U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

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

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

For the fiscal year ended December 31, 2010

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

For the transition period from ______________ to _______________

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

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

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

None

(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:

29,153,672 Shares of Common Stock as of December 31, 2010

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, 2010 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,
		2010				2009				2008				2007				2006
Statement of Operations Data:
Revenues			140,548				110,523				136,268				152,037				123,791
Cost of Goods sold			(85,737	)			(72,173	)			(97,031	)			(112,508	)			(88,867	)
Gross profit			54,811				38,350				39,237				39,529				34,924
Operating expenses
Selling, general and administrative			(37,303	)			(31,039	)			(34,815	)			(30,399	)			(23,114	)
Net loss on derivatives			(476	)			(503	)			(86	)			(4	)			(29	)
Depreciation			(2,779	)			(2,197	)			(3,373	)			(3,095	)			(2,039	)
Operating income			14,253				4,611				963				6,031				9,742
Other income and expense
Interest income			69				147				199				273				282
Gain on currency translation			643				—				1,473				—				—
Gain on sales of securities			258				—				49				—				—
Gain on disposal of property held for lease			1,635				—				2,210				—				—
Interest expenses			(978	)			(842	)			(1,789	)			(3,103	)			(3,258	)
Operating income before income taxes and noncontrolling interest			15,880				3,916				3,105				3,201				6,766
Income taxes expense			(2,877	)			(231	)			(569	)			(1,711	)			(1,403	)
Income before noncontrolling interest			13,003				3,685				2,536				1,490				5,363
Net (income) loss attributable to noncontrolling interest			(9	)			4				(6	)			(1	)			(38	)
Net income attributable to LJ International Inc. common shareholders			12,994				3,689				2,530				1,489				5,325
Net income per share:
Basic			0.51				0.16				0.11				0.07				0.31
Diluted			0.49				0.15				0.11				0.07				0.29
Weighted average number of shares
Basic			25,344				23,230				22,246				21,064				17,390
Diluted			26,657				24,102				22,449				22,289				18,303
Balance Sheet Data:
Working capital			100,584				77,614				72,059				62,786				50,134
Total assets			175,757				133,757				131,190				134,144				124,522
Long-term obligation			1,651				2,322				2,219				1,335				1,640
Total LJ International Inc. shareholders’ equity			110,921				83,872				78,329				72,668				59,739

B. CAPITALIZATION AND INDEBTEDNESS.
		Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS.
		Not applicable.
D. RISK FACTORS.

We do not have any long-term contracts with our customers and, therefore, we cannot be certain that all of our sales will continue; if not, our revenues will likely decline.

     We sell to a large number of customers in a variety of markets. Although we believe that we have maintained good and longstanding relationships with our principal customers, we do not have any long-term contracts with any of them, and they order only on a “purchase order” basis. The loss of a significant number of our principal 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.

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, 2010, we owned all of the issued share capital in the following significant subsidiaries:

	•		Lorenzo Jewelry Limited (“Lorenzo Jewelry”), a company incorporated in Hong Kong on February 20, 1987
	•		ENZO International Holdings Ltd.
	•		ENZO Jewelry Inc.
	•		Lorenzo Crystal Ltd.
	•		Lorenzo (Shenzhen) Co., Ltd.
	•		Wonderful (Shenzhen) Ltd.
	•		Shanghai Enzo Diamond Co., Ltd.

     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 $2,650,000 on capital expenditures, excluding inventory, for ENZO retail store openings during the fiscal year ended December 31, 2010
	•		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

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 as a 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. In 1998 we established a major manufacturing presence in Shenzhen, China, and in the same year our shares began trading on the Nasdaq Stock Market, putting us in the select ranks for major publicly-traded firms in the jewelry business. In recent years we have been aggressively extending our vertical integration to retailing. Following China’s acceptance into the World Trade Organization, we began our retail jewelry operations in that country in December 2004 under the brand name ENZO. As of December 31, 2010, we have established more than 130 ENZO points of sale.

     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 our

retail partners, as well as for our own retail operations, and enhanced profits for us. Innovative processes in stone cutting and production further enhance our competitive position.

     We employ an international design team, and all of our designs and merchandising strategies are proprietary. The exclusive and innovative concepts that we create offer brand potential. Our expertise in stone sourcing, cutting and production, product development and jewelry manufacturing has formed a very solid foundation for the development of ENZO.

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

     Ever since we opened the first ENZO stores in December 2004, we have been committed to a strategy based on retailing. Already, ENZO has developed its self-managed national chain stores rapidly and has become a conspicuous luxury jewelry brand in the China market, which we regard as having one of the largest and fastest growing consumer markets for luxury items. Being a market leader in luxury color stone jewelry, ENZO enjoys a uniquely popular status among jewelry lovers and collectors.

     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 self-managed ENZO stores. We have not and do not intend to grant franchising licenses for our ENZO brand.

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

     Our primary wholesale marketing focus has been in North America. There 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, 2009 and 2010, approximately 35% and 30% of our total sales, respectively, were in North America.

Our Retail Business Strategy

     Our retail business strategy is to:

	•		expand our market share by having a total of 200 points of sale in operation 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
	•		expand customers base by opening of new shops and through effective marketing and promotional campaigns

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.

     Our ENZO operation also gets the benefit of full vertical integration, beginning with the sourcing of gemstones directly from mines around the world to cutting, designing and setting them in our state-of-the-art factory. This control over the entire supply chain backs up ENZO’s commitment to providing excellent quality and service in the jewelry market. It ensures that every piece of jewelry is perfectly designed and made to meet world-class professional standards.

