##### Table of Contents



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 1934ORþ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2009ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the transition period from  toORo
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934Date of event requiring this shell company report
 
 Commission file number 0-29620
 LJ INTERNATIONAL INC.
  LJ INTERNATIONAL INC.
  British Virgin Islands
  Unit #12, 12/F, Block A
Focal Industrial Centre
21 Man Lok Street
Hung Hom, Kowloon, Hong Kong
  Hon Tak Ringo NG, CFO
011-852-2764-3622 (telephone)  ringong@ljintl.com (email)
011-852-2764-3783 (facsimile)
 Unit #12, 12/F, Block A
Focal Industrial Centre
21 Man Lok Street
Hung Hom, Kowloon, Hong Kong
   Title of each
    
    Name of each exchangeclass
    
    on which registered$.01 Par Value Common Stock
    
    NASDAQ(Common Stock)
  
   
     o þ
  o þ
  þ o
 o o
  o o þ
  þ
    
    U.S. GAAPo
    
    International Financial Reporting Standards as issued by
the International Accounting Standards Boardo
    
    Other
  o
    
    Item 17o
    
    Item 18
  o þ




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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 4A. UNRESOLVED STAFF COMMENTSITEM 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 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 16. [RESERVED]ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERTITEM 16B. CODE OF ETHICSITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICESITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEESITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERSITEM 16F. CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANTITEM 16G. CORPORATE GOVERNANCEPART IIIITEM 17. FINANCIAL STATEMENTSITEM 18. FINANCIAL STATEMENTSITEM 19. EXHIBITSSIGNATURESEXHIBIT INDEXEX-4.1EX-8.1EX-12.1EX-12.2EX-13.1EX-13.2EX-15.1    Table of Contents  SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
   
    
    dependence upon certain customers
    
    dependence on key personnel
    
    control by principal shareholder
    
    competitive factors
    
    the operation of our business
    
    general economic conditions
    -2-




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




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A. SELECTED FINANCIAL DATA.
 SELECTED CONSOLIDATED FINANCIAL DATA
(US Dollars in thousands, except per share amounts)
   Year ended December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005Statement of Operations Data:Revenues
    
    
    
    110,523
    
    
    
    136,268
    
    
    
    152,037
    
    
    
    123,791
    
    
    
    99,646Costs of goods sold
    
    
    
    (72,173
    )
    
    
    (97,031
    )
    
    
    (112,508
    )
    
    
    (88,867
    )
    
    
    (77,127
    )Gross profit
    
    
    
    38,350
    
    
    
    39,237
    
    
    
    39,529
    
    
    
    34,924
    
    
    
    22,519Operating expensesSelling, general and
administrative
    
    
    
    (31,039
    )
    
    
    (34,815
    )
    
    
    (30,399
    )
    
    
    (23,114
    )
    
    
    (15,488
    )Net (loss) gain on derivatives
    
    
    
    (503
    )
    
    
    (86
    )
    
    
    (4
    )
    
    
    (29
    )
    
    
    8Depreciation
    
    
    
    (2,197
    )
    
    
    (3,373
    )
    
    
    (3,095
    )
    
    
    (2,039
    )
    
    
    (1,368
    )Operating income
    
    
    
    4,611
    
    
    
    963
    
    
    
    6,031
    
    
    
    9,742
    
    
    
    5,671Other income and expenseInterest income
    
    
    
    147
    
    
    
    199
    
    
    
    273
    
    
    
    282
    
    
    
    139Gain on currency translation
    
    
    
    
    
    
    
    1,473
    
    
    
    
    
    
    
    
    
    
    
    Gain on sales of securities
    
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    
    
    
    
    Gain on disposal of property
held for lease
    
    
    
    
    
    
    
    2,210
    
    
    
    
    
    
    
    
    
    
    
    Interest expenses
    
    
    
    (842
    )
    
    
    (1,789
    )
    
    
    (3,103
    )
    
    
    (3,258
    )
    
    
    (1,991
    )Operating Income before
income taxes, noncontrolling
interest and extraordinary
item
    
    
    
    3,916
    
    
    
    3,105
    
    
    
    3,201
    
    
    
    6,766
    
    
    
    3,819Income taxes expense
    
    
    
    (231
    )
    
    
    (569
    )
    
    
    (1,711
    )
    
    
    (1,403
    )
    
    
    (739
    )Income before noncontrolling
interest and extraordinary
item
    
    
    
    3,685
    
    
    
    2,536
    
    
    
    1,490
    
    
    
    5,363
    
    
    
    3,080Net loss (income)
attributable to
noncontrolling interest
    
    
    
    4
    
    
    
    (6
    )
    
    
    (1
    )
    
    
    (38
    )
    
    
    (20
    )Income before extraordinary
item
    
    
    
    3,689
    
    
    
    2,530
    
    
    
    1,489
    
    
    
    5,325
    
    
    
    3,060Extraordinary gain on
negative goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,291Net income
    
    
    
    3,689
    
    
    
    2,530
    
    
    
    1,489
    
    
    
    5,325
    
    
    
    4,351Net income per share:Basic
    
    
    
    0.16
    
    
    
    0.11
    
    
    
    0.07
    
    
    
    0.31
    
    
    
    0.32Diluted
    
    
    
    0.15
    
    
    
    0.11
    
    
    
    0.07
    
    
    
    0.29
    
    
    
    0.30Weighted average number of
sharesBasic
    
    
    
    23,230
    
    
    
    22,246
    
    
    
    21,064
    
    
    
    17,390
    
    
    
    13,439Diluted
    
    
    
    24,102
    
    
    
    22,449
    
    
    
    22,289
    
    
    
    18,303
    
    
    
    14,322Balance Sheet Data:Working capital
    
    
    
    77,614
    
    
    
    72,059
    
    
    
    62,786
    
    
    
    50,134
    
    
    
    35,554Total assets
    
    
    
    133,757
    
    
    
    131,190
    
    
    
    134,144
    
    
    
    124,522
    
    
    
    108,230Long-term obligation
    
    
    
    2,322
    
    
    
    2,219
    
    
    
    1,335
    
    
    
    1,640
    
    
    
    43Total LJ International Inc.
shareholders equity
    
    
    
    83,872
    
    
    
    78,329
    
    
    
    72,668
    
    
    
    59,739
    
    
    
    45,008
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B. CAPITALIZATION AND INDEBTEDNESS.
  C. REASONS FOR THE OFFER AND USE OF PROCEEDS.
  D. RISK FACTORS.
 We depend upon one customer who accounted for at least 10% of our sales in 2009. We cannot be
certain that these sales will continue; if not, our revenue will likely decline.
  We face significant competition from larger competitors in our wholesale and retail operations.
  -5-




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There are numerous factors relating to the operations of our business that could adversely affect
our success and results.
  
    
    technological developments in the mass production of jewelry
    
    our ability to meet the design and production requirements of our customers
efficiently
    
    the market acceptance of our and our customers jewelry
    
    increases in expenses associated with continued sales growth
    
    our ability to control costs
    
    our managements ability to evaluate the publics taste and new orders to target
satisfactory profit margins
    
    our capacity to develop and manage the introduction of new designed products
    
    our ability to compete
  Our production facilities are located in China. Our results of operations and financial condition
may, therefore, be influenced by the economic, political, legal and social conditions in China.
  Changes to PRC tax laws may adversely affect our financial condition and results of operations in
the future.
   -6-




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




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We rely on short-term financing from banks for our daily operation.
   We rely geographically on the US market for the majority of our wholesale revenue.
  Our holding company structure creates restrictions on the payment of dividends.
  As a foreign private issuer, we are not subject to certain rules promulgated by Nasdaq that other
Nasdaq-listed issuers are required to comply with.
  -8-




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
    
    our independent directors do not hold regularly scheduled meetings in executive
session
    
    the compensation of our executive officers is not determined by an independent
committee of the board or by the independent members of the board of directors, and our
CEO may be present and participate in the deliberations concerning his compensation
    
    related party transactions are not required to be reviewed or approved by our audit
committee or other independent body of the board of directors
    
    we are not required to solicit shareholder approval of stock plans, including those
in which our officers or directors may participate; stock issuances that will result in
a change in control; the issuance of our stock in related party transactions or other
transactions in which we may issue 20% or more of our outstanding shares; or, below
market issuances of 20% or more of our outstanding shares to any person
  It may be difficult to serve us with legal process or enforce judgments against us or our
management.
  
    
    judgments of United States courts against us, our directors or our officers based on
the civil liability provisions of the securities laws of the United States or any
state; or
    
    in original actions brought in the British Virgin Islands, China or Hong Kong,
liabilities against us or non-residents based upon the securities laws of the United
States or any state.
 Some information about us may be unavailable due to exemptions under the Exchange Act for a foreign
private issuer.
  
    
    the rules under the Exchange Act requiring the filing with the Securities and
Exchange Commission of quarterly reports on Form 10-Q or current reports on Form 8-K
    
    the provisions of Regulation FD aimed at preventing issuers from making selective
disclosures of material information
 -9-




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
    
    the sections of the Exchange Act regulating the solicitation of proxies, consents or
authorizations applicable to a security registered under the Exchange Act
    
    the sections of the Exchange Act requiring insiders to file public reports of their
stock ownership and trading activities and establishing insider liability for profits
realized from any short-swing trading transaction
  Since we are a British Virgin Islands company, the rights of our shareholders may be more limited
than those of shareholders of a company organized in the United States.
   We may need to raise capital in the future. Such funds may not be available on acceptable terms or
at all, and, without additional funds, we may not be able to expand our retail business in China.
   
    
    We cannot be certain that additional capital will be available on favorable terms,
if at all;
 -10-




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
    
    Any available additional financing may not be adequate to meet our goals; and
    
    Any equity financing would result in dilution to stockholders.
  We are dependent on certain key personnel and the loss of these key personnel could have a material
adverse effect on our business, financial condition and results of operations.
  Risks Related to Doing Business in the Peoples Republic of China
     -11-




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Anti-inflation measures could harm the economy generally and could harm our business.
  -12-




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ITEM 4. INFORMATION ON THE COMPANY
 A. HISTORY AND DEVELOPMENT OF THE COMPANY.
  
    
    Lorenzo Jewelry Limited (Lorenzo Jewelry), a company incorporated in Hong Kong on
February 20, 1987
    
    Lorenzo Jewellery (Shenzhen) Co., Ltd.
    
    ENZO International Holdings Ltd.
    
    ENZO Jewelry Inc.
    
    Lorenzo Crystal Ltd.
    
    Lorenzo (Shenzhen) Co., Ltd.
    
    Beijing Rainbow Zhen Ai Ltd.
    
    Wonderful (Shenzhen) Ltd.
    
    Goldleaves Gems (Shenzhen) Co., Ltd. (98% equity ownership)
   
    
    we spent $1,415,000 on capital expenditures, excluding inventory, for ENZO retail
store openings during the fiscal year ended December 31, 2009
    
    we spent $1,199,000 on capital expenditures, excluding inventory, for ENZO retail
store openings during the fiscal year ended December 31, 2008
    
    we spent $1,977,000 on capital expenditures, excluding inventory, for ENZO retail
store openings during the fiscal year ended December 31, 2007
 B. BUSINESS OVERVIEW.
   -13-




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LJI continues its expansion strategy in Chinas retail market.
  LJI continues to focus in North America for our wholesale business.
   
    
    fine jewelers
    
    national jewelry chains
    
    department stores
    
    TV shopping channels
    
    discount chain stores
  Our Retail Business Strategy
  
    
    expand our market share by opening an additional 100 points of sale by the end of
2011
 -14-




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
    
    improve the performance of our existing stores by making appropriate adjustments on
product mix and by stepping up our marketing and promotional activities
    
    further expand our product range by introducing new collections for both colored
gemstones and diamonds to capture different market segments
 Our Wholesale Business Strategy
  
    
    increase our market share of moderately priced high-quality gem-set colored and
precious jewelry by capitalizing on our vertically integrated production processes to
produce high-end precious stone jewelry in addition to high volume, high-quality
colored products
    
    further develop our existing customer relationships with our specialized services
    
    expand into new distribution channels, particularly in the United States, China,
Western Europe, Japan and Australia
   Year ended December 31,(in thousands)
    
    2009
    
    
    2008
    
    
    2007US$
    
    
    US$
    
    
    US$US & Canada
    
    
    39,225
    
    
    
    69,232
    
    
    
    80,572Europe and other countries
    
    
    18,110
    
    
    
    27,455
    
    
    
    32,597Japan
    
    
    1,115
    
    
    
    989
    
    
    
    2,206PRC (including Hong Kong and Macau)
    
    
    52,073
    
    
    
    38,592
    
    
    
    36,662110,523
    
    
    
    136,268
    
    
    
    152,037
 Our Production Capability
  -15-




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Sales and Marketing
 Retail
   Wholesale
   -16-




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Show Name
    
    Show DateVicenzaFirst
    
    Jan 11 - 18JA Winter Show
    
    Jan 18 - 20March Hong Kong Show
    
    Mar 4 - 8Basel 2009
    
    Mar 26 - Apr 2VicenzaCharm
    
    May 16 - 20JCK Las Vegas 09
    
    May 30 - Jun 2JA Summer Show
    
    Jul 26 - 29VicenzaChoice
    
    Sep 12 - 16September HK Show
    
    Sep 23 - 27JANY Special Show
    
    Oct 25 - 27
 Design and Product Development
    Production Process
  
    
    cutting and polishing colored gemstones
    
    combining pure gold or sterling silver with gemstones or diamonds to produce jewelry
    
    finishing operations such as cleaning and polishing, resulting in high quality
finished jewelry
  Supply
  -17-




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Security
   Insurance
  -18-




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Competition
 Retail
  Wholesale
   C. ORGANIZATIONAL STRUCTURE AS OF DECEMBER 31, 2009.
  LJ INTERNATIONAL INC.
 100%
 
    
    Lorenzo Jewelry Limited(HK)
    
    Lorenzo Jewellery (Shenzhen) Co., Ltd.(PRC)
    
    ENZO International Holdings Ltd.(BVI)
    
    ENZO Jewelry Inc.(BVI)
    
    Lorenzo Crystal Ltd.(HK)
    
    Lorenzo (Shenzhen) Co., Ltd.(PRC)
    
    Wonderful (Shenzhen) Ltd.(PRC)
    
    Beijing Rainbow Zhen Ai Ltd.(PRC)
 98%
 -19-




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
    
    Goldleaves Gems (Shenzhen) Co., Ltd.(PRC)
 
 D. PROPERTY, PLANTS AND EQUIPMENT.
   
    
    18,848 square feet for a term of five years expiring June 30, 2011 from an
unaffiliated third party at a rental rate of $3,817 per month;
    
    18,848 square feet for a term of two years expiring August 31, 2010 from an
unaffiliated third party at a rental rate of $5,868 per month;
    
    19,364 square feet for a term of three years expiring March 31, 2012 from an
unaffiliated third party at a rental rate of $4,716 per month; and
    
    20,301 square feet for a term of three years expiring March 31, 2012 from an
unaffiliated third party at a rental rate of $4,945 per month.
  -20-




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ITEM 4A. UNRESOLVED STAFF COMMENTS
  -21-




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




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
    
    significant retail market  Chinas retail sales rose 15.5 percent year-on-year to
RMB12,534 billion (about US$1,826 billion) in 2009 (National Bureau of Statistics)
    
    large and growing jewelry market  Chinas jewelry sales growth was recorded up
15.9% in 2009 (National Bureau of Statistics)
    
    large pool of consumers  China has a population of more than 1.3 billion people.
Rising affluence drives luxury sector with per-capita income of urban Chinese of
RMB17,175 (about US$2,502) in 2009, up 9.8% from 2008 (National Bureau of Statistics)
    
    favorable regulatory changes  as a member of the World Trade Organization, China is
eliminating many restrictions on foreign ownership and operation of retail stores.
Tariffs on colored gemstones, gold, silver and pearls have been sharply reduced, and
economic and trade relationships between China and Hong Kong have been liberalized
    
    changing consumer preferences  Chinese consumers are no longer purchasing jewelry
solely as an investment. More Chinese consumers are embracing a more Western view of
jewelry as a fashion accessory and now demand more contemporary, colorful designs
   Critical Accounting Policies and Estimates
  -23-




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Collectibility of Accounts Receivable.
  Stock-based Compensation.
 Goodwill Impairment.
 -24-




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Allowance for Obsolete Inventories.
 Fair value of financial instruments.
 -25-




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A. OPERATING RESULTS.
 Reclassifications
  Revenues
 % ChangeYears ended
    
    
    Years endedYear ended December 31,
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    2009
    
    
    2008
    
    
    2007
    
    
    2009-2008
    
    
    2008-2007RevenuesWholesale
    
    $
    59,733
    
    
    $
    99,840
    
    
    $
    117,689
    
    
    
    -40
    %
    
    
    -15
    %Retail
    
    $
    50,790
    
    
    $
    36,428
    
    
    $
    34,348
    
    
    
    39
    %
    
    
    6
    %$
    110,523
    
    
    $
    136,268
    
    
    $
    152,037
    
    
    
    -19
    %
    
    
    -10
    %
     -26-




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Cost of Sales and Gross Profit
 % ChangeYears ended
    
    
    Years endedYear ended December 31,
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    2009
    
    
    2008
    
    
    2007
    
    
    2009-2008
    
    
    2008-2007Cost of sales and gross profitCost of salesWholesale
    
    $
    47,799
    
    
    $
    79,729
    
    
    $
    95,528
    
    
    
