10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended May 31, 2007
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to

Commission file number 1-7848
LAZARE KAPLAN INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)

Delaware	13-2728690
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)

19 West 44th Street	10036
(Address of principal executive offices)	(Zip Code)
Registrant’s telephone number, including area code (212) 972-9700

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock ($1 par value)	American Stock Exchange
Preferred Share Purchase Rights	American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

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

         Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x

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

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

         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. (check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer x

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

          As of November 30, 2006 the aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the closing price for the registrant’s common equity on the American Stock Exchange at that date was $19,672,199.

          As of July 31, 2007, 8,259,300 of the registrant’s common stock were outstanding

DOCUMENTS INCORPORATED BY REFERENCE

          2007 definitive proxy statement to be filed with the Commission - incorporated by reference into Part III.

          2007 Annual Report to Stockholders for the fiscal year ended May 31, 2007 to be filed with the Commission-incorporated by reference into Parts II and IV.

Part 1

Item 1. Business

The Company

          Lazare Kaplan International Inc. (the “Company”) was incorporated in 1972 under the laws of the state of Delaware as the successor to a business which was founded by Mr. Lazare Kaplan in 1903. The Company is engaged in the cutting, polishing and selling of branded and non-branded (“commercial”) diamonds. The Company’s premier product line is comprised of ideally proportioned diamonds which it markets internationally under the brand name “Lazare Diamonds^®”. Ideally proportioned diamonds are distinguished from non-ideal cut diamonds by the symmetrical relationship of their facets, which optimize the balance of brilliance, sparkle and fire in a polished diamond. Due to these characteristics, Lazare Diamonds command a premium in the marketplace. The Company believes there are only a small number of companies worldwide engaged primarily in the production of ideally proportioned diamonds and that it is one of the largest U.S. providers of ideal cut diamonds. The Company cuts and polishes fine make commercial diamonds at diamond cutting facilities in Russia, South Africa and Namibia which it markets to wholesalers, distributors and, to a growing extent, retail jewelers. All rough stones purchased by the Company are either selected for manufacturing or resold as rough diamonds in the marketplace. The Company believes that the combination of its cutting and polishing operations and its trading operations enables the Company to purchase larger quantities of rough diamonds from which it may select those rough diamonds best suited for the Company’s current needs.

          The Company’s marketing strategy in the selling of Lazare Diamonds is directed primarily toward quality conscious consumers throughout the United States, South America, the Far East, the Middle East and Europe. The Company focuses its distribution efforts for Lazare Diamonds on selectivity with a view towards helping retailers who carry the product maintain a competitive advantage. Lazare Diamonds can be found at some of the most prestigious jewelry stores around the world, including those with international reputations and those known only in their communities as being the highest quality retail jewelers. This strategy helps ensure that the Company’s product is presented in an environment consistent with its superior quality and image. The Company also sells to certain jewelry manufacturers and diamond wholesalers. The Company has developed a comprehensive grading system which, when coupled with the “ideal cut” standard, allows jewelers to order inventory by category rather than through the more cumbersome process of visual selection. In addition, the Company designs, manufactures (through independent contractors) and sells a line of high quality jewelry which features Lazare Diamonds.

          An important element of the Company’s strategy is the promotion of the Lazare Diamond brand name. Every Lazare Diamond bears a laser inscription on its outer perimeter, invisible to the naked eye, containing the Lazare Kaplan logo and an identification number unique to the stone. The laser signature also allows consumers to register their Lazare Diamonds with the Company under its program, The Lazare Diamond Registry^®, thereby providing proof of ownership in case of loss or theft.

          One of the Company’s important suppliers of rough diamonds is the Diamond Trading Company (“DTC”), the rough diamond sales arm of the De Beers Group. Based on published reports, the Company believes that more than half of the world’s current rough diamond output is sold by the DTC. The Company has been a client of the DTC for approximately 60 years. In order to diversify its sources of rough diamond supply, the Company has an office in Antwerp to supplement its rough diamond needs by secondary market purchases and has entered into relationships with other primary source suppliers. The Company believes that its success in maintaining quantities and qualities of polished inventory that best meet its customers’ needs is achieved through its ability to fully integrate its diverse rough and polished diamond sources.

          The Company operates various manufacturing facilities. The Company’s domestic manufacturing operation is located in Puerto Rico. The Company believes its work force in Puerto Rico is among the most highly skilled in the diamond industry. This facility generally produces polished diamonds having weights of 1/5 of a carat and greater. The Company also operates manufacturing facilities in Moscow and Barnaul, Russia, Namibia and South Africa. The facilities in Russia are operated pursuant to an agreement with AK ALROSA of Russia. The facility in Namibia is operated under a strategic cooperation agreement with NamGem Diamond

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Manufacturing Company (PYT) Ltd. The facility in South Africa is operated by Nozala Diamonds (Pty) Ltd, a joint cutting and polishing operation with Nozala Investments (Pty) Ltd, a broadly based women’s empowerment investment group.

Diamond Supply

          The Company’s overall revenues are, in part, dependent upon the availability of rough diamonds, the world’s known sources of which are highly concentrated. Based upon published reports, the Company believes that Angola, Australia, Botswana, Brazil, Canada, Ghana, Guinea, Ivory Coast, Namibia, Republic of the Congo, Russia, Sierra Leone and South Africa account for more than 90% of present world rough gem diamond production. The DTC is the primary world-wide marketing mechanism of the rough diamond industry. Sales for the DTC are made in London and South Africa to a select group of clients (“sightholders”) which, according to published reports, number approximately 95, including the Company. Based upon published reports, the Company believes that more than half of the world’s current rough diamond output is sold by the DTC and its affiliated companies. In order to maintain their purchasing relationship, the DTC’s clients have traditionally been expected to purchase substantially all of the diamonds offered to them by the DTC. Companies that are not sightholders must either purchase their requirements from sightholders or seek access to that portion of the world supply not marketed by the DTC.

          The DTC has been and continues to be an important supplier of rough diamonds to the Company. The DTC periodically invites its clients to submit their requirements as to the amount and type of stones they wish to purchase. Employees of the Company attend offerings of rough diamonds (“sights”) held by the DTC periodically during the year in London. At sights, the Company purchases, at the DTC’s stated price, an assortment of rough diamonds known as a “series”, the composition of which attempts to take into account the qualitative and quantitative requirements of the Company based on requests submitted to the DTC by the Company. The Company has been a sightholder for approximately 60 years. The loss of its status as a sightholder could have a material adverse effect on the Company.

          In 2000, the DTC announced significant changes in its approach to rough diamond marketing. In brief, the DTC stated that it would stop open market purchases, alter its market control and pricing policies and focus on selling its own mining productions through its “Supplier of Choice” marketing programs. These policy changes were intended to drive consumer demand for diamond jewelry by fostering the development of efficient distribution networks that stimulate demand, support the emergence of internationally recognized brands to meet consumer needs, supply clients with a consistent supply of rough diamonds and encourage and support additional investment in marketing and advertising programs with the goal of developing an industry led by advertising and marketing support.

          The DTC has announced a revision of their Supplier of Choice program. All current sightholders have received notification of termination effective December 31, 2007. It is expected that new sightholder appointments will be made in December of 2007. The Company is hopeful it will be reappointed as a sightholder at that time. The Company believes it is well positioned to benefit from these changes in the DTC’s approach to diamond marketing. However, there can be no assurance that this policy change will not have a material adverse effect on the Company’s operations.

          During the third quarter of fiscal 2004, the Company signed a cooperation agreement with NamGem for the cutting and polishing of diamonds in Namibia. NamGem is Namibia’s flagship venture in the international diamond polishing industry. Under the terms of the agreement the Company provides marketing and technical manufacturing assistance to NamGem. The Company purchases rough diamonds and supervises the manufacturing of those deemed suitable to cut and polish. The Company pays NamGem for manufacturing on a fee for services basis. All rough and polished diamonds are bought and sold by the Company for its account.

          During September 2006 the Company and the Overseas Private Investment Corporation, an independent agency of the United States (“OPIC”) signed a commitment letter pursuant to which OPIC committed to provide approximately $25 million of long-term financing in support of the acquisition of certain rough diamonds to be cut and polished in Namibia. Pursuant thereto, a subsidiary of the Company and OPIC entered into a financing agreement in February 2007. The Company is currently in negotiations with third parties regarding changes to its

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existing Namibian operations. Pending a satisfactory outcome of these negotiations and subject to various conditions precedent under the financing agreement, the Company anticipates initial borrowing under the facility to commence during fiscal 2008.

          During the fourth quarter of fiscal 2004 the Company signed a four year technical cooperation agreement regarding the marketing of rough diamonds with SODIAM, the government entity responsible for the development and marketing of diamonds produced in Angola. The Company began active buying operations in the Angolan informal sector during the first quarter of fiscal 2005. During the third fiscal quarter of 2006 the Company’s rough buying operation expanded to include buying in the Angolan formal sector.

          During the second fiscal quarter 2007 Angolan formal sector operations were transferred to separate joint venture companies. The Company is currently negotiating a further expansion and restructuring of its Angolan operations to include exploration and development through various additional joint ventures.

          In November 2004, the Company signed an agreement with Nozala Investments (PTY) LTD., a broadly based women’s empowerment investment group, for cooperation in South Africa’s diamond sector. The agreement contemplates diamond mining, cutting, polishing, and distribution. The joint venture is in line with the South African Government’s recently announced program to promote new entrants and investment in the domestic diamond sector, increasing the sector’s contribution to economic development. Cutting and polishing activities which concentrate on local sources of rough diamond supply, commenced during the third fiscal quarter of 2006.

          In order to diversify its sources of supply, the Company has entered into arrangements with other primary source suppliers and manufacturers. The Company also has established an office in Antwerp to supplement its rough and polished diamond needs by making purchases in the secondary market.

          Through February 2009, the Company’s wholly-owned subsidiary, Pegasus Overseas Ltd. (“POL”) has an exclusive agreement with Diamond Innovations Inc. (“DI”) under which POL will market natural diamonds that have undergone a high pressure, high temperature (HPHT) process to improve the color of certain gem diamonds without reducing their all-natural content. The process is permanent and irreversible and it does not involve treatments such as irradiation, laser drilling, surface coating or fracture filling and is conducted before the final cutting and polishing by the Company. The process is used only on a select, limited range of natural diamonds with qualifying colors, sizes and clarities for both round and fancy cuts. The estimated number of gemstones with characteristics suitable for this process is a small fraction of the overall diamond market. POL sells only diamonds that have undergone the HPHT process under the brand name Bellataire®. Each Bellataire diamond is laser inscribed with a unique identification number.

          In November 2005, the Company (including certain of its subsidiaries) amended certain terms of its agreement with DI relating to the sourcing, manufacture and marketing of Bellataire diamonds. The amendment and related agreements seek to increase the sales and profitability of Bellataire diamonds by more closely aligning the economic interests of the parties through shared management of product sourcing, manufacturing and marketing as well as the sharing of related costs.

          The Company has rough diamond supply arrangements in Russia for the cutting and polishing of diamonds in Russia. See “Cutting and Polishing”.

          The Company believes that it has good relations with its suppliers, that its trade reputation and established customer base will continue to assure access to primary sources of diamonds and that its sources of supply are sufficient to enable the Company to meet its present and foreseeable needs. However, the Company’s sources of supply could be affected by political and economic developments in producing countries over which the Company has no control. While the Company believes that alternative sources of supply may be available, any significant disruption of the Company’s access to its primary source suppliers could have a material adverse effect on its ability to purchase rough diamonds.

          As a concerned member of the international diamond industry and global community at large, the Company fully supports and complies with policies which prohibit the trade in conflict diamonds, prevent money

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laundering and combat the financing of terrorism, a position which reflects the Company’s leadership in the industry. The Company fully complies with clean diamond trading and anti-money laundering legislation adopted by the United States Government such as the USA PATRIOT ACT and the Clean Diamond Trade Act, and supports relevant resolutions of concerned regional governments and international organizations including the OECD and the United Nations. The Company is a founding member of the United Nations Global Compact which was launched in 2000 to “initiate a global compact of shared values and principles which will give a human face to the global market”. The Company will continue to join various industry and trade associations in condemning and combating the trade in illicit diamonds and to comply fully with World Diamond Congress resolutions for industry self-regulation in respect of the Kimberley Process Certification Scheme, including implementation of the prescribed System of Warranties and Code of Conduct. Furthermore, the Company long ago adopted the highest professional and ethical standards in every aspect of our business and is fully compliant with the DTC’s recently developed Diamond Best Practices Principles.

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Cutting and Polishing

          In March 1999, the Company and ALROSA entered into a ten year agreement (the “ALROSA Agreement”) to expand their relationship in the cutting, polishing and marketing of rough gem diamonds for up to $100 million a year. Under the terms of the ALROSA Agreement, the Company and ALROSA agreed to refurbish certain diamond cutting facilities in Russia. At present, the Company’s operations in Russia are consolidated in two facilities, both of which are fully operational. These facilities are staffed by Russian technicians and jointly managed and supervised by the Company and ALROSA personnel. Under the ALROSA agreement, the Company sells the resulting polished diamonds through its worldwide distribution network. The proceeds from the sale of these polished diamonds, after deduction of rough diamond cost, are generally shared equally with ALROSA. This agreement does not require the Company to advance funds for the purchase of rough diamonds. Any interruption in the supply of diamonds from Russia could have a material adverse effect on the Company.

          The Company has signed a strategic cooperation agreement with NamGem Diamond Manufacturing Company (PTY) Ltd. (“NamGem”) for the cutting and polishing of diamonds in Namibia. NamGem is Namibia’s flagship venture in the international diamond polishing industry. Under the terms of the agreement, the Company provides technical manufacturing assistance and supervises the manufacture of the Company’s rough diamonds deemed suitable to cut and polish.

          The Company believes that its factory in Puerto Rico is among the largest cutting and polishing facilities in the United States. Each diamond received in Puerto Rico is evaluated against strict management standards designed to maximize its potential economic contribution to the Company. Expert technicians, assisted by proprietary computer software, determine whether to cut the diamond to ideal or commercial proportions or resell the diamond. The shape of the diamond, its color, clarity, size, potential profitability and salability are among the criteria used in making such determinations.

          Rough diamonds selected for cutting are analyzed and where desirable are sorted for sawing to achieve the desired shape and to eliminate imperfections. They are then cut and polished into finished gems. Each finished ideal cut diamond (weighing .18 carats and larger) which is marketed as a Lazare Diamond is inscribed with the Lazare Kaplan logo and its own identification number by the Company’s patented laser inscription process. The Company believes its work force in Puerto Rico is one of the most highly skilled in the diamond industry.

          The Company believes that it is recognized in the diamond industry for the high quality and brilliance of the gems it cuts and that it also enjoys a reputation as an imaginative and innovative cutter of large and difficult diamonds.

Pricing

          Rough Diamond Prices

          Through its control of more than half of the value of the current world rough diamond output, the DTC can exert significant control over the pricing of rough and polished diamonds by adjusting the quantity and pricing of rough diamonds it supplies to the marketplace. Rough diamond prices established by the DTC have been characterized historically by steady increases over the long term; however, prices in the secondary market have experienced a greater degree of volatility, particularly during the late 1970’s. Traditionally, the Company has been able to pass along such price increases to its customers. From time to time, however, the Company has absorbed these price increases in the short term to maintain an orderly pricing relationship with its customers. This has, in the past, caused temporary adverse effects on the Company’s earnings. A large rapid increase in rough diamond prices could materially adversely affect the Company’s revenues and operating margins if the increased cost of rough diamonds could not be passed along to its customers in a timely manner.

          According to published reports, during 1995 there was an emergence of a two-tier market for rough diamonds. The first tier is comprised of better quality rough diamonds, where supply and demand appear to be in balance. The Company conducts its cutting and polishing operations almost exclusively in this segment of the market. The second tier is comprised of small, less expensive, imperfect rough diamonds. The prices for these

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diamonds have been considerably more volatile since 1995. Because the Company focuses primarily on better quality rough diamonds, this volatility has not had a significant effect on the Company. However, a significant decrease in the price of better quality rough diamonds could materially adversely affect the Company’s revenues, operating margins and inventory value.

          Polished Diamond Prices

          Over the past 60 years, increases in the price of rough diamonds have generally resulted in a corresponding increase in the price of polished diamonds. However, during periods of economic uncertainty, there may be a significant time lag before the Company is able to increase polished diamond prices. During the period of high inflation in the late 1970’s, investors speculated in hard assets, driving polished diamond prices to exceptionally high levels which in turn caused significant increases in the cost of rough diamonds. However, the moderation of inflation during the early 1980’s resulted in a sudden and massive shift of investments from hard assets to financial instruments, resulting in dramatic price declines for polished diamonds which caused a market liquidity crisis as prices of some categories of polished diamonds fell below the inventory costs of such diamonds. Since this period in the early 1980’s, the Company believes the pricing of polished diamonds has returned to its historical pattern of generally responding to increases in the pricing of rough diamonds. The Company has broadened its sales base and implemented strict inventory, pricing and purchasing controls which it believes could lessen the impact of fluctuations in the price of rough and polished diamonds. These include computerized rough diamond evaluation programs and inventory utilization programs. However, there can be no assurance that volatility in the price of polished diamonds could not occur again. Any rapid decrease in the price of polished diamonds could have a material adverse effect on the Company in terms of inventory reserves, lower sales and lower margins.

Marketing, Sales and Distribution

          Marketing Strategy

          The Company’s sales strategy is directed primarily toward quality conscious consumers throughout the United States, South America, the Far East, the Middle East and Europe. The Company focuses its distribution efforts for Lazare Diamonds on selectivity with a view to helping retailers who carry the product maintain a competitive advantage. Lazare Diamonds can be found at some of the most prestigious jewelry stores around the world, including both those with international reputations and those recognized only in their local communities as being the highest quality retail jewelers. This strategy helps ensure that the Company’s product is presented in an environment consistent with its superior quality and image.

          The Company also sells to certain jewelry manufacturers and diamond wholesalers. The Company has developed a comprehensive grading system for its diamonds which, when coupled with the “ideal cut” standard, allows jewelers to order inventory by category rather than through the more cumbersome process of visual selection. In addition, the Company designs, manufactures (through independent contractors) and sells a line of high quality jewelry that features Lazare Diamonds.

          A key element of the Company’s strategy is the promotion of the Lazare Diamond brand name directly to consumers. The Company is able to market its diamonds under a brand name to retailers because (a) the ideal cut differentiates the Company’s diamonds from commercial diamonds in the marketplace and (b) each Lazare Diamond is inscribed with the Company’s logo and identification number using the Company’s patented laser inscription process, thus authenticating the diamonds. The Company holds domestic and various international patents for this process. In addition, in March 2006 an additional U.S. patent was issued to the Company relating to microinscribed gemstones. The Company has additional domestic and international patents-pending.