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

		Year ended December 31,
(in thousands)		2010				2009				2008
		US$				US$				US$
US & Canada			42,400				39,225				69,232
Europe and other countries			16,752				18,110				27,455
Japan			1,291				1,115				989
PRC (including Hong Kong and Macau)			80,105				52,073				38,592
			140,548				110,523				136,268

Our Production Capability

     We have established a sophisticated facility in China that performs stone cutting, 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 12 years and has more than 150,000 square feet of production space. We currently employ approximately 1,300 skilled gemstone cutters and production personnel excluding managerial, sales and marketing staff. The plant turned out approximately 1.6 million pieces of finished fine jewelry during the fiscal year ended December 31, 2010.

     We purchase imported choice gemstone material 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

     The strategy of our retail brand, ENZO, focuses on differentiating ENZO 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. Ever since its first store opened in 2004, ENZO has established a brand image unique to the Chinese market — that of fashionable luxury that is affordable, distinct from other market players (both local and international). It pursues this brand-building strategy through a number of methods, including:

	•		Continuous macro marketing and PR programs to deliver the brand messages, using channels such as national magazines, weekly magazines, newspaper, outdoor advertising space, and MTR advertisement.
	•		Localized marketing programs to fit local markets of different cities. Trunk shows and workshops are arranged for building up close relationship with the media and customers, letting them know more about the brand and doing business at the same time.
	•		Participating in jewelry shows, both for brand building and business development. In 2010, for instance, we had a high-profile presence at the June and September Jewellery Fair in Hong Kong
	•		Seasonal promotional programs based on the festival seasons - e.g. Chinese New Year, Valentine’s Day etc.
	•		Working closely with malls in organizing various localized promotional programs.

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 that are distinctly different from those of our competitors. We continue to devote our efforts toward 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 2010:

Show Name		Show Date
The First, Vicenzaoro Fair		Jan 16 - 21, 2010
Tucson Gem & Mineral Show		Feb 11 - 14, 2010
JA Int’l Jewelry (Winter) Show		Feb 28 - Mar 03, 2010
Hong Kong Int’l Jewellery Show		Mar 05 - 09, 2010
Basel 2010		Mar 18 - 25, 2010
The Charm, Vicenzaoro Fair		May 22 - 26, 2010
JCK Las Vegas 2010		Jun 04 - 07, 2010
JA Int’l Jewelry Show		Jul 25 - 28, 2010
The Choice, Vicenzaoro Fair		Sep 11 - 15, 2010
September HK Jewellery & Gem Fair		Sep 14 - 18, 2010
JA Int’l Jewelry Show		Oct 24 - 26, 2010

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 for 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 appoint a worldwide insurance brokerage firm, Aon, to advise and co-ordinate all our insurance needs. We maintain primary all-risk insurance, with limits which may not meet our inventory levels from time to time, 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 Bulgari.

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. 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, 2010.

     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)
•		ENZO International Holdings Ltd. (BVI)
•		ENZO Jewelry Inc. (BVI)
•		Lorenzo Crystal Ltd. (HK)
•		Lorenzo (Shenzhen) Co., Ltd. (PRC)
•		Wonderful (Shenzhen) Ltd. (PRC)
•		Shanghai Enzo Diamond 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 9,700 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 $5,811 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 $4,883 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 $5,119 per month.

     We own a warehouse facility in Hung Hom consisting of 5,432 square feet, and own an additional property in Hung Hom consisting of 2,897 square feet. We lease all 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, 2010, we reported revenues totaling $140.5 million, up 27% from $110.5 million in 2009. The increase was due to a 55% increase in sales of LJI’s retail operation to $78.9 million from $50.8 million a year earlier. The wholesale operation also reported a small increase of revenues of 3% from $59.7 million a year earlier to $61.7 million.

     In line with the increase in total revenue, the operating income and the net income both significantly increased. Operating income in 2010 was $14.3 million, up 209% from $4.6 million in 2009. Net income in 2010 was $13 million, up 252% from $3.7 million in 2009. If the non-recurring income in 2010 of $1.6 million gain on the sale of a property held for lease and $0.6 million gain on currency translation were excluded, net income would still have increased by 190%. The strong improvement of operating results came from both the retail and wholesale operation.

     The ENZO retail chain in China has increased its store numbers by 38 to a total of 133 as of December 31, 2010 from a total of 95 as of December 31, 2009. As the revenue increase has reached to a level where the ENZO retail chain can enjoy economies of scale, both operating income and net income have grown at higher rates than revenue. Operating income and net income of our retail operation were $11.6 million and $10 million in 2010, up 155% and 125% from $4.6 million and $4.5 million in 2009, respectively.

     As for the wholesale operation, the right-sizing program that started in 2009 has taken full effect in 2010. Although the wholesale revenue increased only by 3% in 2010 from 2009, the operating income and net income of our wholesale operation were $4.5 million and $4.8 million in 2010, up 145% and 379% from $1.8 million and $1 million in 2009 respectively, including the non-recurring income of $1.6 million gain on the sale of a property held for lease in 2010.

     The revenue mix of the two streams of business of LORENZO (wholesale) and ENZO (retail) were roughly in the ratio of 44% and 56% for the year ended December 31, 2010 as compared to a ratio of 54% and 46% for the year ended December 31, 2009 respectively. This marked the first year that our retail revenue has exceeded our wholesale revenue for the year ended December 31, 2010.

     Retail revenue increased because the store number has increased and also productivity at store level has improved due to the continue growth of the ENZO brand popularity. Wholesale revenue remained stagnant indicated that the global economy has stopped its downward trend and upward recovery is not far ahead.

     ENZO’s 133 stores are located in 38 cities throughout China including Hong Kong and Macau. Most of these stores operate in department stores and shopping malls where daily revenue are collected by the department stores or malls and reimbursed to the company on a monthly basis. This reduces the company’s security risk of cash management and at the same

time helps with consumer traffic. ENZO will continue its expansion plan in 2011 by opening more stores mainly in department stores and malls throughout China. It is hopeful that by the end of December 31, 2011, ENZO will be operating 200 stores and is on track to achieve this goal.