    -40
    %
    
    
    -17
    %% of revenues
    
    
    80
    %
    
    
    80
    %
    
    
    81
    %Retail
    
    $
    24,374
    
    
    $
    17,302
    
    
    $
    16,980
    
    
    
    41
    %
    
    
    2
    %% of revenues
    
    
    48
    %
    
    
    47
    %
    
    
    49
    %Total
    
    $
    72,173
    
    
    $
    97,031
    
    
    $
    112,508
    
    
    
    -26
    %
    
    
    -14
    %% of revenues
    
    
    65
    %
    
    
    71
    %
    
    
    74
    %Gross profitWholesale
    
    $
    11,934
    
    
    $
    20,111
    
    
    $
    22,161
    
    
    
    -41
    %
    
    
    -9
    %% of revenues
    
    
    20
    %
    
    
    20
    %
    
    
    19
    %Retail
    
    $
    26,416
    
    
    $
    19,126
    
    
    $
    17,368
    
    
    
    38
    %
    
    
    10
    %% of revenues
    
    
    52
    %
    
    
    53
    %
    
    
    51
    %Total
    
    $
    38,350
    
    
    $
    39,237
    
    
    $
    39,529
    
    
    
    -2
    %
    
    
    -1
    %% of revenues
    
    
    35
    %
    
    
    29
    %
    
    
    26
    %
     -27-




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Selling, General and Administrative Expenses
 % ChangeYears ended
    
    
    Years endedYear ended December 31,
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    2009
    
    
    2008
    
    
    2007
    
    
    2009-2008
    
    
    2008-2007Selling, general and
administrative
expensesWholesale
    
    $
    8,629
    
    
    $
    14,087
    
    
    $
    13,072
    
    
    
    -39
    %
    
    
    8
    %Retail
    
    $
    20,633
    
    
    $
    17,820
    
    
    $
    15,251
    
    
    
    16
    %
    
    
    17
    %Corporate
    
    $
    1,777
    
    
    $
    2,908
    
    
    $
    2,076
    
    
    
    -39
    %
    
    
    40
    %$
    31,039
    
    
    $
    34,815
    
    
    $
    30,399
    
    
    
    -11
    %
    
    
    15
    %% of revenues
    
    
    28
    %
    
    
    26
    %
    
    
    20
    %
 %
 %
 -28-




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Net gain (loss) on derivatives
 % ChangeYears ended
    
    
    Years endedYear ended December 31,
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    2009
    
    
    2008
    
    
    2007
    
    
    2009-2008
    
    
    2008-2007Realized loss on
derivatives
    
    $
    0
    
    
    $
    (483
    )
    
    $
    (349
    )
    
    
    -100
    %
    
    
    38
    %0
    %
    
    
    0
    %
    
    
    0
    %(With the hedging mechanism in place, we have the realized gain on hedging activities)Realized (loss) gain
on hedging activities
    
    $
    (503
    )
    
    $
    397
    
    
    $
    345
    
    
    
    -227
    %
    
    
    15
    %% of revenues
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Net loss on
derivatives and
hedging activities
    
    $
    (503
    )
    
    $
    (86
    )
    
    $
    (4
    )
    
    
    485
    %
    
    
    2050
    %% of revenues
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    -29-




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Depreciation
 % ChangeYears ended
    
    
    Years endedYear ended December 31,
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    2009
    
    
    2008
    
    
    2007
    
    
    2009-2008
    
    
    2008-2007DepreciationWholesale
    
    $
    914
    
    
    $
    1,877
    
    
    $
    1,995
    
    
    
    -51
    %
    
    
    -6
    %% of revenues
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %Retail
    
    $
    1,283
    
    
    $
    1,496
    
    
    $
    1,100
    
    
    
    -14
    %
    
    
    36
    %% of revenues
    
    
    3
    %
    
    
    4
    %
    
    
    3
    %Total
    
    $
    2,197
    
    
    $
    3,373
    
    
    $
    3,095
    
    
    
    -35
    %
    
    
    9
    %% of revenues
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %
   Interest cost
 % ChangeYears ended
    
    
    Years endedYear ended December 31,
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    2009
    
    
    2008
    
    
    2007
    
    
    2009-2008
    
    
    2008-2007Interest expenses
    
    $
    842
    
    
    $
    1,789
    
    
    $
    3,103
    
    
    
    -53
    %
    
    
    -42
    %% of revenues
    
    
    1
    %
    
    
    1
    %
    
    
    2
    %
  -30-




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Income taxes
 % ChangeYears ended
    
    
    Years endedYear ended December 31,
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    2009
    
    
    2008
    
    
    2007
    
    
    2009-2008
    
    
    2008-2007Income taxes expenseWholesales
    
    $
    171
    
    
    $
    569
    
    
    $
    1,015
    
    
    
    -70
    %
    
    
    -44
    %% of revenues
    
    
    0
    %
    
    
    1
    %
    
    
    1
    %Retail
    
    $
    60
    
    
    $
    0
    
    
    $
    696
    
    
    
    N/A
    
    
    
    -100
    %% of revenues
    
    
    0
    %
    
    
    0
    %
    
    
    2
    %Total
    
    $
    231
    
    
    $
    569
    
    
    $
    1,711
    
    
    
    -59
    %
    
    
    -67
    %% of revenues
    
    
    0
    %
    
    
    0
    %
    
    
    1
    %
      -31-




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Inflation
  Foreign Exchange
  Governmental economic and political policies and factors
  B. LIQUIDITY AND CAPITAL RESOURCES
  -32-




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Cash Flows
 Years ended December 31,(in thousands)
    
    2009
    
    2008
    
    2007Net cash provided by operating activities
    
    $
    2,061
    
    
    $
    8,746
    
    
    $
    2,203Net cash used in investing activities
    
    
    (1,628
    )
    
    
    (801
    )
    
    
    (1,806
    )Net cash used in financing activities
    
    
    (2,883
    )
    
    
    (533
    )
    
    
    (1,309
    )Effect of foreign exchange rate change
    
    
    384
    
    
    
    985
    
    
    
    Net (decrease) increase in cash and cash
equivalents
    
    
    (2,066
    )
    
    
    8,397
    
    
    
    (912
    )
 Operating Activities
 Years ended December 31,(in thousands)
    
    2009
    
    
    2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    3,689
    
    
    $
    2,530
    
    
    $
    1,489Adjustments to reconcile income to net cash
provided by (used in) operating activities:Depreciation of property, plant and
equipment and properties held for lease
    
    
    2,197
    
    
    
    3,373
    
    
    
    3,095Gain on sales of securities
    
    
    
    
    
    
    (49
    )
    
    
    Gain on disposal of property held for lease
    
    
    
    
    
    
    (2,210
    )
    
    
    (Gain) loss on disposal and write-off of
property, plant and equipment
    
    
    (5
    )
    
    
    45
    
    
    
    45Gain on currency translation
    
    
    
    
    
    
    (1,473
    )
    
    
    (Reversal of) allowance for doubtful debts
    
    
    (231
    )
    
    
    1,223
    
    
    
    (2
    )Net (loss) income attributable to
noncontrolling interest
    
    
    (4
    )
    
    
    6
    
    
    
    1Compensation costs for warrants granted
    
    
    
    
    
    
    39
    
    
    
    157Compensation expenses recognized during the
year
    
    
    1,043
    
    
    
    361
    
    
    
    330Changes in operating assets and liabilities:Trade receivables
    
    
    (878
    )
    
    
    1,401
    
    
    
    702Inventories
    
    
    (4,764
    )
    
    
    5,375
    
    
    
    (13,261
    )Prepayments and other current assets
    
    
    165
    
    
    
    496
    
    
    
    596Due from related parties
    
    
    
    
    
    
    
    
    
    
    21Trade payables
    
    
    620
    
    
    
    (775
    )
    
    
    9,487Accrued expenses and other payables
    
    
    552
    
    
    
    (1,318
    )
    
    
    (1,432
    )Income taxes payable and deferred taxation
    
    
    (323
    )
    
    
    (278
    )
    
    
    975Net cash provided by operating activities
    
    
    2,061
    
    
    
    8,746
    
    
    
    2,203
 -33-




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Significant changes in assets and liabilities were as follows:
    Investing Activities:
   -34-




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Years ended December 31,(in thousands)
    
    2009
    
    
    2008
    
    
    2007Leasehold improvement
    
    $
    1,376
    
    
    $
    1,199
    
    
    $
    2,156Furniture, fixtures and equipment
    
    $
    129
    
    
    $
    294
    
    
    $
    660Plant and machinery
    
    $
    62
    
    
    $
    81
    
    
    $
    322Motor vehicles
    
    $
    143
    
    
    $
    61
    
    
    $
    1Total
    
    $
    1,710
    
    
    $
    1,635
    
    
    $
    3,139
 Financing Activities:
    Financing Sources
 Banking Facilities and Notes Payables
  -35-




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Years ended December 31,(in thousands)
    
    2009
    
    
    2008
    
    
    2007Granted :Letters of credit
    
    $
    23,170
    
    
    $
    24,085
    
    
    $
    38,957Overdraft
    
    $
    2,923
    
    
    $
    2,923
    
    
    $
    4,14126,093
    
    
    
    27,008
    
    
    
    43,098Utilized :Letters of credit utilized
    
    $
    13,481
    
    
    $
    13,384
    
    
    $
    16,653Overdraft utilized
    
    $
    2,908
    
    
    $
    2,724
    
    
    $
    2,97716,389
    
    
    
    16,108
    
    
    
    19,630
    Years ended December 31,(in thousands)
    
    2009
    
    
    2008
    
    
    2007Notes payable, current portion
    
    $
    5,551
    
    
    $
    9,194
    
    
    $
    4,047Notes payable, non-current portion
    
    $
    2,244
    
    
    $
    2,115
    
    
    $
    1,1547,795
    
    
    
    11,309
    
    
    
    5,201
  -36-




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Gold Loan Facilities
 Years ended December 31,(in thousands)
    
    2009
    
    2008
    
    2007Gold loans outstanding (in $)
    
    $
    
    
    
    $
    
    
    
    $
    4,883Gold loans outstanding (in troy ounces)
    
    
    
    
    
    
    
    
    
    
    11,150Gold loan interest rate
    
    
    
    
    
    
    
    
    
    
    3.1%-3.3
    %
  Looking Forward
  Impact of recently issued US GAAP accounting standards
 Subsequent Events (Topic 855) Amendments to Certain
Recognition and Disclosure Requirements
 Improving Disclosures about Fair Measurements
 -37-




---



##### Table of Contents



Accounting and Reporting for Decreases in Ownership of
a Subsidiary- a Scope Clarification FASB Accounting Standards Codification Noncontrolling Interests in Consolidated Financial Statements.
 Consolidations (Topic 810) Improvements to Financial
Reporting by Enterprises Involved with Variable Interest Entities Amendments to FASB Interpretation
No. 46(R)
 Transfers and Servicing (Topic 860) Accounting for
Transfers of Financial Assets Accounting for Transfers of Financial
Assetsan amendment of FASB Statement No. 140
 -38-




---



##### Table of Contents



Fair Value Measurements and Disclosures (Topic
820) Measuring Liabilities at Fair Value Fair Value Measurements and Disclosures-Overall
 Accounting for Redeemable Equity Instrumentsan
Amendment to Section 480-10-S99 Distinguishing Liabilities from Equity
 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting PrinciplesA Replacement of FASB Statement No. 162 Generally Accepted Accounting Principles
 Subsequent Events Subsequent Events
 Recognition and
Presentation of Other-Than-Temporary Impairments InvestmentsDebt
and Equity Securities
 -39-




---



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Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly Fair Value Measurements and Disclosures
 Interim Disclosures
about Fair Value of Financial Instruments Financial Instruments
 Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities Earnings Per Share
 Determination of the Useful Life of Intangible Assets IntangiblesGoodwill and Other
 Disclosures about Derivative Instruments and Hedging
Activities Derivatives and Hedging
 Business Combinations Business Combinations
 -40-




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##### Table of Contents



Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of ARB No. 51 , Consolidation
 Fair Value Measurements
 C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
  D. TREND INFORMATION.
  -41-




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##### Table of Contents



E. OFF-BALANCE SHEET ARRANGEMENTS.
  F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS.
  Payments due by periodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsUS$
    
    
    US$
    
    
    US$
    
    
    US$
    
    
    US$Long-Term Debt ObligationsCapital (Finance) Lease Obligations
    
    
    191
    
    
    
    108
    
    
    
    83
    
    
    
    
    
    
    
    Operating Lease Obligations
    
    
    2,144
    
    
    
    1,576
    
    
    
    568
    
    
    
    
    
    
    
    Total
    
    
    2,335
    
    
    
    1,684
    
    
    
    651
    
    
    
    
    
    
    
    
 .
 -42-




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##### Table of Contents



ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 A. DIRECTORS AND SENIOR MANAGEMENT.
  Name
    
    Age
    
    PositionYu Chuan Yih
    
    
    70
    
    
    Chairman of the Board of Directors, President and Chief Executive OfficerKa Man Au
    
    
    45
    
    
    Chief Operating Officer, Secretary and DirectorHon Tak Ringo Ng
    
    
    50
    
    
    Chief Financial Officer and DirectorAndrew N. Bernstein
    
    
    57
    
    
    Independent Non-Executive DirectorXiang Xiong Deng
    
    
    45
    
    
    Independent Non-Executive DirectorJin Wang
    
    
    39
    
    
    Independent Non-Executive DirectorJieyun Yu
    
    
    44
    
    
    Independent Non-Executive Director
  Mr. Yih
 Ms. Au
 Mr. Ng
 Mr. Bernstein
 -43-




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##### Table of Contents



Mr. Deng
 Mr. Wang
 Ms. Yu
 B. COMPENSATION.
     -44-




---



##### Table of Contents




    
    Mr. Yih  500,000;
    
    Ms. Au  200,000;
    
    Mr. Ng  200,000;
    
    Mr. Bernstein  50,000;
    
    Mr. Deng  50,000;
    
    Mr. Wang  50,000; and
    
    Ms. Yu  50,000.
  
    
    Mr. Yih  900,000;
    
    Ms. Au  200,000;
    
    Mr. Ng  200,000; and
    
    Mr. Deng  40,000.
 C. BOARD PRACTICES.
 Audit Committee
  
    
    recommend annually to the board of directors the appointment of our independent
public accountants
    
    discuss and review the scope and the fees of the prospective annual audit and review
the results with the independent public accountants
    
    review and approve non-audit services of the independent public accountants
    
    review compliance with our existing accounting and financial policies
    
    review the adequacy of our financial organization
    
    review our managements procedures and policies relative to the adequacy of our
internal accounting controls and compliance with US federal and state laws relating to
financial reporting
 Nominating Committee
 -45-




---



##### Table of Contents




    
    assess the size and composition of the board of directors in light of our operating
requirements and existing social attitudes and trends
    
    develop membership qualifications for the board of directors and all board
committees
    
    monitor compliance with board of director and board committee membership criteria
    
    review and recommend directors for continued service as required based on our
evolving needs
    
    coordinate and assist management and the board of directors in recruiting new
members to the board of directors
    
    investigate suggestions for candidates for membership on the board of directors and
recommend prospective directors, as required, to provide an appropriate balance of
knowledge, experience and capability on the board of directors, including stockholder
nominations for the board of directors
 Compensation Committee
  
    
    review and approve corporate goals and objectives relevant to the compensation of
the chief executive officer and other executive officers
    
    evaluate the chief executive officers performance in light of such goals and
objectives at least annually and communicate the results to the chief executive officer
and the board of directors
    
    set the chief executive officers compensation levels based on the foregoing
evaluation (including annual salary, bonus, stock options and other direct and indirect
benefits), with ratification by the independent directors of the full board of
directors
    
    set the other executive officers compensation levels (including annual salary,
bonus, stock options and other direct and indirect benefits)
 Nasdaq Requirements
   -46-




---



##### Table of Contents




    
    our independent directors do not hold regularly scheduled meetings in executive
session (Rule 5605(b)(2));
    
    the compensation of our executive officers is not determined by an independent
committee of the board or by the independent members of the board of directors, and our
CEO may be present and participate in the deliberations concerning his compensation
(Rule 5605(d));
    
    related party transactions are not required to be reviewed or approved by our audit
committee or other independent body of the board of directors (Rule 5630); and
    
    we are not required to solicit shareholder approval of stock plans, including those
in which our officers or directors may participate; stock issuances that will result in
a change in control; the issuance of our stock in related party transactions or other
transactions in which we may issue 20% or more of our outstanding shares; or, below
market issuances of 20% or more of our outstanding shares to any person (Rule 5635).
  D. EMPLOYEES.
  E. SHARE OWNERSHIP.
  
    
    each person who is known by us to own beneficially more than 5% of our outstanding
common stock;
    
    each of our current executive officers and directors; and
    
    all executive officers and directors as a group.
   -47-




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##### Table of Contents



Number
    
    PercentName of Beneficial Holder
    
    Shares Beneficially OwnedYu Chuan Yih
    
    
    2,984,353
    (1)
    
    
    11.9Ka Man Au
    
    
    485,629
    (2)
    
    
    2.0Hon Tak Ringo Ng
    
    
    525,000
    (3)
    
    
    2.1Andrew N. Bernstein
    
    
    0
    
    
    