          The Company’s decision to pursue the brand name strategy is reinforced by two factors - a rising trend among informed consumers to purchase quality, brand name products, and the need among upscale jewelers to set themselves apart in an increasingly competitive market by carrying and promoting a highly differentiated product.

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          Building awareness and acceptance of the Lazare Diamond brand name is accomplished through a comprehensive marketing program which includes sales training, cooperative advertising, sales promotion and public relations. A wide assortment of sales promotion materials has been designed to facilitate jewelers’ sales of the Company’s diamonds and fine jewelry line to consumers. Public relations events are offered which help build traffic in retail stores. The Company has a program to build both free standing and in-counter boutiques in the stores of a select group of its retail clients. The Company believes these marketing programs have been and will continue to be instrumental in increasing sales. The Company intends to continue concentrating its Lazare Diamond® marketing efforts towards the quality retail jeweler.

          The Lazare Diamond Registry program has been established by the Company to enable consumers to register their Lazare Diamonds with the Company using the laser inscribed identification number, thereby providing proof of ownership in case of loss or theft.

          The Company markets high quality commercial cut diamonds and diamond jewelry through its worldwide distribution network to wholesalers, jewelry manufacturers, distributors and retailer jewelers.

          In addition, Bellataire® diamonds and jewelry are marketed through upscale retailers and select distributors throughout the world. Bellataire diamonds are all-natural diamonds that have been restored to their intrinsic beauty through a patented high pressure, high temperature (HPHT) process that improves the color of a limited group of gem diamonds.

          The Company has developed its own E-commerce site (www.lazarediamonds.com). This site directly links the Company to its retailers, which serves to further strengthen the ties with its retail client base.

Sales and Distribution

          While the purchase and sale of rough diamonds is concentrated among relatively few parties, based on published reports industry wide retailing of polished diamonds occurs through over 40,000 jewelry stores in the United States, over 25,000 retailers in Japan and over 60,000 retail stores in Europe. The Company’s sales efforts for its polished diamonds are directed primarily toward the fine quality segment of these retailers (the majority of which are independently owned and operated), wholesalers and distributors and, to a lesser extent, to jewelry manufacturers. Full time regional sales representatives located throughout the United States, Latin America, Japan, Hong Kong and Europe, are generally compensated, in whole or in part, on a commission or incentive basis and handle sales throughout the respective territories in which they operate.

          The Company’s U.S. sales force is supported by a New York based in-house sales and service department. Sales to certain of the Company’s largest accounts are handled by headquarters personnel. Most of the Company’s major accounts are customers of long standing.

          The Company has been actively working to expand its foreign business activities, particularly in the Far East countries of Japan, Hong Kong, Singapore, Taiwan, Korea, China and Malaysia and recently throughout Latin America, Italy and the Middle East.

          The Company uses a comprehensive sorting and inventory classification system for grading color and clarity of its ideal cut polished diamonds. This system, combined with the fact that the Company’s stones are uniformly cut to ideal proportions, reduces and in some cases eliminates the need for customers to view diamonds before placing orders. The system enables customers to standardize their inventories, order by mail or telephone and minimize their inventory investment.

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          The percentages of the Company’s total domestic and foreign net sales to its customers, which include a combination of both rough diamonds and polished diamonds sales taken together, for the past three fiscal years are set forth below:

	2007			2006			2005
United States		15	%		13	%		20	%
Far East		8	%		7	%		9	%
Europe, Israel & Other		77	%		80	%		71	%
		100	%		100	%		100	%

          The world’s rough diamond trading markets are primarily located in Belgium, India, and Israel; therefore, the majority of the Company’s rough diamond sales have been transacted with foreign customers.

          The Company believes that due to the possible international resale of diamonds by its customers, the above percentages may not represent the final location of retail sales of its product. All of the Company’s foreign sales, other than those made in Japan, are denominated in United States dollars. The profitability of foreign sales of either polished or rough diamonds is consistent with that of domestic sales of similar merchandise.

Competition

          The polished and rough diamond business is highly competitive. While the Company believes that it has achieved a reputation as a leading cutter and distributor of high quality diamonds, it faces competition in sales to its customers in the United States and abroad from many other suppliers. In addition, the Company sells rough diamonds in the competitive world market. A substantial number of cutters and polishers and traders, some of which the Company believes to be larger or to have greater financial resources than the Company, sell diamonds of all qualities to the Company’s customers.

          The Company believes there are significant barriers to entry by potential competitors into the business of manufacturing and distributing high quality cut diamonds. Among the most important of these barriers are the need for significant working capital to purchase rough diamonds and hold polished inventory, the long-term relationships required to have access to adequate supplies of rough diamonds, the limited number of persons with the skills necessary to consistently cut significant amounts of high quality cut diamonds, the difficulty in obtaining access to upscale channels of distribution, the importance of public recognition of an established brand name, a reputation for diamond cutting excellence, and the procurement of computer systems to report on and monitor the manufacturing and distribution network.

Employees

          At July 31, 2007, the Company had 178 full-time employees including seven regional sales representatives. The Company maintains an apprenticeship program at its facility in Puerto Rico, through which it trains its cutters, who are highly skilled workers. The Company provides paid vacations, sick leave, group life, disability, hospitalization and medical insurance for its employees. The Company has a 401(k) retirement plan for its U.S. and Puerto Rico employees. The Company believes that it has satisfactory relationships with its employees. None of the Company’s employees are represented by a union.

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Item 1A. Risk Factors

Supply

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

          Based upon published reports, the Company believes that more than half of the world’s current diamond output is sold by the Diamond Trading Company (“DTC”), the rough diamond sales arm of the De Beers Group. The DTC is the primary world-wide marketing mechanism of the rough diamond industry. Sales for the DTC are made in London and South Africa to a select group of clients (“sightholders”) which, according to published reports, number approximately 95, including the Company. The DTC has been and continues to be an important supplier of rough diamonds to the Company. The Company has been a sightholder for approximately 60 years. The loss of its status as a sightholder could have a material adverse effect on the Company.

          The Company’s cooperation arrangement with ALROSA and its sourcing arrangements in Angola represent a significant part of its operations. Any interruption in the supply of diamonds from Russia or Angola could have a material adverse effect on the Company.

Rough Pricing

          Through its control of more than half of the value of the current world rough diamond output, the DTC can exert significant control over the pricing of rough and polished diamonds by adjusting the quantity and pricing of rough diamonds it supplies to the marketplace. Historically, the Company has been able to pass along such price increases to its customers. From time to time, however, the Company has absorbed these price increases in the short term to maintain an orderly pricing relationship with its customers. This has, in the past, caused temporary adverse effects on the Company’s earnings. A large rapid increase in rough diamond prices could materially adversely affect the Company’s revenues and operating margins if the increased cost of rough diamonds could not be passed along to its customers in a timely manner. Conversely, a significant decrease in the price of better quality rough diamonds could materially adversely affect the Company’s revenues, operating margins and inventory value.

Polished Pricing

          Any rapid decrease in the price of polished diamonds could have a material adverse effect on the Company in terms of inventory reserves, lower sales and lower margins.

Competition

          The polished and rough diamond business is highly competitive. A substantial number of cutters and polishers and traders, some of which the Company believes to be larger or to have greater financial resources than the Company, sell diamonds of all qualities to the Company’s customers.

Item 1B. Unresolved Staff Comments

          Not applicable.

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Item 2. Properties

          In June 2003, the Company entered into a lease for 17,351 square feet of office space, a portion of which will be devoted to sales rooms, at 19 West 44^th Street, New York City, for a term expiring September 30, 2019 at an annual rental rate of approximately $594,000 (subject to escalations). This location serves as the Company’s corporate headquarters.

          The Company also owns a manufacturing facility in Caguas, Puerto Rico. The Caguas facility consists of approximately 12,650 square feet.

          The Company leases office space in Antwerp, Belgium for a term expiring May 31, 2015 at an annual rental rate of approximately $50,000. The Company has the right to terminate the lease on May 31, 2009, and 2012.

          The Company also leases office space in Antwerp, Belgium for a term expiring August 11, 2013 at an annual rental rate of approximately 52,000 Euros (approximately $64,000). The lease is cancelable by either the Company or the landlord on August 11, 2008 and 2010.

          The Company owns a 330 square meter office in Antwerp, Belgium, a portion of which is devoted to sales rooms.

          The Company leases office space in Hong Kong for a term expiring May 31, 2008 at an annual rental rate of 672,000 Hong Kong dollars (approximately $87,000).

          The Company leases office space in Tokyo for a term expiring August 31, 2008 at an annual rental rate of 18,200,000 Japanese Yen (approximately $150,000).

          The Company believes that its facilities are fully equipped and adequate to fulfill its operating and manufacturing needs.

Item 3. Legal Proceedings

          On May 25, 2006, the Company filed a complaint in the United States District Court for the Southern District of New York against Photoscribe Technologies, Inc. (“Photoscribe”). The complaint asserted infringement of the Company’s intellectual property rights by Photoscribe with respect to two of the Company’s patents (the “patents-in-suit”). The patents-in-suit have claims relating to methods of, and apparatus for, laser inscribing gemstones, as well as the inscribed gemstones themselves.

          On November 22, 2006, the Company amended its complaint against Photoscribe to include the Gemological Institute of America (the “GIA”) as a co-defendant. As of February 1996, the Company and the GIA entered into an exclusive United States inscription agreement (except for the Company’s own use) with respect to certain intellectual property, which is owned by the Company relating to certain laser inscription equipment and methods (the “Inscription Agreement”) and which includes the patents-in-suit. The GIA has purportedly terminated the Inscription Agreement as of July 31, 2006 under its terms. The GIA then began to commercially use Photoscribe equipment to inscribe gemstones, thus providing the basis to include the GIA in the suit. In addition to the same charges of patent infringement that were originally made against Photoscribe, the amended complaint also charges the GIA with breach of the exclusive license agreement prior to its purported termination and breach of a letter agreement by which GIA was to maintain the Company’s equipment that it had been using. The amended complaint further charges Photoscribe with tortious interference with the Company’s business relationship with the GIA.

On July 19, 2007, the Company filed a Second Amended Complaint which included Mr. David Benderly, President of Photoscribe, as an additional individual defendant, based on discovery during the case, which showed that Mr. Benderly controlled and directed the infringing activity of Photoscribe, and is thus personally liable for patent infringement. Further, the Second Amended Complaint charged Mr. Benderly with fraud based on a demonstration of Photoscribe equipment he gave in 2000 to counsel for the Company to show that the equipment did not infringe the Company's patents. However, discovery has indicated that he setup the machine for use during the demonstration to give the impression that the Photoscribe equipment could not operate to infringe the Company's patents when he knew that it could.

          In the Photoscribe-GIA-Benderly litigation the Company seeks injunctive relief, as well as damages, including inscription fees and lost profits based on lost sales and the value added to inscribed gemstones by reason of the use of infringing systems by Photoscribe and the GIA. The Company also seeks to recover damages it suffered as a result of Mr. Benderly’s fraud.

          GIA, Photoscribe and Benderly have answered the Second Amended Complaint and all deny liability for the charges made by the Company. GIA has also filed counterclaims alleging non-infringement, invalidity and unenforceability of the patents-in-suit. Further, GIA has

11

asserted counterclaims for (i) breach of contract based on the allegation that the Company failed to provide operative equipment or to maintain the equipment and (ii) false marking for allegedly placing patent numbers on equipment that was not covered by the patents. GIA has additionally filed a counterclaim for equitable estoppel and implied license on the basis that the Company has submitted diamonds to GIA to be graded and these stones may be inscribed by GIA on Photoscribe equipment. The Company has moved to strike this defense. Further, the Company believes that the other counterclaims are without merit and will actively defend against them.

          Photoscribe and David Benderly allege counterclaims for non-infringement, invalidity and unenforceability of the patents-in-suit. Further, Photoscribe and Benderly have asserted a counterclaim which charges the Company with an antitrust violation under Section 2 of the Sherman Act for monopolizing the laser inscription market. The company will vigorously contest this counterclaim and the others as baseless.

          The Company intends to continue to pursue its Second Amended Complaint against Photoscribe, the GIA and Benderly, and to defend aggressively against their counterclaims. A trial date has been set for February 25, 2008.

Item 4. Submission of Matters to a Vote of Security Holders

          None

Executive Officers of the Company

          The following table sets forth information regarding executive officers of the Company.

NAME	POSITION	AGE
Maurice Tempelsman	Chairman of the Board	78
Leon Tempelsman	Vice Chairman of the Board and President	51
William H. Moryto	Vice President and Chief Financial Officer	49

All officers were elected by the Board of Directors at its meeting following the Annual Meeting of Stockholders held in November 2006. All officers hold office until the Board of Directors meeting following the next Annual Meeting of Stockholders and until their respective successors have been duly elected and qualified.

          Maurice Tempelsman is the Chairman of the Board and a director of the Company and a general partner of Leon Tempelsman & Son (“LTS”), a partnership with interests in real estate, venture capital, investments and an ownership interest in the Company. He has held these positions since 1984. Maurice Tempelsman is the father of Leon Tempelsman.

          Leon Tempelsman is the Vice Chairman of the Board, the President and a director of the Company and a general partner of Leon Tempelsman & Son. He has held these positions since 1984. Leon Tempelsman is the son of Maurice Tempelsman.

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          The Company believes that neither the Tempelsmans nor LTS currently engages directly or indirectly in any activities competitive with those of the Company.

          William H. Moryto has been Vice President and Chief Financial Officer since May 2000.

Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

          The Company’s common stock (par value $1 per share) is traded on the American Stock Exchange.

          Market prices and other information with respect to the Company’s common stock are hereby incorporated by reference to the Company’s Annual Report.

          The following table presents a summary of share repurchases made by the Company during the quarter ended May 31, 2007 under the Company’s share repurchase program authorized by our Board of Directors.

	Total Number of Shares Purchased			Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Programs		Maximum Dollar Value that May Yet Be Purchased Under the Programs
MARCH 2007		—	$	—	—	$	2,000,000
APRIL 2007		63,334	$	8.07	63,334	$	1,488,895
MAY 2007		—	$	—	—	$	1,488,895
		63,334	$	8.07	63,334

          On April 11, 2007, the Board of Directors of the Company adopted a resolution to continue to purchase in the open market, at any time and from time to time during the fiscal year ending May 31, 2008, shares of the Company’s common stock with an aggregate value not to exceed $2.0 million.

Item 6. Selected Financial Data

          Selected financial data are hereby incorporated by reference to the Company’s Annual Report.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

          Management’s discussion and analysis of financial condition and results of operations is hereby incorporated by reference to the Company’s Annual Report.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

          At May 31, 2007, the Company had borrowings totaling approximately $121.6 million outstanding under various credit agreements. The interest rates on these borrowings are variable and therefore the general level of U.S. and foreign interest rates affects interest expense. Increases in interest expense resulting from an increase in interest rates could impact the Company’s results of operations. The Company’s policy is to take actions that would mitigate such risk when appropriate. These actions include staggering the term and rate of its borrowings to match anticipated cash flow. International business represents a major portion of the Company’s revenues and profits. All purchases of rough diamonds worldwide are denominated in U.S. dollars. All of the Company’s foreign sales are denominated in U.S. dollars, with the exception of those sales made by the Company’s subsidiary, Lazare Kaplan Japan Inc., which are denominated in Japanese yen. The functional currency for Lazare Kaplan Japan is the Japanese yen and, as of May 31, 2007 and 2006, the Company recognized cumulative foreign

13

currency translation adjustments with regard to the activities of Lazare Kaplan Japan in the amount of $(766,000) and $(425,000) respectively, which are shown as a component of stockholders’ equity in the accompanying balance sheets.

Item 8. Financial Statements and Supplementary Data

          (a) The following financial statements and supplementary data are hereby incorporated by reference to the Company’s Annual Report.

(i)	Report of BDO Seidman, LLP
(ii)	Consolidated Statements of Operations for each of the three years in the period ended May 31, 2007.
(iii)	Consolidated Balance Sheets as at May 31, 2007 and May 31, 2006.
(iv)	Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended May 31, 2007.
(v)	Consolidated Statements of Cash Flows for each of the three years in the period ended May 31, 2007.
(vi)	Notes to Consolidated Financial Statements.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

          None.

Item 9A. Controls and Procedures

          The Company, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) to the Securities and Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in reaching a reasonable level of assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms.

          The principal executive officer and principal financial officer also conducted an evaluation of internal control over financial reporting (“Internal Control”) to determine whether any changes in Internal Control occurred during the quarter ended May 31, 2007 that may have materially affected or which are reasonably likely to materially affect Internal Control. Based on that evaluation, there has been no change in the Company’s internal controls over financial reporting during the quarter ended May 31, 2007 that has materially affected, or is reasonably likely to affect, the Company’s internal controls over financial reporting.

Item 9B. Other Information

          None.

Part III

          Except for information regarding Executive Officers of the Company, which, in accordance with Instruction G to Form 10-K, is included in Part I hereof, the information called for by Part III (Items 10, 11, 12, 13, and 14) is

14

incorporated by reference herein to the Company’s definitive proxy statement to be filed with the Commission within 120 days after the close of its fiscal year ended May 31, 2007.

Part IV

Item 15. Exhibits and Financial Statement Schedules

(a)	1.	The response to this portion of Item 15 is set forth in Item 8 of Part II hereof.
	2.	The schedule and reports of the independent registered public accounting firms thereon.
	3.	The exhibits listed in the exhibit index attached hereto.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
of Lazare Kaplan International Inc.

The audits referred to in our report dated August 28, 2007 relating to the consolidated financial statements of Lazare Kaplan International Inc., which are incorporated in Item 8 of the Form 10-K by reference to the annual report to stockholders for the year ended May 31, 2007 included the audits of the financial statement schedule listed in the accompanying index for the years ended May 31, 2007, 2006 and 2005. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement schedule based upon our audits.

In our opinion such financial statement schedule presents fairly, in all material respects, the information set forth therein for the years ended May 31, 2007, 2006 and 2005.

BDO Seidman, LLP
New York, NY

August 28, 2007

16

LAZARE KAPLAN INTERNATIONAL INC.

AND SUBSIDIARIES

SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS

COLUMN A	COLUMN B		COLUMN C				COLUMN D			COLUMN E
			Additions
Description	Balance at beginning of period		Charged to costs and expenses		Charged to other accounts describe		Deductions describe			Balance at end of period
YEAR ENDED MAY 31, 2007:
Allowance for doubtful accounts	$	515,000	$	358,000	$	—	$	(27,000	)(A)	$	846,000
YEAR ENDED MAY 31, 2006:
Allowance for doubtful accounts	$	360,000	$	168,000	$	—	$	(13,000	)(A)	$	515,000
YEAR ENDED MAY 31, 2005:
Allowance for doubtful accounts	$	365,000	$	59,000	$	—	$	(64,000	)(A)	$	360,000

(A) Amounts written off.

