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

FORM 20-F

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

OR

[   ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended

OR

[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from May 1, 2002 to December 31, 2002

Commission file number 0-29620

|                                                      
|------------------------------------------------------
|LJ INTERNATIONAL INC.                                 
|                                                      
|(Exact name of Registrant as specified in its charter)

|                                               
|-----------------------------------------------
|LJ INTERNATIONAL INC.                          
|                                               
|(Translation of Registrants name into English)

|                                               
|-----------------------------------------------
|British Virgin Islands                         
|                                               
|(Jurisdiction of incorporation or organization)

|                                        
|----------------------------------------
|Unit #12, 12/F, Block A                 
|Focal Industrial Centre                 
|21 Man Lok Street                       
|Hung Hom, Kowloon, Hong Kong            
|                                        
|(Address of principal executive offices)

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

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

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

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

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

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

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

Indicate the number of outstanding shares of each of the issuers classes
of capital or common stock as of December 31, 2002:

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

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

|    |  |     |  |    |  |      
|--- |  | --- |  | -- |  | -----
|Yes |  | [X] |  | No |  | [   ]

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

|        |  |       |  |         |  |    
|------- |  | ----- |  | ------- |  | ---
|Item 17 |  | [   ] |  | Item 18 |  | [X]

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

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

Not Applicable.

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|                                                                                      |  |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS                                    
|PART I                                                                               
|ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                        
|ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE                                      
|ITEM 3. KEY INFORMATION                                                              
|A. SELECTED FINANCIAL DATA.                                                          
|SELECTED CONSOLIDATED FINANCIAL DATA                                                 
|B. CAPITALIZATION AND INDEBTEDNESS.                                                  
|C. REASONS FOR THE OFFER AND USE OF PROCEEDS.                                        
|D. RISK FACTORS.                                                                     
|ITEM 4. INFORMATION ON THE COMPANY                                                   
|A. HISTORY AND DEVELOPMENT OF THE COMPANY.                                           
|B. BUSINESS OVERVIEW.                                                                
|C. ORGANIZATIONAL STRUCTURE AS OF DECEMBER 31, 2002:                                 
|D. PROPERTY, PLANTS AND EQUIPMENT.                                                   
|ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 
|A. OPERATING RESULTS.                                                                
|B. LIQUIDITY AND CAPITAL RESOURCES.                                                  
|C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.                              
|D. TREND INFORMATION.                                                                
|ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   
|ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            
|ITEM 8. FINANCIAL INFORMATION                                                        
|ITEM 9. THE OFFER AND LISTING                                                        
|ITEM 10. ADDITIONAL INFORMATION                                                      
|ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                  
|ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                      
|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                                                     
|PART III                                                                             
|ITEM 17. FINANCIAL STATEMENTS                                                        
|ITEM 18. FINANCIAL STATEMENTS                                                        
|INDEX TO FINANCIAL STATEMENTS                                                        
|ITEM 19. EXHIBITS                                                                    
|SIGNATURES                                                                           
|CERTIFICATIONS                                                                       
|CERTIFICATIONS                                                                       
|Ex-99.1 Certification of Chief Executive Officer                                     
|Ex-99.2 Certification of Chief Financial Officer                                     



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SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements that involve risks
and uncertainties. These include statements about our expectations, plans,
objectives, assumptions or future events. In some cases, you can identify
forward-looking statements by terminology such as anticipate, estimate,
plans, potential, projects, continuing, ongoing, expects,
management believes, we believe, we intend and similar expressions.
These statements involve estimates, assumptions and uncertainties that could
cause actual results to differ materially from those expressed for the reasons
described in this annual report. You should not place undue reliance on these
forward-looking statements.

You should be aware that our actual results could differ materially from
those contained in the forward-looking statements due to a number of factors:



| |  |  | dependence upon certain customers
| | - |  | ---------------------------------
|
| |  |  | dependence on key personnel      
|
| |  |  | control by principal shareholder 
|
| |  |  | competitive factors              
|
| |  |  | the operation of our business    
|
| |  |  | general economic conditions      

You should also consider carefully the statements under Risk Factors and
other sections of this annual report, which address additional factors that
could cause our actual results to differ from those set forth in the
forward-looking statements and could materially and adversely affect our
business, operating results and financial condition. All subsequent written
and oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the applicable cautionary
statements.

The forward-looking statements speak only as of the date on which they are
made, and, except to the extent required by federal securities laws, we
undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement is made or to
reflect the occurrence of unanticipated events. In addition, we cannot assess
the impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from
those contained in any forward-looking statements.

We use data and industry forecasts in this annual report which we have
obtained from internal surveys, market research, publicly available information
and industry publications. Industry publications generally state that the
information they provide has been obtained from sources believed to be reliable
but that the accuracy and completeness of such information is not guaranteed.
Similarly, we believe that the surveys and market research we or others have
performed are reliable, but we have not independently verified this
information.

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PART I






|ITEM 1. |  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|------- |  | -----------------------------------------------------

Not applicable.






|ITEM 2. |  | OFFER STATISTICS AND EXPECTED TIMETABLE
|------- |  | ---------------------------------------

Not applicable.






|ITEM 3. |  | KEY INFORMATION
|------- |  | ---------------






|A. |  | SELECTED FINANCIAL DATA.
|-- |  | ------------------------




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

The following selected consolidated financial data with respect to each of
the years in the five-year period ended April 30, 2002 and the eight months
ended December 31, 2002 have been derived from our audited consolidated
financial statements. The following selected consolidated financial data
should be read in conjunction with Managements Discussion and Analysis of
Financial Condition and Results of Operations and the Consolidated Financial
Statements and Notes included elsewhere in this annual report.

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Selected Financial Data

|                                                                   |                                              |                   |        |                       |       |              |        |        |       |      |        |        |       |      |        |         |       |   |        |         |       |   |        |              |       | 
|------------------------------------------------------------------ | -------------------------------------------- | ----------------- | ------ | --------------------- | ----- | ------------ | ------ | ------ | ----- | ---- | ------ | ------ | ----- | ---- | ------ | ------- | ----- | - | ------ | ------- | ----- | - | ------ | ------------ | ----- | 
|                                                                   |                                              |                   |        |                       |       |              |        |        |       |      |        |        |       |      |        |         |       |   |        |         |       |   |        | Eight-month 
|                                                                   |                                              |                   |        |                       |       |              |        |        |       |      |        |        |       |      |        |         |       |   |        |         |       |   |        | period ended
|                                                                   |                                              |                   |        | Years ended April 30, |       | December 31,
|                                                                   |                                              |                   |        |                       |       |             
|                                                                   |                                              |                   |        | 1998                  |       | 1999         |        | 2000   |       | 2001 |        | 2002   |       | 2002
|                                                                   |                                              |                   |        |                       |       |              |        |        |       |      |        |        |       |     
|Statement of Operations Data:                                      |                                              |                   |        |                       |       |              |        |        |       |      |        |        |       |      |        |         |       |   |        |         |       |   |        |             
|Revenues                                                           |                                              | $                 | 16,067 |                       |       | $            | 25,255 |        |       | $    | 38,926 |        |       | $    | 46,285 |         |       | $ | 39,240 |         |       | $ | 31,809 |             
|Cost of Goods sold                                                 |                                              |                   | 8,188  |                       |       |              | 12,854 |        |       |      | 24,030 |        |       |      | 29,575 |         |       |   | 33,283 |         |       |   | 21,531 |             
|Gross profit                                                       |                                              |                   | 7,879  |                       |       |              | 12,401 |        |       |      | 14,896 |        |       |      | 16,710 |         |       |   | 5,957  |         |       |   | 10,278 |             
|Operating expenses                                                 |                                              |                   |        |                       |       |              |        |        |       |      |        |        |       |      |        |         |       |   |        |         |       |   |        |             
|                                                                   | Selling, general and administrative          |                   |        | (5,190                | )     |              |        | (7,080 | )     |      |        | (8,872 | )     |      |        | (11,363 | )     |   |        | (11,411 | )     |   |        | (7,722       | )    
|                                                                   | Unrealized (Loss) gain on gold loan          |                   |        | 135                   |       |              |        | 81     |       |      |        | 44     |       |      |        | 44      |       |   |        | (660    | )     |   |        | (435         | )    
|                                                                   | Depreciation                                 |                   |        | (245                  | )     |              |        | (643   | )     |      |        | (705   | )     |      |        | (808    | )     |   |        | (1,031  | )     |   |        | (863         | )    
|                                                                   | Impairment on property, plant and equipment  |                   |        |                      |       |              |        |       |       |      |        |       |       |      |        |        |       |   |        | (345    | )     |   |        | (108         | )    
|                                                                   | Amortization and impairment loss on goodwill |                   |        |                      |       |              |        |       |       |      |        |       |       |      |        | (27     | )     |   |        | (242    | )     |   |        | (400         | )    
|Income (loss) from operations                                      |                                              |                   | 2,579  |                       |       |              | 4,759  |        |       |      | 5,363  |        |       |      | 4,556  |         |       |   | (7,732 | )       |       |   | 750    |             
|Other revenues                                                     |                                              |                   | 202    |                       |       |              | 280    |        |       |      | 458    |        |       |      | 570    |         |       |   | 352    |         |       |   | 205    |             
|Interest expenses                                                  |                                              |                   | (928   | )                     |       |              | (890   | )      |       |      | (1,446 | )      |       |      | (1,780 | )       |       |   | (652   | )       |       |   | (441   | )           
|Issuance costs for convertible debentures                          |                                              |                   |       |                       |       |              |       |        |       |      | (585   | )      |       |      |       |         |       |   |       |         |       |   |       |             
|Impairment loss on investment security                             |                                              |                   |       |                       |       |              |       |        |       |      |       |        |       |      |       |         |       |   |       |         |       |   | (200   | )           
|Operating income (loss) before income taxes and minority interests |                                              |                   | 1,853  |                       |       |              | 4,149  |        |       |      | 3,790  |        |       |      | 3,346  |         |       |   | (8,032 | )       |       |   | 314    |             
|Incomes taxes (expense) credit                                     |                                              |                   | (274   | )                     |       |              | (49    | )      |       |      | (3     | )      |       |      | (211   | )       |       |   | 101    |         |       |   | (101   | )           
|Income (Loss) before minority interests                            |                                              |                   | 1,579  |                       |       |              | 4,100  |        |       |      | 3,787  |        |       |      | 3,135  |         |       |   | (7,931 | )       |       |   | 213    |             
|Minority interests in consolidated subsidiaries                    |                                              |                   |       |                       |       |              | 35     |        |       |      | 52     |        |       |      |       |         |       |   | 30     |         |       |   | 120    |             
|Net income (loss)                                                  |                                              | $                 | 1,579  |                       |       | $            | 4,135  |        |       | $    | 3,839  |        |       | $    | 3,135  |         |       | $ | (7,901 | )       |       | $ | 333    |             
|Net income (loss) per share:                                       |                                              |                   |        |                       |       |              |        |        |       |      |        |        |       |      |        |         |       |   |        |         |       |   |        |             
|                                                                   |                                              | Basic             |        | $                     | 0.34  |              |        | $      | 0.65  |      |        | $      | 0.58  |      |        | $       | 0.37  |   |        | $       | (0.91 | ) |        | $            | 0.04  | 
|                                                                   |                                              | Diluted           |        | $                     | 0.34  |              |        | $      | 0.65  |      |        | $      | 0.56  |      |        | $       | 0.37  |   |        | $       | (0.91 | ) |        | $            | 0.04  | 
|                                                                   |                                              | Pro forma basic   |        | $                     | 0.34  |              |        | $      | 0.22  |      |        | $      | 0.57  |      |        | $       | 0.13  |   |        | $       | (0.91 | ) |        | $            | 0.04  | 
|                                                                   |                                              | Pro forma diluted |        | $                     | 0.34  |              |        | $      | 0.22  |      |        | $      | 0.54  |      |        | $       | 0.13  |   |        | $       | (0.91 | ) |        | $            | 0.04  | 
|Weighted average number of shares                                  |                                              |                   |        |                       |       |              |        |        |       |      |        |        |       |      |        |         |       |   |        |         |       |   |        |             
|                                                                   |                                              | Basic             |        |                       | 4,601 |              |        |        | 6,347 |      |        |        | 6,589 |      |        |         | 8,567 |   |        |         | 8,672 |   |        |              | 8,493 | 
|                                                                   |                                              | Diluted           |        |                       | 4,606 |              |        |        | 6,348 |      |        |        | 6,944 |      |        |         | 8,617 |   |        |         | 8,779 |   |        |              | 8,493 | 
|                                                                   |                                              | Pro forma basic   |        |                       | 4,601 |              |        |        | 6,347 |      |        |        | 6,589 |      |        |         | 8,567 |   |        |         | 8,672 |   |        |              | 8,493 | 
|                                                                   |                                              | Pro forma diluted |        |                       | 4,606 |              |        |        | 6,348 |      |        |        | 6,944 |      |        |         | 8,617 |   |        |         | 8,779 |   |        |              | 8,493 | 
|Balance Sheet Data:                                                |                                              |                   |        |                       |       |              |        |        |       |      |        |        |       |      |        |         |       |   |        |         |       |   |        |             
|Working capital                                                    |                                              |                   | 5,057  |                       |       |              | 9,786  |        |       |      | 20,561 |        |       |      | 20,153 |         |       |   | 12,115 |         |       |   | 11,896 |             
|Total assets                                                       |                                              |                   | 18,410 |                       |       |              | 27,558 |        |       |      | 39,700 |        |       |      | 47,300 |         |       |   | 42,961 |         |       |   | 46,085 |             
|Long-term obligation                                               |                                              |                   | 1,364  |                       |       |              | 1,168  |        |       |      | 2,943  |        |       |      | 287    |         |       |   | 8      |         |       |   |       |             
|Total stockholders equity                                         |                                              |                   | 10,084 |                       |       |              | 15,339 |        |       |      | 24,739 |        |       |      | 31,161 |         |       |   | 23,557 |         |       |   | 23,294 |             

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|B. |  | CAPITALIZATION AND INDEBTEDNESS.
|-- |  | --------------------------------

Not applicable.






|C. |  | REASONS FOR THE OFFER AND USE OF PROCEEDS.
|-- |  | ------------------------------------------

Not applicable.






|D. |  | RISK FACTORS.
|-- |  | -------------

We depend upon QVC, Inc. for a large portion of our sales and we cannot be
certain that these sales will continue. If they do not, our revenues will
likely decline.

Although we sell to a large number of customers in a variety of markets, a
substantial portion of our sales involves offerings to one volume customer,
QVC, Inc. For the fiscal years ended April 30, 2002 and December 31, 2002,
QVC, Inc. accounted for approximately 28% and 25% of our sales. Although we
have maintained a good and longstanding relationship with this customer, we do
not have any long-term contracts with QVC, Inc., who orders only on a purchase
order basis. The loss of QVC, Inc. as a customer or a significant reduction in
its orders would have a materially adverse effect.

We are controlled by one of our existing shareholders, whose interests may
differ from other shareholders.

Our largest shareholder beneficially owns or controls approximately 36.5%
of our outstanding shares as of December 31, 2002. Accordingly, he has
controlling influence in determining the outcome of any corporate transaction
or other matter submitted to the shareholders for approval, including mergers,
consolidations and the sale of all, or substantially all, of our assets,
election of directors, and other significant corporate actions. He also has
the power to prevent or cause a change in control. In addition, without the
consent of this shareholder, we could be prevented from entering into
transactions that could be beneficial to us. The interests of this shareholder
may differ from the interests of the other shareholders.

We face significant competition from larger competitors.

The making and distribution of jewelry is a highly competitive industry
characterized by the diversity and sophistication of the product. We compete
with major domestic and international companies with substantially greater
financial, technical and marketing resources and personnel than us. There can
be no assurance other jewelry makers will not similarly develop low-cost,
high-volume production capability or an even better process, providing greater
competition for us and materially affecting our business prospects.

There are numerous factors relating to the operations of our business that
could adversely affect our success and results.

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As a maker and merchandiser of low-cost, high-quality gem-set jewelry, our
existing and future operations are and will be influenced by several factors,
including:



| |  |  | technological developments in the mass production of jewelry;                                                
| | - |  | -------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to meet the design and production requirements of
our customers efficiently;                     
|
| |  |  | the market acceptance of our customers jewelry;                                                             
|
| |  |  | increases in expenses associated with continued sales growth;                                                
|
| |  |  | our ability to control costs;                                                                                
|
| |  |  | our managements ability to evaluate the publics taste and
new orders to target satisfactory profit margins;
|
| |  |  | our capacity to develop and manage the introduction of new
designed products; and                            
|
| |  |  | our ability to compete.                                                                                      

Quality control is also essential to our operations since customers demand
compliance with design and product specifications and consistency of
production. We cannot assure that revenue growth will occur on a quarterly or
annual basis.

Our sales and marketing operations are performed principally at our executive
offices which are located in Hong Kong. This means our results of operations
and financial condition may be influenced by the political situation in Hong
Kong and by the general state of the Hong Kong economy.

On July 1, 1997, sovereignty over Hong Kong was transferred from the
United Kingdom to China, and Hong Kong became a Special Administrative Region
of China, an SAR. As provided in the Sino-British Joint Declaration on the
Question of Hong Kong, referred to as the Joint Declaration, and the Basic Law
of the Hong Kong SAR of China, referred to as the Basic Law, the Hong Kong SAR
is to have a high degree of autonomy except in foreign and defense affairs.
Under the Basic Law, the Hong Kong SAR is to have its own legislature, legal
and judicial system and full economic autonomy for 50 years. We cannot assure,
however, that changes in political or other conditions will not result in an
adverse impact on our financial and operating condition.

Our production facilities are located in China. Our results of operations and
financial condition may, therefore, be influenced by the economic, political,
legal and social conditions in China.

Since 1978, the Chinese government has been reforming, and is expected to
continue to reform, Chinas economic and political systems. Such reforms have
resulted in significant social progress. Other political, economic and social
factors could also lead to further readjustment of the reform measures. This
refinement and readjustment process may not always have a positive effect on
our operations in China. At times, we may also be adversely affected by
changes in policies of the Chinese government such as changes in laws and
regulations or their

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interpretation, the introduction of additional measures to control inflation,
changes in the rate or method of taxation and imposition of additional
restrictions on currency conversion and remittances abroad.

Our products are currently made at our production facility located in Shenzhen,
China. However, our insurance may not adequately cover any losses due to fire,
casualty or theft.

We have obtained fire, casualty and theft insurance aggregating
approximately $12.0 million, covering several of our stock in trade, goods and
merchandise, furniture and equipment and production facility in China. The
proceeds of such insurance may not be sufficient to cover material damage to,
or the loss of, our production facility due to fire, severe weather, flood or
other cause, and such damage or loss would have a material adverse effect on
our financial condition, business and prospects. Consistent with the customary
practice among enterprises in China and due to the cost in relation to the
benefit, we do not carry any business interruption insurance in China.

Sales of our jewelry to retailers are generally stronger during the quarter
ending December 31 of each year due to the importance of the holiday selling
season.

The approximately 25% of our sales during the fiscal year ended December
31, 2002 to our largest customer, QVC, Inc., was not seasonal in nature. It
has been our managements experience that the remaining 75% of our total sales
is seasonally sensitive.

Our holding company structure creates restrictions on the payment of dividends.

We have no direct business operations, other than the ownership of our
subsidiaries. While we have no current intention of paying dividends, should
we, as a holding company, decide in the future to do so, our ability to pay
dividends and meet other obligations depends upon the receipt of dividends or
other payments from our operating subsidiaries and other holdings and
investments. In addition, our operating subsidiaries are subject to
restrictions on their ability to make distributions to us, including, as a
result of restrictive covenants and minimum net worth requirements in loan
agreements, restrictions on the conversion of local currency into U.S. dollars
or other hard currency and other regulatory restrictions.

It may be difficult to serve us with legal process or enforce judgments against
us or our management.

We are a British Virgin Islands holding company, and all or a substantial
portion of our assets are located in China and Hong Kong. In addition, all but
one of our directors and officers are non-residents of the United States, and
all or substantial portions of the assets of such non-residents are located
outside the United States. As a result, it may not be possible to effect
service of process within the United States upon such persons. Moreover, there
is doubt as to whether the courts of the British Virgin Islands, China or Hong
Kong would enforce:

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| |  |  | judgments of United States courts against us, our directors
or our officers based on the civil liability provisions of the
securities laws of the United States or any state; or        
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | in original actions brought in the British Virgin Islands,
China or Hong Kong, liabilities against us or non-residents based
upon the securities laws of the United States or any state.

Some information about us may be unavailable due to exemptions under the
Exchange Act for a foreign private issuer.

We are a foreign private issuer within the meaning of the rules under the
Exchange Act. As such, we are exempt from certain provisions applicable to
United States public companies, including:



| |  |  | the rules under the Exchange Act requiring the filing with
the Securities and Exchange Commission of quarterly reports on Form
10-Q or current reports on Form 8-K;                                                           
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the provisions of Regulation FD aimed at preventing issuers
from making selective disclosures of material information;                                                                                                        
|
| |  |  | the sections of the Exchange Act regulating the solicitation
of proxies, consents or authorizations in respect of a security
registered under the Exchange Act; and                                                           
|
| |  |  | the sections of the Exchange Act requiring insiders to file
public reports of their stock ownership and trading activities and
establishing insider liability for profits realized from any
short-swing trading transaction.

Because of these exemptions, investors are not provided with the same
information which is generally available about public companies organized in
the United States.

Since we are a British Virgin Islands company, the rights of our shareholders
may be more limited than those of shareholders of a company organized in the
United States.

Under the laws of most jurisdictions in the United States, majority and
controlling shareholders generally have certain fiduciary responsibilities to
the minority shareholders. Shareholder action must be taken in good faith and
actions by controlling shareholders which are obviously unreasonable may be
declared null and void. British Virgin Island law protecting the interests of
minority shareholders may not be as protective in all circumstances as the law
protecting minority shareholders in U.S. jurisdictions. In addition, the
circumstances in which a shareholder of a BVI company may sue the company
derivatively, and the procedures and defenses that may be available to the
company, may result in the rights of shareholders of a BVI company being more
limited than those of shareholders of a company organized in the U.S.
Furthermore, our directors have the power to take certain actions without
shareholder approval which would require shareholder approval under the laws of
most U.S. jurisdictions. The directors of a BVI corporation, subject in
certain cases to court approval but without shareholder approval, may implement
a reorganization, merger or consolidation, the sale of any assets, property,
part of the business, or securities of the corporation. Our ability to amend
our Memorandum of Association and Articles of Association without shareholder
approval could

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have the effect of delaying, deterring or preventing a change in our control
without any further action by the shareholders, including a tender offer to
purchase our common stock at a premium over then current market prices.

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|ITEM 4. |  | INFORMATION ON THE COMPANY
|------- |  | --------------------------






|A. |  | HISTORY AND DEVELOPMENT OF THE COMPANY.
|-- |  | ---------------------------------------

LJ International Inc. (we) was incorporated as an international business
company under the International Business Companies Act of the British Virgin
Islands on January 30, 1997. We own all of the issued share capital in the
following significant subsidiaries:



| |  | Lorenzo Jewelry Limited (Lorenzo Jewelry), a company incorporated in
Hong Kong on February 20, 1987.
|- |  | ------------------------------------------------------------------------------------------------------
| 
| |  | Lorenzo Gems Manufacturing (Shenzhen) Co., Ltd.                                                       
| 
| |  | Lorenzo Jewellery (Shenzhen) Co., Ltd.                                                                

Our principal place of business and our executive offices are located at
Units #09-#12, 12/F, Block A, Focal Industrial Centre, 21 Man Lok Street, Hung
Hom, Kowloon, Hong Kong, telephone: (011) 852-2764-3622. We have designated CT
Corporation, 111 Eighth Avenue, New York, New York 10011 as our agent for
service of process in the United States.

During our last three fiscal years, we have made the following significant
capital expenditures:



| |  |  | we purchased a 16.8% equity interest in iBBC Inc. for
$600,000 during the fiscal year ended April 30, 2001.                                                   
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we purchased a 20% equity interest in Goldleaves
International Inc. for $ 2,684,000 during the fiscal year ended
April 30,2001.                               
|
| |  |  | we purchased 68.8% of the common shares of iBBC Inc. for
$2,460,000 during the fiscal year ended April 30, 2002                                               
|
| |  |  | we made a capital contribution of $670,000 for our 95% equity
interest in Lorenzo Giftware Inc. during the fiscal year ended
December 31, 2002                
|
| |  |  | we invested $721,000 for the purchase of 30,000 square feet
of production space in our Shenzhen, China facility during the
fiscal year ended December 31, 2002






|B. |  | BUSINESS OVERVIEW.
|-- |  | ------------------

We are a totally vertically integrated company that designs, brands,
markets and distributes a complete range of fine jewelry. While we specialize
in the semi-precious jewelry segment, we also offer high-end pieces set in
yellow gold, white gold, platinum or sterling silver and adorned with
semi-precious stones, diamonds, pearls and precious stones. We distribute
mainly to fine jewelers, department stores, national jewelry chains and
electronic and specialty retailers throughout North America and Western Europe.
Our product lines incorporate all major categories sought by major retailers,
including earrings, necklaces, pendants, rings and bracelets.

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

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

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



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

For the
fiscal years ended April 30, 2002 and eight-month period ended December 31, 2002,
approximately 73% and 77% of our sales were in North America.

The following is a breakdown of our total revenues (in thousands) by
geographic market for each of our past three financial years:

|                           |  |                      |        |              |  |              |        |             |  |      |        |  |  |                |        |                |  |  |        | 
|-------------------------- |  | -------------------- | ------ | ------------ |  | ------------ | ------ | ----------- |  | ---- | ------ |  |  | -------------- | ------ | -------------- |  |  | ------ | 
|                           |  |                      |        |              |  |              |        |             |  |      |        |  |  | 8 Months ended |        | 8 Months ended
|                           |  | Year ended April 30, |        | December 31, |  | December 31,
|                           |  |                      |        |              |  |             
|                           |  | 2000                 |        | 2001         |  | 2002         |        | 2001        |  | 2002
|                           |  |                      |        |              |  |              |        |             |  |     
|                           |  |                      |        |              |  |              |        | (Unaudited) |  |     
|                           |  | US$                  |        | US$          |  | US$          |        | US$         |  | US$ 
|US & Canada                |  |                      | 29,981 |              |  |              | 38,463 |             |  |      | 28,810 |  |  |                | 19,373 |                |  |  | 24,545 | 
|Hong Kong                  |  |                      | 2,638  |              |  |              | 599    |             |  |      | 4,897  |  |  |                | 1,383  |                |  |  | 1,451  | 
|Europe and other countries |  |                      | 5,864  |              |  |              | 7,028  |             |  |      | 5,518  |  |  |                | 4,167  |                |  |  | 3,469  | 
|PRC                        |  |                      | 312    |              |  |              | 74     |             |  |      | 6      |  |  |                |       |                |  |  |       | 
|Japan                      |  |                      | 131    |              |  |              | 121    |             |  |      | 9      |  |  |                | 119    |                |  |  | 2,344  | 
|                           |  |                      |        |              |  |              |        |             |  |      |        |  |  |                |        |                |  |  |        | 
|                           |  |                      | 38,926 |              |  |              | 46,285 |             |  |      | 39,240 |  |  |                | 25,042 |                |  |  | 31,809 | 
|                           |  |                      |        |              |  |              |        |             |  |      |        |  |  |                |        |                |  |  |        | 

Approximately
25% of our sales during the eight-month period ended December 31,
2002 was to our largest customer, QVC, Inc., and was not seasonal in nature.
It has been our managements

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experience that the remaining 75% of our total sales is seasonally sensitive
and is greater during the quarter ending December 31 of each year.

Our Industry

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



| |  |  | a small number of producers that make and distribute their
own jewelry directly to retailers; and                                                   
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a large number of wholesalers and distributors who purchase
products or portions of products from third parties and resell those
items to retailers.

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

Our Business Strategy

Our business strategy is to:



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

We are aggressively developing new product lines in exotic stones, which
have high perceived values among semi-precious stones. We have recently
expanded into new product categories by:



| |  |  | marketing a line of sterling silver jewelry. These are
typically merchandised with a retail price range of $30 to $150                                                                               
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | offering a new branded collection of sterling silver and 18
karat gold jewelry with a retail price range of $199 to $999                                                                             
|
| |  |  | offering diamond jewelry and expanding this business to our
current client base by adding diamonds to some of our settings, as
well as offering newly designed jewelry                               
|
| |  |  | developing a new 18,000 square feet CAD/CAM enabled
production facility devoted to diamonds and high-end precious
stones, with technology to fully integrate computer design from
prototype to sample

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We intend to implement our business strategy by:



| |  |  | promoting visits with customers to coordinate and cater to
their particular promotional sales needs and monitoring their
on-hand inventory in order to promote more active sell-through                                                  
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | expanding our distribution channels to include all major TV
shopping programs in North America, Japan and Korea and further
developing business with top-20 discount department store chains and
one prominent warehouse club in the U.S.
|
| |  |  | acquiring an electronic supply and replenish module for
independent jewelry stores in the U.S.                                                                                                                                           

Our Production Capability

We have established a sophisticated facility in China that performs stone
cutting and polishing and jewelry production. The facility is located in the
city of Shenzhen in Guangdong Province, China. We closed our former second
facility in Shantou during the fiscal year ended December 31, 2002 and
consolidated all our production in the Shenshen facility, which has been
operating for five years and has 86,000 square feet of production space. We
currently employ approximately 2,000 skilled gemstone cutters and production
personnel and turned out more than a million pieces of finished fine jewelry
during the fiscal year ended December 31, 2002.

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

Sales and Marketing

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

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



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

Our single largest customer is QVC, Inc. which accounted for approximately
28% of our sales during the fiscal year ended April 30, 2002, and 25% of our
sales during the eight-month period ended December 31, 2002. We do not sell to
QVC, Inc. pursuant to any formal or long-term contracts but only on a purchase
order basis. Although we have developed and maintained a good and longstanding
relationship with QVC, Inc., the loss of QVC, Inc. as a customer or a
significant reduction in its orders, would have a materially adverse effect on
us.

In March 2000, our wholly-owned subsidiary Lorenzo Jewelry Mfg. (H.K.)
Limited (n/k/a Lorenzo Jewelry Limited) had entered into a three-year agreement
with QVC, Inc. Under the terms of the agreement, QVC had the exclusive right
to promote, market, sell and distribute all of the jewelry and watches which we
produce, develop or sell through direct response television programs in North
America, the United Kingdom and Germany. This agreement has now expired.

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

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

Design and Product Development

We have seven internationally trained designers who work from our Hong
Kong executive office and ten designers who work in our Shenzhen facility. Our
designers create styles that have been accepted by our various clients
worldwide. Our design teams attend trade fairs worldwide to gather product
ideas and monitor the latest product trends.

We provide our customers with a broad selection of high-quality 10, 14 and
18 karat gold, platinum and sterling silver jewelry products that incorporate
traditional yet fashionable styles

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and designs. We currently offer approximately 5,000 different styles of rings,
bracelets, necklaces, earrings, pendants and matching sets that are
contemporary and desired in the market.

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

Production Process

We make our jewelry at our facility in Shenzhen, China. Our production
processes combine vertical integration, modern technology, mechanization and
handcraftsmanship to turn out contemporary and fashionable jewelry. Our
production operations basically involve:



| |  |  | cutting and polishing semi-precious gemstones;                                                     
| | - |  | ---------------------------------------------------------------------------------------------------
|
| |  |  | combining pure gold, platinum or sterling silver with
gemstones or diamonds to produce jewelry; and
|
| |  |  | finishing operations such as cleaning and polishing,
resulting in high quality finished jewelry.   

Supply

We produce and cut our own semi-precious stones. We purchase imported
gemstones which are from South America, Africa and China. South America is the
major source of ametrine, amethyst, aquamarine, imperial topaz, tourmaline and
white topaz, and Africa is the main source of tanzanite, mandarine garnet,
aquamarine and topaz. We also purchase imported aquamarine, peridot and topaz
from China. We source our diamonds mainly from suppliers in India. We believe
that we have good relationships with our suppliers, most of whom have supplied
us for many years.

