U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

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

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    

o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

LJ INTERNATIONAL INC.

(Exact name of Registrant as specified in its charter)

LJ INTERNATIONAL INC.

(Translation of Registrant’s name into English)

British Virgin Islands

(Jurisdiction of incorporation or organization)

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

Hon Tak Ringo NG, CFO
011-852-2764-3622 (telephone)
ringong@ljintl.com (email)
011-852-2764-3783 (facsimile)

Unit #12, 12/F, Block A
Focal Industrial Centre
21 Man Lok Street
Hung Hom, Kowloon, Hong Kong

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

Title of each class		Name of each exchange on which registered
$.01 Par Value Common Stock (“Common Stock”)		NASDAQ

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

None

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

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

21,437,172 Shares of Common Stock as of December 31, 2007

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

þ		U.S. GAAP
o		International Financial Reporting Standards as issued by
		the International Accounting Standards Board
o		Other

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

o		Item 17
o		Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

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

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

     Not Applicable.

 

 

SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS

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

     You should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, such as but not limited to:

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

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

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

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

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

     Not applicable.

ITEM 3. KEY INFORMATION

A. SELECTED FINANCIAL DATA.

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

     The following selected consolidated financial data with respect to the five-year period ended December 31, 2007 have been derived from our audited consolidated financial statements. The following selected consolidated financial data should be read in conjunction with “Operating and Financial Review and Prospects” and the Consolidated Financial Statements and Notes included elsewhere in this annual report.

Selected Financial Data

		Years ended December 31,
		2007				2006				2005				2004				2003
Statement of Operations Data:
Revenues			152,037				123,791				99,646				77,504				58,330
Cost of Goods sold			(112,508	)			(88,867	)			(77,127	)			(61,265	)			(44,947	)
Gross profit			39,529				34,924				22,519				16,239				13,383
Operating expenses
Selling, general and administrative			(30,399	)			(23,114	)			(15,488	)			(11,578	)			(9,133	)
Net (loss) gain on derivatives			(4	)			(29	)			8				199				87
Depreciation			(3,095	)			(2,039	)			(1,368	)			(1,032	)			(1,184	)
Impairment on property, plant and equipment			—				—				—				—				(84	)
Amortization and impairment loss on goodwill			—				—				—				(698	)			(200	)
Operating income			6,031				9,742				5,671				3,130				2,869
Other income and expenses
Interest income			273				282				139				38				41
Interest expenses			(3,103	)			(3,258	)			(1,991	)			(902	)			(753	)
Operating income before income taxes, minority interests, equity in results of investment securities and extraordinary item			3,201				6,766				3,819				2,266				2,157
Income taxes expense			(1,711	)			(1,403	)			(739	)			(277	)			(352	)
Income before minority interests, equity in results of investment securities and extraordinary item			1,490				5,363				3,080				1,989				1,805
Minority interests in consolidated subsidiaries			(1	)			(38	)			(20	)			—				8
Income before equity in results of investment securities and extraordinary item			1,489				5,325				3,060				1,989				1,813
Equity in results of investment securities			—				—				—				133				(851	)
Income before extraordinary item			1,489				5,325				3,060				2,122				962
Extraordinary gain on negative goodwill			—				—				1,291				—				—
Net income			1,489				5,325				4,351				2,122				962
Net income per share:
Basic			0.07				0.31				0.32				0.19				0.11
Diluted			0.07				0.29				0.30				0.18				0.10
Weighted average number of shares:
Basic			21,064				17,390				13,439				11,119				8,757
Diluted			22,289				18,303				14,322				12,107				9,706
Balance Sheet Data:
Working capital			62,786				50,134				35,554				23,617				17,053
Total assets			134,144				124,522				108,230				73,673				59,885
Long-term obligation			1,335				1,640				43				58				77
Total stockholders’ equity			72,668				59,739				45,008				32,790				27,101

Pursuant to the purchase agreement dated January 1, 2005, the Company paid $2,827,500 for new issuance of 3,900 shares of common stock of Goldleaves International Limited (GIL), in which the Company had 20% equity interests and was classified as investment security as of December 31, 2004. The Company then became the major stockholder holding 98% equity

interests in GIL, which became a subsidiary of the Company. As of December 31, 2004, this investment was accounted for using the cost method. As appropriate for a step-acquisition, in the 2005 financial statements, the investment has been restated to account for under the equity method.

B. CAPITALIZATION AND INDEBTEDNESS.

     Not applicable.

C. REASONS FOR THE OFFER AND USE OF PROCEEDS.

     Not applicable.

D. RISK FACTORS.

We depend upon one customer who accounts for at least 10% of our sales. We cannot be certain that these sales will continue; if they do not, our revenues will likely decline.

     Although we sell to a large number of customers in a variety of markets, one of our customers accounts for at least 10% of our sales. For the fiscal years ended December 31, 2006 and 2007, this customer accounted for approximately 8% of our 2006 sales and 10% of our 2007 sales. This customer is a non-affiliated third party and is not a related party of the Company or any of its subsidiaries. Although we have maintained a good and longstanding relationship with this customer, we do not have any long-term contract with it and it orders only on a “purchase order” basis. The loss of this customer or a significant reduction in its orders would have a materially adverse effect on our revenues.

We face significant competition from larger competitors in our wholesale and retail operations.

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

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

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

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

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

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

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

Changes to PRC tax laws may adversely affect our financial condition and results of operations in the future.

     The National People’s Congress, the Chinese legislature, on March 16, 2007 passed a new enterprise income tax law, which became effective on January 1, 2008. The new law applies a uniform 25% enterprise income tax rate (“EIT”) to both foreign invested enterprises and domestic enterprises, except that enterprises that were approved to be established prior to March 16, 2007 may continue to enjoy the existing preferential tax treatments until December 31, 2012. Existing companies are required to transition to the new EIT rate over a five-year period starting January 1, 2008.

     Under the New EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise”, meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the New EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. Currently no official interpretation or application of this new “resident enterprise” classification is available, therefore it is unclear how tax authorities will determine tax residency based on the facts of each case.

     If the PRC tax authorities determine that our British Virgin Islands holding company is a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that non-China source income would be subject to PRC enterprise income tax at a rate of 25%, in comparison to no taxation in the British Virgin Islands. Second, although under the New EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income”, we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, if our British Virgin Islands holding company is deemed to be a PRC tax resident enterprise, a 10% withholding tax shall be imposed on dividends we pay to our non-PRC shareholders and with respect to gains derived from our non-PRC shareholders transferring our shares

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

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

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

     The approximately 34% of our wholesale sales during the fiscal year ended December 31, 2007 to our TV shopping channel customers was not seasonal in nature. It has been our management’s experience that the remaining 66% of our total wholesale sales is seasonally sensitive and is greater during the quarter ending December 31 of each year.

The success of our retail store expansion program in China is dependent upon numerous factors over which we have limited control.

     The future success of our ENZO retail stores in China is partially dependent upon general economic conditions in China, competitive developments within the retail jewelry sector in China and consumer attitudes, including changes in consumer preferences for certain jewelry styles and materials. In addition, our retail expansion program is also dependent upon a number of factors relating to our stores, including the availability of property, the location of the mall or shopping centre, the availability of desirable locations within a mall, the terms of leases, our relationship with major landlords, and the design and maintenance of our stores.

We rely on short-term financing from banks for our daily operation.

     We rely on short-term borrowings as part of our financing needs. If we fail to achieve timely rollover, extension or refinancing of our short-term debt, we may be unable to meet our obligations in connection with debt service, accounts payable and/or other liabilities when they become due and payable. In addition, we may be exposed to changes in interest rates. If interest rates increase substantially, our results of operations could be adversely affected.

     Certain of our banking facilities that offer short-term borrowings are collateralized by properties owned by Yu Chuan Yih and by his personal guarantee. If Mr. Yih withdraws the properties or his personal guarantee, the banking facilities may no longer remain available for use by us. In that event, our daily operations may be adversely affected.

We rely geographically on the US market for the majority of our revenue.

     Our wholesale business is our major revenue contributor and accounts for 77% of our total revenue. Geographically, North America is a major market for our wholesale business and contributes 68% of our revenues. Accordingly, the revenue of our wholesale business in the US market accounts for 53% of our total revenue. Any substantial decline of the US economy may adversely affect the spending patterns of the US consumers which could, in turn, adversely affect our revenue and income from the region.

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

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

As a “foreign private issuer”, we are not subject to certain rules promulgated by Nasdaq that other Nasdaq-listed issuers are required to comply with.

     Our common shares are currently listed on The Nasdaq Global Market and, for so long as our securities continue to be listed, we will remain subject to the rules and regulations established by Nasdaq applicable to listed companies. As permitted under Nasdaq rules applicable to foreign private issuers, we have determined not to comply with the following Nasdaq rules:

	•		our independent directors do not hold regularly scheduled meetings in executive session;
	•		the compensation of our executive officers is not determined by an independent committee of the board or by the independent members of the board of directors, and our CEO may be present and participate in the deliberations concerning his compensation;
	•		related party transactions are not required to be reviewed or approved by our audit committee or other independent body of the board of directors; and
	•		we are not required to solicit shareholder approval of stock plans, including those in which our officers or directors may participate; stock issuances that will result in a change in control; the issuance of our stock in related party transactions or other transactions in which we may issue 20% or more of our outstanding shares; or, below market issuances of 20% or more of our outstanding shares to any person.

We may in the future determine to voluntarily comply with one or more of the foregoing provisions.