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Item 15. Exhibits and Financial Statement Schedules (continued)

	(b)	Exhibits
(3)	Articles of Incorporation and Bylaws
	(a)	Certificate of Incorporation, as amended - incorporated herein by reference to Exhibit 3(a) to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 1987 filed with the Commission on August 26, 1987, as amended on January 14, 1988.
	(b)	Certificate of Amendment of Certificate of Incorporation filed with the Secretary of State of the State of Delaware on November 1, 1990 - incorporated herein by reference to Exhibit (3)(b) to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 1992 filed with the Commission on August 28, 1992.
	(c)	Certificate of Amendment of the Certificate of Incorporation filed with the Secretary of State of the State of Delaware on November 6, 1997 - incorporated by reference to Exhibit 4.1(a) (iii) to Company’s Registration Statement for the Lazare Kaplan International Inc. 1997 Long Term Stock Incentive Plan on Form S-8 filed with the Commission on November 14, 1997.
	(d)	Certificate of Designations of Series A Junior Participating Preferred Stock filed with the Secretary of State of the State of Delaware on November 6, 1997 - incorporated by reference to Exhibit 4.1(b) to the Company’s Registration Statement on Form S-8 filed with the Commission on November 14, 1997.
	(e)	By-laws, as amended - incorporated herein by reference to Exhibit 3(e) to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2005 filed with the Commission on August 25, 2005, as amended and restated through November 4, 2003.
	(f)	Certificate of Amendment of the Certificate of Incorporation filed with the Secretary of State of the State of Delaware on March 28, 2002.
	(g)	Amendments to By-laws – incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 17, 2007.
(4)	Instruments defining the rights of security holders, including indentures
	(a)	Amended and Restated Rights Agreement, dated as of April 24, 2007, between Lazare Kaplan International Inc. and Mellon Investor Services LLC, Rights Agent – incorporated herein by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 30, 2007.
(10)	Material Contracts
	(a)	Lazare Kaplan International Inc. Amended and Restated 1988 Stock Option Incentive Plan - incorporated herein by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 filed with the Commission on November 5, 1990.
	(b)	Lazare Kaplan International Inc. 1997 Long Term Stock Incentive Plan - incorporated herein by reference to Exhibit A to the Company’s proxy statement for its Annual Meeting of Stockholders held on November 5, 1997 filed with the Commission on September 17, 1997.
	(c)	Form of Incentive Stock Option Agreement for options granted pursuant to the Lazare Kaplan International Inc. 1997 Long Term Stock Incentive Plan - incorporated herein by

18

	reference to Exhibit 4.5(a) to the Company’s Registration Statement on Form S-8 filed with the Commission on November 14, 1997.
(d)	Form of Non-Qualified Stock Option Agreement for options granted pursuant to the Lazare Kaplan International Inc. 1997 Long Term Stock Incentive Plan - incorporated herein by reference to Exhibit 4.5(a) to the Company’s Registration Statement on Form S-8 filed with the Commission on November 14, 1997.
(e)	Revolving Credit Agreement, dated as of August 14, 2002, by and among the Company, as Borrower, ABN AMRO Bank N.V., as Administrative Agent and Arranger, and ABN AMRO Bank N.V. and Bank Leumi USA, as Bank Lenders – incorporated herein by reference to exhibit 10(e) to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2002 filed with the Commission on August 28, 2002.
(f)	Cooperation Agreement, dated March 23, 1999 between the Company and AK Almazi Rossii Sakha - incorporated herein by reference to Exhibit 10(n) to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 1999 filed with the Commission on August 27, 1999 (certain portions of this agreement have been omitted pursuant to a request for confidential treatment).
(g)	Processing Agreement, dated as of February 20, 1999, between Pegasus Overseas Ltd. and a wholly-owned subsidiary of General Electric Company - incorporated herein by reference to Exhibit 10(o) to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 1999 filed with the Commission on August 27, 1999 (certain portions of this agreement have been omitted pursuant to a request for confidential treatment).
(h)	Leon Tempelsman Retirement Benefit Plan of Lazare Kaplan International Inc. – incorporated herein by reference to Exhibit 10(o) to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 1997 filed with the Commission on August 28, 1997.
(i)	Stock Purchase Agreement by and between Fifth Avenue Group, LLC and the Company dated as of January 18, 2002 – incorporated by reference to Exhibit (w) to the Company’s Current Report on Form 8-K filed with the Commission on January 28, 2002.
(j)	Shareholders Agreement by and among Maurice Tempelsman, Leon Tempelsman and Fifth Avenue Group, LLC dated as of January 18, 2002 – incorporated herein by reference to Exhibit (x) to the Company’s Current Report on Form 8-K filed with the Commission on January 28, 2002.
(k)	Form of Irrevocable Proxy from Fifth Avenue Group, LLC to Maurice Tempelsman and Leon Tempelsman – incorporated herein by reference to Exhibit (y) to the Company’s Current Report on Form 8-K filed with the Commission on January 28, 2002.
(l)	Lease Agreement between EBS Forty-Fourth Property Associates LLC and Lazare Kaplan International Inc. dated June 6, 2003. – incorporated herein by reference to exhibit 10(r) to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2003, filed with the Commission on August 26, 2003.
(m)	Amendment to the Revolving Credit Agreement, dated May 28, 2003, by and among the Company, as Borrower, ABN AMRO Bank N.V., as Administrative Agent and Arranger, and ABN AMRO Bank N.V. and Bank Leumi USA, as Bank Lenders– incorporated herein by reference to exhibit 10(s) to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2003, filed with the Commission on August 26, 2003.

19

(n)	Amendment to the Revolving Credit Agreement, dated November 24, 2003, by and among the Company, as Borrower, ABN AMRO Bank N.V., as Administrative Agent and Arranger, and ABN AMRO Bank N.V. and Bank Leumi USA, as Bank Lenders – incorporated herein by reference to exhibit 10(t) to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2004, filed with the Commission on August 27, 2004.
(o)	Cooperation Agreement, dated January 9, 2004, between Lazare Kaplan International Inc. and NamGem Diamond Manufacturing Company (PTY) Ltd. and Namdeb Diamond Corporation (PTY) Ltd. (certain portions of this agreement have been omitted pursuant to a request for confidential treatment) – incorporated herein by reference to exhibit 10(u) to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2004, filed with the Commission on August 27, 2004.
(p)	Agreement dated April 29, 2004 between Lazare Kaplan International Inc. and Sociedade de Comercializacao de Diamantes de Angola, SARL (SODIAM) (certain portions of this agreement have been omitted pursuant to a request for confidential treatment) – incorporated herein by reference to exhibit 10(v) to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2004, filed with the Commission on August 27, 2004.
(q)	Amendment to the Revolving Credit Agreement, dated September 13, 2004, by and among the Company, as Borrower, ABN AMRO Bank N.V., as Administrative Agent and Arranger, and ABN AMRO Bank N.V. and Bank Leumi USA, as Bank Lenders. – incorporated herein by reference to exhibit 10(x) to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2005, filed with the Commission on August 25, 2005.
(r)	Amendment to the Revolving Credit Agreement, dated November 24, 2004, by and among the Company, as Borrower, ABN AMRO Bank N.V., as Administrative Agent and Arranger, and ABN AMRO Bank N.V. and Bank Leumi USA, as Bank Lenders. – incorporated herein by reference to exhibit 10(y) to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2005, filed with the Commission on August 25, 2005.
(s)	Amendment to the Revolving Credit Agreement, dated May 6, 2005, by and among the Company, as Borrower, ABN AMRO Bank N.V., as Administrative Agent and Arranger, and ABN AMRO Bank N.V. and Bank Leumi USA, as Bank Lenders. – incorporated herein by reference to exhibit 10(z) to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2005, filed with the Commission on August 25, 2005.
(t)	Amendment to the Revolving Credit Agreement, dated July 15, 2005, by and among the Company, as Borrower, ABN AMRO Bank N.V., as Administrative Agent and Arranger, and ABN AMRO Bank N.V. and Bank Leumi USA, as Bank Lenders. – incorporated herein by reference to exhibit 10(aa) to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2005, filed with the Commission on August 25, 2005.
(u)	Revolving Credit Agreement dated September 28, 2004 by and between Lazare Kaplan International, as Borrower and HSBC Bank USA, National Association, as Lender. – incorporated herein by reference to exhibit 10(ab) to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2005, filed with the Commission on August 25, 2005.
(v)	Amended and Restated Credit Facility Agreement, dated December 1, 2004, between ABN AMRO Bank N.V., Tokyo Branch, Lazare Kaplan Japan Inc., and Lazare Kaplan

20

	International Inc. – incorporated herein by reference to exhibit 10(ac) to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2005, filed with the Commission on August 25, 2005.
(w)	Amendment to the Leon Tempelsman Retirement Benefit Plan of Lazare Kaplan International Inc., effective as of March 1, 2005. – incorporated herein by reference to exhibit 10(ae) to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2005, filed with the Commission on August 25, 2005.
(x)	William H. Moryto Retirement Benefit Plan of Lazare Kaplan International Inc., effective as of February 1, 2005. – incorporated herein by reference to exhibit 10(af) to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2005, filed with the Commission on August 25, 2005.
(y)	Credit Facility Letter Agreement, dated December 30, 2005, between Antwerpse Diamantbank NV and the Company. – incorporated herein by reference to exhibit 10(ag) to the Company’s Quarterly Report on Form 10-Q for the fiscal period ended November 30, 2005, filed with the Commission on January 13, 2006.
(z)	Credit Facility Letter Agreement, dated December 30, 2005, between Antwerpse Diamantbank NV and Lazare Kaplan Belgium, N.V. – incorporated herein by reference to exhibit 10(ah) to the Company’s Quarterly Report on Form 10-Q for the fiscal period ended November 30, 2005, filed with the Commission on January 13, 2006.
(aa)	Amendment to the Revolving Credit Agreement by and among the Company, as Borrower, ABN AMRO Bank N.V., as Administrative Agent and Arranger, and ABN AMRO Bank N.V and Bank Leumi USA, as Lenders, dated December 1, 2005. – incorporated herein by reference to exhibit 10(ai) to the Company’s Quarterly Report on Form 10-Q for the fiscal period ended November 30, 2005, filed with the Commission on January 13, 2006.
(ab)	Amendment, dated December 1, 2005, to the Revolving Credit Agreement by and between the Company, as Borrower and HSBC Bank USA, National Association, as Lender. – incorporated herein by reference to exhibit 10(aj) to the Company’s Quarterly Report on Form 10-Q for the fiscal period ended November 30, 2005, filed with the Commission on January 13, 2006.
(ac)	Amendment, dated December 1, 2005, to the Credit Facility Agreement among ABN AMRO Bank N.V., Tokyo Branch, Lazare Kaplan Japan Inc., and the Company. – incorporated herein by reference to exhibit 10(ak) to the Company’s Quarterly Report on Form 10-Q for the fiscal period ended November 30, 2005, filed with the Commission on January 13, 2006.
(ad)	Limited Liability Company Agreement of Bellataire International LLC, executed by DI Bahamas Inc. and LKI Bahamas Ltd. dated as of November 30, 2005 (certain portions of this agreement have been omitted pursuant to a request for confidential treatment). – incorporated herein by reference to exhibit 10(al) to the Company’s Quarterly Report on Form 10-Q for the fiscal period ended November 30, 2005, filed with the Commission on January 13, 2006.
(ae)	Amended and Restated Limited Liability Company Agreement of Bellataire LLC executed by the Company and Diamond Innovations, Inc. dated as of November 30, 2005 (certain portions of this agreement have been omitted pursuant to a request for confidential treatment). – incorporated herein by reference to exhibit 10(am) to the Company’s Quarterly Report on Form 10-Q for the fiscal period ended November 30, 2005, filed with the Commission on January 13, 2006.

21

(af)	Letter Agreement, dated as of November 30, 2005, from Diamond Innovations, Inc. to, and agreed to by, Pegasus Overseas Ltd., the Company, Bellataire International LLC, Bellataire LLC and Bellataire BVBA (certain portions of this agreement have been omitted pursuant to a request for confidential treatment).
(ag)	Second Amendment to Revolving Credit Agreement by and between the Company and HSBC Bank USA, National Association.
(ah)	Amendment to the Revolving Credit Agreement by and among the Company, as Borrower, ABN AMRO Bank N.V., as Administrative Agent and Arranger, and ABN AMRO Bank N.V. and Bank Leumi USA, as Lenders, dated April 13, 2007.
(ai)	Credit Facility Letter Agreement between the Company, as Borrower, and ABN AMRO Bank N.V., as Lender, dated April 13, 2007.

22

(13)	2006 Annual Report to Security Holders - incorporated herein by reference to the Company’s 2006 Annual Report to Stockholders to be filed with the Commission.
(14)	Code of Conduct for the President and senior financial officers of the Company – incorporated herein by reference to exhibit 14 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2004, filed with the Commission on August 27, 2004.
(21)	Subsidiaries
(23.1)	Consent of BDO Seidman, LLP (to be filed at a later date)
(31.1)	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2)	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1)	Certifications Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(99.1)	Amended and restated Audit Committee Charter – incorporated herein by reference to Exhibit A to the Company’s Definitive Proxy Statement for the fiscal year ended May 31, 2004, filed with the Commission on October 7, 2004.
(99.2)	Financial statements of Bellataire, pursuant to Rule 3-09 of Regulation S-X (to be filed at a later date).
(99.3)	Financial Statements of Gulfdiam, pursuant to Rule 3-09 of Regulation S-X (to be filed at a later date)
(c)	Not applicable.

23

SIGNATURE

          Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		LAZARE KAPLAN INTERNATIONAL INC.
		By	/s/ William H. Moryto
		William H. Moryto, Vice President and Chief Financial Officer
Dated:	August 29, 2007

          Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Maurice Tempelsman	Chairman of the	August 29, 2007
	Board of Directors
(Maurice Tempelsman)
/s/ Leon Tempelsman	Vice Chairman of the	August 29, 2007
	Board of Directors and
(Leon Tempelsman)	President (principal
	executive officer)
/s/ Lucien Burstein	Director	August 29, 2007
(Lucien Burstein)
/s/ Richard A. Berenson	Director	August 29, 2007
(Richard A. Berenson)
/s/ Robert A. Del Genio	Director	August 29, 2007
(Robert A. Del Genio)
/s/ William H. Moryto	Vice President and	August 29, 2007
	Chief Financial Officer
(William H. Moryto)	(principal financial
	and accounting officer)

24

EX-10.AG

LAZARE KAPLAN INTERNATIONAL INC.
SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT

          This Second Amendment (herein, the “Amendment”) to Revolving Credit Agreement is entered into as of August __, 2007, between Lazare Kaplan International Inc., a Delaware corporation (the “Borrower”) and HSBC Bank USA, National Association, as lender (the “Bank”).

PRELIMINARY STATEMENTS

          A.           The Borrower and Bank entered into a certain Revolving Credit Agreement, dated as of September 28, 2004, as amended by the First Amendment to Revolving Credit Agreement between Borrower and Bank dated as of December 1, 2005 (the Revolving Credit Agreement, as the same has been amended prior to the date hereof, being referred to herein as the “Credit Agreement”). All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Credit Agreement.

          B.           To induce Bank to continue to extend the credit facility to Borrower and to provide for certain requests of Borrower with respect to additional permitted Indebtedness, Bank and Borrower have agreed to amend the Credit Agreement as set forth below.

          Now, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

SECTION 1. AMENDMENTS.

          Subject to the satisfaction of the conditions precedent set forth in Section 2 below, the Credit Agreement shall be and hereby is amended as follows:

           1.1           The following definitions shall be inserted in appropriate alphabetical order in Section 1 of the Credit Agreement:

“ABN Amro Bank Line”: The secured line of credit given by ABN Amro to Gulfdiam in the aggregate amount of up to U.S.$50,000,000, to be used by Gulfdiam for the purpose of financing of purchases and sales of rough diamonds (and possibly working capital needs) in Angola.

“ABN Amro”: ABN Amro Bank N.V.

“Gulfdiam”: Gulfdiam DMCC, a joint venture partially owned by a wholly-owned subsidiary of Borrower.

“Gulfdiam Guaranty”: That certain unsecured limited guaranty executed by Borrower in favor of ABN Amro, pursuant to which Borrower shall guaranty 50% of the net outstanding obligations from time to time of Gulfdiam under the ABN Amro Bank Line, not to exceed U.S.$25,000,000 in the aggregate (or its equivalent in foreign currencies, at

conversion rates established by ABN Amro), plus any interest accrued thereon, charges relating thereto including, without limitation, monetary corrections, if any, and all costs and expenses of enforcement of the Gulfdiam Guaranty.

“Nedbank Guaranty”: That certain guaranty of up to $6,000,000 in Indebtedness (which shall include all Indebtedness of Subsidiaries of Borrower) executed by Borrower in favor of Nedbank, Limited, South Africa, which shall include guaranties by the Borrower and Subsidiaries of the Borrower in connection with such Indebtedness.

          1.2          The definition of “Commitment” appearing in Section 1 of the Credit Agreement shall be amended in its entirety to read as follows: “Commitment: The obligation of Bank to make Loans to the Borrower up to an aggregate outstanding principal amount not to exceed $20,000,000, as such amount may be reduced from time to time or terminated according to the terms of this Agreement, including, without limitation, Section 2.3(b) hereof.”

          1.3           The definition of “Termination Date” appearing in Section 1 of the Credit Agreement shall be amended in its entirety to read as follows: “Termination Date: June 30, 2008.”

          1.4           The following sentence is hereby added to the end of the definition of “Contingent Obligations” as follows: “Notwithstanding the forgoing, the Nedbank Guaranty and the Gulfdiam Guaranty shall not be deemed to be Contingent Obligations for the purposes of this Agreement.”

          1.5           Section 2.3 of the Credit Agreement shall be amended in its entirety to read as follows:

“Section 2.3. Repayments and Prepayments. (a) Optional Prepayment or Repayment. The Borrower hereby agrees to pay to Bank, no later than the Maturity Date, the entire unpaid principal of and interest on the Loans. The Borrower may elect to prepay the outstanding principal of all or any part of any Loan, without premium or penalty, provided that (a) any full or partial prepayment of the outstanding amount of any LIBOR Rate Loans pursuant to this Section 2.3(a) may be made only on the last day of the Interest Period relating thereto, and (b) any such prepayments of LIBOR Rate Loans shall be in a minimum amount of $300,000 or a whole multiple of $100,000 in addition thereto. The Borrower shall give Bank Notice of the date and amount of any proposed prepayment pursuant to this Section 2.3(a) (y) no less than three (3) LIBOR Business Days prior to any such proposed prepayment of any LIBOR Rate Loans, and (z) no later than 10:00 a.m., New York time, on the date of any such prepayment of any Base Rate Loan. The Borrower shall be entitled to reborrow before the Termination Date such amounts, upon the terms and subject to the conditions of this Agreement. Each repayment or prepayment of principal of any Loan shall be accompanied by payment of the unpaid interest accrued to such date on the principal being repaid or prepaid and shall be applied, in the absence of instruction by the Borrower, first to the principal of Base Rate Loans and then to the principal of LIBOR Rate Loans. If at any time the aggregate amount of

2

Loans outstanding shall exceed the Commitment, the Borrower shall immediately pay the amount of such excess to Bank for application to the Loans. The Borrower may elect to reduce or terminate the Commitment by a minimum principal amount of $100,000 or an integral multiple thereof of the amount reduced or, as the case may be, terminated, upon Notice to Bank given by 10:00 a.m., New York time, at least two (2) Business Days prior to the date of such reduction or termination. The Borrower shall not be entitled to reinstate the respective Commitment following such reduction or termination.