     We are reasonably optimistic that the world economy will start to show signs of recovery and our wholesale business will be able to regain its growth track along with it, though may be at a modest rate. As China’s economy continues to show strong growth and prosper, the demand for luxury goods will also increase. This will serve as the perfect platform for ENZO to continue with its expansion and revenue growth strategies in China’s retail market.

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:

Collectability 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 collectability, 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 collectability.

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 significant assumptions used in the discounted cash flow model are:

•		Five-year discounted cash flow is projected. Basic assumptions in the cash flow projection include, among others, an estimated 10% annual growth in turnover in the coming 5 years with reference to the stabilizing growth rate in the last quarter of 2009 after a sharp hit from the economic downturn in North America, and gross profit of around 15%, which is similar to the level in 2010. Any projection beyond 5 years by the Company cannot be forecast with reasonable accuracy, since the business environment is rapidly changing;
•		A discount rate is set at 30%, was based on the subsidiary’s weighted average cost of capital;
•		The EBITDA multiple is set at 5x.

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. If the reporting unit is at risk of failing Step One of the impairment test, we will describe the material events, trends and uncertainties that affect the reported income and the extent to which income is so affected.

We had goodwill of US$1,521,000 as of December 31, 2009 and 2010. The estimated fair value of the reporting unit exceeded its carrying value by 12% at December 31, 2010. 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 guidance issued by the Financial Accounting Standards Board for 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)		2010				2009				2008				2010-2009				2009-2008
Revenues
Wholesale		$	61,682			$	59,733			$	99,840				3	%			-40	%
Retail		$	78,866			$	50,790			$	36,428				55	%			39	%
		$	140,548			$	110,523			$	136,268				27	%			-19	%

     The increase in revenue from jewelry product for wholesale of $1,949,000 or 3% to $61,682,000 for the year ended December 31, 2010, compared to the year ended December 31, 2009, was primarily attributable to the increase in order quantity of 12%.

     The decrease in revenue from 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 Company’s retail business increased by $28,076,000 or 55% to $78,866,000 for the year ended December 31, 2010, compared to the year ended December 31, 2009. 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 47 new stores, which are in better locations with better quality customers, and closed 9 of its less profitable stores. There was a weighted average of 112 ENZO retail stores in full operation for the year ended December 31, 2010 compared to a total of 95 ENZO retail stores at December 31, 2009.

     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. 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.

Cost of Sales and Gross Profit

														% Change
														Years ended				Years ended
		Year ended December 31,												December 31,				December 31,
(in thousands)		2010				2009				2008				2010-2009				2009-2008
Cost of sales and gross profit
Cost of sales
Wholesale		$	48,679			$	47,799			$	79,729				2	%			-40	%
% of revenues			79	%			80	%			80	%
Retail		$	37,058			$	24,374			$	17,302				52	%			41	%
% of revenues			47	%			48	%			47	%
Total		$	85,737			$	72,173			$	97,031				19	%			-26	%
% of revenues			61	%			65	%			71	%
Gross profit
Wholesale		$	13,003			$	11,934			$	20,111				9	%			-41	%
% of revenues			21	%			20	%			20	%
Retail		$	41,808			$	26,416			$	19,126				58	%			38	%
% of revenues			53	%			52	%			53	%
Total		$	54,811			$	38,350			$	39,237				43	%			-2	%
% of revenues			39	%			35	%			29	%

     The gross profit margin of wholesale increased to 21% for the year ended December 31, 2010 from 20% for the year ended December 31, 2009. 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 wholesale remained at 20% for the years ended December 31, 2009 and 2008.

     The gross profit margin of the ENZO retail operation increased to 53% for the year ended December 31, 2010 compared to 52% for the year ended December 31, 2009 and was attributable to more effective procurement of sourced raw materials and finished products at lower costs.

     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 gold jewelry with lower margin being sold in the year ended December 31, 2009 than the year ended December 31, 2008.

Selling, General and Administrative Expenses

														% Change
														Years ended				Years ended
		Year ended December 31,												December 31,				December 31,
(in thousands)		2010				2009				2008				2010-2009				2009-2008
Selling, general and administrative expenses
Wholesale		$	7,449			$	8,629			$	14,087				-14	%			-39	%
Retail		$	28,010			$	20,633			$	17,820				36	%			16	%
Corporate		$	1,844			$	1,777			$	2,908				4	%			-39	%
		$	37,303			$	31,039			$	34,815				20	%			-11	%
% of revenues			27	%			28	%			26	%

     Selling, general and administrative expenses increased by 20% for the year ended December 31, 2010, compared to the year ended December 31, 2009. For the wholesale business, the selling, general and administrative expenses decreased by 14% for the year ended December 31, 2010, compared to the year ended December 31, 2009. The decrease was mainly attributable to decrease in staff cost of $731,000 and decrease in other expenses due to management’s cost-containment and corporate restructuring efforts in response to the global recession. The expenses incurred by the retail business of $28,010,000, a 36% increase of the same for the year ended December 31, 2010, comprised advertising cost of $1,100,000, rental cost of $14,283,000, staff cost of $6,710,000 and other expenses of $5,917,000. The increase was mainly in the rental cost area, which was a result of higher sales. The rental costs of more than 94% of the retail stores were based on percentage of sales, and 76% of these 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 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, a 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% of retail stores were based on percentage of sales, of which 81% of these stores did not have any minimum rentals. The corporate expenses included items of corporate overheads, such as charges for legal and professional advisory services.