    0Xiang Xiong Deng
    
    
    10,000
    (4)
    
    
    *Jin Wang
    
    
    0
    
    
    
    0Jieyun Yu
    
    
    0
    
    
    
    0All directors and executive officers as a group (7 persons)
    
    
    4,004,982
    
    
    
    16.0
 
 *
    
    Represents less than 1% beneficial ownership(1)
    
    Includes options currently exercisable to acquire: 
    
    450,000 shares of common stock at $0.60 per share at any time after February 17,
2010 through February 16, 2011
 (2)
    
    Includes options currently exercisable to acquire:
 
    
    150,000 shares of common stock at $2.00 per share at any time until June 30, 2013
    
    50,000 shares of common stock at $0.60 per share at any time after February 17, 2010
through February 16, 2011
 (3)
    
    Includes options currently exercisable to acquire:
 
    
    150,000 shares of common stock at $2.00 per share at any time until June 30, 2013
    
    50,000 shares of common stock at $0.60 per share at any time after February 17, 2010
through February 16, 2011
 (4)
    
    Represents options currently exercisable to acquire:
 
    
    10,000 shares of common stock at $0.60 per share at any time on or after February
17, 2010 through February 16, 2011
 The 1998 Stock Compensation Plan
  
    
    encourage ownership of our common stock by our officers, directors, employees and
advisors
    
    provide additional incentive for them to promote our success and our business
 -48-




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##### Table of Contents




    
    encourage them to remain in our employ by providing them with an opportunity to
benefit from any appreciation of our common stock through the issuance of stock options
    
    
    a total of 20,000 stock options to purchase 20,000 shares at $2.00 per share through
June 30, 2013, of which no stock options are held by our directors and executive
officers as a group.
 The 2003 Stock Compensation Plan
  
    
    encourage ownership of our common stock by our officers, directors, employees and
advisors
    
    provide additional incentive for them to promote our success and our business
    
    encourage them to remain in our employ by providing them with an opportunity to
benefit from any appreciation of our common stock through the issuance of stock options
  -49-




---



##### Table of Contents




    
    a total of 400,500 stock options to purchase 400,500 shares at $2.00 per share
through June 30, 2013, of which 300,000 stock options are held by our directors and
executive officers as a group.
 The 2005 Stock Compensation Plan
  
    
    encourage ownership of our common stock by our officers, directors, employees and
advisors
    
    provide additional incentive for them to promote our success and our business
    
    encourage them to remain in our employ by providing them with an opportunity to
benefit from any appreciation of our common stock through the issuance of stock options
   
    
    a total of 235,000 stock options to purchase 235,000 shares at $0.40 per share
through various expiration dates, none of which stock options are held by our directors
and executive officers as a group.
 -50-




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##### Table of Contents



The 2008 Stock Compensation Plan
  
    
    encourage ownership of our common stock by our officers, directors, employees and
advisors
    
    provide additional incentive for them to promote our success and our business
    
    encourage them to remain in our employ by providing them with an opportunity to
benefit from any appreciation of our common stock through the issuance of stock options
   
    
    a total of 4,000,000 stock options to purchase 4,000,000 shares at $0.60 per share
through various expiration dates, of which 1,340,000 stock options are held by our
directors and executive officers as a group.
 Other Options and Warrants Outstanding
  
    
    On September 25, 2006, we issued, and 11 institutional investors purchased, an
aggregate of 1,466,668 shares of our common stock at $3.75 per share, as well as an
aggregate of 236,909 warrants to purchase 236,909 shares at an exercise price of $4.221
per share (the Short Term Warrants) and 366,668 warrants to purchase 366,668 shares
at an exercise price of $4.50 per share (the Long Term Warrants). In addition, our
placement agent received 29,333 Long Term Warrants with identical terms to the Long
Term Warrants issued to the investors (the Placement Agent Warrants). The Short Term
Warrants were exercisable at
 -51-




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##### Table of Contents



any time through February 5, 2007. The Long Term Warrants
are exercisable at any time on or after March 25, 2007 for a term of five years
thereafter.As of March 15, 2010, the following warrants remained outstanding:
 
    
    300,001 Long Term Warrants
    
    29,333 Placement Agent Warrants
 
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 A. MAJOR SHAREHOLDERS.
     B. RELATED PARTY TRANSACTIONS.
    -52-




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C. INTERESTS OF EXPERTS AND COUNSEL.
  
 ITEM 8. FINANCIAL INFORMATION
 A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION.
   Securities Litigation. Apple v. LJ International Inc., et al. Cooper v. LJ International, Inc., et al. Lieben v. LJ International
Inc., et. al.
   -53-




---



##### Table of Contents



Derivative Litigation. Vaughn v. Yih, et al. Cooke vs. Yih, et al.
  Vaughn Vaughn Vaughn
 Cooke Vaughn Cooke Vaughn
 B. SIGNIFICANT CHANGES.
  
 ITEM 9. THE OFFER AND LISTING
 A. OFFER AND LISTING DETAILS.
 -54-




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##### Table of Contents



Period
    
    High
    
    LowYear ended December 31, 2005
    
    $
    3.95
    
    
    $
    2.03Year ended December 31, 2006
    
    $
    4.60
    
    
    $
    3.08Year ended December 31, 2007
    
    $
    12.86
    
    
    $
    2.18Year ended December 31, 2008
    
    $
    5.45
    
    
    $
    0.37Year ended December 31, 2009
    
    $
    3.94
    
    
    $
    0.47Quarter ended March 31, 2008
    
    $
    5.45
    
    
    $
    2.47Quarter ended June 30, 2008
    
    $
    3.90
    
    
    $
    2.56Quarter ended September 30, 2008
    
    $
    2.53
    
    
    $
    1.01Quarter ended December 31, 2008
    
    $
    1.02
    
    
    $
    0.37Quarter ended March 31, 2009
    
    $
    0.81
    
    
    $
    0.47Quarter ended June 30, 2009
    
    $
    2.15
    
    
    $
    0.64Quarter ended September 30, 2009
    
    $
    2.74
    
    
    $
    1.69Quarter ended December 31, 2009
    
    $
    3.94
    
    
    $
    2.04Quarter ended March 31, 2010*
    
    $
    3.03
    
    
    $
    2.22Month ended September 30, 2009
    
    $
    2.33
    
    
    $
    1.81Month ended October 31, 2009
    
    $
    3.94
    
    
    $
    2.04Month ended November 30, 2009
    
    $
    3.37
    
    
    $
    3.09Month ended December 31, 2009
    
    $
    3.30
    
    
    $
    2.34Month ended January 31, 2010
    
    $
    2.98
    
    
    $
    2.24Month ended February 28, 2010
    
    $
    2.63
    
    
    $
    2.22Month ended March 31, 2010*
    
    $
    3.03
    
    
    $
    2.62
 
 *
    
    Through March 15, 2010 B. PLAN OF DISTRIBUTION.
  C. MARKETS.
  -55-




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##### Table of Contents



D. SELLING SHAREHOLDERS.
  E. DILUTION.
  F. EXPENSES OF THE ISSUE.
  ITEM 10. ADDITIONAL INFORMATION
 A. SHARE CAPITAL.
  B. MEMORANDUM AND ARTICLES OF ASSOCIATION.
 Corporate Powers
 Directors
 Share Rights, Preferences and Restrictions
 -56-




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##### Table of Contents



Changing Share Rights
 Shareholder Meetings
 Restrictions on Rights to Own Securities
 Change in Control Provisions
 Disclosure of Share Ownership
 Applicable Law
   -57-




---



##### Table of Contents



Changes in Capital
 C. MATERIAL CONTRACTS.
  D. EXCHANGE CONTROLS.
 -58-




---



##### Table of Contents



E. TAXATION.
  United States Federal Income Taxation
  
    
    a court within the United States is able to exercise primary supervision over its
administration; and
    
    one or more United States persons have the authority to control all of its
substantial decisions.
   -59-




---



##### Table of Contents




    
    is a corporation or comes within other exempt categories; or
    
    provides a correct taxpayer identification number, certifies that such holder is not
subject to backup withholding and otherwise complies with the backup withholding rules.
   British Virgin Islands Taxation
    -60-




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##### Table of Contents



F. DIVIDENDS AND PAYING AGENTS.
  G. STATEMENT BY EXPERTS.
  H. DOCUMENTS ON DISPLAY.
  I. SUBSIDIARY INFORMATION.
  
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  -61-




---



##### Table of Contents



PART II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
  
 ITEM 15. CONTROLS AND PROCEDURES
 (a) Disclosure Controls and Procedures.
   (b) Managements annual report on internal control over financial reporting.
 Internal Control-Integrated Framework
   -62-




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##### Table of Contents



(c) Attestation report of the registered public accounting firm.
  (d) Changes in internal control over financial reporting.
  
 ITEM 16. [RESERVED]
 
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B. CODE OF ETHICS
  
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 (a) Audit Fees.
   -63-




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##### Table of Contents



(b) Audit-Related Fees.
  (c) Tax Fees.
  (d) All Other Fees.
  (e) Audit Committee Pre-Approval Policies and Procedures.
     (f).
 
 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  -64-




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##### Table of Contents



ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
   
 ITEM 16F. CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
  
 ITEM 16G. CORPORATE GOVERNANCE
   
    
    our independent directors do not hold regularly scheduled meetings in executive
session (Rule 5605(b)(2));
    
    the compensation of our executive officers is not determined by an independent
committee of the board or by the independent members of the board of directors, and our
CEO may be present and participate in the deliberations concerning his compensation
(Rule 5605(d));
    
    related party transactions are not required to be reviewed or approved by our audit
committee or other independent body of the board of directors (Rule 5630); and
    
    we are not required to solicit shareholder approval of stock plans, including those
in which our officers or directors may participate; stock issuances that will result in
a change in control; the issuance of our stock in related party transactions or other
transactions in which we may issue 20% or more of our outstanding shares;
 -65-




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##### Table of Contents



or, below
market issuances of 20% or more of our outstanding shares to any person (Rule 5635).
  
 PART III
 
 ITEM 17. FINANCIAL STATEMENTS
  
 ITEM 18. FINANCIAL STATEMENTS
         -66-




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##### Table of Contents



PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Statements of Operations
    
    
    F-3Consolidated Balance Sheets
    
    
    F-4Consolidated Statements of Shareholders Equity and
Comprehensive Income
    
    
    F-5  F-6Consolidated Statements of Cash Flows
    
    
    F-7  F-8Notes to and Forming Part of the Financial Statements
    
    
    F-9  F-49Schedule II
    
    
    F-50
 F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
  Internal Control  Integrated Framework
   Consolidations Noncontrolling
Interests in Consolidated Financial Statements)
  
 F-2




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##### Table of Contents



LJ INTERNATIONAL INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
  Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,Notes
    
    
    2009
    
    
    2008
    
    
    2007US$
    
    
    US$
    
    
    US$Operating revenue
    
    
    2
    (c)
    
    
    110,523
    
    
    
    136,268
    
    
    
    152,037Costs of goods sold (Exclusive of depreciation
shown separately below)
    
    
    
    
    
    
    (72,173
    )
    
    
    (97,031
    )
    
    
    (112,508
    )Gross profit
    
    
    
    
    
    
    38,350
    
    
    
    39,237
    
    
    
    39,529Operating expensesSelling, general and administrative expenses
    
    
    
    
    
    
    (31,039
    )
    
    
    (34,815
    )
    
    
    (30,399
    )Net loss on derivatives
    
    
    
    
    
    
    (503
    )
    
    
    (86
    )
    
    
    (4
    )Depreciation
    
    
    
    
    
    
    (2,197
    )
    
    
    (3,373
    )
    
    
    (3,095
    )Operating income
    
    
    
    
    
    
    4,611
    
    
    
    963
    
    
    
    6,031Other income and expenseInterest income
    
    
    2
    (c)
    
    
    147
    
    
    
    199
    
    
    
    273Gain on currency translation
    
    
    
    
    
    
    
    
    
    
    1,473
    
    
    
    Gain on sales of securities
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    Gain on disposal of property held for lease
    
    
    
    
    
    
    
    
    
    
    2,210
    
    
    
    Interest expenses
    
    
    
    
    
    
    (842
    )
    
    
    (1,789
    )
    
    
    (3,103
    )Income before income taxes and noncontrolling
interest
    
    
    
    
    
    
    3,916
    
    
    
    3,105
    
    
    
    3,201Income taxes expense
    
    
    9
    
    
    
    (231
    )
    
    
    (569
    )
    
    
    (1,711
    )Net income
    
    
    
    
    
    
    3,685
    
    
    
    2,536
    
    
    
    1,490Net loss (income) attributable to
noncontrolling interest
    
    
    
    
    
    
    4
    
    
    
    (6
    )
    
    
    (1
    )Net income attributable to LJ International
Inc. common shareholders
    
    
    
    
    
    
    3,689
    
    
    
    2,530
    
    
    
    1,489Numerator:Net income used in computing basic earnings
per share
    
    
    
    
    
    
    3,689
    
    
    
    2,530
    
    
    
    1,489Denominator:Weighted average number of shares used in
calculating basic earnings per share
    
    
    
    
    
    
    23,229,987
    
    
    
    22,245,626
    
    
    
    21,064,253Effect of dilutive potential ordinary shares:Warrants
    
    
    
    
    
    
    
    
    
    
    6,131
    
    
    
    248,945Stock options
    
    
    
    
    
    
    871,867
    
    
    
    196,838
    
    
    
    975,904Weighted average number of shares used in
calculating diluted earnings per share
    
    
    
    
    
    
    24,101,854
    
    
    
    22,448,595
    
    
    
    22,289,102Earnings per share:Basic
    
    
    2
    (g)
    
    
    0.16
    
    
    
    0.11
    
    
    
    0.07Diluted
    
    
    2
    (g)
    
    
    0.15
    
    
    
    0.11
    
    
    
    0.07
  F-3




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##### Table of Contents



LJ INTERNATIONAL INC.
 CONSOLIDATED BALANCE SHEETS
  As of December 31,Notes
    
    
    2009
    
    
    2008US$
    
    
    US$ASSETSCurrent assetsCash and cash equivalents
    
    
    
    
    
    
    11,282
    
    
    
    13,348Restricted cash
    
    
    8
    (a)
    
    
    6,425
    
    
    
    6,493Trade receivables, net of allowance for doubtful accounts
(December 31, 2009: US$1,446; December 31, 2008: US$1,705)
    
    
    
    
    
    
    21,679
    
    
    
    20,570Available-for-sale securities
    
    
    2
    (n)
    
    
    2,360
    
    
    
    2,288Inventories
    
    
    4
    
    
    
    81,401
    
    
    
    76,637Prepayments and other current assets
    
    
    
    
    
    
    1,861
    
    
    
    2,609Total current assets
    
    
    
    
    
    
    125,008
    
    
    
    121,945Properties held for lease, net
    
    
    5
    
    
    
    717
    
    
    
    750Property, plant and equipment, net
    
    
    6
    
    
    
    6,400
    
    
    
    6,863Deferred tax assets
    
    
    
    
    
    
    111
    
    
    
    111Goodwill, net
    
    
    7
    
    
    
    1,521
    
    
    
    1,521Total assets
    
    
    
    
    
    
    133,757
    
    
    
    131,190LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesBank overdrafts
    
    
    8
    
    
    
    2,908
    
    
    
    2,724Notes payable
    
    
    8
    
    
    
    5,551
    
    
    
    9,194Capitalized lease obligation, current portion
    
    
    10
    
    
    
    98
    
    
    
    78Letters of credit, gold loans and others
    
    
    8
    
    
    
    13,481
    
    
    
    13,384Trade payables
    
    
    
    
    
    
    18,545
    
    
    
    17,925Accrued payroll and staff benefits
    
    
    
    
    
    
    2,199
    
    
    
    1,753Accrued expenses and other payables
    
    
    
    
    
    
    3,155
    
    
    
    3,049Income taxes payable
    
    
    
    
    
    
    1,147
    
    
    
    1,441Deferred taxation
    
    
    9
    
    
    
    310
    
    
    
    339Total current liabilities
    
    
    
    
    
    
    47,394
    
    
    
    49,887Notes payable, non-current portion
    
    
    
    
    
    
    2,244
    
    
    
    2,115Capitalized lease obligation, non-current portion
    
    
    10
    
    
    
    78
    
    
    
    103Total liabilities
    
    
    
    
    
    
    49,716
    
    
    
    52,105Commitments and contingencies
    
    
    11EquityCommon stocks, par value US$0.01 each,
Authorized 100 million shares;
Issued 23,768,672 shares as of December 31, 2009 and
22,911,172 shares as of December 31, 2008
    
    
    12
    
    
    
    238
    
    
    
    229Additional paid-in capital
    
    
    
    
    
    
    56,675
    
    
    
    55,286Accumulated other comprehensive income (loss)
    
    
    
    
    
    
    102
    
    
    
    (354
    )Retained earnings
    
    
    
    
    
    
    26,857
    
    
    
    23,168Total LJ International Inc. shareholders equity
    
    
    
    
    
    
    83,872
    
    
    
    78,329Noncontrolling interest
    
    
    
    
    
    
    169
    
    
    
    756Total equity
    
    
    
    
    
    
    84,041
    
    
    
    79,085Total liabilities and equity
    
    
    
    
    
    
    133,757
    
    
    
    131,190
  F-4




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##### Table of Contents



LJ INTERNATIONAL INC.
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
  LJ
International Inc. Shareholders EquityAccumulatedCommon stock
    