We maintain our supply of inventory at our warehouse. The amount of our
inventory of a particular gemstone determines the extent and size of our
marketing program for that product. We purchase our gemstones and diamonds in
advance and in anticipation of orders resulting from our marketing programs.

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

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

We did not engage in hedging activities with respect to possible
fluctuations in the price of gold until the start of 2003. Prior to that, we
believed the risk of not engaging in such

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activities was minimal, since we purchase our gold requirements within a
reasonable period after each significant purchase order is received. We
believe that any change in the price of gold would have had little, if any,
impact on the valuation of our inventories.

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

Security

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

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

Insurance

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

Competition

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

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

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



| |  |  | E.E.A.C. Inc.;        
| | - |  | ----------------------
|
| |  |  | Topaz Group, Inc.; and
|
| |  |  | Fabrikant.            

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

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|C. |  | ORGANIZATIONAL STRUCTURE AS OF DECEMBER 31, 2002:
|-- |  | -------------------------------------------------

The following diagram provides a listing of our significant subsidiaries.
The respective country of organization/incorporation is shown in brackets.

LJ INTERNATIONAL INC.
(British Virgin Islands)



|  |  | 100%                                                    
|- |  | --------------------------------------------------------
| 
| |  | Lorenzo Jewelry Limited
(Hong Kong)                     
| 
| |  | Lorenzo Gems Manufacturing (Shenzhen) Co., Ltd.
(P.R.C.)
| 
| |  | Lorenzo Jewellery (Shenzhen) Co., Ltd.
(P.R.C.)         






|D. |  | PROPERTY, PLANTS AND EQUIPMENT.
|-- |  | -------------------------------

Our principal executive offices are located at Units #9-#12, 12/F, Block
A, Focal Industrial Centre, 21 Man Lok Street, Hung Hom, Kowloon, Hong Kong.
We own approximately 4,800 square feet of office and showroom at this location.

Our jewelry production facility in Shenzhen, China consists of 86,000
square feet of building space located in the Shatoujiao Free Trade Zone,
Shenzhen. We own approximately 38,000 square feet of this space. We also
currently lease 28,000 square feet for a term of five years expiring August 31,
2007 from an unaffiliated third party at a rental rate of $5,700 per month, and
20,000 square feet for a term of two years expiring June 30, 2004, at a rental
rate of $3,600 per month.

We own two warehouse facilities in Hung Hom and Aberdeen consisting of
5,432 square feet and 2,897 square feet. We also own additional properties in
Sai Kung and Hung Hom. We lease all four of these properties to non-affiliated
third parties. We have pledged all of our land and buildings to collateralize
general banking facilities granted to us.

Our production facilities are currently utilized for one shift per day but
are capable of being expanded to accommodate three shifts per day as necessary.

-19-



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

The following discussion and analysis should be read in conjunction with
our financial statements and notes to the financial statements appearing
elsewhere in this Form 20-F. See Special Note Regarding Forward-looking
Statements.

In December 2002, we changed our fiscal year, which used to end on 30
April, to the calendar year. The move was to enable us to continue our trend of
filing financial results in line with the majority of US reporting companies.
During our short fiscal year from May 1, 2002, to December 31, 2002, amid a
very gradual and, at times, uncertain recovery in retail markets worldwide, we
successfully implemented several measures to maintain our position as market
leader in the design, marketing and distribution of a full range of fine
jewelry.

Our concerted marketing efforts paid off and we attracted new, major blue
chip customers and also saw significant increases in orders from existing
clients. There was also a highly positive response to our new diamond line,
which resulted in higher revenue.

The measures we introduced in the corporate reengineering exercise
undertaken after the terrorist attacks in the US on September 11, 2001, bore
fruit during this period and led to significant cost savings as well as
administrative, sales and operational efficiencies. This is reflected in the
decline of costs in 2002, compared with those in 2000.

In January 2003, we consolidated all operations under one roof in our
expanded, 86,000 square-foot Shenzhen facility to improve efficiencies,
eliminate duplication and raise profit margins. Employees from our former
Shantou plant now work together with their colleagues in the Shenzhen facility,
which occupies five floors in a 10-storey building. We have purchased two
floors of this facility while leasing the rest of the space.

As our diamond line has been showing great promise since its introduction
a year ago, we established a high tech facility for diamond and precious stone
jewelry in June 2002. Fitted out with CAD/CAM model making equipment and a
wide range of wax set molding equipment, the facility allows us to fashion up
to 60,000 pieces of jewelry per month at full capacity. The less
labour-intensive CAD/CAM equipment also afford us more flexibility, perfect
repeatability, higher precision and enhance standardization.

In all, we have more than 2,000 gemstone cutters and other personnel, who
style and fashion over two million carats of cut stones and one million pieces
of finished jewelry each year. A team of 30 people in Shenzhen manages the
operations while executives based in Hong Kong ensure regular communication
with them.

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Our experience in fiscal 2001 taught us to reduce our reliance on a key
customer whose orders fell well short of our anticipation in the previous
fiscal year. Instead we decided to focus on increasing our market share and to
this end, in the eight-month period ended December 31, 2002, we continued to
step up our marketing efforts with the Top40 jewelry retailers, many of whom we
were already selling to. The Top40 jewelry retailers represent the largest
U.S. retail sellers of jewelry in terms of sales revenue. This category
consists primarily of retail fine jewelers (such as Zale Corp., Sterling and
Helzberg Diamond Shops, Inc.), department stores (such as J.C. Penney, Macys,
Mervyns and Fortunoff), discount stores (such as Wal-Mart and Fred Meyer
Jewelers) and TV shopping programmers (such as QVC and Home Shopping Network).
Sales to our customers within the Top40 category comprise approximately 70% of
our sales revenue.

Another important practice we have been adopting since the previous fiscal
year is giving guidance on our quarterly results. Although we are a foreign
company technically exempt from some key U.S. reporting requirements, we wish
to bring our reporting and accounting as close in line as possible with U.S.
GAAP reporting and U.S. investor expectations. Taking this step is part of our
strategy to maintain our position as one of the worlds largest publicly traded
designer, marketer and distributor of a full range of fine jewelry. It is also
a reflection of our unwavering commitment to shareholders, clients and staff
alike.

As cautious optimism returns gradually to markets worldwide with the end
of the war in Iraq, we feel confident that the decisions and investments made,
as well as the initiatives and measures taken, in the eight months ended
December 31, 2002, will stand us in good stead in the next fiscal year and we
are ready to capitalize on the opportunities ahead in the jewelry industry. We
have already seen an encouraging increase in the number of our new customers
and in the reception of our diamond line and we fully intend to pursue further
success in these and other areas.






|A. |  | OPERATING RESULTS.
|-- |  | ------------------

Revenues

|               |  |                       |        |                    |  |      |        |        |  |      |        |           |  |                    |        |           |  |   |        |  |  |          |    |       |  |  |     |   |  |        |    |  
|-------------- |  | --------------------- | ------ | ------------------ |  | ---- | ------ | ------ |  | ---- | ------ | --------- |  | ------------------ | ------ | --------- |  | - | ------ |  |  | -------- | -- | ----- |  |  | --- | - |  | ------ | -- | -
|               |  |                       |        |                    |  |      |        |        |  |      |        |           |  |                    |        |           |  |   |        |  |  | % change
|               |  |                       |        |                    |  |      |        |        |  |      |        |           |  |                    |        |           |  |   |        |  |  |         
|               |  |                       |        |                    |  |      |        |        |  |      |        |           |  |                    |        |           |  |   |        |  |  |          |    |       |  |  |     |   |  | Eight-
|               |  |                       |        |                    |  |      |        |        |  |      |        |           |  | Eight-month period |        |           |  |   |        |  |  |          |    | month
|               |  | Years ended April 30, |        | ended December 31, |  | Year |        | period
|               |  |                       |        |                    |  |      |        |       
|(in thousands) |  | 2000                  |        | 2001               |  | 2002 |        | 2001   |  | 2002 |        | 2000-2001 |  | 2001-2002          |        | 2001-2002
|               |  |                       |        |                    |  |      |        |        |  |      |        |           |  |                    |        |          
|               |  |                       |        |                    |  |      |        |        |  |      |        |           |  | Unaudited          |        |           |  |   |        |  |  |          |    |       |  |  |     |   |  |       
|Revenues       |  | $                     | 38,926 |                    |  | $    | 46,285 |        |  | $    | 39,240 |           |  | $                  | 25,042 |           |  | $ | 31,809 |  |  |          | 19 | %     |  |  | -15 | % |  |        | 27 | %
|               |  |                       |        |                    |  |      |        |        |  |      |        |           |  |                    |        |           |  |   |        |  |  |          |    |       |  |  |     |   |  |        |    |  

The increase in revenue for the eight-month period ended December 31,
2002, compared with the same period in 2001,was due to our successful marketing
efforts in winning new, major blue chip customers, as well as the positive
reception of our new diamond line.

-21-



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##### Table of Contents



The global economic fallout from the September 11 attacks in the US
accounted largely for the decrease in revenue for the year ended April 30,
2002, compared with the year ended April 30, 2001. Additionally, a significant
decline in orders from a major client also contributed to this decrease.

Cost of Sales and Gross Profit

|                                        |  |                       |        |                    |  |      |        |        |  |      |        |           |  |                    |        |           |  |   |        |   |  |          |     |       |  |  |     |   |  |        |     |   |  |  |  | 
|--------------------------------------- |  | --------------------- | ------ | ------------------ |  | ---- | ------ | ------ |  | ---- | ------ | --------- |  | ------------------ | ------ | --------- |  | - | ------ | - |  | -------- | --- | ----- |  |  | --- | - |  | ------ | --- | - |  |  |  | 
|                                        |  |                       |        |                    |  |      |        |        |  |      |        |           |  |                    |        |           |  |   |        |   |  | % change
|                                        |  |                       |        |                    |  |      |        |        |  |      |        |           |  |                    |        |           |  |   |        |   |  |         
|                                        |  |                       |        |                    |  |      |        |        |  |      |        |           |  |                    |        |           |  |   |        |   |  |          |     |       |  |  |     |   |  | Eight-
|                                        |  |                       |        |                    |  |      |        |        |  |      |        |           |  | Eight-month period |        |           |  |   |        |   |  |          |     | month
|                                        |  | Years ended April 30, |        | ended December 31, |  | Year |        | period
|                                        |  |                       |        |                    |  |      |        |       
|(in thousands)                          |  | 2000                  |        | 2001               |  | 2002 |        | 2001   |  | 2002 |        | 2000-2001 |  | 2001-2002          |        | 2001-2002
|                                        |  |                       |        |                    |  |      |        |        |  |      |        |           |  |                    |        |          
|                                        |  |                       |        |                    |  |      |        |        |  |      |        |           |  | Unaudited          |        |           |  |   |        |   |  |          |     |       |  |  |     |   |  |       
|Cost of sales                           |  | $                     | 24,030 |                    |  | $    | 29,575 |        |  | $    | 27,573 |           |  | $                  | 16,908 |           |  | $ | 21,531 |   |  |          | 23  | %     |  |  | -7  | % |  |        | 27  | %
|                                        |  |                       |        |                    |  |      |        |        |  |      |        |           |  |                    |        |           |  |   |        |   |  |          |     |       |  |  |     |   |  |        |     |  
|% of revenues                           |  |                       | 62     | %                  |  |      | 64     | %      |  |      | 70     | %         |  |                    | 68     | %         |  |   | 68     | % |  |          |     |       |  |  |     |   |  |        |     |  
|Cost of sales -
write down of
inventory |  | $                     | 0      |                    |  | $    | 0      |        |  | $    | 5,710  |           |  | $                  | 0      |           |  | $ | 0      |   |  |          | N/A |       |  |  | N/A |   |  |        | N/A |  
|                                        |  |                       |        |                    |  |      |        |        |  |      |        |           |  |                    |        |           |  |   |        |   |  |          |     |       |  |  |     |   |  |        |     |  
|% of revenues                           |  |                       | 0      | %                  |  |      | 0      | %      |  |      | 15     | %         |  |                    | 0      | %         |  |   | 0      | % |  |          |     |       |  |  |     |   |  |        |     |  
|Gross profit                            |  | $                     | 14,896 |                    |  | $    | 16,710 |        |  | $    | 5,957  |           |  | $                  | 8,134  |           |  | $ | 10,278 |   |  |          | 12  | %     |  |  | -64 | % |  |        | 26  | %
|                                        |  |                       |        |                    |  |      |        |        |  |      |        |           |  |                    |        |           |  |   |        |   |  |          |     |       |  |  |     |   |  |        |     |  
|% of revenues                           |  |                       | 38     | %                  |  |      | 36     | %      |  |      | 15     | %         |  |                    | 32     | %         |  |   | 32     | % |  |          |     |       |  |  |     |   |  |        |     |  

The gross profit margin remained at 32% for the eight-month periods ended
December 31, 2002 and December 31, 2001.

The gross profit margin dropped from 36% for the year ended April 30, 2001
to 15% for the year ended April 30, 2002. The decrease was due to various
adjustments on inventory as shown below.



| |  |  | $5,394,000 for the write-down of cut stones for orders in
relation to special programs that were later postponed or cancelled;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | $316,000 for the write-down of fine jewelry cost.                                                                             

Excluding the above special charge on inventory, the gross profit margin
was 30% for the year ended April 30, 2002.

The gross profit margin dropped from 38% in 2000 to 36% in 2001 due to:



| |  |  | A change in the product mix. Increasingly more sales are
made with precious stones and diamonds and diamonds alone. Diamond
jewelry generally has a higher sales value but a much lower profit
margin;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Additional model-making charges were incurred and expensed to
build up the European jewelry sample lines; and                                                                                         

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---



##### Table of Contents





| |  |  | Discounts were given on certain volume sale programs for
existing customers and also given to new customers to induce
businesses.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------

Selling, General and Administrative Expenses

|                                             |               |      |                       |      |                    |      |        |      |        |      |        |           |   |           |                    |           |   |   |       |    |   |  |          |   |       |  |   |   |  |  |        |   |  |  |  |  | 
|-------------------------------------------- | ------------- | ---- | --------------------- | ---- | ------------------ | ---- | ------ | ---- | ------ | ---- | ------ | --------- | - | --------- | ------------------ | --------- | - | - | ----- | -- | - |  | -------- | - | ----- |  | - | - |  |  | ------ | - |  |  |  |  | 
|                                             |               |      |                       |      |                    |      |        |      |        |      |        |           |   |           |                    |           |   |   |       |    |   |  | % change
|                                             |               |      |                       |      |                    |      |        |      |        |      |        |           |   |           |                    |           |   |   |       |    |   |  |         
|                                             |               |      |                       |      |                    |      |        |      |        |      |        |           |   |           |                    |           |   |   |       |    |   |  |          |   |       |  |   |   |  |  | Eight-
|                                             |               |      |                       |      |                    |      |        |      |        |      |        |           |   |           | Eight-month period |           |   |   |       |    |   |  |          |   | month
|                                             |               |      | Years ended April 30, |      | ended December 31, |      | Year   |      | period
|                                             |               |      |                       |      |                    |      |        |      |       
|(in thousands)                               |               | 2000 |                       | 2001 |                    | 2002 |        | 2001 |        | 2002 |        | 2000-2001 |   | 2001-2002 |                    | 2001-2002
|                                             |               |      |                       |      |                    |      |        |      |        |      |        |           |   |           |                    |          
|                                             |               |      |                       |      |                    |      |        |      |        |      |        |           |   |           | Unaudited          |           |   |   |       |    |   |  |          |   |       |  |   |   |  |  |       
|Selling, general
and
administrative
expenses |               | $    | 8,872                 |      |                    | $    | 11,363 |      |        | $    | 11,411 |           |   | $         | 7,599              |           |   | $ | 7,722 |    |   |  | 28       | % |       |  | 0 | % |  |  | 2      | %
|                                             |               |      |                       |      |                    |      |        |      |        |      |        |           |   |           |                    |           |   |   |       |    |   |  |          |   |       |  |   |   |  |  |        |  
|                                             | % of revenues |      |                       | 23   | %                  |      |        | 25   | %      |      |        | 29        | % |           |                    | 30        | % |   |       | 24 | % |  |          |   |       |  |   |   |  |  |        |   | 

Selling, general and administrative (SG&A) expenses decreased by 6% of
revenue for the eight-month period ended December 31, 2002 compared with the same
period ended December 31, 2001. Between 2001 and 2002, our SG&A expenses fell
as a direct result of the corporate reengineering exercise we undertook right
after the 9/11 terrorist attacks in the US. The measures we instituted led to
substantial cost savings and administrative, sales and operational
efficiencies.

Unrealized loss (gain) on gold loan

|                                    |  |                       |     |                    |  |      |     |        |  |      |     |           |  |                    |     |           |  |   |     |   |  |          |   |       |  |  |       |   |  |        |     |   |  |  |  | 
|----------------------------------- |  | --------------------- | --- | ------------------ |  | ---- | --- | ------ |  | ---- | --- | --------- |  | ------------------ | --- | --------- |  | - | --- | - |  | -------- | - | ----- |  |  | ----- | - |  | ------ | --- | - |  |  |  | 
|                                    |  |                       |     |                    |  |      |     |        |  |      |     |           |  |                    |     |           |  |   |     |   |  | % change
|                                    |  |                       |     |                    |  |      |     |        |  |      |     |           |  |                    |     |           |  |   |     |   |  |         
|                                    |  |                       |     |                    |  |      |     |        |  |      |     |           |  |                    |     |           |  |   |     |   |  |          |   |       |  |  |       |   |  | Eight-
|                                    |  |                       |     |                    |  |      |     |        |  |      |     |           |  | Eight-month period |     |           |  |   |     |   |  |          |   | month
|                                    |  | Years ended April 30, |     | ended December 31, |  | Year |     | period
|                                    |  |                       |     |                    |  |      |     |       
|(in thousands)                      |  | 2000                  |     | 2001               |  | 2002 |     | 2001   |  | 2002 |     | 2000-2001 |  | 2001-2002          |     | 2001-2002
|                                    |  |                       |     |                    |  |      |     |        |  |      |     |           |  |                    |     |          
|                                    |  |                       |     |                    |  |      |     |        |  |      |     |           |  | Unaudited          |     |           |  |   |     |   |  |          |   |       |  |  |       |   |  |       
|Unrealized Loss
(gain) on gold
loan |  | $                     | (44 | )                  |  | $    | (44 | )      |  | $    | 660 |           |  | $                  | 119 |           |  | $ | 435 |   |  |          | 0 | %     |  |  | -1600 | % |  |        | 266 | %
|                                    |  |                       |     |                    |  |      |     |        |  |      |     |           |  |                    |     |           |  |   |     |   |  |          |   |       |  |  |       |   |  |        |     |  
|% of revenues                       |  |                       | 0   | %                  |  |      | 0   | %      |  |      | 2   | %         |  |                    | 0   | %         |  |   | 1   | % |  |          |   |       |  |  |       |   |  |        |     |  

We have also secured gold loan facilities with various banks in Hong
Kong, which typically bear a below-market interest rate. Under the gold loan
arrangements, we may defer the purchase until such time as we decide
appropriate, the price to be paid being the current market price at time of
payment. The gold loan, however, does expose us to certain market risks
associated with potential future increases in the price of gold. In the past,
we did not hedge against such risks and at the close of each reporting period,
the gold loan was marked to market with changes reflected on the income
statement. However, the volatility of prices in the lead-up to the war in Iraq
prompted us to make a provision of $435,000 in December 2002 to cover possible
losses resulting from price fluctuations. Since the beginning of 2003, we have
put in place mechanisms to hedge against future risks.

-23-



---



##### Table of Contents



Depreciation

|               |  |                       |     |                    |  |      |     |        |  |      |       |           |  |                    |     |           |  |   |     |   |  |          |    |       |  |  |    |   |  |        |    |   |  |  |  | 
|-------------- |  | --------------------- | --- | ------------------ |  | ---- | --- | ------ |  | ---- | ----- | --------- |  | ------------------ | --- | --------- |  | - | --- | - |  | -------- | -- | ----- |  |  | -- | - |  | ------ | -- | - |  |  |  | 
|               |  |                       |     |                    |  |      |     |        |  |      |       |           |  |                    |     |           |  |   |     |   |  | % change
|               |  |                       |     |                    |  |      |     |        |  |      |       |           |  |                    |     |           |  |   |     |   |  |         
|               |  |                       |     |                    |  |      |     |        |  |      |       |           |  |                    |     |           |  |   |     |   |  |          |    |       |  |  |    |   |  | Eight-
|               |  |                       |     |                    |  |      |     |        |  |      |       |           |  | Eight-month period |     |           |  |   |     |   |  |          |    | month
|               |  | Years ended April 30, |     | ended December 31, |  | Year |     | period
|               |  |                       |     |                    |  |      |     |       
|(in thousands) |  | 2000                  |     | 2001               |  | 2002 |     | 2001   |  | 2002 |       | 2000-2001 |  | 2001-2002          |     | 2001-2002
|               |  |                       |     |                    |  |      |     |        |  |      |       |           |  |                    |     |          
|               |  |                       |     |                    |  |      |     |        |  |      |       |           |  | Unaudited          |     |           |  |   |     |   |  |          |    |       |  |  |    |   |  |       
|Depreciation   |  | $                     | 705 |                    |  | $    | 808 |        |  | $    | 1,031 |           |  | $                  | 565 |           |  | $ | 863 |   |  |          | 15 | %     |  |  | 28 | % |  |        | 53 | %
|               |  |                       |     |                    |  |      |     |        |  |      |       |           |  |                    |     |           |  |   |     |   |  |          |    |       |  |  |    |   |  |        |    |  
|% of revenues  |  |                       | 2   | %                  |  |      | 2   | %      |  |      | 3     | %         |  |                    | 2   | %         |  |   | 3   | % |  |          |    |       |  |  |    |   |  |        |    |  

The increase in depreciation costs primarily represents the impact of
on-going capital expenditures and assets acquired for the year ended April 30,
2002. It also incorporates a provision of $158,000 for the depreciation on
leasehold improvements to production facilities we ceased to use before the
expiry of their leases.

Impairment on property, plant and equipment

|                                            |  |                       |   |                    |  |      |   |        |  |      |     |           |  |                    |   |           |  |   |     |   |  |          |     |       |  |  |     |  |  |        |     |  |  |  |  | 
|------------------------------------------- |  | --------------------- | - | ------------------ |  | ---- | - | ------ |  | ---- | --- | --------- |  | ------------------ | - | --------- |  | - | --- | - |  | -------- | --- | ----- |  |  | --- |  |  | ------ | --- |  |  |  |  | 
|                                            |  |                       |   |                    |  |      |   |        |  |      |     |           |  |                    |   |           |  |   |     |   |  | % change
|                                            |  |                       |   |                    |  |      |   |        |  |      |     |           |  |                    |   |           |  |   |     |   |  |         
|                                            |  |                       |   |                    |  |      |   |        |  |      |     |           |  |                    |   |           |  |   |     |   |  |          |     |       |  |  |     |  |  | Eight-
|                                            |  |                       |   |                    |  |      |   |        |  |      |     |           |  | Eight-month period |   |           |  |   |     |   |  |          |     | month
|                                            |  | Years ended April 30, |   | ended December 31, |  | Year |   | period
|                                            |  |                       |   |                    |  |      |   |       
|(in thousands)                              |  | 2000                  |   | 2001               |  | 2002 |   | 2001   |  | 2002 |     | 2000-2001 |  | 2001-2002          |   | 2001-2002
|                                            |  |                       |   |                    |  |      |   |        |  |      |     |           |  |                    |   |          
|                                            |  |                       |   |                    |  |      |   |        |  |      |     |           |  | Unaudited          |   |           |  |   |     |   |  |          |     |       |  |  |     |  |  |       
|Impairment on
property, plant
and equipment |  | $                     | 0 |                    |  | $    | 0 |        |  | $    | 345 |           |  | $                  | 0 |           |  | $ | 108 |   |  |          | N/A |       |  |  | N/A |  |  |        | N/A | 
|                                            |  |                       |   |                    |  |      |   |        |  |      |     |           |  |                    |   |           |  |   |     |   |  |          |     |       |  |  |     |  |  |        |     | 
|% of revenues                               |  |                       | 0 | %                  |  |      | 0 | %      |  |      | 1   | %         |  |                    | 0 | %         |  |   | 0   | % |  |          |     |       |  |  |     |  |  |        |     | 

The impairment loss represents the write-off of property, plant and
equipment as a result of the consolidation of production facilities.

Amortization and impairment loss on goodwill

|                                             |  |                       |   |                    |  |      |    |        |  |      |     |           |  |                    |    |           |  |   |     |   |  |          |     |       |  |  |     |   |  |        |      |   |  |  |  | 
|-------------------------------------------- |  | --------------------- | - | ------------------ |  | ---- | -- | ------ |  | ---- | --- | --------- |  | ------------------ | -- | --------- |  | - | --- | - |  | -------- | --- | ----- |  |  | --- | - |  | ------ | ---- | - |  |  |  | 
|                                             |  |                       |   |                    |  |      |    |        |  |      |     |           |  |                    |    |           |  |   |     |   |  | % change
|                                             |  |                       |   |                    |  |      |    |        |  |      |     |           |  |                    |    |           |  |   |     |   |  |         
|                                             |  |                       |   |                    |  |      |    |        |  |      |     |           |  |                    |    |           |  |   |     |   |  |          |     |       |  |  |     |   |  | Eight-
|                                             |  |                       |   |                    |  |      |    |        |  |      |     |           |  | Eight-month period |    |           |  |   |     |   |  |          |     | month
|                                             |  | Years ended April 30, |   | ended December 31, |  | Year |    | period
|                                             |  |                       |   |                    |  |      |    |       
|(in thousands)                               |  | 2000                  |   | 2001               |  | 2002 |    | 2001   |  | 2002 |     | 2000-2001 |  | 2001-2002          |    | 2001-2002
|                                             |  |                       |   |                    |  |      |    |        |  |      |     |           |  |                    |    |          
|                                             |  |                       |   |                    |  |      |    |        |  |      |     |           |  | Unaudited          |    |           |  |   |     |   |  |          |     |       |  |  |     |   |  |       
|Amortization and
impairment loss
on goodwill |  | $                     | 0 |                    |  | $    | 27 |        |  | $    | 242 |           |  | $                  | 18 |           |  | $ | 400 |   |  |          | N/A |       |  |  | 796 | % |  |        | 2122 | %
|                                             |  |                       |   |                    |  |      |    |        |  |      |     |           |  |                    |    |           |  |   |     |   |  |          |     |       |  |  |     |   |  |        |      |  
|% of revenues                                |  |                       | 0 | %                  |  |      | 0  | %      |  |      | 1   | %         |  |                    | 0  | %         |  |   | 1   | % |  |          |     |       |  |  |     |   |  |        |      |  

Amortization of goodwill was related to the acquisition of a jewelry
company in the year ended April 30, 2000.

-24-



---



##### Table of Contents



In July 2001, Financial Accounting Standards Board issued SFAS No. 142,
Goodwill and Other Intangible Assets, which provides that goodwill and
intangible assets with indefinite useful lives will not be amortized but
rather will be tested at least annually for impairment. As a result, we
stopped amortizing but fully expended the balancing goodwill of $215,000 in
the year ended April 30, 2002.

Impairment loss of goodwill for the eight-month period ended December
31, 2002 was related to the goodwill arising from the acquisition of the
jewelry retail company in March 2002.

Interest cost

|                                                   |  |                       |     |                    |  |      |     |        |  |      |     |           |  |                    |     |           |  |   |     |   |  |          |    |       |  |  |      |   |  |        |     |   |  |  |  | 
|-------------------------------------------------- |  | --------------------- | --- | ------------------ |  | ---- | --- | ------ |  | ---- | --- | --------- |  | ------------------ | --- | --------- |  | - | --- | - |  | -------- | -- | ----- |  |  | ---- | - |  | ------ | --- | - |  |  |  | 
|                                                   |  |                       |     |                    |  |      |     |        |  |      |     |           |  |                    |     |           |  |   |     |   |  | % change
|                                                   |  |                       |     |                    |  |      |     |        |  |      |     |           |  |                    |     |           |  |   |     |   |  |         
|                                                   |  |                       |     |                    |  |      |     |        |  |      |     |           |  |                    |     |           |  |   |     |   |  |          |    |       |  |  |      |   |  | Eight-
|                                                   |  |                       |     |                    |  |      |     |        |  |      |     |           |  | Eight-month period |     |           |  |   |     |   |  |          |    | month
|                                                   |  | Years ended April 30, |     | ended December 31, |  | Year |     | period
|                                                   |  |                       |     |                    |  |      |     |       
|(in thousands)                                     |  | 2000                  |     | 2001               |  | 2002 |     | 2001   |  | 2002 |     | 2000-2001 |  | 2001-2002          |     | 2001-2002
|                                                   |  |                       |     |                    |  |      |     |        |  |      |     |           |  |                    |     |          
|                                                   |  |                       |     |                    |  |      |     |        |  |      |     |           |  | Unaudited          |     |           |  |   |     |   |  |          |    |       |  |  |      |   |  |       
|Interest expenses                                  |  | $                     | 731 |                    |  | $    | 868 |        |  | $    | 652 |           |  | $                  | 424 |           |  | $ | 441 |   |  |          | 19 | %     |  |  | -25  | % |  |        | 4   | %
|                                                   |  |                       |     |                    |  |      |     |        |  |      |     |           |  |                    |     |           |  |   |     |   |  |          |    |       |  |  |      |   |  |        |     |  
|% of revenues                                      |  |                       | 2   | %                  |  |      | 2   | %      |  |      | 2   | %         |  |                    | 2   | %         |  |   | 1   | % |  |          |    |       |  |  |      |   |  |        |     |  
|                                                   |  | $                     | 684 |                    |  | $    | 874 |        |  | $    | 0   |           |  | $                  | 0   |           |  | $ | 0   |   |  |          | 28 | %     |  |  | -100 | % |  |        | N/A |  
|                                                   |  |                       |     |                    |  |      |     |        |  |      |     |           |  |                    |     |           |  |   |     |   |  |          |    |       |  |  |      |   |  |        |     |  
|% of revenues                                      |  |                       | 2   | %                  |  |      | 2   | %      |  |      | 0   | %         |  |                    | 0   | %         |  |   | 0   | % |  |          |    |       |  |  |      |   |  |        |     |  
|Amortization of
discount on
convertible
debentures |  | $                     | 31  |                    |  | $    | 38  |        |  | $    | 0   |           |  | $                  | 0   |           |  | $ | 0   |   |  |          | 23 | %     |  |  | -100 | % |  |        | N/A |  
|                                                   |  |                       |     |                    |  |      |     |        |  |      |     |           |  |                    |     |           |  |   |     |   |  |          |    |       |  |  |      |   |  |        |     |  
|% of revenues                                      |  |                       | 0   | %                  |  |      | 0   | %      |  |      | 0   | %         |  |                    | 0   | %         |  |   | 0   | % |  |          |    |       |  |  |      |   |  |        |     |  

Interest expenses

The decrease in interest expenses for the year ended April 30, 2002 and
eight-month period ended December 31, 2002 was due to consecutive cuts of
interest rates from early 2001 to early 2002.

Interest expenses increased for the year ended April 30, 2001 because of a
higher utilization rate of credit line facilities.

-25-



---



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Beneficial Conversion Features of Convertible Debentures

The embedded beneficial conversion feature associated with the issue of a
convertible debt security was recognized and measured by an amount equal to the
intrinsic value of that feature reflected as a discount from the convertible
debentures with a corresponding credit to additional paid-in capital. That
amount is calculated at the commitment date (i.e. issue date of the convertible
debentures in this case) as the difference between the conversion price and the
fair value of the common stock into which the security is convertible,
multiplied by the number of shares into which the security is convertible. The
intrinsic value of the beneficial conversion feature is amortized to the
statement of operations over the life of the convertible debentures. The
beneficial conversion feature charged to income as interest expense amounted to
$684,000 and $874,000 for the year ended April 30, 2000 and 2001 respectively.