Net gain (loss) on derivatives

														% Change
														Years ended				Years ended
		Year ended December 31,												December 31,				December 31,
(in thousands)		2010				2009				2008				2010-2009				2009-2008
Realized loss on derivatives		$	0			$	0			$	(483	)			N/A				-100	%
			0	%			0	%			0	%
Unrealized loss on derivatives		$	(476	)		$	0			$	0				N/A				N/A
			0	%			0	%			0	%
(With the hedging mechanism in place, we have the realized gain on hedging activities)
Realized (loss) gain on hedging activities		$	0			$	(503	)		$	397				-100	%			-227	%
% of revenues			0	%			0	%			0	%
Net loss on derivatives and hedging activities		$	(476	)		$	(503	)		$	(86	)			-5	%			485	%
% 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 unrealized loss of $476,000 for the year ended December 31, 2010 and realized loss of $nil and $483,000 for the years ended December 31, 2009 and 2008 respectively, on derivatives; and $nil for the year ended December 31, 2010, a realized loss of $503,000 and a realized gain of $397,000 for the year ended December 31, 2009 and 2008 respectively, on hedging activities.

     While the hedging mechanism has been in place, we secured position of a net loss of $476,000, $503,000 and $86,000 for each of the years ended December 31, 2010, 2009 and 2008 respectively, on derivative and hedging activities.

Depreciation

														% Change
														Years ended				Years ended
		Year ended December 31,												December 31,				December 31,
(in thousands)		2010				2009				2008				2010-2009				2009-2008
Depreciation
Wholesale		$	1,029			$	914			$	1,877				13	%			-51	%
% of revenues			2	%			2	%			2	%
Retail		$	1,750			$	1,283			$	1,496				36	%			-14	%
% of revenues			2	%			3	%			4	%
Total		$	2,779			$	2,197			$	3,373				26	%			-35	%
% of revenues			2	%			2	%			2	%

     Depreciation of wholesale business increased by 13% to $1,029,000 for the year ended December 31, 2010 from $914,000 for the year ended December 31, 2009, which reflected amortization on the addition of plant and equipment expenditures during the year. Depreciation of retail business increased by 36% to $1,750,000 for the year ended December 31, 2010 from $1,283,000 for the year ended December 31, 2009, which reflected the amortization of the capital expenditures of renovation on the increased number of retail stores during the year.

     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 were fully amortized upon the expiry of the tenancy leases during the year. Some of these tenancy leases had been renewed for operation and no significant capital expenditures had been incurred.

Interest cost

														% Change
														Years ended				Years ended
		Year ended December 31,												December 31,				December 31,
(in thousands)		2010				2009				2008				2010-2009				2009-2008
Interest expenses		$	978			$	842			$	1,789				16	%			-53	%
% of revenues			1	%			1	%			1	%

     Interest expenses increased by $136,000 or 16% to $978,000 for the year ended December 31, 2010, compared to the year ended December 31, 2009. This was primarily attributable to the utilization of new credit lines of letters of credit and gold loans granted by the banks.

     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. The drop was primarily attributable to the decrease in interest rates and the decrease in utilization level of credit lines, 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)		2010				2009				2008				2010-2009				2009-2008
Income taxes expense
Wholesales		$	886			$	171			$	569				418	%			-70	%
% of revenues			1	%			0	%			1	%
Retail		$	1,991			$	60			$	0				3218	%			N/A
% of revenues			3	%			0	%			0	%
Total		$	2,877			$	231			$	569				1145	%			-59	%
% of revenues			2	%			0	%			0	%

     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 are 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, 2010, two of our subsidiaries qualified as Foreign Investment Enterprises had enjoyed the tax holidays and concessions in full and were no longer eligible for them. 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 22%.

     For other subsidiaries in China, the prevailing corporate income tax rate is 25%. The prevailing corporate income rate is 22% for companies operating in special economic zones of China.

     Income taxes included tax (over) under provision adjustment of $50,000, ($55,000) and $1,000 for the years ended December 31, 2010, 2009 and 2008, 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 43% and 44% of our sales are denominated in US Dollars and Renminbi respectively, whereas the other sales are basically denominated in Hong Kong Dollars. The largest portion of our expenses is denominated in Renminbi, then Hong Kong Dollars, then 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. As of December 31, 2010, the Company held non-

deliverable forward contracts with a bank with total notional amount of US$1,000,000 to hedge its RMB exposures of operating cost in normal course of business.

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)		2010				2009				2008
Net cash (used in) provided by operating activities		$	(16,131	)		$	2,061			$	8,746
Net cash used in investing activities			(9,088	)			(1,628	)			(801	)
Net cash provided by (used in) financing activities			25,355				(2,883	)			(533	)
Effect of foreign exchange rate change			1,630				384				985
Net increase (decrease) in cash and cash equivalents			1,766				(2,066	)			8,397

Operating Activities:

		Years ended December 31,
(in thousands)		2010				2009				2008
Cash flows from operating activities:
Net income		$	13,003			$	3,685			$	2,536
Adjustments to reconcile income to net cash provided by (used in) operating activities:
Depreciation of property, plant and equipment and properties held for lease			2,779				2,197				3,373
Unrealized loss on derivatives			476				—				—
Gain on sales of securities			(258	)			—				(49	)
Gain on disposal of property held for lease			(1,635	)			—				(2,210	)
(Gain) loss on disposal and write-off of property, plant and equipment			(35	)			(5	)			45
Gain on currency translation			(643	)			—				(1,473	)
(Reversal of) allowance for doubtful debts			(7	)			(231	)			1,223
Stock-based compensation costs for warrants granted			—				—				39
Stock-based compensation expenses			442				1,043				361
Changes in operating assets and liabilities:
Trade receivables			(4,203	)			(878	)			1,401
Inventories			(26,265	)			(4,764	)			5,375
Prepayments and other current assets			(1,774	)			165				496
Trade payables			627				620				(775	)
Accrued expenses and other payables			296				552				(1,318	)
Income taxes payable and deferred taxation			1,066				(323	)			(278	)
Net cash (used in) provided by operating activities			(16,131	)			2,061				8,746

     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, 2010, net cash used in operating activities was comprised of net income of $13,003,000, non-cash adjustment of $1,119,000 including adjustment of $2,779,000 and 476,000 for depreciation, unrealized loss on derivatives, gain of $1,635,000 on disposal of property held for lease, gain of $258,000 on sales of securities and gain of $643,000 on valuation of loans dominated in HK dollars and US dollars.