    
    Additional
    
    
    otherNumber
    
    
    Par
    
    
    paid-in
    
    
    comprehensive
    
    
    Retained
    
    
    NoncontrollingNotes
    
    
    of shares
    
    
    value
    
    
    capital
    
    
    income (loss)
    
    
    earnings
    
    
    interest
    
    
    TotalUS$
    
    
    US$
    
    
    US$
    
    
    US$
    
    
    US$
    
    
    US$(Note 2(x))Balance as of January 1, 2007
    
    
    
    
    
    
    18,977,371
    
    
    
    190
    
    
    
    40,456
    
    
    
    (56
    )
    
    
    19,149
    
    
    
    166
    
    
    
    59,905Comprehensive income, net of tax:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,489
    
    
    
    1
    
    
    
    1,490Unrealized holding gain on investment in
available-for-sale securities
    
    
    2
    (n)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    377
    
    
    
    
    
    
    
    
    
    
    
    3771,867Issuance of common stock upon exercise of stock options
    
    12
    (a)(ii)
    
    
    1,897,000
    
    
    
    19
    
    
    
    8,485
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,504Issuance of common stock upon exercise of warrants
    
    12
    (a)(ii)
    
    
    562,801
    
    
    
    5
    
    
    
    2,067
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,072Compensation costs for warrants granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    157
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    157Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    330
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    330Balance as of December 31, 2007
    
    
    
    
    
    
    21,437,172
    
    
    
    214
    
    
    
    51,495
    
    
    
    321
    
    
    
    20,638
    
    
    
    167
    
    
    
    72,835Sales of subsidiary shares to noncontrolling interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    583
    
    
    
    583Comprehensive income, net of tax:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,530
    
    
    
    6
    
    
    
    2,536Exchange translation difference
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (375
    )
    
    
    
    
    
    
    
    
    
    
    (375
    )Unrealized holding gain on investment in
available-for-sale securities
    
    
    2
    (n)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (251
    )
    
    
    
    
    
    
    
    
    
    
    (251
    )Realized gain on sale of available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (49
    )
    
    
    
    
    
    
    
    
    
    
    (49
    )1,861Issuance of common stock upon exercise of stock options
    
    12
    (a)(iii)
    
    
    1,324,000
    
    
    
    13
    
    
    
    3,393
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,406Issuance of common stock for services rendered
    
    12
    (a)(iv)
    
    
    150,000
    
    
    
    2
    
    
    
    141
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    143Compensation costs for warrants granted
    
    
    14
    (b)(i)
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39Stock-based compensation
    
    
    2
    (q)
    
    
    
    
    
    
    
    
    
    
    218
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    218Balance as of December 31, 2008
    
    
    
    
    
    
    22,911,172
    
    
    
    229
    
    
    
    55,286
    
    
    
    (354
    )
    
    
    23,168
    
    
    
    756
    
    
    
    79,085
  F-5




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##### Table of Contents



LJ INTERNATIONAL INC.
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
  LJ
International Inc. Shareholders EquityAccumulatedCommon stock
    
    
    Additional
    
    
    otherNumber
    
    
    Par
    
    
    paid-in
    
    
    comprehensive
    
    
    Retained
    
    
    NoncontrollingNotes
    
    
    of shares
    
    
    value
    
    
    capital
    
    
    income (loss)
    
    
    earnings
    
    
    interest
    
    
    TotalUS$
    
    
    US$
    
    
    US$
    
    
    US$
    
    
    US$
    
    
    US$(Note 2(x))Balance as of December 31, 2008
    
    
    
    
    
    
    22,911,172
    
    
    
    229
    
    
    
    55,286
    
    
    
    (354
    )
    
    
    23,168
    
    
    
    756
    
    
    
    79,085Forfeiture of subsidiary shares sold to noncontrolling
interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (583
    )
    
    
    (583
    )Comprehensive income, net of tax:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.689
    
    
    
    (4
    )
    
    
    3,685Exchange translation difference
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    384
    
    
    
    
    
    
    
    
    
    
    
    384Unrealized holding gain on investment in
available-for-sale securities
    
    
    2
    (n)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72
    
    
    
    
    
    
    
    
    
    
    
    724,141Issuance of common stock upon exercise of stock options
    
    
    12
    (a)(v)
    
    
    857,500
    
    
    
    9
    
    
    
    346
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    355Stock-based compensation
    
    
    2
    (q)
    
    
    
    
    
    
    
    
    
    
    1,043
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,043Balance as of December 31, 2009
    
    
    
    
    
    
    23,768,672
    
    
    
    238
    
    
    
    56,675
    
    
    
    102
    
    
    
    26,857
    
    
    
    169
    
    
    
    84,041
  F-6




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##### Table of Contents



LJ INTERNATIONAL INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2007US$
    
    
    US$
    
    
    US$Cash flows from operating activities:Net income
    
    
    3,689
    
    
    
    2,530
    
    
    
    1,489Adjustments to reconcile income (loss) to net cash
provided by (used in) operating activities:Depreciation of property, plant and equipment
and properties held for lease
    
    
    2,197
    
    
    
    3,373
    
    
    
    3,095Gain on sales of securities
    
    
    
    
    
    
    (49
    )
    
    
    Gain on disposal of property held for lease
    
    
    
    
    
    
    (2,210
    )
    
    
    (Gain) Loss on disposal and write-off of property,
plant and equipment
    
    
    (5
    )
    
    
    45
    
    
    
    45Gain on currency translation
    
    
    
    
    
    
    (1,473
    )
    
    
    (Reversal of) Allowance for doubtful debts
    
    
    (231
    )
    
    
    1,223
    
    
    
    (2
    )Net (loss) income attributable to noncontrolling
interest
    
    
    (4
    )
    
    
    6
    
    
    
    1Compensation costs for warrants granted
    
    
    
    
    
    
    39
    
    
    
    157Compensation expenses recognized during the year
    
    
    1,043
    
    
    
    361
    
    
    
    330Changes in operating assets and liabilities:Trade receivables
    
    
    (878
    )
    
    
    1,401
    
    
    
    702Inventories
    
    
    (4,764
    )
    
    
    5,375
    
    
    
    (13,261
    )Prepayments and other current assets
    
    
    165
    
    
    
    496
    
    
    
    596Due from related parties
    
    
    
    
    
    
    
    
    
    
    21Trade payables
    
    
    620
    
    
    
    (775
    )
    
    
    9,487Accrued expenses and other payables
    
    
    552
    
    
    
    (1,318
    )
    
    
    (1,432
    )Income taxes payable and deferred taxation
    
    
    (323
    )
    
    
    (278
    )
    
    
    975Net cash provided by operating activities
    
    
    2,061
    
    
    
    8,746
    
    
    
    2,203Cash flows from investing activities:Change in restricted cash
    
    
    68
    
    
    
    (2,332
    )
    
    
    1,328Proceeds from disposal of available-for-sale
securities
    
    
    
    
    
    
    434
    
    
    
    Purchase of property, plant and equipment
    
    
    (1,710
    )
    
    
    (1,635
    )
    
    
    (3,139
    )Proceeds from disposals of property held for lease,
and property, plant and equipment
    
    
    14
    
    
    
    2,732
    
    
    
    5Net cash used in investing activities
    
    
    (1,628
    )
    
    
    (801
    )
    
    
    (1,806
    )
  F-7




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##### Table of Contents



LJ INTERNATIONAL INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2007US$
    
    
    US$
    
    
    US$Cash flows from financing activities:Change in bank overdrafts
    
    
    184
    
    
    
    (253
    )
    
    
    1,386Proceeds from issuance of shares upon exercise of
stock options
    
    
    355
    
    
    
    3,406
    
    
    
    8,504Proceeds from issuance of shares upon exercise of
stock warrants
    
    
    
    
    
    
    
    
    
    
    2,072Loans acquired
    
    
    30,956
    
    
    
    21,286
    
    
    
    14,334Repayment of loans
    
    
    (34,366
    )
    
    
    (24,558
    )
    
    
    (24,833
    )Repayment of capitalized lease obligation
    
    
    (109
    )
    
    
    (92
    )
    
    
    (83
    )Letter of credit and factoring
    
    
    97
    
    
    
    (3,269
    )
    
    
    (5,691
    )Proceeds from sale of derivatives net of
retirement of embedded derivatives
    
    
    
    
    
    
    2,947
    
    
    
    3,002Net cash used in financing activities
    
    
    (2,883
    )
    
    
    (533
    )
    
    
    (1,309
    )Effect of foreign exchange rate change
    
    
    384
    
    
    
    985
    
    
    
    Net (decrease) increase in cash and cash
equivalents
    
    
    (2,066
    )
    
    
    8,397
    
    
    
    (912
    )Cash and cash equivalents, as of beginning of year
    
    
    13,348
    
    
    
    4,951
    
    
    
    5,863Cash and cash equivalents, as of end of year
    
    
    11,282
    
    
    
    13,348
    
    
    
    4,951Supplemental disclosure information:Interest expenses
    
    
    842
    
    
    
    1,789
    
    
    
    3,103Income taxes paid
    
    
    555
    
    
    
    847
    
    
    
    736Non-cash transactions:Purchase of property, plant and equipment under
capitalized leases
    
    
    104
    
    
    
    
    
    
    
    
  F-8




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##### Table of Contents



1.
    
    NATURE OF BUSINESS AND BASIS OF FINANCIAL STATEMENTSLJ International Inc. (LJI), its subsidiaries and variable interest entities (VIEs)
(collectively referred to as the Company) are principally involved in the design,
manufacture, marketing, sale of precious and color 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 wholesale sales are currently to the United States
of America (US). The retail stores are located in the PRC, Hong Kong and Macau. The
Company also owns certain commercial and residential properties located in Hong Kong, which
are held primarily for lease.
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 (a)
    
    Basis of accountingThe financial statements are prepared in accordance with US generally accepted
accounting principles (US GAAP).(b)
    
    Principles of consolidation and goodwillThe consolidated financial statements include the financial information of LJI, its
subsidiaries and VIEs for which the Company is the primary beneficiary. The results of
subsidiaries and VIEs acquired or disposed of during the year are consolidated from or
to their effective dates of acquisition or disposal respectively. All material
intercompany balances and transactions have been eliminated on consolidation.The Company adopted Financial Accounting Standards Board (FASB)
Interpretation No. 46 (Revised December 2003), now codified within ASC Topic 810,
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 nor do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties.The application of the consolidation provisions of FIN 46(R) resulted in an
increase in assets and an increase in liabilities as of December 31, 2009 by
US$1,065 and US$396 respectively, and an increase in assets and an increase in
liabilities as of December 31, 2008 by US$1,651 and US$4,087 respectively, and
increase in net loss of US$93 for the years ended December 31, 2009 and increase in
net income of US$326 for the year ended December 31, 2008 and increase in net loss
of US$473 for the year ended December 31, 2007.
 F-9




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##### Table of Contents



2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Goodwill represents the excess of the aggregate purchase price over the fair value of
the net assets acquired in a purchase businesses combination. Goodwill is reviewed for
impairment at least annually in accordance with the provisions of FASB Statement No.
142, now codified within ASC Topic 323, Goodwill and Other Intangible Assets. The
goodwill impairment test is a two-step test. Under the first step, the fair value of
the reporting unit is compared to its carrying value (including goodwill). If the fair
value of the reporting unit is less than its carrying value, an indication of goodwill
impairment exists for the reporting unit and the enterprise must perform step two of the
impairment test (measurement). Under step two, an impairment loss is recognized for any
excess of the carrying amount of the reporting units goodwill over the implied fair
value of that goodwill. The implied fair value of goodwill is determined by allocating
the fair value of the reporting unit in a manner similar to a purchase price allocation,
in accordance with FASB Statement No. 141, now codified within Topic 805, Business
Combinations. The residual fair value after this allocation is the implied fair value
of the reporting unit goodwill. Fair value of the reporting unit is determined using a
discounted cash flow analysis. If the fair value of the reporting unit exceeds its
carrying value, step two does not need to be performed.The Company performed its annual impairment review of goodwill, and
resulting in US$nil included in statement of operations for the years ended
December 31, 2009, 2008 and 2007.(c)
    
    Revenue recognitionOperating revenue represents:
 Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2007US$
    
    US$
    
    US$Product sales
    
    
    115,599
    
    
    
    145,372
    
    
    
    161,375Rental income
    
    
    100
    
    
    
    98
    
    
    
    126115,699
    
    
    
    145,470
    
    
    
    161,501Less: Sales return allowance
    
    
    (5,176
    )
    
    
    (9,202
    )
    
    
    (9,464
    )110,523
    
    
    
    136,268
    
    
    
    152,037
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##### Table of Contents



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



2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (e)
    
    Shipping and handling costsThe shipping and handling costs are included in cost of goods sold. Shipping and
handling costs were US$1,548, US$2,384 and US$2,580 for the years ended December 31,
2009, 2008 and 2007 respectively.(f)
    
    Advertising and promotion costsAdvertising and promotion expenses are generally expensed when incurred. Advertising
costs were US$815, US$824 and US$2,242 for the years ended December 31, 2009, 2008 and
2007 respectively.(g)
    
    Earnings per shareThe calculation of basic earnings per share is based on net income for the year
attributable to shareholders and on the weighted average number of ordinary shares
outstanding during the year.The calculation of diluted earnings per share is based on net income for the year
attributable to shareholders and on the weighted average number of ordinary shares
outstanding during the year, adjusted for the effects of all dilutive potential ordinary
shares. The dilutive effect of convertible securities is reflected in diluted earnings
per share by application of the if-converted method. 329,334 warrants were not included
in the computation of diluted earnings per share for the year ended December 31, 2009
because to do so would have been anti-dilutive for the year.(h)
    
    Fair value of financial instrumentsThe financial instruments used by the Company in the normal course of business,
including cash and cash equivalents, trade receivables, trade payables, notes payable
and letter of credit, gold and other loans, have fair values which approximate their
recorded value as the financial instruments are either short term in nature or carry
interest rate that approximate market rates.
 F-12




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##### Table of Contents



2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (h)
    
    Fair value of financial instruments (continued)The categories of assets and liabilities recorded at fair value on our
consolidated balance sheet based upon the level of judgment associated with inputs
used to measure their fair value. The levels are as follows:
 Level 1
    
    Inputs are unadjusted, quoted prices in active markets for
identical assets or liabilities at the measurement date. An active
market for the asset or liability is a market in which
transactions for the asset or liability occur with sufficient
frequency and volume to provide pricing information on an ongoing
basis.Level 2
    
    Inputs (other than quoted market prices included in Level 1) are
either directly or indirectly observable for the asset or
liability through correlation with market data at the measurement
date and for the duration of the instruments anticipated life.Level 3
    
    Inputs reflect managements best estimate of what market
participants would use in pricing the asset or liability at the
measurement date. Consideration is given to the risk inherent in
the valuation technique and the risk inherent in the inputs to the
model.
 A financial instruments categorization within the valuation hierarchy is
based upon the lowest level of input that is significant to the fair value
measurement.The available-for-sale securities are at Level 1 since they are quoted on
the open market. The values determined under Level 1 for the available for sale
securities were US$2,360 and US$2,288 as of December 31, 2009 and 2008
respectively.(i)
    
    Accounts receivableTrade receivables are recorded at the invoiced amount and do not bear
interest. Amounts collected on trade receivables are included in net cash provided
by operating activities in the consolidated statements of cash flows. The Company
maintains an allowance for doubtful accounts for estimated losses inherent in its
trade receivable portfolio and purchases trade credit insurance to cover the risk
of collectibilities. In establishing the required allowance, management considers
historical losses, current receivables aging, and existing industry and national
economic data.The Company reviews its allowance for doubtful accounts regularly. Past
due balances over 120 days and over a specified amount are reviewed individually
for collectibility. All other balances are reviewed on a pooled basis by aging of
such balances. Account balances are charged off against the allowance after all
means of collection have been exhausted and the potential for recovery is
considered remote. The Company does not have any off-balance-sheet credit exposure
related to its customers, except for outstanding bills discounted with banks (see
note 8), that are subject to recourse for non-payment.
 F-13




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##### Table of Contents



2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (j)
    
    InventoriesInventories are stated at the lower of cost and market. Cost, which comprises all costs
of purchase and, where applicable, costs of conversion and other costs that have
been incurred in bringing the inventories to their present location and condition,
including inbound freight charges, purchasing and receiving cost, inspection costs
and internal transfer costs, is calculated using the weighted average costing
method. Estimated losses on inventories represent reserves for obsolescence,
excess quantities, irregulars and slow moving inventory, and which are charged to
cost of goods sold. In case of inventory which
has been written down below cost at the close of a fiscal year, such reduced amount
forms a new cost basis that subsequently cannot be marked up based on changes in
underlying facts and circumstances. The Company estimates the loss/write-down on the
basis of its assessment of the inventorys net realizable value based upon current
market conditions and historical experience.(k)
    
    Properties held for leaseProperties held for lease are carried at cost, less accumulated depreciation, which
is computed using the straight-line method over the estimated useful lives of the
assets. Rental income from these properties is recorded on a monthly basis in
accordance with the lease terms.(l)
    
