U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended December 31, 2009
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from                       to
OR
o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		Date of event requiring this shell company report

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

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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

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

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

None

(Title of Class)

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

None

(Title of Class)

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

23,768,672 Shares of Common Stock as of December 31, 2009

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o      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  o     Non-accelerated filer þ

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, 2009 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

		Year ended December 31,
			2009				2008				2007				2006				2005
Statement of Operations Data:
Revenues				110,523				136,268				152,037				123,791				99,646
Costs of goods sold				(72,173	)			(97,031	)			(112,508	)			(88,867	)			(77,127	)
Gross profit				38,350				39,237				39,529				34,924				22,519
Operating expenses
Selling, general and administrative				(31,039	)			(34,815	)			(30,399	)			(23,114	)			(15,488	)
Net (loss) gain on derivatives				(503	)			(86	)			(4	)			(29	)			8
Depreciation				(2,197	)			(3,373	)			(3,095	)			(2,039	)			(1,368	)
Operating income				4,611				963				6,031				9,742				5,671
Other income and expense
Interest income				147				199				273				282				139
Gain on currency translation				—				1,473				—				—				—
Gain on sales of securities				—				49				—				—				—
Gain on disposal of property held for lease				—				2,210				—				—				—
Interest expenses				(842	)			(1,789	)			(3,103	)			(3,258	)			(1,991	)
Operating Income before income taxes, noncontrolling interest and extraordinary item				3,916				3,105				3,201				6,766				3,819
Income taxes expense				(231	)			(569	)			(1,711	)			(1,403	)			(739	)
Income before noncontrolling interest and extraordinary item				3,685				2,536				1,490				5,363				3,080
Net loss (income) attributable to noncontrolling interest				4				(6	)			(1	)			(38	)			(20	)
Income before extraordinary item				3,689				2,530				1,489				5,325				3,060
Extraordinary gain on negative goodwill				—				—				—				—				1,291
Net income				3,689				2,530				1,489				5,325				4,351
Net income per share:
Basic				0.16				0.11				0.07				0.31				0.32
Diluted				0.15				0.11				0.07				0.29				0.30
Weighted average number of shares
Basic				23,230				22,246				21,064				17,390				13,439
Diluted				24,102				22,449				22,289				18,303				14,322
Balance Sheet Data:
Working capital				77,614				72,059				62,786				50,134				35,554
Total assets				133,757				131,190				134,144				124,522				108,230
Long-term obligation				2,322				2,219				1,335				1,640				43
Total LJ International Inc. shareholders’ equity				83,872				78,329				72,668				59,739				45,008

     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 accounted for at least 10% of our sales in 2009. We cannot be certain that these sales will continue; if not, our revenue will likely decline.

     Although we sell to a large number of customers in a variety of markets, two of our customers each accounts for at least 10% of our 2008 sales. For the fiscal years ended December 31, 2008 and 2009, these customers accounted for approximately 11% and 11% of our 2008 sales and 10% and 4% of our 2009 sales. Each of these customers is a non-affiliated third party and is not a related party of the Company or any of its subsidiaries. Although we have maintained good and longstanding relationships with these customers, we do not have any long-term contract with either of them and they order only on a “purchase order” basis. The loss of either of these customers or a significant reduction in their 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
	•		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 applicable preferential tax treatments until December 31, 2012. Eligible 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 deemed to be considered as 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 and, 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-PRC 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, under the New EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would be subject to a 10% withholding income tax. 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 at both the retail and wholesale levels are seasonally sensitive and are generally strongest during the quarter ending December 31 of each year due to the importance of the holiday selling season.

     Our retail sales are typically seasonally greater in the fourth quarter and the first quarter of each year due to high spending of consumers during the Christmas and Chinese New Year holidays. Our wholesale sales are typically greater in the third and fourth quarters of each year in anticipation of the Thanksgiving and Christmas holidays.

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 for lease, 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 our Chairman, 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 would be adversely affected.

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

     Our wholesale business has been our major revenue contributor and accounted for 54% of our total revenue for the fiscal year ended December 31, 2009. Geographically, North America is a major market for our wholesale business and contributes 66% of our wholesale revenues. Accordingly, the revenue of our wholesale business in the US market accounts for 35% of our total revenue. Any continuing decline of the US economy would adversely affect the spending patterns of the US consumers which would, 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 shares of common stock 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
	•		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
	•		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 laws 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.

We may need to raise capital in the future. Such funds may not be available on acceptable terms or at all, and, without additional funds, we may not be able to expand our retail business in China.

     We expect to expend significant resources to expand our retail business in China. We will require substantial funds in order to finance our retail distribution and fund operating expenses. In addition to the funds required to open additional retail locations, additional working capital will be needed to operate these additional retail locations due to longer sales and collection cycles and high inventory levels required to support them. Without these funds, we may not be able to meet our goals. We may seek additional funding through equity or debt financing or through collaborative arrangements with strategic partners.

     You should also be aware that in the future:

•

We cannot be certain that additional capital will be available on favorable terms, if at all;

	•		Any available additional financing may not be adequate to meet our goals; and
	•		Any equity financing would result in dilution to stockholders.

     If we cannot raise additional funds when needed and on acceptable terms, we may not be able to effectively execute our growth strategy (including expanding the number of our retail stores in China), take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements.

We are dependent on certain key personnel and the loss of these key personnel could have a material adverse effect on our business, financial condition and results of operations.

     Our success is, to a certain extent, attributable to the management, sales and marketing, and operational and technical expertise of certain key personnel. Each of our named executive officers, including our Chief Executive Officer, Mr. Yu Chuan Yih, performs key functions in the operation of our business. There can be no assurance that we will be able to retain these officers or that such personnel may not receive and/or accept competing offers of employment. The loss of a significant number of these employees could have a material adverse effect upon our business, financial condition, and results of operations. We do not maintain key-man life insurance on any of our senior management.

Risks Related to Doing Business in the People’s Republic of China

     A substantial portion of our retail business operations are conducted entirely in the People’s Republic of China (“PRC”). Because China’s economy and its laws, regulations and policies are different from those typically found in Western countries and are continually changing, we will face risks, including those summarized below.

     We are subject to comprehensive regulation by the PRC legal system, which is uncertain. As a result, it may limit the legal protections available to you and us and we may not now be, or remain in the future, in compliance with PRC laws and regulations.

     Our subsidiaries that own our production facilities and retail stores in China are incorporated under and are governed by the laws of the PRC; a significant portion of our operations are conducted in the PRC; and many of our suppliers are located in the PRC. The PRC government exercises substantial control over virtually every sector of the PRC economy, including the production, distribution and sale of our merchandise. We are required to obtain several membership and approval certificates from these government agencies in order to continue to conduct our business. We may be required to renew such memberships and to obtain approval certificates periodically. In order to operate under PRC law, our PRC subsidiaries require valid licenses, certificates and permits, which must be renewed from time to time. If we were to fail to obtain the necessary renewals for any reason, including sudden or unexplained changes in local regulatory practice, we could be required to shut down all or part of our operations temporarily or permanently.

