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                LAZARE KAPLAN INTERNATIONAL INC.

[Cover photo: From the Lazare Diamond jewelry collection, the 'Starburst' brooch
in platinum features Lazare Diamonds'r', 'the world's most beautiful
diamond'TM'. This exquisite and unique piece of fine jewelry is part of the
'Icicle' collection -- new for 2000.]



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      The leader in ideal cut diamonds for over 90 years.

                     2000 ANNUAL REPORT








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               LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
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              LAZARE KAPLAN INTERNATIONAL INC. 2000 ANNUAL REPORT

Lazare Kaplan International Inc. is engaged in the cutting and polishing of
ideal cut diamonds, which it laser inscribes and distributes to quality retail
jewelers internationally under the brand name 'Lazare Diamonds'r'. Diamonds,
whatever their size, which are cut and polished by Lazare Kaplan craftsmen, are
finished to precise proportions, bringing out all of the diamond's natural
brilliance, fire and luster. In addition, Lazare Kaplan also cuts and polishes
non-ideal cut (commercial) diamonds. These stones are sold through wholesalers
and distributors and, to a growing extent, through retail jewelers, Lazare
Kaplan's traditional channel of distribution. Lazare Kaplan is also engaged in
the buying and selling of uncut rough diamonds.

                            AMERICAN STOCK EXCHANGE

The Company's common stock is traded on the American Stock Exchange under the
ticker symbol LKI.

                                   FORM 10-K

Upon written request, a copy of the Company's Form 10-K Annual Report without
exhibits for the year ended May 31, 2000 as filed with the Securities and
Exchange Commission, will be made available to stockholders without charge.
Requests should be directed to the Controller, Mr. Cochrane, Lazare Kaplan
International Inc., 529 Fifth Avenue, New York, New York 10017.

                                 ANNUAL MEETING
                                November 2, 2000
                                    10 A.M.
                                The Cornell Club
                              Six East 44th Street
                              Third Floor, Library
                            New York, New York 10017

                MARKET PRICES OF COMMON STOCK BY FISCAL QUARTER

<TABLE>
<CAPTION>
                                        FISCAL 2000
                                      ----------------
                                      HIGH         LOW
                                      ----         ---
<S>                                   <C>          <C>
FIRST...............................   11 1/4       7 7/8
SECOND..............................    9 1/2       7 1/4
THIRD...............................    9 5/8       7 1/8
FOURTH..............................    9 3/4       7
</TABLE>

<TABLE>
<CAPTION>
                                        Fiscal 1999
                                      ----------------
                                      High         Low
                                      ----         ---
<S>                                   <C>          <C>
First...............................   12 1/4       8 1/4
Second..............................    9           6 1/2
Third...............................    8 1/4       6 3/4
Fourth..............................    9 1/2       6 7/8
</TABLE>

As of July 31, 2000 there were 1,761 stockholders of record of the 7,944,943
issued and outstanding shares of the common stock of the Company, including CEDE
& Co. and other institutional holders who held an aggregate of 4,626,946 shares
of common stock as nominees for an undisclosed number of beneficial holders. The
Company estimates that it has in excess of 2,200 beneficial holders.

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                              TO OUR SHAREHOLDERS:

                                [LETTER TO COME]

2





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                                [LETTER TO COME]

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               LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
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                            SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(In thousands, except per share data)     2000          1999          1998       1997        1996
---------------------------------------------------------------------------------------------------
                                        -----------------------------------------------------------
<S>                                      <C>           <C>           <C>        <C>         <C>
NET SALES                               $361,134      $261,853      $222,617   $259,797    $266,321
---------------------------------------------------------------------------------------------------
Income/(loss) from continuing
  operations before income tax
  provision, minority interest and
  cumulative effect of change in
  accounting principle                  $     97     ($ 11,575)     $  2,295   $  8,248    $  7,149
---------------------------------------------------------------------------------------------------
Income/(loss) from continuing
  operations before cumulative effect
  of change in accounting principle     $    775     ($  6,323)     $  2,724   $ 12,100    $  7,013
---------------------------------------------------------------------------------------------------
Net income/(loss)                       ($   747)(1) ($  6,323)(2)  $  2,724   $ 11,482    $  7,013
---------------------------------------------------------------------------------------------------
Basic earnings/(loss) per share from
  continuing operations before
  cumulative effect of change in
  accounting principle (based on the
  weighted average number
  of shares)                            $   0.09     ($   0.74)     $   0.32   $ 1.69(3)   $   1.14
---------------------------------------------------------------------------------------------------
Basic earnings/(loss) per share (based
  on the weighted average number of
  shares)                               ($  0.09)    ($   0.74)     $   0.32   $ 1.61(3)   $   1.14
---------------------------------------------------------------------------------------------------
Diluted earnings/(loss) per share from
  continuing operations before
  cumulative effect of change in
  accounting principle (based on the
  weighted average number
  of shares)                            $   0.09     ($   0.74)     $   0.31   $ 1.63(3)   $   1.12
---------------------------------------------------------------------------------------------------
Diluted earnings/(loss) per share
  (based on the weighted average
  number of shares)                    ($   0.09)    ($   0.74)     $   0.31   $ 1.54(3)   $   1.12
---------------------------------------------------------------------------------------------------
At May 31:
  Total assets                          $202,699      $151,913      $142,330   $130,079    $105,066
---------------------------------------------------------------------------------------------------
  Long-term debt                        $ 37,309      $ 38,575      $ 23,560   $ 17,145    $ 34,155
---------------------------------------------------------------------------------------------------
  Working capital                       $ 98,016      $106,581      $111,752   $105,291    $ 74,069
---------------------------------------------------------------------------------------------------
  Stockholders' equity                  $ 82,807      $ 85,994      $ 93,460   $ 90,544    $ 44,870
---------------------------------------------------------------------------------------------------
</TABLE>

Note: No cash dividends were declared or paid by the Company during the past
five fiscal years.

(1) Includes $3.1 million (net of tax) of legal settlement and related costs,
    $0.4 million (net of tax) of benefit relating to insurance policies offset
    by realignment costs and other charges, and $1.5 million (net of tax) of
    cumulative effect of change in accounting principle in 2000.

(2) Includes $2.8 million of fourth quarter losses incurred in the Company's
    rough diamond buying operations in Angola and $3.4 million of costs
    associated with the realignment of the Company's Japanese distribution in
    1999.

(3) Reflects the impact of the issuance of 2,130,000 additional shares of common
    stock during 1997.

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               LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
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                      MANAGEMENT'S DISCUSSION AND ANALYSIS

    This Annual Report contains, in addition to historical information, certain
forward-looking statements that involve significant risks and uncertainties.
Such forward-looking statements are based on management's belief as well as
assumptions made by, and information currently available to, management pursuant
to the 'safe harbor' provisions of the Private Securities Litigation Reform Act
of 1995. The Company's actual results could differ materially from those
expressed in or implied by the forward-looking statements contained herein.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed herein and in Item 1 -- 'Description of Business',
and elsewhere in the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 2000. The Company undertakes no obligation to release publicly the
result of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date of this Annual Report or to
reflect the occurrence of other unanticipated events.

    This discussion and analysis should be read in conjunction with the Selected
Financial Data and the audited consolidated financial statements and related
notes of the Company contained elsewhere in this report. In this discussion, the
years '2000', '1999' and '1998' refer to the fiscal years ended May 31, 2000,
1999 and 1998, respectively.

RESULTS OF OPERATIONS

Net Sales
    Net sales in 2000 of $361,134,000 were 38% greater than net sales of
$261,853,000 in 1999.

    The Company's net revenue from the sale of polished diamonds of $138,568,000
in 2000 was 23% greater than 1999 polished sales of $112,573,000. The increase
in polished diamond sales was primarily due to higher sales of stones produced
at the Company's factories in Russia in the current year, improved sales volume
of Lazare Diamonds and pre-launch sales of Bellataire'TM' diamonds.

    Rough diamond sales were $222,566,000 in 2000, an increase of 49% compared
to $149,280,000 in 1999. The increase from the prior year was primarily
attributable to significantly increased purchases of better quality rough
diamonds from one of the Company's primary rough diamond suppliers, as well as
purchases made in its rough diamond buying operation in Africa. The Company's
buying operations in Angola continued into the third quarter of 2000; however,
its agreement with Empresa Nacional de Diamantes de Angola, Angola's national
diamond mining company (pursuant to which the Company was granted a license by
the Government of Angola to purchase rough diamonds from local Angolan miners
and export such rough diamonds for resale) expired on December 31, 1999. During
the fourth quarter of 2000, the Company terminated its operations in Angola. The
Company believes it has developed alternative sources of rough diamonds;
however, if these sources do not materialize, the rough diamond revenue
component of its business could be materially adversely affected.

    Net sales in 1999 of $261,853,000 were 18% higher than net sales of
$222,617,000 in 1998.

    The Company's net revenue from the sale of polished diamonds of $112,573,000
in 1999 was 34% greater than 1998 polished sales. The increase in polished
diamond sales was primarily due to higher sales of polished stones from the
Company's factory in Russia. This was due to the fact that throughout 1999, the
Company received regular and consistent shipments from the factory, making more
goods available for sale in 1999. In the prior year, the Company did not receive
its first shipment from this factory until the second half of the fiscal year.
During 1999, the Company experienced increased volume in the United States and
in Japan, the first sales increase in Japan in several years. These increases
were partially offset by lower sales in Southeast Asia in the first half of 1999
as compared to the prior year.

    Rough diamond sales were $149,280,000 in 1999, an increase of 8% compared to
$138,559,000 in 1998, despite lower purchases and sales in Angola

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                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                                  (Continued)
during the second half of 1999. Angola experienced increased military activity
between the Government of Angola and the rebel forces during this period which
was heavily concentrated in the diamond producing regions. This resulted in
fewer, less profitable diamonds available for purchase.