(b) Mandatory Repayment. The Borrower hereby agrees to pay to Bank on the following dates the principal amount of the Loans listed next to such date, each payment shall reduce the Commitment by each respective amount.

Date	Payment Amount
September 28, 2007	$1,000,000
October 31, 2007	$1,000,000
November 30, 2007	$1,000,000
December 31, 2007	$7,000,000
March 31, 2008	$5,000,000
June 30, 2008	the entire unpaid principal
	amount then outstanding

          1.6           Section 7.2(a) of the Credit Agreement shall be amended in its entirety to read as follows:

“(a) create, incur or assume any Indebtedness, other than (i) up to $145,000,000 in unsecured Indebtedness, including, without limitation, the Indebtedness to Bank, unsecured Indebtedness under the ABN AMRO Leumi Credit Agreement, Indebtedness (which shall include any Indebtedness of Lazare Kaplan Belgium (LKB) NV) under lines of credit from Antwerp Diamond Bank to it and such Subsidiary, including guaranties by Subsidiaries of the Borrower (including, without limitation, Material Domestic Subsidiaries) in connection with such Indebtedness, (ii) up to five hundred fifty million Yen in unsecured Indebtedness to ABN AMRO Bank N.V., Tokyo branch, including guaranties by Subsidiaries of the Borrower (including, without limitation, Material Domestic Subsidiaries) in connection with such Indebtedness, (iii) current liabilities of the Borrower not incurred through the borrowing of money or the obtaining of credit on an open account basis customarily extended, (iv) Indebtedness in respect of taxes or other governmental charges contested in good faith and by appropriate proceedings and for which adequate reserves have been taken, (v) Indebtedness

3

under the Nedbank Guaranty, (vi) Indebtedness under the Gulfdiam Guaranty, and (vii) other unsecured Indebtedness not in excess of $250,000;”

          1.7           Clause (vi) of Section 7.2(b) of the Credit Agreement shall be amended in its entirety to read as follows:

"and (vi) Liens granted by Subsidiaries of the Borrower on the property of such Subsidiaries located outside of the United States to secure Indebtedness permitted by Section 7.2(a)(i), Section 7.2(a)(v) or Section 7.2(a)(vi);"

          1.8           All references to the “Note” in the Credit Agreement shall be deemed to be references to the Second Amended and Restated Note, to be executed and delivered by the Borrower and payable to the order of the Bank, in the form of Exhibit A attached hereto.

SECTION 2. CONDITIONS PRECEDENT.

          The effectiveness of this Amendment is subject to the satisfaction of all of the following conditions precedent:

          2.1           The Borrower and Bank shall have executed and delivered this Amendment and Borrower shall have executed and delivered to Bank the Second Amended and Restated Note.

          2.2           Bank shall have received copies (executed or certified, as may be appropriate) of all legal documents or proceedings taken in connection with the execution and delivery of this Amendment.

          2.3           Legal matters incident to the execution and delivery of this Amendment shall be satisfactory to Bank.

          2.4           Lazare Kaplan Europe Inc. and Lazare Kaplan Japan Inc. shall have executed and delivered to Bank their consent to this Amendment in the form set forth below.

SECTION 3. REPRESENTATIONS.

          In order to induce Bank to execute and deliver this Amendment, the Borrower hereby represents to Bank that as of the date hereof, except as set forth in that certain letter from Bank to the Borrower dated as of the date hereof, the representations and warranties set forth in Section 5 of the Credit Agreement are and shall be and remain true and correct (except that the representations contained in Section 5(d) shall be deemed to refer to the most recent financial statements of the Borrower delivered to Bank) and the Borrower is in compliance with the terms and conditions of the Credit Agreement and no Default or Event of Default has occurred and is continuing under the Credit Agreement or shall result after giving effect to this Amendment.

4

SECTION 4. MISCELLANEOUS.

          4.1           Except as specifically amended herein, the Credit Agreement shall continue in full force and effect in accordance with its original terms. Reference to this specific Amendment need not be made in the Credit Agreement, the Note, or any other instrument or document executed in connection therewith, or in any certificate, letter or communication issued or made pursuant to or with respect to the Credit Agreement, any reference in any of such items to the Credit Agreement being sufficient to refer to the Credit Agreement as amended hereby.

          4.2           The Borrower agrees to pay on demand all costs and expenses of or incurred by Bank in connection with the negotiation, preparation, execution and delivery of this Amendment, including the fees and expenses of counsel for Bank.

          4.3           This Amendment may be executed in any number of counterparts, and by the different parties on different counterpart signature pages, all of which taken together shall constitute one and the same agreement. Any of the parties hereto may execute this Amendment by signing any such counterpart and each of such counterparts shall for all purposes be deemed to be an original. This Amendment shall be governed by the internal laws of the State of New York.

[SIGNATURE PAGE TO FOLLOW]

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               This Amendment to the Credit Agreement is entered into as of the date and year first above written.

LAZARE KAPLAN INTERNATIONAL INC.

By: _____________________

Name:

Title:

HSBC BANK USA, NATIONAL ASSOCIATION

By: _____________________

Name:

Title:

6

GUARANTOR’S ACKNOWLEDGEMENT AND CONSENT

          Each of the undersigned heretofore executed and delivered to Bank a Guaranty dated September 28, 2004. Each of the undersigned hereby consents to the Second Amendment to Revolving Credit Agreement as set forth above and confirms that its Guaranty and all of the undersigned’s obligations thereunder remain in full force and effect. Each of the undersigned further agrees that the consent thereof to any further amendments to the Credit Agreement shall not be required as a result of this consent having been obtained, except to the extent, if any, specifically required by the Guaranty referred to above.

LAZARE KAPLAN EUROPE INC.

By: ________________________

Name:

Title:

LAZARE KAPLAN JAPAN INC.

By: ________________________

Name:

Title:

7

EXHIBIT A

SECOND AMENDED AND RESTATED PROMISSORY NOTE

	New York, New York
$20,000,000.00	Dated as of September 24, 2004

     On June 30, 2008, FOR VALUE RECEIVED, the undersigned, LAZARE KAPLAN INTERNATIONAL INC., a Delaware corporation (the "Borrower") promises to pay to the order of HSBC BANK USA, National Association at its principal office at 452 Fifth Avenue, New York, New York 10018 the principal sum of Twenty Million Dollars ($20,000,000.00), or such lesser amount as may be advanced to the Borrower hereon pursuant to the Agreement hereinafter identified. This Note is subject to mandatory repayment in accordance with the terms and conditions set forth in the Agreement.

     The Borrower hereby promises to pay interest (computed on the basis of a year of 360 days for the actual number of days elapsed) on the principal amount from time to time remaining unpaid hereon from the date hereof until paid at the rates, and payable in the manner and on the dates, specified in the Agreement.

     All loans made by the payee hereof against this Note, and all payments made by the Borrower on account of the unpaid principal amount hereof, shall be recorded on the books and records of the holder hereof and endorsed hereon prior to any transfer hereof, and the Borrower agrees that in any action or proceeding instituted to collect or enforce collection of this Note, the amount shown as owing on this Note on the books and records of the holder hereof shall be deemed prima facie correct.

     This Note is issued under the terms and provisions of Revolving Credit Agreement bearing even date herewith by and between the Borrower and HSBC BANK USA, National Association, as amended (the "Agreement"), and this Note and the holder hereof are entitled to all of the benefits provided for by said Agreement or referred to therein, including the ability of Bank to accelerate the payment of the Note upon the occurrence of an Event of Default, to which Agreement reference is hereby made for a statement thereof.

     This Note shall be construed in accordance with, and governed by, the internal laws of the State of New York.

     The Borrower hereby promises to pay all costs and expenses (including attorneys' fees) suffered or incurred by the holder hereof in collecting this Note or in enforcing any rights in any collateral therefor. The Borrower hereby waives presentment for payment and notice of dishonor.

8

      This Note evidences loans made by Bank to the Borrower, from time to time and amends and restates in its entirety that certain Amended and Restated Demand Promissory Note dated as of September 28, 2004 given by the Borrower to Bank (the “Old Note”) which evidenced outstanding loans made by Bank up to a maximum aggregate principal amount of $30,000,000.

LAZARE KAPLAN INTERNATIONAL INC.
By:
	Name: William H. Moryto
	Title: Vice President & Chief Financial Officer

9

EX-10.AH

LAZARE KAPLAN INTERNATIONAL INC.
EIGHTH AMENDMENT TO REVOLVING CREDIT AGREEMENT

          This Eighth Amendment to Revolving Credit Agreement (herein, the “Amendment”) is entered into as of April __, 2007, between Lazare Kaplan International Inc., a Delaware. corporation (the “Borrower”), and ABN AMRO Bank N.V., as Administrative Agent (the “Agent”), ABN AMRO Bank N.V., as a lender (“ABN AMRO”) and Bank Leumi USA, as a lender (“Leumi” and together with ABN AMRO, the “Banks”).

PRELIMINARY STATEMENTS

          A. The Borrower, the Agent and the Banks entered into a certain Revolving Credit Agreement, dated as of August 14, 2002, as amended by the First Amendment to Revolving Credit Agreement between the Borrower and the Banks dated as of May 28, 2003, a Second Amendment to Revolving Credit Agreement dated as of November 24, 2003, a Third Amendment to Revolving Credit Agreement dated as of September 13, 2004, a Fourth Amendment to Revolving Credit Agreement dated as of November 24, 2004, a Fifth Amendment to Revolving Credit Agreement dated as of May 6, 2005, a Sixth Amendment to Revolving Credit Agreement dated as of July 15, 2005 and Seventh Amendment to Revolving Credit Agreement dated as of December 1, 2005 (the Revolving Credit Agreement, as the same has been amended prior to the date hereof, being referred to herein as the “Credit Agreement”). All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Credit Agreement.

          B. The Borrower has requested that the Banks extend the existing Termination Date of December 1, 2007 in accordance with Section 24 of the Credit Agreement, and make certain other amendments thereto and the Banks are willing to do so under the terms and conditions set forth in this Amendment.

          NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

SECTION 1. AMENDMENTS.

          Subject to the satisfaction of the conditions precedent set forth in Section 2 below, the Credit Agreement shall be and hereby is amended as follows:

          1.1. The definition of “Commitment” in Section 1 of the Credit Agreement shall be amended and restated in its entirety to read as follows:

“Commitment: The several obligations of (a) ABN AMRO to make Loans to the Borrower up to an aggregate outstanding principal amount not to exceed $27,200,000, and (b) Leumi to make Loans to the Borrower up to an aggregate outstanding principal amount not to exceed $10,000,000, as such amounts may be reduced from time to time or terminated according to the terms of this Agreement.”

          1.2. The definition of “Termination Date” in Section 1 of the Credit Agreement shall be amended and restated in its entirety to read as follows:

“Termination Date: December 1, 2008, or such later date as may be extended pursuant to Section 24 hereof.”

1.3. Section 8.3(a) shall be amended in its entirety to read as follows:
	“(a) as of the end of each of its fiscal quarters, Working Capital of not less than one hundred million dollars ($100,000,000);”
1.4. Section 9.1(f) shall be amended in its entirety to read as follows:
	“(i) any of the Borrower or its Subsidiaries shall be in default (after any applicable period of grace or cure period) under any agreement or agreements evidencing a Capitalized Lease or Indebtedness in excess of $100,000 owing to any Person or any affiliate thereof, or shall fail to pay such amounts thereunder when due, or within any applicable period of grace or (ii) any lender of the Borrower or its Subsidiaries (other than the Banks) shall demand repayment of any Indebtedness payable on demand under any uncommitted borrowing facility;”

SECTION 2. CONDITIONS PRECEDENT.

          The effectiveness of this Amendment is subject to the satisfaction of all of the following conditions precedent:

          2.1. The Borrower, the Agent and the Banks shall have executed and delivered this Amendment, and the Borrower shall have executed and delivered replacement Promissory Notes to the Banks.

          2.2. The Agent shall have received copies (executed or certified, as may be appropriate) of all legal documents or proceedings taken in connection with the execution and delivery of this Amendment to the extent the Agent or its counsel may reasonably request.

          2.3. Legal matters incident to the execution and delivery of this Amendment shall be satisfactory to the Agent and its counsel.

          2.4. Lazare Kaplan Europe Inc., Lazare Kaplan Japan Inc. and Lazare Kaplan Africa Inc. shall have executed and delivered to the Agent their consent to this Amendment in the form set forth below.

SECTION 3. REPRESENTATIONS.

          In order to induce the Banks to execute and deliver this Amendment, the Borrower hereby represents to the Banks that as of the date hereof the representations and warranties set forth in Section 6 of the Credit Agreement are and shall be and remain true and correct (except

- 2 -

that the representations contained in Section 6(d) shall be deemed to refer to the most recent financial statements of the Borrower delivered to the Banks) and the Borrower is in compliance with the terms and conditions of the Credit Agreement and no Default or Event of Default has occurred and is continuing under the Credit Agreement or shall result after giving effect to this Amendment.

SECTION 4. MISCELLANEOUS.

          4.1. Except as specifically amended herein, the Credit Agreement shall continue in full force and effect in accordance with its original terms. Reference to this specific Amendment need not be made in the Credit Agreement, the Notes, or any other instrument or document executed in connection therewith, or in any certificate, letter or communication issued or made pursuant to or with respect to the Credit Agreement, any reference in any of such items to the Credit Agreement being sufficient to refer to the Credit Agreement as amended hereby.

          4.2. The Borrower agrees to pay on demand all costs and expenses of or incurred by the Agent in connection with the negotiation, preparation, execution and delivery of this Amendment, including the fees and expenses of counsel for the Agent.

          4.3. This Amendment may be executed in any number of counterparts, and by the different parties on different counterpart signature pages, all of which taken together shall constitute one and the same agreement. Any of the parties hereto may execute this Amendment by signing any such counterpart and each of such counterparts shall for all purposes be deemed to be an original. This Amendment shall be governed by the internal laws of the State of New York.

[SIGNATURE PAGE TO FOLLOW]

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          This Eighth Amendment to Revolving Credit Agreement is entered into as of the date and year first above written.

LAZARE KAPLAN INTERNATIONAL INC.
By
	Name
	Title

Accepted and agreed to:

ABN AMRO BANK N.V., individually and as Agent
By
	Name
	Title
By
	Name
	Title

BANK LEUMI USA
By
	Name
	Title
By
	Name
	Title

GUARANTOR’S ACKNOWLEDGEMENT AND CONSENT

          Each of the undersigned heretofore executed and delivered to the Bank a Guaranty dated August 14, 2002. Each of the undersigned hereby consents to the Eighth Amendment to the Credit Agreement as set forth above and confirms that its Guaranty and all of the undersigned’s obligations thereunder remain in full force and effect. Each of the undersigned further agrees that the consent thereof to any further amendments to the Credit Agreement shall not be required as a result of this consent having been obtained, except to the extent, if any, required by the Guaranty referred to above.

LAZARE KAPLAN EUROPE INC.
By
	Name
	Title

LAZARE KAPLAN JAPAN INC.
By
	Name
	Title

LAZARE KAPLAN AFRICA INC.
By
	Name
	Title

EX-10.AI

April 13, 2007

Lazare Kaplan International Inc.
19 West 44^th Street
New York, New York 10036
Attention: Mr. William H. Moryto

Re: Facility Letter

Ladies and Gentlemen:

In accordance with our recent discussions, we are please to confirm ABN AMRO Bank N.V.’s (the “Bank”) agreement to hold available to Lazare Kaplan International Inc. (the “Borrower”) a revolving loan facility for own-note borrowings (“Loans”) up to a maximum aggregate principal amount of $7,800,000 (the “Facility”). The Facility will be available at the Bank’s discretion in accordance with this letter agreement (the “Facility Letter”) until the earlier to occur of (i) notice from the Bank that the Bank has terminated the Facility or (ii) December 1, 2008.

Reference is made to the Revolving Credit Agreement dated as of August 14, 2002 (as the same has been and may be amended, restated or otherwise modified, the “Credit Agreement”) by and among the Borrower, the Bank (as Administrative Agent, Arranger and a lender) and Bank Leumi USA. Terms used herein but not otherwise defined shall have the meaning assigned to such terms in the Credit Agreement and such terms are hereby incorporated herein by reference.

The Bank’s agreement to make the Loans under the Facility is subject to the following terms and conditions:

The proceeds of the Loans shall be used for working capital. The Borrower acknowledges and agrees that compliance by the Borrower with the terms and conditions set forth herein, merely entitles the Borrower to make requests for Loans hereunder, the granting of which, however, shall, in each case, remain within the Bank’s sole and absolute discretion.

The interest rate applicable to the Loans made under this Facility shall be either (i) the Base Rate or (ii) the LIBOR Rate plus LIBOR Rate Margin. Each Base Rate Loan shall bear interest for the period commencing with the Drawdown Date thereof and ending on the last day of the Interest Period with respect thereto at a rate per annum equal to the Base Rate. Each LIBOR Rate Loan shall bear interest for the period commencing with the Drawdown Date thereof and ending on the last day of there Interest Period with respect thereto at rate per annum equal to the sum of (i) the LIBOR Rate determined for such Interest Period plus (ii) LIBOR Rate Margin. Without limiting the uncommitted nature of this Facility Letter and the Bank’s right to demand repayment of the Loans hereunder, together with all interest accrued thereon and any other obligations thereunder, the Borrower promises to pay interest on each Loan in arrears on each Interest Payment Date with respect thereto and upon demand. The Borrower hereby further promises to pay to the order of the Bank, on demand, at the place of payment indicated in the

attached note, interest on any unpaid amounts under this Facility Letter following an Event of Default under the Credit Agreement or after demand by the Bank under this Facility Letter, at a rate per annum equal to the Base Rate plus two percent (2%) until such amount is paid in full.

Section 4.1 of the Credit Agreement shall be applicable to all Loans with interest based on the LIBOR Rate. Please be advised that Loans with interest based on the LIBOR Rate are made in the Bank’s sole and absolute discretion.

As security for the Facility, you will provide us with an unconditional guaranty in favor of the Bank by the Guarantors.