     The legal and judicial systems in the PRC are still rudimentary. The laws governing our business operations are sometimes vague and uncertain and enforcement of existing laws

is inconsistent. Thus, we can offer no assurance that we are, or will remain, in compliance with PRC laws and regulations.

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

     The PRC government exercises significant control over the PRC economy. In recent years, the PRC government has instituted measures to curb the risk of inflation. These measures have included monitoring the exchange rate of the RMB, restrictions on the availability of domestic credit, and limited re-centralization of the approval process for some international transactions. These measures may not succeed in controlling inflation, or they may slow the economy below a healthy growth rate and lead to economic stagnation or recession; in the worst-case scenario, the measures could slow the economy without curbing inflation, causing “stagflation.” The PRC government could adopt additional measures to further combat inflation, including the establishment of price freezes or moratoriums on certain projects or transactions. Such measures could harm the economy generally and hurt our business by limiting the income of our customers available to purchase our merchandise, by forcing us to lower our profit margins, and by limiting our ability to obtain credit or other financing to pursue our expansion plan or maintain our business.

ITEM 4. INFORMATION ON THE COMPANY

A. HISTORY AND DEVELOPMENT OF THE COMPANY.

     LJ International Inc. (“we”, “LJI” 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, 2009, 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.
	•		ENZO International Holdings Ltd.
	•		ENZO Jewelry Inc.
	•		Lorenzo Crystal Ltd.
	•		Lorenzo (Shenzhen) Co., Ltd.
	•		Beijing Rainbow Zhen Ai Ltd.
	•		Wonderful (Shenzhen) Ltd.
	•		Goldleaves Gems (Shenzhen) Co., Ltd. (98% equity ownership)

     Our principal place of business and 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, 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 spent $1,415,000 on capital expenditures, excluding inventory, for ENZO retail store openings during the fiscal year ended December 31, 2009
	•		we spent $1,199,000 on capital expenditures, excluding inventory, for ENZO retail store openings during the fiscal year ended December 31, 2008
	•		we spent $1,977,000 on capital expenditures, excluding inventory, for ENZO retail store openings during the fiscal year ended December 31, 2007

B. BUSINESS OVERVIEW.

     We established a major manufacturing presence in Shenzhen, China in 1998. In that same year, our shares began trading on the Nasdaq Stock Market and entered the select ranks of major publicly-traded firms in the jewelry business. In December 2004, we began our retail jewelry operations in China by introducing our own ENZO brand of jewelry retail chain following the country’s acceptance into the World Trade Organization (WTO). 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 or sterling silver and adorned with colored stones, diamonds, pearls and precious stones. 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.

LJI continues its expansion strategy in China’s retail market.

     Ever since we opened the first stores of our ENZO chain in December 2004, we have been committed to a strategy based on retailing. We conduct our jewelry retail business through the ENZO brand in the Asia Pacific region, with the primary focus in the China market, which we regard as having one of the largest and fastest growing consumer demands for luxury items. Our wholesale and manufacturing operations play crucial supporting roles, but we have consistently envisioned China’s untapped retail market as the key long-term driver of growth in revenues and profits. We will continue to expand our retail operations in China by opening new ENZO stores.

LJI continues to focus in North America for our wholesale business.

     Our primary wholesale 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
	•		discount chain stores

     For the years ended December 31, 2008 and 2009, approximately 51% and 35% of our total sales were in North America.

Our Retail Business Strategy

     Our retail business strategy is to:

•

expand our market share by opening an additional 100 points of sale by the end of 2011

	•		improve the performance of our existing stores by making appropriate adjustments on product mix and by stepping up our marketing and promotional activities
	•		further expand our product range by introducing new collections for both colored gemstones and diamonds to capture different market segments

Our Wholesale Business Strategy

     Our wholesale 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 high-end precious stone jewelry in addition to high volume, high-quality colored products
	•		further develop our existing customer relationships with our specialized services
	•		expand into new distribution channels, particularly in the United States, China, Western Europe, Japan and Australia

     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 following is a breakdown of our total revenues, including wholesale and retail, by geographic market for each of our past three financial years:

		Year ended December 31,
(in thousands)		2009				2008				2007
		US$				US$				US$
US & Canada			39,225				69,232				80,572
Europe and other countries			18,110				27,455				32,597
Japan			1,115				989				2,206
PRC (including Hong Kong and Macau)			52,073				38,592				36,662
			110,523				136,268				152,037

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 eleven years and has more than 150,000 square feet of production space. We currently employ approximately 1,700 skilled gemstone cutters and production personnel excluding managerial, sales and marketing staff, and turned out approximately 1.1 million pieces of finished fine jewelry during the fiscal year ended December 31, 2009.

     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

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 a 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.

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

     We exhibited at the following international jewelry shows in 2009:

Show Name		Show Date
VicenzaFirst		Jan 11 - 18
JA Winter Show		Jan 18 - 20
March Hong Kong Show		Mar 4 - 8
Basel 2009		Mar 26 - Apr 2
VicenzaCharm		May 16 - 20
JCK Las Vegas 09		May 30 - Jun 2
JA Summer Show		Jul 26 - 29
VicenzaChoice		Sep 12 - 16
September HK Show		Sep 23 - 27
JANY Special Show		Oct 25 - 27

Design and Product Development

     We have a group of internationally trained designers who work in our Shenzhen, China office. 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 and sterling silver jewelry products that incorporate traditional yet fashionable styles and designs.

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

Production Process

     We produce our jewelry at our facilities 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 or sterling silver with gemstones or diamonds to produce jewelry
	•		finishing operations such as cleaning and polishing, resulting in high quality finished jewelry

     We strive to commit to high standards and continual improvement for success through improved customer satisfaction and staff motivation. We obtained the Quality Management System — ISO 9001:2008 Certificates on June 30, 2008.

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 facility, all of our retail stores 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 count 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

Retail

     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 Tai Fook, Chow Sang Sang, Tse Sui Luen and Luk Fook; the local Chinese retail competitors include Laofengxiang, Chaohongji, and Laomiao; and foreign competitors include Tiffany, Cartier and Bvlgari.

Wholesale

     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 or 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.

C. ORGANIZATIONAL STRUCTURE AS OF DECEMBER 31, 2009.

     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 (HK)
•		Lorenzo Jewellery (Shenzhen) Co., Ltd. (PRC)
•		ENZO International Holdings Ltd. (BVI)
•		ENZO Jewelry Inc. (BVI)
•		Lorenzo Crystal Ltd. (HK)
•		Lorenzo (Shenzhen) Co., Ltd. (PRC)
•		Wonderful (Shenzhen) Ltd. (PRC)
•		Beijing Rainbow Zhen Ai Ltd. (PRC)

98%

•

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 and lease 11,100 square feet of office and showroom at this location.