Gross Profit

    The Company's gross margin on net sales of polished diamonds includes all
overhead costs associated with the purchase, sale and manufacture of rough
stones (the 'Polished Diamond Gross Margin'). Polished Diamond Gross Margin for
2000 was 17% as compared to 13% in 1999. In 2000, the Polished Diamond Gross
Margin was favorably impacted by increased sales volume of higher margin, large
stones produced at the Company's factories in Russia. In addition, the Company
realized increased sales of Lazare Diamonds compared to 1999 which contributed
positively to the polished gross diamond margin percentage. The increased margin
was partially offset by the effect of recording certain inventory reserves of
approximately $2.0 million.

    Polished Diamond Gross Margin for 1999 was 13% as compared to 11% in 1998.
In 1999, the Polished Diamond Gross Margin was favorably impacted by increased
sales volume of large stones produced at the Company's factory in Russia. In
addition, during 1999 the Company had increased sales volume of higher margin
Lazare Diamonds as compared to 1998.

    The gross margin on sales of rough stones not selected for manufacturing and
sales of rough stones from the rough trading operation, including an allocation
of overhead costs estimated to be associated with the purchase and sale of rough
stones, has traditionally been approximately 3%. In 2000, the rough diamond
margin was approximately 3%, however, in 1999 the Company experienced a negative
rough diamond margin of  - 2% which was caused by adverse results from the
Company's operations in Angola, as discussed above. This was compounded by
relatively high fixed infrastructure and security costs which could not be
quickly reduced, certain purchases which resulted in significant losses upon
resale, and the defection of a significant portion of the Company's expatriate
rough diamond buying team. As a result, the Company incurred a loss of
approximately $4.6 million ($2.8 million, net of tax) from its Angolan
activities during the fourth quarter of 1999 which was included in the cost of
goods sold for rough diamonds and, therefore, adversely impacted the rough
diamond gross margin.

    During 2000, the overall gross margin on net sales of both polished diamonds
and rough diamonds was 8.1%. This compares to 4.5% in 1999 and 6.2% in 1998. The
increase in 2000 was attributable to the increased sales volume of higher margin
polished stones combined with a more favorable rough diamond margin as compared
to 1999. The decrease in 1999 was primarily attributable to the lower rough
diamond margin as discussed above. Excluding the effect of the losses sustained
in Angola, the overall gross margin for 1999 would have been 6.3%.

Selling, General and Administrative Expenses
    Selling, general and administrative expenses in 2000 were $20,608,000 (5.7%
of net sales) as compared to expenses of $20,691,000 (7.9% of net sales) in
1999. Excluding realignment costs and other charges, approximately $0.8 million
of benefit in 2000 and $5.6 million of expense in 1999 (discussed below),
selling, general and administrative expenses increased approximately $6.3
million during 2000. The increase was primarily attributable to higher
compensation and benefit costs (including selling commissions) including the
building of the Company's salesforce in Japan, increased marketing and
advertising expense and higher depreciation expense resulting from recent
information system upgrades.

    Selling, general and administrative expenses in 1999 of $15,103,000 (5.8% of
net sales), excluding $5.6 million of realignment costs discussed below,
increased 10% or $1,382,000 compared with expenses of $13,721,000 (6.2% of net
sales) in 1998. The increase was primarily attributable to the opening of

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                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                                  (Continued)
the Company's sales office in Japan in the beginning of 1999 partially offset by
the capitalization of certain salary and benefit costs for those employees
directly involved with the Company's implementation of its new computer system.

Realignment Costs and Other Charges

a. Japanese Distribution

    After working with its former distributor of over 25 years, in 1999, the
Company changed the nature of its distribution in Japan by assuming control of
the distribution of its products and opening its own office. In this way, the
Company has realigned its position with its retail and wholesale customers and
shortened its channels of distribution. In addition, this realignment has
enabled the Company, without interruption, to assume control of the expansion
and maintenance of the Lazare Diamond brand name in Japan. As part of the
realignment, the Company retained experienced Japanese staff, giving it
immediate and direct access to important customers as well as in depth industry
knowledge. The Company believes that this realignment was necessary in order to
compete effectively in Japan (the world's second largest market for diamonds and
diamond jewelry) in the years to come. As a result, the Company recorded a
charge of approximately $5.6 million in 1999.

    During 2000, the Company realized approximately $3.0 million as beneficiary
of certain life insurance policies which arose from its relationship with its
former Japanese distributor. The Company also incurred $1.1 million of
additional costs relating to the realignment of its Japanese operations.

b. Angola

    On December 31, 1999, the Company's license to purchase diamonds in Angola
expired. Through February 2000, the Company continued to operate its Angolan
buying operations. During the fourth quarter of 2000, the Company terminated its
operations in Angola and recorded charges relating to such operations of $1.1
million.

c. Other Charges
    The Company recorded charges of $2.0 million in the fourth quarter of 2000
primarily related to year-end inventory adjustments.

    In aggregate, during 2000, realignment costs and other charges resulted in a
decrease of approximately $0.8 million in selling, general and administrative
expenses and an increase of approximately $2.0 million in cost of sales. For
1999, the net effect was an increase of $5.6 million in selling, general and
administrative expenses.

Legal Settlement and Related Costs
    In October 1999, the Company settled litigation which was commenced against
it and other related parties by International Diamond Traders CY B.V.B.A.
('IDT') and Avi Neumark, the President and controlling stockholder of IDT. The
total cost of the settlement to the Company was $5,048,000, including related
legal and other expenses.

Sale of Interest in Lazare Kaplan Botswana (Pty) Ltd.
    In 1998, the Company completed a transaction for the sale of its interest in
Lazare Kaplan Botswana (Pty) Ltd. for $11.1 million and recorded a gain of
approximately $3.7 million (net of $485,000 of Botswana taxes) on the
transaction.

Interest Expense
    Net interest expense was $3,621,000, $2,702,000 and $2,062,000 in 2000, 1999
and 1998, respectively. The increase in 2000 was due to higher average balances
outstanding on the Company's various lines of credit of $42.9 million compared
to $22.2 million in 1999, partially offset by higher interest income in 2000. In
addition, interest expense on the Company's Senior Notes decreased by
approximately $400,000 during 2000 due to the reduction of the outstanding
balance. The increase in 1999 was due to higher average balances outstanding on
the Company's lines of credit of $22.2 million compared to $4.2 million in 1998,
partially offset by lower interest expense on the Company's Senior Notes due to
the reduction of the outstanding balance during the year.

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                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                                  (Continued)

Income Taxes

    During 2000, 1999 and 1998, the Company's tax provision included tax
benefits of $1,126,000, $5,280,000 and $260,000, respectively, primarily in
recognition of the net operating losses incurred in those years.

Cumulative Effect of Change in Method of Accounting for Start-up Costs

    In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position
(SOP) 98-5, 'Reporting on the Costs of Start-Up Activities', which was required
for financial statements for fiscal years beginning after December 15, 1998. The
SOP broadly defines start-up costs as those one-time activities related to
opening a new facility, introducing a new product or service, conducting
business in a new territory, conducting business with a new class of customer,
initiating a new process in an existing facility or commencing some new
operation. The SOP requires that start-up costs capitalized prior to adoption be
written off as a cumulative effect of a change in accounting principle and any
future start-up costs be expensed as incurred. The Company was required to adopt
this standard on June 1, 1999 and recorded a non-cash charge of $1,522,000 (net
of tax benefit of $671,000), or $0.18 per share. This amount is primarily
comprised of a) the start-up expenses related to the operations of the Company's
newly formed, wholly owned subsidiary, Pegasus Overseas Ltd. and the signing and
implementation of its ten year agreement with a wholly owned subsidiary of
General Electric Company, and b) the start-up expenses related to the signing
and implementation of the March 1999 Cooperation Agreement with AK ALROSA of
Russia. The adoption of SOP 98-5 did not have a material effect on income from
continuing operations for the year ended May 31, 2000.

Earnings/(Loss) Per Share

    During 2000, 1999 and 1998, basic earnings/(loss) per share before the
cumulative effect of change in accounting principle was $0.09, ($0.74) and
$0.32, respectively. Diluted earnings/(loss) per share before the cumulative
effect of change in accounting principle was $0.09, ($0.74) and $0.31 in 2000,
1999 and 1998, respectively. In 2000, basic and diluted earnings/(loss) per
share after the cumulative effect of change in accounting principle was ($0.09)
per share. Basic earnings per share is computed based upon the weighted average
number of common shares outstanding. Diluted earnings per share includes the
impact of dilutive stock options.

FOREIGN OPERATIONS
    International business represents a major portion of the Company's revenues
and profits. All purchases of rough diamonds worldwide are denominated in U.S.
dollars. All of the Company's foreign sales are denominated in U.S. dollars,
with the exception of those sales made by the Company's subsidiary, Lazare
Kaplan Japan, which are denominated in Japanese yen. The functional currency for
Lazare Kaplan Japan is the Japanese yen and, as of May 31, 2000 and 1999, the
Company recognized cumulative foreign currency translation adjustments with
regard to the activities of Lazare Kaplan Japan in the amount of $239,000 and
$44,000, respectively, which are shown as a component of stockholders' equity in
the accompanying balance sheet. In addition, the functional currency for Lazare
Kaplan Botswana (Pty) Ltd. (interest sold in March 1998) was the U.S. dollar and
this subsidiary was not materially affected by foreign currency fluctuations.

LIQUIDITY -- CAPITAL RESOURCES
    The Company's working capital at May 31, 2000 was $98,016,000, a decrease of
$8,565,000 from May 31, 1999. This decrease was primarily related to the
repurchase of treasury shares, capital expenditures and the reclassification of
a portion of the Company's long-term debt to current.