Amortization of discount on convertible debentures

In connection with the convertible debentures issued with detachable
warrants to debenture holders, the proceeds from the issuance was allocated
between the warrant and the convertible debenture based on their fair values at
time of issuance. The difference between the proceeds allocated to the
debentures and the face value of the debentures was recorded as discount or
premium. The discount or premium was amortized over the life of the
debentures.

Impairment loss on investment

|                                         |  |                       |   |                    |  |      |   |        |  |      |   |           |  |                    |   |           |  |   |     |   |  |          |     |       |  |  |     |  |  |        |     |  |  |  |  | 
|---------------------------------------- |  | --------------------- | - | ------------------ |  | ---- | - | ------ |  | ---- | - | --------- |  | ------------------ | - | --------- |  | - | --- | - |  | -------- | --- | ----- |  |  | --- |  |  | ------ | --- |  |  |  |  | 
|                                         |  |                       |   |                    |  |      |   |        |  |      |   |           |  |                    |   |           |  |   |     |   |  | % change
|                                         |  |                       |   |                    |  |      |   |        |  |      |   |           |  |                    |   |           |  |   |     |   |  |         
|                                         |  |                       |   |                    |  |      |   |        |  |      |   |           |  |                    |   |           |  |   |     |   |  |          |     |       |  |  |     |  |  | Eight-
|                                         |  |                       |   |                    |  |      |   |        |  |      |   |           |  | Eight-month period |   |           |  |   |     |   |  |          |     | month
|                                         |  | Years ended April 30, |   | ended December 31, |  | Year |   | period
|                                         |  |                       |   |                    |  |      |   |       
|(in thousands)                           |  | 2000                  |   | 2001               |  | 2002 |   | 2001   |  | 2002 |   | 2000-2001 |  | 2001-2002          |   | 2001-2002
|                                         |  |                       |   |                    |  |      |   |        |  |      |   |           |  |                    |   |          
|                                         |  |                       |   |                    |  |      |   |        |  |      |   |           |  | Unaudited          |   |           |  |   |     |   |  |          |     |       |  |  |     |  |  |       
|Impairment loss
on investment
securities |  | $                     | 0 |                    |  | $    | 0 |        |  | $    | 0 |           |  | $                  | 0 |           |  | $ | 200 |   |  |          | N/A |       |  |  | N/A |  |  |        | N/A | 
|                                         |  |                       |   |                    |  |      |   |        |  |      |   |           |  |                    |   |           |  |   |     |   |  |          |     |       |  |  |     |  |  |        |     | 
|% of revenues                            |  |                       | 0 | %                  |  |      | 0 | %      |  |      | 0 | %         |  |                    | 0 | %         |  |   | 1   | % |  |          |     |       |  |  |     |  |  |        |     | 

Impairment loss on investment for the eight-month period ended December
31, 2002 was related to the acquisition in April 2001 of 20% equity interests
in a company whose principal activities are the manufacturing and trading of
rough and pre-formed gemstones.

Issuing cost of convertible debentures

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|                                       |  |                       |     |                    |  |      |   |        |  |      |   |           |  |                    |   |           |  |   |   |   |  |          |      |       |  |  |     |  |  |        |     |  |  |  |  | 
|-------------------------------------- |  | --------------------- | --- | ------------------ |  | ---- | - | ------ |  | ---- | - | --------- |  | ------------------ | - | --------- |  | - | - | - |  | -------- | ---- | ----- |  |  | --- |  |  | ------ | --- |  |  |  |  | 
|                                       |  |                       |     |                    |  |      |   |        |  |      |   |           |  |                    |   |           |  |   |   |   |  | % change
|                                       |  |                       |     |                    |  |      |   |        |  |      |   |           |  |                    |   |           |  |   |   |   |  |         
|                                       |  |                       |     |                    |  |      |   |        |  |      |   |           |  |                    |   |           |  |   |   |   |  |          |      |       |  |  |     |  |  | Eight-
|                                       |  |                       |     |                    |  |      |   |        |  |      |   |           |  | Eight-month period |   |           |  |   |   |   |  |          |      | month
|                                       |  | Years ended April 30, |     | ended December 31, |  | Year |   | period
|                                       |  |                       |     |                    |  |      |   |       
|(in thousands)                         |  | 2000                  |     | 2001               |  | 2002 |   | 2001   |  | 2002 |   | 2000-2001 |  | 2001-2002          |   | 2001-2002
|                                       |  |                       |     |                    |  |      |   |        |  |      |   |           |  |                    |   |          
|                                       |  |                       |     |                    |  |      |   |        |  |      |   |           |  | Unaudited          |   |           |  |   |   |   |  |          |      |       |  | 
|Issuing cost of
convertible
debentures |  | $                     | 585 |                    |  | $    | 0 |        |  | $    | 0 |           |  | $                  | 0 |           |  | $ | 0 |   |  |          | -100 | %     |  |  | N/A |  |  |        | N/A | 
|                                       |  |                       |     |                    |  |      |   |        |  |      |   |           |  |                    |   |           |  |   |   |   |  |          |      |       |  |  |     |  |  |        |     | 
|% of revenues                          |  |                       | 2   | %                  |  |      | 0 | %      |  |      | 0 | %         |  |                    | 0 | %         |  |   | 0 | % |  |          |      |       |  |  |     |  |  |        |     | 

During 2000, we issued convertible debentures with gross proceeds of
$6,500,000 and incurred $585,000 issuing expenses.

Other Revenues

|                 |  |                       |     |                    |  |      |     |        |  |      |     |           |  |                    |     |           |  |   |     |   |  |          |     |       |  |  |     |   |  |        |     |   |  |  |  | 
|---------------- |  | --------------------- | --- | ------------------ |  | ---- | --- | ------ |  | ---- | --- | --------- |  | ------------------ | --- | --------- |  | - | --- | - |  | -------- | --- | ----- |  |  | --- | - |  | ------ | --- | - |  |  |  | 
|                 |  |                       |     |                    |  |      |     |        |  |      |     |           |  |                    |     |           |  |   |     |   |  | % change
|                 |  |                       |     |                    |  |      |     |        |  |      |     |           |  |                    |     |           |  |   |     |   |  |         
|                 |  |                       |     |                    |  |      |     |        |  |      |     |           |  |                    |     |           |  |   |     |   |  |          |     |       |  |  |     |   |  | Eight-
|                 |  |                       |     |                    |  |      |     |        |  |      |     |           |  | Eight-month period |     |           |  |   |     |   |  |          |     | month
|                 |  | Years ended April 30, |     | ended December 31, |  | Year |     | period
|                 |  |                       |     |                    |  |      |     |       
|(in thousands)   |  | 2000                  |     | 2001               |  | 2002 |     | 2001   |  | 2002 |     | 2000-2001 |  | 2001-2002          |     | 2001-2002
|                 |  |                       |     |                    |  |      |     |        |  |      |     |           |  |                    |     |          
|                 |  |                       |     |                    |  |      |     |        |  |      |     |           |  | Unaudited          |     |           |  |   |     |   |  |          |     |       |  |  |     |   |  |       
|Interest incomes |  | $                     | 345 |                    |  | $    | 508 |        |  | $    | 217 |           |  | $                  | 172 |           |  | $ | 47  |   |  |          | 47  | %     |  |  | -57 | % |  |        | -73 | %
|                 |  |                       |     |                    |  |      |     |        |  |      |     |           |  |                    |     |           |  |   |     |   |  |          |     |       |  |  |     |   |  |        |     |  
|% of revenues    |  |                       | 1   | %                  |  |      | 1   | %      |  |      | 1   | %         |  |                    | 1   | %         |  |   | 0   | % |  |          |     |       |  |  |     |   |  |        |     |  
|Rental incomes   |  | $                     | 113 |                    |  | $    | 62  |        |  | $    | 135 |           |  | $                  | 93  |           |  | $ | 158 |   |  |          | -45 | %     |  |  | 118 | % |  |        | 70  | %
|                 |  |                       |     |                    |  |      |     |        |  |      |     |           |  |                    |     |           |  |   |     |   |  |          |     |       |  |  |     |   |  |        |     |  
|% of revenues    |  |                       | 0   | %                  |  |      | 0   | %      |  |      | 0   | %         |  |                    | 0   | %         |  |   | 0   | % |  |          |     |       |  |  |     |   |  |        |     |  

Interest income decreased from $508,000 in fiscal 2001 to $217,000 in
fiscal 2002. The decrease was mainly due to consecutive cuts of interest rates
from early 2001 to early 2002.

Interest income increased from $345,000 in fiscal 2000 to $508,000 in
fiscal 2001. The increase was mainly due to the increase in restricted cash as
security deposit for banking facilities.

Rental income increased 118% from $62,000 in fiscal 2001 to $135,000 in
fiscal 2002. Additional investment property was rented out in fiscal 2002.

Rental income decreased 45% from $113,000 in fiscal 2000 to $62,000 in
fiscal 2001. One of the investment properties was left vacant during the year
after the expiry of a short-term lease. The said property is being rented to a
new tenant for a period of 2 years.

Income taxes

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|                               |  |                       |   |                    |  |      |     |        |  |      |      |           |  |                    |    |           |  |   |     |   |  |          |      |       |  |  |      |   |  |        |     |   |  |  |  | 
|------------------------------ |  | --------------------- | - | ------------------ |  | ---- | --- | ------ |  | ---- | ---- | --------- |  | ------------------ | -- | --------- |  | - | --- | - |  | -------- | ---- | ----- |  |  | ---- | - |  | ------ | --- | - |  |  |  | 
|                               |  |                       |   |                    |  |      |     |        |  |      |      |           |  |                    |    |           |  |   |     |   |  | % change
|                               |  |                       |   |                    |  |      |     |        |  |      |      |           |  |                    |    |           |  |   |     |   |  |         
|                               |  |                       |   |                    |  |      |     |        |  |      |      |           |  |                    |    |           |  |   |     |   |  |          |      |       |  |  |      |   |  | Eight-
|                               |  |                       |   |                    |  |      |     |        |  |      |      |           |  | Eight-month period |    |           |  |   |     |   |  |          |      | month
|                               |  | Years ended April 30, |   | ended December 31, |  | Year |     | period
|                               |  |                       |   |                    |  |      |     |       
|(in thousands)                 |  | 2000                  |   | 2001               |  | 2002 |     | 2001   |  | 2002 |      | 2000-2001 |  | 2001-2002          |    | 2001-2002
|                               |  |                       |   |                    |  |      |     |        |  |      |      |           |  |                    |    |          
|                               |  |                       |   |                    |  |      |     |        |  |      |      |           |  | Unaudited          |    |           |  |   |     |   |  |          |      |       |  |  |      |   |  |       
|Incomes taxes
expense (credit) |  | $                     | 3 |                    |  | $    | 211 |        |  | $    | (101 | )         |  | $                  | 39 |           |  | $ | 101 |   |  |          | 6933 | %     |  |  | -148 | % |  |        | 159 | %
|                               |  |                       |   |                    |  |      |     |        |  |      |      |           |  |                    |    |           |  |   |     |   |  |          |      |       |  |  |      |   |  |        |     |  
|% of revenues                  |  |                       | 0 | %                  |  |      | 0   | %      |  |      | 0    | %         |  |                    | 0  | %         |  |   | 0   | % |  |          |      |       |  |  |      |   |  |        |     |  

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

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

Our subsidiaries in China are registered to qualify as Foreign Investment
Enterprises in China and are eligible for certain tax holidays and concessions.
Accordingly, certain of our Chinese subsidiaries are exempt from Chinese
income tax for two years starting from their first profit-making year, followed
by a 50% reduction of tax for the next three years.

Two of our subsidiaries in China are currently enjoying the tax holidays
or concessions which will expire in fiscal 2005 and 2006 respectively. Other
subsidiaries in China either no longer enjoy the tax holiday and concession or
have not yet commenced its first profit-making year. PRC income tax is
calculated at the applicable rates relevant to these subsidiaries which
currently are 15%.

During the years ended April 30, 2000, 2001 and 2002, there were tax
overprovision of $156,000, $27,000 and $103,000 respectively, after the
finalization of tax assessment for the year.

Inflation

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

Foreign Exchange

More than 99% of our sales are denominated in U.S. Dollars whereas the
other sales are basically denominated in Hong Kong Dollars. The largest
portion of our expenses are denominated in Hong Kong Dollars, followed by U.S.
Dollars and Renminbi. The exchange rate of the Hong Kong Dollar is currently
pegged to the U.S. Dollar, but during the past several years the market
exchange rate has fluctuated within a narrow range. The Chinese government
principally sets the exchange rate between the Renminbi and all other
currencies. As a result, the exchange rates between the Renminbi and the U.S. Dollar and the Hong Kong
Dollar have fluctuated in the past and may fluctuate in the future. If the
value of the Renminbi or the Hong Kong Dollar decreases relative to the U.S.
Dollar, such fluctuation may have a positive effect on the results of our
operations. If the value of the Renminbi or the Hong Kong Dollar increases
relative to the U.S. Dollar, such fluctuation may have a negative effect on the
results of our operations. We do not currently hedge our foreign exchange
positions.

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Governmental economic and political policies and factors

For information regarding governmental economic, fiscal, monetary and political
policies that could materially affect our operations, directly or indirectly,
please refer to the Risk Factors section on pages 7 to 10.






|B. |  | LIQUIDITY AND CAPITAL RESOURCES.
|-- |  | --------------------------------

We have no direct business operations other than the ownership of our
subsidiaries and investment securities. Our ability to pay dividends and meet
other obligations depends upon our receipt of dividends or other payments from
our operating subsidiaries and investment securities.

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Cash Flows

|                                                     |  |                       |        |                    |  |      |        |      |  |      |        |   |  |                    |      |   |  |   |        |  
|---------------------------------------------------- |  | --------------------- | ------ | ------------------ |  | ---- | ------ | ---- |  | ---- | ------ | - |  | ------------------ | ---- | - |  | - | ------ | -
|                                                     |  |                       |        |                    |  |      |        |      |  |      |        |   |  | Eight-month period
|                                                     |  | Years ended April 30, |        | ended December 31,
|                                                     |  |                       |        |                   
|(in thousands)                                       |  | 2000                  |        | 2001               |  | 2002 |        | 2001 |  | 2002
|                                                     |  |                       |        |                    |  |      |        |      |  |     
|                                                     |  |                       |        |                    |  |      |        |      |  |      |        |   |  | Unaudited          |      |   |  |  
|Net cash provided by (used in) operating activities  |  | $                     | (1,549 | )                  |  | $    | 3,707  |      |  | $    | (753   | ) |  | $                  | (787 | ) |  | $ | 3,533  |  
|Net cash provided by (used in) investing activities  |  |                       | (2,067 | )                  |  |      | (6,058 | )    |  |      | (2,248 | ) |  |                    | (384 | ) |  |   | (2,207 | )
|Net cash provided by (used in) financing activities  |  |                       | 5,073  |                    |  |      | 2,390  |      |  |      | 2,017  |   |  |                    | 185  |   |  |   | (983   | )
|Effect of foreign exchange rate change               |  |                       |       |                    |  |      |       |      |  |      |       |   |  |                    |     |   |  |   | (68    | )
|Net increase (decrease) in cash and cash equivalents |  |                       | 1,457  |                    |  |      | 39     |      |  |      | (984   | ) |  |                    | (986 | ) |  |   | 275    |  

Operating Activities:

The increase in cash flow in the eight-month period ended December 31,
2002 compared with the same period in 2001 resulted from growth in revenues and
improved working capital management. The negative cash flow from operating
activities for the eight-month period ended December 31, 2001 reflected our
managements deliberate accumulation of cut stones inventory in anticipation of
significant increase in sales for the new fiscal year. The rise in the cost of
rough gemstones, the build-up of more sample lines of jewelry and the
maintaining of sufficient inventory for block-orders also accentuated the
negative cash flow.

Investing Activities:

In addition to on-going capital expenditures and restricted cash deposits,
we undertook various one-off investments that contributed to changes in our net
cash positions for the various reporting periods. The increase in cash used in
investing activities for the eight-month period ended December 31, 2002
compared with the same period ended December 31, 2001, was due to new
manufacturing facilities in China, as well as an increase in restricted cash
deposits for securing banking facilities.

For the year ended April 30, 2002 our investing activities included the
further acquisition of 68.8% of a subsidiary, iBBC Inc., which engages in
marketing jewelry from its display cases in retail shops. As a result of this
investment, we now hold 85.6% of the subsidiary. For the year ended April 30,
2001, our negative cash flow from investing activities reflected the
acquisition of investment securities for $3,284,000. These investment
securities included the acquisition of 20%
equity interests in a company whose principal activities are the
manufacturing and trading of rough and pre-formed gemstones, and an acquisition
of 16.8% equity interests in a jewelry retail company for our further expansion
through vertical integration and the development of distribution channels in
the United States. We had no significant control and influence over both
companies operating and financial policies. Our additional investment for the
year ended April

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30, 2000, was the acquisition of the remaining 40% of Lorenzo Marketing, which
we did not already own, for $237,000 to further expand our market share in
Japan and Europe.

Our on-going capital expenditure by category for the periods presented
were:

|                                  |  |                       |     |                    |  |      |     |      |  |      |     |  |  |                    |     |  |  |   |       | 
|--------------------------------- |  | --------------------- | --- | ------------------ |  | ---- | --- | ---- |  | ---- | --- |  |  | ------------------ | --- |  |  | - | ----- | 
|                                  |  |                       |     |                    |  |      |     |      |  |      |     |  |  | Eight-month period
|                                  |  | Years ended April 30, |     | ended December 31,
|                                  |  |                       |     |                   
|(in thousands)                    |  | 2000                  |     | 2001               |  | 2002 |     | 2001 |  | 2002
|                                  |  |                       |     |                    |  |      |     |      |  |     
|                                  |  |                       |     |                    |  |      |     |      |  |      |     |  |  | Unaudited          |     |  |  |  
|Land & buildings                  |  | $                     |    |                    |  | $    |    |      |  | $    |    |  |  | $                  |    |  |  | $ | 721   | 
|Leasehold improvement             |  | $                     | 135 |                    |  | $    | 343 |      |  | $    | 215 |  |  | $                  | 95  |  |  | $ | 159   | 
|Furniture, fixtures and equipment |  | $                     | 140 |                    |  | $    | 300 |      |  | $    | 181 |  |  | $                  | 239 |  |  | $ | 382   | 
|Plant and machinery               |  | $                     | 176 |                    |  | $    | 178 |      |  | $    | 24  |  |  | $                  | 21  |  |  | $ | 282   | 
|Motor vehicles                    |  | $                     | 18  |                    |  | $    | 16  |      |  | $    |    |  |  | $                  |    |  |  | $ | 12    | 
|                                  |  |                       |     |                    |  |      |     |      |  |      |     |  |  |                    |     |  |  |   |       | 
|Total                             |  | $                     | 469 |                    |  | $    | 837 |      |  | $    | 420 |  |  | $                  | 355 |  |  | $ | 1,556 | 
|                                  |  |                       |     |                    |  |      |     |      |  |      |     |  |  |                    |     |  |  |   |       | 

Financing Activities:

The negative net cash from financing activities for the eight-month period
ended December 31, 2002, compared with the same period in 2001, reflected the
repayment of gold loan of $2,474,000 and the repurchase of common stock of the
Company at an aggregate consideration of $391,000. The positive net cash
provided by financing activities in each of the other periods mainly reflected
our gold loan arrangement and the utilization of overdraft facilities. For the
year ended April 30, 2000, it further included proceeds of $6,500,000 from
convertible loans, and issuing cost of $585,000.

Our cash and cash equivalents are mainly held in U.S. dollars and HK
dollars.

Financing Sources

Banking Facilities and Notes Payables

We have various letters of credit and overdraft under banking facilities.
The banking facilities are collateralized by land and buildings, investment
properties, restricted cash deposits, factored receivables and personal
guarantees of one of our directors.

Letters of Credit and overdrafts:

|                           |  |                       |        |                    |  |      |        |      |  |      |        |  |  |                    |        |  |  |   |        | 
|-------------------------- |  | --------------------- | ------ | ------------------ |  | ---- | ------ | ---- |  | ---- | ------ |  |  | ------------------ | ------ |  |  | - | ------ | 
|                           |  |                       |        |                    |  |      |        |      |  |      |        |  |  | Eight-month period
|                           |  | Years ended April 30, |        | ended December 31,
|                           |  |                       |        |                   
|(in thousands)             |  | 2000                  |        | 2001               |  | 2002 |        | 2001 |  | 2002
|                           |  |                       |        |                    |  |      |        |      |  |     
|                           |  |                       |        |                    |  |      |        |      |  |      |        |  |  | Unaudited          |        |  |  |  
|Facilities granted:        |  |                       |        |                    |  |      |        |      |  |      |        |  |  |                    |        |  |  |   |        | 
|Letters of credit          |  | $                     | 8,603  |                    |  | $    | 11,125 |      |  | $    | 11,643 |  |  | $                  | 10,996 |  |  | $ | 9,615  | 
|Overdraft                  |  | $                     | 4,722  |                    |  | $    | 6,274  |      |  | $    | 3,532  |  |  | $                  | 3,532  |  |  | $ | 3,244  | 
|                           |  |                       |        |                    |  |      |        |      |  |      |        |  |  |                    |        |  |  |   |        | 
|                           |  |                       | 13,325 |                    |  |      | 17,399 |      |  |      | 15,175 |  |  |                    | 14,528 |  |  |   | 12,859 | 
|                           |  |                       |        |                    |  |      |        |      |  |      |        |  |  |                    |        |  |  |   |        | 
|Utilized:                  |  |                       |        |                    |  |      |        |      |  |      |        |  |  |                    |        |  |  |   |        | 
|Letters of credit utilized |  | $                     | 3,356  |                    |  | $    | 3,649  |      |  | $    | 5,646  |  |  | $                  | 7,565  |  |  | $ | 5,756  | 
|Overdraft utilized         |  | $                     | 821    |                    |  | $    | 3,262  |      |  | $    | 2,607  |  |  | $                  | 2,313  |  |  | $ | 3,107  | 
|                           |  |                       |        |                    |  |      |        |      |  |      |        |  |  |                    |        |  |  |   |        | 
|                           |  |                       | 4,177  |                    |  |      | 6,911  |      |  |      | 8,253  |  |  |                    | 9,878  |  |  |   | 8,863  | 
|                           |  |                       |        |                    |  |      |        |      |  |      |        |  |  |                    |        |  |  |   |        | 

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The letters of credit and bank overdrafts are denominated in H.K. dollars
and U.S. dollars, bear interest at the floating commercial bank lending rates
in Hong Kong, and are renewable annually with the consent of the relevant
banks.

Notes payable:

|               |  |                       |       |                    |  |      |     |      |  |      |     |  |  |                    |     |  |  |   |       | 
|-------------- |  | --------------------- | ----- | ------------------ |  | ---- | --- | ---- |  | ---- | --- |  |  | ------------------ | --- |  |  | - | ----- | 
|               |  |                       |       |                    |  |      |     |      |  |      |     |  |  | Eight-month period
|               |  | Years ended April 30, |       | ended December 31,
|               |  |                       |       |                   
|(in thousands) |  | 2000                  |       | 2001               |  | 2002 |     | 2001 |  | 2002
|               |  |                       |       |                    |  |      |     |      |  |     
|               |  |                       |       |                    |  |      |     |      |  |      |     |  |  | Unaudited          |     |  |  |  
|Notes payable  |  | $                     | 1,311 |                    |  | $    | 773 |      |  | $    | 282 |  |  | $                  | 447 |  |  | $ | 1,073 | 

We have term loans classified under notes payable which are related to the
Groups properties. These loans are denominated in H.K. dollars and Renminbi,
bear interest at pre-fixed rates in Hong Kong and China upon renewal.

Gold Loan Facilities:

|                                        |  |                       |            |                    |  |      |        |      |  |      |          |   |  |                    |           |   |  |   |          |  
|--------------------------------------- |  | --------------------- | ---------- | ------------------ |  | ---- | ------ | ---- |  | ---- | -------- | - |  | ------------------ | --------- | - |  | - | -------- | -
|                                        |  |                       |            |                    |  |      |        |      |  |      |          |   |  | Eight-month period
|                                        |  | Years ended April 30, |            | ended December 31,
|                                        |  |                       |            |                   
|(in thousands)                          |  | 2000                  |            | 2001               |  | 2002 |        | 2001 |  | 2002
|                                        |  |                       |            |                    |  |      |        |      |  |     
|                                        |  |                       |            |                    |  |      |        |      |  |      |          |   |  | Unaudited          |           |   |  |  
|Gold loans outstanding (in $)           |  | $                     | 1,327      |                    |  | $    | 1,847  |      |  | $    | 5,697    |   |  | $                  | 3,442     |   |  | $ | 4,439    |  
|Gold loans outstanding (in troy ounces) |  |                       | 4,850      |                    |  |      | 6,950  |      |  |      | 18,450   |   |  |                    | 12,450    |   |  |   | 12,950   |  
|Gold loan interest rate                 |  |                       | 3.15%-3.45 | %                  |  |      | 2%-2.9 | %    |  |      | 1.7%-3.4 | % |  |                    | 1.65%-4.1 | % |  |   | 1.5%-2.4 | %

We have also secured gold loan facilities with various banks in Hong
Kong, which bear a below-market interest rate. Due to lower interest rates
charged for gold loans, our cost through our gold loan program has been
substantially less than the costs that would have been incurred if we were to
finance the purchase of all of our gold requirements with borrowings under our
letter of credit facility or other credit arrangements. The gold loan,
however, does expose us to certain market risks associated with potential
future increases in the price of gold, so since the beginning of 2003, we have
put in place mechanisms to hedge against such risks. Under the gold loan
arrangements, we may defer the purchase until such time as we deem appropriate,
the price to be paid being the current market price at time of payment. At the
close of each reporting period, the gold loan is marked to market with
changes reflected on the income statement.

Convertible Debentures:

On October 29, 1999, we entered into a Securities Purchase Agreement with
an accredited investor pursuant to which we agreed to issue, and the investor
agreed to purchase, up to $10,500,000 of 3% convertible debentures, as well as
common stock purchase warrants. During

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the fiscal year ended April 30, 2000, we received gross proceeds of $6,500,000
from the issue of the 3% convertible debentures to that investor. $3,500,000
of the gross proceeds and related interest expenses have been converted into
1,072,412 shares of our common stock as of April 30, 2000. The remaining
$3,000,000 and accrued interest was subsequently converted into 1,233,557
shares of our common stock during the fiscal year ended April 30, 2001. The
proceeds of convertible debentures was used to provide restricted cash of
$906,000 and $1,940,000 as collateral for general banking facilities in fiscal
2000 and 2001, and partly used to finance the purchases of investment
securities in 2001.

Equity Line of Credit:

We do not currently consider the proceeds of the equity line of credit as
a source of liquidity. If the price and the trading volume of our common stock
remain at current levels, we will be unable to draw down all or substantially
all of the $10,000,000 under the equity line. The maximum draw down amount of
any draw down under our equity line facility will be equal to 20% of the
weighted average price for our common stock for the particular number of
trading days immediately prior to the date that we deliver notice to Navigator
of our intention to exercise a draw down multiplied by the total trading volume
in respect of our common stock for such period. If our stock price and trading
volume remain at current levels, then either the maximum draw down amount
formula or the threshold price will probably prevent us from being able to draw
down all of the proposed equity line facility with Navigator. For example,
during the 10 trading day period ended September 19, 2002, our weighted average
stock price was $1.1961 per share and our total daily trading volume was
126,850 shares. Based on such stock price and trading volume levels, the
maximum draw down amount available to us during such period would have been
$30,345. Accordingly, if our stock price and the trading volume of our stock
remain at these levels for the near future, we will be unable to access the
full $10,000,000 under the equity line.

The threshold prices which we select for each different draw down will
depend, at those times, on a number of different variables which we are not
able to quantify at this time, including such factors as:



| | (i)   |  | the then-current trading price of our common stock;          
| | ----- |  | -------------------------------------------------------------
|
| | (ii)  |  | the then-current net tangible book value of our common stock;
|
| | (iii) |  | the amount of equity line financing we are seeking;          
|
| | (iv)  |  | the availability of alternative financing; and               
|
| | (v)   |  | the need and timing for the financing.                       

Looking Forward:

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

Impact of recently issued US GAAP accounting standards.

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In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which requires costs
associated with exit or disposal activities to be recognized when the
costs are incurred, rather than at a date of commitment to an exit or
disposal plan. The provisions of SFAS 146 are effective for disposal
activities initiated after December 31, 2002. The adoption of SFAS
No. 146 is not expected to have a material impact on the Groups
financial statements.

In October 2002, the FASB issued SFAS No. 147, Acquisitions of
Certain Financial Institutions  an amendment of FASB Statements No.
72 and 144 and FASB Interpretation which applies to all acquisitions
of a financial institution except those between two or more mutual
enterprises, which is being addressed in a separate project. The
provisions of SFAS No. 147 are effective on October 1, 2002, and the
Company believes that SFAS 147 will not have a material adverse impact
on the Groups financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure  an amendment of
FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123 to provide
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method
used on reported results. Companies having a year-end after December
15, 2002 are required to follow the prescribed format and provide the
additional disclosures in their annual reports. SFAS No. 148 does not
amend SFAS No. 123 to require companies to account for employee stock
options using the fair value method. The Company adopted the
disclosure provisions required in SFAS No. 148 and has provided the
necessary disclosure in note 15.






|C. |  | RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
|-- |  | ----------------------------------------------------

During each of the last three fiscal years, we did not spend any
significant amounts on company-sponsored research and development activities.

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|D. |  | TREND INFORMATION.
|-- |  | ------------------

The total production for fiscal year ended December 31, 2003 is estimated
to be more than one million pieces which is the same level as the fiscal year
2002. Due to the uncertainty of the US economy, the sales for fiscal year 2003
is estimated at US$46 million, compared to US$32 million for the eight month
period ended December 31, 2002. The gross profit margin for the fiscal year
2003 is estimated to stay at the same 30% level as the fiscal year 2002. The
average inventory level for fiscal year 2003 is estimated to be approximately
$17 million compared with the eight month period ended December 31, 2002 which
amounted to $18 million.

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|ITEM 6. |  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|------- |  | ------------------------------------------
|       
|A.      |  | DIRECTORS AND SENIOR MANAGEMENT.          

Our senior management and directors are as follows:

|                 |  |     |    |          |  |                                                                          
|---------------- |  | --- | -- | -------- |  | -------------------------------------------------------------------------
|Name             |  | Age |    | Position
|                 |  |     |    |         
|Yu Chuan Yih     |  |     | 63 |          |  | Chairman of the Board of Directors, President and Chief Executive Officer
|Ka Man Au        |  |     | 38 |          |  | Chief Operating Officer, Secretary and Director                          
|Hon Tak Ringo Ng |  |     | 43 |          |  | Chief Financial Officer and Director                                     
|Po Yee Elsa Yue  |  |     | 38 |          |  | Non-Executive Director                                                   
|Lionel C. Wang   |  |     | 46 |          |  | Non-Executive Director                                                   

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

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

Ms. Auhas served as a director of Lorenzo Jewelry Ltd. since its
incorporation in 1987. Ms. Au has been our chief operating officer since
January 1, 2002 and is primarily responsible for our general administration,
human resources, operations and management.

Mr. Nghas served as our chief financial officer since September 1997 and
as one of our directors since May 1, 2001. He received his Bachelor of Science
degree in civil engineering from the University of London in 1984 and his
Master of Commerce in accounting and commercial administration from the
University of New South Wales in 1994. From July 1994 through September 1997,
he was an audit senior with Moores Rowland C.A., Certified Public Accountants.
Mr. Ng is a certified practising accountant of the Australian Society of CPAs.

Ms. Yuehas served as a non-executive director since December 1999. She
is a graduate gemologist from the Gemological Institute of America and served
as vice president of GIA, Hong Kong, from August 1994 to December 2002. Her
responsibilities included managing the Hong Kong office and administering their
education programs, marketing and related activities. Since December 2002, Ms.
Yue has served as a manager for a colored gems import and export trading
company.