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

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

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

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

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

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

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

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

     Under the laws of most jurisdictions in the United States, majority and controlling shareholders generally have certain fiduciary responsibilities to the minority shareholders. Shareholder action must be taken in good faith, and actions by controlling shareholders which are obviously unreasonable may be declared null and void. British Virgin Islands law protecting the interests of minority shareholders may not be as protective in all circumstances as the law protecting minority shareholders in US jurisdictions. In addition, the circumstances in which a shareholder of a BVI company may sue the company derivatively, and the procedures and defenses that may be available to the company, may result in the rights of shareholders of a BVI company being more limited than those of shareholders of a company organized in the US.

     Furthermore, our directors have the power to take certain actions without shareholder approval which would require shareholder approval under the laws of most US jurisdictions. The directors of a BVI corporation, subject in certain cases to court approval but without shareholder approval, may implement a reorganization, merger or consolidation, the sale of any assets, property, part of the business, or securities of the corporation. Our ability to amend our Memorandum of Association and Articles of Association without shareholder approval could have the effect of delaying, deterring or preventing a change in our control without any further action by the shareholders, including a tender offer to purchase our common stock at a premium over then current market prices.

Legal proceedings related to our historical reporting of financial results and other issues may significantly harm our business.

     Several lawsuits have been filed against us and certain officers and members of the Board of Directors, alleging false representations and material omissions in connection with press releases, SEC filings and other statements that purportedly overstated the Company’s business prospects and financial results. These lawsuits are described more fully in Part I, Item 8 and in Part I, Item 18, Note 12 to our consolidated financial statements contained in this Form 20-F. Defending these lawsuits has and will continue to result in significant expenditures and the diversion of our management’s time and attention from the operation of our business, which could have a negative effect on our business operations. From time to time, we may become involved in other litigation or other proceedings. Matters arising out of or related to the outcome of litigation could possibly harm our future results of operations or financial condition due to expenses we may incur to defend ourselves or the ramifications of an adverse decision.

ITEM 4. INFORMATION ON THE COMPANY

A. HISTORY AND DEVELOPMENT OF THE COMPANY.

          LJ International Inc. (“we” or the “Company”) was incorporated as an international business company under the International Business Companies Act of the British Virgin Islands on January 30, 1997. As of December 31, 2007, we owned all of the issued share capital in the following significant subsidiaries except Goldleaves Gems (Shenzhen) Co., Ltd.:

	•		Lorenzo Jewelry Limited (“Lorenzo Jewelry”), a company incorporated in Hong Kong on February 20, 1987
	•		Lorenzo Jewellery (Shenzhen) Co., Ltd.
	•		Lorenzo (Shenzhen) Co., Ltd.
	•		Goldleaves Gems (Shenzhen) Co., Ltd. (98% equity ownership)

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

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

	•		we invested $670,000 for the purchase of 1,639 square meters of production space in our Shenzhen, China facility during the fiscal year ended December 31, 2005
	•		we acquired an additional 78% of the equity of Goldleaves International Limited for $2,827,500 during the fiscal year ended December 31, 2005
	•		we spent $1,105,000 on capital expenditures, excluding inventory, for ENZO retail store openings during the fiscal year ended December 31, 2006
	•		we spent $1,977,000 on capital expenditures, excluding inventory, for ENZO retail store openings during the fiscal year ended December 31, 2007

B. BUSINESS OVERVIEW.

          We are a vertically integrated company that designs, brands, markets, distributes and retails a complete range of fine jewelry. While we specialize in the colored jewelry segment, we also offer high-end pieces set in yellow gold, white gold, platinum or sterling silver and adorned with colored stones, diamonds, pearls and precious stones. We distribute to fine jewelers, department stores, national jewelry chains and electronic and specialty retailers throughout North America and Western Europe; and we conduct our jewelry retail business through the ENZO brand in the Asia Pacific region, with the primary focus in the PRC market, which we regard as having one of the largest and fastest growing consumer demands for luxury items. Our

product lines incorporate all major categories sought by major retailers, including earrings, necklaces, pendants, rings and bracelets.

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

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

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

	•		fine jewelers;
	•		national jewelry chains;
	•		department stores;
	•		TV shopping channels; and
	•		discount chain stores.

     For the years ended December 31, 2006 and 2007, approximately 62% and 53% of our sales were in North America.

     In addition to our “wholesale” line of business involving direct sales to retailers, we have expanded into the “retail sales” line of business involving direct sales to consumers in China through company-owned retail stores under the brand name ENZO. In March 2004, we opened our first retail store in Hong Kong and opened our flagship store in Shanghai in November 2004. As of June 11, 2008, we currently operate 98 ENZO retail stores across Hong Kong, China and Macau.

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

		Year ended December 31,
		2007				2006				2005
(in thousands)		US$				US$				US$
US & Canada			80,572				76,889				67,780
Europe and other countries			32,597				24,452				20,527
Japan			2,206				2,454				3,686
PRC (including Hong Kong and Macau)			36,662				19,996				7,653
			152,037				123,791				99,646

Our Industry

     The US jewelry industry is a highly fragmented $45 billion market, with no single entity having more than 6% market share. The industry consists primarily of three retail sectors:

	•		specialty retailers account for $27 billion in sales
	•		mass merchants and department stores account for $12 billion in sales
	•		direct avenues (television shopping, e-commerce, catalogs) account for $6 billion

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

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

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

     The Chinese jewelry industry has experienced rapid development due to a series of major reforms, including the liberalization of China’s gold market, the lowering of tariff rates, and the decision of the Chinese Government to open up the retail sector to international companies.

     In addition, rising income levels coupled with the growing urban population in China have helped the jewelry market record double-digit growth annually. The continuing

acceleration of the urbanization trend in China will likely result in improved income levels, thereby increasing private consumption. The Chinese Government has also encouraged consumer spending by instituting longer national holidays and increasing the salary of civil servants.

     Management believes that China is the largest consumer of platinum and jade in the world for the past three years, the largest consumer of diamonds in Asia, and the second largest consumer of gold in the world.

Our Business Strategy

     Our business strategy is to:

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

     We are aggressively developing new product lines in exotic stones, which have high perceived values among colored stones. We continue to expand into new product categories by:

	•		marketing a line of sterling silver jewelry. These are typically merchandised with a retail price range of $30 to $150;
	•		adding more lines into our “LORENZO” branded products with a retail price range of $199 to $999; and
	•		offering diamond jewelry and expanding this business to our current client base by adding diamonds to some of our settings, as well as offering newly designed jewelry.

Our China Retail Sales Strategy

     In 2004, we initiated a retail sales strategy aimed at gaining market share in the rapidly growing consumer market in China. We opened three ENZO stores, two in China (including a flagship store in Shanghai) and one in Hong Kong. We believe that China represents an excellent retail sales opportunity for several reasons:

	•		significant retail market — China’s retail sales exceed $600 billion annually, making China the third largest market in the world.
	•		large and growing jewelry market — we estimate that China’s jewelry sales totaled nearly $17 billion in 2006 and $26 billion in 2007.
	•		large pool of consumers — China has a population of more than 1.3 billion people. We estimate that roughly 160 million Chinese have enough income to purchase luxury goods.

	•		favorable regulatory changes — as a member of the World Trade Organization, China is eliminating many restrictions on foreign ownership and operation of retail stores. Tariffs on colored gemstones, gold, silver and pearls have been sharply reduced, and economic and trade relationships between China and Hong Kong have been liberalized.
	•		changing consumer preferences — Chinese consumers are no longer purchasing jewelry solely as an investment. More Chinese consumers are embracing a more Western view of jewelry as a fashion accessory and now demand more contemporary, colorful designs.

     We are expanding into China by means of Company-owned and -operated retail stores and supplier relationships with leading retailers, such as Carrefour.

     We intend to implement our business strategy by:

	•		expanding our retail jewelry market in China by planning to open additional ENZO stores in China during 2008
	•		promoting visits with customers to coordinate and cater to their particular promotional sales needs and monitoring their on-hand inventory in order to promote more active sell-through
	•		expanding our distribution channels and further developing business with retail jewelry chains in the US.

Our Production Capability

     We have established a sophisticated facility in China that performs stone cutting and polishing and jewelry production. The facility is located in the city of Shenzhen in Guangdong Province, China. Our production facility in Shenzhen has been operating for nine years and has more than 14,000 square meters of production space. We currently employ approximately 3,000 skilled gemstone cutters and production personnel and turned out approximately two million pieces of finished fine jewelry during the fiscal year ended December 31, 2007.

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

Sales and Marketing

Wholesale

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

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

	•		fine jewelers;
	•		national jewelry chains;
	•		department stores;
	•		TV shopping channels; and
	•		discount chain stores.

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

Retail

     Our retail brand, ENZO focuses on brand building strategy that differentiates itself from the many mass market local competitors. This is the result of continuous marketing programs that built an unique image and identity for ENZO.

     ENZO has combined its product, sales and marketing programs that align with the strategic direction of reinforcing the brand as one of the most recognized foreign jewelry brands in China.

     With almost 100 retail points covering strategic locations in major cities, ENZO is the foreign jewelry brand with the highest number of retail points in China. This perfect retail platform provides the most effective touch points for the consumers, in particular the fast growing middle class segment in China.

     In 2007, total jewelry retail sales in China reached $26 billion and is expected to grow at a double digit rate over the next few years.

Design and Product Development

     We have 20 internationally trained designers who work in our Hong Kong and China offices. Our designers create styles that have been accepted by our various clients worldwide. Our design teams attend trade fairs worldwide to gather product ideas and monitor the latest product trends.

     We provide our customers with a broad selection of high-quality 10, 14 and 18 karat gold, platinum and sterling silver jewelry products that incorporate traditional yet fashionable styles and designs. We currently offer more than 50,000 different styles of rings, bracelets, necklaces, earrings, pendants and matching sets that are contemporary and desired in the market.