     Our jewelry production facility in Shenzhen, China consists of 151,557 square feet of building space located inside of and close to the Shatoujiao Free Trade Zone, Shenzhen. We own approximately 74,196 square feet of this space. We also currently lease:

	•		18,848 square feet for a term of five years expiring June 30, 2011 from an unaffiliated third party at a rental rate of $3,817 per month;
	•		18,848 square feet for a term of two years expiring August 31, 2010 from an unaffiliated third party at a rental rate of $5,868 per month;
	•		19,364 square feet for a term of three years expiring March 31, 2012 from an unaffiliated third party at a rental rate of $4,716 per month; and
	•		20,301 square feet for a term of three years expiring March 31, 2012 from an unaffiliated third party at a rental rate of $4,945 per month.

     We own two warehouse facilities in Hung Hom and Aberdeen consisting of 5,432 square feet and 5,200 square feet. We also own an additional property in Hung Hom. We lease all three 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.”

     For the fiscal year ended December 31, 2009, we reported revenues totaling $110.5 million, down 19% from $136.3 million in 2008. The decrease was due to a 40% drop in sales of LJI’s wholesale operations to $59.7 million from $99.8 million a year earlier. This decrease was partially offset by a 39% increase in sales from our ENZO retail chain in China to $50.8 million in 2009 from $36.4 million a year earlier.

     Despite the decrease in total revenue, the operating income as well as the net income were both improved. Operating income in 2009 was $4.6 million, up 379% from $1 million in 2008. Net income in 2009 was $3.7 million, up 46% from $2.5 million in 2008. If the non-recurring income in 2008 of $2.2 million gain on the sale of a property held for lease and $1.5 million gain on currency translation were excluded, net income would have increased by 420%. The strong operating result improvement mainly reflected the significant improvement of the ENZO retail chain which had closed underperforming stores and sharply increased its per-store results in the process. The increase in net income was also due to the right sizing of our wholesale business operation, and the shift in our revenue mix from wholesale to retail.

     The revenue mix of the two streams of business of LORENZO (wholesale) and ENZO (retail) were roughly in the ratio of 54% and 46% for the year ended December 31, 2009 as compared to a ratio of 73% and 27% for the year ended December 31, 2008 respectively.

     The decline in wholesale revenue was due largely to the slowdown in the global economy and consumer spending. The recession in the U.S., which accounts for the majority of our wholesale revenues, had an especially sharp impact on sales.

     Retail sales increased due to the growing popularity of the ENZO brand, productivity gains at the store level as well as ongoing changes in its inventory mix.

     As at December 31, 2009, there were 95 ENZO stores throughout China compared to 97 stores as at December 31, 2008. ENZO has stores in Macau, Hong Kong, Shanghai, Beijing, Harbin, Qingdao, Shenyang, Ningbo, Chengdu, Changsha, Wuxi, Tianjin, Dalian, Changchun, Tangshan, Guiyang, Xian, Anshan, Changzhou, Hefei, Shijiazhuang, Zhengzhou, Nanchang, Chongqing, Kunming, Jinan, Suzhou, Wuhan, Hengyang, Nanjing, and Xiangtan. Our ENZO stores in China operate in department stores and shopping malls.

     Our ENZO chain has reported robust revenue by 39% growth year-over-year in 2009 while the China GDP has increased by 8.7%. Moreover, ENZO has accomplished this feat without a significant net addition of stores. Its store count has remained in the low 90s over the past two years. So its strong revenue performance results not from new store openings but from prudent management of existing stores and the ability to close stores that are not performing up to ENZO standards.

     We believe that China represents an excellent retail sales opportunity for several reasons:

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

     Obviously, we would be much farther along this growth track if the world economy had steadily hummed along since 2007. But considering the harsh current environment for sellers of luxury goods in both the retail and wholesale markets, we are not dismayed by our record of the past two years or by our current situation. The drop in our wholesale revenues reflects the sharp contraction in that part of the global jewelry market. We do not expect a quick wholesale rebound; maintaining the status quo is a more realistic hope. But we are entering this period of more-or-less flat sales with little long-term debt, ample working capital and plenty of cash. In other words, we believe that our wholesale operations are scaled-down but financially healthy, profitable and positioned to gain market share following a recovery in the U.S. economy.

     With points of sales covering strategic locations in 31 major cities as of March 15, 2010, ENZO is the foreign jewelry brand with the highest number of points of sales 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.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements requires us to make estimates 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 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 14 to our consolidated financial statements included elsewhere in this annual report. The measurement of stock-based compensation cost is based on several criteria including, but not limited to, the valuation model used and associated input factors such as expected term of the award, our stock price volatility, dividend rate, risk free interest rate, and award forfeiture rate. The input factors to use in the valuation model are based on subjective future expectations combined with management judgment. We estimate the fair value of stock options granted using the Black-Scholes valuation model and the assumptions shown in Note 14 to the accompanying consolidated financial statements. We use historical data to estimate pre-vesting stock options forfeitures and record stock- based compensation expense only for those awards that are expected to vest. We base the dividend yield assumption on historical dividend payouts, which are zero. The risk-free interest rate assumption is based on U.S. Treasury instruments with a term that is consistent with the expected term of our stock options. The expected stock price volatility for our common stock was determined by examining our historical volatilities. The fair value of equity awards granted is amortized on a straight-line basis over the requisite service periods of the awards, which are the vesting periods.

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, 2008 and 2009. The estimated fair value of the reporting unit exceeded its carrying value at December 31, 2009. 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.

Fair value of financial instruments. We follow guidances issued by Financial Accounting Standards Board for the 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, refundable customer deposits, 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)		2009				2008				2007				2009-2008				2008-2007
Revenues
Wholesale		$	59,733			$	99,840			$	117,689				-40	%			-15	%
Retail		$	50,790			$	36,428			$	34,348				39	%			6	%
		$	110,523			$	136,268			$	152,037				-19	%			-10	%

     The decrease in revenue of jewelry product for wholesale of $40,107,000 or 40% to $59,733,000 for the year ended December 31, 2009, compared to the year ended December 31, 2008, was primarily attributable to the decrease in order quantity of 33% and the decrease in average selling price of 9%.

     The decrease in revenue of jewelry product for wholesale of $17,849,000 or 15% to $99,840,000 for the year ended December 31, 2008, compared to the year ended December 31, 2007, was primarily attributable to the decrease in order quantity of 12%.

     The Company’s retail business increased by $14,362,000 or 39% to $50,790,000 for the year ended December 31, 2009, compared to the year ended December 31, 2008. This increase was primarily due to the ongoing implementation of the Company’s strategy of consolidation of its ENZO retail stores and changes in its inventory mix. The Company opened 21 new stores, which are in better locations with better quality customers, and closed 23 of its less profitable stores. In effect, there were a total of 95 ENZO retail stores in full operation for the year ended December 31, 2009 compared to a total of 97 ENZO retail stores at December 31, 2008.