Mr. Wanghas served as a non-executive director since June 1998. He
received his Bachelor of Commerce from Tamkung University, Taipei, Taiwan in
1978, his Master of

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Business Administration from California State Polytechnic University in 1980,
and his Master of Science from Stanford University in 1981. From 1984 to 1990,
Mr. Wang was a marketing research analyst and senior strategic planning analyst
for The Gillette Company, Boston, Massachusetts. From 1990 to 1995, he served
as associate director and then director of product development for Information
Resources, Inc., Waltham, Massachusetts. From 1995 to 1996, Mr. Wang was
vice-president at Nielsen North America, with responsibility for analytical and
modeling projects on the Kraft Foods/White Plains account. From 1996 until
June 2000, Mr. Wang served as director of analytical services for The NPD
Group, Inc., Port Washington, New York. From June 2000 until June 2001, he was
vice president of product development for NFO Interactive, Greenwich,
Connecticut. Since June 2001, Mr. Wang has been president of his own firm,
Marketing and Innovation, LLC., Greenwich, Connecticut.



|B. |  | COMPENSATION.
|-- |  | -------------

The aggregate compensation paid by us to all of our directors and
executive officers as a group for the fiscal year ended December 31, 2002 on an
accrual basis, for services in all capacities, was $533,000. During the fiscal
year ended December 31, 2002, we contributed an aggregate amount of $17,000
toward the pension plans of our directors and executive officers.

Executive Service Contract

We entered into an employment agreement with Mr. Yu Chuan Yih, effective
October 1, 2000, for a period of three years at an annual salary of $233,000.
Mr. Yihs remuneration package includes benefits with respect to an automobile.
In addition, Mr. Yih is entitled to an annual management bonus of a sum to be
determined by the board at its absolute discretion, having regard for our
operating results and the performance of Mr. Yih during the relevant financial
year. The amount payable to Mr. Yih will be decided by majority decision of
the members of the board present in the meeting called for that purpose. Mr.
Yih shall abstain from voting and not be counted in the quorum in respect of
the resolution regarding the amount payable to him.

On May 8, 2000, we granted Mr. Yih options exercisable to acquire 600,000
shares of common stock at $3.00 per share at any time until May 7, 2010.

On October 17, 2000, we offered all option holders the opportunity to
cancel all or some of their stock options in exchange for new options to be
granted on April 30, 2001 to acquire an equal number of shares with an exercise
price equal to the then last sale price of the stock on April 30, 2001 for a
new term of seven years expiring April 30, 2008. Mr. Yih accepted the offer
and now holds an option to acquire an aggregate of 775,000 shares exercisable
at $2.00 per share at any time until April 30, 2008.

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|C. |  | BOARD PRACTICES.
|-- |  | ----------------

Each of our five current directors was elected at our last annual meeting
of shareholders held December 5, 2002 to serve a one-year term or until their
successor is elected and qualified.

There are no directors service contracts with us or any of our
subsidiaries providing for benefits upon termination of employment.

Our board of directors has established an audit committee, which consists
of Messrs. Yih and Wang and Ms. Yue. Its functions are to:



| |  |  | recommend annually to the board of directors the appointment
of our independent public accountants;                                                                                     
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | discuss and review the scope and the fees of the prospective
annual audit and review the results thereof with the independent
public accountants;                                       
|
| |  |  | review and approve non-audit services of the independent public accountants;                                                                                                            
|
| |  |  | review compliance with our existing accounting and financial policies;                                                                                                                  
|
| |  |  | review the adequacy of our financial organization; and                                                                                                                                  
|
| |  |  | review our managements procedures and policies relative to
the adequacy of our internal accounting controls and compliance with
federal and state laws relating to financial reporting.



|D. |  | EMPLOYEES.
|-- |  | ----------

As of December 31, 2002, we employed approximately 2,000 persons on a
full-time basis for our production of jewelry and gemstone cutting and
polishing. Approximately 100 of these people include our management and
executive staff in Hong Kong and China. None of our employees is represented
by a labor union and we believe that our employee relations are good.



|E. |  | SHARE OWNERSHIP.
|-- |  | ----------------

The following table sets forth certain information regarding the
beneficial ownership of our shares of common stock as of December 31, 2002 by:



| |  |  | each person who is known by us to own beneficially more than
5% of our outstanding common stock;
| | - |  | ------------------------------------------------------------------------------------------------
|
| |  |  | each of our current executive officers and directors; and                                       
|
| |  |  | all directors and executive officers as a group.                                                

As of December 31, 2002, we had 8,671,615 shares of our common stock issued and
outstanding.

This information gives effect to securities deemed outstanding pursuant to
Rule 13d-3(d)(l) under the Securities Exchange Act of 1934, as amended.

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The address for each person named below is c/o LJ International Inc., Unit
#12, 12/F, Block A, Focal Industrial Centre, 21 Man Lok Street, Hung Hom,
Kowloon, Hong Kong.

|                                                            |  |                           |           |         |  |  |      |  
|----------------------------------------------------------- |  | ------------------------- | --------- | ------- |  |  | ---- | -
|Name of Beneficial Holder                                   |  | Number                    |           | Percent
|                                                            |  |                           |           |        
|                                                            |  | Shares Beneficially Owned
|                                                            |  |                          
|Yu Chuan Yih                                                |  |                           | 3,529,553 | (1)(2)  |  |  | 36.5 | %
|Ka Man Au                                                   |  |                           | 200,000   | (3)     |  |  | 2.3  | %
|Hon Tak Ringo Ng                                            |  |                           | 200,000   | (4)     |  |  | 2.3  | %
|Po Yee Elsa Yue                                             |  |                           | 6,000     | (5)     |  |  | *    |  
|Lionel C. Wang                                              |  |                           | 0         |         |  |  | *    |  
|Debora Mu Yong Yih                                          |  |                           | 1,260,000 | (6)     |  |  | 13.9 | %
|All directors and executive officers as a group (5 persons) |  |                           | 3,935,553 |         |  |  | 37.5 | %



---

|*   |  | Represents less than 1% of the outstanding common stock.                                                                                                                                                                                                  
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) |  | Of Mr. Yihs 2,524,553 shares, 1,500,000 shares are owned of record by
Pacific Growth Developments Ltd., a British Virgin Islands corporation,
which is owned by Mr. Yih (60%), his wife Tammy Yih (20%) and an adult
daughter, Bianca Tzu Hsiu Yih (20%).
|   
|(2) |  | Includes options currently exercisable to acquire 775,000 shares of
common stock held by Mr. Yih and options currently exercisable to acquire
230,000 shares of common stock held by Mr. Yihs wife at $2.00 per share
at any time until April 30, 2008.  
|   
|(3) |  | Represents options currently exercisable to acquire 200,000 shares of
common stock at $2.00 per share at any time until April 30, 2008.                                                                                                                   
|   
|(4) |  | Represents options currently exercisable to acquire 200,000 shares of
common stock at $2.00 per share at any time until April 30, 2008.                                                                                                                   
|   
|(5) |  | Represents options currently exercisable to acquire 6,000 shares of
common stock at $2.00 per share at any time until April 30, 2008.                                                                                                                     
|   
|(6) |  | Includes options currently exercisable to acquire 400,000 shares of
common stock at $2.00 per share at any time until April 30, 2008.                                                                                                                     

The 1998 Stock Compensation Plan

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



| |  |  | encourage ownership of our common stock by our officers,
directors, employees and advisors;
| | - |  | -------------------------------------------------------------------------------------------

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| |  |  | provide additional incentive for them to promote our success
and our business; and                                                                                      
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | encourage them to remain in our employ by providing them with
an opportunity to benefit from any appreciation of our common stock
through the issuance of stock options.

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

On October 17, 2000, the Company offered each option holder the
opportunity to cancel all or some of the stock options previously granted in
exchange for the granting on April 30, 2001 of options to acquire an equal
number of shares with an exercise price equal to the then last sale price of
the stock on April 30, 2001, for a new term of seven years expiring April 30,
2008.

As of December 31, 2002, no options had been exercised and the following
exchanged options to purchase shares of our common stock under the Plan
remained outstanding:



| |  |  | stock options to purchase 3,025,500 shares at $2.00 per share
through April 30, 2008, of which 1,181,000 are held by our directors
and officers as a group.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

Other Options and Warrants Outstanding

As of December 31, 2002, the following additional options and warrants to
purchase shares of our common stock were outstanding:



| |  |  | 1,679,000 common stock purchase warrants which are publicly
traded and which we issued in our April 1998 initial public offering
to purchase 1,679,000 shares of common stock at $5.75 per share
through April 15, 2005 (as amended)              
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 146,000 stock purchase options to purchase 146,000 shares of
common stock at $8.25 per share through April 15, 2005 (as amended),
which we sold to the IPO underwriter and/or persons related to the
underwriter                                  
|
| |  |  | 146,000 warrant purchase options to purchase 146,000 warrants
at $0.20625 per warrant to purchase shares of common stock at $8.25
per share through April 15, 2003, which we sold to the IPO
underwriter and/or persons related to the underwriter
|
| |  |  | options to purchase 35,000 shares at $5.00 per share through
July 30, 2004, which we granted to a former financial consultant on
July 31, 1999, for services rendered in connection with public
relations                                         

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| |  |  | warrants to purchase 75,000 shares at $3.75 per share through
November 30, 2004, and warrants to purchase 87,500 shares at $6.9375
per share through March 31, 2005, which we granted to two investors
and a placement agent in connection with two tranches of our 3%
Convertible Debentures on November 5, 1999, and March 22, 2000
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | warrants to purchase shares which we granted to a former
financial consultant on June 1, 2001, for services rendered in
connection with corporate development as follows:                                                                                                                                                            



| |  |  | 100,000 shares at $2.29 per share exercisable through May 31, 2003;   
| | - |  | ----------------------------------------------------------------------
|
| |  |  | 80,000 shares at $3.43 per share exercisable through May 31, 2004; and
|
| |  |  | 80,000 shares at $4.57 per share exercisable through May 31, 2005.    



| |  |  | warrants to purchase 200,000 shares at $3.00 per share
through August 15, 2006, which we granted to The Bauer Partnership,
Inc. on August 16, 2001, in connection with a proposed debt
placement which was never completed               
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | warrants to purchase 150,000 shares at $1.7892 per share
through April 14, 2005, which we granted to Navigator Investments
Holding IX Limited on April 15, 2002, as a commitment fee in
connection with an equity line of credit facility






|ITEM
7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|---------------------------------------------------------



|A. |  | MAJOR SHAREHOLDERS.
|-- |  | -------------------

Please see Item 6.E. for share ownership information regarding our major
shareholder. Our major shareholder does not have different voting rights.

To the extent known to us, we are not directly or indirectly owned or
controlled by another corporation, by any foreign government or by any other
natural or legal persons severally or jointly.

To our knowledge, there are no arrangements the operation of which may at
a subsequent date result in a change in control of our company.



|B. |  | RELATED PARTY TRANSACTIONS.
|-- |  | ---------------------------

Yu Chuan Yih, our chairman and president, is a director and principal
shareholder of Gemological Institute of America, Hong Kong Limited. Mr. Yih is
also a director of iBBC Inc. which has a subsidiary, Gemriver Jewelry Limited.
During the fiscal years ended April 30, 2001 and 2002, and December 31, 2002,
Mr. Yih and these affiliated companies received unsecured advances from, and
made unsecured advances to, us, which were interest free and repayable on
demand. The maximum amount due from Mr. Yih were $622,000, $243,000 and $0
during the fiscal years ended April 30, 2001 and 2002, and December 31, 2002.
The closing balance due to Mr. Yih was $248,000 as of April 30, 2001. There
was no outstanding amount with Mr. Yih as of April 30, 2002 and December 31,
2002.

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Certain of our banking facilities are collateralized by properties owned
by Yih Yu Chuan and his personal guarantee to the extent of $8,440,000 and
$8,311,000 as of April 30, 2002, and December 31, 2002. Mr. Yih has not
received any additional compensation or consideration from us in return for his
personal guarantees.

During the fiscal year ended April 30, 1999, we provided a guarantee to a
bank in respect of mortgage loans granted to Yu Chuan Yih to the extent of
$632,000. As of December 31, 2002, the guarantee amount was $437,000.

During the fiscal year ended April 30, 2000, we received management fee
income of $36,000 from Gemological Institute of America, Hong Kong Limited,
which were determined by the directors for the services provided.

During the fiscal year ended April 30, 2001, we sold finished goods of
$158,000 to Gemriver Jewelry Limited, which were made according to the
published prices and conditions offered to our major customers. We also
received from Gemriver Jewelry Limited for rental and management fee income of
$21,000 and $32,000 respectively. In addition, we received management fee
income of $27,000 from Gemological Institute of America, Hong Kong Limited,
which were determined by the directors for the services provided.

During the fiscal year ended April 30, 2002, we further acquired 68.8%
equity interest of iBBC Inc. from entities controlled by a director for a
consideration for $2,460,000.

For additional information, refer to Footnote 16 to the Consolidated
Financial Statements.



|C. |  | INTERESTS OF EXPERTS AND COUNSEL.
|-- |  | ---------------------------------

Not applicable.






|ITEM 8. |  | FINANCIAL INFORMATION                                   
|------- |  | --------------------------------------------------------
|       
|A.      |  | CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION.

The Consolidated Financial Statements are filed in this Annual Report as
Item 18.



|B. |  | SIGNIFICANT CHANGES.
|-- |  | --------------------

We believe that no significant changes have occurred since the date of the
annual financial statements.






|ITEM 9. |  | THE OFFER AND LISTING
|------- |  | ---------------------

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|A. |  | OFFER AND LISTING DETAILS.
|-- |  | --------------------------

Our common stock is listed and quoted for trading on The Nasdaq National
Market under the symbol JADE. The following table sets forth, during the
periods indicated, the high and low last sale prices for the common stock as
reported by Nasdaq:

|                                |  |      |      |     |  |   |      | 
|------------------------------- |  | ---- | ---- | --- |  | - | ---- | 
|Period                          |  | High |      | Low
|                                |  |      |      |    
|Year ended April 30, 1999       |  | $    | 9.81 |     |  | $ | 4.00 | 
|Year ended April 30, 2000       |  | $    | 6.69 |     |  | $ | 3.00 | 
|Year ended April 30, 2001       |  | $    | 3.88 |     |  | $ | 1.63 | 
|Year ended April 30, 2002       |  | $    | 2.79 |     |  | $ | 1.18 | 
|Year ended December 31, 2002    |  | $    | 1.56 |     |  | $ | 1.11 | 
|Quarter ended July 31, 2000     |  | $    | 3.53 |     |  | $ | 2.44 | 
|Quarter ended October 31, 2000  |  | $    | 3.88 |     |  | $ | 2.16 | 
|Quarter ended January 31, 2001  |  | $    | 2.50 |     |  | $ | 1.63 | 
|Quarter ended April 30, 2001    |  | $    | 2.31 |     |  | $ | 1.66 | 
|Quarter ended July 31, 2001     |  | $    | 2.79 |     |  | $ | 2.00 | 
|Quarter ended October 31, 2001  |  | $    | 2.11 |     |  | $ | 1.48 | 
|Quarter ended January 31, 2002  |  | $    | 1.56 |     |  | $ | 1.22 | 
|Quarter ended April 30, 2002    |  | $    | 1.74 |     |  | $ | 1.18 | 
|Quarter ended July 31, 2002     |  | $    | 1.56 |     |  | $ | 1.11 | 
|Quarter ended October 31, 2002  |  | $    | 1.37 |     |  | $ | 1.12 | 
|Quarter ended December 31, 2002 |  | $    | 1.33 |     |  | $ | 1.15 | 
|Quarter ended March 31, 2003    |  | $    | 1.30 |     |  | $ | 1.14 | 
|Month ended November 30, 2002   |  | $    | 1.30 |     |  | $ | 1.15 | 
|Month ended December 31, 2002   |  | $    | 1.33 |     |  | $ | 1.23 | 
|Month ended January 31, 2003    |  | $    | 1.29 |     |  | $ | 1.19 | 
|Month ended February 28, 2003   |  | $    | 1.30 |     |  | $ | 1.15 | 
|Month ended March 31, 2003      |  | $    | 1.22 |     |  | $ | 1.14 | 
|Month ended April 30, 2003      |  | $    | 1.29 |     |  | $ | 1.17 | 

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Our warrants are listed and quoted for trading on The Nasdaq National
Market under the symbol JADEW. The following table sets forth, during the
periods indicated, the high and low last sale prices for the warrants as
reported by Nasdaq:

|                                |  |      |      |     |  |   |      | 
|------------------------------- |  | ---- | ---- | --- |  | - | ---- | 
|Period                          |  | High |      | Low
|                                |  |      |      |    
|Year ended April 30, 1999       |  | $    | 5.38 |     |  | $ | 0.63 | 
|Year ended April 30, 2000       |  | $    | 3.25 |     |  | $ | 1.00 | 
|Year ended April 30, 2001       |  | $    | 1.38 |     |  | $ | 0.22 | 
|Year ended April 30, 2002       |  | $    | 0.55 |     |  | $ | 0.02 | 
|Year ended December 31, 2002    |  | $    | 0.15 |     |  | $ | 0.01 | 
|Quarter ended July 31, 2000     |  | $    | 1.38 |     |  | $ | 0.75 | 
|Quarter ended October 31, 2000  |  | $    | 1.25 |     |  | $ | 0.50 | 
|Quarter ended January 31, 2001  |  | $    | 0.69 |     |  | $ | 0.28 | 
|Quarter ended April 30, 2001    |  | $    | 0.63 |     |  | $ | 0.22 | 
|Quarter ended July 31, 2001     |  | $    | 0.55 |     |  | $ | 0.30 | 
|Quarter ended October 31, 2001  |  | $    | 0.44 |     |  | $ | 0.06 | 
|Quarter ended January 31, 2002  |  | $    | 0.22 |     |  | $ | 0.02 | 
|Quarter ended April 30, 2002    |  | $    | 0.20 |     |  | $ | 0.06 | 
|Quarter ended July 31, 2002     |  | $    | 0.13 |     |  | $ | 0.04 | 
|Quarter ended October 31, 2002  |  | $    | 0.10 |     |  | $ | 0.01 | 
|Quarter ended December 31, 2002 |  | $    | 0.15 |     |  | $ | 0.03 | 
|Quarter ended March 31, 2003    |  | $    | 0.12 |     |  | $ | 0.04 | 
|Month ended November 30, 2002   |  | $    | 0.07 |     |  | $ | 0.03 | 
|Month ended December 31, 2002   |  | $    | 0.15 |     |  | $ | 0.07 | 
|Month ended January 31, 2003    |  | $    | 0.12 |     |  | $ | 0.06 | 
|Month ended February 28, 2003   |  | $    | 0.08 |     |  | $ | 0.06 | 
|Month ended March 31, 2003      |  | $    | 0.06 |     |  | $ | 0.04 | 
|Month ended April 30, 2003      |  | $    | 0.03 |     |  | $ | 0.02 | 

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



|B. |  | PLAN OF DISTRIBUTION.
|-- |  | ---------------------

Not applicable.

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|C. |  | MARKETS.
|-- |  | --------

Our common stock and our warrants have been listed and quoted for trading
on The Nasdaq National Market System since April 15, 1998.



|D. |  | SELLING SHAREHOLDERS.
|-- |  | ---------------------

Not applicable.



|E. |  | DILUTION.
|-- |  | ---------

Not applicable.



|F. |  | EXPENSES OF THE ISSUE.
|-- |  | ----------------------

Not applicable.






|ITEM 10. ADDITIONAL INFORMATION
|-------------------------------
|                               
|A.                             

Not applicable.



|B. |  | MEMORANDUM AND ARTICLES OF ASSOCIATION.
|-- |  | ---------------------------------------

Corporate Powers. We have been registered in the British Virgin Islands
since January 30, 1997, under British Virgin Islands International Business
Companies number 216796. Clause 4 of our Memorandum of Association states that
the objects for which we are established are to engage in any businesses which
are not prohibited by law in force in the British Virgin Islands.

Directors. A director who is materially interested in any transaction
with us shall declare the material facts of and nature of his interest at the
meeting of the Board of Directors. A director may vote or be counted as the
quorum on any resolution of the Board in respect of any transaction in which he
is materially interested. With the prior or subsequent approval by a
resolution of members, the directors may, by a resolution of directors, fix the
emoluments of directors with respect to services to be rendered in any capacity
to us. The directors may, by a resolution of directors, exercise all the
powers of the Company to borrow money. There is no age limit requirement for
retirement or non-retirement of directors. A director shall not require a
share qualification.

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Share Rights, Preferences and Restrictions. Our authorized share capital
is US$1 million divided into 100 million shares of par value US$0.01 per share.
All dividends unclaimed for three years after having been declared may be
forfeited by resolution of the directors for our benefit. All shares vote as
one class and each whole share has one vote. We may redeem any of our own
shares for such fair value as we by a resolution of directors determine. All
shares have the same rights with regard to dividends and distributions upon our
liquidation.

Changing Share Rights. The rights of each class and series of shares that
we are authorized to issue shall be fixed by the resolution of directors. If
the authorized capital is divided into different classes, the rights attached
to any class may be varied with the consent in writing of the holders of not
less than three-fourths of the issued shares of that class and of the holders
of not less than three-fourths of the issued shares of any other class which
may be affected by such variation.

Shareholder Meetings. The directors may convene meetings of our members
at such times and in such manner and places as the directors consider necessary
or desirable. The directors shall convene such a meeting upon the written
request of members holding 10 percent or more of our outstanding voting shares.
At least seven days notice of the meeting shall be given to the members whose
names appear on the share register.

Restrictions on Rights to Own Securities. There are no limitations on the
rights to own our securities.

Change in Control Provisions. There are no provisions of our Memorandum
of Association and Articles of Association that would have an effect of
delaying, deferring or preventing a change in our control and that would have
operate only with respect to a merger, acquisition or corporate restructuring
involving us.

Disclosure of Share Ownership. There are no provisions governing the
ownership threshold above which shareholder ownership must be disclosed.

Applicable Law. Under the laws of most jurisdictions in the US, majority
and controlling shareholders generally have certain fiduciary
responsibilities to the minority shareholders. Shareholder action must be
taken in good faith and actions by controlling shareholders which are obviously
unreasonable may be declared null and void. BVI law protecting the interests
of minority shareholders may not be as protective in all circumstances as the
law protecting minority shareholders in US jurisdictions.

While BVI law does permit a shareholder of a BVI company to sue its
directors derivatively, that is, in the name of ,and for the benefit of, our
company and to sue a company and its directors for his benefit and for the
benefit of others similarly situated, the circumstances in which any such
action may be brought, and the procedures and defenses that may be available in
respect of any such action, may result in the rights of shareholders of a BVI
company being more limited than those of shareholders of a company organized in
the US.

Our directors have the power to take certain actions without shareholder
approval, including an amendment of our Memorandum of Association or Articles
of Association or an

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increase or reduction in our authorized capital, which would require
shareholder approval under the laws of most US jurisdictions. In addition, the
directors of a BVI corporation, subject in certain cases to court approval but
without shareholder approval, may, among other things, implement a
reorganization, certain mergers or consolidations, the sale, transfer, exchange
or disposition of any assets, property, part of the business, or securities of
the corporation, or any combination, if they determine it is in the best
interests of the corporation, its creditors, or its shareholders. Our ability
to amend our Memorandum of Association and Articles of Association without
shareholder approval could have the effect of delaying, deterring or preventing
a change in our control without any further action by the shareholders,
including a tender offer to purchase our common stock at a premium over then
current market prices.

The International Business Companies Act of the British Virgin Islands
permits the creation in our Memorandum and Articles of Association of staggered
terms of directors, cumulative voting, shareholder approval of corporate
matters by written consent, and the issuance of preferred shares. Currently,
our Memorandum and Articles of Association only provide for shareholder
approval of corporate matters by written consent, but not for staggered terms
of directors, cumulative voting or the issuance of preferred shares.

As in most US jurisdictions, the board of directors of a BVI corporation
is charged with the management of the affairs of the corporation. In most US
jurisdictions, directors owe a fiduciary duty to the corporation and its
shareholders, including a duty of care, under which directors must properly
apprise themselves of all reasonably available information, and a duty of
loyalty, under which they must protect the interests of the corporation and
refrain from conduct that injures the corporation or its shareholders or that
deprives the corporation or its shareholders of any profit or advantage. Many
US jurisdictions have enacted various statutory provisions which permit the
monetary liability of directors to be eliminated or limited. Under BVI law,
liability of a corporate director to the corporation is primarily limited to
cases of willful malfeasance in the performance of his duties or to cases where
the director has not acted honestly and in good faith and with a view to the
best interests of the corporation. However, under our Articles of Association,
we are authorized to indemnify any director or officer who is made or
threatened to be made a party to a legal or administrative proceeding by virtue
of being one of our directors or officers, provided such person acted honestly
and in good faith and with a view to our best interests and, in the case of a
criminal proceeding, such person had no reasonable cause to believe that his
conduct was unlawful. Our Articles of Association also enable us to indemnify
any director or officer who was successful in such a proceeding against expense
and judgments, fines and amounts paid in settlement and reasonably incurred in
connection with the proceeding.

The above description of certain differences between BVI and US corporate
laws is only a summary and does not purport to be complete or to address every
applicable aspect of such laws. However, we believe that all material
differences are disclosed above.

Changes in Capital. Requirements to effect changes in capital are not
more stringent than is required by law.



|C. |  | MATERIAL CONTRACTS.
|-- |  | -------------------

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None.



|D. |  | EXCHANGE CONTROLS.
|-- |  | ------------------

There are no material British Virgin Islands laws that impose foreign
exchange controls on us or that affect our payment of dividends, interest or
other payments to non-resident holders of our capital stock. British Virgin
Islands law and our Memorandum of Association and Articles of Association
impose no limitations on the right of non-resident or foreign owners to hold or
vote our common stock.



|E. |  | TAXATION.
|-- |  | ---------

The following is a summary of anticipated material U.S. federal income and
British Virgin Islands tax consequences of an investment in our common stock.
The summary does not deal with all possible tax consequences relating to an
investment in our common stock and does not purport to deal with the tax
consequences applicable to all categories of investors, some of which, such as
dealers in securities, insurance companies and tax-exempt entities, may be
subject to special rules. In particular, the discussion does not address the
tax consequences under state, local and other non-U.S. and non-British Virgin
Islands tax laws. Accordingly, each prospective investor should consult its
own tax advisor regarding the particular tax consequences to it of an
investment in the common stock. The discussion below is based upon laws and
relevant interpretations in effect as of the date of this annual report, all of
which are subject to change.

United States Federal Income Taxation

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



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

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

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

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accumulated earnings and profits as determined under U.S. federal income tax
principles. Any distributions in excess of our earnings and profits will first
be treated, for U.S. federal income tax purposes, as a nontaxable return of
capital, to the extent of the U.S. investors adjusted tax basis in our common
stock, and then as gain from the sale or exchange of a capital asset, provided
that our common stock constitutes a capital asset in the hands of the U.S.
investor. U.S. corporate shareholders will not be entitled to any deduction
for distributions received as dividends on our common stock.

Gain or loss on the sale or exchange of our common stock will be treated
as capital gain or loss if our common stock is held as a capital asset by the
U.S. investor. Such capital gain or loss will be long-term capital gain or
loss if the U.S. investor has held our common stock for more than one year at
the time of the sale or exchange.

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

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



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

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

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

British Virgin Islands Taxation

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

-49-



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

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



|F. |  | DIVIDENDS AND PAYING AGENTS.
|-- |  | ----------------------------

Not applicable.



|G. |  | STATEMENT BY EXPERTS.
|-- |  | ---------------------

Not applicable.



|H. |  | DOCUMENTS ON DISPLAY.
|-- |  | ---------------------

The documents concerning our company, which are referred to in this Annual
Report, may be inspected at our principal executive offices at Unit #12, 12/F,
Block A, Focal Industrial Centre, 21 Man Lok Street, Hung Hom, Kowloon, Hong
Kong.



|I. |  | SUBSIDIARY INFORMATION.
|-- |  | -----------------------

Not applicable.






|ITEM 11. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- |  | ----------------------------------------------------------

Not applicable.






|ITEM 12. |  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|-------- |  | ------------------------------------------------------

Not applicable.




PART II






|ITEM 13. |  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
|-------- |  | -----------------------------------------------

Not applicable.

-50-



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|ITEM 14. |  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|-------- |  | ----------------------------------------------------------------------------

Effective December 5, 2002, we announced a two-year extension of the
exercise term to April 15, 2005 for our 1,679,000 outstanding registered common
stock purchase warrants (Nasdaq: JADEW). Each warrant remains exercisable to
purchase one share of common stock at $5.75 per share.






|ITEM 15. |  | CONTROLS AND PROCEDURES
|-------- |  | -----------------------

Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our chairman,
chief financial officer and chief operating officer, of the effectiveness of
the design and operation of our disclosure controls and procedures. Based on
this evaluation, which will be used as input for further improvement actions,
they concluded that our disclosure controls and procedures are effective timely
alerting them to material information about LJ International Inc. and its
consolidated subsidiaries.

There have been no significant changes in our internal controls or in
other factors that could significantly affect those controls subsequent to the
date of this evaluation.




PART III






|ITEM 17. |  | FINANCIAL STATEMENTS
|-------- |  | --------------------

Not applicable.






|ITEM 18. |  | FINANCIAL STATEMENTS
|-------- |  | --------------------

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LJ INTERNATIONAL INC.

INDEX TO FINANCIAL STATEMENTS

|                                                                                                                                                                                                             |  |      |            | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ---------- | 
|                                                                                                                                                                                                             |  | Page
|                                                                                                                                                                                                             |  |     
|Report of Independent Auditors                                                                                                                                                                               |  |      | F-2        | 
|                                                                                                                                                                                                             |  |      |            | 
|Consolidated statements of operations for each of the years in the three-year period ended
April 30, 2002 and for each of the periods in the eight-month period ended
December 31, 2001 (unaudited) and 2002 |  |      | F-3        | 
|                                                                                                                                                                                                             |  |      |            | 
|Consolidated balance sheets as of April 30, 2001, April 30, 2002 and December 31, 2002                                                                                                                       |  |      | F-4        | 
|                                                                                                                                                                                                             |  |      |            | 
|Consolidated statements of shareholders equity for each of the years in the three-year period
ended April 30, 2002 and for the eight-month period ended December 31, 2002                                   |  |      | F-5        | 
|                                                                                                                                                                                                             |  |      |            | 
|Consolidated statements of cash flows for each of the years in the three-year period ended
April 30, 2002 and for each of the periods in the eight-month period ended
December 31, 2001 (unaudited) and 2002 |  |      | F-6        | 
|                                                                                                                                                                                                             |  |      |            | 
|Notes to and forming part of the financial statements                                                                                                                                                        |  |      | F-7  F-38 | 

F-1



---



##### Table of Contents



Report of Independent Auditors

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

We have audited the accompanying consolidated balance sheets of LJ
International Inc. and its subsidiaries as of April 30, 2001, April 30, 2002
and December 31, 2002 and the related consolidated statements of operations,
shareholders equity and cash flows for each of the years in the three-year
period ended April 30, 2002 and for the eight-month period ended December 31,
2002. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the management, as well as
evaluating the overall financial statements presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of LJ
International Inc. and its subsidiaries as of April 30, 2001, April 30, 2002
and December 31, 2002 and the consolidated results of their operations and
their cash flows for each of the years in the three-year period ended April 30,
2002 and for the eight-month period ended December 31, 2002, in conformity with
generally accepted accounting principles in the United States of America.

As discussed in note 2(e) to the financial statements, the Group has
changed its accounting policy for sales returns from the period beginning May 1, 2002.

Moores RowlandChartered Accountants
Certified Public Accountants, Hong Kong

Dated: May 15, 2003.