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

Production Process

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

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

Supply

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

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

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

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

     We purchase our gold requirements within a reasonable period after each significant purchase order is received.

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

Security

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

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

Insurance

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

Competition

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

quality. Our ability to conceive, design and develop products consistent with the requirements of each retail distribution channel represents a competitive advantage.

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

     The North American market is highly fragmented but does contain a number of major competitors, many of whom import much of their product from the Far East and many of whom sell higher priced items. The key United States competitor is E.E.A.C. Inc. International competitors include Pranda International and Beauty Gems Limited. Most of these manufacturers/wholesalers have been successful vendors for many years and enjoy good relations with their clients. Although it may be difficult for a newcomer to break into established relationships, we have already made substantial inroads in the North American jewelry market and we believe we can remain competitive, based on our vertically integrated, low-cost, high-volume and high-quality production process.

     Regarding the China retail jewelry market, there are many Hong Kong, local and foreign competitors. Those competitors may have product type, price range, market segment, target customer, size, history, strategy and background similar to or different from ENZO. Hong Kong competitors include Hong Kong-listed chain store operators such as Chow Sang Sang, Tse Sui Luen and Luk Fook; the local Chinese retail competitor is Laofengxiang; and foreign competitors include Tiffany, Cartier and Bvlgari.

C. ORGANIZATIONAL STRUCTURE AS OF DECEMBER 31, 2007.

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

LJ INTERNATIONAL INC.
(British Virgin Islands)

     100%

•		Lorenzo Jewelry Limited (Hong Kong)
•		Lorenzo Jewellery (Shenzhen) Co., Ltd. (PRC)
•		Lorenzo (Shenzhen) Co., Ltd. (PRC)
98%
•		Goldleaves Gems (Shenzhen) Co., Ltd. (PRC)

D. PROPERTY, PLANTS AND EQUIPMENT.

     Our principal executive office is located at Unit #12, 12/F, Block A, Focal Industrial Centre, 21 Man Lok Street, Hung Hom, Kowloon, Hong Kong. We own approximately 11,100 square feet of office and showroom at this location.

     Our jewelry production facility in Shenzhen, China consists of 14,080 square meters of building space located inside of and close to the Shatoujiao Free Trade Zone, Shenzhen. We own approximately 6,893 square meters of this space. We also currently lease:

	•		1,751 square meters for a term of five years expiring June 30, 2011 from an unaffiliated third party at a rental rate of $3,817 per month;
	•		1,751 square meters for a term of two years expiring August 31, 2008, at a rental rate of $4,490 per month;
	•		1,799 square meters for a term of three years expiring March 31, 2009, at a rental rate of $4,381 per month; and
	•		1,886 square meters for a term of three years expiring September 30, 2009 at a rental rate of $4,593 per month.

     We own two warehouse facilities in Hung Hom and Aberdeen consisting of 5,432 square feet and 5,200 square feet. We also own additional properties in Sai Kung and Hung Hom. We lease all four of these properties to non-affiliated third parties. We have pledged all of our land and buildings to collateralize general banking facilities granted to us.

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

ITEM 4A. UNRESOLVED STAFF COMMENTS

     Not applicable.

     ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

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

     LJ International Inc., via its operating subsidiaries, designs, manufactures, distributes and markets a full range of fine jewelry through both wholesale and retail channels under the tradenames of LORENZO and ENZO, respectively. In term of sales revenue, geographically the US and the PRC are the two major contributors.

     Our product types include ring, bracelet, necklace, earring and pendant, and we are one of the prominent companies in colored gemstones that employ the mine-to-market strategy for cost minimization and ease of quality and production lead time control. Our colored gemstones are mainly imported from Brazil and Africa which supply, in term of color, size and quality, the best colored gemstones in the world, the choices of which to customers are many and diversified that includes, amongst others, ametrine, amethyst, aquamarine, imperial topaz, tourmaline, white topaz, tanzanite, mandarine garnet, topaz, ruby, sapphire and emerald.

     Our wholesale customers comprise fine jewelers, national jewelry chain stores, department stores and television shopping networks in North America, Western Europe, Japan and China. To keep in touch with our customers and to ensure that they are updated with our latest designs and products, we exhibited at the following international jewelry shows in 2007: Hong Kong January Int’l Jewellery & Watch Show, VicenzaOro1, JA Int’l Jewelry (Winter) Show, Tucson “2007” Gem Show, Hong Kong International Jewellery Show 2007, BaselWorld, The JCK Show — Las Vegas 2007, JA International Jewelry (Summer) Show, VicenzaOro Autumn, Hong Kong Jewellery & Watch Fair - September 2007, JANY Special Delivery Show, and Jewellery Collection Dubai.

     Our retail customers in China are individual consumers. Under the segment of retail business, besides classic affordable luxury jewelry items that are available in our ENZO retail shops, the Company also operates the ENZO Signature line that represents a truly luxury premium line of jewelry that comprises, amongst others, diamond, ruby, sapphire, emerald and tourmaline. 2007 represents a year of rapid growth of ENZO in the PRC that it opened, net, 50 stores in the PRC — as at December 31, 2007 there were 91 stores in the PRC compared to 41 stores as at December 31, 2006.

     Our business strategies include broadening the retail product line, and diversifying our customer base. Besides focusing on our traditional colored gemstone jewelry business, we are also continuing to develop our diamond jewelry business at our ENZO stores. Product initiatives include a variety of different sizes, shape and cutting methods. Successful examples include our ENZO88 and Gabrielle Diamond lines. The expansion of our diamond jewelry business will diversify our already strong presence in colored jewelry, offering increasing choices of jewelry products to our customers.

     The revenue mix of the two streams of business of LORENZO (wholesale) and ENZO (retail) were roughly in the ratio of 77% to 23% for the year ended December 31, 2007.

     The wholesale business focuses on the US market with sales made to those $100 Million Supersellers such as Sterling Jewelers Inc, Fred Meyer Jewelers, Helzberg Diamonds, ShopNBC, Zales Corporation, QVC, Wal-Mart, Finlay Fine Jewelry, Home Shopping Network, Ben Bridge Jeweler, Kohl’s Corporation, Macy’s East, Macy’s West and JC Penney. The turnover of our sales to those Supersellers in the US and Canada amounted to $80.6 million for 2007 compared to $76.9 million in 2006, an increase of 5%.

     Employing the brand new ENZO name, the retail business operates in the Asia Pacific region, with a primary focus on the PRC market. ENZO currently has 94 stores in the PRC, two stores in Macau and one store in Hong Kong, totaling 97 stores. ENZO now has one or more retail locations in China’s richest and largest population cities, including Shanghai, Beijing, Harbin, Qingdao, Shenyang, Ningbo, Chengdu, Changsha, Wuxi, Tianjin, Dalian, Shenzhen, Changchun, Tangshan, Guiyang, Xian, Anshan, Changshou, Hefei, Taiyuan, Shijiazhuang, Zhengzhou, Nanchang, Chongqing, Kunming and Jinan. Our ENZO stores in the PRC operate in department stores and shopping malls. 18K gold is the most popular, followed by 24K jewelry. The most popular diamonds are of 0.21 carat to 0.49 carat.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements requires us to make estimate and judgments that affect the reported amounts of our assets, liabilities, revenue and expenses. These estimates are based on our historical experience and on various other assumptions that we believe to be reasonable. Estimates are evaluated on an ongoing basis, but actual results may differ from these estimates.

Critical accounting policies are those that, in management’s view, are most important in the portrayal of our financial condition and results of operations. Those that require significant judgments and estimates include:

Collectibility of Accounts Receivable. Our management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all customers requiring credit over a certain amount. Our international sales are settled via letter of credit or open account. For export sales on open account, we purchased trade credit insurance to cover the risk of collectibility, the insured percentage is 85% on the invoiced amount to customers. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility.

We make specific allowance for doubtful accounts based on our best estimate of the amount of losses that could result from the inability or intention of our existing customers not to make the

required payments. We generally review the allowance by taking into account factors such as historical experience, age of the accounts receivable balances and economic conditions that may affect a customer’s ability to pay.

Stock-based Compensation. We account for share-based compensation in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004) (SFAS 123R), Share-Based Payment. SFAS 123R requires us to use a fair-value based method to account for share-based compensation. Accordingly, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. Our option plans are described more fully in Note 15 to our consolidated financial statements included elsewhere in this annual report.

Goodwill Impairment. Goodwill is tested for impairment at least annually based on a two-step approach. The first step is conducted by comparing the fair value of each reporting unit to its carrying amount. If the fair value of a reporting unit is less than its carrying amount, the second step requires a comparison of the implied fair value of goodwill to its carrying value. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. An impairment loss is recognized for any excess in the carrying value of goodwill over its implied fair value.

We have determined that iBBC Inc., a subsidiary of the Company in the US, is the reporting unit for goodwill impairment testing. The fair value of iBBC Inc. is determined based on the discounted expected cash flow method. The discount rate was based on the subsidiary’s weighted average cost of capital. The use of discounted cash flow methodology requires significant judgments including estimation of future revenues and costs, industry economic factors, future profitability, determination of iBBC Inc.’s weighted average cost of capital and other variables. Although we believe that the assumptions adopted in our discounted cash flow model are reasonable, those assumptions are inherently unpredictable and uncertain.

We had goodwill of US$1,521,000 as of December 31, 2006 and 2007. The estimated fair value of the reporting unit exceeded its carrying value at December 31, 2007. Consequently, no goodwill impairment has been recognized.