     The Company’s retail business increased by $2,080,000 or 6% to $36,428,000 for the year ended December 31, 2008, compared to the year ended December 31, 2007. Considering the fact of suspension of the Signature line operation in 2008, retail revenue at retail store level actually increased by $15,031,000 or 70% for the year ended December 31, 2008 as compared to the year ended December 31, 2007. This increase was primarily due to the implementation of the Company’s strategy of consolidation of its ENZO retail stores. The Company opened 22 new stores, which are in better locations with better quality customers, and closed 20 of its less profitable stores. In effect, there were a total of 97 ENZO retail stores in full operation for the year ended December 31, 2008 compared to the same number of retail stores at December 31, 2007, but some of which did not operate for the full year.

Cost of Sales and Gross Profit

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

     The gross profit margin of wholesale remained at 20% for the years ended December 31, 2009 and 2008.

     The gross profit margin of wholesale increased to 20% for the year ended December 31, 2008 from 19% for the year ended December 31, 2007. This was attributable to more effective procurement of sourced raw materials at lower costs and consumption of inventory whose original costs were lower than market.

     The gross profit margin of ENZO retail operation decreased to 52% for the year ended December 31, 2009 compared to 53% for the year ended December 31, 2008 and was attributable to more diamonds and 999 gold jewelry with lower margin being sold in the year ended December 31, 2009 than the year ended December 31, 2008.

     The gross profit margin of ENZO retail operation increased to 53% for the year ended December 31, 2008 compared to 51% for the year ended December 31, 2007 and was attributable to more effective procurement of sourced raw materials and finished products at lower costs.

Selling, General and Administrative Expenses

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

     Selling, general and administrative expenses decreased by 11% for the year ended December 31, 2009, compared to the year ended December 31, 2008. For the wholesale business, the selling, general and administrative expenses decreased by 39% for the year ended December 31, 2009, compared to the year ended December 31, 2008. The decrease was mainly attributable to the reversal of allowance for doubtful accounts of $258,000 for settled debts for the year ended December 31, 2009, compared to the allowance for doubtful accounts of $1,223,000 for the year ended December 31, 2008, decrease in staff cost of $2,115,000 and decrease in other expenses of $1,862,000 due to management’s cost-containment and corporate restructuring efforts in response to the global recession. The expenses incurred by the retail business of $20,633,000, or 16% increase of the same for the year ended December 31, 2009, comprised advertising cost of $646,000, rental cost of $10,630,000, staff cost of $4,897,000 and other expenses of $4,460,000. The increase was mainly in the rental cost area which was a result of higher sales. The rental costs of more than 88% in number of retail stores were based on percentage of sales of which 81% in number of stores did not have any minimum rentals. The corporate expenses included items of corporate overheads, such as charges for legal and professional advisory services.

     Selling, general and administrative expenses increased by 15% for the year ended December 31, 2008, compared to the year ended December 31, 2007. For the wholesale business, the selling, general and administrative expenses increased by 8% for the year ended December 31, 2008, compared to the year ended December 31, 2007. The increase was mainly attributable to the allowance for doubtful accounts of $1,223,000 because the debtors filed for bankruptcy protection. Excluding the allowance for doubtful accounts, the selling, general and administrative expenses of the wholesale business was $12,864,000, a decrease of 2% for the year ended December 31, 2008, compared to the year ended December 31, 2007. The expenses incurred by the retail business of $17,820,000, or 17% increase of the same for the year ended December 31, 2007, comprised advertising cost of $686,000, rental cost of $8,361,000, staff cost of $4,920,000 and other expenses of $3,853,000. The increase was mainly in the rental cost area which was a result of higher sales. The rental costs of more than 90% in number of retail stores were based on percentage of sales of which 44% in number of stores did not have any minimum rentals. The corporate expenses included items of corporate overheads, such as charges for legal and professional advisory services, and non-recurring litigation expenses of $1,311,000.

Net gain (loss) on derivatives

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

     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.

     We have hedged 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 realized loss of US$nil, $483,000 and $349,000 for each of the years ended December 31, 2009, 2008 and 2007 respectively; and a realized loss of $503,000 for the year ended December 31, 2009, a realized gain of $397,000 and $345,000 for each of the years ended December 31, 2008 and 2007 respectively.

     While the hedging mechanism has been in place, we secured position of a net loss of $503,000, $86,000 and $4,000 for each of the years ended December 31, 2009, 2008 and 2007 respectively, on derivative hedging activities.

Depreciation

														% Change
														Years ended				Years ended
		Year ended December 31,												December 31,				December 31,
(in thousands)		2009				2008				2007				2009-2008				2008-2007
Depreciation
Wholesale		$	914			$	1,877			$	1,995				-51	%			-6	%
% of revenues			2	%			2	%			2	%
Retail		$	1,283			$	1,496			$	1,100				-14	%			36	%
% of revenues			3	%			4	%			3	%
Total		$	2,197			$	3,373			$	3,095				-35	%			9	%
% of revenues			2	%			2	%			2	%

     Depreciation of wholesale business decreased by 51% to $914,000 for the year ended December 31, 2009 from $1,877,000 for the year ended December 31, 2008, which reflected part of the on-going capital expenditures which were fully amortized during the year. Depreciation of retail business decreased by 14% to $1,283,000 for the year ended December 31, 2009 from $1,496,000 for the year ended December 31, 2008, which reflected part of the capital expenditures of renovation of some stores with tenancy leases expired and renewed during the year were fully amortized.

     Depreciation of wholesale business decreased by 6% to $1,877,000 for the year ended December 31, 2008 from $1,995,000 for the year ended December 31, 2007, which reflected part of the on-going capital expenditures which were fully amortized during the year. Depreciation of retail business increased by 36% to $1,496,000 for the year ended December 31, 2008 from $1,100,000 for the year ended December 31, 2007, which reflected the amortization of the capital expenditures of renovation on the increased number of retail stores during the year.

Interest cost

														% Change
														Years ended				Years ended
		Year ended December 31,												December 31,				December 31,
(in thousands)		2009				2008				2007				2009-2008				2008-2007
Interest expenses		$	842			$	1,789			$	3,103				-53	%			-42	%
% of revenues			1	%			1	%			2	%

     Interest expenses decreased by $947,000 or 53% to $842,000 for the year ended December 31, 2009, compared to the year ended December 31, 2008, and was primarily attributable to the decrease in interest rates and the decrease in utilization level of credit lines of letters of credit and gold loans due to the suspension or cancellation imposed by the banking facilities.