     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.

Significant changes in assets and liabilities were as follows:

     Trade receivables increased by $4,203,000 for the year ended December 31, 2010 were mainly due to the extended credit terms to wholesale customers which accounted for

19% of the increase, and the increased revenue generated in retail business in December 2010 than in December 2009 which was collected by shopping malls as central cashiers accounted for 81% of the increase. Trade receivables increased by $878,000 for the year ended December 31, 2009.

     Inventory balance increased by $26,265,000 and $4,764,000 for the years ended December 31, 2010 and 2009 respectively. The changes were mainly due to the build-up of inventory for the rapid growth of retail business. There were 133 and 95 retail stores in operation as at December 31, 2010 and 2009 respectively.

     Trade payables increased by $627,000 and $620,000 for the years ended December 31, 2010 and 2009 respectively, which were mainly due to increased level of material purchases during the last quarter of the year.

Investing Activities:

     For the year ended December 31, 2010, 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, as well as renovation of new stores for the retail business.

     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, as well as renovation of new stores for the retail business.

     Our capital expenditures by category for the periods presented were:

		Years ended December 31,
(in thousands)		2010				2009				2008
Leasehold improvement		$	2,399			$	1,376			$	1,199
Furniture, fixtures and equipment		$	370			$	129			$	294
Plant and machinery		$	3,801			$	62			$	81
Motor vehicles		$	44			$	143			$	61
Total		$	6,614			$	1,710			$	1,635

Financing Activities:

     Net cash provided by financing activities for the year ended December 31, 2010 was $25,355,000, which included proceeds of $12,210,000 from the issuance of shares in private placement, proceeds of $668,000 from the issuance of shares upon exercise of stock options, increase of new loans offset by the repayment of matured bank loans, change in letter of credit and factoring and decrease in bank overdrafts utilization level.

     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, increase of new loans offset by the repayment of matured bank loans, change in letter of credit and factoring and increase 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 Payable

     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)		2010				2009				2008
Granted:
Letters of credit		$	25,150			$	23,170			$	24,085
Overdraft		$	2,923			$	2,923			$	2,923
			28,073				26,093				27,008
Utilized:
Letters of credit utilized		$	18,878			$	13,481			$	13,384
Overdraft utilized		$	2,879			$	2,908			$	2,724
			21,757				16,389				16,108

     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)		2010				2009				2008
Notes payable, current portion		$	10,720			$	5,551			$	9,194
Notes payable, non-current portion		$	1,621			$	2,244			$	2,115
			12,341				7,795				11,309

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

Gold Loan Facilities:

		Years ended December 31,
(in thousands)		2010				2009				2008
Gold loans outstanding (in $)		$	2,661			$	—			$	—
Gold loans outstanding (in troy ounces)			2,283				—				—
Gold loan interest rate			2.8	%			—				—

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

Looking Forward:

     We anticipate that cash flow from operations, borrowings available under our existing credit line and our gold loan arrangement will be sufficient to satisfy our capital needs for 2011.

Impact of recently issued US GAAP accounting standards

     In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-01, Accounting for Distributions to Shareholders with Components of Stock and Cash , which clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The adoption of this ASU did not have a material impact on our consolidated financial statements.

     In January 2010, the FASB issued ASU No. 2010-02, Accounting and Reporting for Decreases in Ownership of a Subsidiary — a Scope Clarification, which affects accounting and reporting by an entity that experiences a decrease in ownership in a subsidiary that is a business or nonprofit activity. This ASU also affects accounting and reporting by an entity that exchanges a group of assets that constitutes a business or nonprofit activity for an equity interest in another entity. The amendments in this update are effective beginning in the period that an entity adopts ASU 810-10, Consolidations. If an entity has previously adopted ASC 810-10 as of the date the amendments in this update are included in the Accounting Standards Codification, the amendments in this update are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. The amendments in this update should be applied retrospectively to the first period that an entity adopted ASC 810-10. The adoption of this ASU did not have a material impact on our consolidated financial statements.

     In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: (1) transfers in and out of Levels 1 and 2: a reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; (2) activity in Level 3 fair value measurements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3) a reporting entity should present separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarifies existing disclosures as follows: (1) level of disaggregation: a reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; (2) Disclosures about inputs and valuation techniques: A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3.

     The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair

value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU, however, the adoption of this ASU did not have a material impact on our consolidated financial statements.

     In April 2010, the FASB issued ASU 2010-13, Compensation -Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. This update provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in currency of a market in which a substantial porting of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The adoption of this ASU did not have a material impact on our consolidated financial statements.

     In September 2010, the FASB issued Accounting Standard Update 2010-25, Plan Accounting—Defined Contribution Pension Plans (Topic 962): Reporting Loans to Participants by Defined Contribution Pension Plans . This ASU clarifies how loans to participants should be classified and measured by defined contribution plans and how International Financial Reporting Standards compare to these provisions. The amendments in this update are effective for fiscal years ending after December 15 2010. The adoption of this ASU did not have a material impact on our consolidated financial statements.

     In December 2010, the FASB issued Accounting Standard Update 2010-28, Intangibles—Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts . This ASU modified Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. For public entities, the amendments in the ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.