    Property, plant and equipment (PPE) and depreciationPPE are stated at cost less accumulated depreciation and accumulated impairment
loss, and include expenditure that substantially increases the useful lives of existing
assets. Maintenance and repairs are charged to current operations as incurred. Upon
sale, retirement, or other disposition of these assets, the cost and related accumulated
depreciation and accumulated impairment loss are removed from the respective accounts,
and any gain or loss is included in the consolidated statement of operations. Plant and
equipment under capital leases are stated at the present value of minimum lease
payments.Depreciation on PPE is calculated by using the straight-line method (after taking
into account their respective estimated residual values) over the estimated useful lives
of the related assets at the following annual rates:
 Leasehold land and buildings
    
    2%or over the unexpired term of leasesLeasehold improvement
    
    shorter of 10% or the unexpired term of leasesFurniture, fixtures and equipment
    
    20% to 50%Plant and machinery
    
    10%Motor vehicles
    
    10% to 20%
 Depreciation on PPE attributable to manufacturing activities is capitalized as part
of inventory, and expensed to cost of goods sold as inventory is sold. Depreciation
related to abnormal amounts from idle capacity is charged to cost of goods sold for the
period incurred. Total depreciation for the years ended December 31, 2009, 2008 and
2007 were US$2,197, US$3,373 and US$3,095 respectively.
 F-14




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##### Table of Contents



2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (m)
    
    Impairment of long-lived assetsIn accordance with Statement of Financial Accounting Standards (SFAS) No.
144 (SFAS No. 144), now codified within ASC Topic 360-10-20, Accounting for the
Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property,
plant and equipment, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.
If circumstances require a long-lived asset be tested for possible impairment, the
Company first compares undiscounted cash flows expected to be generated by an asset
to the carrying value of the asset. If the carrying value of the long-lived asset
is not recoverable on an undiscounted cash flow basis, impairment is recognized to
the extent that the carrying value exceeds it fair value. Fair value is determined
through various valuation techniques including discounted cash
flow models, quoted market values and third-party independent appraisals, as considered
necessary.(n)
    
    Available-for-sale securitiesThe Company classifies its investment in capital guaranteed fund as available-for-sale
securities. The fund is restricted and secures obligations under trade credit banking
facilities. It is carried at market value which is quoted in active market with a
corresponding recognition of net unrealized holding gain or loss (net of tax) as a
separate component of shareholders equity until realized. Unrealized losses are charged
against net earnings when a decline in fair value is determined to be other than
temporary. Gains and losses on sales of securities are computed on a specific
identification basis. Available-for-sale securities comprise:
 As of December 31,2009
    
    
    2008US$
    
    
    US$Quoted capital guaranteed fund, at cost
    
    
    2,111
    
    
    
    2,111Gross unrealized gains
    
    
    249
    
    
    
    177Fair value of available-for-sale securities
    
    
    2,360
    
    
    
    2,288
 (o)
    
    Gold loans and embedded derivativeGold loans are commodity-indexed debts with an embedded derivative. The loan is
recorded at its original amount and adjusted for additional borrowings and repayments.
The embedded derivative component was valued at fair value, considering the market price
of gold, volatility of gold and the time value of money. Any changes in fair value of
embedded derivative are included in the consolidated statement of operations and an
asset or liability representing the value of the embedded derivative portion is included
in the consolidated balance sheets.(p)
    
    DerivativesThe Company enters into derivative contracts to hedge the future settlement of gold
loans in order to mitigate the risk of market price fluctuations. They consist of
contracts that are used to hedge against changes in the fair value of gold price when
the Company settles the gold loans.
 F-15




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##### Table of Contents



2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (p)
    
    Derivatives (continue)The derivative contracts and the embedded derivative are valued at fair value. Changes
in fair value of derivative contracts are included in the consolidated statement of
operations, net of changes in fair value of embedded derivative set out in note 2(o).(q)
    
    Stock-based compensationStatement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment,
(SFAS No. 123(R)), now codified within Accounting Standards Codification (ASC) 718-
Compensation-Stock Based compensation, requires the Company to measure the cost of
employee services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. The Company records the cost as expense over the
offering
period and vesting term in connection with compensation expense for stock-based employee
compensation plans.Effective January 1, 2006, the Company began recording compensation expense for
stock-based employee compensation plans in accordance with SFAS No. 123(R) as
interpreted by SEC Staff Accounting Bulletin No. 107. The Company adopted the modified
prospective transition method provided for under SFAS No. 123(R), and consequently has
not retroactively adjusted results from prior periods. Under this transition method,
compensation expense for stock-based employee compensation plans recognized for the year
ended December 31, 2006 now includes estimated expense for the portion of stock options
vesting in the period for options granted prior to, but not vested as of January 1,
2006, based on the grant date fair value estimated in accordance with the original
provisions of Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation(SFAS No. 123).As of December 31, 2009, the Company has four stock-based employee compensation plans,
details of which are set out in note 14(a).During the year ended December 31, 2009, the Company has granted 4,000,000 stock options
to the employees. The fair value of these options was estimated on the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions:
 Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2007Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Expected stock price volatility
    
    
    95
    %
    
    
    108
    %
    
    
    33
    %Risk-free interest rate
    
    
    1.22
    %
    
    
    1.61
    %
    
    
    4.90
    %Expected life of options
    
    3.19 years
    
    0.91 year
    
    0.08 year
 The weighted average fair value per option granted during the years ended December
31, 2009, 2008 and 2007 were US$0.35, US$0.17 and US$0.22 respectively.
 F-16




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##### Table of Contents



2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (r)
    
    Income taxesIncome taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit carry
forwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date. The Company provides a valuation allowance, if necessary, to reduce
deferred tax assets to their estimated realizable value.Effective January 7, 2007, the Company adopted the provisions of Financial Accounting
Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement No. 109 (now codified within ASC 740, Income
Taxes (ASC 740)) which addresses how the benefit of tax positions taken or
expected to be taken on a tax return should be recorded in the financial statements. Tax
benefits associated with uncertain tax positions are recognized in the period in which
one of the following conditions is satisfied: (1) the more likely than not recognition
threshold is satisfied; (2) the position is ultimately settled through negotiation or
litigation; or (3) the statute of limitations for the taxing authority to examine and
challenge the position has expired. Tax benefits associated with an uncertain tax
position are derecognized in the period in which the more likely than not recognition
threshold is no longer satisfied.(s)
    
    Foreign currenciesLJIs functional currency is United States dollars. Transactions denominated in
currencies other than US dollars are translated into US dollars at the exchange rate
prevailing at the dates of transactions. Foreign currency transaction gains and losses
are included in the consolidated statement of operations. The assets and liabilities of
the Companys subsidiaries whose functional currencies are other than US dollars, are
translated at the exchange rates in effect at the balance sheets date and related
revenue and expenses are translated at average exchange rates during the year. Related
transaction gains or losses are reported as a separate component of accumulated other
comprehensive income (loss).The aggregate transaction (loss) gain included in determining net income were
(US$691), US$795 and (US$453) for each of the three years ended December 31, 2009, 2008
and 2007 respectively.
 F-17




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##### Table of Contents



2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (t)
    
    Cash equivalents and Pledged Bank DepositsCash consists of cash on hand, cash in bank accounts and interest-bearing savings
accounts. Cash deposits that are restricted as to withdrawal or pledged as security, are
disclosed separately on the face of the consolidated balance sheets, and not included in
the cash total for the purpose of the consolidated statements of cash flows.(u)
    
    Uses of estimatesThe preparation of the consolidated financial statements, in accordance
with US GAAP, requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financials statements and accompanying notes.
Significant items subject to such estimates and assumptions include the carrying
amount of property, plant and equipment and goodwill; valuation allowance for
receivables, inventories and deferred income tax asset; valuation of derivative
instruments; valuation of share-based compensation. Actual results could differ
from those estimates.(v)
    
    Related partiesParties are considered to be related if one party has the ability, directly or
indirectly, to control the other party, or exercise significant influence over the other
party in making financial and operating decisions. Parties are also considered to be
related if they are subject to common control or common significant influence.(w)
    
    DividendsThe Directors of the Company have never declared or paid any cash
dividends on the Companys capital stock and do not anticipate paying
cash dividends in the foreseeable future. The ability to pay
dividends depends upon receipt of dividends or other payments from
subsidiaries and other holdings and investments. In addition, the
operating subsidiaries from time to time may be subject to
restrictions on their ability to make distributions to the Company,
including as a result of restrictive covenants in loan agreements,
restrictions on the conversion of local currency into US dollars or
other currencies and other regulatory restrictions. Currently, none
of the subsidiaries has such restriction during the periods presented
except for the covenants as set out in note 8 to the financial
statements.(x)
    
    Comprehensive incomeThe Company reports comprehensive income in accordance with SFAS No. 130, now codified
within ASC Topic 220, Reporting Comprehensive Income. Accumulated other comprehensive
gain represents exchange translation adjustments and unrealised holding gains on
investment, and is included in the shareholders equity section of the balance sheets.
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##### Table of Contents



2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (y)
    
    New accounting pronouncementsIn February 2010, FASB issued ASU 2010-9 Subsequent Events (Topic 855)
Amendments to Certain Recognition and Disclosure Requirements(ASU 2010-9). ASU
2010-9 amends disclosure requirements within Subtopic 855-10. An entity that is an
SEC filer is not required to disclose the date through which subsequent events have
been evaluated. This change alleviates potential conflicts between Subtopic 855-10
and the SECs requirements. ASU 2010-9 is effective for interim and annual periods
ending after June 15, 2010. The Company does not expect the adoption of ASU 2010-09
to have a material impact on its consolidated results of operations or financial
position.In January 2010, FASB issued ASU 2010-6 Improving Disclosures about Fair
Measurements(ASU 2010-6). ASU 2010-6 provides amendments to subtopic 820-10 that
require separate disclosure of significant transfers in and out of Level 1 and
Level 2 fair value measurements and the presentation of separate information
regarding purchases, sales, issuances and settlements for Level 3 fair value
measurements. Additionally, ASU 2010-6 provides amendments to subtopic 820-10 that
clarify existing disclosures about the level of disaggregation and inputs and
valuation techniques. ASU 2010-6 is effective for financial statements issued for
interim and annual periods ending after December 15, 2010. The Company does not
expect the adoption of ASU 2010-06 to have a material impact on its consolidated
results of operations or financial position.In January 2010, FASB issued ASU 2010-2 Accounting and Reporting for
Decreases in Ownership of a Subsidiary- a Scope Clarification(ASU 2010-2). ASU
2010-2 addresses implementation issues related to the changes in ownership
provisions in the ConsolidationOverall Subtopic (Subtopic 810-10) of the FASB
Accounting Standards Codification, originally issued as FASB Statement No. 160,
Noncontrolling Interests in
Consolidated Financial Statements.Subtopic 810-10 establishes the accounting and
reporting guidance for noncontrolling interests and changes in ownership interests of a
subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases
to have a controlling financial interest in the subsidiary. Upon deconsolidation of a
subsidiary, an entity recognizes a gain or loss on the transaction and measures any
retained investment in the subsidiary at fair value. The gain or loss includes any gain
or loss associated with the difference between the fair value of the retained investment
in the subsidiary and its carrying amount at the date the subsidiary is deconsolidated.
In contrast, an entity is required to account for a decrease in ownership interest of a
subsidiary that does not result in a change of control of the subsidiary as an equity
transaction. ASU 2010-2 is effective for the Company starting January 1, 2010. The
Company does not expect the adoption of ASU 2010-2 to have a material impact on the
Companys consolidated results of operations or financial position.
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##### Table of Contents



2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (y)
    
    New accounting pronouncements (Continued)In December 2009, FASB issued ASU 2009-17 Consolidations (Topic 810)
Improvements to Financial Reporting by Enterprises Involved with Variable Interest
Entities(ASU 2009-17). ASU 2009-17 amends the FASB ASC for the issuance of FASB
Statement No. 167, Amendments to FASB Interpretation No. 46(R). The amendments in
ASU 2009-17 replace the quantitative-based risks and rewards calculation for
determining which enterprise, if any, has a controlling financial interest in a
variable interest entity with an approach focused on identifying which enterprise
has the power to direct the activities of a variable interest entity that most
significantly impact the entitys economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the entity.
ASU 2009-17 also requires additional disclosures about an enterprises involvement
in variable interest entities. ASU 2009-17 is effective as of the beginning of each
reporting entitys first annual reporting period that begins after November 15,
2009. The Company does not expect the adoption of ASU 2009-17 to have a material
impact on its consolidated results of operations or financial position.In December 2009, FASB issued ASU 2009-16 Transfers and Servicing (Topic
860) Accounting for Transfers of Financial Assets(ASU 2009-16). ASU 2009-16
amends the FASB Accounting Standards Codification for the issuance of FASB
Statement No. 166, Accounting for Transfers of Financial Assetsan amendment of
FASB Statement No. 140. The amendments in ASU 2009-16 improve financial reporting
by eliminating the exceptions for qualifying special-purpose entities from the
consolidation guidance and the exception that permitted sale accounting for certain
mortgage securitizations when a transferor has not surrendered control over the
transferred financial assets. In addition, the amendments require enhanced
disclosures about the risks that a transferor continues to be exposed to because of
its continuing involvement in transferred financial assets. ASU 2009-16 is
effective as of the beginning of each reporting entitys first annual reporting
period that begins after November 15, 2009. The Company does not expect the
adoption
of ASU 2009-16 to have a material impact on its consolidated results of operations or
financial position.In August 2009, FASB issued ASU 2009-5 Fair Value Measurements and
Disclosures (Topic 820) Measuring Liabilities at Fair Value(ASU 2009-5). ASU
2009-5 provides amendments to Subtopic 820-10, Fair Value Measurements and
Disclosures-Overall, for the fair value measurement of liabilities. ASU 2009-5
clarifies that in circumstances in which a quoted price in an active market for the
identical liability is not available, a reporting entity is required to measure
fair value. ASU 2009-5 was effective for the Company for interim and annual periods
ending after September 30, 2009. The adoption of ASU 2009-5 did not have a material
impact on the Companys consolidated results of operations or financial position.
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2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (y)
    
    New accounting pronouncements (Continued)In August 2009, FASB issued ASU 2009-4 Accounting for Redeemable Equity
Instrumentsan Amendment to Section 480-10-S99(ASU 2009-4). ASU 2009-4
represents a Securities and Exchange Commission (SEC) update to Section
480-10-S99, Distinguishing Liabilities from Equity. The adoption of guidance within
ASU 2009-4 did not have an impact on the Companys consolidated results of
operations or financial position.In June 2009, FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting PrinciplesA
Replacement of FASB Statement No. 162, (now codified within ASC 105, Generally
Accepted Accounting Principles(ASC 105)). ASC 105 establishes the Codification
as the single source of authoritative GAAP recognized by the FASB to be applied by
nongovernmental entities. All guidance contained in the Codification carries an
equal level of authority. Following this statement, FASB will not issue new
standards in the form of statements, FASB Staff Positions, or Emerging Issues Task
Force Abstracts. Instead, it will issue Accounting Standards Updates, which will
serve only to: (1) update the Codification; (2) provide background information
about the guidance; and (3) provide the bases for conclusions on the change(s) in
the Codification. ASC 105 was effective for financial statements issued for interim
and annual periods ending after September 15, 2009. The Codification supersedes all
existing non-SEC accounting and reporting standards. The adoption of ASC 105 did
not have an impact on the Companys consolidated results of operations or financial
position.In May 2009, FASB issued SFAS No. 165, Subsequent Events, (now codified within ASC
855, Subsequent Events(ASC 855)). ASC 855 establishes the general standards of
accounting for and disclosure of events that occur after the balance sheet date but
before financial statements are issued or are available to be issued. ASC 855 was
effective for the
Company on April 1, 2009. The adoption of ASC 855 did not have a material impact on the
Companys consolidated results of operations or financial position.In April 2009, FASB issued Staff Position (FSP) No. 115-2 and FSP 124-2,
Recognition and Presentation of Other-Than-Temporary Impairments(now codified
within ASC 320, InvestmentsDebt and Equity Securities(ASC 320)). ASC 320
provides greater clarity about the credit and noncredit component of an
other-than-temporary impairment event and more effectively communicates when an
other-than-temporary impairment event has occurred. ASC 320 amends the
other-than-temporary impairment model for debt securities. The impairment model for
equity securities was not affected. Under ASC 320, an other-than-temporary
impairment must be recognized through earnings if an investor has the intent to
sell the debt security or if it is more likely than not that the investor will be
required to sell the debt security before recovery of its amortized cost basis.
This standard was effective for interim periods ending after June 15, 2009. The
adoption of ASC 320 did not have a material impact on the Companys consolidated
results of operations or financial position.
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2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (y)
    