    The Company's working capital at May 31, 1999 was $106,581,000, a decrease
of $5,171,000 from May 31, 1998. This decrease was primarily related to the
reclassification of a portion of the Company's deferred tax assets to
non-current assets.

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                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                                  (Continued)

    In the fourth quarter of 1998, the Company completed the sale of its
interest in Lazare Kaplan Botswana (Pty) Ltd. for $11.1 million in cash. The
Company used the proceeds to repay its outstanding non-current bank loans.

    Fixed asset additions totaled $2,716,000, $4,144,000 and $2,600,000 in 2000,
1999 and 1998, respectively. In 1998, the Company commenced the design and
implementation of a new, fully integrated computer system which is Year 2000
compliant. The Company incurred $980,000, $1,900,000 and $1,100,000 in 2000,
1999 and 1998, respectively, in connection with this project.

    In December 1999, a subsidiary of the Company borrowed, at a fixed exchange
rate, 1.1 billion Japanese Yen (approximately $10,000,000) under a loan facility
with one of its primary commercial bank lenders, payable in seven quarterly
installments of 96,250,000 Yen each, which commenced on March 7, 2000 and
continue until December 7, 2001, at which time the entire principal is payable
in full, plus interest. The loan bore interest at a rate equal to the Japanese
prime rate plus 1% or the 90-day LIBOR rate for Yen borrowings plus 1% at the
option of the borrower. As of May 31, 2000, the balance outstanding under this
loan facility was $9.1 million. The Company has guaranteed the payment of the
loan and has secured its guarantee by pledging interest bearing deposits of
approximately $9.5 million to the bank, of which $5.6 million is included in
non-current assets. In June 2000, the Company entered into an interest rate swap
agreement with one of its primary commercial bank lenders which had the effect
of converting the loan to a fixed interest rate loan at 1.58%.

    The Company has a $30 million unsecured line of credit with a bank at an
interest rate of 150 basis points above the bank's base rate (which rate is
currently 9.35%). As of May 31, 2000, the balance outstanding under this line of
credit was $16.8 million. This line of credit is available for the Company's
working capital requirements.

    The Company has a long-term unsecured, revolving loan agreement with two
banks. The agreement, as amended, provides that the Company may borrow up to
$40,000,000 in the aggregate, at an interest rate of any of a) one-eighth of one
percent above the bank's prime rate, b) 160 basis points above the London
Interbank Offered Rate (LIBOR), or c) 160 basis points above the bank's cost of
funds rate. The applicable interest rate is contingent upon the method of
borrowing selected by the Company. The term of the loan is through September 1,
2002. The proceeds of this facility are available for the Company's working
capital needs and to fund its future annual installments due under the Senior
Note Agreement. The revolving loan agreement contains certain provisions that
require, among other things, (a) maintenance of defined levels of current
working capital and annual cash flow, (b) limitations of borrowing levels,
capital expenditures, and rental obligations and (c) limitations on restricted
payments, including the amount of dividends. The Company was not in compliance
with the current ratio covenant under the revolving loan agreement for the year
ended May 31, 2000. The banks have given a waiver to the Company and
prospectively amended certain related definitions which had given rise to
noncompliance at May 31, 2000. As of May 31, 2000 and 1999 there was an
aggregate balance outstanding of $38,135,000 and $32,158,000, respectively,
under this agreement.

    The Company has outstanding unsecured 9.97% Senior Notes, due May 15, 2001.
As of May 31, 2000 and 1999, the balance of Senior Notes outstanding was
$4,290,000 and $8,575,000, respectively.

    Management believes the Company has the ability to meet its current and
anticipated financing needs for the next twelve months with the facilities in
place and funds from operations, however, given the growth prospects of the
Company, it may seek to increase its credit facilities during the upcoming year.

    Stockholders' equity was $82,807,000 at May 31, 2000, $85,994,000 at
May 31, 1999 and $93,460,000 at May 31, 1998. The decreases in 2000 and 1999

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                      MANAGEMENT'S DISCUSSION AND ANALYSIS
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were attributable to the net losses incurred during the periods as well as the
repurchase of the Company's common stock of $2,676,000 and $1,191,000 in 2000
and 1999, respectively.

BUSINESS DEVELOPMENTS

    Under the terms of its agreement with AK ALROSA of Russia, the Company
equipped a diamond cutting factory which was completed in February 1997 within
the ALROSA facility in Moscow. This facility is staffed by Russian technicians
and managed and supervised by Company personnel. ALROSA has agreed to supply a
minimum of $45 million per year of large rough gem diamonds selected by the
Company as being suitable for processing at this facility. In May 1997, the
facility completed the production of its first polished stones and the Company
received its first shipment of polished stones produced at this facility during
November 1997. Since that time the Company has received regular and consistent
shipments of polished stones from the ALROSA facility. The Company is selling
the resulting polished gem stones through its worldwide distribution network.
The proceeds from the sale of these polished diamonds, after deduction of rough
diamond cost, generally are shared equally with ALROSA. This agreement serves as
a long-term off-take arrangement to secure the repayment of financing which has
been received by ALROSA from a United States commercial bank and is guaranteed
by the Export-Import Bank of the United States (Eximbank) for the purchase by
ALROSA of U.S. manufactured mining equipment. This equipment is being used by
ALROSA to increase production in its diamond mines.

    In March 1999, (in furtherance of a Memorandum of Understanding signed by
Eximbank, ALROSA and the Company in July, 1998) the Company and ALROSA entered
into a Cooperation Agreement to expand their relationship in the cutting,
polishing and marketing of rough gem diamonds. Under the terms of this
agreement, the Company and ALROSA agreed to refurbish two new polishing
facilities in Russia with an annual capacity to cut and polish in excess of $150
million of rough diamonds. Both of these facilities were operational as of
May 31, 2000 and are in addition to the existing facility which is equipped to
cut and polish $45 million per year of rough diamonds discussed above.

    In March 1999, the Company announced that a wholly-owned subsidiary, Pegasus
Overseas Ltd. ('POL') had entered into an exclusive ten-year agreement with a
wholly-owned subsidiary of General Electric Company ('GE') under which POL will
market natural diamonds that have undergone a new GE process. The process is
permanent and irreversible and it does not involve treatments such as
irradiation, laser drilling, surface coating or fracture filling and is
conducted before the final cutting and polishing by the Company. The process is
designed to improve the color of qualifying diamonds without reducing their
all-natural content. The process, which was developed and is owned by GE, will
be used only on a select, limited range of natural diamonds with qualifying
colors, sizes and clarities for both round and fancy cuts. The estimated number
of gemstones with characteristics suitable for this process is a small fraction
of the overall diamond market. POL will sell only diamonds that have undergone
the new GE process. Each diamond sold by POL will be laser inscribed with the
brand name 'GE POL.' In December 1999, POL completed the test marketing of these
diamonds in the United States. After careful study, a brand name, Bellataire,
was selected for the consumer launch. The Bellataire diamond is being offered
for sale to U.S. retailers as of June 2000.

    The Company has granted GE a security interest in a portion of POL's
inventory of polished diamonds.

    As a concerned member of the diamond industry and global community at large,
the Company fully supports a policy which prohibits the purchase of diamonds
illicitly seized and sold by rebel forces in Angola, Sierra Leone, and the
Democratic Republic of the Congo. As it has in the past, the Company will
continue to condemn trading in illicit diamonds, a position which reflects the
Company's leadership in the industry. Furthermore, the Company fully complies

10





<PAGE>

                                     [Logo]

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                                  (Continued)
with and supports the resolutions adopted by the United Nations as well as
concerned regional and international governments and various industry trade
associations in attempting to isolate and eliminate the trade in illicit stones.

RISKS AND UNCERTAINTIES
    The world's sources of rough diamonds are highly concentrated in a limited
number of countries. Varying degrees of political and economic risk exist in may
of these countries. As a consequence, the diamond business is subject to various
sovereign risks beyond the Company's control, such as changes in laws and
policies affecting foreign trade and investment. In addition, the Company is
subject to various political and economic risks, including the instability of
foreign economies and governments, labor disputes, war and civil disturbances
and other risks that could cause production difficulties or stoppages, restrict
the movement of inventory or result in the deprivation or loss of contract
rights or the taking of property by nationalization or expropriation without
fair compensation.

    The Company's business is dependent upon the availability of rough diamonds.
Based upon published reports, the Company believes that approximately 60% of the
world's current diamond output is sold by De Beers Centenary AG and its
affiliated companies. Although De Beers has historically been one of the
Company's major suppliers of rough diamonds, the Company has successfully
diversified its sources of supply by entering into arrangements with other
primary source suppliers and has been able to supplement its rough diamond needs
by purchasing supplies in the secondary market. While the Company believes that
it has good relationships with its suppliers and that its sources of supply are
sufficient to meet its present and foreseeable needs, the Company's rough
diamond supplies, and therefore, its manufacturing capacity, could be adversely
affected by political and economic developments in producing countries over
which it has no control. While the Company believes that alternative sources of
supply may be available, any significant disruption of the Company's access to
its primary source suppliers could have a material adverse effect on its ability
to purchase rough diamonds.

    Further, through its control of the world's diamond output, De Beers can
exert significant control over the pricing of rough and polished diamonds. A
large rapid increase in rough diamond prices could materially adversely affect
the Company's revenue and operating margins if the increased cost of the rough
diamonds could not be passed along to its customers in a timely manner.
Alternatively, any rapid decrease in the price of polished diamonds could have a
material adverse affect on the Company in terms of inventory losses and lower
margins.