     In December 2010, the FASB issued Accounting Standard Update 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. This ASU specifies that, if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. ASU 2010-29 is effective prospectively for business combinations where the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.

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

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

D. TREND INFORMATION.

     Other than as disclosed elsewhere in this annual report, we are not aware of any known trends, uncertainties, demands, commitments or events for the period from January 1, 2010 to December 31, 2010 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, 2010, 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			12,341				10,720				1,236				385				—
Capital (Finance) Lease Obligations			83				52				31				—				—
Operating Lease Obligations			3,618				2,772				846				—				—
Purchase Obligations			—				—				—				—				—
Total			16,042				13,544				2,113				385				—

     We had term loans classified under notes payable under long-term obligations, which were repayable by 48-60 monthly installments; each monthly installment included the principal amount and the interest accrued at each payment date. The expected maturities were during 2013 to 2015. Interest charges on these loans are pre-fixed at the beginning of each monthly installment, which ranged from 3.76%-3.8% per annum as of December 31, 2010.

     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 installments beginning in 2009, respectively. A minimum finance charge may be charged if we pay off all the balances early. As of December 31, 2010, one of the finance leases entered in 2006 had 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		71		Chairman of the Board of Directors, President and Chief Executive Officer
Ka Man Au		46		Chief Operating Officer, Secretary and Director
Hon Tak Ringo Ng		51		Chief Financial Officer and Director
Andrew N. Bernstein		58		Independent Non-Executive Director
Xiang Xiong Deng		46		Independent Non-Executive Director
Jin Wang		40		Independent Non-Executive Director
Jieyun Yu		45		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, 2010 on an accrual basis, for services in all capacities, was $1,105,000. During the fiscal year ended December 31, 2010, we contributed an aggregate amount of $30,000 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, 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.

     During the fiscal year ended December 31, 2010, we did not grant any options to any of our directors or executive officers.

C. BOARD PRACTICES.

     We do not have any directors’ service contracts with us or any of our subsidiaries providing for benefits upon termination of employment.

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, 2010, 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 February 28, 2011 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 February 28, 2011, we had 30,193,672 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			3,434,353	(1)			11.2
Ka Man Au			535,629	(2)			1.8
Hon Tak Ringo Ng			575,000	(3)			1.9
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)			4,554,982				14.9

•

450,000 shares of common stock at $0.60 per share at any time through February 16, 2012

	•		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 through February 16, 2012

	•		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 through February 16, 2012

•

10,000 shares of common stock at $0.60 per share at any time through February 16, 2012

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 February 28, 2011, 3,990,000 options had been exercised and the following options to purchase shares of our common stock under the plan were outstanding:

•

a total of 10,000 stock options to purchase 10,000 shares at $2.00 per share through June 30, 2013, none of which 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 February 28, 2011, 3,440,500 options had been exercised and the following options to purchase shares of our common stock under the plan were outstanding:

•

a total of 387,500 stock options to purchase 387,500 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 February 28, 2011, 3,830,000 options had been exercised and the following options to purchase shares of our common stock under the plan were outstanding:

•

a total of 170,000 stock options to purchase 170,000 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 February 28, 2011, 1,422,000 options had been exercised and the following options to purchase shares of our common stock under the plan were outstanding:

•

a total of 2,578,000 stock options to purchase 2,578,000 shares at $0.60 per share through various expiration dates, of which 780,000 stock options are held by our directors and executive officers as a group.

Other Options and Warrants Outstanding

     As of February 28, 2011, 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 February 28, 2011, the following warrants remained outstanding:

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

     Each of the foregoing warrants contains provisions for the adjustment of exercise price and number of warrant shares in the event of “Dilutive Issuances” as defined therein.

     Accordingly, the number of warrants and the exercise price of the foregoing 329,334 warrants have been adjusted pursuant to the “Dilutive Issuances” provisions thereof to represent an aggregate of 456,000 warrants at an adjusted exercise price of $3.25 per share.

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 24, 2011, we had 189 record holders of our common stock. Of the 30,193,672 shares outstanding as of March 24, 2011, 28,648,559 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 $40,155,000 as of December 31, 2010. Mr. Yih has not received any additional compensation or consideration from us in return for his personal guarantees.

     During the fiscal years ended December 31, 2010, 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 amount of $240,000. 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 year ended December 31, 2010 the amount of $189,000. In addition, Mr. Bernstein received an annual fee of $12,000 during the fiscal year ended December 31, 2010 for his service as one of our independent non-executive directors.

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.

     Retail sales constitute a majority of our total sales volume.

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, 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
Year ended December 31, 2010		$	5.64			$	2.22
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

Period		High				Low
Quarter ended December 31, 2009		$	3.94			$	2.04
Quarter ended March 31, 2010		$	3.03			$	2.22
Quarter ended June 30, 2010		$	3.00			$	2.45
Quarter ended September 30, 2010		$	3.87			$	2.46
Quarter ended December 31, 2010		$	5.64			$	3.53
Quarter ended March 31, 2011		$	4.17			$	3.39
Month ended September 30, 2010		$	3.87			$	3.32
Month ended October 31, 2010		$	5.10			$	3.86
Month ended November 30, 2010		$	5.64			$	3.57
Month ended December 31, 2010		$	4.04			$	3.53
Month ended January 31, 2011		$	3.97			$	3.65
Month ended February 28, 2011		$	4.15			$	3.43
Month ended March 31, 2011		$	4.17			$	3.39

B. PLAN OF DISTRIBUTION.

     Not applicable.

C. MARKETS.

     Our common stock has been listed and quoted for trading on The Nasdaq Global Market (formerly The Nasdaq National Market) since April 15, 1998.

D. SELLING SHAREHOLDERS.

     Not applicable.

E. DILUTION.

     Not applicable.

F. EXPENSES OF THE ISSUE.

     Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A. SHARE CAPITAL.