    New accounting pronouncements (Continued)In April 2009, FASB issued FSP 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly(now codified within
ASC 820, Fair Value Measurements and Disclosures). ASC 820 provides guidelines for
making fair value measurements more consistent and provides additional
authoritative guidance in determining whether a market is active or inactive and
whether a transaction is distressed. ASC 820 is applied to all assets and
liabilities (i.e., financial and non-financial) and requires enhanced disclosures.
This standard was effective for periods ending after June 15, 2009. The adoption of
ASC 820 did not have a material impact on the Companys consolidated results of
operations or financial position.In April 2009, FASB issued FSP 107-1 and Accounting Principles Board 28-1, Interim
Disclosures about Fair Value of Financial Instruments(now codified within ASC 825,
Financial Instruments(ASC 825)). ASC 825 requires disclosures about fair value of
financial instruments in interim financial statements as well as in annual financial
statements. ASC 825 was effective for interim periods ending after June 15, 2009. The
adoption of ASC 825 did not have a material impact on the Companys consolidated results
of operations or financial position.In June 2008, FASB issued Staff PositionEmerging Issues Task Force
03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions
Are Participating Securities(now codified within ASC 260, Earnings Per Share(ASC
260)). Under ASC 260, unvested share based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. ASC 260 was effective for
financial statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those years and requires retrospective application. The
adoption of ASC 260 did not have a material impact on the Companys earnings per
share calculations.In April 2008, FASB issued FSP 142-3, Determination of the Useful Life of
Intangible Assets(now codified within ASC 350, IntangiblesGoodwill and Other
(ASC 350)). ASC 350 provides guidance for determining the useful life of a recognized intangible
asset and requires enhanced disclosures so that users of financial statements are able
to assess the extent to which the expected future cash flows associated with the asset
are affected by our intent and/or ability to renew or extend the arrangement. ASC 350
was effective for financial statements issued for fiscal years and interim periods
beginning after December 15, 2008. The adoption of ASC 350 on January 1, 2009 did not
impact the Companys consolidated results of operations or financial position.
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2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (y)
    
    New accounting pronouncements (Continued)In March 2008, FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities(now codified within ASC 815, Derivatives and
Hedging(ASC 815)). ASC 815 requires enhanced disclosures about an entitys
derivative and hedging activities aimed at improving the transparency of financial
reporting. ASC 815 was effective for financial statements issued for fiscal years
and interim periods beginning after November 15, 2008. The adoption of ASC 815 did
not have any impact on the Companys consolidated results of operations or
financial position.In December 2007, FASB issued SFAS No. 141(R), Business Combinations(now
codified within ASC 805, Business Combinations(ASC 805)). ASC 805 establishes
principles and requirements for how the acquirer in a business combination
recognizes and measures in its financial statements the fair value of identifiable
assets acquired, the liabilities assumed and any noncontrolling interest in the
acquiree at the acquisition date. ASC 805 significantly changes the accounting for
business combinations in a number of areas, including the treatment of contingent
consideration, preacquisition contingencies, transaction costs and restructuring
costs. In addition, under ASC 805, changes in an acquired entitys deferred tax
assets and uncertain tax positions after the measurement period will impact income
tax expense. The provisions of this standard will apply to any acquisitions we
complete on or after December 15, 2008. The adoption of ASC 805 did not have an
impact on the Companys consolidated results of operations or financial position.In December 2007, FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51(now codified within ASC
810, Consolidation(ASC 810)). ASC 810 changes the accounting and reporting for
minority interests, which is recharacterized as noncontrolling interests and classified
as a component of equity. This new consolidation method significantly changes the
accounting for transactions with minority interest holders. The provisions of ASC 810
were applied to all noncontrolling interests prospectively, except for the presentation
and disclosure requirements, which were applied retrospectively to all periods presented
and have been disclosed as such in the Companys consolidated financial statements
herein. ASC 810 became effective for fiscal years beginning on or after December 15,
2008. The Company adopted ASC 810 effective January 4, 2009. The adoption of ASC 810 did
not
have an initial material impact on the Companys consolidated results of operations or
financial position.
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2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (y)
    
    New accounting pronouncements (Continued)In September 2006, FASB issued SFAS No. 157, Fair Value Measurements(now
codified within ASC 820). ASC 820 provides guidance for using fair value to measure
assets and liabilities. Under ASC 820, fair value refers to the price that would be
received to sell an asset or paid to transfer a liability in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants at the measurement date. The guidance within ASC 820 became
effective for financial statements issued for fiscal years beginning after November
15, 2007; however, the FASB provided a one year deferral for implementation of the
standard for non-recurring, non-financial assets and liabilities. The Company
adopted ASC 820 for non-financial assets and non-financial liabilities effective
January 1, 2009, which did not have any effect on its consolidated results of
operations or financial position.(z)
    
    Noncontrolling interestNoncontrolling Interest, formerly defined as minority interest, is recognized as equity
in the consolidated balance sheets, is reflected in net income attributable to
noncontrolling interests in consolidated net income and is captured within a
summary of changes in equity attributable to controlling and noncontrolling
interests. A noncontrolling interest emphasizes the Companys substantive control
over a subsidiary rather than a simple ownership percentage as with minority
interest.
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3.
    
    OPERATING RISKS
 (a)
    
    Concentrations of credit risksDetails of major customers from which the Company derived operating revenue are shown in
note 17(a).Credit risk represents the accounting loss that would be recognized at the reporting
date if counterparties failed completely to perform as contracted. Concentrations of
credit risk (whether on or off balance sheets) that arise from financial instruments
exist for groups of customers or counterparties when there are similar economic
characteristics that would cause their ability to meet contractual obligations to be
similarly affected by changes in economic or other conditions. The major concentration
of credit risk arises from the Companys receivables. Even though the Company does have
major customers, it does not consider itself to be exposed to significant credit risk
with regards to collection of the related receivables. Historical losses have not been
significant.(b)
    
    Country risksThe Company may also be exposed to certain risks as a result of its manufacturing
operation being located in the PRC and its properties held for lease in Hong Kong which
are not typically associated with companies operating in North America and Western
Europe. These include risks associated with, among others, the political, economic and
legal environments and foreign currency exchange. The Companys results may be
adversely affected by changes in the political and social conditions in the PRC, and by
changes in governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of taxation,
among other things. The Companys management believe these risks not to be significant.
There can be no assurance, however, that changes in political, social and other
conditions will not result in any adverse impact.(c)
    
    Cash and time depositsThe Company maintains majority of its cash balances and investments in time deposits
with various banks and financial institutions in Hong Kong. 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.
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4.
    
    INVENTORIESInventories consist of the following:
 As of December 31,2009
    
    
    2008US$
    
    
    US$Raw materials
    
    
    40,057
    
    
    
    36,165Work-in-progress
    
    
    803
    
    
    
    1,711Finished goods
    
    
    40,541
    
    
    
    38,76181,401
    
    
    
    76,637
 5.
    
    PROPERTIES HELD FOR LEASE, NETThe Company owns leasehold land and buildings in Hong Kong and leases them out for lease
term of two years. Properties held for lease consist of the following:
 As of December 31,2009
    
    
    2008US$
    
    
    US$Leasehold land and buildings
    
    
    1,246
    
    
    
    1,246Less: Accumulated depreciation
    
    
    (529
    )
    
    
    (496
    )717
    
    
    
    750
 The Company pledged all properties held for lease as collateral for general banking
facilities granted to the Company as of December 31, 2009 and 2008 (see note 8).The future aggregate minimum rental receivables under non-cancellable operating leases are
as follows:
 As of December 31,2009
    
    
    2008US$
    
    
    US$2009
    
    
    
    
    
    
    582010
    
    
    79
    
    
    
    272011
    
    
    46
    
    
    
    2012
    
    
    9
    
    
    
    134
    
    
    
    85
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6.
    
    PROPERTY, PLANT AND EQUIPMENT, NETProperty, plant and equipment consist of the following:
 As of December 31,2009
    
    
    2008US$
    
    
    US$Leasehold land and buildings
    
    
    2,405
    
    
    
    2,405Leasehold improvement
    
    
    10,968
    
    
    
    10,076Furniture, fixtures and equipment
    
    
    5,539
    
    
    
    5,547Plant and machinery
    
    
    2,543
    
    
    
    2,482Motor vehicles
    
    
    1,080
    
    
    
    90522,535
    
    
    
    21,415Less: Accumulated depreciation
    
    
    (16,135
    )
    
    
    (14,552
    )6,400
    
    
    
    6,863
 The Company pledged leasehold land and buildings with net book values of US$1,656 and
US$1,251 as of December 31, 2009 and 2008 respectively as collateral for general banking
facilities granted to the Company (see note 8).
 7.
    
    GOODWILL, NET
 As of December 31, 2009, goodwill is attributed to wholesale segment of the acquisition of a
jewelry company in 2002.
 Year ended December 31,2009
    
    
    2008US$
    
    
    US$Carrying value, beginning of year
    
    
    1,521
    
    
    
    1,521Impairment loss
    
    
    
    
    
    
    Carrying value, end of year
    
    
    1,521
    
    
    
    1,521
 The Company conducts annual impairment tests. The testing included the determination
of each reporting units fair value using the market multiples and discounted cash flow
analysis. No goodwill impairment charge was necessary for the year ended December 31, 2009.
The accumulated amortization and impairment losses were US$869 and US$869 as of December
31, 2009 and 2008 respectively.
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8.
    
    BANKING FACILITIES AND OTHER LOANS
 As of December 31,2009
    
    
    2008Notes
    US$
    
    
    US$Bank overdrafts
    
    
    (a
    )
    
    
    2,908
    
    
    
    2,724Notes payable:Current portion
    
    
    (b
    )
    
    
    5,551
    
    
    
    9,194Letters of credit, gold loans and others:Letters of credit
    
    
    (a
    )
    
    
    11,816
    
    
    
    9,386Factoring
    
    
    (a
    )
    
    
    1,665
    
    
    
    3,998Gold loan
    
    
    (c
    )
    
    
    
    
    
    
    13,481
    
    
    
    13,384
 The Companys banking facilities are collateralized by leasehold land and buildings
(see notes 5 and 6), restricted cash deposits, factored receivables, and personal guarantees
of and properties owned by a director (see note 15(b)).The material provisions of indentures relating to the Companys various banking facility
agreements contain, among others, covenants pertaining to maintenance of the tangible net
worth of LJI and one of its subsidiaries amounting to US$25,000 and US$4,487 respectively.
In the event of default, the bank would at its discretion to cancel the facilities and
demand immediate repayment of all principal, interest, fees and other amount outstanding.
 (a)
    
    As of December 31, 2009, the Company had various revolving bank facilities of
overdrafts, letters of credit and factoring facilities granted by banks, amounting to
US$2,923 (2008: US$2,923), US$13,423 (2008: US$12,077) and US$9,747 (2008: US$12,008)
respectively.The bank overdrafts are denominated in Hong Kong dollars, bear interest at the
floating commercial bank lending rates in Hong Kong, which ranged from 2.4% to 5.5%
per annum as of December 31, 2009 and ranged from 2.5% to 4.8% per annum as of
December 31, 2008.The factoring facilities granted are limited to the extent of accounts receivable
collateralized to the banks.Under the banking facilities arrangements, the Company is required to maintain
certain cash balances and investment in capital guaranteed fund based on the amount
of facilities granted. The cash balances are reflected as restricted cash in the
balance sheets.
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8.
    
    BANKING FACILITIES AND OTHER LOANS (Continued)
 (b)
    
    The Company also had term loans classified under notes payable which are
related to the Companys leasehold land and buildings (see note 6). These loans
aggregated to US$7,795 and US$11,309 as of December 31, 2009 and 2008 respectively.
The expected maturities of these notes payable are within 1-5 years. Interest charges
on these loans ranged from 2.1% to 10.6% per annum as of December 31, 2009 and ranged
from 2.3% to 10.6% per annum as of December 31, 2008.(c)
    
    The Company also had bank facilities of gold loan which are related to the
Companys leasehold land and buildings (see note 6). The Company did not have
outstanding loans to purchase gold as of December 31, 2009 and 2008 with the related
balances being US$nil as of December 31, 2009 and 2008.The weighted average interest rate for the year ended December 31,
2009 and 2008 were 2.6% and 3.7% per annum respectively.
 9.
    
    INCOME TAXESIncome taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating losses and tax credit carry
forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.The Company is subject to income taxes on an entity basis on income arising in or derived
from the tax jurisdiction in which it is domiciled and operates. Income tax expense
comprises of the following:
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9.
    
    INCOME TAXES (Continued)
 Year ended December 31,2009
    
    
    2008
    
    
    2007US$
    
    
    US$
    
    
    US$Current taxes arising in foreign
subsidiaries:For the year
    
    
    (315
    )
    
    
    (568
    )
    
    
    (1,525
    )Over (under) provision in prior years
    
    
    55
    
    
    
    (1
    )
    
    
    (195
    )Total current tax
    
    
    (260
    )
    
    
    (569
    )
    
    
    (1,720
    )Deferred taxes arising in foreign
subsidiaries:For the year
    
    
    29
    
    
    
    
    
    
    
    9Income taxes expense
    
    
    (231
    )
    
    
    (569
    )
    
    
    (1,711
    )
 Reconciliation to the expected statutory tax rate in Hong Kong of 16.5% (2008: 16.5%
and 2007: 17.5%) is as follows:
 Year ended December 31,2009
    
    
    2008
    
    
    2007%
    
    
    %
    
    
    %Statutory rate
    
    
    16.5
    
    
    
    16.5
    
    
    
    17.5Tax effect of net operating losses
    
    
    5.5
    
    
    
    17.2
    
    
    
    43.8Non taxable profits, net
    
    
    (16.4
    )
    
    
    (21.9
    )
    
    
    (13.3
    )Others
    
    
    0.3
    
    
    
    6.5
    
    
    
    5.4Effective rate
    
    
    5.9
    
    
    
    18.3
    
    
    
    53.4
 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:
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9.
    
    INCOME TAXES (Continued)
 As of December 31,2009
    
    
    2008US$
    
    
    US$Deferred tax assets:Net operating loss
    
    
    2,789
    
    
    
    3,693Depreciation
    
    
    81
    
    
    
    90Others
    
    
    80
    
    
    
    42,950
    
    
    
    3,787Valuation allowance
    
    
    (2,839
    )
    
    
    (3,676
    )Total deferred tax assets
    
    
    111
    
    
    
    111Deferred tax liabilities:Accelerated tax allowance
    
    
    (44
    )
    
    
    (95
    )Others
    
    
    (266
    )
    
    
    (244
    )Net deferred tax liabilities
    
    
    (310
    )
    
    
    (339
    )
 In assessing the realizability of deferred tax assets, management considers whether it
is more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become
deductible. The decrease in valuation allowance for the years ended December 31, 2009 and
2008 were US$837 and US$1,291 respectively, there was increase in valuation allowance
amounted to US$868 for the year ended December 31, 2007.Based on the history of the Companys profitability, management believes that it is more
likely than not that the Company will realize the benefits of the deferred tax assets of
US$111 and US$111, net of valuation allowances as of December 31, 2009 and 2008.
 10.
    
    LEASESThe Company is obligated under capital leases covering certain motor vehicles and
office equipment that expire at various dates during the next three years. At December 31,
2009 and 2008, the gross amount of motor vehicles and office equipment and related
accumulated amortization recorded under capital leases were as follows:
 As of December 31,2009
    
    
    2008US$
    
    
    US$Motor vehicles
    
    
    451
    
    
    
    493Furniture, fixtures and equipment
    
    
    
    
    
    
    19451
    
    
    
    512Less: Accumulated amortization
    
    
    (263
    )
    
    
    (344
    )188
    
    
    
    168
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10.
    
    LEASES (Continued)Amortization of assets held under capital leases is included with depreciation expenses.The Company leases certain of its office and factory premises under various
operating leases which the rent payables are charged to statements of operations on a
straight-line basis over the term of the relevant leases including any periods of free
rent. In addition to the future minimum lease payments, the terms of the leases in
respect of the retail shops in the PRC and Hong Kong provide for the payment of
contingent rentals based on a percentage of sales in excess of a stipulated amount.
Rental expenses for operating leases for the years ended December 31, 2009, 2008 and
2007 consisted of the following:
 Year ended December 31,2009
    
    
    2008
    
    
    2007US$
    
    
    US$
    
    
    US$Minimum rentals
    
    
    2,935
    
    
    
    3,756
    
    
    
    2,937Contingent rentals
    
    
    8,984
    
    
    
    6,197
    
    
    
    3,271Rental expenses
    
    
    11,919
    
    
    
    9,953
    
    
    
    6,208
 Future minimum capital lease payments under capitalized leases and non-cancellable
operating leases are approximately as follows:
 As of December 31, 2009
    
    
    As of December 31, 2008Capitalized
    
    
    Operating
    
    
    Capitalized
    
    
    Operatingleases
    
    
    leases
    
    
    leases
    
    
    leasesUS$
    
    
    US$
    
    
    US$
    
    
    US$2009
    
    
    
    
    
    
    
    
    
    
    87
    
    
    
    1,6982010
    
    
    108
    
    
    
    1,576
    
    
    
    85
    
    
    
    6502011
    
    
    52
    
    
    
    487
    
    
    
    21
    
    
    
    1062012
    
    
    31
    
    
    
    81
    
    
    
    
    
    
    
    47Thereafter
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total future
minimum lease
payments
    
    
    191
    
    
    
    2,144
    
    
    
    193
    
    
    
    2,501Less: Amount
representing
interest (at rates
ranging from 3.25%
to 3.5%)
    
    
    (15
    )
    
    
    
    
    
    
    (12
    )Present value of
net minimum capital
lease payments
    
    
    176
    
    
    
    
    
    
    
    181Less current
instatements of
obligations under
capital leases
    
    
    (98
    )
    
    
    
    
    
    
    (78
    )Obligations under
capital leases,
excluding current
instalments
    
    
    78
    
    
    
    
    
    
    
    103
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10.
    
    LEASES (Continued)The Company leases certain of its office and quarters from a related party with two year
lease terms expiring in 2010 and 2011. Rental expenses for operating leases paid to the
related party are included in the data presented above. Total rent expenses associated with
these leases were
US$246, US$246 and US$245 for the years ended December 31, 2009, 2008 and 2007
respectively.
 11.
    