Without in any way limiting the uncommitted nature of the Facility, you agree that if any of the Borrower or its Subsidiaries shall default under any agreement or agreements evidencing any indebtedness in excess of $100,000 owing to any person, or if such Indebtedness shall be payable on demand, and demand shall be made, or any affiliate thereof, or shall fail to pay such amounts thereunder when due or demanded, irrespective of any applicable period of grace or cure period, then the Bank may, by written notice to the Borrower, demand, and the Borrower will make, immediate payment to the Bank of all Loans and other amounts outstanding under the Facility, including but not limited to interest, costs and expenses, whether mature, contingent or unmatured.

Without in any way affecting the uncommitted nature of this Facility, you agree that so long as this Facility is in effect and until all Loans and obligations incurred hereunder are paid in full, you shall comply with the covenants set forth in Section 8 of the Credit Agreement.

Upon the execution of this Facility Letter and the related note, the Borrower acknowledges that $2,800,000 of loans made under the Credit Agreement shall be allocated to the note under this Facility and such loans shall be deemed “Loans” under this Facility and shall be subject to the terms of this Facility Letter, including, but not limited to the Bank’s right to demand repayment of such Loans at any time.

The terms of this Facility Letter shall not be amended without the prior written consent of each of the Borrower and the Bank.

The Borrower shall pay to the Bank, on demand, the reasonable costs, expenses and disbursements (including, but not limited to legal fees) in connection with the preparation, interpretation, amendment, modification, cancellation, enforcement or restructuring of the Borrower’s obligations under this Facility Letter.

All obligations under this Facility are payable immediately on demand. In addition to any other rights ABN may have, and without limiting the uncommitted nature of this Facility, if the Borrower does not comply with any of its undertakings in this letter agreement, or an Event of Default shall have occurred under Section 9.1(a)-(j) of the Credit Agreement, or should any guaranty issued in support of this Facility be canceled or in any other way become ineffective or impaired, the Bank may, at its option, declare all Loans and other obligations under this Facility to the Bank to be, whereupon they shall become, immediately due and payable, without presentment, demand, protest or further notice of any kind, all of which the Borrower hereby waives.

For the avoidance of doubt, this is not a committed facility; no commitment fee shall be charged and the Bank may terminate this Facility or demand the Loans at any time. This Facility Letter shall be governed and construed in accordance with the laws of the State of New York.

If you are in agreement with the foregoing, kindly indicate your acceptance by signing the attached copy of this letter in the space provided and the attached promissory note and returning the same to us.

Very truly yours,

ABN AMRO Bank N.V.

Anna Martin	Ned Koppelson
Accepted and agreed:
LAZARE KAPLAN INTERNATIONAL INC.
By
Name
Title

PROMISSORY NOTE

New York, New York
April 13, 2007

$7,800,000

          On April 13, 2007, FOR VALUE RECEIVED, the undersigned, LAZARE KAPLAN INTERNATIONAL INC., a Delaware corporation (the “Borrower”) promises to pay to the order of ABN AMRO Bank N.V. at its New York office at 565 Fifth Avenue, New York, New York 10017, ON DEMAND the principal sum of Seven Million Eight Hundred Thousand Dollars ($7,800,000), or such lesser amount as may be advanced to the Borrower hereon pursuant to the Agreement hereinafter identified.

          The Borrower hereby promises to pay interest, at the place of payment, ON DEMAND (computed on the basis of a year of 360 days for the actual number of days elapsed) on the principal amount from time to time remaining unpaid hereon from the date hereof until paid at the rates, and payable in the manner specified in the Agreement and ON DEMAND or otherwise on the dates, specified in the Agreement.

          All loans made by the payee hereof against this Note, and all payments made by the Borrower on account of the unpaid principal amount hereof, shall be recorded on the books and records of the holder hereof and endorsed hereon prior to any transfer hereof, and the Borrower agrees that in any action or proceeding instituted to collect or enforce collection of this Note, the amount shown as owing on this Note on the books and records of the holder hereof shall be deemed prima facie correct.

          This Note is issued under the terms and provisions of Facility Letter bearing even date herewith by and among the Borrower and ABN AMRO BANK N.V, and this Note and the holder hereof are entitled to all of the benefits provided for by said Agreement or referred to therein, including the ability of the Bank to demand payment of the Note at any time.

          The Loans evidenced by this Note may be prepaid in whole or in part on any business day, without penalty or premium.

          Demand of payment of this Note shall be sufficiently made upon the Borrower by written, telex, telegraphic, electronic or telephonic notice given by or on behalf of the holder to the Borrower at its last known address. No other method of delivering actual demand or notice is precluded hereby, and any such notice or demand shall be fully effective, without further demand, presentment, protest or notice of any kind, all of which are hereby waived by the Borrower. No delay on the party of the holder in exercising any of its options, powers or rights, or partial or single exercise thereof shall constitute a waiver thereof. The options, powers and rights of the holder hereof specified herein are in addition to those otherwise created.

          This Note shall be construed in accordance with, and governed by, the internal laws of the State of New York.

          The Borrower hereby promises to pay all costs and expenses (including attorneys’ fees) suffered or incurred by the holder hereof in collecting this Note or in enforcing any rights in any collateral therefor.

LAZARE KAPLAN INTERNATIONAL INC.

By:

Its:

GUARANTY

          This Guaranty Agreement (the “Guaranty”) dated as of this 13th day of April, 2007, from each of the parties who have executed this Guaranty (being herein referred to collectively, as the “Guarantors” and individually, as a “Guarantor”) in favor of ABN AMRO Bank N.V. (“ABN AMRO”).

W I T N E S S E T H     T H A T :

          WHEREAS, LAZARE KAPLAN INTERNATIONAL INC., a Delaware corporation, (the “Borrower”) and ABN AMRO have entered into the Facility Letter, dated as of April 13, 2007 (such Facility Letter as the same may be amended, modified, supplemented, restated and/or replaced from time to time being hereinafter referred to as the “Facility Letter”), pursuant to which ABN AMRO as the “Bank” agreed, subject to certain terms and conditions, to extend credit and make certain other financial accommodations to the Borrower;

          WHEREAS, the Bank shall be hereinafter referred to as the “Guaranteed Creditor”;

          WHEREAS, pursuant to the Facility Letter, the Bank has required, among other things, that each Guarantor provide to the Guaranteed Creditor its payment guarantee of the credit facilities under the Facility Letter;

          WHEREAS, the Borrower provides each Guarantor that is a subsidiary of the Borrower (whether directly or indirectly) with substantial financial, management, administrative, and technical support, and each Guarantor will benefit, directly or indirectly, from credit and other financial accommodations extended by the Guaranteed Creditor to the Borrower;

          WHEREAS, as to each Guarantor that is not a subsidiary of the Borrower, it is in the best business interest of such Guarantor and its stockholders that the Borrower receive credit and other financial accommodations extended by the Guaranteed Creditor because of the mutual business interests and endeavors of the Borrower and such Guarantor;

          NOW, THEREFORE, for and in consideration of the benefits accruing to each Guarantor, the receipt and sufficiency are hereby acknowledged, each Guarantor hereby makes the following representations and warranties to the Guaranteed Creditor and hereby covenants and agrees with the Guaranteed Creditor as follows:

          Section 1. All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Facility Letter.

          Section 2. Each Guarantor hereby jointly and severally guarantees to the Guaranteed Creditor, the due and punctual payment when due of (a) any and all indebtedness, obligations, and liabilities of whatsoever kind and nature of the Borrower under the Facility Letter, whether direct or indirect, absolute or contingent, due or to become due, and whether now existing or hereafter arising and howsoever held, evidenced, or acquired, (the “Bank Obligations”), (b) any and all reasonable expenses and charges, legal or otherwise, suffered or incurred by the Guaranteed Creditor, in collecting or enforcing any of such indebtedness, obligations, or liabilities or in realizing on or protecting or preserving any security therefor, if any (all of the

foregoing being hereinafter referred to as the “Guaranteed Indebtedness”). In case of failure by the Borrower to punctually pay any Guaranteed Indebtedness, each Guarantor hereby jointly and severally agrees to make such payment or to cause such payment to be made punctually as and when the same shall become due and payable, whether at stated maturity, by acceleration or otherwise. All payments hereunder by any Guarantor shall be made in immediately available and freely transferable funds in Dollars without set-off, counterclaim or other defense or withholding or deduction of any nature. Notwithstanding anything in this Guaranty to the contrary, the right of recovery against a Guarantor under this Guaranty shall not exceed $1.00 less than the amount which would render such Guarantor’s obligations under this Guaranty void or voidable under applicable law, including fraudulent conveyance law.

          Section 3. Each Guarantor further jointly and severally agrees to pay on demand all reasonable out of pocket expenses, legal and/or otherwise (including court costs and reasonable attorneys’ fees), paid or incurred by the Guaranteed Creditor in endeavoring to collect the Guaranteed Indebtedness or any part thereof, or in enforcing or endeavoring to enforce any Guarantor’s obligations hereunder, or any part thereof, or in protecting, defending or enforcing this Guaranty in any litigation, bankruptcy or insolvency proceedings or otherwise.

          Section 4. Each Guarantor agrees that, upon demand, such Guarantor shall pay to the Guaranteed Creditor the full amount of the indebtedness hereby guaranteed when due (subject to the right of recovery from such Guarantor pursuant to the last sentence of Section 2 above) whether or not any one or more of the other Guarantors shall then or thereafter pay any amount whatsoever in respect to their obligations hereunder, provided, however, that the aggregate amount payable by the Guarantors shall in no event exceed the amount due and owing to the Guaranteed Creditor by the Borrower.

          Section 5. Each Guarantor agrees that such Guarantor will not exercise or enforce any right of exoneration, contribution, reimbursement, recourse or subrogation available to such Guarantor against any Person liable for payment of the indebtedness hereby guaranteed, or as to any security therefor, unless and until the full amount owing and payable to the Guaranteed Creditor of the Guaranteed Indebtedness has been fully paid and satisfied and the Facility Letter shall have expired or otherwise terminated. The payment by any Guarantor of any amount or amounts to the Guaranteed Creditor pursuant hereto shall not in any way entitle any such Guarantor, either at law, in equity or otherwise, to any right, title or interest (whether by way of subrogation or otherwise) in and to the Guaranteed Indebtedness or any part thereof or any collateral security therefor, if any, or any other rights or remedies in any way relating thereto or in and to any amounts theretofore, then or thereafter paid or applicable to the payment thereof howsoever such payment may be made and from whatsoever source such payment may be derived unless and until all of the Guaranteed Indebtedness and all costs and expenses suffered or incurred by the Guaranteed Creditor in enforcing this Guaranty have been paid and satisfied in full and the uncommitted agreement by the Guaranteed Creditor to extend any Guaranteed Indebtedness shall have expired or otherwise terminated and unless and until such payment in full and termination, any payments made by any Guarantor hereunder and any other payments from whatsoever source derived on account of or applicable to the Guaranteed Indebtedness or any part thereof shall be held and taken to be merely payments to the Guaranteed Creditor reducing pro tanto the indebtedness hereby guaranteed.

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          Section 6. This Guaranty is a continuing, absolute and unconditional guaranty of payment and not merely of collection, and shall remain in full force and effect as against each Guarantor until all of the Guaranteed Indebtedness shall be fully paid and satisfied and the Facility Letter shall have expired or have been terminated. The Guaranteed Creditor may at any time or from time to time release any Guarantor from its obligations hereunder or effect any compromise with any Guarantor and no such release or compromise shall in any manner impair or otherwise affect the obligations hereunder of the other Guarantors. No release, compromise, or discharge of any one or more of the Guarantors shall release, compromise or discharge the obligations of the other Guarantors hereunder.

          Section 7. In case of the dissolution, liquidation or insolvency (howsoever evidenced) of, or the institution of voluntary bankruptcy or receivership proceedings against the Borrower or the institution of involuntary bankruptcy proceedings against the Borrower that are not dismissed within sixty (60) days following the commencement thereto, all of the Guaranteed Indebtedness relating to the Borrower which is then existing shall immediately become due or accrued and payable from the Guarantors. All payments received from the Borrower or on account of the Guaranteed Indebtedness from whatsoever source, shall be taken and applied as payment on the indebtedness hereby guaranteed, and this Guaranty shall apply to and secure any ultimate balance that shall remain owing to the Guaranteed Creditor.

          Section 8. The liability hereunder shall in no way be affected or impaired by (and the Guaranteed Creditor is hereby expressly authorized to make from time to time, without notice to any of the Guarantors), any sale, pledge, surrender, compromise, settlement, release, renewal, extension, impairment, indulgence, alteration, substitution, exchange, change in, modification or other disposition of any of the Guaranteed Indebtedness, either express or implied, or of the Facility Letter or any other contract or contracts evidencing any thereof, or of any security or collateral therefor or any guaranty thereof. The liability hereunder shall in no way be affected or impaired by any acceptance or release by the Guaranteed Creditor of any security for or other guarantors upon any of the Guaranteed Indebtedness, or by any failure, neglect or omission on the part of the Guaranteed Creditor to realize upon or protect any of the Guaranteed Indebtedness, or any collateral or security therefor, if any, (including, without limitation, impairment of collateral and failure to perfect security interest in any collateral), or to exercise any lien upon or right of appropriation of any moneys, credits or property of the Borrower or any Guarantor, possessed by the Guaranteed Creditor, toward the liquidation of the Guaranteed Indebtedness, or by any application of payments or credits thereon. In order to hold any Guarantor liable hereunder, there shall be no obligation on the part of the Guaranteed Creditor, at any time, to resort for payment to the Borrower or to any other Guarantor, or to any other Person, its property or estate, or resort to any collateral, security, property, liens or other rights or remedies whatsoever, and the Guaranteed Creditor shall have the right to enforce this Guaranty against any Guarantor irrespective of whether or not other proceedings or steps are pending seeking resort to or realization upon or from any of the foregoing are pending.

          Section 9. All diligence in collection or protection, and all presentment, demand, protest and/or notice, as to any and everyone, whether or not the Borrower or the Guarantors or others, of dishonor and of default and of non-payment and of the creation and existence of any and all of said Guaranteed Indebtedness, and of any security and collateral therefor, and of the

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acceptance of this Guaranty, and of any and all extensions of credit and indulgence hereunder, are expressly waived.

          Section 10. The Guarantors waive any and all defenses, claims and discharges of the Borrower, or any other obligor or guarantor, pertaining to the Guaranteed Indebtedness, except the defense of discharge by irrevocable payment in full. Without limiting the generality of the foregoing, the Guarantors will not assert, plead or enforce against the Guaranteed Creditor any defense of waiver, release, discharge in bankruptcy, statute of limitations, res judicata, statute of frauds, anti-deficiency statute, fraud, incapacity, minority, usury, illegality or unenforceability which may be available to the Borrower or any other Person liable in respect of any of the Guaranteed Indebtedness, or any set-off available against the Guaranteed Creditor to the Borrower or any such other Person, whether or not on account of a related transaction. The Guarantors agree that the Guarantors shall be and remain jointly and severally liable for any deficiency remaining after foreclosure or other realization on any lien or security interest, if any, securing the Guaranteed Indebtedness, whether or not the liability of the Borrower or any other obligor for such deficiency is discharged pursuant to statute or judicial decision.

          Section 11. If any payment applied by the Guaranteed Creditor to the indebtedness hereby guaranteed is thereafter set aside, recovered, rescinded or required to be returned for any reason (including, without limitation, the bankruptcy, insolvency or reorganization of the Borrower or any other obligor), the Guaranteed Indebtedness to which such payment was applied shall for the purposes of this Guaranty be deemed to have continued in existence, notwithstanding such application, and this Guaranty shall be enforceable as to such of the Guaranteed Indebtedness as fully as if such application had never been made.

          Section 12. The liability of the Guarantors under this Guaranty is in addition to and shall be cumulative with all other liabilities of the Guarantors after the date hereof to the Guaranteed Creditor as a guarantor of the indebtedness hereby guaranteed, without any limitation as to amount, unless the instrument or agreement evidencing or creating such other liability specifically provides to the contrary.

          Section 13. Any invalidity or unenforceability of any provision or application of this Guaranty shall not affect other lawful provisions and applications hereof, and to this end the provisions of this Guaranty are declared to be severable. Without limiting the generality of the foregoing, any invalidity or unenforceability against any Guarantor of any provision or application of the Guaranty shall not affect the validity or enforceability of the provisions or application of this Guaranty as against the other Guarantors.

          Section 14. Any demand for payment on this Guaranty or any other notice required or desired to be given hereunder to any Guarantor shall be in writing (including, without limitation, notice by telecopy) and shall be given to the relevant party at its address or telecopier number set forth on the appropriate signature page hereof, or such other address or telecopier number as such party may hereafter specify by notice to the Guaranteed Creditor given by United States certified or registered mail or by telecopy. Each such notice, request or other communication shall be effective (i) if given by telecopier, when such telecopy is transmitted to the telecopier number specified in this Section and a confirmation of such telecopy has been received by the

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sender, or (ii) if given by mail, 5 days after such communication is deposited in the mail, certified or registered with return receipt requested, addressed as aforesaid.

          Section 15. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE LAW OF THE STATE OF NEW YORK (without regard to principles of conflicts of laws) in which state it shall be performed by the Guarantors and may not be waived, amended, released or otherwise changed except by a writing signed by the Banks. This Guaranty and every part thereof shall be effective upon delivery to the Guaranteed Creditor without further act, condition or acceptance by the Guaranteed Creditor, shall be binding upon the Guarantors and upon the legal representatives, successors and assigns of the Guarantors, and shall inure to the benefit of the Guaranteed Creditor, its successors, legal representatives and assigns. The Guarantors waive notice of the Guaranteed Creditor’s acceptance hereof. This Guaranty may be executed in counterparts and by different parties hereto on separate counterparts each of which shall be an original, but all together to be one and the same instrument.

          Section 20. Each Guarantor hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any State court sitting in New York City, for purposes of all legal proceedings arising out of or relating to this Guaranty or the transactions contemplated hereby. Each Guarantor irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such court has been brought in an inconvenient forum. EACH GUARANTOR AND, BY ACCEPTING THE BENEFITS OF THIS AGREEMENT, THE GUARANTEED CREDITOR HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED HEREBY.

[SIGNATURE PAGES TO GUARANTY AGREEMENT TO FOLLOW]

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          IN WITNESS WHEREOF, the Guarantors have caused this Guaranty to be executed and delivered as of the date first above written.

	GUARANTORS:
	LAZARE KAPLAN EUROPE INC.
Address:
c/o Lazare Kaplan International Inc.
529 Fifth Avenue
New York, New York 10017	By:
Telecopier No. 212-697-3197
	Its:
	LAZARE KAPLAN JAPAN INC.
Address:
c/o Lazare Kaplan International Inc.
529 Fifth Avenue
New York, New York 10017	By:
Telecopier No. 212-697-3197
	Its:
	LAZARE KAPLAN AFRICA INC.
Address:
c/o Lazare Kaplan International Inc.
529 Fifth Avenue
New York, New York 10017	By:
Telecopier No. 212-697-3197
	Its:

EX-13

LAZARE KAPLAN INTERNATIONAL INC.