     Interest expenses decreased by $1,314,000 or 42% to $1,789,000 for the year ended December 31, 2008, compared to the year ended December 31, 2007, and was primarily attributable to the decrease in interest rates and the decrease in utilization level of credit lines of letters of credit and gold loans due to the suspension or cancellation imposed by the banking facilities.

Income taxes

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

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

     For our subsidiaries in Hong Kong, the prevailing corporate income tax rate is 16.5%.

     Effective January 1, 2008, the National People’s Congress of China enacted a new PRC Enterprise Income Tax Law, under which foreign invested enterprises and domestic companies is subject to enterprise income tax at a uniform rate of 25%. During the transition period, the tax rate for entities operating in the Shenzhen Special Economic Zone gradually increased to coincide with the new tax rate within five years starting from 2008 and reaching the uniform rate of 25% in 2012. The applicable tax rate is 18%, 20%, 22%, 24% and 25% for the years ending December 31, 2008, 2009, 2010, 2011 and 2012 onwards, respectively.

     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.

     As of December 31, 2009, one of our subsidiaries in China is enjoying the tax holiday as its first profit-making year was in 2005 and another subsidiary in China is enjoying the tax

holiday as its first profit-making year was in 2008. PRC income tax is calculated at the applicable rates relevant to these subsidiaries which currently are 20%.

     For other subsidiaries in China, the prevailing corporate income tax rate is 25%. The prevailing corporate income rate is 20% for companies operating in special economic zones of China.

     Income taxes included tax (over) under provision adjustment of ($55,000), $1,000 and $195,000 for the years ended December 31, 2009, 2008 and 2007, respectively, after the finalization of tax assessment for prior years.

Inflation

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

Foreign Exchange

     Approximately 53% 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 Renminbi, Hong Kong Dollars, followed by US Dollars. 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 appreciates 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 depreciates 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 7 to 14.

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)		2009				2008				2007
Net cash provided by operating activities		$	2,061			$	8,746			$	2,203
Net cash used in investing activities			(1,628	)			(801	)			(1,806	)
Net cash used in financing activities			(2,883	)			(533	)			(1,309	)
Effect of foreign exchange rate change			384				985				—
Net (decrease) increase in cash and cash equivalents			(2,066	)			8,397				(912	)

Operating Activities:

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

     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 31, 2009, net cash provided by operating activities was comprised of net income of $3,689,000, non-cash adjustment of $3,000,000 including adjustment of $2,197,000 and $231,000 for depreciation and reversal of allowance for doubtful debts, respectively.

     For the year ended December 31, 2008, net cash provided by operating activities was comprised of net income of $2,530,000, non-cash adjustment of $1,315,000 including adjustment of $3,373,000 and 1,223,000 for depreciation and allowance for doubtful debts, respectively, gain of $2,210,000 on disposal of property held for lease and gain of $1,473,000 on valuation of loans dominated in HK dollars and US dollars.

Significant changes in assets and liabilities were as follows:

     Trade receivables increased by $878,000 for the year ended December 31, 2009 and decreased by $1,401,000 for the year ended December 31, 2008.

     Inventory balance increased by $4,764,000 for the year ended December 31, 2009 mainly due to the build up of inventory for the rapid growth of retail business. Inventory balance decreased by $5,375,000 for the year ended December 31, 2008 due to utilization of old inventory for special promotion programs with certain customers and the enforcement of strict control on inventory purchases.

     Trade payables increased by $620,000 for the year ended December 31, 2009 due to increased level of material purchases during the last quarter of the year. Trade payables decreased by $775,000 for the year ended December 31, 2008 due to a reduced level of material purchases which was in line with sales expectation for the year.

Investing Activities:

     For the year ended December 31, 2009, net cash used in investing activities was for capital expenditures and decrease in restricted cash. Capital expenditures were mainly for on-going improvements of existing production facilities in Shenzhen, and other business necessities, and renovation of new stores for the retail business.

     For the year ended December 31, 2008, net cash used in investing activities was for capital expenditures and increase in restricted cash, which was offset by the proceeds on disposal of investment property. Capital expenditures were mainly for on-going improvements of the existing production facilities in Shenzhen, and other business necessities, and renovation of new stores for the retail business.

     Our capital expenditures by category for the periods presented were:

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

Financing Activities:

     Net cash used in financing activities for the year ended December 31, 2009 was $2,883,000, which included proceeds of $355,000 from the issuance of shares upon exercise of stock options, sales proceeds of derivatives and an increase of new loans and was offset by the repayment of matured bank loans, change in letter of credit and factoring and increase in bank overdrafts utilization level.

     Net cash used in financing activities for the year ended December 31, 2008 was $533,000, which included proceeds of $3,406,000 from the issuance of shares upon exercise of stock options, sales proceeds of derivatives and an increase of new loans and was 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, HK dollars and Renminbi.

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)		2009				2008				2007
Granted :
Letters of credit		$	23,170			$	24,085			$	38,957
Overdraft		$	2,923			$	2,923			$	4,141
			26,093				27,008				43,098
Utilized :
Letters of credit utilized		$	13,481			$	13,384			$	16,653
Overdraft utilized		$	2,908			$	2,724			$	2,977
			16,389				16,108				19,630

     The letters of credit and bank overdrafts are denominated in HK dollars, US dollars and Renminbi, bear interest at the floating commercial bank lending rates in Hong Kong and China, 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)		2009				2008				2007
Notes payable, current portion		$	5,551			$	9,194			$	4,047
Notes payable, non-current portion		$	2,244			$	2,115			$	1,154
			7,795				11,309				5,201

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

Gold Loan Facilities:

		Years ended December 31,
(in thousands)		2009				2008				2007
Gold loans outstanding (in $)		$	—			$	—			$	4,883
Gold loans outstanding (in troy ounces)			—				—				11,150
Gold loan interest rate			—				—				3.1%-3.3	%

     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. As of December 31, 2009 and 2008, we do not have any gold loan outstanding.

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 2009.

Impact of recently issued US GAAP accounting standards

     In February 2010, FASB issued ASU 2010-9 Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements (“ASU 2010-9”). ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC’s requirements. ASU 2010-9 is effective for interim and annual periods ending after June 15, 2010. We do not expect the adoption of ASU 2010-09 to have a material impact on our consolidated results of operations or financial position.

     In January 2010, FASB issued ASU 2010-6 Improving Disclosures about Fair Measurements (“ASU 2010-6”). ASU 2010-6 provides amendments to subtopic 820-10 that require separate disclosure of significant transfers in and out of Level 1 and Level 2 fair value measurements and the presentation of separate information regarding purchases, sales, issuances and settlements for Level 3 fair value measurements. Additionally, ASU 2010-6 provides amendments to subtopic 820-10 that clarify existing disclosures about the level of disaggregation and inputs and valuation techniques. ASU 2010-6 is effective for financial

statements issued for interim and annual periods ending after December 15, 2010. We do not expect the adoption of ASU 2010-06 to have a material impact on our consolidated results of operations or financial position.