    Throughout 1999 and 2000, the Diamond Trading Company ('DTC'), a De Beers
affiliate, conducted a strategic review of its overall business model. In
July 2000, the DTC announced significant changes in its approach to rough
diamond marketing. In brief, the DTC stated that it will stop open market
purchases and alter its market control and pricing policies. Henceforth, the DTC
has said it will focus on selling its own mining productions through its
'supplier of choice' marketing programs. These policy changes are intended to
modernize business practices within the industry, shorten channels of
distribution, lower working diamond stocks, supply clients with downstream
distribution and encourage additional investment in marketing and advertising
programs. The Company believes it is well positioned to benefit from these
changes in the DTC's approach to diamond marketing. However, there can be no
assurance that this policy change will not have a material adverse effect on the
Company's operations.

                                                                              11





<PAGE>

                                     [LOGO]

               LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                   Year Ended May 31,
----------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)              2000         1999         1998
----------------------------------------------------------------------------------------------
                                                          ------------------------------------
<S>                                                       <C>          <C>          <C>
Net sales                                                 $  361,134   $  261,853   $  222,617
Cost of sales                                                331,760      250,035      208,717
----------------------------------------------------------------------------------------------
                                                              29,374       11,818       13,900
----------------------------------------------------------------------------------------------
Selling, general and administrative expenses                  20,608       20,691       13,721
Interest expense, net of interest income                       3,621        2,702        2,062
Legal settlement and related costs                             5,048       -            -
Gain on sale of consolidated subsidiary                       -            -            (4,178)
----------------------------------------------------------------------------------------------
                                                              29,277       23,393       11,605
----------------------------------------------------------------------------------------------
Income/(loss) before income tax provision/(benefit) and
  minority interest                                               97      (11,575)       2,295
Income tax provision/(benefit)                                  (678)      (5,252)         417
----------------------------------------------------------------------------------------------
Income/(loss) before minority interest                           775       (6,323)       1,878
Minority interest in loss of consolidated subsidiary          -            -               846
----------------------------------------------------------------------------------------------
Income/(loss) before cumulative effect of change in
  accounting principle                                           775       (6,323)       2,724
Cumulative effect of change in accounting principle           (1,522)      -            -
----------------------------------------------------------------------------------------------
NET INCOME/(LOSS)                                         $     (747)  $   (6,323)  $    2,724
----------------------------------------------------------------------------------------------
                                                          ------------------------------------
EARNINGS/(LOSS) PER SHARE
Basic earnings/(loss) per share before cumulative effect
  of change in accounting principle                       $     0.09   $    (0.74)  $     0.32
----------------------------------------------------------------------------------------------
                                                          ------------------------------------
Basic earnings/(loss) per share                           $    (0.09)  $    (0.74)  $     0.32
----------------------------------------------------------------------------------------------
                                                          ------------------------------------
Average number of shares outstanding during the period     8,212,251    8,488,861    8,499,131
----------------------------------------------------------------------------------------------
                                                          ------------------------------------
Diluted earnings/(loss) per share before cumulative
  effect of change in accounting principle                $     0.09   $    (0.74)  $     0.31
----------------------------------------------------------------------------------------------
                                                          ------------------------------------
Diluted earnings/(loss) per share                         $    (0.09)  $    (0.74)  $     0.31
----------------------------------------------------------------------------------------------
                                                          ------------------------------------
Average number of shares outstanding during the period,
  assuming dilution                                        8,307,047    8,488,861    8,669,366
----------------------------------------------------------------------------------------------
                                                          ------------------------------------
</TABLE>

See notes to consolidated financial statements.

12





<PAGE>

                                     [LOGO]

               LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                    May 31,
---------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)                               2000       1999
---------------------------------------------------------------------------------
                                                              -------------------
<S>                                                           <C>        <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                   $  7,254   $  5,181
  Accounts receivable, less allowance for doubtful accounts
    ($1,065 and $202 in 2000 and 1999, respectively)            66,258     32,902
  Inventories, net:
      Rough stones                                              31,155     30,363
      Polished stones                                           57,484     50,991
                                                              -------------------
        Total inventories                                       88,639     81,354
                                                              -------------------
  Prepaid expenses and other current assets                     12,191     13,038
  Deferred tax assets -- current                                 6,257      1,450
---------------------------------------------------------------------------------
        TOTAL CURRENT ASSETS                                   180,599    133,925
PROPERTY, PLANT AND EQUIPMENT, net                               9,554      8,151
OTHER ASSETS                                                     7,891      2,172
DEFERRED TAX ASSETS, net                                         4,655      7,665
---------------------------------------------------------------------------------
                                                              $202,699   $151,913
---------------------------------------------------------------------------------
                                                              -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable and other current liabilities              $ 49,874   $ 25,186
  Notes payable -- other and current portion of long-term
    debt                                                        32,709      2,158
---------------------------------------------------------------------------------
        TOTAL CURRENT LIABILITIES                               82,583     27,344
OTHER LONG-TERM DEBT                                            37,309     38,575
---------------------------------------------------------------------------------
        TOTAL LIABILITIES                                      119,892     65,919
---------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
  Preferred stock, par value $.01 per share:
    Authorized, 5,000,000 shares, no shares outstanding          -          -
  Common stock, par value $1 per share:
    Authorized, 20,000,000 shares in 2000 and 1999
    Issued 8,543,393 and 8,535,493 shares in 2000 and 1999,
      respectively                                               8,543      8,535
  Additional paid-in capital                                    58,182     58,149
  Cumulative translation adjustment                                239         44
  Retained earnings                                             19,732     20,479
---------------------------------------------------------------------------------
                                                                86,696     87,207
  Less treasury stock, 498,150 and 167,150 shares at cost in
    2000 and 1999, respectively                                 (3,889)    (1,213)
---------------------------------------------------------------------------------
        TOTAL STOCKHOLDERS' EQUITY                              82,807     85,994
---------------------------------------------------------------------------------
                                                              $202,699   $151,913
---------------------------------------------------------------------------------
                                                              -------------------
</TABLE>

See notes to consolidated financial statements.

                                                                              13





<PAGE>

                                     [LOGO]

               LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                            Year Ended May 31,
         ------------------------------------------------------------------------------------------
         (IN THOUSANDS)                                                 2000      1999       1998
         ------------------------------------------------------------------------------------------
                                                                       ----------------------------
         <S>                                                           <C>       <C>       <C>
         CASH FLOWS FROM OPERATING ACTIVITIES:
         Net income/(loss)                                             $  (747)  $(6,323)  $  2,724
         Adjustments to reconcile net income/(loss) to net cash
           provided by/(used in) operating activities:
             Depreciation and amortization                               2,208       943      2,070
             Provision for uncollectible accounts                          863        60         60
             Benefit from deferred income taxes                         (1,126)   (5,480)      (260)
             Cumulative effect of change in method of accounting         1,522      -         -
             Minority interest in loss of consolidated subsidiary         -         -          (846)
             Net gain on sale of consolidated subsidiary                  -         -        (3,693)
         (Increase)/decrease in assets and increase/ (decrease) in
           liabilities:
             Accounts receivable                                       (34,219)    4,785     (8,204)
             Rough and polished inventories                             (7,285)      164    (25,588)
             Prepaid expenses and other current assets                  (1,741)     (398)    (1,837)
             Other assets                                               (6,219)   (1,704)        66
             Accounts payable and other current liabilities             24,688        26     12,628
                                                                       ----------------------------
         Net cash used in operating activities                         (22,056)   (7,927)   (22,880)
         ------------------------------------------------------------------------------------------
         CASH FLOWS FROM INVESTING ACTIVITIES:
         Capital expenditures                                           (2,716)   (4,144)    (2,600)
         Proceeds from sale of stock in consolidated subsidiary           -         -        11,100
                                                                       ----------------------------
         Net cash provided by/(used in) investing activities            (2,716)   (4,144)     8,500
         ------------------------------------------------------------------------------------------
         CASH FLOWS FROM FINANCING ACTIVITIES:
         Increase/(decrease) in short-term borrowings                   30,551     2,158     (1,343)
         Increase/(decrease) in long-term borrowings                    (1,266)   15,015      6,415
         Purchase of treasury stock                                     (2,676)   (1,191)       (22)
         Proceeds from exercise of stock options                            41         4        214
                                                                       ----------------------------
         Net cash provided by financing activities                      26,650    15,986      5,264
         ------------------------------------------------------------------------------------------
         Effect of cumulative translation adjustment                       195        44      -
                                                                       ----------------------------
         Net increase/(decrease) in cash and cash equivalents            2,073     3,959     (9,116)
         Cash and cash equivalents at beginning of year                  5,181     1,222     10,338
                                                                       ----------------------------
         Cash and cash equivalents at end of year                      $ 7,254   $ 5,181   $  1,222
         ------------------------------------------------------------------------------------------
                                                                       ----------------------------
         SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
         Cash paid during the year for:
         Interest                                                      $ 4,044   $ 2,872   $  2,288
         Income taxes                                                  $   156   $   129   $    716
         ------------------------------------------------------------------------------------------
</TABLE>

      See notes to consolidated financial statements.