Allowance for Obsolete Inventories. We established inventory allowance for unmarketable inventory in an amount equal to the difference between the cost of inventory and its estimated net realizable value based upon assumptions about future demand and market conditions. Management records a write-down against inventory based on several factors, including expected sales price of the item and the length of time the item has been in inventory. If actual demand and market conditions are less favorable than those projected by management, additional inventory allowance could be required. In that event, our gross margin would be reduced. In case

of inventory which have been written down below cost at the close of a fiscal year, such reduced amount forms a new cost basis that subsequently cannot be marked up based on changes in underlying facts and circumstances.

Fair Value of Financial Instruments. The Company follows Statement of Financial Accounting Standards No. 107 (SFAS No. 107), Disclosures about Fair Value of Financial Instruments, for its financial instruments. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, prepayments and other current assets, notes payable, capital lease obligations, accounts payable, income taxes payable, and accrued expenses and other current liabilities, approximate their fair values because of the short maturity of these instruments and market rates of interest.

A. OPERATING RESULTS.

Reclassifications

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

Revenues

														% Change
														Years ended				Years ended
		Year ended December 31,												December 31,				December 31,
(in thousands)		2007				2006				2005				2007-2006				2006-2005
Revenues
Wholesale
Jewelry product		$	117,689			$	108,679			$	95,318				8	%			14	%
Giftware product		$	—			$	—			$	1,827				N/A				-100	%
		$	117,689			$	108,679			$	97,145				8	%			12	%
Retail		$	34,348			$	15,112			$	2,501				127	%			504	%
		$	152,037			$	123,791			$	99,646				23	%			24	%

     The increase in revenue of jewelry product of wholesale of $9,010,000 or 8% to $117,689,000 for the year ended December 31, 2007, compared to the year ended December 31, 2006, was primarily attributable to the increase in average selling price of 4%, increase in order quantity of 8%.

     The increase in revenue of jewelry product of wholesale of $13,361,000 or 14% to $108,679,000 for the year ended December 31, 2006, compared to the year ended December 31, 2005, was primarily attributable to the increase in average selling price of 1% , increase in order quantity of 7% and increase of $3.2 million from the launch of a gold jewelry product line.

     The revenue of giftware product of wholesale for the year ended December 31, 2005 was $1,827,000. This product line with low profit margin was closed during the third quarter of 2005.

     The Company’s retail business increased by $19,236,000, or 127% to $34,348,000 for the year ended December 31, 2007, compared to the year ended December 31, 2006. This increase was primarily due to the successful launch of the ENZO Signature line of high-end jewelry which accounted for $12,951,000 of the Company’s retail business. The remaining increase was due to the Company’s new ENZO retail store openings and the continued operation of its existing 51 ENZO retail stores, that is, a total of 95 ENZO retail stores in full operation compared to a total of 44 ENZO retail stores on December 31, 2006.

     The Company’s retail business increased by $12,611,000, or 504%, from 2005 to $15,112,000 for the year ended December 31, 2006. This increase was primarily due to the successful launch of the ENZO Signature line of high-end jewelry. The service income related to line of high-end jewelry accounted for $4,130,000 of the Company’s retail business in 2006. The remaining increase was due to the Company’s new ENZO retail store openings and the continued operation of its existing 26 ENZO retail stores, that is, a total of 44 ENZO retail stores in full operation compared to a total of 18 ENZO retail stores on December 31, 2005.

Cost of Sales and Gross Profit

														% Change
														Years ended				Years ended
		Year ended December 31,												December 31,				December 31,
(in thousands)		2007				2006				2005				2007-2006				2006-2005
Cost of sales and gross profit
Cost of sales
Wholesale		$	95,528			$	83,387			$	75,645				15	%			10	%
% of revenues			81	%			77	%			78	%
Retail		$	16,980			$	5,480			$	1,482				210	%			270	%
% of revenues			49	%			36	%			59	%
Total		$	112,508			$	88,867			$	77,127				27	%			15	%
% of revenues			74	%			72	%			77	%
Gross profit
Wholesale		$	22,161			$	25,292			$	21,500				-12	%			18	%
% of revenues			19	%			23	%			22	%
Retail		$	17,368			$	9,632			$	1,019				80	%			845	%
% of revenues			51	%			64	%			41	%
Total		$	39,529			$	34,924			$	22,519				13	%			55	%
% of revenues			26	%			28	%			23	%

     The gross profit margin of wholesale decreased to 19% for the year ended December 31, 2007 from 23% for the year ended December 31, 2006 and was attributable to the sales of product which are with lower gross profit margin.

     The gross profit margin of wholesale increased to 23% for the year ended December 31, 2006 from 22% for the year ended December 31, 2005 and was attributable to the sales of a higher-end product mix.

     The gross profit margin of ENZO retail operation decreased to 51% for the year ended December 31, 2007 compared to 64% for the year ended December 31, 2006. The gross profit margin of 64% in 2006 was attributable to the service income from launch of the ENZO Signature line of jewelry products which substantially increased the retail division’s gross profit margins. Excluding the contribution from service income, the gross profit margin of retail operation remained at 51% for the years ended December 31, 2007 and 2006.

     The gross profit margin of ENZO retail operation increased to 64% for the year ended December 31, 2006 compared to 41% for the year ended December 31, 2005 and was attributable to the service income from launch of the ENZO Signature line of jewelry products which substantially increased the retail division’s gross profit margins. Excluding the service income, the gross profit margin of retail operation was 51% for the year ended December 31, 2006.

Selling, General and Administrative Expenses

														% Change
														Years ended				Years ended
		Year ended December 31,												December 31,				December 31,
(in thousands)		2007				2006				2005				2007-2006				2006-2005
Selling, general and administrative expenses
Wholesale		$	13,072			$	13,324			$	11,545				-2	%			15	%
Retail		$	15,251			$	7,562			$	2,653				102	%			185	%
Corporate		$	2,076			$	2,228			$	1,290				-7	%			73	%
		$	30,399			$	23,114			$	15,488				32	%			49	%
% of revenues			20	%			19	%			16	%

     Selling, general and administrative expenses increased by 32% for the year ended December 31, 2007, compared to the year ended December 31, 2006. For the wholesale business, the selling, general and administrative expenses decreased by 2% for the year ended December 31, 2007, compared to the same of year 2006. The decrease was mainly attributable to decrease in development cost of new products, designs and markets. The expenses incurred by the retail business of $15,251,000, or 102% increase of the same for the year ended December 31, 2006, comprised advertising cost of $2,058,000, rental cost of $5,367,000, staff cost of $4,933,000 and other expenses of $2,893,000 as a result of higher sales and increased store counts. The corporate expenses included items of corporate overheads, such as charges for legal and professional advisory services.

          Selling, general and administrative expenses increased by 49% for the year ended December 31, 2006, compared to the year ended December 31, 2005. For the wholesale business, the selling, general and administrative expenses increased by 15% for the year ended December 31, 2006, compared to the same of year 2005. The increase mainly comprised 2% increase in selling and distribution expenses which varied to sales revenues, 2% increase in manpower on development of new products, designs and markets and 5% increase in staff cost. The expenses incurred by the retail business of $7,562,000, or 185% increase of the same for the year ended December 31, 2005, comprised advertising cost of $1,142,000, rental cost of $2,454,000, staff cost of $2,198,000 and other expenses of $1,768,000 as a result of higher sales and increased store counts. The corporate expenses included items of corporate overheads, such as charges for legal and professional advisory services.

														% Change
														Years ended				Years ended
		Year ended December 31,												December 31,				December 31,
(in thousands)		2007				2006				2005				2007-2006				2006-2005
Unrealized (loss) gain on derivatives		$	(349	)		$	190			$	(88	)			-284	%			-316	%
% of revenues			0	%			0	%			0	%
(With the hedging mechanism in place, we have the realized gain on hedging activities)
Realized gain (loss) on hedging activities		$	345			$	(219	)		$	96				-258	%			-328	%
% of revenues			0	%			0	%			0	%
Net (loss) gain on derivatives and hedging activities		$	(4	)		$	(29	)		$	8				-86	%			-463	%
% of revenues			0	%			0	%			0	%

          We have secured “gold loan” facilities with various banks in Hong Kong, which typically bear a below-market interest rate. Under the gold loan arrangements, we may defer the purchase until such time as we decide appropriate, the price to be paid being the current market price at time of payment. The gold loan, however, does expose us to certain market risks associated with potential future increases in the price of gold. In the past, we did not hedge against such risks and at the close of each reporting period, the gold loan was valued at fair value with changes reflected on the income statement.

          Since 2003, we have commenced hedging the fluctuations in the price of gold related to the gold loans by entering into contracts with financial institutions for the future purchase of gold. With the hedging mechanism in place, we have incurred an unrealized loss of $349,000 for the year ended December 31, 2007, and an unrealized gain of $190,000 and an unrealized loss of

$88,000 for each of the years ended December 31, 2006 and 2005 respectively; and a realized gain of $345,000 for the year ended December 31, 2007, and a realized loss of $219,000 and a realized gain of $96,000 on derivatives for each of the years ended December 31, 2006 and 2005 respectively.

          The hedging mechanism has been in place since 2003. We secured position of a net loss of $4,000 and $29,000 for each of the years ended December 31, 2007 and 2006, respectively, and a net gain on derivative hedging activities of $8,000 for the year ended December 31, 2005.

Depreciation

														% Change
														Years ended				Years ended
		Year ended December 31,												December 31,				December 31,
(in thousands)		2007				2006				2005				2007-2006				2006-2005
Depreciation
Wholesale		$	1,995			$	1,425			$	1,154				40	%			23	%
% of revenues			2	%			1	%			1	%
Retail		$	1,100			$	614			$	214				79	%			187	%
% of revenues			3	%			4	%			9	%
Total		$	3,095			$	2,039			$	1,368				52	%			49	%
% of revenues			2	%			2	%			1	%

          Depreciation of wholesale business increased by 40% to $1,995,000 for the year ended December 31, 2007 from $1,425,000 for the year ended December 31, 2006, which reflected the amortization on the on-going capital expenditures, and a full year’s amortization on cost of renovation and motor vehicles incurred in 2006. Depreciation of retail business increased by 79% to $1,100,000 for the year ended December 31, 2007 from $614,000 for the year ended December 31, 2006 which reflected the amortization of the capital expenditures of renovation on the increased number of retail stores during the year.