     In January 2010, FASB issued ASU 2010-2 Accounting and Reporting for Decreases in Ownership of a Subsidiary- a Scope Clarification (“ASU 2010-2”). ASU 2010-2 addresses implementation issues related to the changes in ownership provisions in the Consolidation—Overall Subtopic (Subtopic 810-10) of the FASB Accounting Standards Codification, originally issued as FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements. Subtopic 810-10 establishes the accounting and reporting guidance for noncontrolling interests and changes in ownership interests of a subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. The gain or loss includes any gain or loss associated with the difference between the fair value of the retained investment in the subsidiary and its carrying amount at the date the subsidiary is deconsolidated. In contrast, an entity is required to account for a decrease in ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. ASU 2010-2 is effective for the Company starting January 1, 2010. We do not expect the adoption of ASU 2010-2 to have a material impact on our consolidated results of operations or financial position.

     In December 2009, FASB issued ASU 2009-17 Consolidations (Topic 810) Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”). ASU 2009-17 amends the FASB ASC for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). The amendments in ASU 2009-17 replace the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. ASU 2009-17 also requires additional disclosures about an enterprise’s involvement in variable interest entities. ASU 2009-17 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009. We do not expect the adoption of ASU 2009-17 to have a material impact on our consolidated results of operations or financial position.

     In December 2009, FASB issued ASU 2009-16 Transfers and Servicing (Topic 860) Accounting for Transfers of Financial Assets (“ASU 2009-16”). ASU 2009-16 amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140. The amendments in ASU 2009-16 improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. ASU 2009-16 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009. We do not expect the adoption of ASU 2009-16 to have a material impact on our consolidated results of operations or financial position.

     In August 2009, FASB issued ASU 2009-5 Fair Value Measurements and Disclosures (Topic 820) Measuring Liabilities at Fair Value (“ASU 2009-5”). ASU 2009-5 provides amendments to Subtopic 820-10, Fair Value Measurements and Disclosures-Overall, for the fair value measurement of liabilities. ASU 2009-5 clarifies that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value. ASU 2009-5 was effective for the Company for interim and annual periods ending after September 30, 2009. The adoption of ASU 2009-5 did not have a material impact on our consolidated results of operations or financial position.

     In August 2009, FASB issued ASU 2009-4 Accounting for Redeemable Equity Instruments—an Amendment to Section 480-10-S99 (“ASU 2009-4”). ASU 2009-4 represents a Securities and Exchange Commission (“SEC”) update to Section 480-10-S99, Distinguishing Liabilities from Equity. The adoption of guidance within ASU 2009-4 did not have an impact on our consolidated results of operations or financial position.

     In June 2009, FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—A Replacement of FASB Statement No. 162, (now codified within ASC 105, Generally Accepted Accounting Principles (“ASC 105”)). ASC 105 establishes the Codification as the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. All guidance contained in the Codification carries an equal level of authority. Following this statement, FASB will not issue new standards in the form of statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates, which will serve only to: (1) update the Codification; (2) provide background information about the guidance; and (3) provide the bases for conclusions on the change(s) in the Codification. ASC 105 was effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification supersedes all existing non-SEC accounting and reporting standards. The adoption of ASC 105 did not have an impact on our consolidated results of operations or financial position.

     In May 2009, FASB issued SFAS No. 165, Subsequent Events, (now codified within ASC 855, Subsequent Events (“ASC 855”)). ASC 855 establishes the general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 was effective for the Company on April 1, 2009. The adoption of ASC 855 did not have a material impact on our consolidated results of operations or financial position.

     In April 2009, FASB issued Staff Position (“FSP”) No. 115-2 and FSP 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (now codified within ASC 320, Investments—Debt and Equity Securities (“ASC 320”)). ASC 320 provides greater clarity about the credit and noncredit component of an other-than-temporary impairment event and more effectively communicates when an other-than-temporary impairment event has occurred. ASC 320 amends the other-than-temporary impairment model for debt securities. The impairment model for equity securities was not affected. Under ASC 320, an other-than-temporary impairment must be recognized through earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost basis. This standard was effective for interim periods ending after June 15, 2009. The adoption of ASC 320 did not have a material impact on our consolidated results of operations or financial position.

     In April 2009, FASB issued FSP 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (now codified within ASC 820, Fair Value Measurements and Disclosures). ASC 820 provides guidelines for making fair value measurements more consistent and provides additional authoritative guidance in determining whether a market is active or inactive and whether a transaction is distressed. ASC 820 is applied to all assets and liabilities (i.e., financial and non-financial) and requires enhanced disclosures. This standard was effective for periods ending after June 15, 2009. The adoption of ASC 820 did not have a material impact on the our consolidated results of operations or financial position.

     In April 2009, FASB issued FSP 107-1 and Accounting Principles Board 28-1, Interim Disclosures about Fair Value of Financial Instruments (now codified within ASC 825, Financial Instruments (“ASC 825”)). ASC 825 requires disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. ASC 825 was effective for interim periods ending after June 15, 2009. The adoption of ASC 825 did not have a material impact on our consolidated results of operations or financial position.

     In June 2008, FASB issued Staff Position—Emerging Issues Task Force 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (now codified within ASC 260, Earnings Per Share (“ASC 260”)). Under ASC 260, unvested share based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. ASC 260 was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years and requires retrospective application. The adoption of ASC 260 did not have a material impact on our earnings per share calculations.

     In April 2008, FASB issued FSP 142-3, Determination of the Useful Life of Intangible Assets (now codified within ASC 350, Intangibles—Goodwill and Other (“ASC 350”)). ASC 350 provides guidance for determining the useful life of a recognized intangible asset and requires enhanced disclosures so that users of financial statements are able to assess the extent to which the expected future cash flows associated with the asset are affected by our intent and/or ability to renew or extend the arrangement. ASC 350 was effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The adoption of ASC 350 on January 1, 2009 did not impact our consolidated results of operations or financial position.

     In March 2008, FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (now codified within ASC 815, Derivatives and Hedging (“ASC 815”)). ASC 815 requires enhanced disclosures about an entity’s derivative and hedging activities aimed at improving the transparency of financial reporting. ASC 815 was effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of ASC 815 did not have any impact on our consolidated results of operations or financial position.

     In December 2007, FASB issued SFAS No. 141(R), Business Combinations (now codified within ASC 805, Business Combinations (“ASC 805”)). ASC 805 establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the fair value of identifiable assets acquired, the liabilities

assumed and any noncontrolling interest in the acquiree at the acquisition date. ASC 805 significantly changes the accounting for business combinations in a number of areas, including the treatment of contingent consideration, preacquisition contingencies, transaction costs and restructuring costs. In addition, under ASC 805, changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. The provisions of this standard will apply to any acquisitions we complete on or after December 15, 2008. The adoption of ASC 805 did not have an impact on our consolidated results of operations or financial position.