14





<PAGE>

                                     [LOGO]

               LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                            Additional   Cumulative                              Total
                                   Common    Paid-in     Translation   Retained   Treasury   Stockholders'
(In thousands, except share data)  Stock     Capital     Adjustment    Earnings    Stock        Equity
----------------------------------------------------------------------------------------------------------
                                   -----------------------------------------------------------------------
<S>                                <C>      <C>           <C>           <C>        <C>          <C>
Balance, May 31, 1997              $8,407    $58,059       $-          $24,078    $  -          $90,544
Net income                           -         -            -            2,724       -            2,724
Exercise of stock options,
  127,428 shares issued               128         86        -             -          -              214
Purchase of treasury stock, 2,000
  shares                             -         -            -             -           (22)          (22)
----------------------------------------------------------------------------------------------------------
Balance, May 31, 1998               8,535     58,145        -           26,802        (22)       93,460
Comprehensive income/(loss):
    Net income/(loss)                -         -            -           (6,323)      -           (6,323)
    Foreign currency translation     -         -              44          -          -               44
                                                                                             -------------
Comprehensive income/(loss)                                                                      (6,279)
Exercise of stock options, 944
  shares issued                      -             4        -             -          -                4
Purchase of treasury stock,
  165,150 shares                     -         -            -             -        (1,191)       (1,191)
----------------------------------------------------------------------------------------------------------
Balance, May 31, 1999               8,535     58,149          44        20,479     (1,213)       85,994
Comprehensive income/(loss):
    Net income/(loss)                -         -            -             (747)      -             (747)
    Foreign currency translation     -         -             195          -          -              195
                                                                                             -------------
Comprehensive income/(loss)                                                                        (552)
Exercise of stock options, 7,900
  shares issued                         8         33        -             -          -               41
Purchase of treasury stock,
  331,000 shares                     -         -            -             -        (2,676)       (2,676)
----------------------------------------------------------------------------------------------------------
Balance, May 31, 2000              $8,543    $58,182        $239       $19,732    $(3,889)      $82,807
----------------------------------------------------------------------------------------------------------
                                   -----------------------------------------------------------------------
</TABLE>

See notes to consolidated financial statements.

                                                                              15





<PAGE>

                                     [LOGO]

               LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    Years ended May 31, 2000, 1999 and 1998

1. ACCOUNTING POLICIES
---------------------------------------------

a. The Company and its principles of consolidation

    The Company and its subsidiaries are engaged in the cutting and polishing of
rough diamonds and selling of both polished and uncut rough diamonds. The
consolidated financial statements include the accounts of the Company and its
subsidiaries, all of which are wholly owned. Through March 1998, the Company
owned 60% of Lazare Kaplan Botswana (Pty) Ltd. Minority interest represents the
minority stockholders' proportionate share of the equity of Lazare Kaplan
Botswana (Pty) Ltd. through such date (see Note 9). Effective January 1, 1998,
the Company restructured certain foreign operations. This resulted in the
inclusion of all revenue from these operations and an increase in rough diamond
sales for the year ended May 31, 1998 of approximately $37 million. All material
intercompany balances and transactions have been eliminated. In these notes to
consolidated financial statements, the years '2000', '1999' and '1998' refer to
the fiscal years ended May 31, 2000, 1999 and 1998, respectively.

b. Use of estimates

    The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
certain estimates and assumptions that could affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
these estimates.

c. Sales and accounts receivable

    The Company's net sales to customers in each of the following regions for
the years ended May 31, 2000, 1999 and 1998 are set forth below:

<TABLE>
<CAPTION>
                        2000   1999   1998
------------------------------------------
                        ------------------
<S>                     <C>    <C>    <C>
United States            23%    31%    28%
Far East                  8%     8%     7%
Europe, Israel & other   69%    61%    65%
------------------------------------------
                        100%   100%   100%
------------------------------------------
                        ------------------
</TABLE>

    No single customer of the Company accounted for 10% or more of the Company's
net sales for the fiscal years ended May 31, 2000, 1999 and 1998. Credit is
extended based on an evaluation of each customer's financial condition and
generally collateral is not required on the Company's receivables. Revenue is
recognized when earned.

d. Cash and cash equivalents

    The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.

e. Inventories

    Inventories are stated at the lower of cost, using the first-in, first-out
method, or market.

f. Property, plant and equipment

    Property, plant and equipment is stated at cost less accumulated
depreciation and amortization. Depreciation and amortization is computed using
the straight-line method over the shorter of asset lives or lease terms.

g. Asset Impairments

    The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by the
related assets are less than the carrying amounts of those assets.

h. Foreign currency

    All purchases of rough diamonds worldwide are denominated in U.S. dollars.
All of the Company's foreign sales are denominated in U.S. dollars, with the
exception of those sales made by the Company's subsidiary, Lazare Kaplan Japan,
which are denominated in Japanese yen. The functional currency for Lazare Kaplan
Japan is the Japanese yen and the Company recognizes foreign currency
translation adjustments with regard to the activities of Lazare Kaplan Japan
which are shown as a component stockholders' equity in the accompanying balance
sheets. In addition, the functional currency for Lazare Kaplan Botswana (Pty)
Ltd. (interest sold in March

16





<PAGE>

                                     [Logo]

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    Years ended May 31, 2000, 1999 and 1998

1998) was the U.S. dollar and this subsidiary was not materially affected by
foreign currency fluctuations.

i. Advertising

    Advertising costs are expensed as incurred and were $2,480,000, $1,214,000
and $1,148,000 in 2000, 1999, and 1998, respectively.

j. Income taxes

    The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, 'Accounting for Income Taxes', whereby
deferred income taxes are determined based upon the enacted income tax rates for
the years in which these taxes are estimated to be payable or recoverable.
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) operating loss
carryforwards. Realization of the net deferred tax assets is dependent on
generating sufficient taxable income prior to the expiration of net operating
loss carryforwards. Although realization is not assured, management believes it
is more likely than not that the net deferred tax asset will be realized. The
amount of the net deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.

    The Company and its domestic subsidiaries file a consolidated income tax
return. The Company's foreign subsidiaries are not subject to Federal income
taxes and their provisions for income taxes have been computed based on the
effective tax rates, if any, in the foreign countries.

    There were no taxable dividends paid to the Company from foreign
subsidiaries during 2000.

k. Earnings/(Loss) per share

    The Company computes basic earnings per share based upon the weighted
average number of common shares outstanding, and diluted earnings per share
based upon the weighted average number of common shares outstanding including
the impact of dilutive stock options.

l. Risks and Uncertainties

    The world's sources of rough diamonds are highly concentrated in a limited
number of countries. Varying degrees of political and economic risk exist in
many of these countries. As a consequence, the diamond business is subject to
various sovereign risks beyond the Company's control, such as changes in laws
and policies affecting foreign trade and investment. In addition, the Company is
subject to various political and economic risks, including the instability of
foreign economies and governments, labor disputes, war and civil disturbances
and other risks that could cause production difficulties or stoppages, restrict
the movement of inventory or result in the deprivation or loss of contract
rights or the taking of property by nationalization or expropriation without
fair compensation.

    The Company's business is dependent upon the availability of rough diamonds.
Based upon published reports, the Company believes that approximately 60% of the
world's current diamond output is sold by De Beers Centenary AG and its
affiliated companies. Although De Beers has historically been one of the
Company's major suppliers of rough diamonds, the Company has successfully
diversified its sources of supply by entering into arrangements with other
primary source suppliers and has been able to supplement its rough diamond needs
by purchasing supplies in the secondary market. While the Company believes that
it has good relationships with its suppliers and that its sources of supply are
sufficient to meet its present and foreseeable needs, the Company's rough
diamond supplies, and therefore, its manufacturing capacity, could be adversely
affected by political and economic developments in producing countries over
which it has no control. While the Company believes that alternative sources of
supply may be available, any significant disruption of the Company's access to
its primary source suppliers could have a material adverse effect on its ability
to purchase rough diamonds.

    Further, through its control of the world's diamond output, De Beers can
exert significant control over the pricing of rough and polished diamonds. A
large rapid increase in rough diamond prices could materially adversely affect
the Company's revenue and

                                                                              17





<PAGE>

                                     [Logo]

               LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    Years ended May 31, 2000, 1999 and 1998

operating margins if the increased cost of the rough diamonds could not be
passed along to its customers in a timely manner. Alternatively, any rapid
decrease in the price of rough or polished diamonds could have a material
adverse affect on the Company in terms of inventory losses and lower margins.

    Throughout 1999 and 2000, the DTC, a De Beers affiliate, conducted a
strategic review of its overall business model. In July 2000, the DTC announced
significant changes in its approach to rough diamond marketing. In brief, the
DTC stated that it will stop open market purchases and alter its market control
and pricing policies. Henceforth, the DTC has said it will focus on selling its
own mining productions through its 'supplier of choice' marketing programs.
These policy changes are intended to modernize business practices within the
industry, shorten channels of distribution, lower working diamond stocks, supply
clients with downstream distribution and encourage additional investment in
marketing and advertising programs. The Company believes it is well positioned
to benefit from these changes in the DTC's approach to diamond marketing.
However, there can be no assurance that this policy change will not have a
material adverse effect on the Company's operations.

m. Stock Incentive Plans
    The Company accounts for its stock-based compensation plans using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25
'Accounting for Stock Issued to Employees' and related interpretations and makes
certain pro forma disclosures (see Note 11).

n. Comprehensive Income/(Loss)

    The Company reports 'Comprehensive Income/(Loss)' in accordance with
Statement of Financial Accounting Standards No. 130, which requires foreign
currency translation adjustments to be included in other comprehensive income.
For the years ended May 31, 2000 and 1999, total comprehensive loss was $552,000
and $6,279,000, respectively.

o. Reclassifications

    Certain prior year amounts have been reclassified to conform to current year
presentation.