     Not applicable.

B. MEMORANDUM AND ARTICLES OF ASSOCIATION.

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

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

     Share Rights, Preferences and Restrictions. Our authorized share capital is US$1 million divided into 100 million shares of par value US$0.01 per share. All dividends unclaimed for three years after having been declared may be forfeited by resolution of the directors for our benefit. All shares vote as one class and each whole share has one vote. Directors stand for reelection on an annual basis. Cumulative voting for directors is not authorized. We may redeem any of our own shares for such fair value as we by a resolution of directors determine. All shares have the same rights with regard to dividends and distributions upon our liquidation.

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

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

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

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

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

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

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

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

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

     As in most US jurisdictions, the board of directors of a BVI corporation is charged with the management of the affairs of the corporation. In most US jurisdictions, directors owe a fiduciary duty to the corporation and its shareholders, including a duty of care, under which directors must properly apprise themselves of all reasonably available information, and a duty of loyalty, under which they must protect the interests of the corporation and refrain from conduct that injures the corporation or its shareholders or that deprives the corporation or its shareholders of any profit or advantage. Many US jurisdictions have enacted various statutory provisions which permit the monetary liability of directors to be eliminated or limited.

     Under BVI law, liability of a corporate director to the corporation is primarily limited to cases of willful malfeasance in the performance of his duties or to cases where the director has not acted honestly and in good faith and with a view to the best interests of the corporation. However, under our Articles of Association, we are authorized to indemnify any director or officer who is made or threatened to be made a party to a legal or administrative proceeding by virtue of being one of our directors or officers, provided such person acted honestly and in good faith and with a view to our best interests and, in the case of a criminal proceeding, such person had no reasonable cause to believe that his conduct was unlawful. Our Articles of Association also enable us to indemnify any director or officer who was successful in such a proceeding against expense and judgments, fines and amounts paid in settlement and reasonably incurred in connection with the proceeding.

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

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

C. MATERIAL CONTRACTS.

     None.

D. EXCHANGE CONTROLS.

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

E. TAXATION.

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

United States Federal Income Taxation

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

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

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

     A US investor receiving a distribution of our common stock will be required to include such distribution in gross income as a taxable dividend, to the extent of our current or accumulated earnings and profits as determined under US federal income tax principles. Any distributions in excess of our earnings and profits will first be treated, for US federal income tax purposes, as a nontaxable return of capital, to the extent of the US investor’s adjusted tax basis in our common stock, and then as gain from the sale or exchange of a capital asset, provided that our common stock constitutes a capital asset in the hands of the US investor. US corporate shareholders will not be entitled to any deduction for distributions received as dividends on our common stock.

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

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

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

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

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

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

British Virgin Islands Taxation

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

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

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

F. DIVIDENDS AND PAYING AGENTS.

     Not applicable.

G. STATEMENT BY EXPERTS.

     Not applicable.

H. DOCUMENTS ON DISPLAY.

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

I. SUBSIDIARY INFORMATION.

     Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We do not believe that we have any material exposures to market risk associated with activities in derivative financial instruments, other financial instruments, derivative commodity instruments, and other market risk sensitive instruments, positions and transactions.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     Not applicable.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     None.

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

     None.

ITEM 15. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures.

     As of the end of the period covered by this report, our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures within the meaning of Rules 13a-15(e) of the Exchange Act.

     Based upon that evaluation, our management has concluded that, as of December 31, 2010, our disclosure controls and procedures were effective.

(b) Management’s annual report on internal control over financial reporting.

     Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) under the Exchange Act. Our management evaluated the effectiveness of our internal control over financial reporting based on criteria established in the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness of our internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

     The SEC has advised us by a letter dated March 24, 2011 that it is not clear to the SEC that our Chief Financial Officer and Senior Vice President have sufficient expertise to prepare financial statements in accordance with U.S. GAAP since they do not appear to have the requisite U.S. GAAP experience. In this regard, the SEC notes that our Chief Financial Officer and Senior Vice President do not hold a license as a Certified Public Accountant in the U.S., have not attended U.S. institutions or extended educational programs that would appear to provide enough of the relevant education relating to U.S. GAAP, and most of their U.S. GAAP experience is limited to knowledge gained from their current positions with us. Accordingly, the SEC believes that we have an accounting department with limited

knowledge of U.S. GAAP and that this “lack of U.S. GAAP experience” constitutes a material weakness; thus, the SEC believes that our internal control over financial reporting would not be effective.

     Although we strongly disagree with the SEC’s approach, evaluation and conclusion in this regard, and in order to remedy this “material weakness” in the future, we intend to adopt the International Financial Reporting Standards (“IFRS”) and interpretations approved by the International Accounting Standards Board rather than U.S. GAAP as soon as practicable after the date hereof.

(c) Not applicable

(d) Changes in internal control over financial reporting.

     There were no changes in our internal controls over financial reporting identified in connection with the evaluation that occurred during the period covered by this Annual Report on Form 20-F that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

     Our Board of Directors has determined that it considers Jin Wang as the audit committee financial expert serving on our audit committee. Mr. Wang is an independent non-executive director as defined in The Nasdaq Stock Market’s listing standards.

ITEM 16B. CODE OF ETHICS

     We have adopted a code of ethics that applies to all of our employees, including our chief executive officer and our chief financial officer.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

(a) Audit Fees.

     Gruber & Company, LLC was our principal accountant for the audit of our financial statements for the fiscal years ended December 31, 2009 and 2010.

     The aggregate fees billed for each of the last two fiscal years for professional services rendered by our principal accountant for the audit of our annual financial statements or

services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were $255,000 for the fiscal year ended December 31, 2009 and $265,000 for the fiscal year ended December 31, 2010. The aggregate fees billed for the audit of our internal control over financial reporting were $25,000 for the fiscal year ended December 31, 2009 and $25,000 for the fiscal year ended December 31, 2010.