F-2



---



##### Table of Contents



LJ INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

|                                                         |                                                                                         |                           |    |       |     |      |         |                      |         |              |         |           |        |      |         |           |         |  |         |                |         |  |         |           |   | 
|-------------------------------------------------------- | --------------------------------------------------------------------------------------- | ------------------------- | -- | ----- | --- | ---- | ------- | -------------------- | ------- | ------------ | ------- | --------- | ------ | ---- | ------- | --------- | ------- |  | ------- | -------------- | ------- |  | ------- | --------- | - | 
|                                                         |                                                                                         |                           |    |       |     |      |         |                      |         |              |         |           |        |      |         |           |         |  |         | 8 Months ended
|                                                         |                                                                                         |                           |    |       |     |      |         | Year ended April 30, |         | December 31,
|                                                         |                                                                                         |                           |    |       |     |      |         |                      |         |             
|                                                         |                                                                                         |                           |    | Notes |     | 2000 |         | 2001                 |         | 2002         |         | 2001      |        | 2002
|                                                         |                                                                                         |                           |    |       |     |      |         |                      |         |              |         |           |        |     
|                                                         |                                                                                         |                           |    |       |     |      |         | US$                  |         | US$          |         | US$       |        | US$  |         | US$      
|                                                         |                                                                                         |                           |    |       |     |      |         |                      |         |              |         |           |        |      |         |           |         |  |         | (Unaudited)    |         |  |         |          
|Operating revenue                                        |                                                                                         |                           | 2  | (d)   |     |      | 38,926  |                      |         |              | 46,285  |           |        |      | 39,240  |           |         |  | 25,042  |                |         |  | 31,809  |          
|Costs of goods sold                                      |                                                                                         |                           |    |       |     |      | (24,030 | )                    |         |              | (29,575 | )         |        |      | (33,283 | )         |         |  | (16,908 | )              |         |  | (21,531 | )        
|                                                         |                                                                                         |                           |    |       |     |      |         |                      |         |              |         |           |        |      |         |           |         |  |         |                |         |  |         |          
|Gross profit                                             |                                                                                         |                           |    |       |     |      | 14,896  |                      |         |              | 16,710  |           |        |      | 5,957   |           |         |  | 8,134   |                |         |  | 10,278  |          
|Operating expenses                                       |                                                                                         |                           |    |       |     |      |         |                      |         |              |         |           |        |      |         |           |         |  |         |                |         |  |         |          
|                                                         | Selling, general and administrative expenses                                            |                           |    |       |     |      |         | (8,872               | )       |              |         | (11,363   | )      |      |         | (11,411   | )       |  |         | (7,599         | )       |  |         | (7,722    | )
|                                                         | Unrealized gain (loss) on gold loan                                                     |                           |    |       |     |      |         | 44                   |         |              |         | 44        |        |      |         | (660      | )       |  |         | (119           | )       |  |         | (435      | )
|                                                         | Depreciation                                                                            |                           |    |       |     |      |         | (705                 | )       |              |         | (808      | )      |      |         | (1,031    | )       |  |         | (565           | )       |  |         | (863      | )
|                                                         | Impairment on property, plant and equipment                                             |                           |    |       |     |      |         |                     |         |              |         |          |        |      |         | (345      | )       |  |         |               |         |  |         | (108      | )
|                                                         | Amortization and impairment loss on
goodwill                                            |                           |    |       |     |      |         |                     |         |              |         | (27       | )      |      |         | (242      | )       |  |         | (18            | )       |  |         | (400      | )
|                                                         |                                                                                         |                           |    |       |     |      |         |                      |         |              |         |           |        |      |         |           |         |  |         |                |         |  |         |          
|Operating income (loss)                                  |                                                                                         |                           |    |       |     |      | 5,363   |                      |         |              | 4,556   |           |        |      | (7,732  | )         |         |  | (167    | )              |         |  | 750     |          
|Other revenue and expense                                |                                                                                         |                           |    |       |     |      |         |                      |         |              |         |           |        |      |         |           |         |  |         |                |         |  |         |          
|                                                         | Other revenues                                                                          |                           |    | 2     | (d) |      |         | 458                  |         |              |         | 570       |        |      |         | 352       |         |  |         | 265            |         |  |         | 205       |  
|                                                         | Interest expenses                                                                       |                           |    |       |     |      |         | (1,446               | )       |              |         | (1,780    | )      |      |         | (652      | )       |  |         | (424           | )       |  |         | (441      | )
|                                                         | Issuance costs for convertible debentures                                               |                           |    |       |     |      |         | (585                 | )       |              |         |          |        |      |         |          |         |  |         |               |         |  |         |          |  
|                                                         | Impairment loss on investment securities                                                |                           |    |       |     |      |         |                     |         |              |         |          |        |      |         |          |         |  |         |               |         |  |         | (200      | )
|                                                         |                                                                                         |                           |    |       |     |      |         |                      |         |              |         |           |        |      |         |           |         |  |         |                |         |  |         |          
|Income (loss) before income taxes and minority
interests |                                                                                         |                           |    |       |     |      | 3,790   |                      |         |              | 3,346   |           |        |      | (8,032  | )         |         |  | (326    | )              |         |  | 314     |          
|Income taxes credit (expense)                            |                                                                                         |                           | 11 |       |     |      | (3      | )                    |         |              | (211    | )         |        |      | 101     |           |         |  | (39     | )              |         |  | (101    | )        
|                                                         |                                                                                         |                           |    |       |     |      |         |                      |         |              |         |           |        |      |         |           |         |  |         |                |         |  |         |          
|Income (Loss) before minority interests                  |                                                                                         |                           |    |       |     |      | 3,787   |                      |         |              | 3,135   |           |        |      | (7,931  | )         |         |  | (365    | )              |         |  | 213     |          
|Minority interests in consolidated subsidiaries          |                                                                                         |                           |    |       |     |      | 52      |                      |         |              |        |           |        |      | 30      |           |         |  |        |                |         |  | 120     |          
|                                                         |                                                                                         |                           |    |       |     |      |         |                      |         |              |         |           |        |      |         |           |         |  |         |                |         |  |         |          
|Net income (loss)                                        |                                                                                         |                           |    |       |     |      | 3,839   |                      |         |              | 3,135   |           |        |      | (7,901  | )         |         |  | (365    | )              |         |  | 333     |          
|                                                         |                                                                                         |                           |    |       |     |      |         |                      |         |              |         |           |        |      |         |           |         |  |         |                |         |  |         |          
|Numerator:                                               |                                                                                         |                           |    |       |     |      |         |                      |         |              |         |           |        |      |         |           |         |  |         |                |         |  |         |          
|                                                         | Net income (loss) used in computing basic
earnings (loss) per share                     |                           |    |       |     |      |         | 3,839                |         |              |         | 3,135     |        |      |         | (7,901    | )       |  |         | (365           | )       |  |         | 333       |  
|                                                         | Interest on 3% convertible debentures                                                   |                           |    |       |     |      |         | 32                   |         |              |         | 16        |        |      |         |          |         |  |         |               |         |  |         |          |  
|                                                         |                                                                                         |                           |    |       |     |      |         |                      |         |              |         |           |        |      |         |           |         |  |         |                |         |  |         |          
|                                                         | Adjusted net income (loss) used in computing
diluted earnings (loss) per share          |                           |    |       |     |      |         | 3,871                |         |              |         | 3,151     |        |      |         | (7,901    | )       |  |         | (365           | )       |  |         | 333       |  
|                                                         |                                                                                         |                           |    |       |     |      |         |                      |         |              |         |           |        |      |         |           |         |  |         |                |         |  |         |          
|Denominator:                                             |                                                                                         |                           |    |       |     |      |         |                      |         |              |         |           |        |      |         |           |         |  |         |                |         |  |         |          
|                                                         | Weighted average number of shares used in
calculating basic earnings (loss) per share   |                           |    |       |     |      |         | 6,589,415            |         |              |         | 8,567,366 |        |      |         | 8,671,615 |         |  |         | 8,671,615      |         |  |         | 8,492,851 |  
|                                                         | Effect of dilutive potential ordinary shares:                                           |                           |    |       |     |      |         |                      |         |              |         |           |        |      |         |           |         |  |         |                |         |  |         |           |  
|                                                         |                                                                                         | 3% convertible debentures |    |       |     |      |         |                      | 337,239 |              |         |           | 48,753 |      |         |           |        |  |         |                |        |  |         |           |  | 
|                                                         |                                                                                         | Warrants                  |    |       |     |      |         |                      | 17,986  |              |         |           |       |      |         |           | 7       |  |         |                | 11      |  |         |           |  | 
|                                                         |                                                                                         | Stock options             |    |       |     |      |         |                      |        |              |         |           | 731    |      |         |           | 106,759 |  |         |                | 160,138 |  |         |           |  | 
|                                                         |                                                                                         |                           |    |       |     |      |         |                      |         |              |         |           |        |      |         |           |         |  |         |                |         |  |         |          
|                                                         | Weighted average number of shares used in
calculating diluted earnings (loss) per share |                           |    |       |     |      |         | 6,944,640            |         |              |         | 8,616,850 |        |      |         | 8,778,381 |         |  |         | 8,831,764      |         |  |         | 8,492,851 |  
|                                                         |                                                                                         |                           |    |       |     |      |         |                      |         |              |         |           |        |      |         |           |         |  |         |                |         |  |         |          
|Earnings (loss) per share:                               |                                                                                         |                           |    |       |     |      |         |                      |         |              |         |           |        |      |         |           |         |  |         |                |         |  |         |          
|                                                         | Basic                                                                                   |                           |    | 2     | (h) |      |         | 0.58                 |         |              |         | 0.37      |        |      |         | (0.91     | )       |  |         | (0.04          | )       |  |         | 0.04      |  
|                                                         |                                                                                         |                           |    |       |     |      |         |                      |         |              |         |           |        |      |         |           |         |  |         |                |         |  |         |          
|                                                         | Diluted                                                                                 |                           |    | 2     | (h) |      |         | 0.56                 |         |              |         | 0.37      |        |      |         | (0.91     | )       |  |         | (0.04          | )       |  |         | 0.04      |  
|                                                         |                                                                                         |                           |    |       |     |      |         |                      |         |              |         |           |        |      |         |           |         |  |         |                |         |  |         |          

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

F-3



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##### Table of Contents



LJ INTERNATIONAL INC.

CONSOLIDATED BALANCE SHEETS

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

|                                           |                                                                                                                                                              |  |       |     |      |  |           |        |           |  |              |        |  |  |        |        |  
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----- | --- | ---- |  | --------- | ------ | --------- |  | ------------ | ------ |  |  | ------ | ------ | -
|                                           |                                                                                                                                                              |  |       |     |      |  | As of     |        | As of     |  | As of       
|                                           |                                                                                                                                                              |  |       |     |      |  | April 30, |        | April 30, |  | December 31,
|                                           |                                                                                                                                                              |  | Notes |     | 2001 |  | 2002      |        | 2002     
|                                           |                                                                                                                                                              |  |       |     |      |  |           |        |          
|                                           |                                                                                                                                                              |  |       |     |      |  | US$       |        | US$       |  | US$         
|ASSETS                                     |                                                                                                                                                              |  |       |     |      |  |           |        |           |  |              |        |  |  |        |       
|Current asset                              |                                                                                                                                                              |  |       |     |      |  |           |        |           |  |              |        |  |  |        |       
|                                           | Cash and cash equivalents                                                                                                                                    |  |       |     |      |  |           | 1,706  |           |  |              | 722    |  |  |        | 997    |  
|                                           | Restricted cash                                                                                                                                              |  |       |     |      |  |           | 5,315  |           |  |              | 5,643  |  |  |        | 6,358  |  
|                                           | Trade receivables, net of allowance
for doubtful accounts
(April 30,
2001: US$204; April 30, 2002:
US$225; December 31, 2002: US$280)                        |  |       |     |      |  |           | 6,264  |           |  |              | 8,013  |  |  |        | 8,159  |  
|                                           | Inventories                                                                                                                                                  |  |       | 5   |      |  |           | 20,822 |           |  |              | 15,802 |  |  |        | 17,932 |  
|                                           | Prepayments and other current assets                                                                                                                         |  |       |     |      |  |           | 1,898  |           |  |              | 1,203  |  |  |        | 1,233  |  
|                                           |                                                                                                                                                              |  |       |     |      |  |           |        |           |  |              |        |  |  |        |       
|                                           | Total current assets                                                                                                                                         |  |       |     |      |  |           | 36,005 |           |  |              | 31,383 |  |  |        | 34,679 |  
|Properties held for lease, net             |                                                                                                                                                              |  | 6     |     |      |  | 1,671     |        |           |  | 1,616        |        |  |  | 1,561  |       
|Property, plant and equipment, net         |                                                                                                                                                              |  | 7     |     |      |  | 4,707     |        |           |  | 4,635        |        |  |  | 5,153  |       
|Due from related parties                   |                                                                                                                                                              |  | 16    | (b) |      |  | 1,390     |        |           |  | 521          |        |  |  | 511    |       
|Goodwill, net                              |                                                                                                                                                              |  | 8     |     |      |  | 242       |        |           |  | 2,121        |        |  |  | 1,721  |       
|Investment securities, net                 |                                                                                                                                                              |  | 9     |     |      |  | 3,285     |        |           |  | 2,685        |        |  |  | 2,460  |       
|                                           |                                                                                                                                                              |  |       |     |      |  |           |        |           |  |              |        |  |  |        |       
|Total assets                               |                                                                                                                                                              |  |       |     |      |  | 47,300    |        |           |  | 42,961       |        |  |  | 46,085 |       
|                                           |                                                                                                                                                              |  |       |     |      |  |           |        |           |  |              |        |  |  |        |       
|LIABILITIES AND SHAREHOLDERS EQUITY       |                                                                                                                                                              |  |       |     |      |  |           |        |           |  |              |        |  |  |        |       
|Current liabilities                        |                                                                                                                                                              |  |       |     |      |  |           |        |           |  |              |        |  |  |        |       
|                                           | Bank overdrafts                                                                                                                                              |  |       | 10  |      |  |           | 3,262  |           |  |              | 2,607  |  |  |        | 3,107  |  
|                                           | Notes payable, current portion                                                                                                                               |  |       | 10  |      |  |           | 490    |           |  |              | 282    |  |  |        | 1,073  |  
|                                           | Letters of credit, gold and other loans                                                                                                                      |  |       | 10  |      |  |           | 5,496  |           |  |              | 11,343 |  |  |        | 10,195 |  
|                                           | Trade payables                                                                                                                                               |  |       |     |      |  |           | 3,297  |           |  |              | 3,310  |  |  |        | 6,620  |  
|                                           | Accrued expenses and other payables                                                                                                                          |  |       |     |      |  |           | 2,742  |           |  |              | 1,723  |  |  |        | 1,719  |  
|                                           | Due to a director                                                                                                                                            |  |       | 16  | (b)  |  |           | 248    |           |  |              |       |  |  |        |       |  
|                                           | Income taxes payable                                                                                                                                         |  |       | 11  |      |  |           | 317    |           |  |              | 3      |  |  |        | 69     |  
|                                           |                                                                                                                                                              |  |       |     |      |  |           |        |           |  |              |        |  |  |        |       
|                                           | Total current liabilities                                                                                                                                    |  |       |     |      |  |           | 15,852 |           |  |              | 19,268 |  |  |        | 22,783 |  
|Notes payable, non-current portion         |                                                                                                                                                              |  | 10    |     |      |  | 283       |        |           |  |             |        |  |  |       |       
|Other payables, non-current                |                                                                                                                                                              |  |       |     |      |  | 4         |        |           |  | 8            |        |  |  |       |       
|                                           |                                                                                                                                                              |  |       |     |      |  |           |        |           |  |              |        |  |  |        |       
|Total liabilities                          |                                                                                                                                                              |  |       |     |      |  | 16,139    |        |           |  | 19,276       |        |  |  | 22,783 |       
|                                           |                                                                                                                                                              |  |       |     |      |  |           |        |           |  |              |        |  |  |        |       
|Minority interest                          |                                                                                                                                                              |  |       |     |      |  |          |        |           |  | 128          |        |  |  | 8      |       
|Commitments and contingencies              |                                                                                                                                                              |  | 12    |     |      |  |           |        |           |  |              |        |  |  |        |       
|Shareholders equity                       |                                                                                                                                                              |  |       |     |      |  |           |        |           |  |              |        |  |  |        |       
|                                           | Common
stocks, par value US$0.01 each,
Authorized - 100 million shares,
Issued - 8,671,615 shares as of
April 30, 2001,
April 30, 2002
and December 31, 2002 |  |       | 13  |      |  |           | 87     |           |  |              | 87     |  |  |        | 87     |  
|                                           | Additional paid-in capital                                                                                                                                   |  |       |     |      |  |           | 17,167 |           |  |              | 17,464 |  |  |        | 17,410 |  
|                                           | Treasury stock                                                                                                                                               |  |       | 13  | (f)  |  |           |       |           |  |              |       |  |  |        | (391   | )
|                                           | Accumulated other comprehensive loss                                                                                                                         |  |       |     |      |  |           |       |           |  |              |       |  |  |        | (151   | )
|                                           | Retained earnings                                                                                                                                            |  |       |     |      |  |           | 13,907 |           |  |              | 6,006  |  |  |        | 6,339  |  
|                                           |                                                                                                                                                              |  |       |     |      |  |           |        |           |  |              |        |  |  |        |       
|Total shareholders equity                 |                                                                                                                                                              |  |       |     |      |  | 31,161    |        |           |  | 23,557       |        |  |  | 23,294 |       
|                                           |                                                                                                                                                              |  |       |     |      |  |           |        |           |  |              |        |  |  |        |       
|Total liabilities and shareholders equity |                                                                                                                                                              |  |       |     |      |  | 47,300    |        |           |  | 42,961       |        |  |  | 46,085 |       
|                                           |                                                                                                                                                              |  |       |     |      |  |           |        |           |  |              |        |  |  |        |       

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

F-4



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##### Table of Contents



LJ INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Amounts in thousands, except share and per share data)

|                                                                                     |                            |  |       |     |           |  |              |   |            |  |           |   |                |  |             |   |          |  |               |   |          |  |      |   |     |  |      |      |   |  |        |        |   |  |        |        |  
|------------------------------------------------------------------------------------ | -------------------------- |  | ----- | --- | --------- |  | ------------ | - | ---------- |  | --------- | - | -------------- |  | ----------- | - | -------- |  | ------------- | - | -------- |  | ---- | - | --- |  | ---- | ---- | - |  | ------ | ------ | - |  | ------ | ------ | -
|                                                                                     |                            |  |       |     |           |  | Common stock |   |            |  |           |   | Treasury stock |  | Accumulated |   |          |  |               |   |          |  |     
|                                                                                     |                            |  |       |     |           |  |              |   | Additional |  |           |   | other          |  |             |   |          |  |               |   |         
|                                                                                     |                            |  |       |     |           |  | Number       |   | Par        |  | Paid-in   |   | Number         |  |             |   |          |  | comprehensive |   | Retained |  |      |   |    
|                                                                                     |                            |  | Notes |     | of shares |  | value        |   | Capital    |  | of shares |   | Cost           |  | loss        |   | earnings |  | Total        
|                                                                                     |                            |  |       |     |           |  |              |   |            |  |           |   |                |  |             |   |          |  |              
|                                                                                     |                            |  |       |     |           |  |              |   |            |  | US$       |   | US$            |  |             |   |          |  | US$           |   | US$      |  | US$  |   | US$
|Balance as of May 1, 1999                                                            |                            |  |       |     |           |  | 6,365,646    |   |            |  | 64        |   |                |  | 8,698       |   |          |  |              |   |          |  |     |   |     |  |     |      |   |  | 6,933  |        |   |  | 15,695 |       
|Comprehensive income:                                                                |                            |  |       |     |           |  |              |   |            |  |           |   |                |  |             |   |          |  |               |   |          |  |      |   |     |  |      |      |   |  |        |        |   |  |        |       
|                                                                                     | Net income                 |  |       |     |           |  |              |  |            |  |           |  |                |  |             |  |          |  |               |  |          |  |      |  |     |  |      |     |   |  |        | 3,839  |   |  |        | 3,839  |  
|Shares issued on conversion of
convertible debentures                                |                            |  | 13    | (e) |           |  | 1,072,412    |   |            |  | 11        |   |                |  | 3,512       |   |          |  |              |   |          |  |     |   |     |  |     |      |   |  |       |        |   |  | 3,523  |       
|Interest expense arising on
beneficial conversion features of
convertible debentures |                            |  | 2     | (t) |           |  |             |   |            |  |          |   |                |  | 1,553       |   |          |  |              |   |          |  |     |   |     |  |     |      |   |  |       |        |   |  | 1,553  |       
|Discount on convertible debentures                                                   |                            |  |       |     |           |  |             |   |            |  |          |   |                |  | 69          |   |          |  |              |   |          |  |     |   |     |  |     |      |   |  |       |        |   |  | 69     |       
|Compensation costs for
stock-based transactions                                      |                            |  | 15    | (b) |           |  |             |   |            |  |          |   |                |  | 60          |   |          |  |              |   |          |  |     |   |     |  |     |      |   |  |       |        |   |  | 60     |       
|                                                                                     |                            |  |       |     |           |  |              |   |            |  |           |   |                |  |             |   |          |  |               |   |          |  |      |   |     |  |      |      |   |  |        |        |   |  |        |       
|Balance as of April 30, 2000                                                         |                            |  |       |     |           |  | 7,438,058    |   |            |  | 75        |   |                |  | 13,892      |   |          |  |              |   |          |  |     |   |     |  |     |      |   |  | 10,772 |        |   |  | 24,739 |       
|Comprehensive income:                                                                |                            |  |       |     |           |  |              |   |            |  |           |   |                |  |             |   |          |  |               |   |          |  |      |   |     |  |      |      |   |  |        |        |   |  |        |       
|                                                                                     | Net income                 |  |       |     |           |  |              |  |            |  |           |  |                |  |             |  |          |  |               |  |          |  |      |  |     |  |      |     |   |  |        | 3,135  |   |  |        | 3,135  |  
|Shares issued on conversion of
convertible debentures                                |                            |  | 13    | (e) |           |  | 1,233,557    |   |            |  | 12        |   |                |  | 3,004       |   |          |  |              |   |          |  |     |   |     |  |     |      |   |  |       |        |   |  | 3,016  |       
|Interest expense arising on
beneficial conversion features of
convertible debentures |                            |  | 2     | (t) |           |  |             |   |            |  |          |   |                |  | 5           |   |          |  |              |   |          |  |     |   |     |  |     |      |   |  |       |        |   |  | 5      |       
|Compensation costs for
stock-based transactions                                      |                            |  | 15    | (b) |           |  |             |   |            |  |          |   |                |  | 266         |   |          |  |              |   |          |  |     |   |     |  |     |      |   |  |       |        |   |  | 266    |       
|                                                                                     |                            |  |       |     |           |  |              |   |            |  |           |   |                |  |             |   |          |  |               |   |          |  |      |   |     |  |      |      |   |  |        |        |   |  |        |       
|Balance as of April 30, 2001                                                         |                            |  |       |     |           |  | 8,671,615    |   |            |  | 87        |   |                |  | 17,167      |   |          |  |               |   |          |  |      |   |     |  |     |      |   |  | 13,907 |        |   |  | 31,161 |       
|Comprehensive loss:                                                                  |                            |  |       |     |           |  |              |   |            |  |           |   |                |  |             |   |          |  |               |   |          |  |      |   |     |  |      |      |   |  |        |        |   |  |        |       
|                                                                                     | Net loss                   |  |       |     |           |  |              |  |            |  |           |  |                |  |             |  |          |  |               |  |          |  |      |  |     |  |      |     |   |  |        | (7,901 | ) |  |        | (7,901 | )
|Compensation costs for
stock-based transactions                                      |                            |  | 15    | (b) |           |  |             |   |            |  |          |   |                |  | 297         |   |          |  |              |   |          |  |     |   |     |  |     |      |   |  |       |        |   |  | 297    |       
|                                                                                     |                            |  |       |     |           |  |              |   |            |  |           |   |                |  |             |   |          |  |               |   |          |  |      |   |     |  |      |      |   |  |        |        |   |  |        |       
|Balance as of April 30, 2002                                                         |                            |  |       |     |           |  | 8,671,615    |   |            |  | 87        |   |                |  | 17,464      |   |          |  |              |   |          |  |     |   |     |  |     |      |   |  | 6,006  |        |   |  | 23,557 |       
|Comprehensive income:                                                                |                            |  |       |     |           |  |              |   |            |  |           |   |                |  |             |   |          |  |               |   |          |  |      |   |     |  |      |      |   |  |        |        |   |  |        |       
|                                                                                     | Net income                 |  |       |     |           |  |              |  |            |  |           |  |                |  |             |  |          |  |               |  |          |  |      |  |     |  |      |     |   |  |        | 333    |   |  |        | 333    |  
|                                                                                     | Translation adjustment     |  |       |     |           |  |              |  |            |  |           |  |                |  |             |  |          |  |               |  |          |  |      |  |     |  |      | (151 | ) |  |        |       |   |  |        | (151   | )
|                                                                                     | Total comprehensive income |  |       |     |           |  |              |   |            |  |           |   |                |  |             |   |          |  |               |   |          |  |      |   |     |  |      |      |   |  |        |        |   |  |        | 182    |  
|Reversal of cancelled warrants                                                       |                            |  |       |     |           |  |             |   |            |  |          |   |                |  | (54         | ) |          |  |              |   |          |  |     |   |     |  |     |      |   |  |       |        |   |  | (54    | )     
|Purchase of treasury stock                                                           |                            |  |       |     |           |  |             |   |            |  |          |   |                |  |            |   |          |  | 318,200       |   |          |  | (391 | ) |     |  |     |      |   |  |       |        |   |  | (391   | )     
|                                                                                     |                            |  |       |     |           |  |              |   |            |  |           |   |                |  |             |   |          |  |               |   |          |  |      |   |     |  |      |      |   |  |        |        |   |  |        |       
|Balance as of December 31, 2002                                                      |                            |  |       |     |           |  | 8,671,615    |   |            |  | 87        |   |                |  | 17,410      |   |          |  | 318,200       |   |          |  | (391 | ) |     |  | (151 | )    |   |  | 6,339  |        |   |  | 23,294 |       
|                                                                                     |                            |  |       |     |           |  |              |   |            |  |           |   |                |  |             |   |          |  |               |   |          |  |      |   |     |  |      |      |   |  |        |        |   |  |        |       

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

F-5



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##### Table of Contents



LJ INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except share and per share data)