    COMMITMENTS AND CONTINGENCIES
 (a)
    
    CommitmentsAs of December 31, 2009, 2008 and 2007, the Company had capital expenditure
commitments of US$97, US$66 and US$9 respectively.(b)
    
    ContingenciesAs of December 31, 2009, 2008 and 2007, the Company provided guarantee in respect of
bank mortgage loans granted to the Companys Chairman and Chief Executive Officer,
Mr. Yu Chuan Yih to the extent of US$nil, US$nil and US$79 respectively.(c)
    
    Legal ProceedingsSecurities Litigation.In September 2007, three shareholder class actions were filed
in the United States District Court for the Central District of California against
the Company and certain officers and directors of the Company, entitled Apple v. LJ
International Inc., et al.(No. 07-06076), Cooper v. LJ International, Inc., et al.
(No. 07/06213), and Lieben v. LJ International Inc., et. al.(No. 07-06216). On
February 8, 2008, the judge to whom the cases were referred consolidated the cases
and appointed lead plaintiff and lead counsel. On April 8, 2008, the lead plaintiff
filed an amended and consolidated complaint (the Complaint.)The Complaint alleges that the defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. It seeks an
unspecified amount of damages on behalf of all persons who purchased LJ common stock
during the period from February 15, 2007, to September 6, 2007 (the Class Period).
The Complaint alleges that the Companys February 15, 2007 press release, which
provided financial guidance for the Companys fourth quarter and year-end 2006 net
income and earnings, contained materially false and misleading statements. The
Complaint alleges that the defendants overstated the Companys fiscal 2006 financial
results, and thereby artificially inflated the market price of LJs common stock
throughout the Class Period.
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##### Table of Contents



11.
    
    COMMITMENTS AND CONTINGENCIES (Continued)
 (c)
    
    Legal proceedings (Continued)On May 27, 2008, the Company (the only defendant served with the Complaint) moved to
dismiss the Complaint pursuant to Rule 12(b) of the Federal Rules of Civil Procedure.
After the parties fully briefed the motion to dismiss, but before it came on for
hearing before the Court, the parties agreed to settle the shareholder class action.
On October 19, 2009, the Court granted final approval of the settlement. Under the
terms of the settlement, our insurer paid $2,000,000 in full and final settlement of
all claims asserted in the securities litigation. In December 2009, we also settled
opt-out claims with Alder Capital Partners I, LP, Alder Offshore Partners Ltd. and
Alder Offshore Master Fund, LP (collectively, Alder). Under the terms of the
agreement with Alder, our insurer paid $150,000 in full and final settlement of
Alders Claims.Derivative Litigation.Two purported shareholder derivative lawsuits, Vaughn v. Yih,
et al. (Los Angeles Superior Court No. BC 378903)and Cooke vs. Yih, et al. (Los
Angeles Superior Court No. BC 380214), were filed in California in Los Angeles
County Superior Court on October 10 and November 5, 2007, respectively.The complaints in the derivative actions allege that various officers and directors
of the Company caused the Company to issue a series of press releases, Securities and
Exchange Commission filings, and other statements that significantly overstated the
Companys business prospects and financial results. They further allege that, as a
result of these statements, the Companys share price traded at artificially inflated
levels, and that defendants actions led to a delay in the release of the Companys
financial statements for the fiscal fourth quarter of 2006 and the fiscal first
quarter of 2007. The plaintiffs purport to state causes of action for breach of
fiduciary duty, waste of corporate assets, and unjust enrichment. By their
complaints, they seek unspecified damages to be paid to the Company, corporate
governance reforms, and equitable and injunctive relief, including restitution and
the creation of a constructive trust.On May 9, 2008, the court in the Vaughnaction sustained the defendants demurrer
without leave to amend on the ground that the plaintiff failed to obtain the required
leave from the High Court of the British Virgin Islands to file the derivative
action. The Vaughnaction was dismissed pursuant to the order sustaining the
demurrer. On May 15, 2008, the plaintiff filed a notice of appeal from the order of
dismissal. The California Court of Appeal heard oral argument on February 25, 2009
and, on May 26, 2009, the Court of Appeal affirmed the dismissal of the Vaughncase.
The plaintiffs filed a petition for review with the California Supreme Court and, on
August 19, 2009, the petition for review was denied.In May 2008, the Cookeaction was reassigned to the same judge that presided over the
Vaughnaction. The parties stipulated and the Court ordered that the Cookeaction be
stayed pending resolution of the Vaughnappeal. The case was dismissed on September
8, 2009.
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11.
    
    COMMITMENTS AND CONTINGENCIES (Continued)
 (c)
    
    Legal proceedings (Continued)Besides the above-mentioned legal proceedings, the Company is exposed to certain
asserted and unasserted potential claims. There can be no assurance that, with
respect to potential claims made against the Company, the Company could resolve such
claims under terms and conditions that would not have a material adverse effect on
its business, its liquidity or financial results. Periodically the Company reviews
the status of each significant matter and assesses its potential financial exposure.
If the
potential loss from any claim or legal proceeding is considered probable and a range
of possible losses can be estimated, the Company then accrued a liability for the
estimated loss. Any liability for estimated loss is based on the criteria in SFAS
No. 5, now codified within ASC 450-20-25-2, Accounting for Contingencies. Legal
proceedings are subject to uncertainties, and the outcomes are difficult to predict.
Because of such uncertainties, accruals are based only on the best information
available at the time. As additional information becomes available, the Company
reassesses the potential liability related to pending claims and litigation and may
revise estimate. Presently, no accrual has been estimated under SFAS No. 5 for
potential losses that may or may not arise from the current lawsuits in which the
Company is involved. Accruals include billings for legal services performed to date
and expected.
 12.
    
    COMMON STOCK AND WARRANTS OTHER THAN STOCK-BASED COMPENSATION
 (a)
    
    Common stock(i) In September 2006, the Company entered into a securities purchase agreement with
certain institutional investors for the issuance of shares of common stock and
warrants to purchase shares of common stock. The Company sold to the investors an
aggregate of 1,466,668 units at a purchase price of $3.75 per unit, each unit
consisting of one share of common stock and a short-term warrant and a long-term
warrant (note 12(b)(i)).(ii) During the year ended December 31, 2007 warrants to purchase 562,801 shares
of common stock (note 12(b)) and 1,897,000 stock options (note 14(a)) were exercised.
A total of 2,459,801 shares of common stock of the Company were issued accordingly.(iii) During the year ended December 31, 2008, 1,324,000 stock options (note
14(a)) were exercised. A total of 1,324,000 shares of common stock of the Company
were issued accordingly.
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12.
    
    COMMON STOCK AND WARRANTS OTHER THAN STOCK-BASED COMPENSATION (Continued)
 (a)
    
    Common stock (Continued)
 (iv)
    
    On October 1, 2008, the Company entered into a consulting agreement with a
consultant for a period of 3 months commencing on October 1, 2008. Pursuant to the
agreement, the Company issued to the consultant 150,000 shares of restricted common
stock of the Company, which shares contained the customary restrictive legend
pursuant to the US Securities Act of 1933, as amended. The shares were valued at the
then current market price.(v)
    
    During the year ended December 31, 2009, 857,500 stock options (note 14(a))
were exercised. A total of 857,500 shares of common stock of the Company were issued
accordingly.
 As of December 31, 2009, the Company had 23,768,672 shares of common stock issued.
 (b)
    
    Warrants other than stock-based compensation
 As of December 31,2009
    
    
    2008
    
    
    2007Number of
    
    
    Number of
    
    
    Number ofwarrants
    
    
    warrants
    
    
    warrantsOutstanding, beginning of year
    
    
    499,785
    
    
    
    499,785
    
    
    
    1,062,586Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    (562,801
    )Expired
    
    
    (170,451
    )
    
    
    
    
    
    
    Outstanding, end of year
    
    
    329,334
    
    
    
    499,785
    
    
    
    499,785
 The following table shows the warrants outstanding as of December 31, 2009.
 Number ofwarrantsDate of grant
    
    Notes
    
    
    outstanding
    
    
    Exercise price
    
    
    Expiration dateSeptember 25, 2006
    
    
    (i
    )
    
    
    329.334
    
    
    US$
    4.50
    
    
    March 25, 2012September 25, 2006
    
    
    (i
    )
    
    
    
    
    
    US$
    4.221
    
    
    February 5, 2007
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12.
    
    COMMON STOCK AND WARRANTS OTHER THAN STOCK-BASED COMPENSATION (Continued)
 (b)
    
    Warrants other than stock-based compensation (Continued)
 (i)
    
    On September 25, 2006, the Company issued long-term and
short-term warrants to the investors of a private placement. The long-term
warrants represent a five-year option to purchase in the aggregate up to 366,668
shares of common stock at $4.50 per share at any time during the period from
March 25, 2007 until March 25, 2012, and the short-term warrants represent an
option to purchase in the aggregate up to 236,909 shares of common stock at
$4.221 per share at any time during the period from September 25, 2006 until
February 5, 2007.The Company has also issued warrants to the placement agent of the private
placement to purchase 29,333 shares of the Company. The warrants issued to
the placement agent are identical to the long-term warrants.
 The fair value of warrants was valued using the Black-Scholes option pricing model
with resulting allocation of the aggregate proceeds from private placement between
common stock and the underlying warrants, and which have been included in the
additional paid-in capital.
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13.
    
    EMPLOYEE RETIREMENT BENEFIT PLANSFollowing the introduction of the Mandatory Provident Fund (MPF) legislation in Hong Kong,
the Company has participated in the defined contribution mandatory provident fund since
December 1, 2000. Both the Company and its employees in Hong Kong make monthly
contributions to the fund at 5% of the employees earnings as defined under Mandatory
Provident Fund legislation. The 5% monthly contribution of the Company and the employees
are subject to a cap of US$0.128 per month and thereafter contributions are voluntary. When
employees leave the MPF scheme prior to vesting fully in voluntary contributions, the
contributions payable by the Company are reduced by the amount of forfeited contributions.The amount of forfeitures in respect of the MPF scheme, which was available to reduce the
Companys contribution payable, for the year ended December 31, 2009, 2008 and 2007 was
US$12, US$221 and US$27 respectively.The full-time employees of the PRC subsidiaries are entitled to staff welfare benefits,
including medical care, welfare subsidies, unemployment insurance and pension benefits.
These companies are required to accrue for these benefits based on certain percentages of
the employees salaries in accordance with the relevant regulations, and to make
contributions to the state-sponsored pension and medical plans out of the amounts accrued
for medical and pension benefits. The state-sponsored retirement plan was responsible for
the entire pension obligations for the actual pension payments or post-retirement benefits
beyond the annual contributions.The Company has adopted Profit Sharing Plan and Trust (Profit Sharing Plan) for the
benefit of substantially all employees in the US that satisfied the age and service
requirements. The Companys contributions are determined according to a discretionary
formula in an amount determined each year by the management and will be allocated to
each Qualifying Participants individual account using the pro rata formula. No profit
sharing expense made during all financial periods since its adoption.Contributions paid and payable by the Company in respect of the employee retirement benefit
plans charged to the consolidated statement of operations were US$1,771, US$2,234 and
US$1,505 for the years ended December 31, 2009, 2008 and 2007 respectively.
 14.
    
    STOCK-BASED COMPENSATION
 (a)
    
    Stock incentive planOn June 1, 1998, the Company adopted a stock option plan (The 1998 Plan) which was
approved by the shareholders on December 9, 1998. The 1998 Plan allows the Board of
Directors, or a committee thereof at the Boards discretion, to provide for a total
of 2,000,000 stock options to officers, directors, key employees and advisors of the
Company.
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##### Table of Contents



14.
    
    STOCK-BASED COMPENSATION (Continued)
 (a)
    
    Stock incentive plan (Continued)Out of the stock options provided, 1,285,000 stock options were issued in accordance
with the terms of The 1998 Plan on April 12, 1999 to certain officers, directors, key
employees and advisors of the Company at an exercise price of US$5.0 per share (the
fair market value of the common stock as of April 12, 1999) and are exercisable
during the period from April 12, 1999 to April 11, 2009.Pursuant to the 1999 Annual Meeting of the Shareholders on December 15, 1999, the
authorized number of stock options was increased from 2,000,000 to 4,000,000. The
purchase price of the shares of the Common Stock covered by The 1998 Plan shall be at
least 100% of the fair market value per share of such shares on the date of grant,
with a term of ten years.On July 1, 2003, the Company adopted the second stock option plan (The 2003 Plan)
which was approved by the shareholders on December 5, 2003. The 2003 Plan allows the
Board of Directors, or a committee thereof at the Boards discretion, to provide for
a total of 4,000,000 stock options to officers, directors, key employees and advisors
of the Company. The purchase price of the shares of the Common Stock covered by The
2003 Plan could be less than, equal to or greater than 100% of the fair market value
of the Common Stock at the time of grant, with a term of ten years.On July 1, 2005, the Company adopted and approved the third stock option plan (The
2005 Plan) which was approved by the shareholders on September 26, 2005. The Company
believes that a new plan is necessary since there are only a minimal number of
options remaining under The 1998 Plan and The 2003 Plan. The Company believes that
the grant of stock options is accomplishing its purposes, which is to promote the
Company and the shareholders interests by providing key employees with an opportunity
to acquire a proprietary interest in the Company and to develop a stronger incentive
to put forth maximum effort for the Companys continued success and growth. In
addition, the opportunity to acquire a propriety interest in the Company aids the
Company in attracting and retaining key personnel of outstanding ability.Options granted under The 2005 Plan will constitute either incentive stock options
within the meaning of Section 422 of the United States Internal Revenue Code of 1986,
as amended, or options which constitute nonqualified options at the time of issuance
of such options. The 2005 Plan provides that incentive stock options and/or
nonqualified stock options may be granted to our officers, directors, employees and
advisors selected by the compensation committee. A total of 4,000,000 shares of
common stock are authorized and reserved for issuance during the term of The 2005
Plan, which expires in June 2015. The compensation committee has the sole authority
to interpret The 2005 Plan and make all determinations necessary or advisable for
administering The 2005 Plan. The exercise price for any incentive option and
nonqualified option may be less than, equal to or greater than 100% and 110%
respectively of the fair market value of the shares as of the date of grant.
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##### Table of Contents



14.
    
    STOCK-BASED COMPENSATION (Continued)
 (a)
    
    Stock incentive plan (Continued)Upon the exercise of the option, the exercise price must be paid in
full either in cash, shares of the Companys stock or a combination. If any
option is not exercised for any reason, such shares shall again become available
for the purposes of The 2005 Plan. As of December 31, 2009, 2,850,000 options
had been exercised and 1,150,000 options to purchase the Companys shares of
common stock under The 2005 Plan were outstanding.On August 8, 2008, the Company adopted and approved the fourth stock option plan (The
2008 Plan) which was approved by the shareholders on November 14, 2008. The Company
believes that a new plan is necessary since there are only a minimal number of
options remaining under The 2003 Plan and The 2005 Plan. The Company believes that
the grant of stock options is accomplishing its purposes, which is to promote the
Company and the shareholders interests by providing key employees with an opportunity
to acquire a proprietary interest in the Company and to develop a stronger incentive
to put forth maximum effort for the Companys continued success and growth. In
addition, the opportunity to acquire a propriety interest in the Company aids the
Company in attracting and retaining key personnel of outstanding ability.Options granted under The 2008 Plan will constitute either incentive stock options
within the meaning of Section 422 of the United States Internal Revenue Code of 1986,
as amended, or options which constitute nonqualified options at the time of issuance
of such options. The 2008 Plan provides that incentive stock options and/or
nonqualified stock options may be granted to our officers, directors, employees and
advisors selected by the compensation committee. A total of 4,000,000 shares of
common stock are authorized and reserved for issuance during the term of The 2008
Plan, which expires in August 2018. The compensation committee has the sole
authority to interpret The 2008 Plan and make all determinations necessary or
advisable for administering The 2008 Plan. The exercise price for any incentive
option and nonqualified option may be less than the fair market value of the shares
as of the date of grant.Upon the exercise of the option, the exercise price must be paid in
full either in cash, shares of the Companys stock or a combination. If any
option is not exercised for any reason, such shares shall again become available
for the purposes of The 2008 Plan. As of December 31, 2009, 4,000,000 options
had been issued and 4,000,000 options to purchase the Companys shares of common
stock under The 2008 Plan were outstanding.
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14.
    