          Depreciation of wholesale business increased by 23% to $1,425,000 for the year ended December 31, 2006 from $1,154,000 for the year ended December 31, 2005, and reflected the amortization on the on-going capital expenditures, renovation and new motor vehicles. Depreciation of retail business increased by 187% to $614,000 for the year ended December 31, 2006 from $214,000 for the year ended December 31, 2005 and reflected the amortization of the capital expenditures of renovation on the increased number of retail stores during the year.

														% Change
														Years ended				Years ended
		Year ended December 31,												December 31,				December 31,
(in thousands)		2007				2006				2005				2007-2006				2006-2005
Interest expenses		$	3,103			$	3,258			$	1,991				-5	%			64	%
% of revenues			2	%			3	%			2	%

          Interest expenses decreased by $155,000 or 5% to $3,103,000 for the year ended December 31, 2007, compared to the year ended December 31, 2006, was primarily attributable to the decrease in interest rates and decrease in utilization level of credit lines of letters of credit and gold loans.

          Interest expenses increased by $1,267,000, or 64% to $3,258,000 for the year ended December 31, 2006, compared to the year ended December 31, 2005. This increase reflected the continuous increase in interest rates and a higher utilization level of credit line facilities as working capital.

														% Change
														Years ended				Years ended
		Year ended December 31,												December 31,				December 31,
(in thousands)		2007				2006				2005				2007-2006				2006-2005
Income taxes expense
Wholesales		$	1,015			$	682			$	739				49	%			-8	%
% of revenues			1	%			1	%			1	%
Retail		$	696			$	721			$	0				-3	%			N/A
% of revenues			2	%			5	%			0	%
Total		$	1,711			$	1,403			$	739				22	%			90	%
% of revenues			1	%			1	%			1	%

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

          For our subsidiaries in Hong Kong, the prevailing corporate income tax rate is 17.5%.

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

          One of our subsidiaries in China is enjoying the tax holiday as its first profit-making year in 2004 and another subsidiary in China is enjoying the tax holiday as its first profit-making year

in 2005. PRC income tax is calculated at the applicable rates relevant to these subsidiaries which currently are 15%.

          For other subsidiaries in China, the prevailing corporate income tax rate is 33%. The prevailing corporate income rate is 15% for companies operating in special economic zones of China.

          Incomes taxes included tax under provision adjustment of $195,000, $72,000 and $77,000 for the years ended December 31, 2007, 2006 and 2005 respectively, after the finalization of tax assessment for prior years.

														% Change
														Years ended				Years ended
		Year ended December 31,												December 31,				December 31,
(in thousands)		2007				2006				2005				2007-2006				2006-2005
Extraordinary gain on negative goodwill		$	0			$	0			$	1,291				N/A				-100	%
% of revenues			0	%			0	%			1	%

          Extraordinary gain on negative goodwill of $1,291,000 was arisen from the sequential acquisition of a company whose principal activities are the manufacturing and trading of rough and pre-formed gemstones (the Investee).

          Pursuant to the purchase agreement dated January 1, 2005, the Company paid US$2,827,500 to the Investee for the issuance of 3,900 new shares therein, in which the Company had 20% equity interests. The Company then became the major stockholder holding 98% equity interests in the Investee, which became a subsidiary of the Company.

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

          Approximately 76% of our sales are denominated in US Dollars whereas the other sales are basically denominated in Hong Kong Dollars and Renminbi. The largest portion of our expenses are denominated in Hong Kong Dollars, followed by US Dollars and Renminbi. The exchange rate of the Hong Kong Dollar is currently pegged to the US Dollar, but during the past several years the market exchange rate has fluctuated within a narrow range. The Chinese government principally sets the exchange rate between the Renminbi and all other currencies. As a result, the exchange rates between the Renminbi and the US Dollar and the Hong Kong

Dollar have fluctuated in the past and may fluctuate in the future. If the value of the Renminbi or the Hong Kong Dollar depreciates relative to the US Dollar, such fluctuation may have a positive effect on the results of our operations. If the value of the Renminbi or the Hong Kong Dollar appreciates relative to the US Dollar, such fluctuation may have a negative effect on the results of our operations. We do not currently hedge our foreign exchange positions.

Governmental economic and political policies and factors

          For information regarding governmental economic, fiscal, monetary and political policies that could materially affect our operations, directly or indirectly, please refer to the “Risk Factors” section on pages 4 to 10.

B. LIQUIDITY AND CAPITAL RESOURCES.

          We have no direct business operations other than the ownership of our subsidiaries and investment securities. Our ability to pay dividends and meet other obligations depends upon our receipt of dividends or other payments from our operating subsidiaries and investment securities. Our operating subsidiaries are subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants and minimum net worth requirements in loan agreements, restrictions on the conversion of local currency into US dollars or other hard currency and other regulatory restrictions.

Cash Flows

		Years ended December 31,
(in thousands)		2007				2006				2005
Net cash provided by (used in) operating activities		$	2,203			$	(6,200	)		$	(14,222	)
Net cash used in investing activities			(1,806	)			(3,829	)			(4,655	)
Net cash (used in) provided by financing activities			(1,309	)			11,096				20,450
Effect of foreign exchange rate change			—				—				(5	)
Net (decrease) increase in cash and cash equivalents			(912	)			1,067				1,568

Operating Activities:

		Years ended December 31,
(in thousands)		2007				2006				2005
Cash flows from operating activities:
Net income		$	1,489			$	5,325			$	4,351
Adjustments to reconcile income to net cash provided by (used in) operating activities:
Depreciation of property, plant and equipment and properties held for lease			3,095				2,039				1,368
Extraordinary gain on negative goodwill			—				—				(1,291	)
Unrealized (gain) loss on derivatives			—				(48	)			88
Loss on disposal and write-off of property, plant and equipment			45				3				8
Reversal of doubtful debts			(2	)			(40	)			(72	)
Minority interests			1				37				20
Compensation costs for warrants granted			157				158				118
Compensation expenses recognized during the year			330				213				18
Changes in operating assets and liabilities:
Trade receivables			702				1,106				(8,607	)
Inventories			(13,261	)			(12,810	)			(12,060	)
Prepayments and other current assets			596				(580	)			601
Due from related parties			21				463				7
Trade payables			9,487				(2,955	)			1,883
Accrued expenses and other payables			(1,432	)			272				(854	)
Income taxes payable and deferred taxation			975				617				200
Net cash provided by (used in) operating activities			2,203				(6,200	)			(14,222	)

          Net cash provided by and used in operating activities was net income adjusted for certain non-cash items and changes in assets and liabilities.

          For the year ended December 2007, net cash provided by operating activities was comprised of a net income of $1,489,000, non-cash adjustment of $3,626,000 including adjustment of $3,095,000 for depreciation.

          For the year ended December 2006, net cash used in operating activities was comprised of a net income of $5,325,000, non-cash adjustment of $2,362,000 including adjustment of $2,039,000 for depreciation.

          Significant changes in assets and liabilities were as follows:

          Trade receivables were decreased by $702,000 and $1,106,000 for the year ended December 31, 2007 and 2006 respectively.

          Inventory balance was increased by $13,261,000 and $12,810,000 for the year ended December 31, 2007 and 2006 respectively. It was the accumulation of inventory of gemstones in anticipation of significant increase in sales for the new fiscal year, and the build up of inventory for retail business, the rise in the cost of gold and rough gemstones, the build-up of more sample lines of jewelry and the maintaining of sufficient inventory for block-orders.

          Trade payables increased by $9,487,000 for the year ended December 31, 2007 due to increased level of material purchases during last quarter of the year. The decrease by $2,955,000 for the year ended December 31, 2006 due to reduced level of material purchases during last quarter of the year.

Investing Activities:

          For the year ended December 31, 2007, net cash used in investing activities was for capital expenditures and partially offset by the deduction in restricted cash. Capital expenditures were mainly for renovation of headquarter office in Hong Kong, on-going improvements of the existing production facilities in Shenzhen, and other business necessities, and renovation of new stores for the retail business.

          For the year ended December 31, 2006, net cash used in investing activities was for capital expenditures and partially offset by the deduction in restricted cash. Capital expenditures were mainly for on-going improvements of the existing production facilities in Shenzhen, and other business necessities including computer system upgrade, acquisition of motor vehicles, and renovation of stores for the retail business.

          For the year ended December 31, 2005, net cash used in investing activities was for capital expenditures and the purchase of a capital guaranteed fund, which was partially offset by the deduction in restricted cash. Capital expenditures were mainly for acquisition of a production facility in Shenzhen, renovation and improvement of the existing production facilities in Shenzhen, other ongoing business necessities, including a new computer system and a motor vehicle and the renovation of shops for our new retail business. The capital guaranteed fund was purchased from banks for securing new banking facilities.

          Our capital expenditures by category for the periods presented were:

		Years ended December 31,
(in thousands)		2007				2006				2005
Land & buildings		$	—			$	—			$	617
Leasehold improvement		$	2,156			$	2,852			$	783
Furniture, fixtures and equipment		$	660			$	690			$	1,060
Plant and machinery		$	322			$	260			$	209
Motor vehicles		$	1			$	381			$	200
Total		$	3,139			$	4,183			$	2,869

Financing Activities:

          Net cash used in financing activities for the year ended December 31, 2007 was $1,309,000, which included proceeds of $10,576,000 from issuance of shares upon exercise of stock options and warrants, sales proceeds of derivatives, increase of new loans and offset by the repayment of matured bank loans, change in letter of credit and factoring and increase in bank overdrafts utilization level.