(b) Audit-Related Fees.

     No fees were billed in each of the last two fiscal years for assurance and related services by our principal accountants that are reasonably related to the performance of the audit or review of our financial statements and are not reported under paragraph (a) of this Item for the fiscal years ended December 31, 2009 and 2010.

(c) Tax Fees.

     No fees were billed in each of the last two fiscal years for professional services rendered by our principal accountants for tax compliance, tax advice, and tax planning.

(d) All Other Fees.

     No fees were billed in each of the last two fiscal years for products and services provided by our principal accountant, other than the services reported in paragraphs (a) through (c) of this Item for the fiscal years ended December 31, 2009 and 2010.

(e) Audit Committee Pre-Approval Policies and Procedures.

     To ensure continuing auditor objectivity and to safeguard the independence of our auditors, our audit committee has determined a framework for the type and authorization of non-audit services which our current auditor, Gruber & Company, LLC, may provide.

     The audit committee has adopted policies for the pre-approval of specific services that may be provided by our principal auditors. These policies are kept under review and amended as necessary to meet the dual objectives of ensuring that we benefit in a cost effective manner from the cumulative knowledge and experience of our auditors while also ensuring that the auditors maintain the necessary degree of independence and objectivity.

     Our audit committee approved the engagement of Gruber & Company, LLC as our principal accountant to render audit and non-audit services before Gruber & Company, LLC was engaged by us.

     All of the services described in each of paragraphs (b) through (d) of this Item were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

(f) Not applicable.

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

     Not applicable.

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

     In September 2001, we announced a common stock repurchase program pursuant to which we may repurchase up to 1,000,000 shares of common stock from time to time in the open market and in negotiated transactions, including block transactions, and may be discontinued at any time without prior notice.

     We did not repurchase any of our shares of common stock during the fiscal year ended December 31, 2010.

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

     Not applicable.

ITEM 16G. CORPORATE GOVERNANCE

     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.

PART III

ITEM 17. FINANCIAL STATEMENTS

     Not applicable.

ITEM 18. FINANCIAL STATEMENTS

     The following financial statements, together with the report of the independent registered public accounting firm Gruber & Company, LLC, for the years ended December 31, 2008, 2009 and 2010 are being filed as part of this Annual Report on Form 20-F.

Consolidated statements of operations for the years ended December 31, 2008, 2009 and 2010.

Consolidated balance sheets as of December 31, 2009 and 2010.

Consolidated statements of shareholders’ equity for the years ended December 31, 2008, 2009 and 2010.

Consolidated statements of cash flows for the years ended December 31, 2008, 2009 and 2010.

Notes to and forming part of the financial statements.

Schedule II — Valuation and Qualifying Accounts for the years ended December 31, 2008, 2009 and 2010.

All other schedules are omitted, as required information is inapplicable or the information is presented in the consolidated financial statements or related notes.

LJ INTERNATIONAL INC.

		Page
Report of Independent Registered Public Accounting Firm			F-2
Consolidated Statements of Operations			F-3
Consolidated Balance Sheets			F-4
Consolidated Statement of Shareholders’ Equity and Comprehensive Income			F-5— F-6
Consolidated Statements of Cash Flows			F-7—F-8
Notes to and Forming Part of the Financial Statements			F-9—F-46
Schedule II			F-47

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
LJ International, Inc.

We have audited the accompanying consolidated balance sheets of LJ International, Inc. and subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of operations, shareholders’ equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2010. Our audits also included the financial statement Schedule II. These consolidated financial statements and the financial statement Schedule II are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement Schedule II based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LJ International, Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. Also in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

We were not engaged to examine management’s assertion about the effectiveness of LJ International Inc.’s internal control over financial reporting as of December 31, 2010 included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon.

/s/ Gruber & Company, LLC

Gruber & Company, LLC
Lake Saint Louis, Missouri

March 16, 2011

LJ INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

						Year ended				Year ended				Year ended
						December 31,				December 31,				December 31,
		Notes				2010				2009				2008
						US$				US$				US$
Operating revenue			2	(c)			140,548				110,523				136,268
Costs of goods sold (Exclusive of depreciation shown separately below)							(85,737	)			(72,173	)			(97,031	)
Gross profit							54,811				38,350				39,237
Operating expenses
Selling, general and administrative expenses							(37,303	)			(31,039	)			(34,815	)
Net loss on derivatives							(476	)			(503	)			(86	)
Depreciation							(2,779	)			(2,197	)			(3,373	)
Operating income							14,253				4,611				963
Other income and expense
Interest income							69				147				199
Gain on currency translation							643				—				1,473
Gain on sales of securities							258				—				49
Gain on disposal of property held for lease							1,635				—				2,210
Interest expenses							(978	)			(842	)			(1,789	)
Income before income taxes and noncontrolling interest							15,880				3,916				3,105
Income taxes expense			9				(2,877	)			(231	)			(569	)
Net income							13,003				3,685				2,536
Net (income) loss attributable to noncontrolling interest							(9	)			4				(6	)
Net income attributable to LJ International Inc. common shareholders							12,994				3,689				2,530
Numerator:
Net income used in computing basic earnings per share							12,994				3,689				2,530
Denominator:
Weighted average number of shares used in calculating basic earnings per share							25,343,557				23,229,987				22,245,626
Effect of dilutive potential ordinary shares:
Warrants							31,021				—				6,131
Stock options							1,282,417				871,867				196,838
Weighted average number of shares used in calculating diluted earnings per share							26,656,995				24,101,854				22,448,595
Earnings per share:
Basic			2	(g)			0.51				0.16				0.11
Diluted			2	(g)			0.49				0.15				0.11