|                                                                                               |                                                                                            |  |      |     |      |  |                      |        |              |  |        |        |      |  |        |        |   |  |                |        |   |  |        |        |  
|---------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------ |  | ---- | --- | ---- |  | -------------------- | ------ | ------------ |  | ------ | ------ | ---- |  | ------ | ------ | - |  | -------------- | ------ | - |  | ------ | ------ | -
|                                                                                               |                                                                                            |  |      |     |      |  |                      |        |              |  |        |        |      |  |        |        |   |  | 8 Months ended
|                                                                                               |                                                                                            |  |      |     |      |  | Year ended April 30, |        | December 31,
|                                                                                               |                                                                                            |  |      |     |      |  |                      |        |             
|                                                                                               |                                                                                            |  | Note |     | 2000 |  | 2001                 |        | 2002         |  | 2001   |        | 2002
|                                                                                               |                                                                                            |  |      |     |      |  |                      |        |              |  |        |        |     
|                                                                                               |                                                                                            |  |      |     |      |  | US$                  |        | US$          |  | US$    |        | US$  |  | US$   
|                                                                                               |                                                                                            |  |      |     |      |  |                      |        |              |  |        |        |      |  |        |        |   |  | (Unaudited)    |        |   |  |       
|Cash flows from operating activities:                                                          |                                                                                            |  |      |     |      |  |                      |        |              |  |        |        |      |  |        |        |   |  |                |        |   |  |        |       
|Net income (loss)                                                                              |                                                                                            |  |      |     |      |  | 3,839                |        |              |  | 3,135  |        |      |  | (7,901 | )      |   |  | (365           | )      |   |  | 333    |       
|Adjustments to reconcile income (loss) to net cash
provided by (used in) operating activities: |                                                                                            |  |      |     |      |  |                      |        |              |  |        |        |      |  |        |        |   |  |                |        |   |  |        |       
|                                                                                               | Depreciation of property, plant and equipment                                              |  |      |     |      |  |                      | 705    |              |  |        | 808    |      |  |        | 1,031  |   |  |                | 565    |   |  |        | 863    |  
|                                                                                               | Impairment loss on property, plant and equipment                                           |  |      |     |      |  |                      |       |              |  |        |       |      |  |        | 345    |   |  |                |       |   |  |        | 108    |  
|                                                                                               | Amortization of organization costs                                                         |  |      |     |      |  |                      | 51     |              |  |        |       |      |  |        |       |   |  |                |       |   |  |        |       |  
|                                                                                               | Amortization and impairment loss on goodwill                                               |  |      |     |      |  |                      |       |              |  |        | 27     |      |  |        | 242    |   |  |                | 18     |   |  |        | 400    |  
|                                                                                               | Impairment loss on investment securities                                                   |  |      |     |      |  |                      |       |              |  |        |       |      |  |        |       |   |  |                |       |   |  |        | 200    |  
|                                                                                               | Unrealized (gain) loss on gold loan                                                        |  |      |     |      |  |                      | (44    | )            |  |        | (44    | )    |  |        | 660    |   |  |                | 119    |   |  |        | 594    |  
|                                                                                               | Issuance costs for convertible debentures                                                  |  |      |     |      |  |                      | 585    |              |  |        |       |      |  |        |       |   |  |                |       |   |  |        |       |  
|                                                                                               | Loss on disposal and write-off of property, plant
and equipment                            |  |      |     |      |  |                      | 3      |              |  |        | 10     |      |  |        | 214    |   |  |                |       |   |  |        |       |  
|                                                                                               | Allowance for doubtful debts                                                               |  |      |     |      |  |                      | 75     |              |  |        | (119   | )    |  |        | 82     |   |  |                |       |   |  |        | 61     |  
|                                                                                               | Write-down of inventories                                                                  |  |      |     |      |  |                      |       |              |  |        |       |      |  |        | 5,710  |   |  |                |       |   |  |        |       |  
|                                                                                               | Minority interests                                                                         |  |      |     |      |  |                      | (52    | )            |  |        |       |      |  |        | (30    | ) |  |                |       |   |  |        | (120   | )
|                                                                                               | Interest expense arising on beneficial conversion
features of convertible debentures       |  |      |     |      |  |                      | 684    |              |  |        | 874    |      |  |        |       |   |  |                |       |   |  |        |       |  
|                                                                                               | Amortization of financial consulting fee paid to the
representative in the public offering |  |      |     |      |  |                      | 36     |              |  |        | 18     |      |  |        |       |   |  |                |       |   |  |        |       |  
|                                                                                               | Costs associated with stock-based transactions                                             |  |      |     |      |  |                      | 60     |              |  |        | 266    |      |  |        | 297    |   |  |                | 147    |   |  |        | (54    | )
|                                                                                               | Amortization of discount on convertible debentures                                         |  |      |     |      |  |                      | 31     |              |  |        | 38     |      |  |        |       |   |  |                |       |   |  |        |       |  
|Changes in operating assets and liabilities:                                                   |                                                                                            |  |      |     |      |  |                      |        |              |  |        |        |      |  |        |        |   |  |                |        |   |  |        |       
|                                                                                               | Trade receivables                                                                          |  |      |     |      |  |                      | (1,177 | )            |  |        | (622   | )    |  |        | (1,801 | ) |  |                | 760    |   |  |        | (207   | )
|                                                                                               | Inventories                                                                                |  |      |     |      |  |                      | (7,090 | )            |  |        | (1,619 | )    |  |        | (647   | ) |  |                | (2,194 | ) |  |        | (2,130 | )
|                                                                                               | Prepayments and other current assets                                                       |  |      |     |      |  |                      | (696   | )            |  |        | 905    |      |  |        | 830    |   |  |                | (1,282 | ) |  |        | (30    | )
|                                                                                               | Due from related parties                                                                   |  |      |     |      |  |                      | (85    | )            |  |        | (950   | )    |  |        |       |   |  |                | (1,352 | ) |  |        | 10     |  
|                                                                                               | Due from director                                                                          |  |      |     |      |  |                      | 4      |              |  |        |       |      |  |        |       |   |  |                | (62    | ) |  |        |       |  
|                                                                                               | Trade payables                                                                             |  |      |     |      |  |                      | 808    |              |  |        | (196   | )    |  |        | (120   | ) |  |                | 198    |   |  |        | 3,310  |  
|                                                                                               | Accrued expenses and other payables                                                        |  |      |     |      |  |                      | 1,788  |              |  |        | 378    |      |  |        | (1,101 | ) |  |                | (837   | ) |  |        | 19     |  
|                                                                                               | Due to a director                                                                          |  |      |     |      |  |                      | 2      |              |  |        | 246    |      |  |        | (247   | ) |  |                | (248   | ) |  |        |       |  
|                                                                                               | Letters of credit                                                                          |  |      |     |      |  |                      | (1,068 | )            |  |        | 293    |      |  |        | 1,997  |   |  |                | 3,917  |   |  |        | 110    |  
|                                                                                               | Income tax payable                                                                         |  |      |     |      |  |                      | (8     | )            |  |        | 259    |      |  |        | (314   | ) |  |                | (171   | ) |  |        | 66     |  
|                                                                                               |                                                                                            |  |      |     |      |  |                      |        |              |  |        |        |      |  |        |        |   |  |                |        |   |  |        |       
|Net cash provided by (used in) operating activities                                            |                                                                                            |  |      |     |      |  | (1,549               | )      |              |  | 3,707  |        |      |  | (753   | )      |   |  | (787           | )      |   |  | 3,533  |       
|                                                                                               |                                                                                            |  |      |     |      |  |                      |        |              |  |        |        |      |  |        |        |   |  |                |        |   |  |        |       
|Cash flows from investing activities:                                                          |                                                                                            |  |      |     |      |  |                      |        |              |  |        |        |      |  |        |        |   |  |                |        |   |  |        |       
|Change in restricted cash                                                                      |                                                                                            |  |      |     |      |  | (1,399               | )      |              |  | (1,952 | )      |      |  | (328   | )      |   |  | (30            | )      |   |  | (715   | )     
|Advance to related parties                                                                     |                                                                                            |  |      |     |      |  |                     |        |              |  |       |        |      |  | (5,442 | )      |   |  |               |        |   |  |       |       
|Purchase of investment securities                                                              |                                                                                            |  |      |     |      |  |                     |        |              |  | (3,284 | )      |      |  |       |        |   |  |               |        |   |  |       |       
|Purchase of property, plant and equipment                                                      |                                                                                            |  |      |     |      |  | (450                 | )      |              |  | (832   | )      |      |  | (420   | )      |   |  | (355           | )      |   |  | (1,556 | )     
|Purchase of subsidiary                                                                         |                                                                                            |  | 3    |     |      |  | (237                 | )      |              |  |       |        |      |  | (2,381 | )      |   |  |               |        |   |  |       |       
|Proceeds on disposals of property, plant and equipment                                         |                                                                                            |  |      |     |      |  | 19                   |        |              |  | 10     |        |      |  | 12     |        |   |  | 1              |        |   |  | 64     |       
|Repayment from related parties                                                                 |                                                                                            |  |      |     |      |  |                     |        |              |  |       |        |      |  | 6,311  |        |   |  |               |        |   |  |       |       
|                                                                                               |                                                                                            |  |      |     |      |  |                      |        |              |  |        |        |      |  |        |        |   |  |                |        |   |  |        |       
|Net cash used in investing activities                                                          |                                                                                            |  |      |     |      |  | (2,067               | )      |              |  | (6,058 | )      |      |  | (2,248 | )      |   |  | (384           | )      |   |  | (2,207 | )     
|                                                                                               |                                                                                            |  |      |     |      |  |                      |        |              |  |        |        |      |  |        |        |   |  |                |        |   |  |        |       
|Cash flows from financing activities:                                                          |                                                                                            |  |      |     |      |  |                      |        |              |  |        |        |      |  |        |        |   |  |                |        |   |  |        |       
|Change in bank overdrafts                                                                      |                                                                                            |  |      |     |      |  | (272                 | )      |              |  | 2,441  |        |      |  | (655   | )      |   |  | (949           | )      |   |  | 500    |       
|Proceeds from issue of 3% convertible debentures                                               |                                                                                            |  |      |     |      |  | 6,500                |        |              |  |       |        |      |  |       |        |   |  |               |        |   |  |       |       
|Issuance costs on 3% convertible debentures                                                    |                                                                                            |  |      |     |      |  | (585                 | )      |              |  |       |        |      |  |       |        |   |  |               |        |   |  |       |       
|Loans acquired                                                                                 |                                                                                            |  |      |     |      |  | 1,177                |        |              |  | 564    |        |      |  | 3,190  |        |   |  | 1,476          |        |   |  | 1,695  |       
|Repayment of loans                                                                             |                                                                                            |  |      |     |      |  | (1,675               | )      |              |  | (538   | )      |      |  | (490   | )      |   |  | (326           | )      |   |  | (2,756 | )     
|Repayment of other payables                                                                    |                                                                                            |  |      |     |      |  | (72                  | )      |              |  | (77    | )      |      |  | (28    | )      |   |  | (16            | )      |   |  | (31    | )     
|Purchase of treasury stock                                                                     |                                                                                            |  |      |     |      |  |                     |        |              |  |       |        |      |  |       |        |   |  |               |        |   |  | (391   | )     
|                                                                                               |                                                                                            |  |      |     |      |  |                      |        |              |  |        |        |      |  |        |        |   |  |                |        |   |  |        |       
|Net cash provided by (used in) financing activities                                            |                                                                                            |  |      |     |      |  | 5,073                |        |              |  | 2,390  |        |      |  | 2,017  |        |   |  | 185            |        |   |  | (983   | )     
|                                                                                               |                                                                                            |  |      |     |      |  |                      |        |              |  |        |        |      |  |        |        |   |  |                |        |   |  |        |       
|Effect of foreign exchange rate change                                                         |                                                                                            |  |      |     |      |  |                     |        |              |  |       |        |      |  |       |        |   |  |               |        |   |  | (68    | )     
|                                                                                               |                                                                                            |  |      |     |      |  |                      |        |              |  |        |        |      |  |        |        |   |  |                |        |   |  |        |       
|Net increase (decrease) in cash and cash equivalents                                           |                                                                                            |  |      |     |      |  | 1,457                |        |              |  | 39     |        |      |  | (984   | )      |   |  | (986           | )      |   |  | 275    |       
|Cash and cash equivalents, as of beginning of period                                           |                                                                                            |  |      |     |      |  | 210                  |        |              |  | 1,667  |        |      |  | 1,706  |        |   |  | 1,706          |        |   |  | 722    |       
|                                                                                               |                                                                                            |  |      |     |      |  |                      |        |              |  |        |        |      |  |        |        |   |  |                |        |   |  |        |       
|Cash and cash equivalents, as of end of period                                                 |                                                                                            |  |      |     |      |  | 1,667                |        |              |  | 1,706  |        |      |  | 722    |        |   |  | 720            |        |   |  | 997    |       
|                                                                                               |                                                                                            |  |      |     |      |  |                      |        |              |  |        |        |      |  |        |        |   |  |                |        |   |  |        |       
|Supplemental disclosure information                                                            |                                                                                            |  |      |     |      |  |                      |        |              |  |        |        |      |  |        |        |   |  |                |        |   |  |        |       
|Interest expense                                                                               |                                                                                            |  |      |     |      |  | 708                  |        |              |  | 861    |        |      |  | 638    |        |   |  | 424            |        |   |  | 424    |       
|Income taxes paid (refunded)                                                                   |                                                                                            |  |      |     |      |  | 12                   |        |              |  | (47    | )      |      |  | 212    |        |   |  | 210            |        |   |  | 31     |       
|                                                                                               |                                                                                            |  |      |     |      |  |                      |        |              |  |        |        |      |  |        |        |   |  |                |        |   |  |        |       
|Non-cash transactions:                                                                         |                                                                                            |  |      |     |      |  |                      |        |              |  |        |        |      |  |        |        |   |  |                |        |   |  |        |       
|Conversion of convertible debentures                                                           |                                                                                            |  | 13   | (e) |      |  | 3,523                |        |              |  | 3,016  |        |      |  |       |        |   |  |               |        |   |  |       |       
|                                                                                               |                                                                                            |  |      |     |      |  |                      |        |              |  |        |        |      |  |        |        |   |  |                |        |   |  |        |       

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

F-6



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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|1. |  | NATURE OF BUSINESS AND BASIS OF FINANCIAL STATEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | LJ International Inc. (the Company) and its subsidiaries (collectively the
Group) are principally involved in the design, manufacture, marketing and
sale of precious and semi-precious gemstones jewelry as well as diamond
jewelry. While the Company is based in Hong Kong, its manufacturing
operations are in the Peoples Republic of China (PRC) and most of its
sales are currently in the United States of America (US). The Group also
owns certain commercial and residential properties located in Hong Kong,
which are held primarily for investment purposes.                                                                                                     
|  
|   |  | During the year ended April 30, 1998, the Company merged with Lorenzo
Jewelry Limited (Lorenzo). The Company was incorporated as a British
Virgin Islands (BVI) company on January 30, 1997 and prior to the merger
it had no significant operations, but had incurred certain organization
and deferred offering costs. The merger had been accounted for as if it
was a pooling of interest as there exists common ownership between the
companies. The capital structure reflected in the financial statements is
that of the Company, which is a holding company after the merger.                                                                                          
|  
|   |  | The Company changed to a calendar-year basis of reporting financial
results effective May 1, 2002. For comparative purposes, the reported
consolidated results of operations and cash flows for the 2000, 2001 and
2002 annual periods are for the twelve months ended April 30. As a
requirement of the change in fiscal year, the Company is reporting
consolidated results of operations and cash flows for a special transition
period for the eight months ended December 31, 2002 (audited) compared
with the eight months ended December 31, 2001 (unaudited). The
comparative consolidated balance sheets are as of April 30, 2001 and 2002.                            
|  
|   |  | Effective May 1, 2002, the Company has determined that reporting currency
is US dollar and local currency will continue to be the functional
currency for the Companys foreign subsidiaries. The Company has also
changed its basis of accounting and prepared its financial statements in
accordance with generally accepted accounting principles in the US. These
changes were adopted in order to assist the readers in better
understanding the financial statements. The financial statements of
periods prior to the change have been comprehensively recast as if the new
reporting currency and the new basis of accounting had been in use for all
periods presented.
|  
|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



| | (a) |  | Basis of accounting                                                                                                                                                                                                                                                               
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The financial statements are prepared in accordance with generally
accepted accounting principles in the US. The measurement basis used
in the preparation of the financial statements is historical cost.                                                                        
|
| | (b) |  | Principles of consolidation                                                                                                                                                                                                                                                       
|
| |     |  | The consolidated financial statements include the financial
information of the Company and its subsidiaries. The results of
subsidiaries acquired or disposed of during the year/period are
consolidated from or to their effective dates of acquisition or
disposal respectively.
|
| |     |  | All material intercompany balances and transactions have been
eliminated on consolidation.                                                                                                                                                                                        

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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|-- |  | ------------------------------------------------------



| | (c) |  | Goodwill on consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Goodwill represents the excess of cost over fair value of acquired net
assets. Prior to June 30, 2001, goodwill arising on acquisition of
subsidiaries had been amortized on a straight-line basis over 10
years. Following the adoption of Statement of Financial Accounting
Standard (SFAS) No. 142, Goodwill and Other Intangible Assets,
issued by the Financial Accounting Standard Board (FASB), goodwill is
no longer amortized but subject to annual impairment tests. As part
of an ongoing review of the valuation and amortization of goodwill,
management assesses the carrying value of the Companys goodwill to
determine if changes in facts and circumstances suggest that they may
be impaired. If this review indicates that the goodwill is not
recoverable, as determined by a discounted cash flow analysis over the
remaining amortization period, the carrying value of the Groups
goodwill would be reduced to its estimated fair value.
|
| | (d) |  | Revenue recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |     |  | Revenue is recognized when it is probable that the economic benefits
will flow to the Group and when the revenue and cost, if applicable,
can be measured reliably.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |     |  | Operating revenue represents sale of goods at invoiced value to
customers, net of returns and discounts, and are recognized when goods
are delivered and title has passed to customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |     |  | Other revenue is recognized on the following basis:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 



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



| | (e) |  | Sales return reserve                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | In prior years, it was the policy of the Group not to allow sales
returns, other than defective items, from its customers. Any
defective items were generally notified or returned to the Company
within one month after sales. During each period presented in the
financial statements prior to April 30, 2002, the Group experienced an
insignificant return rate in relation to the turnover and the net
income. Accordingly, no reserve for sales returns had been made.
During the current period, the Group has allowed sales returns and its
sales generally include specified return policy for certain customers.
The Group reserves for sales returns as a reduction of revenue at the
time the operating revenue is recognized based on historical sales
return experience. This change in accounting policy has no
significant financial impact in prior years due to the reasons as
aforesaid. Accordingly, the management of the Group considered it is
not necessary to adopt this change in accounting policy
retrospectively in previous years.
|
| | (f) |  | Shipping and handling costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |     |  | The shipping and handling costs are included in costs of goods sold.
The amounts of revenue received for shipping and handling are included
in operating revenue.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-8



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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|-- |  | ------------------------------------------------------



| | (g) |  | Advertising costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Advertising, promotion and exhibition expenses are generally expensed
when incurred. Advertising costs included in selling, general and
administrative expenses were US$341, US$332, US$646, US$336
(unaudited) and US$413 for the years ended April 30, 2000, 2001 and
2002 and for the eight months ended December 31, 2001 and 2002
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | (h) |  | Earnings (loss) per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |     |  | The calculation of basic earnings (loss) per share is based on net
income (loss) for the year/period attributable to shareholders and on
the weighted average number of ordinary shares outstanding during the
year/period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |     |  | The calculation of diluted earnings (loss) per share is based on net
income for the year/period attributable to shareholders and on the
weighted average number of ordinary shares outstanding during the
year/period, adjusted for the effects of all dilutive potential
ordinary shares. The dilutive effect of convertible securities is
reflected in diluted earnings (loss) per share by application of the
if-converted method. The number of incremental shares included in the
denominator in connection with the warrants and options is determined
by computing year-to-date weighted average number of incremental
shares included in each quarterly diluted earnings (loss) per share
computation which is computed by using the average market prices
during the three months included in the reporting period.
|
| | (i) |  | Fair value of financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |     |  | The financial instruments used by the Group 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.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (j) |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |     |  | Inventories are stated at the lower of cost and market. Cost, which
comprises all costs of purchase and, where applicable, costs of
conversion and other costs that have been incurred in bringing the
inventories to their present location and condition, is calculated
using the first-in, first-out method. Estimated losses on inventories
represent reserves for obsolescence, excess quantities, irregulars and
slow moving inventory. The Group 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 lease                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |     |  | Properties 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-9



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LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|-- |  | ------------------------------------------------------



| | (l) |  | Property, plant and equipment (PPE) and depreciation                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | PPE are stated at cost, less accumulated depreciation and accumulated
impairment loss, and include expenditure that substantially increase
the useful lives of existing assets. Maintenance and repairs are
charged to current operations as incurred. Upon sale, retirement, or
other disposition of these assets, the cost and related accumulated
depreciation and accumulated impairment loss are removed from the
respective accounts, and any gain or loss is included in the
consolidated statement of operations.
|
| |     |  | Depreciation is provided by using the straight-line method over the
estimated useful lives of the related assets at the following annual
rates:                                                                                                                                                                                                                                                                                                                                                                          

|                                                                                                                        |  |                                                                                                          
|----------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------
|Leasehold land and buildings
Furniture, fixtures and equipment
Motor vehicles
Plant and machinery
Leasehold improvement |  | 2% or over the unexpired term of leases
20% to 50%
20%
10%
shorter of 10% or the unexpired term of leases



| | (m) |  | Impairment of long-lived assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Long-lived assets are reviewed at least annually for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount
of an asset to undiscounted future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired,
impairment is measured at the difference between the carrying amount
and fair value of the asset. Goodwill will not be allocated to
long-lived assets, when tested for impairment.
|
| | (n) |  | Investment securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |     |  | Investment securities held for an identified long term purpose are
stated at cost and subject to impairment review at each reporting date
to reflect any diminution in their value, which is expected to be
other than temporary. The amount of impairment is recognized as an
expense in the period in which the decline occurs.                                                                                                                                                                                                                                                                           
|
| | (o) |  | Gold loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |     |  | Gold loan balances are translated at the gold price prevailing at the
close of business on the balance sheet date. Profits or losses
arising on translation are dealt with in the consolidated statement of
operations.                                                                                                                                                                                                                                                                                                                                                                                     
|
| | (p) |  | Stock-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |     |  | The Company records compensation expense for stock-based employee
compensation plans using the intrinsic value method in which
compensation expense, if any, is measured as the excess of the market
price of the stock over the exercise price of the award on the
measurement date.                                                                                                                                                                                                                                                                                                                       

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LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|-- |  | ------------------------------------------------------



| | (q) |  | Income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The Group accounts for income taxes under the liability method.
Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. The
Group provides a valuation allowance, if necessary, to reduce deferred
tax assets to their estimated realizable value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (r) |  | Comprehensive income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |     |  | SFAS No. 130, Reporting Comprehensive Income, requires the
presentation of comprehensive income, in addition to the existing
statements of operations. Comprehensive income is defined as the
change in equity during a period from transactions and other events,
excluding the changes resulting from investments by owners and
distributions to owners.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | (s) |  | Foreign currencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |     |  | The financial position and results of operations of the Company and
its subsidiaries are measured using local currency as the functional
currency. Transactions in currencies other than the functional
currency (foreign currencies) during the period are translated into
the functional currency at the applicable rates of exchange prevailing
at the time of transactions. Monetary assets and liabilities
denominated in foreign currencies are translated into functional
currency at applicable rates of exchange in effect at the balance
sheet date. Exchange differences are recorded within the consolidated
statement of operations.                                                                                                                                                                                                                                                                                                   
|
| |     |  | Upon consolidation, assets and liabilities of subsidiaries denominated
in respective functional currencies are translated into US dollars at
the exchange rate as of the balance sheet date. Revenues, costs and
expenses denominated in respective functional currencies are
translated into US dollars at the weighted average exchange rate for
the period. The effects of foreign currencies translation adjustments
are included as a separate component of accumulated other
comprehensive income (loss).                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | (t) |  | Discount on and beneficial conversion features of convertible debentures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |     |  | The proceeds from issuance of convertible debenture with detachable
warrants are allocated between the warrant and the convertible
debenture based on their fair values at time of issuance. The
difference between the proceeds allocated to the debentures and the
face value of the debenture is recorded as discount or premium. The
discount or premium is amortized over the life of the debenture, using
the interest method, to the consolidated statement of operations.
During the year ended April 30, 2000, the Company recognized a sum
US$69 as discount on convertible debentures. The amount of discount
on convertible debentures amortized for the years ended April 30, 2000
and 2001 were US$31 and US$38 respectively.                                                                                                                                                                                                         
|
| |     |  | The embedded beneficial conversion feature associated with the issue
of a convertible debt security is recognized and measured by an amount
equal to the intrinsic value of that feature reflected as a discount
from the convertible debentures with a corresponding credit to
additional paid-in capital. That amount is calculated at the
commitment date (i.e. issue date of the convertible debentures) as the
difference between the conversion price and the fair value of the
common stock into which the security is convertible, multiplied by the
number of shares into which the security is convertible. The
intrinsic value of the beneficial conversion feature is amortized to
the consolidated statement of operations over the life of the
convertible debentures. The beneficial conversion feature charged to
income as interest expense amounted to US$684 and US$874 for the years
ended April 30, 2000 and 2001 respectively.

F-11



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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|-- |  | ------------------------------------------------------



| | (u) |  | Treasury Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The Company applies the cost method of accounting for treasury stock.
The cost method requires the Company to record the cost of acquiring
treasury stock as a deduction from the total capital. The treasury
stock account is debited for the cost of the shares acquired and will
be credited upon reissuance at cost on a first-in-first-out basis. If
the treasury stock is reissued at a price in excess of acquisition
cost, the excess will be credited to additional paid-in capital in
excess of par value from treasury stock. If the treasury stock is
reissued at less than acquisition cost, the deficiency will be treated
first as a reduction of any capital in excess of par related to
previous reissuances or retirements. If the balance in capital in
excess of par value from treasury stock is insufficient to absorb the
deficiency, the remainder is recorded as a reduction of retained
earnings; however, the Company has not yet reissued any of its
treasury stock.
|
| | (v) |  | Cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |     |  | The Group considers all short-term, highly liquid investments with
maturities of three months or less to be cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (w) |  | Uses of estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |     |  | The preparation of the Groups financial statements in conformity with
generally accepted accounting principles requires the Companys
management to make estimates and assumptions that affect the amounts
reported in these financial statements and accompanying notes. Actual
amounts could differ from those estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (x) |  | Related parties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |     |  | Parties are considered to be related if one party has the ability,
directly or indirectly, to control the other party, or exercise
significant influence over the other party in making financial and
operating decisions. Parties are also considered to be related if
they are subject to common control or common significant influence.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | (y) |  | Dividend                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |     |  | The Directors of the Company have never declared or paid any cash
dividends on the Companys capital stock and do not anticipate paying
cash dividends in the foreseeable future. The ability to pay
dividends depends upon receipt of dividends or other payments from
subsidiaries and other holdings and investments. In addition, the
operating subsidiaries from time to time may be subject to
restrictions on their ability to make distributions to the Company,
including as a result of restrictive covenants in loan agreements,
restrictions on the conversion of local currency into US dollars or
other currencies and other regulatory restrictions. Currently, none
of the subsidiaries has such restriction during the periods presented
except for the covenants as set out in note 10 to the financial
statements.                                                                                                                                                           

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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|-- |  | ------------------------------------------------------



| | (z) |  | New accounting pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which requires costs
associated with exit or disposal activities to be recognized when the
costs are incurred, rather than at a date of commitment to an exit or
disposal plan. The provisions of SFAS 146 are effective for disposal
activities initiated after December 31, 2002. The adoption of SFAS
No. 146 is not expected to have a material impact on the Groups
financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |     |  | In October 2002, the FASB issued SFAS No. 147, Acquisitions of
Certain Financial Institutions  an amendment of FASB Statements No.
72 and 144 and FASB Interpretation which applies to all acquisitions
of a financial institution except those between two or more mutual
enterprises, which is being addressed in a separate project. The
provisions of SFAS No. 147 are effective on October 1, 2002, and the
Company believes that SFAS 147 will not have impact on the Groups
financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |     |  | In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure  an amendment of
FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123 to provide
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method
used on reported results. Companies having a year-end after December
15, 2002 are required to follow the prescribed format and provide the
additional disclosures in their annual reports. SFAS No. 148 does not
amend SFAS No. 123 to require companies to account for employee stock
options using the fair value method. The Company adopted the
disclosure provisions required in SFAS No. 148 and has provided the
necessary disclosure in note 15.

F-13



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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|3. |  | ACQUISITIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On March 22, 2000, Lorenzo acquired the remaining shareholding (i.e. 40%)
of Lorenzo Marketing Co. Limited (Lorenzo Marketing), presently known as
Lorenzo Giftware Limited, for a consideration of US$237.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | During the year ended April 30, 2001, the Company acquired 12,000,000
common stocks (16.8% equity interest) of iBBC Inc., a company engaged in
marketing jewelry from its display cases in retail shops, for the
consideration of US$600. For further expansion through vertical
integration and the development of distribution channel, the Company
further acquired 49,200,000 common stocks (68.8% equity interest) of iBBC
Inc. from entities controlled by a director for a consideration of
US$2,460 on March 21, 2002. The objective of the acquisition was to
acquire the know-how of interactive showcase as well as the established
distribution retail network in the US and therefore increase shareholders
value. As the goodwill was arisen from acquisition after June 30, 2001,
the goodwill is subject to impairment review.
|  
|   |  | Details of the identifiable assets and liabilities acquired at the date of
acquisition are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                                                        |                                     |  |           |      |           |  |       |       |  
|------------------------------------------------------- | ----------------------------------- |  | --------- | ---- | --------- |  | ----- | ----- | -
|                                                        |                                     |  | Lorenzo   |      |           |  |      
|                                                        |                                     |  | Marketing |      | iBBC Inc.
|                                                        |                                     |  | 2000      |      | 2002     
|                                                        |                                     |  |           |      |          
|                                                        |                                     |  | US$       |      | US$      
|Net assets acquired:                                    |                                     |  |           |      |           |  |       |      
|                                                        | Property, plant and equipment       |  |           | 1    |           |  |       | 1,056 |  
|                                                        | Trade receivables                   |  |           | 16   |           |  |       | 6     |  
|                                                        | Inventories                         |  |           | 66   |           |  |       | 43    |  
|                                                        | Other receivables                   |  |           |     |           |  |       | 160   |  
|                                                        | Cash and cash equivalents           |  |           | 13   |           |  |       | 79    |  
|                                                        | Trade payables                      |  |           | (9   | )         |  |       | (133  | )
|                                                        | Accrued expenses and other payables |  |           | (167 | )         |  |       | (115  | )
|                                                        |                                     |  |           |      |           |  |       |       |  
|                                                        |                                     |  | (80       | )    |           |  | 1,096 |      
|Interest attributable to the Group as of March 22, 2000 |                                     |  | 48        |      |           |  |      |      
|Minority interests                                      |                                     |  |          |      |           |  | (157  | )    
|Goodwill arising from acquisition                       |                                     |  | 269       |      |           |  | 2,121 |      
|                                                        |                                     |  |           |      |           |  |       |       |  
|Total purchase consideration                            |                                     |  | 237       |      |           |  | 3,060 |      
|                                                        |                                     |  |           |      |           |  |       |       |  
|Satisfied by cash paid in the financial year:           |                                     |  |           |      |           |  |       |      
|                                                        | 2000                                |  |           | 237  |           |  |       |      |  
|                                                        | 2001                                |  |           |     |           |  |       | 600   |  
|                                                        | 2002                                |  |           |     |           |  |       | 2,460 |  
|                                                        |                                     |  |           |      |           |  |       |       |  
|                                                        |                                     |  | 237       |      |           |  | 3,060 |      
|                                                        |                                     |  |           |      |           |  |       |       |  

F-14



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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|3. |  | ACQUISITIONS (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | None of the amount of goodwill is expected to be deductible for tax
purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | The Companys consolidated results of operations have incorporated Lorenzo
Marketings and iBBC Inc.s activities on a consolidated basis from the
dates of acquisitions, which were March 22, 2000 and March 21, 2002
respectively. The following unaudited consolidated results of operations
reflect pro forma the results of operations for each of the years in the
three-year period ended April 30, 2002, as if the aforementioned
acquisitions had occurred on May 1, 1999, and after giving effect to
purchase accounting adjustments. The pro forma results have been prepared
for comparative purposes only and do not purport to be indicative of what
operating results would have been had the acquisitions actually taken
place on May 1, 1999 and may not be indicative of future operating
results.

|           |                            |         |  |                      |      |      |  |        |      |  |  |        |       |  
|---------- | -------------------------- | ------- |  | -------------------- | ---- | ---- |  | ------ | ---- |  |  | ------ | ----- | -
|           |                            |         |  | Year ended April 30,
|           |                            |         |  |                     
|           |                            |         |  | 2000                 |      | 2001 |  | 2002  
|           |                            |         |  |                      |      |      |  |       
|           |                            |         |  | US$                  |      | US$  |  | US$   
|Pro forma: |                            |         |  |                      |      |      |  |        |      |  |  |       
|           | Operating revenue          |         |  | 38,926               |      |      |  | 46,285 |      |  |  | 39,296 |      
|           |                            |         |  |                      |      |      |  |        |      |  |  |        |      
|           | Net income (loss)          |         |  | 3,787                |      |      |  | 2,264  |      |  |  | (9,900 | )    
|           |                            |         |  |                      |      |      |  |        |      |  |  |        |      
|           | Earnings (loss) per share: |         |  |                      |      |      |  |        |      |  |  |        |      
|           |                            | Basic   |  |                      | 0.57 |      |  |        | 0.26 |  |  |        | (1.14 | )
|           |                            |         |  |                      |      |      |  |        |      |  |  |        |      
|           |                            | Diluted |  |                      | 0.55 |      |  |        | 0.26 |  |  |        | (1.14 | )
|           |                            |         |  |                      |      |      |  |        |      |  |  |        |      

F-15



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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|4. |  | OPERATING RISKS
|-- |  | ---------------



| | (a) |  | Concentrations of credit risks                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Details of major customers from which the Group derived operating
revenue are shown in note 17(b).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |     |  | Credit risk represents the accounting loss that would be recognized at
the reporting date if counterparties failed completely to perform as
contracted. Concentrations of credit risk (whether on or off balance
sheet) that arise from financial instruments exist for groups of
customers or counterparties when there are similar economic
characteristics that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic or other
conditions. The major concentration of credit risk arises from the
Groups receivables. Even though the Group does have major customers,
it does not consider itself be exposed to significant credit risk with
regards to collection of the related receivables. Historical losses
have not been significant.                                                                                                                              
|
| | (b) |  | Country risks                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |     |  | The Group may also be exposed to certain risks as a result of its
manufacturing operation being located in the PRC and its investment
properties in Hong Kong which are not typically associated with
companies operating in North America and Western Europe. These
include risks associated with, among others, the political, economic
and legal environments and foreign currency exchange. The Groups
results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of
taxation, among other things. The Companys management does not
believe these risks to be significant. There can be no assurance,
however, that changes in political, social and other conditions will
not result in any adverse impact.
|
| | (c) |  | Cash and time deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |     |  | The Group maintains its cash balances and investments in time deposits
with various banks and financial institutions. In common with local
practice, such amounts are not insured or otherwise protected should
the financial institutions be unable to meet their liabilities. There
has been no history of credit losses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-16



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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|5. |  | INVENTORIES                            
|-- |  | ---------------------------------------
|  
|   |  | Inventories consisted of the following:

|                                             |  |           |        |           |  |              |        |  |  |  |        | 
|-------------------------------------------- |  | --------- | ------ | --------- |  | ------------ | ------ |  |  |  | ------ | 
|                                             |  | As of     |        | As of     |  | As of       
|                                             |  | April 30, |        | April 30, |  | December 31,
|                                             |  | 2001      |        | 2002      |  | 2002        
|                                             |  |           |        |           |  |             
|                                             |  | US$       |        | US$       |  | US$         
|Raw materials                                |  |           | 15,709 |           |  |              | 10,691 |  |  |  | 12,892 | 
|Work-in-progress                             |  |           | 1,576  |           |  |              | 533    |  |  |  | 341    | 
|Finished goods                               |  |           | 3,692  |           |  |              | 4,578  |  |  |  | 4,699  | 
|Less: Provision for

slow moving
inventories |  |           | (155   | )         |  |              |       |  |  |  |       | 
|                                             |  |           |        |           |  |              |        |  |  |  |        | 
|                                             |  |           | 20,822 |           |  |              | 15,802 |  |  |  | 17,932 | 
|                                             |  |           |        |           |  |              |        |  |  |  |        | 

Included in the inventories as of April 30, 2002 above are certain gemstones
(raw materials) and fine jewelry (finished goods) at a carrying value of
US$6,762, which represent managements estimate of its net realizable value.
Such inventories were intended to be used or reused exclusively for the
production of fine jewelry, in particular to meet orders in relation to special
programs in previous years. Because of uncertain economic conditions, the
demand for fine jewelry has dropped dramatically in the year ended April 30,
2002 and is expected to remain that way in foreseeable future. As a result,
gemstones built up which were intended to meet orders in relation to special
programs were stated at net realizable value when the orders did not
materialize. Slow moving fine jewelry inventories were stated at net
realizable value based on forecasts for close-out sales in the ensuing years.
The effect of such estimate has resulted in a write-down of inventories
amounting to US$5,710 being recognized in costs of goods sold for the year
ended April 30, 2002. The Group has adopted the same basis for the valuation
of inventories in the current period.