2. PROPERTY, PLANT AND EQUIPMENT
---------------------------------------------

    Property, plant and equipment consists of (in thousands):

<TABLE>
<CAPTION>
                                May 31,
--------------------------------------------
                            2000      1999
--------------------------------------------
                           -----------------
<S>                        <C>       <C>
Land and buildings         $ 2,693   $ 2,436
Leasehold improvements       2,209     2,107
Machinery, tools and
  equipment                  4,924     4,247
Furniture and fixtures       1,877     1,850
Computer hardware and
  equipment                  6,870     2,093
Construction in progress         7     3,393
--------------------------------------------
                            18,580    16,126
Less accumulated
  depreciation and
  amortization               9,026     7,975
--------------------------------------------
                           $ 9,554   $ 8,151
--------------------------------------------
                           -----------------
</TABLE>

Depreciation and amortization rates:

<TABLE>
<S>                               <C>
--------------------------------------------
Buildings                          2 TO 3.7%
Leasehold improvements            3.7 TO 20%
Machinery, tools and
  equipment                        10 TO 25%
Furniture and fixtures             10 TO 20%
Computer hardware and
  equipment                        10 TO 33%
--------------------------------------------
</TABLE>

    Depreciation expense for 2000, 1999 and 1998 was $1,313,000, $727,000 and
$1,082,000, respectively.

18





<PAGE>

                                     [Logo]

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    Years ended May 31, 2000, 1999 and 1998

3. INCOME TAXES
---------------------------------------------
    The items comprising the Company's net deferred tax assets are as follows
(in thousands):

<TABLE>
<CAPTION>
                                  May 31,
----------------------------------------------
                              2000      1999
----------------------------------------------
                             -----------------
<S>                          <C>       <C>
Deferred tax assets:
  Operating loss and other
    carryforwards            $ 9,181   $ 9,100
  Other                        2,881       650
Deferred tax liabilities:
  Depreciation                   265        50
----------------------------------------------
                              11,797     9,700
Less: Valuation allowance       (885)     (585)
----------------------------------------------
Net deferred tax assets      $10,912   $ 9,115
----------------------------------------------
                             -----------------
</TABLE>

    The income tax provision/(benefit) is comprised of the following (in
thousands):

<TABLE>
<CAPTION>
                          Year ended May 31,
------------------------------------------------
                        2000      1999     1998
------------------------------------------------
                       -------------------------
<S>                    <C>       <C>       <C>
Current:
Federal                $    48   $  -      $  20
State and local            327        28      24
Foreign                     73      -        633
------------------------------------------------
                           448        28     677
Deferred:
Federal, state and
  local                 (1,126)   (5,280)   (260)
------------------------------------------------
                       $  (678)  $(5,252)  $ 417
------------------------------------------------
                       -------------------------
</TABLE>

    Income/(loss) before income taxes from the Company's domestic and foreign
operations was ($408,000) and $505,000, respectively for the year ended May 31,
2000, ($11,102,000) and ($473,000), respectively for the year ended May 31, 1999
and $3,615,000 and ($1,320,000), respectively for the year ended May 31, 1998.

    The tax provision/(benefit) is different from amounts computed by applying
the Federal income tax rate to the income before taxes as follows (in
thousands):

<TABLE>
<CAPTION>
------------------------------------------------
                        2000      1999     1998
------------------------------------------------
                       -------------------------

<S>                    <C>       <C>       <C>
Tax
  provision/(benefit)
  at statutory rate    $    33   $(3,936)  $ 780
(Decrease)/increase
  in taxes resulting
  from:
  Differential
    attributable to
    foreign
    operations            (174)      (58)    149
  State and local
    taxes, net of
    Federal benefit        164      (578)      8
  Permanent items       (1,001)     -        -
  Change in valuation
    allowance for
    deferred tax
    asset                  300      (680)   (520)
------------------------------------------------
Actual tax
  provision/(benefit)  $  (678)  $(5,252)  $ 417
------------------------------------------------
                       -------------------------
</TABLE>

    The Company has available Federal net operating losses to offset future
taxable income which expire as follows (in thousands):

<TABLE>
<CAPTION>
                                          Net
                                    Operating
Year                                   Losses
---------------------------------------------
                                     -------
<S>                                 <C>
2001                                 $ 3,500
2002                                     500
2007                                     500
2008                                     900
2010                                     400
2013                                   1,200
2019                                  11,125
---------------------------------------------
                                     $18,125
---------------------------------------------
                                     -------
</TABLE>

    In addition, the Company has New York State and New York City net operating
loss carryforwards of approximately $9,800,000 each, expiring from 2001 to 2014.
The Company has Puerto Rico net operating loss carryforwards of approximately
$1,800,000 expiring from 2002 through 2005.

                                                                              19





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                                     [Logo]

               LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    Years ended May 31, 2000, 1999 and 1998

4. ACCOUNTS PAYABLE AND OTHER
   CURRENT LIABILITIES
---------------------------------------------

    Accounts payable and other current liabilities consist of (in thousands):

<TABLE>
<CAPTION>
                            2000      1999
--------------------------------------------
                           -----------------
<S>                        <C>       <C>
Accounts payable           $27,526   $13,109
Accrued expenses            22,348    12,077
--------------------------------------------
                           $49,874   $25,186
--------------------------------------------
                           -----------------
</TABLE>

5. LINES OF CREDIT
---------------------------------------------

    The Company has a long-term unsecured, revolving loan agreement with two
banks. The agreement, as amended, provides that the Company may borrow up to
$40,000,000 in the aggregate, at an interest rate of any of a) one-eighth of one
percent above the bank's prime rate, b) 160 basis points above the London
Interbank Offered Rate (LIBOR), or c) 160 basis points above the bank's cost of
funds rate. The applicable interest rate is contingent upon the method of
borrowing selected by the Company. The term of the loan is through September 1,
2002. The proceeds of this facility are available for the Company's working
capital needs and to fund its future annual installments due under the Senior
Note Agreement. The revolving loan agreement contains certain provisions that
require, among other things, (a) maintenance of defined levels of current
working capital and annual cash flow, (b) limitations of borrowing levels,
capital expenditures, and rental obligations and (c) limitations on restricted
payments, including dividends. The Company was not in compliance with the
current ratio covenant under the revolving loan agreement for the year ended
May 31, 2000. The banks have given a waiver to the Company and prospectively
amended certain related definitions which had given to noncompliance at May 31,
2000. As of May 31, 2000 and 1999 there was an aggregate balance outstanding of
$38,135,000 and $32,158,000, respectively, under this agreement. The weighted
average interest rate during 2000 and 1999 on the Company's revolving loan was
7.43% and 6.96%, respectively.

    In December 1999, a subsidiary of the Company borrowed, at a fixed exchange
rate, 1.1 billion Japanese Yen (approximately $10,000,000) under a loan facility
with one of its primary commercial bank lenders, payable in seven quarterly
installments of 96,250,000 Yen each, which commenced on March 7, 2000 and
continue until December 7, 2001, at which time the entire principal is payable
in full, plus interest. The loan bore interest at a rate equal to the Japanese
prime rate plus 1% or the 90-day LIBOR rate for Yen borrowings plus 1%, at the
option of the borrower. As of May 31, 2000, the balance outstanding under this
loan facility was $9.1 million. The Company has guaranteed the payment of the
loan and has secured its guarantee by pledging interest bearing deposits of
approximately $9.5 million to the bank, of which $5.6 million is included in
non-current assets. In June 2000, the Company entered into an interest rate swap
agreement with one of its primary commercial bank lenders which had the effect
of converting the loan to a fixed interest rate loan at 1.58%.

    The Company has a $30 million unsecured line of credit with a bank at an
interest rate of 150 basis points above the bank's base rate (which rate is
currently 9.35%). As of May 31, 2000, the balance outstanding under this line of
credit was $16.8 million. This line of credit is available for the Company's
working capital requirements.

6. SENIOR NOTES
---------------------------------------------

    The Company has outstanding unsecured 9.97% Senior Notes, due May 15, 2001.
Interest is payable semi-annually. As of May 31, 2000 and 1999, the balance of
Senior Notes outstanding was $4,290,000 and $8,575,000, respectively.

    Provisions of the Senior Notes require, among other things, (a) maintenance
of defined levels of consolidated tangible net worth and current working
capital, (b) limitation of borrowing levels and (c) limitations on restricted
payments, including the amount of dividends.

20





<PAGE>

                                     [Logo]

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    Years ended May 31, 2000, 1999 and 1998

7. LEGAL SETTLEMENT AND RELATED COSTS
---------------------------------------------

    A settlement agreement, dated October 18, 1999, was signed which settled all
of the various disputes among the Company and other related parties and
International Diamond Traders CY B.V.B.A. ('IDT') and Avi Neumark, the President
and controlling stockholder of IDT. The Company agreed to pay the parties the
sum of $3,275,000 over a period of 40 months. The balance outstanding on
May 31, 2000 was $1,975,000. The total cost of the settlement to the Company
during the year ended May 31, 2000 was $5,048,000, including related legal and
other expenses.

8. REALIGNMENT COSTS AND OTHER CHARGES
---------------------------------------------

a. Japanese Distribution

    After working with its former distributor of over 25 years, in 1999, the
Company changed the nature of its distribution in Japan by assuming control of
the distribution of its products and opening its own office. In this way, the
Company has realigned its position with its retail and wholesale customers and
shortened its channels of distribution. In addition, this realignment has
enabled the Company, without interruption, to assume control of the expansion
and maintenance of the Lazare Diamond brand name in Japan. As part of the
realignment, the Company retained experienced Japanese staff, giving it
immediate and direct access to important customers as well as in depth industry
knowledge. The Company believes that this realignment was necessary in order to
compete effectively in Japan (the world's second largest market for diamonds and
diamond jewelry) in the years to come. As a result, the Company recorded a
charge of approximately $5.6 million in 1999.

    During 2000, the Company realized approximately $3.0 million as beneficiary
of certain life insurance policies which arose from its relationship with its
former Japanese distributor. The Company also incurred $1.1 million of
additional costs relating to the realignment of its Japanese operations.

b. Angola

    On December 31, 1999, the Company's license to purchase diamonds in Angola
expired. Through February 2000, the Company continued to operate its Angolan
buying operations. During the fourth quarter of 2000, the Company terminated its
operations in Angola and recorded charges relating to such operations of
$1.1 million.

c. Other Charges

    The Company recorded charges of $2.0 million in the fourth quarter of 2000
primarily related to year-end inventory adjustments.