2007
ANNUAL REPORT

Lazare Kaplan International Inc. 2007 Annual Report

Lazare Kaplan International Inc. is engaged in the cutting and polishing of ideal cut diamonds, which it laser inscribes and distributes to quality retail jewelers internationally under the brand name “Lazare Diamonds^®” Diamonds, whatever their size, which are cut and polished by Lazare Kaplan craftsmen, are finished to precise proportions, bringing out all of the diamond’s natural brilliance, sparkle and fire. In addition, Lazare Kaplan also cuts and polishes fine make (non-ideal) commercial diamonds and high pressure, high temperature (HPHT) processed diamonds sold under the Bellataire® diamonds brand name. These stones are sold through wholesalers and distributors and, to a growing extent, through retail jewelers. Lazare Kaplan is also engaged in the buying and selling of uncut rough diamonds.

American Stock Exchange
The Company’s common stock is traded on the American Stock Exchange under the ticker symbol LKI.
Form 10-K

Upon written request, a copy of the Company’s Form 10-K Annual Report without exhibits for the year ended May 31, 2007 as filed with the Securities and Exchange Commission, will be made available to stockholders without charge. Requests should be directed to the Controller, Mr. Ned Cochrane, Lazare Kaplan International Inc., 19 West 44^th Street, New York, New York 10036.

Annual Meeting
November 8, 2007
10 A.M.
Sofitel Hotel
45 West 44^th Street
Second floor, Trocadero Room
New York, New York 10036

Market Prices of Common Stock by Fiscal Quarter

	Fiscal 2007
	High			Low
First		$	9.70		$	7.88
Second			9.98			7.61
Third			10.95			8.40
Fourth			10.10			7.56

	Fiscal 2006
	High			Low
First		$	11.65		$	8.55
Second			10.95			8.12
Third			8.95			7.40
Fourth			8.79			7.58

As of August 20, 2007 there were 1,710 stockholders of record of the 8,259,300 issued and outstanding shares of the common stock of the Company, including CEDE & Co. and other institutional holders who held an aggregate of 3,119,972 shares of common stock as nominees for an undisclosed number of beneficial holders.

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To Our Shareholders:

     The Company’s financial year ended May 31, 2007 was one of continuing challenge for LKI and transition for the industry. While overall economic growth in by far the world’s largest market for polished diamonds, the U.S., remained relatively healthy, progressive monetary tightening and the appearance of strains in certain economic sectors as well as credit markets heightened uncertainty, and signaled a weakening of those conditions that have underpinned relatively high levels of discretionary consumer spending in recent years. More robust growth in Asia may bode well for the global economy in general and the long-term outlook for diamond consumption in particular, but off a much lower base than the U.S. where diamond jewellery buying is concerned.

     At the same time, a difficult restructuring for the industry continues. Increased margin pressures are strongly evident as the market adjusts to a model based not on upstream buffer stocks and associated price stability but on ultimate downstream demand and relative price volatility. As global sales of polished diamonds lagged the intake of rough diamonds in many categories during the year under review, leveraging within the manufacturing and distribution sectors continued to grow, with bank debt in this segment of the “pipeline” reaching historic highs. The industry’s principal source of rough supply, the Diamond Trading Company (DTC), distributed to each of its sightholders a notice of termination of all supply contracts with effect from the end of 2007, compounding concerns of a consolidation within the sector. The increasing prospect of competition from synthetic diamonds remains a trend to be taken into account. In short, a confluence of factors has substantially raised the systemic level of risk within the industry, without, to date, a corresponding upward recalibration of reward. It seems likely that this equation will lead to a consolidation of participants in the market, especially if a downturn in the U.S. economy eventuates.

     In the face of these challenging conditions, LKI has, during the past year, carefully managed its credit exposure, diversified its customer base, moved to align interests with key stakeholders, and implemented cost-saving and rationalization measures to visible effect in the second half of the year under review. These moves have not been painless, and have included redundancies, pay cuts, and staff redeployments in several areas. At a strategic level, we are refocusing the business to take into account the tougher operating context. The result of these ongoing Company measures, we believe, will be a platform designed both for durability in the face of present challenges, and for growth as the industry emerges from its present transition. That platform represents a cumulative and continuing significant investment by the Company in the future.

     Despite the difficult and uncertain trading conditions, LKI maintains its belief that the long-term fundamentals of the diamond industry remain sound, and that LKI is positioned to take advantage of substantial opportunities that will arise both during and after the industry’s current transition. Independent projections consistently anticipate that over the coming decade fresh global demand for polished diamonds will exceed new sources of rough supply, with much of the demand growth coming in Asia where

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LKI’s presence is longstanding. LKI is also well-situated in those southern African countries to which the center of gravity of global diamond manufacturing is moving, particularly Namibia and Botswana. As one of the sightholders historically ranked highly by the DTC, LKI is hopeful that when the new sightholder list is announced toward the end of 2007 its continuation as a DTC customer through the new three-and-a-half year contractual supply cycle will be confirmed.

     Turning from an overview to specific areas of Company activity: In Namibia, steps toward the restructuring of operations and ownership at NamGem to accommodate an expected increase in the quantity and quality of goods polished at the factory continue apace. These measures are in line with the Government of Namibia’s announcement in January 2007 of new marketing arrangements with the DTC, under which a new joint venture company (Namibia Diamond Trading Company, or NDTC) will be established with the aim, among other things, of supplying a target of $300 million per year in suitable rough supply to the local polishing sector. As an established leader in that sector, NamGem is well positioned to benefit from these new arrangements, which are scheduled to commence late this year. LKI expects to build on its existing technical role by taking up an approximate 50% ownership interest in NamGem, aligning interests with that company’s existing shareholders. Relatedly, the Company during the financial year entered into a contract with the U.S. Government’s Overseas Private Investment Corporation (OPIC) for a ten-year, $25.2 million line of project financing to be utilized at NamGem. Consummation of this OPIC financing will depend on the entry into a suitable rough diamond supply contract with NDTC.

     Implementation of LKI’s business plan in Botswana is proceeding on schedule, with prime land for a new polishing factory having now been acquired, and plans for that factory having been submitted for official approval. As in Namibia, the Government of Botswana has agreed with the DTC on new arrangements for the supply of rough diamonds to local beneficiators licensed by the Government. LKI, through a wholly-owned subsidiary, is one of sixteen companies that have been issued with such a license. The details of the supply arrangements remain uncertain, but continue to be developed by the DTC and Government and are slated for implementation during the coming calendar year. Building on its longstanding ties with Botswana—-the world’s largest and lowest-cost producer of rough diamonds—-LKI continues to engage proactively and constructively with Government and other key stakeholders in the pursuit of value-adding commercial opportunities throughout the domestic diamond sector.

     In South Africa, LKI’s joint venture with a broad-based women’s empowerment consortium, Nozala Diamonds, continues to develop a niche within the local beneficiation industry. Nozala has won recognition both within Government and publicly for its innovation in advancing the entry into the mainstream diamond sector of those traditionally confined to the industry’s margins, in step with the country’s stated developmental priorities. South Africa’s principal diamond polishing factories, including Nozala, face the prospect of potentially diminished supply from the traditional source of most of the nation’s supply,

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the DTC, due to the announced divestiture by DeBeers of a number of its existing South African mines. Nozala’s plans for expansion, endorsed by Governmental authorities at both provincial and national level, will depend on its ability, against the grain of this development, to increase its share of locally available supply.

     Angola remains on track to become an ever more important force in the global diamond industry, as the country’s exploration, mining and trading sectors benefit from the country’s peacetime revival after some three decades of civil war. LKI has built on its established track record in Angola by expanding both the breadth and volume of its activities, beginning with its ongoing contract with SODIAM—-the parastatal legally charged with marketing Angolan diamonds—-to buy rough stones produced in the informal sector and sell them globally. Increases in sales volumes through this channel have been enhanced by growth in the marketing of formal mine production by a freestanding entity, accounted for on an equity method, in which LKI holds a minority interest. Meaningful progress has also been made in diversification into exploration for new diamond deposits, in what are considered by the world’s major diamond mining companies to be highly attractive conditions geologically. Consistent with its local standing as a leading corporate citizen, LKI is fulfilling its commitments to support post-war reconstruction and development, through a ground-breaking public-private partnership aimed at improving living standards in Lunda Norte where much of the nation’s diamond patrimony is located.

     Russia is also becoming an increasingly important independent force in the global diamond market, on the back of its large-scale mine output (second only to Botswana’s) and its changing downstream arrangements, including a decreasing reliance on sales through the DTC. LKI’s position in Russia remains anchored by its agreement with the country’s major producer, A.K. Alrosa, for local polishing and international distribution of Russian diamonds. Discussions are underway with the relevant authorities on possible means of expanding and potentially diversifying this successful collaboration.

     The variances between rough and polished price movements during the year under review, as well as the imperative of prudent liquidity management, have given rise to rough diamond trading opportunities which LKI is positioned to take advantage of. LKI continues to focus on its capacity in this area, which remains an important adjunct to its core business in polished diamonds.

     LKI’s signature product, the branded Lazare Diamond®, is among the most venerable and visible product offerings in the industry, and an integral part of LKI’s broader strategy of pursuing and maintaining market niches that can generate sustainable premiums. LKI continues to expand its chain of branded retail boutiques in Asia, where brand consciousness retains a central importance in the luxury goods market. LKI is also building its network of dedicated counters and “store within a store” facilities at leading high-end retail jewellers. At the same time, the Company is expanding its presence in the fine cut, commercial make segment of the market and strengthening its bulk sales capacity in such established polished trading centres as Belgium, Israel and Hong Kong. Polished sales

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growth going forward is expected to be targeted largely on the Middle East and Asia. During the year under review the Company streamlined its polished sales functions, and pursued, in an increasingly price-sensitive environment, more reciprocal customer relationships premised on quality.

     LKI continues to rationalize its jewellery lines with the aim of increasing sales velocity, maintaining an emphasis on diamond-centered classical design and larger stones. Another source of differentiation for the Company is its Bellataire® line of HPHT-processed diamonds. During the year under review LKI’s partner in this product offering changed, with Sandvik, a large Swedish group specializing in advanced materials, high technology and engineering buying out the interest of Littlejohn. Discussions have begun with this new and welcome partner on how to make the most of Bellataire’s unique, established niche in the market.

     LKI has always taken pride in its own intellectual property and technological innovations, especially against the backdrop of progressively increasing industry reliance on technology. In that vein, the Company continued to invest heavily during Fiscal Year 2007 in protecting its valuable intellectual property rights against infringement. The Gemmological Institute of America (GIA) has been added as a defendant in the suit filed in 2006 against PhotoScribe Technologies Inc. asserting violation of certain of LKI’s patent rights. The Company intends vigorously to pursue this litigation, for which a trial date in early 2008 has now been set.

     LKI’s polishing factory in Puerto Rico, the first in the industry accorded SA8000 certification status for workplace excellence, represents intellectual capital of a different sort. The workforce there specializes in precision diamond polishing that continues to distinguish the Lazare Diamond and anchor the brand. However, Puerto Rico is not immune from the forces that are drawing beneficiation away from traditional centers toward lower-cost operations in Asia and greenfields ventures in southern Africa; and the scale of manufacturing at this factory is accordingly decreasing. Puerto Rico will progressively act as a service center for LKI’s distribution and manufacturing facilities elsewhere--a source, in a skills-based business, of valuable human and other resources on which those operations can draw.

     The Company remains committed to upholding the standards and values of transparency, accountability, and good corporate citizenship throughout the many jurisdictions in which it operates. This is a matter not just of an operating culture cultivated through over a century of straight dealing, but also, increasingly, of necessity for the diamond industry as a whole in an era of heightened consumer and other scrutiny. The Company’s operations are aligned not only with such binding measures as the USA PATRIOT Act and the Kimberley Process, but also with various voluntary systems of warranty, disclosure and proactive engagement developed by such bodies as the World Diamond Council and the United Nations Global Compact.

     Of course, in these matters as in others, and all the more so in challenging trading conditions, it is on the quality and commitment of its people that the Company ultimately depends. LKI thanks all its employees for their professionalism, their dedication, and their performance-for all the practical hard work which gives rise to that most impractical and alluring of objects, the diamond.

     And let us in closing, on a personal note and on behalf of all the directors of LKI, pay tribute to one of our Board members who passed away during the year under review. We salute Mike Feldman as a distinguished public servant and businessman, a dedicated and longstanding director of LKI, an exemplar of the good conduct to which the Company aspires, and above all a good friend and human being.

Maurice Tempelsman	Leon Tempelsman
Chairman of the	Vice Chairman of the
Board	Board

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Selected Financial Data

(In thousands, except share and per share data)		2007			2006		2005		2004		2003
Net sales	$	434,406		$	528,045	$	421,411	$	235,775	$	203,159
Income/(loss) before income tax provision/(benefit) and cumulative effect of change in accounting principle	$	(4,751	)	$	766	$	7,870	$	3,273	$	3,256
Income/(loss) before cumulative effect of change in accounting principle	$	(4,751	)	$	766	$	7,870	$	2,399	$	2,066
Net income/(loss)	$	(2,976	)	$	1,528	$	5,230	$	2,399	$	1,094	(1)
Basic earnings/(loss) per share before cumulative effect of change in accounting principle (based on the weighted average number of shares)	$	(0.36	)	$	0.18	$	0.62	$	0.28	$	0.24
Basic earnings/(loss) per share (based on weighted average number of shares)	$	(0.36	)	$	0.18	$	0.62	$	0.28	$	0.13
Diluted earnings/(loss) per share before cumulative effect of change in accounting principle (based on the weighted average number of shares)	$	(0.36	)	$	0.18	$	0.60	$	0.28	$	0.24
Diluted earnings/(loss) per share (based on the weighted average number of shares)	$	(0.36	)	$	0.18	$	0.60	$	0.28	$	0.13
At May 31:
Total assets	$	290,283		$	263,712	$	250,284	$	180,712	$	160,411
Long-term debt, long-term portion	$	36,060		$	64,176	$	60,000	$	34,726	$	16,756
Working capital	$	105,438		$	143,724	$	141,556	$	110,599	$	90,175
Stockholders’ equity	$	92,997		$	95,796	$	96,305	$	92,416	$	90,207

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

(1) Includes $1.0 million (net of tax) charge for the cumulative effect of a change in accounting principle.

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Management’s Discussion and
Analysis

          This Annual Report contains, in addition to historical information, certain forward-looking statements that involve significant risks and uncertainties. Such forward-looking statements are based on management’s belief as well as assumptions made by, and information currently available to, management pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The Company’s actual results could differ materially from those expressed in or implied by the forward-looking statements contained herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed herein and in Item 1—“Description of Business”, and elsewhere in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2007. The Company undertakes no obligation to release publicly the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this Annual Report or to reflect the occurrence of other unanticipated events.

          This discussion and analysis should be read in conjunction with the Selected Financial Data and the audited consolidated financial statements and related notes of the Company contained elsewhere in this report. In this discussion, the years “2007”, “2006” and “2005” refer to the fiscal years ended May 31, 2007, 2006 and 2005, respectively.

Overview

          The Company is engaged in the cutting, polishing and selling of branded and non-branded (“commercial”) diamonds. The Company’s premier product line is comprised of ideally proportioned diamonds which it markets internationally under the brand name “Lazare Diamonds^®”. Ideally proportioned diamonds are distinguished from non-ideal cut diamonds by the symmetrical relationship of their facets, which optimize the balance of brilliance, sparkle and fire in a polished diamond. The Company’s domestic manufacturing facility, located in Puerto Rico, is believed by the Company to be among the largest diamond cutting facilities in the United States. In addition, through various cooperative agreements, the Company cuts and polishes commercial diamonds which it markets to wholesalers, distributors and retail jewelers. Rough stones purchased by the Company are either selected for manufacturing or resold as rough diamonds in the marketplace.

          The Company’s overall revenues are, in part, dependent upon the availability of rough diamonds, the world’s known sources of which are highly concentrated. The Diamond Trading Company (“DTC”) is the world’s largest rough diamond selling organization. The Company has been a client of the DTC for approximately 60 years. The Company supplements its rough diamond needs by secondary market purchases and has entered into relationships with other primary source suppliers.

          The Company has a technical assistance and cooperation agreement regarding the purchasing and marketing of rough diamonds with Sociedade de Comercializacao de Diamantes de Angola SARL (“SODIAM”), the government entity responsible for development and marketing of diamonds produced in Angola. Informal sector rough diamond buying from this operation commenced during the first fiscal quarter of 2005. During the third fiscal quarter of 2006 the Company’s rough buying operations expanded to include buying in the Angolan formal sector. During the second fiscal quarter 2007 Angolan formal sector operations were transferred to separate joint venture companies. The Company is currently negotiating a further expansion and restructuring of its Angolan operations to include exploration and development through various additional joint ventures.

          The Company has an agreement with AK ALROSA of Russia, which is the largest producer of rough diamonds in Russia. Under the terms of this agreement, the Company sells polished diamonds that are cut in facilities jointly managed and supervised by the Company and ALROSA personnel. The proceeds from the sale of these polished diamonds, after deduction of rough diamond cost, generally are shared equally with ALROSA.

          The Company has signed a strategic cooperation agreement with NamGem Diamond Manufacturing Company (PTY) Ltd. (“NamGem”) for the cutting and polishing of diamonds in Namibia. NamGem is Namibia’s flagship venture in the international diamond polishing industry. Under the terms of the agreement, the Company provides technical manufacturing assistance and supervises the manufacture of the Company’s rough diamonds deemed suitable to cut and polish. Production under this agreement commenced during the third quarter of 2004.

          During September 2006 the Company and the Overseas Private Investment Corporation, an independent agency of the United States Government (“OPIC”) signed a commitment letter pursuant to

8

which OPIC committed to provide approximately $25 million of long-term financing in support of the acquisition of certain rough diamonds to be cut and polished in Namibia. Pursuant thereto, a subsidiary of the Company and OPIC entered into a financing agreement in February 2007. The Company is currently in negotiations with third parties regarding changes to its existing Namibian operations. Pending a satisfactory outcome of these negotiations and subject to various conditions precedent under the financing agreement, the Company anticipates initial borrowing under the facility to commence during fiscal 2008.

          In November of 2004 the Company signed an agreement with Nozala Investments (Pty) Ltd., a broadly based women’s empowerment investment group, for cooperation in South Africa’s diamond sector. The agreement contemplates diamond mining, cutting, polishing, and distribution. The joint venture is in line with the South African Government’s recently announced program to promote new entrants and investment in the domestic diamond sector, increasing the sector’s contribution to economic development. Cutting and polishing activities which concentrate on local sources of rough diamond supply commenced during the third fiscal quarter of 2006.

          In February 2006, Lazare Kaplan Botswana (Pty) Ltd., a wholly owned subsidiary, was granted a license from the Government of Botswana to cut and polish diamonds in that country.