          Net cash provided by financing activities for the year ended December 31, 2006 was $11,096,000, which included proceeds of $4,191,000 from issuance of shares in private placement, proceeds of $4,744,000 from issuance of shares upon exercise of stock options and warrants, sales proceeds of derivatives, increase of new loans and offset by the repayment of matured bank loans, change in letter of credit and factoring and decrease in bank overdrafts utilization level.

          Our cash and cash equivalents are mainly held in US dollars and HK dollars.

Financing Sources

Banking Facilities and Notes Payables

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

          Letters of Credit, overdrafts and others:

		Years ended December 31,
(in thousands)		2007				2006				2005
Letters of credit		$	38,957			$	41,046			$	31,533
Overdraft		$	4,141			$	3,564			$	3,461
			43,098				44,610				34,994
Utilized :
Letters of credit utilized		$	16,653			$	22,344			$	21,887
Overdraft utilized		$	2,977			$	1,591			$	2,028
			19,630				23,935				23,915

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

          The factoring facilities granted are limited to the extent of accounts receivable collateralized to the banks.

          Notes payable:

		Years ended December 31,
(in thousands)		2007				2006				2005
Notes payable		$	5,201			$	5,365			$	3,079

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

Gold Loan Facilities:

		Years ended December 31,
(in thousands)		2007				2006				2005
Gold loans outstanding (in $)		$	4,883			$	11,079			$	10,756
Gold loans outstanding (in troy ounces)			11,150				26,920				27,920
Gold loan interest rate			3.1%-3.3	%			2.6%-3.1	%			2.4%-2.6	%

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

Looking Forward:

          We anticipate that cash flow from operations, borrowings available under our existing credit line and our gold loan arrangement will be sufficient to satisfy our capital needs for 2008.

Impact of recently issued US GAAP accounting standards

     SFAS No. 157. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (SFAS No. 157), Fair Value Measurements, which defines fair value, provides a framework for measuring fair value, and expands the disclosures required for fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require fair value measurements and does not require any new fair value measurements. SFAS No. 157 is effective for fiscal year beginning after November 15, 2007. We are required to adopt SFAS No. 157 beginning on January 1, 2008. SFAS No. 157 is required to be applied prospectively, except for certain financial instruments. Any transition adjustment will be recognized as an adjustment to opening retained earnings in the year of adoption. In November 2007, the FASB proposed a one-year deferral of SFAS No. 157’s fair value measurement requirements for non-financial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. We do not expect the adoption of SFAS No. 157 will have a material impact on its financial statements.

      SFAS No. 159. In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (SFAS No. 159), The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. SFAS No. 159 allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. SFAS No. 159 also establishes presentation and disclosure requirements designed to draw comparison between entities that elect different measurement attributes for similar assets and liabilities. We do not expect the adoption of SFAS No. 159 will have a material impact on its financial statements.

     SFAS No. 141R. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R (SFAS No. 141R), Business Combinations, which is a revision of SFAS No. 141, Business Combinations. This statement establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. We are required to apply this new standard prospectively to business combinations for which the acquisition date is on or after the beginning of the annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited. We are currently evaluating the impact of the adoption of SFAS No. 141R on our consolidated financial statements.

          SFAS No. 160. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160 (SFAS No. 160), Non-controlling Interests in Consolidated Financial Statements. SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the non-controlling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. We are required to adopt this new standard for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We are currently evaluating the impact of the adoption of SFAS No. 160 on our consolidated financial statements.

           SFAS No. 161. In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 (SFAS No. 161), Disclosures about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133. SFAS No. 161 requires enhanced disclosures on derivative and hedging activities by requiring objectives to be disclosed for using derivative instruments in terms of underlying risk and accounting designation. This statement requires disclosures on the need of using derivative instruments, accounting of derivative

instruments and related hedged items, if any, under SFAS No. 133 and the effect of such instruments and related hedge items, if any, on the financial position, financial performance and cash flows. We are required to adopt this new statement for fiscal years beginning after November 15, 2008. We are currently evaluating the impact of the adoption of SFAS No. 161 on our consolidated financial statements.

          SFAS No. 162. In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162 (SFAS No. 162), The Hierarchy of Generally Accepted Accounting Principles. The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles for non-governmental entities. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We are currently evaluating the impact of the adoption of SFAS No. 162 on our consolidated financial statements.

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

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

D. TREND INFORMATION.

          Other than as disclosed elsewhere in this annual report, we are not aware of any known trends, uncertainties, demands, commitments or events for the period from January 1, 2007 to December 31, 2007 that are reasonably likely to have a material adverse effect on our net sales or revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

E. OFF-BALANCE SHEET ARRANGEMENTS.

          Except for those arrangements which are disclosed in the Consolidated Financial Statements, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS.

          As of the December 31, 2007, we had the following known contractual obligations:

		Payments due by period
						Less than												More than
		Total				I year				1-3 years				3-5 years				5 years
		US$				US$				US$				US$				US$
Long-Term Debt Obligations
Capital (Finance) Lease Obligations			273				92				160				21				—
Operating Lease Obligations			3,299				1,838				1,330				131				—
Total			3,572				1,930				1,490				152				—

          We had entered into finance lease agreements for the purchase of motor vehicles in 2003 and 2006. The financed amounts were $95,000 and $366,000, bearing interest at 5%-6% and 3.25%-3.5% per annum, and repayable in 60 monthly installments beginning in 2003 and 2006 respectively. A minimum finance charge may be charged if we pay off all the balances early.

          Our senior management and directors are as follows:

Name		Age				Position
Yu Chuan Yih			68			Chairman of the Board of Directors, President and Chief Executive Officer
Ka Man Au			43			Chief Operating Officer, Secretary and Director
Hon Tak Ringo Ng			48			Chief Financial Officer and Director
Andrew N. Bernstein			55			Independent Non-Executive Director
Xiang Xiong Deng			43			Independent Non-Executive Director
Jin Wang			37			Independent Non-Executive Director
Jieyun Yu			42			Independent Non-Executive Director
Po Yee Elsa Yue			43			Independent Non-Executive Director (1)
Chi Fai Frank Cheung			45			Independent Non-Executive Director (2) (3)
Wing Kwan Ted Lai			45			Independent Non-Executive Director (3)
Kelvin Wong			41			Independent Non-Executive Director (3)

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

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

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

          Mr. Ng has served as our chief financial officer since September 1997 and as one of our directors since May 1, 2001. He received his Bachelor of Science degree in civil engineering from the University of London in 1984 and his Master of Commerce in accounting and

commercial administration from the University of New South Wales in 1994. From July 1994 through September 1997, he was an audit senior with Moores Rowland C.A., Certified Public Accountants. Mr. Ng is a certified practicing accountant of the Australian Society of CPAs.

          Mr. Bernstein joined us as an independent non-executive director in July 2005. He serves on the Compensation and Nominating Committees. He earned his Bachelor of Science degree from Cornell University in 1974 and his Juris Doctor degree from Boston College Law School in 1977. Since 1978, Mr. Bernstein has been engaged in the private practice of law in Denver, Colorado, with emphasis on the representation of private and public companies and their transactional, corporate and securities matters. Mr. Bernstein has served as our US securities counsel since March 1997.

          Mr. Deng joined us and was appointed as an independent non-executive director effective October 29, 2007. He serves on the Audit and Nominating Committees. He has served as a Director of Intermost Corp. (OTCBB: IMOT) since August 2005 and was appointed Acting Chief Executive Officer of that company from August 2005 to September 2007. Mr. Deng graduated from Shenzhen University (Bachelor of Law) and Shanghai Jiao Tong University (MBA). He is a member of the Shenzhen Board of Arbitration and formerly the General Manager of a number of state-owned and private enterprises. He is experienced in both capital management and investment banking.

          Mr. Wang joined us and was appointed as an independent non-executive director effective October 29, 2007. He serves as chair of the Audit Committee and a member of the Nominating and Compensation committees. He is currently Vice President of the Shenzhen Shengwei Taxation Co. Ltd. and has held that position since January 2006. Before that, he served in a number of posts with responsibilities for financial management and auditing. These include Project Manager of the Audit Department at the accounting firm Shenzhen Changcheng (2004-2005), Assistant Financial Manager at Shenzhen Jinggong Design and Decoration Co. Ltd. (2003-2004) and Manager of the Finance Department at Jiaguo Trading (Shenzhen) Co. Ltd., a wholly owned subsidiary of Bank of China Group Investment Co. Ltd (1997-2003).

          Ms. Yu joined us and was appointed as an independent non-executive director effective October 29, 2007. She serves on the Audit and Compensation committees. She is currently Assistant Manager of Finance at the headquarters of the Bank of China Group Insurance Co. Ltd. and General Manager of Finance at the company’s Shenzhen Branch Office. She has held these positions since June 2003. Earlier, she served in finance management positions for Midland Realty (Shenzhen) Co. Ltd. (2001-2002), Intermost Corp. (1998-2001) and Guanghua Zhaori Production Co. Ltd. (1992-1998). Before that she was a statistician and auditor (1998-2002) at the Shenzhen Culture Bureau.

          Ms. Yue served as an independent non-executive director from December 1999 until her resignation effective June 1, 2007. She is a graduate gemologist from the Gemological Institute of America and served as vice president of GIA, Hong Kong, from August 1994 to December 2002. Her responsibilities included managing the Hong Kong office and administering their education programs, marketing and related activities. Since December 2002, Ms. Yue has served as a manager for a colored gems import and export trading company.