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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|6. |  | PROPERTIES HELD FOR LEASE, NET                                                                                                                                    
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Group owns leasehold land and buildings in Hong Kong and leases them
out for lease terms of 1 to 3 years. Properties held for lease consists
of the following:

|                               |  |           |       |           |  |              |       |   |  |  |       |  
|------------------------------ |  | --------- | ----- | --------- |  | ------------ | ----- | - |  |  | ----- | -
|                               |  | As of     |       | As of     |  | As of       
|                               |  | April 30, |       | April 30, |  | December 31,
|                               |  | 2001      |       | 2002      |  | 2002        
|                               |  |           |       |           |  |             
|                               |  | US$       |       | US$       |  | US$         
|Leasehold land and buildings   |  |           | 2,055 |           |  |              | 2,055 |   |  |  | 2,037 |  
|Less: Accumulated depreciation |  |           | (384  | )         |  |              | (439  | ) |  |  | (476  | )
|                               |  |           |       |           |  |              |       |   |  |  |       |  
|                               |  |           | 1,671 |           |  |              | 1,616 |   |  |  | 1,561 |  
|                               |  |           |       |           |  |              |       |   |  |  |       |  



| |  | The Group has pledged all leasehold land and buildings as collateral for
general banking facilities granted to the Group as of April 30, 2001 and
2002 and December 31, 2002 (see note 10).
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The future aggregate minimum rental receivables under non-cancellable
operating leases are as follows:                                                                                     

|                         |  |              |     | 
|------------------------ |  | ------------ | --- | 
|                         |  | As of       
|                         |  | December 31,
|                         |  | 2002        
|                         |  |             
|                         |  | US$         
|Year ending December 31, |  |              |     | 
|2003                     |  |              | 111 | 
|2004                     |  |              | 30  | 
|                         |  |              |     | 
|                         |  |              | 141 | 
|                         |  |              |     | 

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LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|7. |  | PROPERTY, PLANT AND EQUIPMENT, NET                     
|-- |  | -------------------------------------------------------
|  
|   |  | Property, plant and equipment consist of the following:

|                                                   |  |           |        |           |  |              |        |   |  |  |        |  
|-------------------------------------------------- |  | --------- | ------ | --------- |  | ------------ | ------ | - |  |  | ------ | -
|                                                   |  | As of     |        | As of     |  | As of       
|                                                   |  | April 30, |        | April 30, |  | December 31,
|                                                   |  | 2001      |        | 2002      |  | 2002        
|                                                   |  |           |        |           |  |             
|                                                   |  | US$       |        | US$       |  | US$         
|Leasehold land and buildings                       |  |           | 953    |           |  |              | 953    |   |  |  | 1,665  |  
|Leasehold improvement                              |  |           | 2,597  |           |  |              | 2,513  |   |  |  | 2,650  |  
|Furniture, fixtures and equipment                  |  |           | 1,552  |           |  |              | 2,904  |   |  |  | 3,246  |  
|Plant and machinery                                |  |           | 2,128  |           |  |              | 2,152  |   |  |  | 2,349  |  
|Motor vehicles                                     |  |           | 363    |           |  |              | 313    |   |  |  | 322    |  
|                                                   |  |           |        |           |  |              |        |   |  |  |        |  
|                                                   |  |           | 7,593  |           |  |              | 8,835  |   |  |  | 10,232 |  
|Less: Accumulated depreciation and
impairment loss |  |           | (2,886 | )         |  |              | (4,200 | ) |  |  | (5,079 | )
|                                                   |  |           |        |           |  |              |        |   |  |  |        |  
|                                                   |  |           | 4,707  |           |  |              | 4,635  |   |  |  | 5,153  |  
|                                                   |  |           |        |           |  |              |        |   |  |  |        |  



| |  | The Group pledged leasehold land and buildings with net book values of
US$598, US$583 and US$898 as of April 30, 2001, April 30, 2002 and
December 31, 2002 respectively as collateral for general banking
facilities granted to the Group (see note 10).
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|8. |  | GOODWILL, NET                                                                                                                                                                                                                        
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Following the adoption of SFAS No. 142, the Group discontinued
amortization of goodwill effective June 30, 2001. As of December 31,
2002, goodwill is attributed to the acquisition of a jewelry retail
company in 2002 (see note 3).

|                                         |  |                      |     |              |  |      |       |   |  |                |       |  
|---------------------------------------- |  | -------------------- | --- | ------------ |  | ---- | ----- | - |  | -------------- | ----- | -
|                                         |  |                      |     |              |  |      |       |   |  | 8 Months ended
|                                         |  | Year ended April 30, |     | December 31,
|                                         |  |                      |     |             
|                                         |  | 2001                 |     | 2002         |  | 2002
|                                         |  |                      |     |              |  |     
|                                         |  | US$                  |     | US$          |  | US$ 
|Carrying value, beginning of year/period |  |                      | 269 |              |  |      | 242   |   |  |                | 2,121 |  
|Goodwill acquired                        |  |                      |    |              |  |      | 2,121 |   |  |                |      |  
|Amortization                             |  |                      | (27 | )            |  |      | (27   | ) |  |                |      |  
|Impairment loss                          |  |                      |    |              |  |      | (215  | ) |  |                | (400  | )
|                                         |  |                      |     |              |  |      |       |   |  |                |       |  
|Carrying value, end of year/ period      |  |                      | 242 |              |  |      | 2,121 |   |  |                | 1,721 |  
|                                         |  |                      |     |              |  |      |       |   |  |                |       |  



| |  | At the end of the period, the Group performed its annual impairment test
of goodwill. The testing included the determination of each reporting
units fair value using the market multiples and discount cash flow
analysis. The Groups reduced earnings and cash flow forecast, primarily
due to the prolonged downturn in the economy, uncertain demand, and
competitive industry conditions, resulted in the Group determining that a
goodwill impairment charge of US$400 was necessary. The accumulated
amortization and impairment losses was US$27, US$269, US$45 (unaudited)
and US$669 as of April 30, 2001, April 30, 2002, December 31, 2001, and
December 31, 2002 respectively.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|9. |  | INVESTMENT SECURITIES, NET
|-- |  | --------------------------

|                                    |  |           |       |           |  |              |       |  |  |  |       |  
|----------------------------------- |  | --------- | ----- | --------- |  | ------------ | ----- |  |  |  | ----- | -
|                                    |  | As of     |       | As of     |  | As of       
|                                    |  | April 30, |       | April 30, |  | December 31,
|                                    |  | 2001      |       | 2002      |  | 2002        
|                                    |  |           |       |           |  |             
|                                    |  | US$       |       | US$       |  | US$         
|Equity securities at cost, unlisted |  |           | 3,285 |           |  |              | 2,685 |  |  |  | 2,660 |  
|Less: Accumulated impairment loss   |  |           |      |           |  |              |      |  |  |  | (200  | )
|                                    |  |           |       |           |  |              |       |  |  |  |       |  
|                                    |  |           | 3,285 |           |  |              | 2,685 |  |  |  | 2,460 |  
|                                    |  |           |       |           |  |              |       |  |  |  |       |  



| |  | During the year ended April 30, 2001, the Company acquired 20% equity
interests in a company whose principal activities are the manufacturing
and trading of rough and pre-formed gemstones, and 16.8% equity interests
in a jewelry retail company, of which the Group had no significant control
and influence over their operating and financial policies.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During the year ended April 30, 2002, the Company acquired further 68.8%
equity interest in the jewelry retail company. The Groups ownership
interest and control in this company rendered it become a subsidiary of
the Company effective from March 21, 2002 (see note 3).                                                                                
|
| |  | The directors of the Company consider such acquisitions would enhance the
Group by forward and backward vertical integration.                                                                                                                                                                                                                                
|
| |  | No impairment loss was recognized for the years ended April 30, 2000, 2001
and 2002. The amount of impairment loss charged to the consolidated
statement of operations for the eight months ended December 31, 2001 and
2002 was US$Nil (unaudited) and US$200 respectively.                                                                                 
|
| |  | F-21Table of Contents                                                                                                                                                                                                                                                                                                                                        

LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|10. |  | BANKING FACILITIES AND OTHER LOANS
|--- |  | ----------------------------------

|                              |                     |  |      |    |      |  |           |       |           |  |              |       |  |  |        |       | 
|----------------------------- | ------------------- |  | ---- | -- | ---- |  | --------- | ----- | --------- |  | ------------ | ----- |  |  | ------ | ----- | 
|                              |                     |  |      |    |      |  | As of     |       | As of     |  | As of       
|                              |                     |  |      |    |      |  | April 30, |       | April 30, |  | December 31,
|                              |                     |  | Note |    | 2001 |  | 2002      |       | 2002     
|                              |                     |  |      |    |      |  |           |       |          
|                              |                     |  |      |    |      |  | US$       |       | US$       |  | US$         
|Bank overdrafts               |                     |  | (a   | )  |      |  | 3,262     |       |           |  | 2,607        |       |  |  | 3,107  |      
|                              |                     |  |      |    |      |  |           |       |           |  |              |       |  |  |        |      
|Notes payable:                |                     |  |      |    |      |  |           |       |           |  |              |       |  |  |        |      
|                              | Current portion     |  |      |    |      |  |           | 490   |           |  |              | 282   |  |  |        | 1,073 | 
|                              | Non-current portion |  |      |    |      |  |           | 283   |           |  |              |      |  |  |        |      | 
|                              |                     |  |      |    |      |  |           |       |           |  |              |       |  |  |        |      
|                              |                     |  | (b   | )  |      |  | 773       |       |           |  | 282          |       |  |  | 1,073  |      
|                              |                     |  |      |    |      |  |           |       |           |  |              |       |  |  |        |      
|Letters of credit, gold loan: |                     |  |      |    |      |  |           |       |           |  |              |       |  |  |        |      
|                              | Letters of credit   |  |      | (a | )    |  |           | 3,649 |           |  |              | 5,646 |  |  |        | 5,756 | 
|                              | Gold loan           |  |      | (c | )    |  |           | 1,847 |           |  |              | 5,697 |  |  |        | 4,439 | 
|                              |                     |  |      |    |      |  |           |       |           |  |              |       |  |  |        |      
|                              |                     |  |      |    |      |  | 5,496     |       |           |  | 11,343       |       |  |  | 10,195 |      
|                              |                     |  |      |    |      |  |           |       |           |  |              |       |  |  |        |      



| |  | The Groups banking facilities are collaterized by leasehold land and
buildings (see notes 6 and 7), restricted cash deposits, factored
receivables and personal guarantees of a director (see note 16(b)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The provisions of indenture relating to the banking facility agreements
contain various covenants pertaining to (i) maintenance of the net worths
of the Company and one of its subsidiaries amounting to US$16,000 and
US$4,487 respectively; and (ii) cross-default provision of not more than
US$10,000. In the event of default, the bank would at its discretion to
cancel the facilities and demand immediate repayment of all principal,
interest, fees and other amount outstanding. As of April 30, 2001, April
30, 2002 and December 31, 2002, both the Company and the subsidiary
maintained the minimum net worth requirement, and the Group did not breach
any cross-default provision.

F-22



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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|10. |  | BANKING FACILITIES AND OTHER LOANS (Continued)
|--- |  | ----------------------------------------------



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

|                      |  |           |        |           |  |              |        |  |  |  |       | 
|--------------------- |  | --------- | ------ | --------- |  | ------------ | ------ |  |  |  | ----- | 
|                      |  | As of     |        | As of     |  | As of       
|                      |  | April 30, |        | April 30, |  | December 31,
|                      |  | 2001      |        | 2002      |  | 2002        
|                      |  |           |        |           |  |             
|                      |  | US$       |        | US$       |  | US$         
|Facilities granted    |  |           |        |           |  |              |        |  |  |  |       | 
|Letters of credit     |  |           | 11,125 |           |  |              | 11,643 |  |  |  | 8,718 | 
|Overdrafts            |  |           | 6,274  |           |  |              | 3,532  |  |  |  | 3,244 | 
|                      |  |           |        |           |  |              |        |  |  |  |       | 
|Utilized              |  |           |        |           |  |              |        |  |  |  |       | 
|Letters of credit     |  |           | 3,649  |           |  |              | 5,646  |  |  |  | 5,756 | 
|Overdrafts            |  |           | 3,262  |           |  |              | 2,607  |  |  |  | 3,107 | 
|                      |  |           |        |           |  |              |        |  |  |  |       | 
|Unutilized facilities |  |           |        |           |  |              |        |  |  |  |       | 
|Letters of credit     |  |           | 7,476  |           |  |              | 5,997  |  |  |  | 2,962 | 
|Overdrafts            |  |           | 3,012  |           |  |              | 925    |  |  |  | 137   | 
|                      |  |           |        |           |  |              |        |  |  |  |       | 



| |  | The bank overdrafts are denominated in Hong Kong dollars, bear
interest at the floating commercial bank lending rates in Hong Kong,
which ranged from 5% to 6% per annum as of December 31, 2002 (April
30, 2001: 7.0% to 7.5%; April 30, 2002: 5.1% to 6.1%) and are
renewable annually with the consent of the relevant banks.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Under the banking facilities arrangements, the Group is required to
maintain certain cash balances based on the amount of facilities
granted. These balances are reflected as restricted cash in the
balance sheet.                                                                                                             

F-23



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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|10. |  | BANKING FACILITIES AND OTHER LOANS (Continued)
|--- |  | ----------------------------------------------



| | (b) |  | The Group also had term loans classified under notes payable
which are related to the Groups leasehold land and buildings. These
loans aggregated to US$773, US$282 and US$1,073 as of April 30, 2001,
April 30, 2002 and December 31, 2002 respectively. Interest charges
on these loans range from 4.9% to 6.3% per annum as of December 31,
2002 (April 30, 2001: 9% to 9.5%; April 30, 2002: 7.5% to 9.5%).
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Expected maturities of notes payable are as follows:                                                                                                                                                                                                                                                                                                                                                            

|                  |  |           |     |           |  |              |     |  |  |  |       | 
|----------------- |  | --------- | --- | --------- |  | ------------ | --- |  |  |  | ----- | 
|                  |  | As of     |     | As of     |  | As of       
|                  |  | April 30, |     | April 30, |  | December 31,
|                  |  | 2001      |     | 2002      |  | 2002        
|                  |  |           |     |           |  |             
|                  |  | US$       |     | US$       |  | US$         
|Year ending       |  |           |     |           |  |              |     |  |  |  |       | 
|April 30, 2002    |  |           | 490 |           |  |              |    |  |  |  |      | 
|April 30, 2003    |  |           | 283 |           |  |              | 282 |  |  |  |      | 
|December 31, 2003 |  |           |    |           |  |              |    |  |  |  | 1,073 | 
|                  |  |           |     |           |  |              |     |  |  |  |       | 
|                  |  |           | 773 |           |  |              | 282 |  |  |  | 1,073 | 
|                  |  |           |     |           |  |              |     |  |  |  |       | 



| | (c) |  | The Group had outstanding loans to purchase 6.95 oz, 18.45 oz
and 12.95 oz of gold as of April 30, 2001, April 30, 2002 and
December 31, 2002 with the related balances being US$1,847, US$5,697
and US$4,439 respectively. These loans are due within the following
year, however, have been historically renewed. These loans bear
interest at 1.5% to 2.4% per annum as of December 31, 2002 (April 30,
2001: 2% to 2.9%; April 30, 2002: 1.7% to 3.4%) and can be repaid in
cash at the current exchange rate of gold any time prior to maturity.
The Group adjusts the outstanding loan balance to the current market
rate of gold as of the balance sheet date. Due to changing prices of
gold, this adjustment has resulted in additional income of US$44,
loss of US$660, loss of US$119 (unaudited) and loss of US$435 for the
years ended April 30, 2001 and 2002 and for the eight months ended
December 31, 2001 and 2002 respectively. As the Group does not hedge
for changes in the future price of gold, the Group is exposed to
certain market risks, which may result from potential future
increases in the price of gold.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-24



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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|11. |  | INCOME TAXES                                                                                                                                                                                                       
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Group is subject to income taxes on an entity basis on income arising
in or derived from the tax jurisdiction in which it is domiciled and
operated. Income tax credit (expense) is comprised of the following:

|                                               |                               |  |                      |      |              |  |      |      |      |  |      |     |   |  |                |     |   |  |      |      |  
|---------------------------------------------- | ----------------------------- |  | -------------------- | ---- | ------------ |  | ---- | ---- | ---- |  | ---- | --- | - |  | -------------- | --- | - |  | ---- | ---- | -
|                                               |                               |  |                      |      |              |  |      |      |      |  |      |     |   |  | 8 Months ended
|                                               |                               |  | Year ended April 30, |      | December 31,
|                                               |                               |  |                      |      |             
|                                               |                               |  | 2000                 |      | 2001         |  | 2002 |      | 2001 |  | 2002
|                                               |                               |  |                      |      |              |  |      |      |      |  |     
|                                               |                               |  | US$                  |      | US$          |  | US$  |      | US$  |  | US$ 
|Current taxes arising in foreign
subsidiaries: |                               |  |                      |      |              |  |      |      |      |  |      |     |   |  |                |     |   |  |      |     
|                                               | For the year/period           |  |                      | (156 | )            |  |      | (238 | )    |  |      | (2  | ) |  |                | (39 | ) |  |      | (101 | )
|                                               | Over provision in prior years |  |                      | 153  |              |  |      | 27   |      |  |      | 103 |   |  |                |    |   |  |      |     |  
|                                               |                               |  |                      |      |              |  |      |      |      |  |      |     |   |  |                |     |   |  |      |      |  
|Income tax credit (expense)                    |                               |  | (3                   | )    |              |  | (211 | )    |      |  | 101  |     |   |  | (39            | )   |   |  | (101 | )   
|                                               |                               |  |                      |      |              |  |      |      |      |  |      |     |   |  |                |     |   |  |      |      |  



| |  | Reconciliation to the expected statutory tax rate in Hong Kong of 16%
(2000: 16%; 2001: 16% and 2002: 16%) is as follows:
| |  | -------------------------------------------------------------------------------------------------------------------------

|                                                 |  |                      |       |              |  |      |       |      |  |      |       |   |  |                |       |   |  |  |        |  
|------------------------------------------------ |  | -------------------- | ----- | ------------ |  | ---- | ----- | ---- |  | ---- | ----- | - |  | -------------- | ----- | - |  |  | ------ | -
|                                                 |  |                      |       |              |  |      |       |      |  |      |       |   |  | 8 Months ended
|                                                 |  | Year ended April 30, |       | December 31,
|                                                 |  |                      |       |             
|                                                 |  | 2000                 |       | 2001         |  | 2002 |       | 2001 |  | 2002
|                                                 |  |                      |       |              |  |      |       |      |  |     
|                                                 |  | %                    |       | %            |  | %    |       | %    |  | %   
|Statutory rate                                   |  |                      | 16.0  |              |  |      | 16.0  |      |  |      | (16.0 | ) |  |                | (16.0 | ) |  |  | 16.0   |  
|Tax effect of net operating losses               |  |                      | 5.1   |              |  |      | 6.1   |      |  |      | 6.7   |   |  |                | 84.6  |   |  |  | 106.2  |  
|Non taxable PRC profits, net                     |  |                      | (16.3 | )            |  |      | (17.7 | )    |  |      |      |   |  |                | (77.7 | ) |  |  | (147.9 | )
|Impairment of goodwill and
investment securities |  |                      |      |              |  |      |      |      |  |      |      |   |  |                |      |   |  |  | 30.6   |  
|Others                                           |  |                      | (4.7  | )            |  |      | 1.9   |      |  |      | 8.0   |   |  |                | (2.8  | ) |  |  | 27.4   |  
|                                                 |  |                      |       |              |  |      |       |      |  |      |       |   |  |                |       |   |  |  |        |  
|Effective rate                                   |  |                      | 0.1   |              |  |      | 6.3   |      |  |      | (1.3  | ) |  |                | (11.9 | ) |  |  | 32.3   |  
|                                                 |  |                      |       |              |  |      |       |      |  |      |       |   |  |                |       |   |  |  |        |  



| |  | The Group deferred tax assets are as follows:
| |  | ---------------------------------------------

|                               |  |           |     |           |  |              |        |   |  |  |        |  
|------------------------------ |  | --------- | --- | --------- |  | ------------ | ------ | - |  |  | ------ | -
|                               |  | As of     |     | As of     |  | As of       
|                               |  | April 30, |     | April 30, |  | December 31,
|                               |  | 2001      |     | 2002      |  | 2002        
|                               |  |           |     |           |  |             
|                               |  | US$       |     | US$       |  | US$         
|Operating losses carry forward |  |           | 54  |           |  |              | 1,128  |   |  |  | 1,868  |  
|Valuation allowance            |  |           | (54 | )         |  |              | (1,128 | ) |  |  | (1,868 | )
|                               |  |           |     |           |  |              |        |   |  |  |        |  
|                               |  |           |    |           |  |              |       |   |  |  |       |  
|                               |  |           |     |           |  |              |        |   |  |  |        |  

F-25



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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|12. |  | COMMITMENTS AND CONTINGENCIES
|--- |  | -----------------------------



| | (a) |  | Commitments                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The Group leases certain of its office and factory premises under
various operating leases. Rent expenses under these leases totalled
approximately US$486, US$552, US$599, US$391 (unaudited) and US$430
for the years ended April 30, 2000, 2001 and 2002 and for the eight
months ended December 31, 2001 and 2002 respectively. Future
minimum rental payments under non-cancelable operating leases are
approximately as follows:

|                         |  |              |     | 
|------------------------ |  | ------------ | --- | 
|                         |  | As of       
|                         |  | December, 31
|                         |  | 2002        
|                         |  |             
|                         |  | US$         
|Year ending December 31, |  |              |     | 
|2003                     |  |              | 421 | 
|2004                     |  |              | 193 | 
|2005                     |  |              | 128 | 
|2006                     |  |              | 83  | 
|2007                     |  |              | 46  | 
|Thereafter               |  |              |    | 
|                         |  |              |     | 
|                         |  |              | 871 | 
|                         |  |              |     | 



| |     |  | As of April 30, 2001, April 30, 2002 and December 31, 2002, the
Group had capital expenditure commitments contracted but not
provided for net of deposit paid amounting to US$212, US$Nil and
US$57 respectively.                                                                                                                                                                                                                                                                                                 
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Contingencies
As of April 30, 2001, April 30, 2002 and December 31, 2002, the
Group had contingent liabilities in respect of bills discounted with
recourse amounting to US$43, US$562 and US$2,803 respectively.                                                                                                                                                                                                                                                                                                 
|
| |     |  | As of April 30, 2001, April 30, 2002 and December 31, 2002, the
Group provided guarantee in respect of a loan facility granted to
two companies, to the extent of US$Nil, US$1,294 and US$1,282 plus
the related interests respectively. The guarantee was subsequently
released in April 2003.                                                                                                                                                                                                                   
|
| |     |  | As of April 30, 2001, April 30, 2002 and December 31, 2002, the
Group provided guarantee in respect of bank mortgage loans granted
to a director, Yih Yu Chuan to the extent of US$925, US$672 and
US$437 respectively.                                                                                                                                                                                                                                                                                           
|
| |     |  | In July 2002, two former employees of a subsidiary filed a complaint
in court against the same subsidiary, the Company and two directors
of the Company for fraud and breach of employment contracts. Two
individuals, in total, seek a minimum of US$400 in severance
payments, together with interest and damage costs. The Group
believes the claim is without merit and intends to vigorously defend
itself. The outcome of this matter is still uncertain and a range
of loss cannot be reasonably estimated.

F-26



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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|13. |  | COMMON STOCK, WARRANTS AND CONVERTIBLE DEBENTURES
|--- |  | -------------------------------------------------



| | (a) |  | As of April 15, 1998, the Company issued 1,460,000 shares of
common stock to the public in the Initial Public Offering and had
raised US$6,734.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The merger with the Deen Technology, Corp (Deen), which was
committed to in December 1996 was completed by the issue of 142,946
shares of its common stock at nil consideration on October 6, 1997,
with the Company being the legal surviving entity. Deen had no
significant assets or liabilities, but did have a large number of
U.S. shareholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |     |  | As agreed with the US$783 promissory note holders in respect of the
bridge loan financing before the Initial Public Offering, the
Company issued 156,500 shares of common stock to note holders on the
effective date of the Initial Public Offering, without any
additional consideration.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | (b) |  | In the Initial Public Offering, the Company has issued
1,679,000 warrants (including 219,000 over-allotment warrants). Each
warrant entitles the holders to purchase one share of common stock at
a price of US$5.75 per share for a period of five years from the
effective date of the offering. The Company has received all
proceeds from the issue totalling US$210 and was recorded in the
Companys additional paid-in capital. On December 5, 2002, the
Company announced a two-year extension for these 1,679,000 warrants
to April 15, 2005.                                                                                                                                                                                                                                                                                                                           
|
| | (c) |  | In addition to note 13(b) above, the representative of the
Initial Public Offering received warrants to purchase 146,000 shares
of common stock at US$8.25 per share and options to purchase 146,000
warrants, each of which also entitles the holder to purchase one
share of common stock at US$8.25 per share, at US$0.20625 per
warrant. The warrants are exercisable from April 15, 1998 and have
been extended by two years to April 15, 2005. The options are
exercisable from April 15, 1998 and expired on April 15, 2003.                                                                                                                                                                                                                                                                                                                                              
|
| | (d) |  | During the year ended April 30, 1999, 219,000 additional shares
were issued to cover the over-allotment for the initial public
offering completed in April 1998.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | (e) |  | On October 29, 1999, the Company entered into a Securities
Purchase Agreement with an accredited investor pursuant to which the
Company agreed to issue and the investor agreed to purchase up to
US$10,500 of 3% Convertible Debentures, as well as common stock
purchase warrants. The Debenture is convertible into the shares of
the Companys common stock, with an exercise price at the lesser of
Fixed Conversion Price or the Variable Conversion Price. The Fixed
Conversion Price is the greater of US$5.00 per share or 125% of the
average closing bid price of the common stock for the 15 trading days
ending on the trading day immediately before the respective Closing
Dates. The Variable Conversion Price represents 92% of the average
of the two lowest closing bid prices of the common stock during the
20 trading days immediately prior to conversion.

F-27



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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|13. |  | COMMON STOCK, WARRANTS AND CONVERTIBLE DEBENTURES (Continued)
|--- |  | -------------------------------------------------------------



| | (e) |  | (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | On November 5, 1999, the Company issued the first tranche of
US$3,000 of 3% Convertible Debentures with the date of maturity on
November 5, 2002; and Warrants for the Convertible Debenture holder
to purchase 45,000 shares of the Companys common stock at an
exercise price of US$3.75 per share with an expiration date of
November 30, 2004. In addition, Warrants to purchase 30,000 shares
of the Companys common stock were issued to the placement agent as
partial compensation for its services, with the same terms as the
detachable warrants.
|
| |     |  | On March 22, 2000, the Company issued the second tranche of US$3,500
of 3% Convertible Debentures with the date of maturity on March 22,
2003; and Warrants for the Convertible Debenture holder to purchase
52,500 shares of the Companys common stock at an exercise price of
US$6.94 per share with an expiration date of March 31, 2005. In
addition, Warrants to purchase 35,000 shares of the Companys common
stock were issued to the placement agent as partial compensation for
its services, with the same terms as the detachable warrants.      
|
| |     |  | During the year ended April 30, 2000, all the first tranche of
US$3,000 and US$500 out of the US$3,500 second tranche Convertible
Debentures and related interest amounting to US$23 up to the dates
of conversion, were exercised, and 1,072,412 shares of common stock
were issued in this respect. The remaining second tranche of
Convertible Debentures of US$3,000 and the accrued interest thereof
amounting to US$16 were converted into 1,233,557 shares of common
stock during the year ended April 30, 2001.                                       
|
| | (f) |  | During the eight months ended December 31, 2002, the Company
repurchased, through open market purchases, 318,200 shares of common
stock of the Company at an aggregate consideration of US$391.                                                                                                                                                                                                                                                                                                                                                               



| |  | No other share of common stock was issued during the years ended April 30,
2000, 2001 and 2002 and the eight months ended December 31, 2002. The
Company had 8,671,615 shares of common stock issued as of April 30, 2001,
April 30, 2002 and December 31, 2002.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-28



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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|14. |  | EMPLOYEE RETIREMENT BENEFIT PLANS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Prior to December 1, 2000, the Group operated a defined contribution
retirement plan (Retirement Plan) which is optional for all qualified
employees in Hong Kong. The assets of the Retirement Plan are held
separately from those of the Group in a provident fund managed by an
independent trustee. The pension cost charge represents contributions
payable to the fund by the Group at rates specified in the rules of the
Retirement Plan. Where employees leave the Retirement Plan prior to
vesting fully in the contributions, the contributions payable by the Group
are reduced by the amount of forfeited contributions.                                                                     
|   
|    |  | Following the introduction of the Mandatory Provident Fund (MPF)
legislation in Hong Kong, the Group has participated in the defined
contribution mandatory provident fund since December 1, 2000. Both the
Group 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 contribution of the Group 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 Group are
reduced by the amount of forfeited contributions.
|   
|    |  | The amounts of forfeitures in respect of Retirement Plan and MPF
scheme for the years ended April 30, 2000, 2001 and 2002, and for the
eight months ended December 31, 2001 and 2002 were US$29, US$2,
US$46, US$31 (unaudited) and US$17 respectively which was available
to reduce the Groups employer contribution payable in future
periods.                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | As stipulated by the rules and regulations in the PRC, the PRC
subsidiaries are required to contribute to a state-sponsored social
insurance plan for all of its employees at rates ranging from 12% to 21%
of the basic salary of its employees. 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 Group 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 Group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 Group in respect of the employee
retirement benefit plans charged to the consolidated statement of
operations were US$182, US$377, US$481, US$311 (unaudited) and US$290
for the years ended April 30, 2000, 2001 and 2002 and for the eight
months ended December 31, 2001 and 2002 respectively.                                                                                                                                                                                                                                                                                                                                                                  

F-29



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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|15. |  | STOCK-BASED COMPENSATION
|--- |  | ------------------------



| | (a) |  | Stock incentive plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | On 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 or its subsidiaries. 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 Group 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.                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |     |  | The 1998 Plan option activities and related information are
summarized as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                                            |  |                 |           |                    |  |          |      |            |  |         |            |          |  |            |      |       |  |          |           |            |  |  |      |          |  |  |           |   |  |  |      | 
|------------------------------------------- |  | --------------- | --------- | ------------------ |  | -------- | ---- | ---------- |  | ------- | ---------- | -------- |  | ---------- | ---- | ----- |  | -------- | --------- | ---------- |  |  | ---- | -------- |  |  | --------- | - |  |  | ---- | 
|                                            |  | As of April 30, |           | As of December 31,
|                                            |  |                 |           |                   
|                                            |  | 2000            |           | 2001               |  | 2002     |      | 2002      
|                                            |  |                 |           |                    |  |          |      |           
|                                            |  |                 |           |                    |  | Weighted |      |            |  |         |            | Weighted |  |            |      |       |  | Weighted |           |            |  |  |      | Weighted
|                                            |  |                 |           |                    |  | average  |      |            |  |         |            | average  |  |            |      |       |  | average  |           |            |  |  |      | average 
|                                            |  |                 |           |                    |  | exercise |      |            |  |         |            | exercise |  |            |      |       |  | exercise |           |            |  |  |      | exercise
|                                            |  | Options         |           | price              |  | Options  |      | price      |  | Options |            | Price    |  | Options    |      | price
|                                            |  |                 |           |                    |  |          |      |            |  |         |            |          |  |            |      |      
|                                            |  |                 |           |                    |  | US$      |      |            |  |         |            | US$      |  |            |      |       |  | US$      |           |            |  |  |      | US$     
|Outstanding,
beginning of
year/period       |  |                 | 1,285,000 |                    |  |          | 5.00 |            |  |         | 1,550,000  |          |  |            | 5.00 |       |  |          | 3,376,000 |            |  |  | 2.00 |          |  |  | 2,918,000 |   |  |  | 2.00 | 
|Granted                                     |  |                 | 265,000   |                    |  |          | 5.00 |            |  |         | 5,226,000  |          |  |            | 2.35 |       |  |          |          |            |  |  |     |          |  |  | 300,000   |   |  |  | 2.00 | 
|Cancelled                                   |  |                 |          |                    |  |          |     |            |  |         | (3,400,000 | )        |  |            | 3.91 |       |  |          | (458,000  | )          |  |  | 2.00 |          |  |  | (192,500  | ) |  |  | 2.00 | 
|                                            |  |                 |           |                    |  |          |      |            |  |         |            |          |  |            |      |       |  |          |           |            |  |  |      |          |  |  |           |   |  |  |      | 
|Outstanding, end of
year/period             |  |                 | 1,550,000 |                    |  |          | 5.00 |            |  |         | 3,376,000  |          |  |            | 2.00 |       |  |          | 2,918,000 |            |  |  | 2.00 |          |  |  | 3,025,500 |   |  |  | 2.00 | 
|                                            |  |                 |           |                    |  |          |      |            |  |         |            |          |  |            |      |       |  |          |           |            |  |  |      |          |  |  |           |   |  |  |      | 
|Exercisable, end of
year/period             |  |                 | 1,550,000 |                    |  |          | 5.00 |            |  |         | 3,376,000  |          |  |            | 2.00 |       |  |          | 2,918,000 |            |  |  | 2.00 |          |  |  | 2,913,000 |   |  |  | 2.00 | 
|                                            |  |                 |           |                    |  |          |      |            |  |         |            |          |  |            |      |       |  |          |           |            |  |  |      |          |  |  |           |   |  |  |      | 
|Weighted average
remaining
contractual life |  | 9.13 years      |           |                    |  |          |      | 7.06 years |  |         |            |          |  | 6.06 years |      |       |  |          |           | 5.33 years |  |  |      |         
|                                            |  |                 |           |                    |  |          |      |            |  |         |            |          |  |            |      |       |  |          |           |            |  |  |      |          |  |  |           |   |  |  |      | 



| |  |  | All options granted, other than 112,500 options granted during the
period ended December 31, 2002, were immediately exercisable. The
112,500 options only vest in additional increments of 37,500 options
upon each of September 1, 2003, 2004 and 2005.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-30