     In December 2007, FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51 (now codified within ASC 810, Consolidation (“ASC 810”)). ASC 810 changes the accounting and reporting for minority interests, which is recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions with minority interest holders. The provisions of ASC 810 were applied to all noncontrolling interests prospectively, except for the presentation and disclosure requirements, which were applied retrospectively to all periods presented and have been disclosed as such in our consolidated financial statements herein. ASC 810 became effective for fiscal years beginning on or after December 15, 2008. We adopted ASC 810 effective January 4, 2009. The adoption of ASC 810 did not have an initial material impact on our consolidated results of operations or financial position.

     In September 2006, FASB issued SFAS No. 157, Fair Value Measurements (now codified within ASC 820). ASC 820 provides guidance for using fair value to measure assets and liabilities. Under ASC 820, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The guidance within ASC 820 became effective for financial statements issued for fiscal years beginning after November 15, 2007; however, the FASB provided a one year deferral for implementation of the standard for non-recurring, non-financial assets and liabilities. We adopted ASC 820 for non-financial assets and non-financial liabilities effective January 1, 2009, which did not have any effect on our consolidated results of operations or financial position.

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, 2009 to December 31, 2009 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 material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS.

     As of December 31, 2009, we had the following known contractual obligations:

		Payments due by period
						Less than												More than
		Total				1 year				1-3 years				3-5 years				5 years
		US$				US$				US$				US$				US$
Long-Term Debt Obligations
Capital (Finance) Lease Obligations			191				108				83				—				—
Operating Lease Obligations			2,144				1,576				568				—				—
Total			2,335				1,684				651				—				—

     We had entered into finance lease agreements for the purchase of motor vehicles in 2006 and 2009. The financed amounts were $366,000 and $104,000, bearing interest at 3.25%-3.5% and 3.5% per annum, respectively, and repayable in 60 monthly installments beginning in 2006, and repayable in 48 installations beginning in 2009, respectively. A minimum finance charge may be charged if we pay off all the balances early. As of December 31, 2009, one of the finance leases entered in 2006 has been retired.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. DIRECTORS AND SENIOR MANAGEMENT.

     Our senior management and directors are as follows:

Name		Age				Position
Yu Chuan Yih			70			Chairman of the Board of Directors, President and Chief Executive Officer
Ka Man Au			45			Chief Operating Officer, Secretary and Director
Hon Tak Ringo Ng			50			Chief Financial Officer and Director
Andrew N. Bernstein			57			Independent Non-Executive Director
Xiang Xiong Deng			45			Independent Non-Executive Director
Jin Wang			39			Independent Non-Executive Director
Jieyun Yu			44			Independent Non-Executive Director

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

     Mr. 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 was appointed as an independent non-executive director effective October 29, 2007. He serves on the audit and nominating committees. 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 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 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). Prior to these positions, she was a statistician and auditor (1998-2002) at the Shenzhen Culture Bureau.

B. COMPENSATION.

     The aggregate compensation paid by us to all of our directors and executive officers as a group for the fiscal year ended December 31, 2009 on an accrual basis, for services in all capacities, was $1,036,000. During the fiscal year ended December 31, 2009, we contributed an aggregate amount of $35,000 toward the pension plans of our directors and executive officers.

     We entered into an employment agreement with Mr. Yu Chuan Yih, effective January 1, 2010, 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.

     During the fiscal year ended December 31, 2007, we did not grant any options to any of our directors or executive officers, except as follows: on January 5, 2007, we 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.

     During the fiscal year ended December 31, 2008, we did not grant any options to any of our directors or executive officers, except as follows: on October 28, 2008, we granted the

following executive officers and directors an aggregate of 1,100,000 options exercisable to acquire 1,100,000 shares subject to various vesting schedules at $0.40 per share at any time on or after January 28, 2009:

•		Mr. Yih — 500,000;
•		Ms. Au — 200,000;
•		Mr. Ng — 200,000;
•		Mr. Bernstein — 50,000;
•		Mr. Deng — 50,000;
•		Mr. Wang — 50,000; and
•		Ms. Yu — 50,000.

     During the fiscal year ended December 31, 2009, we did not grant any options to any of our directors or executive officers, except as follows: on February 17, 2009, we granted the following executive officers and directors an aggregate of 1,340,000 options to acquire 1,340,000 shares subject to various vesting schedules at $0.60 per share at any time on or after February 17, 2010:

•		Mr. Yih — 900,000;
•		Ms. Au — 200,000;
•		Mr. Ng — 200,000; and
•		Mr. Deng — 40,000.

C. BOARD PRACTICES.

Audit Committee

     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
	•		review our management’s procedures and policies relative to the adequacy of our internal accounting controls and compliance with US federal and state laws relating to financial reporting

Nominating Committee

     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
	•		investigate suggestions for candidates for membership on the board of directors and recommend prospective directors, as required, to provide an appropriate balance of knowledge, experience and capability on the board of directors, including stockholder nominations for the board of directors

Compensation Committee

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

Nasdaq Requirements

     Our shares of common stock 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 its Rule 5600 Series to impose various corporate governance requirements on listed securities. Rule 5615 provides that foreign private issuers such as our company are required to comply with certain specific requirements of the Rule 5600 Series, but, as to the balance of the Rule 5600 Series, 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 the Rule 5600 Series. In addition, we have elected to voluntarily comply with certain other requirements of the Rule 5600 Series, notwithstanding that our home country does not mandate compliance;

although we may in the future determine to cease voluntary compliance with those provisions of the Rule 5600 Series. However, we have determined not to comply with the following provisions of the Rule 5600 Series since the laws of the British Virgin Islands do not require compliance:

	•		our independent directors do not hold regularly scheduled meetings in executive session (Rule 5605(b)(2));
	•		the compensation of our executive officers is not determined by an independent committee of the board or by the independent members of the board of directors, and our CEO may be present and participate in the deliberations concerning his compensation (Rule 5605(d));
	•		related party transactions are not required to be reviewed or approved by our audit committee or other independent body of the board of directors (Rule 5630); and
	•		we are not required to solicit shareholder approval of stock plans, including those in which our officers or directors may participate; stock issuances that will result in a change in control; the issuance of our stock in related party transactions or other transactions in which we may issue 20% or more of our outstanding shares; or, below market issuances of 20% or more of our outstanding shares to any person (Rule 5635).

We may in the future determine to voluntarily comply with one or more of the foregoing provisions of the Rule 5600 Series.

D. EMPLOYEES.

     As of December 31, 2009, we employed approximately 2,600 persons on a full-time basis for our production of jewelry, gemstone cutting and polishing, and retailing. Approximately 70 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 March 15, 2010 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 March 15, 2010, we had 24,678,672 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.