          Mr. Cheung served as an independent non-executive director from his appointment effective June 1, 2007 until his resignation effective October 15, 2007. He has over 20 years of experience in accounting, finance and administration and has held senior positions in various multinational companies. He is the chief financial officer and an executive director of Sun Innovation Holdings Ltd., a Hong Kong Stock Exchange-listed company engaged in property investment and in providing value-added media and entertainment products to mobile phone users. He holds an MBA from University of Technology, Sydney, Australia, and is an associate member of the Hong Kong Institute of Certified Public Accountants as well as fellow member of the Association of Chartered Certified Accountants. From 2001 to 2003, he was a director of e-Lux (Hong Kong) Ltd., a subsidiary of e-Lux Corporation, in charge of value-added telecommunications in Hong Kong, Taiwan and the People’s Republic of China.

          Mr. Lai served as an independent non-executive director from July 2005 until his resignation effective October 15, 2007. He is a lawyer by profession. Mr. Lai received his law degree from the University of London in 1984. He progressed from his legal career to become the managing director of a listed company in Hong Kong at the age of 25 from 1987 to 2001. Mr. Lai was in charge of the legal, accounting and investment operations of the company. Since 2001, he manages his own investments and serves as a consultant to a law firm.

          Mr. Wong served as an independent non-executive director from July 2005 until his resignation effective October 15, 2007. Since 2002, he serves as the finance director of a Hong Kong-based private conglomerate group which mainly engages in garment manufacturing and property investments. Mr. Wong earned a Bachelor of Science degree from the University of Southern California in 1990, majoring in accounting. He was formerly the manager of the Assurance and Business Advisory Services division of PriceWaterhouseCoopers in Hong Kong. Mr. Wong has over 14 years of experience in the accounting and finance field. He is currently a member of the American Institute of Certified Public Accountants, the California State Board of Accountancy and the Hong Kong Institute of Certified Public Accountants.

          The aggregate compensation paid by us to all of our directors and executive officers as a group for the fiscal year ended December 31, 2007 on an accrual basis, for services in all capacities, was $1,477,000. During the fiscal year ended December 31, 2007, we contributed an aggregate amount of $41,000 toward the pension plans of our directors and executive officers.

          We entered into an employment agreement with Mr. Yu Chuan Yih, effective January 1, 2007, for a period of three years at an annual salary of $308,000. Mr. Yih’s remuneration package includes benefits with respect to an automobile. In addition, Mr. Yih is entitled to an annual management bonus of a sum to be determined by the compensation committee of the board of directors at its discretion, having regard for our operating results and the performance of Mr. Yih during the relevant financial year.

          On January 3, 2005, we had granted Mr. Yih, Ms. Au and Mr. Ng options exercisable to acquire 500,000 shares, 100,000 shares and 100,000 shares, respectively, at $3.00 per share at any time through March 30, 2005.

          On July 22, 2005, we had granted Mr. Yih, Ms. Au and Mr. Ng options exercisable to acquire 413,500 shares, 300,000 shares and 300,000 shares, respectively, at $2.25 per share at any time through April 30, 2008.

          We did not grant any options to any of our directors or executive officers during the fiscal year ended December 31, 2006.

          On January 5, 2007, we had granted Mr. Yih, Ms. Au and Mr. Ng options exercisable to acquire 500,000 shares, 100,000 shares and 100,000 shares, respectively, at $4.50 per share at any time through February 4, 2007.

          Each of our seven current directors was elected at our last annual meeting of shareholders held on March 14, 2008 to serve a one-year term or until his/her successor is elected and qualified.

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

          We have established an audit committee, which currently consists of Xiang Xiong Deng, Jin Wang and Jieyun Yu. Its functions are to:

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

          We have established a nominating committee, which currently consists of Xiang Xiong Deng, Jin Wang and Andrew N. Bernstein. Its purpose and functions are to:

	•		assess the size and composition of the board of directors in light of our operating requirements and existing social attitudes and trends;
	•		develop membership qualifications for the board of directors and all board committees;
	•		monitor compliance with board of director and board committee membership criteria;
	•		review and recommend directors for continued service as required based on our evolving needs;
	•		coordinate and assist management and the board of directors in recruiting new members to the board of directors; and
	•		investigate suggestions for candidates for membership on the board of directors and recommend prospective directors, as required, to provide an appropriate balance of knowledge, experience and capability on the board of directors, including stockholder nominations for the board of directors.

          We have established a compensation committee, which currently consists of Andrew N. Bernstein, Jieyun Yu and Jin Wang. Its purpose and functions are to:

	•		review and approve corporate goals and objectives relevant to the compensation of the chief executive officer and other executive officers;
	•		evaluate the chief executive officer’s performance in light of such goals and objectives at least annually and communicate the results to the chief executive officer and the board of directors;
	•		set the chief executive officer’s compensation levels based on the foregoing evaluation (including annual salary, bonus, stock options and other direct and indirect benefits), with ratification by the independent directors of the full board of directors; and

•

set the other executive officers’ compensation levels (including annual salary, bonus, stock options and other direct and indirect benefits).

          Our common shares are currently listed on The Nasdaq Global Market and, for so long as our securities continue to be listed, we will remain subject to the rules and regulations established by Nasdaq as being applicable to listed companies. Nasdaq has adopted amendments to its Rule 4350 to impose various corporate governance requirements on listed securities. Section (a)(1) of Rule 4350 provides that foreign private issuers such as our company are required to comply with certain specific requirements of Rule 4350, but, as to the balance of Rule 4350, foreign private issuers are not required to comply if the laws of their home country do not otherwise require compliance.

          We currently comply with the specifically mandated provisions of Rule 4350. In addition, we have elected to voluntarily comply with certain other requirements of Rule 4350, notwithstanding that our home country does not mandate compliance; although we may in the future determine to cease voluntary compliance with those provisions of Rule 4350. However, we have determined not to comply with the following provisions of Rule 4350 since the laws of the British Virgin Islands do not require compliance:

	•		our independent directors do not hold regularly scheduled meetings in executive session;
	•		the compensation of our executive officers is not determined by an independent committee of the board or by the independent members of the board of directors, and our CEO may be present and participate in the deliberations concerning his compensation;
	•		related party transactions are not required to be reviewed or approved by our audit committee or other independent body of the board of directors; and
	•		we are not required to solicit shareholder approval of stock plans, including those in which our officers or directors may participate; stock issuances that will result in a change in control; the issuance of our stock in related party transactions or other transactions in which we may issue 20% or more of our outstanding shares; or, below market issuances of 20% or more of our outstanding shares to any person.

We may in the future determine to voluntarily comply with one or more of the foregoing provisions of Rule 4350.

          As of December 31, 2007, we employed approximately 3,600 persons on a full-time basis for our production of jewelry, gemstone cutting and polishing, and retailing. Approximately 100 of these people were our management and executive staff in Hong Kong, Macau and China. None of our employees is represented by a labor union and we believe that our employee relations are good.

E. SHARE OWNERSHIP.

          The following table sets forth certain information regarding the beneficial ownership of our shares of common stock as of June 1, 2008 by:

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

          As of June 1, 2008, we had 22,235,672 shares of our common stock issued and outstanding.

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

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

Name of Beneficial Holder		Number				Percent
		Shares Beneficially Owned
Yu Chuan Yih			2,034,353				9.1
Ka Man Au			254,000	(1)			1.1
Hon Tak Ringo Ng			275,000	(2)			1.2
Andrew N. Bernstein			0					*
Xiang Xiong Deng			0					*
Jin Wang			0					*
Jieyun Yu			0					*
All directors and executive officers as a group (7 persons)			2,563,353				11.4
Pacific Growth Developments Ltd.			1,500,000				6.7

•

150,000 shares of common stock at $2.00 per share at any time until June 30, 2013.

(2)

Includes options currently exercisable to acquire:

•

150,000 shares of common stock at $2.00 per share at any time until June 30, 2013.

The 1998 Stock Compensation Plan

          Effective June 1, 1998, we adopted and approved the 1998 Stock Compensation Plan, which our shareholders approved on December 9, 1998. The purpose of the plan is to:

	•		encourage ownership of our common stock by our officers, directors, employees and advisors;
	•		provide additional incentive for them to promote our success and our business; and
	•		encourage them to remain in our employ by providing them with an opportunity to benefit from any appreciation of our common stock through the issuance of stock options.

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

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

          As of June 1, 2008, 3,980,000 options had been exercised and the following options to purchase shares of our common stock under the plan were outstanding:

•

a total of 20,000 stock options to purchase 20,000 shares at $2.00 per share through June 30, 2013, of which no stock options are held by our directors and officers as a group.

The 2003 Stock Compensation Plan

     Effective July 1, 2003, we adopted and approved the 2003 Stock Compensation Plan, which our shareholders approved on December 5, 2003. The purpose of the plan is to:

	•		encourage ownership of our common stock by our officers, directors, employees and advisors;
	•		provide additional incentive for them to promote our success and our business; and
	•		encourage them to remain in our employ by providing them with an opportunity to benefit from any appreciation of our common stock through the issuance of stock options.

     Options constitute either incentive stock options within the meaning of Section 422 of the United States Internal Revenue Code of 1986, as amended, or options which constitute nonqualified options at the time of issuance of such options. The plan provides that incentive stock options and/or nonqualified stock options may be granted to our officers, directors, employees and advisors selected by the compensation committee. A total of 4,000,000 shares of common stock are authorized and reserved for issuance during the term of the plan, which expires in June 2013. The compensation committee has the sole authority to interpret the plan and make all determinations necessary or advisable for administering the plan. The exercise price for any incentive option or nonqualified option may be less than the fair market value of the shares as of the date of grant. Upon the exercise of the option, the exercise price must be paid in full either in cash, shares of our stock or a combination. If any option is not exercised for any reason, such shares shall again become available for the purposes of the plan.