    In aggregate, during 2000, the life insurance proceeds net of realignment
costs and other charges resulted in a decrease of approximately $0.8 million in
selling, general and administrative expenses and an increase of approximately
$2.0 million in cost of sales. In 1999, the net effect was an increase of $5.6
million in selling, general and administrative expenses.

9. SALE OF INTEREST IN LAZARE KAPLAN
   BOTSWANA (PTY) LTD.
---------------------------------------------

    In March 1998, the Company completed the sale of its 60% interest in Lazare
Kaplan Botswana (Pty) Ltd. for a price of $11.1 million in cash and recorded a
gain of approximately $3.7 million on the transaction (net of $485,000 of
Botswana taxes).

10. CUMULATIVE EFFECT OF CHANGE IN METHOD
    OF ACCOUNTING FOR START-UP COSTS
---------------------------------------------

    In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
98-5, 'Reporting on the Costs of Start-Up Activities', which was required for
financial statements for fiscal years beginning after December 15, 1998. The SOP
broadly defines start-up costs as those one-time activities related to opening a
new facility, introducing a new product or service, conducting business in a new
territory, conducting business with a new class of customer, initiating a new
process in an existing facility or commencing some new operation. The SOP
requires that start-up costs capitalized prior to adop-

                                                                              21





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                                     [Logo]

               LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    Years ended May 31, 2000, 1999 and 1998

tion be written off as a cumulative effect of a change in accounting principle
and any future start-up costs be expensed as incurred. The Company was required
to adopt this standard on June 1, 1999 and recorded a non-cash charge of
$1,522,000 (net of tax benefit of $671,000). This amount is primarily comprised
of a) the start-up expenses related to the operations of the Company's newly
formed, wholly owned subsidiary, Pegasus Overseas Ltd. and the signing and
implementation of its ten year agreement with a wholly owned subsidiary of
General Electric Company, and b) the start-up expenses related to the signing
and implementation of the March 1999 Cooperation Agreement with AK ALROSA of
Russia. The adoption of SOP 98-5 did not have a material effect on income from
continuing operations for the year ended May 31, 2000.

11. STOCK INCENTIVE PLANS
---------------------------------------------

    A Stock Option Incentive Plan was approved by the Board of Directors on
March 11, 1988 (the 1988 Plan). The 1988 Plan has reserved 650,000 shares of the
common stock of the Company for issuance to key employees of the Company and its
subsidiaries. No future grants may be made under the 1988 Plan, although
outstanding options may continue to be exercised.

    A Long-Term Stock Incentive Plan was approved by the Board of Directors on
April 10, 1997 (the 1997 Plan). The 1997 Plan has reserved 600,000 shares of the
common stock of the Company for issuance to key employees of the Company and its
subsidiaries.

    The purchase price of each share of common stock subject to an incentive
option under each of the plans is not to be less than 100 percent of the fair
market value of the stock on the day preceding the day the option is granted
(110 percent for 10 percent beneficial owners). The Stock Option Committee
determines the period or periods of time during which an option may be exercised
by the participant and the number of shares as to which the option is
exercisable during such period or periods, provided that the option period shall
not extend beyond ten years (five years in the case of 10 percent beneficial
owners) from the date the option is granted.

    The Company does not recognize compensation expense when the exercise price
of the Company's stock options equals the market price of the underlying stock
on the date of the grant. Under Statement of Financial Accounting Standards
No. 123 'Accounting for Stock-Based Compensation', pro forma information
regarding net income and earnings per share is required as if the Company had
accounted for its employee stock options under the fair value method of the
Statement. For purposes of pro forma disclosures, the Company estimated the fair
value of stock options granted in 2000, 1999 and 1998 at the date of the grant
using the Black-Scholes option pricing model. The estimated fair value of the
options is amortized as an expense over the options' vesting period for the pro
forma disclosures.

    The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

22





<PAGE>

                                     [Logo]

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    Years ended May 31, 2000, 1999 and 1998

    The following summarizes the assumptions used to estimate the fair value of
stock options granted in each year and certain pro forma information:

<TABLE>
<CAPTION>
-------------------------------------------------
                        2000     1999     1998
-------------------------------------------------
                         ------------------------
<S>                      <C>      <C>      <C>
Risk-free interest rate   6.00%    6.00%    6.00%
Expected option life    5 YEARS  5 years  5 years
Expected volatility      35.80%   37.30%   35.70%
Expected dividends
  per share              $ 0.00   $ 0.00   $ 0.00
Weighted average
  estimated fair value
  per share of options
  granted at market
  price                  $ 3.00   $ 3.13   $ 4.30
Weighted average
  estimated fair value
  per share of options
  granted above
  market price           $  2.66     --    $ 3.94
Pro forma net
  income/(loss) (000's)  $(1,272) $(7,103) $2,042
Pro forma basic
  earnings/(loss)
  per share              $ (0.16)  $(0.84) $ 0.24
Pro forma diluted
  earnings/(loss)
  per share              $ (0.16)  $(0.84) $ 0.24
-------------------------------------------------
                         ------------------------
</TABLE>

    As any options granted in the future will also be subject to the fair value
pro forma calculations, the pro forma adjustments for 2000, 1999 and 1998 may
not be indicative of future years.

    A summary of the Plans' activity for each of the three years in the period
ended May 31, 2000 is as follows:

<TABLE>
<CAPTION>
                                                         Weighted
                                                         average
                                                          price
                           Number                          per
                          of shares     Option price      share
-----------------------------------------------------------------
                          ---------------------------------------
<S>                       <C>         <C>                <C>
Outstanding -- June 1,
 1997                      658,507    $ 5.000-$ 16.225   $ 9.107
Options expired               (600)   $ 5.000-$  5.000   $ 5.000
Options issued             169,050    $10.375-$11.4125   $10.498
Options exercised         (191,633)   $ 5.000-$ 6.6000   $ 5.872
-----------------------------------------------------------------
Outstanding -- May 31,
 1998                      635,324     $ 5.125-$16.225   $10.456
Options expired             (8,834)    $ 6.375-$ 7.625   $ 7.578
Options issued               6,500     $ 7.375-$ 7.375   $ 7.375
Options exercised           (5,666)    $ 6.000-$ 6.375   $ 6.044
-----------------------------------------------------------------
Outstanding -- May 31,
 1999                      627,324    $ 5.125-$ 16.225   $10.505
Options expired             (1,300)   $ 7.625-$ 10.375   $ 9.318
Options issued             141,300    $ 7.000-$  9.000   $ 7.414
Options exercised           (7,900)   $ 5.125-$  5.125   $ 5.125
-----------------------------------------------------------------
Outstanding -- May 31,
 2000                      759,424    $ 5.125-$ 16.225   $ 9.988
-----------------------------------------------------------------
                          ---------------------------------------
Exercisable options        557,708
-----------------------------------------------------------------
                          --------
</TABLE>

    The following table summarizes information about stock options at May 31,
2000:

<TABLE>
<CAPTION>
                                          Exercisable stock
Outstanding stock options                      options
---------------------------------------   ------------------
                             Weighted
                              average               Weighted
                             remaining              average
                            contractual             exercise
Range of prices   Shares       life       Shares     price
------------------------------------------------------------
------------------------------------------------------------
<S>               <C>       <C>           <C>       <C>
$ 5.125-$ 6.375   153,181   3.71 years    153,181   $ 5.958
$ 7.000-$ 7.700   203,743   6.87 years     68,110   $ 7.181
$ 9.000-$11.4125  178,250   7.20 years    112,167   $10.498
$14.750-$16.225   224,250   6.43 years    224,250   $14.882
------------------------------------------------------------
</TABLE>

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                                     [Logo]

               LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    Years ended May 31, 2000, 1999 and 1998

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

    Future minimum payments (excluding sub-lease income) under noncancelable
operating leases with initial terms of more than one year consist of the
following at May 31, 2000 (in thousands):

<TABLE>
<CAPTION>
                                   Operating
Year                                  leases
--------------------------------------------
                                      ------
<S>                                   <C>
2001                                  $  544
2002                                     539
2003                                     355
2004                                      93
Thereafter                                 0
--------------------------------------------
                                      $1,531
--------------------------------------------
                                      ------
</TABLE>

    Rental expense, including additional charges paid for increases in real
estate taxes and other escalation charges and credits for the years ended
May 31, 2000, 1999 and 1998, was approximately $842,000, $542,000 and $422,000,
respectively.

13. PROFIT SHARING PLAN
---------------------------------------------

    The Company has a profit sharing and retirement plan subject to
Section 401(k) of the Internal Revenue Code. The plan covers all full-time
employees in the United States and Puerto Rico who complete at least one year of
service. Participants may contribute up to a defined percentage of their annual
compensation through salary deductions. The Company intends to match employee
contributions in an amount equal to $0.50 for every pretax dollar contributed by
the employee up to 6% of the first $20,000 of compensation, provided the
Company's pretax earnings for the fiscal year that ends in the plan year exceed
$3,500,000. During 1998 the Company contributed approximately $45,000 for
calendar year 1997. The Company did not make a matching contribution during 2000
and 1999 for calendar years 1999 and 1998, respectively.