		Number				Percent
Name of Beneficial Holder		Shares Beneficially Owned
Yu Chuan Yih			2,984,353	(1)			11.9
Ka Man Au			485,629	(2)			2.0
Hon Tak Ringo Ng			525,000	(3)			2.1
Andrew N. Bernstein			0				0
Xiang Xiong Deng			10,000	(4)			*
Jin Wang			0				0
Jieyun Yu			0				0
All directors and executive officers as a group (7 persons)			4,004,982				16.0

•

450,000 shares of common stock at $0.60 per share at any time after February 17, 2010 through February 16, 2011

(2)		Includes options currently exercisable to acquire:

	•		150,000 shares of common stock at $2.00 per share at any time until June 30, 2013
	•		50,000 shares of common stock at $0.60 per share at any time after February 17, 2010 through February 16, 2011

(3)		Includes options currently exercisable to acquire:

	•		150,000 shares of common stock at $2.00 per share at any time until June 30, 2013
	•		50,000 shares of common stock at $0.60 per share at any time after February 17, 2010 through February 16, 2011

(4)		Represents options currently exercisable to acquire:

•

10,000 shares of common stock at $0.60 per share at any time on or after February 17, 2010 through February 16, 2011

The 1998 Stock Compensation Plan

     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 was 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

•

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 constituted either incentive stock options within the meaning of Section 422 of the United States Internal Revenue Code of 1986, as amended, or options which constituted nonqualified options at the time of issuance of such options. The plan provided 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 were authorized and reserved for issuance during the term of the plan, which expired in June 2008. The compensation committee had 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 March 15, 2010, 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 executive 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
	•		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 March 15, 2010, 3,427,500 options had been exercised and the following options to purchase shares of our common stock under the plan were outstanding:

•

a total of 400,500 stock options to purchase 400,500 shares at $2.00 per share through June 30, 2013, of which 300,000 stock options are held by our directors and executive officers as a group.

The 2005 Stock Compensation Plan

     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
	•		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 March 15, 2010, 3,765,000 options had been exercised and the following options to purchase shares of our common stock under the plan were outstanding:

•

a total of 235,000 stock options to purchase 235,000 shares at $0.40 per share through various expiration dates, none of which stock options are held by our directors and executive officers as a group.

The 2008 Stock Compensation Plan

     Effective August 8, 2008, we adopted and approved the 2008 Stock Compensation Plan, which our shareholders approved on November 14, 2008. 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
	•		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 August 2018. 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 March 15, 2010, no options have been exercised and the following options to purchase shares of our common stock under the plan were outstanding:

•

a total of 4,000,000 stock options to purchase 4,000,000 shares at $0.60 per share through various expiration dates, of which 1,340,000 stock options are held by our directors and executive officers as a group.

Other Options and Warrants Outstanding

     As of March 15, 2010, the following additional options and warrants to purchase shares of our common stock were outstanding:

•

On September 25, 2006, we issued, and 11 institutional investors purchased, an aggregate of 1,466,668 shares of our common stock at $3.75 per share, as well as an aggregate of 236,909 warrants to purchase 236,909 shares at an exercise price of $4.221 per share (the “Short Term Warrants”) and 366,668 warrants to purchase 366,668 shares at an exercise price of $4.50 per share (the “Long Term Warrants”). In addition, our placement agent received 29,333 Long Term Warrants with identical terms to the Long Term Warrants issued to the investors (the “Placement Agent Warrants”). The Short Term Warrants were exercisable at

			any time through February 5, 2007. The Long Term Warrants are exercisable at any time on or after March 25, 2007 for a term of five years thereafter.
			As of March 15, 2010, the following warrants remained outstanding:

	•		300,001 Long Term Warrants
	•		29,333 Placement Agent Warrants

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. MAJOR SHAREHOLDERS.

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

     As of March 15, 2010, we had 193 record holders of our common stock. Of the 24,678,672 shares outstanding as of March 15, 2010, 23,110,822 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 $28,772,000, $23,095,000 and $22,813,000 as of December 31, 2007, 2008 and 2009, 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. Since December 31, 2008, the balance of the mortgage loans has remained at $nil.

     During the fiscal years ended December 31, 2007, 2008 and 2009, we leased certain of our office and quarters from an entity of which one of our directors, Ms. Alfonsa Au, serves as a director in the respective amounts of $245,000, $246,000 and $246,000. We believe that the lease rates are fair and reasonable and are based on comparable fair market values.

     We paid Andrew N. Bernstein, P.C., the law firm of which Andrew N. Bernstein, one of our directors, is the sole shareholder, for legal services rendered to us during the fiscal years ended December 31, 2007, 2008 and 2009 the respective amounts of $143,000, $185,000 and $140,000. In addition, Mr. Bernstein also received an annual fee of $12,000 during the fiscal years ended December 31, 2007, 2008 and 2009 for his service as an independent non-executive director.

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 majority of our total sales volume.

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

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

     On May 27, 2008, the Company (the only defendant served with the Complaint) moved to dismiss the Complaint pursuant to Rule 12(b) of the Federal Rules of Civil Procedure. After the parties fully briefed the motion to dismiss, but before it came on for hearing before the Court, the parties agreed to settle the shareholder class action. On October 19, 2009, the Court granted final approval of the settlement. Under the terms of the settlement, our insurer paid $2,000,000 in full and final settlement of all claims asserted in the securities litigation. In December 2009, we also settled opt-out claims with Alder Capital

Partners I, LP, Alder Offshore Partners Ltd. and Alder Offshore Master Fund, LP (collectively, “Alder”). Under the terms of the agreement with Alder, our insurer paid $150,000 in full and final settlement of Alder’s Claims.

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

     The complaints in the derivative actions allege that various officers and directors of the Company caused the Company to issue a series of press releases, Securities and Exchange Commission filings, and other statements that significantly overstated the Company’s business prospects and financial results. They further allege that, as a result of these statements, the Company’s share price traded at artificially inflated levels, and that defendants’ actions led to a delay in the release of the Company’s financial statements for the fiscal fourth quarter of 2006 and the fiscal first quarter of 2007. The plaintiffs purport to state causes of action for breach of fiduciary duty, waste of corporate assets, and unjust enrichment. By their complaints, they seek unspecified damages to be paid to the Company, corporate governance reforms, and equitable and injunctive relief, including restitution and the creation of a constructive trust.

     On May 9, 2008, the court in the 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. The California Court of Appeal heard oral argument on February 25, 2009 and, on May 26, 2009, the Court of Appeal affirmed the dismissal of the Vaughn case. The plaintiffs filed a petition for review with the California Supreme Court and, on August 19, 2009, the petition for review was denied.

     In May 2008, the Cooke action was reassigned to the same judge that presided over the Vaughn action. The parties stipulated and the Court ordered that the Cooke action be stayed pending resolution of the Vaughn appeal. The case was dismissed on September 8, 2009.

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