          The Company continues its efforts to develop additional sources of rough diamonds, including potential opportunities in Africa.

          Through February 2009, the Company’s wholly-owned subsidiary, Pegasus Overseas Ltd. (“POL”) has an exclusive agreement with Diamond Innovations Inc. (“DI”) under which POL will market natural diamonds that have undergone a new high pressure, high temperature (HPHT) process to improve the color of certain gem diamonds without reducing their all-natural content. POL sells diamonds that have undergone the HPHT process under the Bellataire® brand name.

          In November 2005, the Company (including certain of its subsidiaries) amended certain terms of its agreement with DI relating to the sourcing, manufacture and marketing of Bellataire diamonds. The amendment and related agreements seek to increase the sales and profitability of Bellataire diamonds by more closely aligning the economic interests of the parties through shared management of product sourcing, manufacturing and marketing as well as the sharing of related costs.

          While the Company believes that its success in maintaining quantities and qualities of polished inventory that best meet its customers’ needs is achieved through its ability to fully integrate its diverse rough and polished diamond sources, any significant disruption of the Company’s access to its primary source suppliers could have a material adverse effect on the Company.

Results of Operations

2007 Compared to 2006

Net Sales

               Net sales in 2007 and 2006 were $434.4 million and $528.0 million, respectively. The decrease in net sales primarily reflects the transfer during the second fiscal quarter 2007 of certain rough trading operations to a separately operated joint venture company, which the Company accounts for on the equity method.

               Polished diamond revenues in 2007 were $143.3 million, as compared to $149.8 million in 2006. This decrease reflects lower sales of branded diamonds partially offset by increased sales of fine cut commercial diamonds. Factors leading to the decrease in polished sales include liquidity concerns throughout the diamond and jewelry distribution chain, reluctance on the part of U.S. retailers to take stock positions and market resistance to price increases the Company seeks to pass through to customers.

               Rough diamond sales in 2007 were $291.1 million, as compared to $378.3 million in 2006. The decrease in rough diamond sales reflects the transfer of formal sector Angolan rough diamond buying and trading operations to a joint venture entity, which the Company accounts for on the equity method. Rough diamond revenue for 2007 includes $1.0 million received in connection with certain sourcing and financing initiatives.

Gross Profit

               During 2007 gross margin on net polished sales was 9.9% compared to 13.8% in 2006. The decrease in polished gross margin reflects a shift in sales mix with a higher percentage of polished sales derived from fine cut commercial diamonds which typically carry a lower gross margin than branded

9

diamonds. This decrease also reflects increased rough diamond prices which the Company was unable to fully pass through to customers and efforts by the Company to sell certain slower moving commercial diamonds at reduced prices. Additionally, polished gross margin reflects reduced revenue and margin from laser inscription fees (see “Legal Proceedings”).

               Rough gross margin during 2007 was 3.0% compared to 2.4% in the prior year. Increased rough gross margin reflects improving market conditions and a reduction in allocable sourcing costs incurred by the Company’s Angolan informal sector operations.

               As a result of the foregoing, overall gross margin percentage during 2007 was 5.3% compared to 5.7% in 2006.

Selling, General and Administrative Expenses

               Selling, general and administrative expenses for 2007 were $25.7 million, as compared to $24.8 million for 2006. The increase for 2007 reflects increased legal costs associated with litigation the Company initiated to protect certain of its intellectual property rights offset by a reduction in employee salaries and wages. Selling, general and administrative expense for 2007 reflects the reimbursement of $1.2 million of costs incurred in connection with certain sourcing and financing initiatives. Selling, general and administrative expense for 2006 is net of $1.5 million which a third party agreed to pay the Company in connection with the settlement of certain contractual obligations.

Interest Expense

               Interest expense for 2007 was $5.9 million, as compared to $3.8 million for 2006. This increase primarily reflects increased levels of borrowing and higher interest rates during 2007. Increased borrowings during 2007 primarily related to the expansion of rough sourcing in Angola.

Equity in (Income) / Loss of Joint Ventures

               During 2007 and 2006 the Company entered into several joint venture agreements relating to sourcing, cutting, polishing, processing and sales of diamonds. The Company’s share of operations aggregated a profit of $3.9 million in 2007 and a loss of approximately $0.5 million in 2006.

Income Tax

               The Company’s 2007 and 2006 income tax benefit primarily reflects its ability to carryforward certain operating losses for U.S. income tax purposes. For 2006 this tax benefit was partially offset by tax expense attributable to the repatriation of certain previously untaxed accumulated foreign earnings.

Earnings Per Share

               Basic and fully diluted earnings/(loss) per share were $(0.36) for 2007 and $0.18 for 2006. Basic earnings per share is computed based upon the weighted average number of common shares outstanding. Diluted earnings per share include the impact of dilutive stock options.

2006 Compared to 2005

Net Sales

               Net sales in 2006 of $528.0 million were $106.6 million or 25% higher than net sales in 2005.

               Polished diamond revenues in 2006 were $149.8 million, as compared to $156.9 million in 2005. This decrease reflects lower sales of branded diamonds partially offset by increased sales of fine cut commercial diamonds. Factors leading to the decrease in polished sales include an overall slowing of the U.S. economy, liquidity concerns throughout the diamond and jewelry distribution chain, reluctance on the part of U.S. retailers to take stock positions prior to the start of the 2006 holiday season, and market resistance to price increases the Company seeks to pass through to customers.

               Rough diamond sales in 2006 were $378.2 million, an increase of $113.8 million over 2005. The increase in rough diamond sales is primarily related to an increase in the Company’s Angolan rough buying and trading operations. This increase also reflects an increase in the supply of rough diamonds made available to the Company by other rough diamond producers.

Gross Profit

               During 2006 gross margin on net polished sales was 13.8% compared to 16.2% in 2005. The decrease in polished gross margin reflects a shift in sales mix toward lower margin fine cut commercial diamonds, and sales incentives offered to liquidate slower moving commercial diamond inventory compared to the prior year.

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          Rough gross margin during 2006 was 2.4% compared to 3.5% in the prior year. The decrease in rough gross margin percentage reflects increased rough costs and associated fees charged by diamond producers at a time of excess supply and soft demand from diamond manufacturers.

          As a result of the foregoing, overall gross margin percentage during 2006 was 5.7% compared to 8.2% in 2005.

Selling, General and Administrative Expenses

          Selling, general and administrative expenses for 2006 were $24.8 million, as compared to $24.5 million for 2005. The increase for 2006 reflects legal, consulting and other costs associated with the negotiation and implementation of sourcing and manufacturing operations in Southern Africa. Additionally, the increase in costs reflects expenses incurred in connection with the renegotiation of certain agreements relating to the manufacture and distribution of Bellataire diamonds and the settlement of certain third party obligations related thereto. Amounts expensed are net of $1.5 million which a third party has agreed to pay the Company in connection therewith.

Interest Expense

          Interest expense for 2006 was $3.8 million, as compared to $2.4 million for 2005. This increase primarily reflects increased levels of borrowing and higher interest rates during 2006. Increased borrowings during 2006 primarily related to the expansion of rough sourcing in Angola and cutting and polishing operations in Namibia.

Equity in (Income) / Loss of Joint Ventures

          During 2006 the Company entered into several joint venture agreements relating to sourcing, cutting, polishing, processing and sales of diamonds. The Company’s share of initial operations aggregated a loss of approximately $0.5 million.

Income Tax

          The Company’s 2006 income tax benefit reflects its ability to carryforward certain operating losses for U.S. income tax purposes, offset in part by tax expense attributable to the repatriation of certain previously untaxed accumulated foreign earnings. The tax provision for 2005 generally approximated the U.S. statutory federal income tax rate.

Earnings Per Share

          Basic and fully diluted earnings per share for 2006 were each $0.18. Basic and fully diluted earnings per share for 2005 were $0.62 and $0.60, respectively. Basic earnings per share is computed based upon the weighted average number of common shares outstanding. Diluted earnings per share include the impact of dilutive stock options.

New Accounting Pronouncements

          In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires financial statement recognition of the impact of a tax position if a position is more likely than not of being sustained on audit, based on the technical merits of the position. Additionally, FIN 48 provides guidance on measurement, derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The provisions of FIN 48 will be effective as of the beginning of the Company’s fiscal year 2008, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of FIN 48 on its financial position, results of operations and cash flows.

           In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact of SFAS 157 on its financial position, results of operations and cash flows.

           In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Asset and Financial Liability: Including an amendment of FASB Statement No. 115” (“SFAS 159”). The standard permits all entities to elect to measure certain financial instruments and other items at fair value with changes in fair value reported in earnings. SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. The Company is currently evaluating the impact of SFAS 159 on its financial position, results of operations and cash flows.

Foreign Operations

          International business represents a major portion of the Company’s revenues and profits. All purchases of rough diamonds worldwide are denominated in U.S. dollars. All of the Company’s foreign sales are denominated in U.S. dollars, with the exception of those sales made by the Company’s subsidiary, Lazare Kaplan Japan Inc., which are denominated in Japanese yen. The functional currency for Lazare Kaplan Japan is the Japanese yen and, as of May 31, 2007 and 2006, the Company

11

recognized cumulative foreign currency translation adjustments with regard to the activities of Lazare Kaplan Japan in the amount of $(766,000) and $(425,000) respectively, which are shown as a component of stockholders’ equity in the accompanying balance sheets.

Liquidity—Capital Resources

          The Company used $9.3 million and $33.7 million of cash flow from operations in 2007 and 2006, respectively. The Company’s usage of cash flow from operations, funded by an increase in borrowings, was primarily used to expand inventory sourcing and support increased sales volume.

          The Company’s working capital at May 31, 2007, 2006 and 2005 was $105.4 million, $143.7 million and $141.6 million, respectively. The decrease in working capital for 2007 primarily reflects a shift in borrowing by the Company with a greater portion of current year operations financed by short-term loan facilities.

          Fixed asset additions of $0.5 million in 2007 and $1.8 million in 2006 primarily reflect the expansion and upgrading of manufacturing facilities and equipment.

          The Company has a $35.0 million long-term unsecured, committed revolving loan agreement and a $10.0 million unsecured, uncommitted credit agreement. The Company may borrow under the committed facility (including up to $1.0 million under letters of credit, $0.7 million issued at May 31, 2007) through December 1, 2008. The loan term may be extended in one-year increments commencing November 30, 2007, subject to the consent of the lending banks. Borrowings under both agreements bear interest at (a) the higher of the banks base rate or one half of one percent above the Federal Funds Effective Rate, or (b) 160 basis points above LIBOR. The applicable interest rate is contingent upon the method of borrowing selected by the Company. The proceeds of these facilities are available for the Company’s working capital needs. The loan agreements contain certain provisions that require, among other things, (a) maintenance of defined levels of working capital, net worth and profitability, and (b) limitation on other borrowing levels, investments, capital expenditures, dividends and the repurchase of treasury shares. As of May 31, 2007 and 2006, the balance outstanding under both facilities was $41.0 million and $38.0 million, respectively.

          The Company maintains an additional unsecured, committed revolving loan agreement with a bank. At May 31, 2007 the maximum amount available under the facility was $30.0 million. The maximum borrowing limit permitted under the facility is scheduled to reduce to $20.0 million on June 30, 2007, with further reductions of $1.0 million at the end of September, October and November 2007, $7.0 million on December 31, 2007 and $5.0 million on each of March 31, 2008 and June 30, 2008. Borrowings under this agreement bear interest at (a) the higher of the banks base rate or one half of one percent above the Federal Funds Effective Rate, or (b) 160 basis points above LIBOR. The applicable interest rate is contingent upon the method of borrowing selected by the Company. The proceeds of this facility are available for working capital purposes. The loan agreement contains certain provisions that require, among other things, (a) maintenance of defined levels of working capital, net worth and profitability, (b) limitations on borrowing levels, investments and capital expenditures and (c) limitations on dividends and the repurchase of treasury shares. Borrowings under this loan agreement amounted to $26.0 million and $29.2 million at May 31, 2007 and 2006, respectively.

          The Company has a $25.0 million and a $45.0 million unsecured, uncommitted line of credit with a bank. Borrowings under both lines bear interest at a rate 160 basis points above the 90 day LIBOR. As of May 31, 2007 and 2006, the balance outstanding under both lines of credit was $53.5 million and $40.8 million, respectively. Borrowings under these lines are available for the Company’s working capital requirements and are payable on demand.

          A subsidiary of the Company maintains a loan facility which enables it to borrow up to 520 million Japanese yen (approximately $4.3 million U.S. dollars) at an interest rate 1% above the Japanese yen LIBOR through November 2008. Borrowings under the facility are available for working capital purposes. The Company guarantees repayment of amounts borrowed. Borrowings under the loan are used in support of its operations in Japan. As of May 31, 2007 and 2006 the balance outstanding under this facility was $1.1 million and $4.2 million U.S. dollars, respectively.

          The Company’s long-term facilities do not contain subjective acceleration clauses or require the Company to utilize a lockbox whereby remittances from the Company’s customers reduce the debt outstanding.

          Long-term debt of $36.1 million outstanding at May 31, 2007 is scheduled to be repaid in the fiscal year ended May 31, 2009. At May 31, 2007 the Company was not in compliance with an annual financial covenant under certain of its loan facilities.

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The Company has since received waivers from its lenders.

          The following table includes aggregate information about the Company’s contractual obligations including interest as of May 31, 2007 and the periods in which payments are due. Certain of these amounts are not required to be included in the Company’s consolidated balance sheet (in millions):

Payments Due by          Period	Total		Less than 1 year		1 - 3 years		4 - 5 years		Over 5 years
Debt	$	133.2	$	92.2	$	41.0	$	—	$	—
Operating Leases		8.3		0.8		1.9		1.3		4.3
Total Contractual Cash Obligations	$	141.5	$	93.0	$	42.9	$	1.3	$	4.3

          Management believes the Company has the ability to meet its current and anticipated financing needs for the next twelve months with the facilities in place and funds from operations.

          Stockholders’ equity was $93.0 million at May 31, 2007 as compared to $95.8 million at May 31, 2006. This decrease primarily reflects current year results of operations. No dividends were paid to stockholders during the year ended May 31, 2007.

Critical Accounting Policies

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

          Revenue Recognition—The Company recognizes revenue when title and risk of ownership have passed to the buyer, the earnings process is complete and the sale price is fixed or determinable. In addition, in certain instances, the Company may be entitled to receive incremental profits from its customers on the sale of certain stones. Such profits are recognized as revenue when realized. Conversely, in certain instances, the Company is obligated to share profits it realizes on the sale of stones. This additional cost is included in cost of sales when the related revenue is recognized. When necessary, the Company provides for estimated returns (where a right to return exists) in the same period the revenue is recorded. These estimates are based upon historical analysis, customer agreements and/or currently known factors that arise in the normal course of business.

          Equity in (income) / loss of joint ventures – The Company utilizes the equity method of accounting to record its proportionate share of income and losses from joint ventures.

          Inventories—Inventories, including amounts on consignment with customers, are stated at the lower of cost or market, using the average cost method. The Company provides an inventory reserve equal to the difference between the cost of the inventory and the estimated market value, to ensure inventories are stated at the lower of cost or market. The determination of market value is highly subjective as it is based on the relative significance assigned to various attributes of a diamond, including carat weight, color, clarity and quality of cut. If actual market conditions are less favorable than those projected by management, inventory write-downs may be required.

          Allowance for Doubtful Accounts—Accounts receivable are reduced by an allowance for amounts that may be uncollectible in the future. Estimates are used in determining the allowance for doubtful accounts and are based on the Company’s ongoing credit evaluations of customers, customer payment history and account aging.

          Deferred Tax Assets—Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) net operating loss carryforwards. The Company provides a valuation allowance for the estimated unrecoverable portion of the deferred tax assets. Factors that the Company considers in assessing the likelihood of future realization include the forecast of future taxable income and available tax planning strategies. Realization of the net deferred tax assets is dependent on generating sufficient taxable income prior to the expiration of net operating loss carryforwards. Although realization is not assured, management believes it is more likely than not that the net deferred tax asset will be realized. The Company will continue to monitor and assess the recoverability of its deferred tax assets in the future for changes to the tax code, change in statutory tax rates and the projected level of taxable income.

          Asset Impairment—The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the

13

undiscounted cash flows estimated to be generated by the related assets are less than the carrying amounts of those assets. In assessing the recoverability of the Company’s long-lived assets, the Company makes assumptions in determining estimated future sales, profit margin and expenses to arrive at estimated future cash flows. If the Company determines, based upon such measures, that the carrying amount is impaired, the long-lived asset will be written down to its recoverable value based upon either the discounted future cash flows or appraised fair value. The fair value of assets could be different using different estimates and assumptions in these valuation techniques.

Business Developments

          In March 1999, the Company and ALROSA entered into a ten year agreement to expand their relationship in the cutting, polishing and marketing of gem diamonds for up to $100 million a year. Under the terms of this agreement, the Company and ALROSA agreed to refurbish certain diamond cutting facilities in Russia. At present, the Company’s operations in Russia are consolidated in two facilities, both of which are fully operational.

           During the fourth quarter of 2004 the Company signed a four year technical assistance and cooperation agreement regarding the purchasing and marketing of rough diamonds with SODIAM, the government entity responsible for the development and marketing of diamonds produced in Angola. The Company began active buying in the Angolan informal sector during the first quarter of fiscal 2005. During the third fiscal quarter of 2006 the Company’s rough buying operations expanded to include buying in the Angolan formal sector. During the second fiscal quarter 2007 Angolan formal sector operations were transferred to separate joint venture companies. The Company is currently negotiating a further expansion and restructuring of its Angolan operations to include exploration and development through various additional joint ventures.

          During the third quarter of 2004 the Company signed a cooperation agreement with NamGem for the cutting and polishing of diamonds in Namibia. NamGem is Namibia’s flagship venture in the international diamond polishing industry. Under the terms of the agreement the Company provides marketing and technical manufacturing assistance to NamGem. The Company purchases rough diamonds and supervise’s the manufacturing of those deemed suitable to cut and polish. The Company pays NamGem for manufacturing on a fee for services basis. All rough and polished diamonds are bought and sold by the Company for its account.

          During September 2006 the Company and the Overseas Private Investment Corporation, an independent agency of the United States Government (“OPIC”) signed a commitment letter pursuant to which OPIC committed to provide approximately $25 million of long-term financing in support of the acquisition of certain rough diamonds to be cut and polished in Namibia. Pursuant thereto, a subsidiary of the Company and OPIC entered into a financing agreement in February 2007. The Company is currently in negotiations with third parties regarding changes to its existing Namibian operations. Pending a satisfactory outcome of these negotiations and subject to various conditions precedent under the financing agreement, the Company anticipates initial borrowing under the facility to commence during fiscal 2008.