    STOCK-BASED COMPENSATION (Continued)
 (a)
    
    Stock incentive plan (Continued)The stock options activities and related information are summarized as follows:
 Year ended
    
    
    Year ended
    
    
    Year endedDecember 31, 2009
    
    
    December 31, 2008
    
    
    December 31, 2007Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageexercise
    
    
    
    
    
    
    exercise
    
    
    
    
    
    
    exerciseOptions
    
    
    price
    
    
    Options
    
    
    price
    
    
    Options
    
    
    PriceUS$
    
    
    
    
    
    
    US$
    
    
    
    
    
    
    US$Outstanding, beginning of year
    
    
    2,428,000
    
    
    
    0.68
    
    
    
    1,424,000
    
    
    
    2.07
    
    
    
    1,821,000
    
    
    
    2.06Granted
    
    
    4,000,000
    
    
    
    0.60
    
    
    
    2,500,000
    
    
    
    0.98
    
    
    
    1,500,000
    
    
    
    5.14Exercised (note 12(a)(v))
    
    
    (857,500
    )
    
    
    0.41
    
    
    
    (1,324,000
    )
    
    
    2.57
    
    
    
    (1,897,000
    )
    
    
    4.48Cancelled
    
    
    
    
    
    
    
    
    
    
    (150,000
    )
    
    
    2.00
    
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    
    
    
    
    (22,000
    )
    
    
    2.25
    
    
    
    
    
    
    
    Outstanding, end of year
    
    
    5,570,500
    
    
    
    0.23
    
    
    
    2,428,000
    
    
    
    0.68
    
    
    
    1,424,000
    
    
    
    2.07Exercise price less than the
market price on date of grant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,000
    
    
    
    2.00Exercise price equals to
market price on date of grant
    
    
    4,000,000
    
    
    
    0.60
    
    
    
    
    
    
    
    
    
    
    
    404,000
    
    
    
    2.00Exercise price exceeds the
market price on date of grant
    
    
    1,570,500
    
    
    
    0.68
    
    
    
    2,428,000
    
    
    
    0.68
    
    
    
    870,000
    
    
    
    2.125,570,500
    
    
    
    0.23
    
    
    
    2,428,000
    
    
    
    0.68
    
    
    
    1,424,000
    
    
    
    2.07Range of exercise price  US$0.40
    
    
    1,150,000
    
    
    
    0.40
    
    
    
    2,000,000
    
    
    
    0.40
    
    
    
    
    
    
    
     US$0.60
    
    
    4,000,000
    
    
    
    0.60
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
     US$2.00
    
    
    420,500
    
    
    
    2.00
    
    
    
    428,000
    
    
    
    2.00
    
    
    
    1,010,500
    
    
    
    2.00 US$2.25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    413,500
    
    
    
    2.255,570,500
    
    
    
    0.23
    
    
    
    2,428,000
    
    
    
    0.68
    
    
    
    1,424,000
    
    
    
    2.07Exercisable, end of year exercise price at US$0.40
    
    
    980,000
    
    
    
    0.40
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
     exercise price at US$2.00
    
    
    420,500
    
    
    
    2.00
    
    
    
    428,000
    
    
    
    2.00
    
    
    
    963,625
    
    
    
    2.00 exercise price at US$2.25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    413,500
    
    
    
    2.251,400,500
    
    
    
    0.88
    
    
    
    428,000
    
    
    
    2.00
    
    
    
    1,377,125
    
    
    
    2.08Weighted average remaining
contractual life exercise price at US$0.40
    
    0.21 year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
     exercise price at US$2.00
    
    3.49 years
    
    
    
    
    
    4.49 years
    
    
    
    
    
    3.32 years exercise price at US$2.25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.33 years
 All options issued, other than 4,170,000 options, are immediately exercisable as
of December 31, 2009. The 4,170,000 options are issued and outstanding but only
vested in additional increments of 1,487,000 in 2010, 1,437,000 in 2011, 437,000 in
each of 2012 and 2013 , 327,000 in 2014 and 15,000 in each of 2015 to 2017.
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14.
    
    STOCK-BASED COMPENSATION (Continued)
 (b)
    
    Warrants
 (i)
    
    Pursuant to a media relation services agreement dated April 5,
2005, the Company issued to a consultant warrants to purchase 50,000 shares,
150,000 shares, 150,000
shares, 100,000 shares and 50,000 shares of common stock of the Company at
US$2.80, US$3.00, US$3.50, US$4.00 and US$4.50 respectively per share
exercisable through April 4, 2008. These warrants were exercised during the
year ended December 31, 2006 and 500,000 shares of common stock were issued
accordingly.(ii)
    
    In connection with private placement to investors completed in
September 2006, the Company issued to a consultant warrants to purchase 29,333
shares of common stock of the Company at US$4.50 per share exercisable through
March 25, 2012 (see note 12(b)(i)).
 Save as disclosed above, none of the warrants as aforesaid was exercised for the
three years ended December 31, 2009, 2008 and 2007. The costs associated with these
transactions are accounted for based on fair value of the warrants on the date of
grant.
 
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15.
    
    RELATED PARTY TRANSACTIONS
 (a)
    
    Names and relationship of related parties:
 Existing relationships with the CompanyYu Chuan Yih
    
    Director and major beneficial shareholder of the CompanyTanzanite (H.K.) Limited
    
    Common directorsAndrew N. Bernstein
    
    Non-executive director
 (b)
    
    Summary of balances with related parties:
 As of December 31,2009
    
    
    2008US$
    
    
    US$Certain banking facilities granted to the
Company collateralized by properties owned
by Yu Chuan Yih and his personal guarantee
to the extent of
    
    
    22,813
    
    
    
    23,095
 (c)
    
    Summary of related party transactions:
 Year ended December 31,2009
    
    
    2008
    
    
    2007US$
    
    
    US$
    
    
    US$Expenses:Rental expense to Tanzanite (H.K.) Limited
    
    
    246
    
    
    
    246
    
    
    
    245Legal fee to Andrew N. Bernstein, P.C.
    
    
    140
    
    
    
    185
    
    
    
    143Directors fee to Andrew N. Bernstein
    
    
    12
    
    
    
    12
    
    
    
    12398
    
    
    
    443
    
    
    
    400
 The Company leases certain of its office and quarter from a related party. The leases
are for two years term expiring in 2010 and 2011. The Company may terminate these
tenancies at any time after the expiration of the first 12 months after the
commencement of the term of tenancies, by giving the landlord no less than two months
prior notice.
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16.
    
    SEGMENT INFORMATIONThe Company has adopted SFAS No. 131, now codified within ASC Topic 280-10-50-20
through 280-10-50-32, Disclosures about Segments of an Enterprise and Related
Information, which establishes annual reporting standards for enterprise business
segments and related disclosures about its products and services, geographic areas and
major customers. SFAS No. 131 defines operating segments as components of an enterprise
about which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance.The Company evaluates segment performance and allocates resources based on several
factors of which the primary financial measures are revenues from external customers
and operating income. As a result, the Company considers that it has two operating
segments, (i) manufacture and wholesale of jewelry products, and (ii) retail of jewelry
products.
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16.
    
    SEGMENT INFORMATION (Continued)Contributions of the major activities, profitability information and asset information
are summarized below:
 Manufactureandwholesale
    
    
    Retail
    
    
    Corporate
    
    
    TotalUS$
    
    
    US$
    
    
    US$
    
    
    US$Year ended December 31, 2009Segment revenue from external
customers
    
    
    59,733
    
    
    
    50,790
    
    
    
    
    
    
    
    110,523Income (loss) from operations
    
    
    1,846
    
    
    
    4,542
    
    
    
    (1,777
    )
    
    
    4,611Interest income
    
    
    137
    
    
    
    10
    
    
    
    
    
    
    
    147Interest expenses
    
    
    (811
    )
    
    
    (31
    )
    
    
    
    
    
    
    (842
    )Income before income taxes and
noncontrolling interest
    
    
    1,172
    
    
    
    4,521
    
    
    
    (1,777
    )
    
    
    3,916Incomes taxes
    
    
    (171
    )
    
    
    (60
    )
    
    
    
    
    
    
    (231
    )Net loss attributable to
noncontrolling interest
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Net income (loss)
    
    
    1,005
    
    
    
    4,461
    
    
    
    (1,777
    )
    
    
    3,689Significant non-cash itemsDepreciation
    
    
    914
    
    
    
    1,283
    
    
    
    
    
    
    
    2,197Noncontrolling interest
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (4
    )Stock-based compensation cost
    
    
    
    
    
    
    
    
    
    
    1,043
    
    
    
    1,043Segment assets
    
    
    82,970
    
    
    
    50,787
    
    
    
    
    
    
    
    133,757Total expenditures for
additions to long-lived assets
    
    
    295
    
    
    
    1,415
    
    
    
    
    
    
    
    1,710Depreciation and amortization
    
    
    914
    
    
    
    1,283
    
    
    
    
    
    
    
    2,197
 F-45




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16.
    
    SEGMENT INFORMATION (Continued)
 Manufactureandwholesale
    
    
    Retail
    
    
    Corporate
    
    
    TotalUS$
    
    
    US$
    
    
    US$
    
    
    US$Year ended December 31, 2008Segment revenue from external
customers
    
    
    99,840
    
    
    
    36,428
    
    
    
    
    
    
    
    136,268Income (loss) from operations
    
    
    4,061
    
    
    
    (190
    )
    
    
    (2,908
    )
    
    
    963Interest income
    
    
    192
    
    
    
    7
    
    
    
    
    
    
    
    199Gain on currency translation
    
    
    
    
    
    
    1,473
    
    
    
    
    
    
    
    1,473Gain on sale securities
    
    
    49
    
    
    
    
    
    
    
    
    
    
    
    49Gain on disposal of property
held for lease
    
    
    2,210
    
    
    
    
    
    
    
    
    
    
    
    2,210Interest expenses
    
    
    (1,789
    )
    
    
    
    
    
    
    
    
    
    
    (1,789
    )Income before income taxes and
noncontrolling interest
    
    
    4,723
    
    
    
    1,290
    
    
    
    (2,908
    )
    
    
    3,105Incomes taxes
    
    
    (569
    )
    
    
    
    
    
    
    
    
    
    
    (569
    )Net income attributable to
noncontrolling interest
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    (6
    )Net income (loss)
    
    
    4,148
    
    
    
    1,290
    
    
    
    (2,908
    )
    
    
    2,530Significant non-cash itemsDepreciation
    
    
    1,877
    
    
    
    1,496
    
    
    
    
    
    
    
    3,373Noncontrolling interest
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    6Stock-based compensation cost
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    400Segment assets
    
    
    86,852
    
    
    
    44,338
    
    
    
    
    
    
    
    131,190Total expenditures for
additions to long-lived assets
    
    
    436
    
    
    
    1,199
    
    
    
    
    
    
    
    1,635Depreciation and amortization
    
    
    1,877
    
    
    
    1,496
    
    
    
    
    
    
    
    3,373
 F-46




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16.
    
    SEGMENT INFORMATION (Continued)
 Manufactureandwholesale
    
    
    Retail
    
    
    Corporate
    
    
    TotalUS$
    
    
    US$
    
    
    US$
    
    
    US$Year ended December 31, 2007Segment revenue from external
customers
    
    
    117,689
    
    
    
    34,348
    
    
    
    
    
    
    
    152,037Income (loss) from operations
    
    
    7,090
    
    
    
    1,017
    
    
    
    (2,076
    )
    
    
    6,031Interest income
    
    
    265
    
    
    
    6
    
    
    
    2
    
    
    
    273Interest expenses
    
    
    (3,103
    )
    
    
    
    
    
    
    
    
    
    
    (3,103
    )Income before income taxes and
noncontrolling interest
    
    
    4,252
    
    
    
    1,023
    
    
    
    (2,074
    )
    
    
    3,201Incomes taxes
    
    
    (1,015
    )
    
    
    (696
    )
    
    
    
    
    
    
    (1,711
    )Net income attributable to
noncontrolling interest
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )Net income (loss)
    
    
    3,236
    
    
    
    327
    
    
    
    (2,074
    )
    
    
    1,489Significant non-cash itemsDepreciation
    
    
    1,995
    
    
    
    1,100
    
    
    
    
    
    
    
    3,095Noncontrolling interests
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Stock-based compensation cost
    
    
    25
    
    
    
    162
    
    
    
    300
    
    
    
    487Segment assets
    
    
    97,715
    
    
    
    36,429
    
    
    
    
    
    
    
    134,144Total expenditures for
additions to long-lived assets
    
    
    1,162
    
    
    
    1,977
    
    
    
    
    
    
    
    3,139Depreciation and amortization
    
    
    1,995
    
    
    
    1,100
    
    
    
    
    
    
    
    3,095
 F-47




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##### Table of Contents



16.
    
    SEGMENT INFORMATION (Continued)
 (a)
    
    Geographical areasThe following summarizes the Companys revenue from the following
geographic areas (based on the location of the customer).
 Year ended December 31,2009
    
    
    2008
    
    
    2007US$
    
    
    US$
    
    
    US$Revenue from external customers:US & Canada
    
    
    39,225
    
    
    
    69,232
    
    
    
    80,572Europe and other countries
    
    
    18,110
    

    
    
    27,455
    

    
    
    32,597Japan
    
    
    1,115
    

    
    
    989
    

    
    
    2,206PRC (including Hong Kong and
Macau)
    
    
    52,073
    

    
    
    38,592
    

    
    
    36,662110,523
    

    
    
    136,268
    

    
    
    152,037
 As of December 31,2009
    
    
    2008US$
    
    
    US$Carrying amount of long-lived assets:Hong Kong
    
    
    2,713
    
    
    
    3,363PRC
    
    
    4,400
    
    
    
    4,240US
    
    
    4
    
    
    
    10Total long-lived assets (excluding goodwill)
    
    
    7,117
    
    
    
    7,613Reconciling items:Others
    
    
    126,640
    
    
    
    123,577Total consolidated assets
    
    
    133,757
    
    
    
    131,190
 F-48




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##### Table of Contents



17.
    
    SIGNIFICANT CONCENTRATIONS AND RISKS
 (a)
    
    Revenue concentrationsThe Company derived operating revenue from the following major customers,
which accounted for over 10% of operating revenue.
 Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2009
    
    2008
    
    2007US$
    
    %
    
    US$
    
    %
    
    US$
    
    %Customer A
    
    
    11,008
    
    
    
    10
    
    
    
    14,421
    
    
    
    11
    
    
    
    11,993
    
    
    
    8Customer B
    
    
    4,441
    
    
    
    4
    
    
    
    15,490
    
    
    
    11
    
    
    
    14,840
    
    
    
    10
 Trade receivables related to these major customers were US$713 and US$322 as of
December 31, 2009 respectively and US$3,896 and US$312 as of December 31, 2008
respectively.(b)
    
    Dependence on suppliersGold is the major raw material used in the production of the Companys Jewelry products.
The Company purchased gold from banks, gold refiners and commodity dealers who supplied
substantially all of the Companys gold needs, which the Company believed was sufficient
to meet its requirement.The following suppliers of gold, diamonds and gemstones accounted for 10% or more of
total purchases:
 Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2009
    
    2008
    
    2007US$
    
    %
    
    US$
    
    %
    
    US$
    
    %Supplier A
    
    
    17,483
    
    
    
    34
    
    
    
    29,820
    
    
    
    45
    
    
    
    25,841
    
    
    
    26Supplier B
    
    
    7,930
    
    
    
    16
    
    
    
    8,625
    
    
    
    13
    
    
    
    4,485
    
    
    
    5Supplier C
    
    
    5,266
    
    
    
    10
    
    
    
    2,255
    
    
    
    4
    
    
    
    2,872
    
    
    
    3Supplier D
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,348
    
    
    
    11
 Trade payables related to these suppliers were US$2,622 and US$7,270 as of December
31, 2009 and 2008 respectively.
 18.
    
    RECLASSIFICATIONS
 Certain prior year amounts have been reclassified to confirm to the
current year presentation.
 F-49




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Sales return reserves
 US$Balance at January 1, 2007
    
    
    2,437Charges to operations
    
    
    9,464Deductions
    
    
    (10,348
    )Balance at December 31, 2007
    
    
    1,553Charges to operations
    
    
    9,202Deductions
    
    
    (9,108
    )Balance at December 31, 2008
    
    
    1,647Charges to operations
    
    
    5,176Deductions
    
    
    (5,763
    )Balance at December 31, 2009
    
    
    1,060
 F-50




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##### Table of Contents



ITEM 19. EXHIBITS
  1.1
    
    Memorandum of Association of the Company*1.2
    
    Articles of Association of the Company*1.3
    
    Amendment to Articles of Association of the Company*4.1
    
    Employment Agreement of Yu Chuan Yih with the Registrant8.1
    
    List of Significant Subsidiaries of the Company11.1
    
    Code of Ethics**12.1
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)12.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)13.1
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 135013.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 135015.1
    
    Consent of Gruber & Company, LLC
 
 *
    
    Incorporated by reference to the Exhibits to our Registration Statement on Form F-1 and
pre-effective and post-effective amendments thereto, SEC File No. 333-7912, declared effective
on April 15, 1998.**
    
    Incorporated by reference to the Exhibits to our Annual Report on Form 20-F for the fiscal
year ended December 31, 2003. 117




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##### Table of Contents



SIGNATURES
  LJ INTERNATIONAL INC.
(Registrant)Date:  March 25, 2010
    By:
    /s/ YU CHUAN YIHYu Chuan YihChairman




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Exhibit1.1
    
    Memorandum of Association of the Company*1.2
    
    Articles of Association of the Company*1.3
    
    Amendment to Articles of Association of the Company*4.1
    
    Employment Agreement of Yu Chuan Yih with the Registrant8.1
    
    List of Significant Subsidiaries of the Company11.1
    
    Code of Ethics**12.1
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)12.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)13.1
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) and 18
U.S.C. Section 135013.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) and 18
U.S.C. Section 135015.1
    
    Consent of Gruber & Company, LLC
 
 *
    
    Incorporated by reference to the Exhibits to our Registration Statement on Form F-1 and
pre-effective and post-effective amendments thereto, SEC File No. 333-7912, declared effective
on April 15, 1998.**
    
    Incorporated by reference to the Exhibits to our Annual Report on Form 20-F for the
fiscal year ended December 31, 2003.