24





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                                     [Logo]

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    Years ended May 31, 2000, 1999 and 1998

14. GEOGRAPHIC SEGMENT INFORMATION
---------------------------------------------

    Revenue, gross profit and income/(loss) before income tax provision and
minority interest for each of the three years in the period ended May 31, 2000
and identifiable assets at the end of each of those years, classified by
geographic area, which was determined by where sales originated from and where
identifiable assets are held, were as follows (in thousands):

<TABLE>
<CAPTION>
                                    NORTH                                       ELIMI-     CONSOLI-
                                   AMERICA     EUROPE     AFRICA    FAR EAST    NATIONS     DATED
---------------------------------------------------------------------------------------------------
                                   ----------------------------------------------------------------
<S>                                <C>        <C>        <C>        <C>        <C>         <C>
Year ended May 31, 2000
Net sales to unaffiliated
  customers                        $106,848   $236,327   $    208   $17,751    $   -       $361,134
Transfers between geographic
  areas                              25,275      6,646    132,627      -        (164,548)     -
                                   ----------------------------------------------------------------
    Total revenue                  $132,123   $242,973   $132,835   $17,751    $(164,548)  $361,134
                                   ----------------------------------------------------------------
Gross profit/(loss)                $ 23,650   $  1,560   $    498   $ 3,666        -       $ 29,374
                                   ----------------------------------------------------------------
Income/(loss) from continuing
  operations before income tax
  provision and cumulative effect
  of change in accounting
  principle                        $  1,915   $   (172)  $ (1,121)  $  (525)       -       $     97
                                   ----------------------------------------------------------------
Identifiable assets at May 31,
  2000                             $167,472   $ 51,982   $ 12,635   $13,479    $ (42,869)  $202,699
---------------------------------------------------------------------------------------------------
                                   ----------------------------------------------------------------
Year ended May 31, 1999
Net sales to unaffiliated
  customers                        $113,017   $ 98,339   $ 36,206   $14,291    $   -       $261,853
Transfers between geographic
  areas                              22,798      9,432     70,913      -        (103,143)     -
                                   ----------------------------------------------------------------
    Total revenue                  $135,815   $107,771   $107,119   $14,291    $(103,143)  $261,853
                                   ----------------------------------------------------------------
Gross profit/(loss)                $ 11,791   $    689   $ (3,001)  $ 2,692    $    (353)  $ 11,818
                                   ----------------------------------------------------------------
Income/(loss) from continuing
  operations before income tax
  provision and minority interest  $ (7,361)  $    (96)  $ (3,713)  $   (52)   $    (353)  $(11,575)
                                   ----------------------------------------------------------------
Identifiable assets at May 31,
  1999                             $145,493   $ 22,602   $ 34,096   $ 9,719    $ (59,997)  $151,913
---------------------------------------------------------------------------------------------------
                                   ----------------------------------------------------------------
Year ended May 31, 1998
Net sales to unaffiliated
  customers                        $107,298   $ 66,401   $ 48,918   $  -       $   -       $222,617
Transfers between geographic
  areas                              14,460     15,725     52,371      -         (82,556)     -
                                   ----------------------------------------------------------------
    Total revenue                  $121,758   $ 82,126   $101,289   $  -       $ (82,556)  $222,617
                                   ----------------------------------------------------------------
Gross profit                       $ 11,814   $  1,016   $  4,316   $  -       $  (3,246)  $ 13,900
                                   ----------------------------------------------------------------
Income/(loss) from continuing
  operations before income tax
  provision and minority interest  $  2,211   $    510   $   (608)  $  -       $     182   $  2,295
                                   ----------------------------------------------------------------
Identifiable assets at May 31,
  1998                             $128,549   $ 14,834   $ 23,051   $  -       $ (24,104)  $142,330
---------------------------------------------------------------------------------------------------
                                   ----------------------------------------------------------------
</TABLE>

    The identifiable assets which are included in the eliminations primarily
represent advances to affiliates. These advances are included therein since the
Company, which is the parent company, finances the operations of these
affiliates.

                                                                              25





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               LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    Years ended May 31, 2000, 1999 and 1998

    Revenue and gross profit for each of the three years in the period ended May
31, 2000 classified by product were as follows (in thousands):

<TABLE>
<CAPTION>
                                                              POLISHED    ROUGH      TOTAL
<S>                                                           <C>        <C>        <C>
--------------------------------------------------------------------------------------------
                                                              ------------------------------
Year ended May 31, 2000
Net sales                                                     $138,568   $222,566   $361,134
                                                              ------------------------------
Gross profit                                                  $ 23,333   $  6,041   $ 29,374
--------------------------------------------------------------------------------------------
                                                              ------------------------------
Year ended May 31, 1999
Net sales                                                     $112,573   $149,280   $261,853
                                                              ------------------------------
Gross profit/(loss)                                           $ 14,415   $ (2,597)  $ 11,818
--------------------------------------------------------------------------------------------
                                                              ------------------------------
Year ended May 31, 1998
Net sales                                                     $ 84,058   $138,559   $222,617
                                                              ------------------------------
Gross profit                                                  $  9,369   $  4,531   $ 13,900
--------------------------------------------------------------------------------------------
                                                              ------------------------------
</TABLE>

15. TREASURY STOCK
--------------------------------------------------------------------------------

    The Board of Directors authorized the repurchase, at management's
discretion, of up to 1,000,000 shares of the Company's common stock from time to
time through April 12, 2001. During 2000 and 1999, the Company purchased 331,000
and 165,150 shares, respectively, of its common stock which are shown as a
reduction of stockholders' equity in the accompanying balance sheets.

16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
--------------------------------------------------------------------------------
    The following is a summary of the results of operations for the years ended
May 31, 2000 and 1999 (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                        QUARTER
--------------------------------------------------------------------------------------------------
                                                      FIRST       SECOND       THIRD       FOURTH
--------------------------------------------------------------------------------------------------
                                                     ---------------------------------------------
<S>                                                  <C>         <C>          <C>          <C>
2000
Net sales                                            $69,742     $111,906     $106,238     $73,248
Gross profit                                         $ 6,492     $  8,195     $  8,875     $ 5,812
Income/(loss) before cumulative effect of change in
  accounting principle                               $ 1,016 (1) $   (861)(2) $  2,834(3)  $(2,214)(4)
Net income/(loss)                                    $  (506)(1) $   (861)(2) $  2,834(3)  $(2,214)(4)
Basic earnings/(loss) per share                      $ (0.06)    $  (0.10)    $   0.35     $ (0.27)
Diluted earnings/(loss) per share                    $ (0.06)    $  (0.10)    $   0.35     $ (0.27)
1999
Net sales                                            $68,844     $ 74,705     $ 47,045     $71,259
Gross profit                                         $ 3,193     $  3,743     $  3,863     $ 1,019
Net income/(loss)                                    $  (547)    $   (627)    $    263     $(5,412)(5)
Basic earnings/(loss) per share                      $ (0.06)    $  (0.07)    $   0.03     $ (0.64)
Diluted earnings/(loss) per share                    $ (0.06)    $  (0.07)    $   0.03     $ (0.64)
</TABLE>

(1) Includes $1.5 million (net of tax) related to the cumulative effect of a
    change in method of accounting and $0.5 million (net of tax) of costs
    associated with a legal settlement.

(2) Includes $2.6 million (net of tax) of costs associated with a legal
    settlement.

(3) Includes $1.6 million of benefits from certain life insurance policies.

(4) Includes $1.4 million of benefits from certain life insurance policies
    offset by $2.6 million (net of tax) in costs to realign operations and other
    charges.

(5) Includes $2.8 million (net of tax) of losses incurred in the Company's rough
    diamond buying operations in Angola and $3.4 million (net of tax) of costs
    associated with the realignment of the Company's Japanese distribution.

26





<PAGE>

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--------------------------------------------------------------------------------
                          INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Lazare Kaplan International Inc.

    We have audited the accompanying consolidated balance sheets of Lazare
Kaplan International Inc. and subsidiaries as of May 31, 2000 and 1999 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended May 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Lazare Kaplan International Inc. and subsidiaries at May 31, 2000 and 1999 and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended May 31, 2000 in conformity with accounting
principles generally accepted in the United States.




                                                              Ernst & Young LLP

New York, New York
August 11, 2000

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               LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                             CORPORATE INFORMATION

<TABLE>
<S>                                <C>                                    <C>
CORPORATE HEADQUARTERS             DIRECTORS AND OFFICERS                 REGISTRAR AND TRANSFER AGENT

529 Fifth Avenue                   Maurice Tempelsman                     ChaseMellon Transfer
New York, New York 10017           Director;                              Services, LLC
Telephone (212) 972-9700           Chairman of the Board                  85 Challenger Road
                                                                          Overpeck Center
                                   Leon Tempelsman                        Ridgefield Park, NJ 07660
                                   Director;
                                   Vice Chairman of the Board             COUNSEL
                                   and President
                                                                          Warshaw Burstein Cohen
                                   Lucien Burstein                        Schlesinger & Kuh, LLP
                                   Director;                              555 Fifth Avenue
                                   Secretary                              New York, New York 10017
                                   Partner
                                   Warshaw Burstein Cohen                 INDEPENDENT AUDITORS
                                   Schlesinger & Kuh, LLP
                                   (attorneys)                            Ernst & Young LLP
                                                                          787 Seventh Avenue
                                   Myer Feldman                           New York, New York 10019
                                   Director;
                                   Attorney,
                                   self-employed

                                   Sheldon L. Ginsberg
                                   Director;
                                   President and Chief
                                   Executive Officer
                                   Enjewel, LLC

                                   Robert Speisman
                                   Director;
                                   Senior Vice President - Sales

                                   William H. Moryto
                                   Vice President and
                                   Chief Financial Officer
</TABLE>

28





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                                    [LOGO]

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LAZARE KAPLAN INTERNATIONAL INC., 529 FIFTH AVENUE, NEW YORK, NY 10017
                            (212) 972-9700