     As of June 1, 2008, 3,394,500 options had been exercised and the following options to purchase shares of our common stock under the plan were outstanding:

•

a total of 433,500 stock options to purchase 433,500 shares at $2.00 per share through June 30, 2013, of which 300,000 stock options are held by our directors and officers as a group.

The 2005 Stock Compensation Plan

     Effective July 1, 2005, we adopted and approved the 2005 Stock Compensation Plan, which our shareholders approved on September 26, 2005. The purpose of the plan is to:

	•		encourage ownership of our common stock by our officers, directors, employees and advisors;
	•		provide additional incentive for them to promote our success and our business; and
	•		encourage them to remain in our employ by providing them with an opportunity to benefit from any appreciation of our common stock through the issuance of stock options.

     Options constitute either incentive stock options within the meaning of Section 422 of the United States Internal Revenue Code of 1986, as amended, or options which constitute nonqualified options at the time of issuance of such options. The plan provides that incentive

stock options and/or nonqualified stock options may be granted to our officers, directors, employees and advisors selected by the compensation committee. A total of 4,000,000 shares of common stock are authorized and reserved for issuance during the term of the plan, which expires in June 2015. The compensation committee has the sole authority to interpret the plan and make all determinations necessary or advisable for administering the plan. The exercise price for any incentive option or nonqualified option may be less than the fair market value of the shares as of the date of grant. Upon the exercise of the option, the exercise price must be paid in full either in cash, shares of our stock or a combination. If any option is not exercised for any reason, such shares shall again become available for the purposes of the plan.

     As of June 1, 2008, 1,500,000 options had been exercised and no options to purchase shares of our common stock under the plan were outstanding.

Other Options and Warrants Outstanding

     As of June 1, 2008, the following additional options and warrants to purchase shares of our common stock were outstanding:

	•		warrants to purchase an aggregate of 170,451 shares at $2.98 per share through September 3, 2009 which we sold to a group of investors as part of a private placement offering on September 1, 2004
	•		On September 25, 2006, we issued, and 11 institutional investors purchased, an aggregate of 1,466,668 shares of our common stock at $3.75 per share, as well as an aggregate of 236,909 warrants to purchase 236,909 shares at an exercise price of $4.221 per share (the “Short Term Warrants”) and 366,668 warrants to purchase 366,668 shares at an exercise price of $4.50 per share (the “Long Term Warrants”). In addition, our placement agent received 29,333 Long Term Warrants with identical terms to the Long Term Warrants issued to the investors (the “Placement Agent Warrants”). The Short Term Warrants were exercisable at any time through February 5, 2007. The Long Term Warrants are exercisable at any time on or after March 25, 2007 for a term of five years thereafter.
			As of June 1, 2008, the following warrants remained outstanding:

	•		333,334 Long Term Warrants
	•		29,333 Placement Agent Warrants

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. MAJOR SHAREHOLDERS.

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

     As of June 10, 2008, we had 253 record holders of our common stock. Of the 22,574,672 shares outstanding as of June 10, 2008, 21,634,054 shares were held by CEDE & Co.

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

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

B. RELATED PARTY TRANSACTIONS.

     Certain of our banking facilities are collateralized by properties owned by Yu Chuan Yih and his personal guarantee to the extent of $21,244,000, $23,161,000 and $14,708,000 as of December 31, 2005, 2006 and 2007, respectively. Mr. Yih has not received any additional compensation or consideration from us in return for his personal guarantees.

     During the fiscal year ended April 30, 1999, we provided a guarantee to a bank in respect of mortgage loans granted to Yu Chuan Yih to the extent of $632,000. As of December 31, 2007, the balance of the mortgage loans amounted to $79,000.

     We paid Andrew N. Bernstein, P.C., the law firm of which Andrew N. Bernstein, one of our directors, is the sole shareholder, less than $200,000 for legal services rendered to us during the fiscal year ended December 31, 2007.

C. INTERESTS OF EXPERTS AND COUNSEL.

     Not applicable.

ITEM 8. FINANCIAL INFORMATION

A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION.

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

     Export sales constitute a substantial majority of our total sales volume.

     Securities Litigation. In September 2007, several shareholder class actions were filed in the United States District Court for the Central District of California against the Company and certain officers and directors of the Company, entitled Apple v. LJ International Inc., et al. (No. 07-06076), Cooper v. LJ International, Inc., et al. (No. 07/06213), and Lieben v. LJ International Inc., et. al. (No. 07-06216). On February 8, 2008, the judge to whom the cases were referred consolidated the cases and appointed lead plaintiff and lead counsel. On April 8, 2008, the lead plaintiff filed an amended and consolidated complaint (the “Complaint”.)

     The Complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. It seeks an unspecified amount of damages on behalf of all persons who purchased LJ common stock during the period from February 15, 2007, to September 6, 2007 (the “Class Period”). The Complaint alleges that the Company’s February 15, 2007 press release, which provided financial guidance for the Company’s fourth quarter and year-end 2006 net income and earnings, contained materially false and misleading statements. Specifically, paragraph 10 of the Complaint alleges that the press release “failed to disclose known uncertainties, such as applicable tax provisions, that had material, adverse effects on LJ’s 2006 fourth quarter and full year earnings and net income.” The Complaint alleges that the defendants overstated the Company’s fiscal 2006 financial results, and thereby artificially inflated the market price of LJ’s common stock throughout the Class Period.

     On May 27, 2008, the Company (the only defendant served with the Complaint) moved to dismiss the Complaint pursuant to Rule 12(b) of the Federal Rules of Civil Procedure.

     At this time, we are unable to form a professional judgment as to whether unfavorable outcomes are either probable or remote.

     Derivative Litigation. Two purported shareholder derivative lawsuits, Vaughn v. Yih, et al. (Los Angeles Superior Court No. BC 378903) and Cooke vs. Yih, et al. (Los Angeles Superior Court No. BC 380214), were filed in California in Los Angeles County Superior Court on October 10 and November 5, 2007, respectively.

     The complaints in the derivative actions allege, among other things, that various officers and directors of the Company caused the Company to issue a series of press releases, Securities and Exchange Commission filings, and other statements that significantly overstated the Company’s business prospects and financial results. They further allege that, as a result of these

statements, the Company’s share price traded at artificially inflated levels, and that defendants’ actions led to a delay in the release of the Company’s financial statements for the fiscal fourth quarter of 2006 and the fiscal first quarter of 2007. The plaintiffs purport to state causes of action for breach of fiduciary duty, waste of corporate assets, and unjust enrichment. By their complaints, they seek, among other relief, unspecified damages to be paid to the Company, corporate governance reforms, and equitable and injunctive relief, including restitution and the creation of a constructive trust.

     On May 9, 2009, the court in the Vaughn action sustained the defendants’ demurrer without leave to amend on the ground that the plaintiff failed to obtain the required leave from the High Court of the British Virgin Islands to file the derivative action. The Vaughn action was dismissed pursuant to the order sustaining the demurrer. On May 15, 2008, the plaintiff filed a notice of appeal from the order of dismissal.

     In May 2008, the Cooke action was reassigned to the same judge that presided over the Vaughn action. The Company anticipates that the court will set a status conference in due course.

     At this time, we are unable to form a professional judgment as to whether unfavorable outcomes are either probable or remote.

     Shao v. Yih, et al. On October 28, 2007, the former chief executive officer of Lorenzo USA, Inc. (a wholly-owned subsidiary of LJ), sued LJ, Lorenzo USA, Inc., and LJ’s Chief Executive Officer Yu Chuan Yih in Los Angeles Superior Court, Shao v, Yih, et al., Case No. BC379851. The plaintiff claimed that the defendants wrongfully refused to honor his valid exercise of options for the purchase of LJ stock. On April 25, 2008, the parties agreed to settle the dispute at mediation. The plaintiff has filed a Request for Dismissal in May 2008.

B. SIGNIFICANT CHANGES.

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

ITEM 9. THE OFFER AND LISTING

A. OFFER AND LISTING DETAILS.

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

Period		High				Low
Year ended December 31, 2003		$	5.00			$	1.14
Year ended December 31, 2004		$	5.74			$	2.21
Year ended December 31, 2005		$	3.95			$	2.03
Year ended December 31, 2006		$	4.60			$	3.08
Year ended December 31, 2007		$	12.86			$	2.18
Quarter ended March 31, 2006		$	4.16			$	3.34
Quarter ended June 30, 2006		$	3.79			$	3.08
Quarter ended September 30, 2006		$	4.59			$	3.67
Quarter ended December 31, 2006		$	4.60			$	3.71
Quarter ended March 31, 2007		$	12.00			$	4.42
Quarter ended June 30, 2007		$	12.86			$	8.93
Quarter ended September 30, 2007		$	12.37			$	3.99
Quarter ended December 31, 2007		$	6.15			$	2.18
Quarter ended March 31, 2008		$	5.45			$	2.47
Quarter ended June 30, 2008*		$	3.90			$	2.56
Month ended December 31, 2007		$	5.72			$	3.25
Month ended January 31, 2008		$	5.45			$	3.10
Month ended February 29, 2008		$	3.56			$	3.16
Month ended March 31, 2008		$	3.10			$	2.47
Month ended April 30, 2008		$	3.15			$	2.56
Month ended May 31, 2008		$	3.90			$	2.61
Month ended June 30, 2008*		$	3.73			$	2.89