanzanite (H.K.)
Limited
    
    
    
    
    
    
    77
    
    
    
    23
    
    
    
    15
    
    
    
    19
   (i)
    
    The amounts due from related parties represent unsecured advances which are
interest-free and repayable on demand.(ii)
    
    The advances were expenses paid on behalf of related parties with
terms set out in note 16(c)(i) above. The related party transactions with Gemriver Jewelry Limited and iBBC Inc. as
aforesaid relate to transactions made before they became subsidiaries of the Company. F-34




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 17. SEGMENT INFORMATION As over 90% of the Companys turnover and contribution to operating results are derived from
the business segment of manufacture and sales of jewelry, the Company considered that it has
only one business segment. In respect of geographical areas, revenues are based on the
country in which the customer is located. Long-lived assets are where the assets are
located.  (a)
    Geographical areas: 8 monthsYear ended
    
    
    ended
    
    
    Year endedYear ended
    
    
    December 31,
    
    
    December 31,
    
    
    April 30,December 31, 2004
    
    
    2003
    
    
    2002
    
    
    2002US$
    
    
    US$
    
    
    US$
    
    
    US$Revenue from external
customers:US & Canada
    
    
    56,186
    
    
    
    42,851
    
    
    
    24,545
    
    
    
    28,810Hong Kong
    
    
    3,765
    
    
    
    1,961
    
    
    
    1,451
    
    
    
    4,897Europe and other countries
    
    
    13,062
    
    
    
    8,017
    
    
    
    3,469
    
    
    
    5,518PRC
    
    
    208
    
    
    
    
    
    
    
    
    
    
    
    6Japan
    
    
    4,158
    
    
    
    5,338
    
    
    
    2,344
    
    
    
    977,379
    
    
    
    58,167
    
    
    
    31,809
    
    
    
    39,240
 As of December 31,2004
    
    
    2003
    
    
    2002US$
    
    
    US$
    
    
    US$Carrying amount of long-lived assets:Hong Kong
    
    
    5,385
    
    
    
    5,564
    
    
    
    5,744PRC
    
    
    2,922
    
    
    
    3,030
    
    
    
    3,027US
    
    
    278
    
    
    
    303
    
    
    
    403Total long-lived assets (excluding goodwill)
    
    
    8,585
    
    
    
    8,897
    
    
    
    9,174Reconciling items:Others
    
    
    66,454
    
    
    
    51,789
    
    
    
    39,714Total consolidated assets
    
    
    75,039
    
    
    
    60,686
    
    
    
    48,888
 F-35




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##### Table of Contents



LJ INTERNATIONAL INC. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 17. SEGMENT INFORMATION (CONTINUED)  (b)
    The Company derived operating revenue from the following major customers, which
accounted for over 10% of operating revenue. 8 monthsYear ended
    
    
    Year ended
    
    
    
    
    
    
    ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    April 30,2004
    
    
    2003
    
    
        2002
    
    
    2002US$
    
    
    %
    
    
    US$
    
    
    %
    
    
    US$
    
    
    %
    
    
    US$
    
    
    %Customer A
    
    
    8,482
    
    
    
    11
    
    
    
    5,164
    
    
    
    9
    
    
    
    1,916
    
    
    
    6
    
    
    
    2,706
    
    
    
    7Customer B
    
    
    7,234
    
    
    
    9
    
    
    
    5,870
    
    
    
    10
    
    
    
    2,709
    
    
    
    9
    
    
    
    3,121
    
    
    
    8Customer C
    
    
    6,454
    
    
    
    8
    
    
    
    5,869
    
    
    
    10
    
    
    
    8,021
    
    
    
    25
    
    
    
    10,963
    
    
    
    28
 Trade receivables related to these major customers were US$1,347, US$2,711 and
US$1,655, as of December 31, 2004, 2003 and 2002 respectively. 18. SUBSEQUENT EVENTS Pursuant to the purchase agreement dated January 1, 2005, the Company would pay US$2,828 to
Goldleaves International Limited (GIL), in which the Company had 20% equity interests and is
classified as investment security (see note 9) as of December 31, 2004, for the issuance of
3,900 new shares in GIL (Acquisition). The Acquisition was completed on January 1, 2005.
The Company then became the major stockholder holding 98% equity interests in GIL, which
became a subsidiary of the Company. This investment is currently accounted for using the cost method. As appropriate for a
step- acquisition, in the 2005 financial statements, the investment as of December 31, 2004
and 2003 will be restated to account for under the equity method. 19. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the current year
presentation. F-36




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ITEM 19. EXHIBITS The following exhibits are being filed as part of this Annual Report on Form 20-F: 1.1
    
    
    Memorandum of Association of the Company*1.2
    
    
    Articles of Association of the Company*1.3
    
    
    Amendment to Articles of Association of the Company*4.1
    
    
    Employment Agreement of Yu Chuan Yih with the Registrant**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 1350
   *
    
    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, 2004. -89-




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SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf. LJ INTERNATIONAL INC.
(Registrant)Date: March 31, 2005
    
    By:
    
    /s/ YU CHUAN YIH

Yu Chuan Yih
Chairman




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##### Table of Contents



EXHIBIT INDEX Exhibit
    
    
    
    PageNumber
    
    Description of Exhibit
    
    Number1.1
    
    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 1350
   *
    
    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, 2004.