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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|15. |  | STOCK-BASED COMPENSATION (Continued)
|--- |  | ------------------------------------



| | (a) |  | Stock incentive plan (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | As the exercise price of the Companys incentive stock options is
same as or higher than the market price of the underlying stock on
the date of grant, pursuant to APB No. 25, no compensation expense
has been recognized for stock options granted to employees for each
of the periods presented. Had compensation expense for the same
stock options been determined based on the fair value at the date of
grant and been amortized over the period from the date of grant to
the date that the award is vested, consistent with the provisions of
SFAS No. 123, the Companys net income and earnings per share would
have been reported as follows:

|                                                                                                                     |                      |  |                      |      |              |  |        |      |  |  |                |      | 
|-------------------------------------------------------------------------------------------------------------------- | -------------------- |  | -------------------- | ---- | ------------ |  | ------ | ---- |  |  | -------------- | ---- | 
|                                                                                                                     |                      |  |                      |      |              |  |        |      |  |  | 8 months ended
|                                                                                                                     |                      |  | Year ended April 30, |      | December 31,
|                                                                                                                     |                      |  |                      |      |             
|                                                                                                                     |                      |  | 2000                 |      | 2001         |  | 2002  
|                                                                                                                     |                      |  |                      |      |              |  |       
|                                                                                                                     |                      |  | US$                  |      | US$          |  | US$   
|Net income, as reported                                                                                              |                      |  | 3,839                |      |              |  | 3,135  |      |  |  | 333            |     
|Total stock-based
employee compensation
expenses determined under
fair value based method
for all awards, net of
tax |                      |  | (109                 | )    |              |  | (2,027 | )    |  |  |               |     
|                                                                                                                     |                      |  |                      |      |              |  |        |      |  |  |                |     
|Pro forma net income                                                                                                 |                      |  | 3,730                |      |              |  | 1,108  |      |  |  | 333            |     
|                                                                                                                     |                      |  |                      |      |              |  |        |      |  |  |                |     
|Earnings per share:                                                                                                  |                      |  |                      |      |              |  |        |      |  |  |                |     
|                                                                                                                     | Basic, as reported   |  |                      | 0.58 |              |  |        | 0.37 |  |  |                | 0.04 | 
|                                                                                                                     |                      |  |                      |      |              |  |        |      |  |  |                |     
|                                                                                                                     | Basic, pro forma     |  |                      | 0.57 |              |  |        | 0.13 |  |  |                | 0.04 | 
|                                                                                                                     |                      |  |                      |      |              |  |        |      |  |  |                |     
|                                                                                                                     | Diluted, as reported |  |                      | 0.56 |              |  |        | 0.37 |  |  |                | 0.04 | 
|                                                                                                                     |                      |  |                      |      |              |  |        |      |  |  |                |     
|                                                                                                                     | Diluted, pro forma   |  |                      | 0.54 |              |  |        | 0.13 |  |  |                | 0.04 | 
|                                                                                                                     |                      |  |                      |      |              |  |        |      |  |  |                |     



| |  |  | There were no stock options granted to employees during the year
ended April 30, 2002 and the eight months ended December 31, 2001,
and accordingly no pro forma net loss and loss per share for the
same year are presented.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-31



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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|15. |  | STOCK-BASED COMPENSATION (Continued)
|--- |  | ------------------------------------



| | (a) |  | Stock incentive plan (Continued)                                                                                                                              
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The fair value of these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions:

|                                |  |                      |      |              |  |         |      |   |  |                |      |  
|------------------------------- |  | -------------------- | ---- | ------------ |  | ------- | ---- | - |  | -------------- | ---- | -
|                                |  |                      |      |              |  |         |      |   |  | 8 months ended
|                                |  | Year ended April 30, |      | December 31,
|                                |  |                      |      |             
|                                |  | 2000                 |      | 2001         |  | 2002   
|                                |  |                      |      |              |  |        
|Expected dividend yield         |  | Nil                  |      | Nil          |  | Nil    
|Expected stock price volatility |  |                      | 19   | %            |  |         | 22   | % |  |                | 7    | %
|Risk-free interest rate         |  |                      | 6.49 | %            |  |         | 5.34 | % |  |                | 4.47 | %
|Expected life of options        |  | 3 years              |      | 3 years      |  | 3 years



| |     |  | The weighted average fair value per option granted during the years
ended April 30, 2000 and 2001 and the eight months ended December
31, 2002 was US$0.41, US$0.45 and US$Nil respectively.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Warrants                                                                                                                                                                                    



| | (i)   |  | The Company issued to a placement agent two
warrants to purchase an aggregate of 65,000 shares of common
stock for the services rendered in respect of the issue of the
convertible debentures on November 5, 1999 and March 22, 2000
(see note 13(e)).                                                                                                                                                                                              
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii)  |  | On July 31, 1999 the Company entered into a
consulting agreement with a consultant which providing investor
relationship services to the Company, and the Company agreed to
issue a 5-year common stock purchase warrant, with the expiry
date on July 30, 2004. The consulting agreement was terminated
on January 31, 2000 and a warrant to purchase 35,000 shares of
common stock of the Company at an exercise price of US$5.00 was
issued.      
|
| | (iii) |  | On May 26, 2001, the Company entered into a
consulting agreement with a consultant for a period of 24
months commencing on June 1, 2001. Pursuant to the agreement,
the Company issued to the consultant warrants to purchase
260,000 shares of common stock of the Company on June 1, 2001,
and would issue to the consultant the same number of warrants
on June 1, 2002. Of the warrants issued on June 1, 2001, the
warrantholder is entitled to:



| |  |  | purchase 100,000 shares at US$2.29 per
share exercisable through May 31, 2003;
| | - |  | ------------------------------------------------------------------------------
|
| |  |  | purchase 80,000 shares at US$3.43 per share exercisable through May 31, 2004; 
|
| |  |  | purchase 80,000 shares at US$4.57 per share exercisable through May 31, 2005. 

F-32



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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|15. |  | STOCK-BASED COMPENSATION (Continued)
|--- |  | ------------------------------------



| | (b) |  | Warrants (Continued)
| | --- |  | --------------------



| | (iv) |  | On May 27, 2001, the Company entered into another
consulting agreement with a consultant. Pursuant to the
agreement, the Company issued to the consultant warrants to
purchase 100,000 shares of the common stock of the Company. On
the same day, the Company issued to the consultant the said
warrants at US$2.79 per share exercisable through May 26, 2002.                                                                                                                                  
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (v)  |  | On August 16, 2001, the Company issued to an agent
warrants to purchase 200,000 shares of common stock of the
Company in consideration for consultancy services at US$3.00
per share exercisable through August 15, 2006. In addition,
the Company entered into a consulting agreement with the same
agent. Pursuant to the agreement, the Company issued to the
agent warrants to purchase 150,000 shares of common stock of
the Company at US$1.79 per share exercisable through April 14,
2005.
|
| | (vi) |  | On April 15, 2002, in accordance with a common
stock purchase agreement, the Company issued to an investor
warrants to purchase 150,000 shares of common stock of the
Company at US$1.79 per share exercisable through April 14,
2005.                                                                                                                                                                                                                                                            



| |  |  | None of the warrants as aforesaid was exercised for each of the
years in the three-year period ended April 30, 2002 and for the
eight-month period ended December 31, 2002. The costs associated
with these transactions are accounted for based on fair value of the
warrants at the date of issue.                                                    
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In addition, incentive stock options were issued to
consultants/advisers under The 1998 Plan (see note 15(a)) to
purchase the common stock of the Company as part of their fees
during the year ended April 30, 2001. The costs associated with
these transactions are also accounted for based on the fair value of
these options at the date of issue.
|
| |  |  | There were no incentive stock options and warrants granted and
issued to consultants/advisers during the eight months ended
December 31, 2002, and accordingly no related costs arise.                                                                                                                                                                  

F-33



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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|15. |  | STOCK-BASED COMPENSATION (Continued)
|--- |  | ------------------------------------



| | (b) |  | Warrants (Continued)                                                                         
| | --- |  | ---------------------------------------------------------------------------------------------
|
| |     |  | Using the Black-Scholes option pricing model with the following
weighted-average assumptions:

|                                |  |                      |      |              |  |            |      |            |  |  |      |   |  |                |      |  
|------------------------------- |  | -------------------- | ---- | ------------ |  | ---------- | ---- | ---------- |  |  | ---- | - |  | -------------- | ---- | -
|                                |  |                      |      |              |  |            |      |            |  |  |      |   |  | 8 months ended
|                                |  | Year ended April 30, |      | December 31,
|                                |  |                      |      |             
|                                |  | 2000                 |      | 2001         |  | 2002       |      | 2001      
|                                |  |                      |      |              |  |            |      |           
|Expected dividend yield         |  | Nil                  |      | Nil          |  | Nil        |      | Nil       
|Expected stock price volatility |  |                      | 19   | %            |  |            | 22   | %          |  |  | 23   | % |  |                | 23   | %
|Risk-free interest rate         |  |                      | 6.49 | %            |  |            | 5.34 | %          |  |  | 4.23 | % |  |                | 4.23 | %
|Expected life of options        |  | 3 years              |      | 3 years      |  | 3.21 years |      | 3.21 years



| |  |  | The fair value of these warrants and options was estimated as US$60,
US$266, US$297 and US$147 (unaudited) respectively for the years
ended April 30, 2000, 2001 and 2002 and for the eight months ended
December 31, 2001. The additional expense was recognized in the
consolidated statement of operations and the same amount was
recorded in the Companys additional paid-in capital.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-34



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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|16. |  | RELATED PARTY TRANSACTIONS
|--- |  | --------------------------



| | (a) |  | Names and relationship of related parties:
| | --- |  | ------------------------------------------

|                                                    |  |                                              
|--------------------------------------------------- |  | ---------------------------------------------
|                                                    |  | Existing relationships with the Group        
|                                                    |  |                                              
|Yih Yu Chuan                                        |  | Director and major shareholder of the Company
|Gemological Institute of America, Hong Kong Limited |  | Common director and major shareholder        
|iBBC Inc.                                           |  | Common director (Became a subsidiary)        
|International Asset Management Limited              |  | Common director                              
|Gemriver Jewelry Limited                            |  | Common directors (Became a subsidiary)       
|Tanzanite (H.K.) Limited                            |  | Common directors                             



| | (b) |  | Summary of balances with related parties:
| | --- |  | -----------------------------------------

|                                                                                                                                               |                                                     |  |      |    |      |  |           |      |           |  |              |     |  |  |       |     | 
|---------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------- |  | ---- | -- | ---- |  | --------- | ---- | --------- |  | ------------ | --- |  |  | ----- | --- | 
|                                                                                                                                               |                                                     |  |      |    |      |  | As of     |      | As of     |  | As of       
|                                                                                                                                               |                                                     |  |      |    |      |  | April 30, |      | April 30, |  | December 31,
|                                                                                                                                               |                                                     |  | Note |    | 2001 |  | 2002      |      | 2002     
|                                                                                                                                               |                                                     |  |      |    |      |  |           |      |          
|                                                                                                                                               |                                                     |  |      |    |      |  | US$       |      | US$       |  | US$         
|Due from related parties:                                                                                                                      |                                                     |  |      |    |      |  |           |      |           |  |              |     |  |  |       |    
|                                                                                                                                               | Gemological Institute of
America, Hong Kong Limited |  |      |    |      |  |           | 468  |           |  |              | 468 |  |  |       | 464 | 
|                                                                                                                                               | Gemriver Jewelry Limited                            |  |      |    |      |  |           | 922  |           |  |              |    |  |  |       |    | 
|                                                                                                                                               | Tanzanite (H.K.) Limited                            |  |      |    |      |  |           |     |           |  |              | 53  |  |  |       | 47  | 
|                                                                                                                                               |                                                     |  |      |    |      |  |           |      |           |  |              |     |  |  |       |    
|                                                                                                                                               |                                                     |  | (i   | )  |      |  | 1,390     |      |           |  | 521          |     |  |  | 511   |    
|                                                                                                                                               |                                                     |  |      |    |      |  |           |      |           |  |              |     |  |  |       |    
|Due to a director:                                                                                                                             |                                                     |  |      |    |      |  |           |      |           |  |              |     |  |  |       |    
|                                                                                                                                               | Yih Yu Chuan                                        |  |      | (i | )    |  |           | (248 | )         |  |              |    |  |  |       |    | 
|                                                                                                                                               |                                                     |  |      |    |      |  |           |      |           |  |              |     |  |  |       |    
|Maximum outstanding balance
during the financial year/period                                                                                   |                                                     |  |      |    |      |  | 622       |      |           |  | 243          |     |  |  | 516   |    
|                                                                                                                                               |                                                     |  |      |    |      |  |           |      |           |  |              |     |  |  |       |    
|Certain banking facilities
granted to the Group
collateralized by properties
owned by Yih Yu Chuan and his
personal guarantee to the extent
of |                                                     |  |      |    |      |  | 7,683     |      |           |  | 8,440        |     |  |  | 8,311 |    
|                                                                                                                                               |                                                     |  |      |    |      |  |           |      |           |  |              |     |  |  |       |    

F-35



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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|16. |  | RELATED PARTY TRANSACTIONS (Continued)
|--- |  | --------------------------------------



| | (c) |  | Summary of related party transactions:
| | --- |  | --------------------------------------

|                                                    |                                        |  |       |  |      |     |                      |   |              |     |      |   |      |     |       |       |  |     |                |       |  |   |   |   | 
|--------------------------------------------------- | -------------------------------------- |  | ----- |  | ---- | --- | -------------------- | - | ------------ | --- | ---- | - | ---- | --- | ----- | ----- |  | --- | -------------- | ----- |  | - | - | - | 
|                                                    |                                        |  |       |  |      |     |                      |   |              |     |      |   |      |     |       |       |  |     | 8 Months ended
|                                                    |                                        |  |       |  |      |     | Year ended April 30, |   | December 31, |    
|                                                    |                                        |  |       |  |      |     |                      |   |             
|                                                    |                                        |  | Notes |  | 2000 |     | 2001                 |   | 2002         |     | 2001 |   | 2002
|                                                    |                                        |  |       |  |      |     |                      |   |              |     |      |   |     
|                                                    |                                        |  |       |  |      |     | US$                  |   | US$          |     | US$  |   | US$  |     | US$  
|                                                    |                                        |  |       |  |      |     |                      |   |              |     |      |   |      |     |       |       |  |     | (Unaudited)    |       |  |   |  
|Sales:                                              |                                        |  |       |  |      |     |                      |   |              |     |      |   |      |     |       |       |  |     |                |       |  |   |   |  
|                                                    | Gemriver Jewelry
Limited               |  | (ii)  |  |      |    |                      |   |              | 158 |      |   |      |    |       |       |  |    |                |       |  |  |  
|                                                    |                                        |  |       |  |      |     |                      |   |              |     |      |   |      |     |       |       |  |     |                |       |  |   |   |  
|Purchase of equity
interest in iBBC
Inc.:           |                                        |  |       |  |      |     |                      |   |              |     |      |   |      |     |       |       |  |     |                |       |  |   |   |  
|                                                    | Entities
controlled by Yih
Yu Chuan    |  |       |  |      |     |                      |  |              |     |      |  |      |     |       | 2,460 |  |     |                |      |  |   |   |  | 
|                                                    |                                        |  |       |  |      |     |                      |   |              |     |      |   |      |     |       |       |  |     |                |       |  |   |   |  
|Advances to:                                        |                                        |  |       |  |      |     |                      |   |              |     |      |   |      |     |       |       |  |     |                |       |  |   |   |  
|                                                    | Gemriver Jewelry
Limited               |  | (iii) |  |      |    |                      |   |              | 711 |      |   |      | 679 |       |       |  | 571 |                |       |  |  |  
|                                                    | iBBC Inc.                              |  |       |  |      |     |                      |  |              |     |      |  |      |     |       | 4,763 |  |     |                | 4,001 |  |   |   |  | 
|                                                    |                                        |  |       |  |      |     |                      |   |              |     |      |   |      |     |       |       |  |     |                |       |  |   |   |  
|                                                    |                                        |  |       |  |      |     |                     |   |              |     | 711  |   |      |     | 5,442 |       |  |     | 4,572          |       |  |   |  |  
|                                                    |                                        |  |       |  |      |     |                      |   |              |     |      |   |      |     |       |       |  |     |                |       |  |   |   |  
|Repayment from:                                     |                                        |  |       |  |      |     |                      |   |              |     |      |   |      |     |       |       |  |     |                |       |  |   |   |  
|                                                    | Gemriver Jewelry
Limited               |  |       |  |      |     |                      |  |              |     |      |  |      |     |       | 1,360 |  |     |                | 1,289 |  |   |   |  | 
|                                                    | iBBC Inc.                              |  |       |  |      |     |                      |  |              |     |      |  |      |     |       | 4,951 |  |     |                | 1,803 |  |   |   |  | 
|                                                    |                                        |  |       |  |      |     |                      |   |              |     |      |   |      |     |       |       |  |     |                |       |  |   |   |  
|                                                    |                                        |  |       |  |      |     |                     |   |              |     |     |   |      |     | 6,311 |       |  |     | 3,092          |       |  |   |  |  
|                                                    |                                        |  |       |  |      |     |                      |   |              |     |      |   |      |     |       |       |  |     |                |       |  |   |   |  
|Consultancy and
professional fees
paid and payable: |                                        |  |       |  |      |     |                      |   |              |     |      |   |      |     |       |       |  |     |                |       |  |   |   |  
|                                                    | International
Asset Management
Limited |  | (iv)  |  |      | 113 |                      |   |              |    |      |   |      |    |       |       |  |    |                |       |  |  |  
|                                                    |                                        |  |       |  |      |     |                      |   |              |     |      |   |      |     |       |       |  |     |                |       |  |   |   |  



| | (i)   |  | The amounts due from/to related parties/director
represent unsecured advances which are interest free and
repayable on demand.       
| | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii)  |  | The sales to the related party are made according
to the published prices and conditions offered to the major
customers of the Group.
|
| | (iii) |  | The advances were expenses paid on behalf of
related parties with terms set out in note 16(c)(i) above.                              
|
| | (iv)  |  | The consultancy and professional fees were
determined based on normal commercial terms.                                              



| |  |  | The related party transactions with Gemriver Jewelry Limited as
aforesaid relate to transactions made before it became a subsidiary
of the Company.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

F-36



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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|17. |  | SEGMENT INFORMATION                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The management reported segment information on a geographical basis as
over 90% of the Groups turnover and contribution to operating results are
derived from the business segment of manufacture and sales of jewelry. In
respect of geographical segment reporting, revenues are based on the
country in which the customer is located. Total long-lived assets are
where the assets are located.



| | (a) |  | Geographical segments:
| | --- |  | ----------------------

|                                 |                            |  |                      |        |              |  |        |        |      |  |        |        |  |  |                |        |  |  |        |        | 
|-------------------------------- | -------------------------- |  | -------------------- | ------ | ------------ |  | ------ | ------ | ---- |  | ------ | ------ |  |  | -------------- | ------ |  |  | ------ | ------ | 
|                                 |                            |  |                      |        |              |  |        |        |      |  |        |        |  |  | 8 Months ended
|                                 |                            |  | Year ended April 30, |        | December 31,
|                                 |                            |  |                      |        |             
|                                 |                            |  | 2000                 |        | 2001         |  | 2002   |        | 2001 |  | 2002  
|                                 |                            |  |                      |        |              |  |        |        |      |  |       
|                                 |                            |  | US$                  |        | US$          |  | US$    |        | US$  |  | US$   
|                                 |                            |  |                      |        |              |  |        |        |      |  |        |        |  |  | (Unaudited)    |        |  |  |       
|Revenue from external
customers: |                            |  |                      |        |              |  |        |        |      |  |        |        |  |  |                |        |  |  |        |       
|                                 | US & Canada                |  |                      | 29,981 |              |  |        | 38,463 |      |  |        | 28,810 |  |  |                | 19,373 |  |  |        | 24,545 | 
|                                 | Hong Kong                  |  |                      | 2,638  |              |  |        | 599    |      |  |        | 4,897  |  |  |                | 1,383  |  |  |        | 1,451  | 
|                                 | Europe and other countries |  |                      | 5,864  |              |  |        | 7,028  |      |  |        | 5,518  |  |  |                | 4,167  |  |  |        | 3,469  | 
|                                 | PRC                        |  |                      | 312    |              |  |        | 74     |      |  |        | 6      |  |  |                |       |  |  |        |       | 
|                                 | Japan                      |  |                      | 131    |              |  |        | 121    |      |  |        | 9      |  |  |                | 119    |  |  |        | 2,344  | 
|                                 |                            |  |                      |        |              |  |        |        |      |  |        |        |  |  |                |        |  |  |        |       
|                                 |                            |  | 38,926               |        |              |  | 46,285 |        |      |  | 39,240 |        |  |  | 25,042         |        |  |  | 31,809 |       
|                                 |                            |  |                      |        |              |  |        |        |      |  |        |        |  |  |                |        |  |  |        |        | 

|                                             |           |  |           |        |           |  |              |        |  |  |        |        | 
|-------------------------------------------- | --------- |  | --------- | ------ | --------- |  | ------------ | ------ |  |  | ------ | ------ | 
|                                             |           |  | As of     |        | As of     |  | As of       
|                                             |           |  | April 30, |        | April 30, |  | December 31,
|                                             |           |  | 2001      |        | 2002      |  | 2002        
|                                             |           |  |           |        |           |  |             
|                                             |           |  | US$       |        | US$       |  | US$         
|Carrying amount of long-lived assets:        |           |  |           |        |           |  |              |        |  |  |        |       
|                                             | Hong Kong |  |           | 6,239  |           |  |              | 6,224  |  |  |        | 5,944  | 
|                                             | PRC       |  |           | 3,424  |           |  |              | 2,318  |  |  |        | 3,027  | 
|                                             | US        |  |           |       |           |  |              | 2,525  |  |  |        | 403    | 
|                                             |           |  |           |        |           |  |              |        |  |  |        |       
|Total long-lived assets (excluding goodwill) |           |  | 9,663     |        |           |  | 8,936        |        |  |  | 9,174  |       
|Reconciling items:                           |           |  |           |        |           |  |              |        |  |  |        |       
|                                             | Others    |  |           | 37,637 |           |  |              | 34,025 |  |  |        | 36,911 | 
|                                             |           |  |           |        |           |  |              |        |  |  |        |       
|Total consolidated assets                    |           |  | 47,300    |        |           |  | 42,961       |        |  |  | 46,085 |       
|                                             |           |  |           |        |           |  |              |        |  |  |        |        | 

F-37



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##### Table of Contents



LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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



|17. |  | SEGMENT INFORMATION (Continued)
|--- |  | -------------------------------



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

|                        |  |                      |        |              |  |      |    |      |  |      |        |   |  |     |    |   |  |     |        |   |  |  |    |  |  |                |       |  |  |  |    |  |  |  |       |  |  |  |    | 
|----------------------- |  | -------------------- | ------ | ------------ |  | ---- | -- | ---- |  | ---- | ------ | - |  | --- | -- | - |  | --- | ------ | - |  |  | -- |  |  | -------------- | ----- |  |  |  | -- |  |  |  | ----- |  |  |  | -- | 
|                        |  |                      |        |              |  |      |    |      |  |      |        |   |  |     |    |   |  |     |        |   |  |  |    |  |  | 8 Months ended
|                        |  | Year ended April 30, |        | December 31,
|                        |  |                      |        |             
|                        |  | 2000                 |        | 2001         |  | 2002 |    | 2001 |  | 2002
|                        |  |                      |        |              |  |      |    |      |  |     
|                        |  | US$                  |        | %            |  | US$  |    | %    |  | US$  |        | % |  | US$ |    | % |  | US$ |        | %
|QVC Network Inc.        |  |                      | 17,604 |              |  |      | 45 |      |  |      | 21,848 |   |  |     | 47 |   |  |     | 10,963 |   |  |  | 28 |  |  |                | 7,639 |  |  |  | 31 |  |  |  | 8,021 |  |  |  | 25 | 
|Goldleaves Trading Ltd. |  |                      |       |              |  |      |   |      |  |      |       |   |  |     |   |   |  |     | 4,273  |   |  |  | 11 |  |  |                | 1,458 |  |  |  | 6  |  |  |  | 1,418 |  |  |  | 4  | 
|                        |  |                      |        |              |  |      |    |      |  |      |        |   |  |     |    |   |  |     |        |   |  |  |    |  |  |                |       |  |  |  |    |  |  |  |       |  |  |  |    | 



| |  |  | Trade receivables related to these major customers were US$296,
US$3,198 and US$3,290 as of April 30, 2001 and 2002 and December 31,
2002 respectively.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

F-38



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##### Table of Contents








|ITEM 19. |  | EXHIBITS
|-------- |  | --------

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

Report of Independent Auditors

Consolidated statements of operations for the years ended April 30, 2000,
2001, 2002 and for the eight-month period ended December 31, 2002.

Consolidated balance sheets at April 30, 2001, 2002 and December 31,2002.

Consolidated statements of shareholders equity for the years ended April
30, 2000, 2001, 2002 and for the eight-month period ended December 31, 2002.

Consolidated statements of cash flows for the years ended April 30, 2000,
2001, 2002 and for the eight-month period ended December 31, 2002.

Notes to and forming part of the financial statements

(b)  The following exhibits are being filed as part of this Annual Report
on Form 20-F:



| | 1.1  |  | Memorandum of Association of the Company*                                                                                                                                                                                                                                
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 1.2  |  | Articles of Association of the Company*                                                                                                                                                                                                                                  
|
| | 1.3  |  | Amendment to Articles of Association of the Company*                                                                                                                                                                                                                     
|
| | 4.1  |  | Employment Agreement of Yu Chuan Yih with the
Registrant  incorporated by reference to the Exhibits to our
Annual Report on Form 20-F for the fiscal year ended April 30,
2001, SEC File No. 0-29620.                                                                   
|
| | 4.2  |  | Agreement with QVC, Inc.*                                                                                                                                                                                                                                                
|
| | 4.3  |  | Securities Purchase Agreement dated as of October
29, 1999 and exhibits and amendments thereto  incorporated by
reference to the Exhibits to our Registration Statement on
Form F-3 and amendments thereto, SEC File No. 333-11482,
declared effective on April 3, 2000.
|
| | 4.4  |  | Common Stock Purchase Agreement, dated as of
April 15, 2002, between Navigator Investments Holding IX
Limited and the Registrant**                                                                                                                                       
|
| | 4.5  |  | Registration Rights Agreement, dated as of April
15, 2002, between Navigator Investments Holding IX Limited and
the Registrant**                                                                                                                                         
|
| | 4.6  |  | Warrant Agreement, dated as of April 15, 2002,
between Navigator Investments Holding IX Limited and the
Registrant**                                                                                                                                                     
|
| | 8.1  |  | List of Subsidiaries of the Company*                                                                                                                                                                                                                                     
|
| | 99.1 |  | Certification of Chief Executive Officer                                                                                                                                                                                                                                 
|
| | 99.2 |  | Certification of Chief Financial Officer                                                                                                                                                                                                                                 



---

|*  |  | 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 pre-effective
Registration Statement on Form F-1, SEC File No. 333-90016, filed on June
7, 2002                                                         





---



##### Table of Contents






SIGNATURES

The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.

|                   |  |                                    |  |                      
|------------------ |  | ---------------------------------- |  | ---------------------
|                   |  | LJ INTERNATIONAL INC.
(Registrant)
|                   |  |                                    |  |                      
|                   |  |                                    |  |                      
|Date: May 15, 2003 |  | By:                                |  | /s/ Yu Chuan Yih     
|                   |  |                                    |  |                      
|                   |  |                                    |  | Yu Chuan Yih
Chairman





---



##### Table of Contents






CERTIFICATIONS

I, Yu Chuan Yih, certify that:

1.     I have reviewed this annual report on Form 20-F of LJ International Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:



| | a. |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c. |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| | a. |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                   |  |                                                   
|------------------ |  | --------------------------------------------------
|Date: May 15, 2003 |  |                                                   
|                   |  | /s/ Yu Chuan Yih                                  
|                   |  |                                                   
|                   |  | Yu Chuan Yih,
Chairman and Chief Executive Officer





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##### Table of Contents






CERTIFICATIONS

I, Hon Tak Ringo Ng, certify that:

1.     I have reviewed this annual report on Form 20-F of LJ International Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:



| | a. |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c. |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| | a. |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                   |  |                                          
|------------------ |  | -----------------------------------------
|Date: May 15, 2003 |  |                                          
|                   |  | /s/ Hon Tak Ringo Ng                     
|                   |  |                                          
|                   |  | Hon Tak Ringo Ng,
Chief Financial Officer





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##### Table of Contents



EXHIBIT INDEX

|        |  |                                                                                                                                  |  |       
|------- |  | -------------------------------------------------------------------------------------------------------------------------------- |  | ------
|Exhibit |  |                                                                                                                                  |  | Page  
|Number  |  | Description of Exhibit                                                                                                           |  | Number
|        |  |                                                                                                                                  |  |       
|1.1     |  | Memorandum of Association of the Company                                                                                         |  | *     
|1.2     |  | Articles of Association of the Company                                                                                           |  | *     
|1.3     |  | Amendment to Articles of Association of the Company                                                                              |  | *     
|4.1     |  | Employment Agreement of Yu Chuan Yih with the Registrant                                                                         |  | **    
|4.2     |  | Agreement with QVC, Inc.                                                                                                         |  | *     
|4.3     |  | Securities Purchase Agreement dated as of October 29, 1999 and exhibits
and amendments thereto                                   |  | ***   
|4.4     |  | Common Stock Purchase Agreement, dated as of April 15, 2002,
between Navigator Investments Holding IX Limited and the Registrant |  | ****  
|4.5     |  | Registration Rights Agreement, dated as of April 15, 2002,
between Navigator Investments Holding IX Limited and the Registrant   |  | ****  
|4.6     |  | Warrant Agreement, dated as of April 15, 2002, between Navigator
Investments, Ltd. and the Registrant                            |  | ****  
|8.1     |  | List of Subsidiaries of the Company                                                                                              |  | *     
|99.1    |  | Certification of Chief Executive Officer                                                                                         |  |       
|99.2    |  | Certification of Chief Financial Officer                                                                                         |  |       



---

|*    |  | 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 April 30, 2001,
SEC File No. 0-29620.                                                              
|    
|***  |  | Incorporated by reference to the Exhibits to our Registration Statement
on Form F-3 and amendments thereto, SEC File No. 333-11482, declared
effective on April 3, 2000.                                 
|    
|**** |  | Incorporated by reference to the Exhibits to our pre-effective
Registration Statement on Form F-1, SEC File No. 333-90016, filed on June 7, 2002.