          In November of 2004 the Company signed an agreement with Nozala Investments (Pty) Ltd., a broadly based women’s empowerment investment group, for cooperation in South Africa’s diamond sector. The agreement contemplates diamond mining, cutting, polishing, and distribution. The joint venture is in line with the South African Government’s recently announced program to promote new entrants and investment in the domestic diamond sector, increasing the sector’s contribution to economic development. Cutting and polishing activities which concentrate on local sources of rough diamond supply commenced during the third fiscal quarter of 2006.

          Through February 2009, the Company’s wholly-owned subsidiary, Pegasus Overseas Ltd. (“POL”) has an exclusive agreement with Diamond Innovations Inc. (“DI”) under which POL will market natural diamonds that have undergone a high pressure, high temperature (HPHT) process to improve the color of certain gem diamonds without reducing their all-natural content. The process is permanent and irreversible and it does not involve treatments such as irradiation, laser drilling, surface coating or fracture filling and is conducted before the final cutting and polishing by the Company. The process will be used only on a select, limited range of natural diamonds with qualifying colors, sizes and clarities for both round and fancy shapes. The estimated number of gemstones with characteristics suitable for this process is a small fraction of the overall diamond market. POL sells only diamonds that have undergone the HPHT process under the Bellataire® brand name. In connection with this

14

agreement, the Company granted a security interest in POL’s diamond inventory amounting to $13.5 million at May 31, 2006.

          In November 2005, the Company (including certain of its subsidiaries) amended certain terms of its agreement with DI relating to the sourcing, manufacture and marketing of Bellataire diamonds. The amendment and related agreements seek to increase the sales and profitability of Bellataire diamonds by more closely aligning the economic interests of the parties through shared management of product sourcing, manufacturing and marketing as well as the sharing of related costs.

          As a concerned member of the international diamond industry and global community at large, the Company fully supports and complies with policies which prohibit the trade in conflict diamonds, prevent money laundering and combat the financing of terrorism, a position which reflects the Company’s leadership in the industry. The Company fully complies with clean diamond trading and anti-money laundering legislation adopted by the United States Government such as the USA PATRIOT ACT and the Clean Diamond Trade Act, and supports relevant resolutions of concerned regional governments and international organizations including the OECD and the United Nations. The Company is a founding member of the United Nations Global Compact which was launched in 2000 to “initiate a global compact of shared values and principles which will give a human face to the global market”. The Company will continue to join various industry and trade associations in condemning and combating the trade in illicit diamonds and to comply fully with World Diamond Congress resolutions for industry self-regulation in respect of the Kimberley Process Certification Scheme, including implementation of the prescribed System of Warranties and Code of Conduct. Furthermore, the Company long ago adopted the highest professional and ethical standards in every aspect of our business and is fully compliant with the DTC’s recently developed Diamond Best Practices Principles.

Risks and Uncertainties

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

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

          In July 2000, the DTC announced significant changes in its approach to rough diamond marketing. In brief, the DTC stated that it will stop open market purchases and alter its market control and pricing policies. Henceforth, the DTC has said it will focus on selling its own mining productions through its “supplier of choice” marketing programs. These policy changes are intended to drive consumer demand for diamond jewelry by fostering the development of efficient distribution networks that stimulate demand, support the emergence of internationally recognized brands to meet consumer needs, supply clients with a consistent supply of rough diamonds and encourage and support additional investment in marketing and advertising programs with the goal of developing an industry led by advertising and marketing support.

          Further, through its control of the world’s diamond output, the DTC could exert significant control over the pricing of rough and polished diamonds. A large rapid increase in rough diamond prices could materially adversely affect the

15

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

          The Company is currently a DTC Sightholder under the Supplier of Choice Program. The Company believes it is well positioned to benefit from these changes in the DTC’s approach to diamond marketing. However, there can be no assurance that this policy change will not have a material adverse effect on the Company’s operations.

          In addition, the Company’s manufacturing, trading and sourcing operations abroad are subject to various political and economic risks, including the instability of foreign economies and governments, labor disputes, war and civil disturbances and other risks that could cause production difficulties or stoppages, restrict the movement of inventory or result in the deprivation or loss of contract rights or the taking of property by nationalization or expropriation without fair compensation.

          The Company’s cooperation arrangement with ALROSA and its sourcing arrangements in Angola represent a significant part of its operations. Any interruption in the supply of diamonds from Russia or Angola could have a material adverse effect on the Company.

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Consolidated Statements of Operations

	Year ended May 31,
(In thousands, except share and per share data)	2007			2006			2005
Net sales	$	434,406		$	528,045		$	421,411
Cost of sales		411,523			498,197			386,677
		22,883			29,848			34,734
Selling, general and administrative expenses		25,691			24,759			24,475
Interest expense		5,856			3,786			2,389
Equity in (income) / loss of joint ventures		(3,913	)		537			—
		27,634			29,082			26,864
Income / (loss) before income tax provision		(4,751	)		766			7,870
Income tax provison/(benefit)		(1,775	)		(762	)		2,640
NET INCOME / (LOSS)	$	(2,976	)	$	1,528		$	5,230
EARNINGS / (LOSS) PER SHARE
Basic earnings / (loss) per share	$	(0.36	)	$	0.18		$	0.62
Average number of shares outstanding during the period		8,207,006			8,291,413			8,448,704
Diluted earnings / (loss) per share	$	(0.36	)	$	0.18		$	0.60
Average number of shares outstanding during the period, assuming dilution		8,207,006			8,569,661			8,653,222

See notes to consolidated financial statements.

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Consolidated Balance Sheets

	May 31,
(In thousands, except share data)	2007			2006
Assets
CURRENT ASSETS:
Cash and cash equivalents	$	7,869		$	8,160
Accounts receivable, less allowance for doubtful accounts ($846 and $515 in 2007 and 2006, respectively)		133,989			91,403
Inventories, net:
Rough stones		14,300			24,746
Polished stones		97,767			108,368
Total inventories		112,067			133,114
Prepaid expenses and other current assets		10,750			12,763
Deferred tax assets-current		1,989			2,024
TOTAL CURRENT ASSETS		266,664			247,464
Property, plant and equipment, net		7,281			8,318
Other assets		6,804			423
Deferred tax assets, net		9,534			7,507
	$	290,283		$	263,712
Liabilities and Stockholders’ Equity
CURRENT LIABILITIES:
Accounts payable and other current liabilities	$	75,690		$	55,771
Current portion of long-term debt and lines of credit		85,536			47,969
TOTAL CURRENT LIABILITIES		161,226			103,740
Long-term debt		36,060			64,176
TOTAL LIABILITIES		197,286			167,916
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred stock, par value $.01 per share:
Authorized 1,500,000; no shares outstanding		—			—
Common stock, par value $1 per share:
Authorized 12,000,000 shares; issued 8,946,845 and 8,821,345 in 2007 and 2006, respectively		8,947			8,821
Additional paid-in capital		63,090			62,187
Cumulative translation adjustment		(766	)		(425	)
Retained earnings		27,324			30,300
		98,595			100,883
Less treasury stock, 687,545 and 624,211 shares at cost in 2007 and 2006, respectively		(5,598	)		(5,087	)
TOTAL STOCKHOLDERS’ EQUITY		92,997			95,796
	$	290,283		$	263,712

See notes to consolidated financial statements.

18

Consolidated Statements of Cash Flows

	Year ended May 31,
(In thousands)	2007			2006			2005
Cash Flows from Operating Activities:
Net income/(loss)	$	(2,976	)	$	1,528		$	5,230
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		1,518			1,310			1,159
Provision for uncollectible accounts		358			168			59
Compensation expense - noncash		124			—			329
Deferred income taxes		(1,992	)		(1,585	)		2,289
Equity in earnings of unconsolidated affiliates		(3,913	)		537			—
Changes in operating assets and liabilities:
Accounts receivable		(42,944	)		(4,581	)		(25,237	)
Rough and polished inventories		21,047			(8,530	)		(31,207	)
Prepaid expenses and other current assets		2,013			(944	)		(5,779	)
Other assets		(2,489	)		(124	)		45
Accounts payable and other current liabilities		19,919			(21,470	)		30,564
Net cash used in operating activities		(9,335	)		(33,691	)		(22,548	)
Cash Flows from Investing Activities:
Capital expenditures		(460	)		(1,839	)		(1,790	)
Net cash used in investing activities		(460	)		(1,839	)		(1,790	)
Cash Flows from Financing Activities:
Increase in borrowings		9,451			35,407			35,119
Purchase of treasury stock		(511	)		(1,968	)		(1,973	)
Proceeds from exercise of stock options		905			115			258
Net cash provided by financing activities		9,845			33,554			33,404
Effect of exchange rate changes on cash		(341	)		(184	)		45
Net increase/(decrease) in cash and cash equivalents		(291	)		(2,160	)		9,111
Cash and cash equivalents at beginning of year		8,160			10,320			1,209
Cash and cash equivalents at end of year	$	7,869		$	8,160		$	10,320
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest	$	5,558		$	3,363		$	2,532
Income taxes	$	211		$	508		$	449

See notes to consolidated financial statements.

19

Consolidated Statements of Stockholders’ Equity

(In thousands, except share data)	Common Stock		Additional Paid-in Capital		Cumulative Translation Adjustment			Retained Earnings			Treasury Stock			Total Stockholders’ Equity
Balance, May 31, 2004	$	8,711	$	61,595	$	(286	)	$	23,542		$	(1,146	)	$	92,416
Comprehensive income:
Net income		—		—		—			5,230			—			5,230
Foreign currency translation		—		—		45			—			—			45
Comprehensive income															5,275
Exercise of stock options, 92,060 shares issued		92		495		—			—			—			587
Purchase of treasury stock,197,273 shares		—		—		—			—			(1,973	)		(1,973	)
Balance, May 31, 2005	$	8,803	$	62,090	$	(241	)	$	28,772		$	(3,119	)	$	96,305
Comprehensive income:
Net income		—		—		—			1,528			—			1,528
Foreign currency translation		—		—		(184	)		—			—			(184	)
Comprehensive income															1,344
Exercise of stock options, 18,666 shares issued		18		97		—			—			—			115
Purchase of treasury stock, 216,838 shares		—		—		—			—			(1,968	)		(1,968	)
Balance, May 31, 2006	$	8,821	$	62,187	$	(425	)	$	30,300		$	(5,087	)	$	95,796
Comprehensive loss:
Net loss		—		—		—			(2,976	)		—			(2,976	)
Foreign currency translation		—		—		(341	)		—			—			(341	)
Comprehensive loss															(3,317	)
Exercise of stock options, 125,500 shares issued		126		779		—			—			—			905
Share based compensation expense				124											124
Purchase of treasury stock, 63,334 shares		—		—		—			—			(511	)		(511	)
Balance, May 31, 2007	$	8,947	$	63,090	$	(766	)	$	27,324		$	(5,598	)	$	92,997

See notes to consolidated financial statements.

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Notes to Consolidated Financial Statements
Years ended May 31, 2007, 2006 and 2005

1. Accounting Policies

a. The Company and its Principles of Consolidation

          The Company and its subsidiaries are engaged in the cutting and polishing of rough diamonds and selling of both polished and uncut rough diamonds. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated. In these notes to consolidated financial statements, the years “2007”, “2006” and “2005” refer to the fiscal years ended May 31, 2007, 2006 and 2005, respectively.

b. Use of estimates

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

c. Sales and accounts receivable

Sales arrangements with customers:

          The Company’s polished diamond and diamond jewelry customers consist primarily of wholesale and retail clients. The Company’s rough diamond customers consist primarily of rough diamond cutters. The Company generally ships polished diamond inventory to customers subject to verification of the diamond particulars.

          The Company’s policy is to recognize revenue when title and risk of ownership have passed to the buyer, the earnings process is complete and the sale price is fixed and determinable. Polished diamond sales includes revenue derived from the sale of polished diamonds and the cutting, polishing and laser inscription of polished diamonds. In addition, in certain instances, the Company may be entitled to receive incremental profits from its customers on the sale of certain stones. Such profits are recognized as revenue when realized. Where the Company acts as a principal in the sales transaction, takes title to the product and has risks and rewards of ownership, the gross value of diamonds invoiced is recorded as sales with the portion of profits allocable to others (where applicable) included in cost of sales.

          Where the Company believes profitability can be maximized, the Company may combine, and jointly sell, certain of its diamonds with those of other wholesalers. In such instances, the Company is obligated to share profits it realizes on the sale of such stones. Typically, the participating wholesaler is required to advance funds to the Company equal to their proportional interest in the underlying diamonds.

          The Company has an arrangement with a diamond producer whereby the Company sells certain polished diamonds that are cut and polished in Russia. The risk and rewards of ownership of these diamonds is transferred to the Company upon delivery to the Company of the diamonds in polished form. Generally, upon receipt, the Company pays a negotiated base price and the producer receives an economic interest in future profits associated with the diamonds.

          The Company has a technical cooperation agreement with an entity responsible for the development and marketing of diamonds produced in Angola. Pursuant to this agreement the Company has established a joint buying and rough diamond trading operation. The Company takes title to the diamonds upon acquisition in Angola and assumes responsibility for risk of loss. Sales by the Company are recorded at their gross invoice value. Profits in excess of operating and rough acquisition costs as defined are allocated between parties with such costs classified as cost of sales by the Company.

          The Company’s net sales to customers in each of the following regions for the years ended May 31, 2007, 2006 and 2005 are set forth below:

	2007			2006			2005
United States		15	%		13	%		20	%
Far East		8	%		7	%		9	%
Europe, Israel & Other		77	%		80	%		71	%
		100	%		100	%		100	%

          No single customer of the Company accounted for 10% or more of the Company’s net sales for the fiscal years ended May 31, 2007, 2006 and 2005. Where the Company believes profitability can be

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maximized, the Company may combine, and jointly sell, certain of its rough stones with those of other wholesalers. Under certain circumstances, primarily related to foreign sales, the wholesaler assumes responsibility for billing and collection efforts. While the ultimate sales are made to multiple third parties the resulting accounts receivable are aggregated for purposes of determining concentration of credit risk. One customer accounted for 34.1% of accounts receivable at May 31, 2007. Two customers accounted for 15.2% and 11.5% of accounts receivable at May 31, 2006.

          Accounts receivable are reduced by an allowance for amounts that may be uncollectible in the future. Estimates are used in determining the allowance for doubtful accounts and are based on the Company’s ongoing credit evaluations of customers, customer payment history and account aging.

          Credit is extended based on an evaluation of each customer’s financial condition and generally collateral is not required on the Company’s receivables

d. Customer rebates

          From time to time the Company has had arrangements whereby it would rebate to a customer a percentage of certain of its qualifying purchases. The Company characterizes such rebates as a reduction of sales.

e. Cash and cash equivalents

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

f. Inventories

          Inventories, including amounts on consignment with customers, are stated at the lower of cost or market, using the average cost method.

g. Property, plant and equipment

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

h. Asset impairments

          The Company records impairment losses on long-lived assets with finite lives used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by the related assets are less than the carrying amounts of those assets. If the Company determines, based upon such measures, that the carrying amount is impaired the long-lived asset will be written down to its recoverable value based upon either the discounted future cash flows or appraised fair value.

i. Foreign currency

          All purchases of rough diamonds worldwide are denominated in U.S. dollars. All of the Company’s foreign sales are denominated in U.S. dollars, with the exception of those sales made by the Company’s subsidiary, Lazare Kaplan Japan, which are denominated in Japanese yen. The functional currency for Lazare Kaplan Japan is the Japanese yen and the Company recognizes foreign currency translation adjustments with regard to the activities of Lazare Kaplan Japan as a component of stockholders’ equity in the accompanying balance sheets.

 j. Advertising and incentive programs

          The Company participates in cooperative advertising arrangements with customers in order to build brand awareness and product acceptance. Under such an arrangement a customer is eligible to receive an allowance of up to a specified percentage of its purchases from the Company if certain qualitative advertising criteria are met and if specified amounts are spent on qualifying advertising. The Company characterizes as selling, general and administrative expense the consideration it pays to customers for cooperative advertising.

          In addition, the Company offers programs whereby certain sales staff employed by the Company’s customers can receive consideration for sales of the Company’s products. The Company characterizes as selling, general and administrative expense the consideration it pays to the salesperson.

k. Consideration received from vendors

          Periodically, the Company negotiates agreements with vendors to share certain promotional costs. The Company classifies amounts expended on such promotions as selling general and administrative expense when incurred. Similarly, amounts reimbursed by vendors are characterized as a reduction of selling, general and administrative expense.

          Advertising costs are expensed as incurred and were $2.3 million, $2.6 million and $2.8 million in 2007, 2006 and 2005, respectively.

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l. Shipping and handling:

          Shipping and handling costs incurred by the Company to deliver product to customers, $0.3 million in 2007, $0.4 million in 2006 and $0.3 million in 2005, are classified in the Company’s income statement as selling, general and administrative expense.

m. Equity investments

          The Company utilizes the equity method of accounting to record its proportionate share of income and losses from joint ventures

n. Income taxes

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

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

          Earnings from foreign subsidiaries are intended to be reinvested indefinitely with the exception that Pegasus Overseas Ltd., a wholly owned foreign subsidiary, declared on May 1, 2006 a dividend in the amount of $8.0 million. The Company provided $0.4 million for U.S. income taxes related to the dividend in 2006.

o. Earnings per share

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

	2007		2006		2005
Average number of shares outstanding during the period		8,207,006		8,291,413		8,448,704
Effect of dilutive stock options		—		278,248		204,518
Average number of shares outstanding during the period assuming dilution		8,207,006		8,569,661		8,653,222

Antidilutive options of 926,451 were not included in the computation of dilutive earnings per share for 2007 because the Company had a net loss for the year. For 2006 and 2005 601,800 and 352,000 antidilutive options, respectively were not included in the computation of diluted earnings per share because the exercise price of the options were greater than the average market price of the common shares.

 p. Risks and Uncertainties

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

          The Company’s business is dependent upon the availability of rough diamonds. Based upon published reports, the Company believes that more than half of the world’s current diamond output is sold by the Diamond Trading Company (“DTC”), the rough diamond sales arm of the De Beers Group. Although the DTC has historically been one of the Company’s major suppliers of rough diamonds, the Company has diversified its sources of supply by entering into arrangements with other primary source suppliers and has been able to supplement its rough diamond needs by purchasing supplies in the secondary market. While the Company believes that it has good relationships with its suppliers and that its sources of supply are

23

sufficient to meet its present and foreseeable needs, the Company’s rough diamond supplies, and therefore, its manufacturing capacity, could be adversely affected by political and economic developments in producing countries over which it has no control. While the Company believes that alternative sources of supply may be available, any significant disruption of the Company’s access to its primary source suppliers could have a material adverse effect on its ability to purchase rough diamonds.

          In July 2000, the DTC announced significant changes in its approach to rough diamond marketing. In brief, the DTC stated that it will stop open market purchases and alter its market control and pricing policies. Henceforth, the DTC has said it will focus on selling its own mining productions through its “supplier of choice” marketing programs. These policy changes are intended to drive consumer demand for diamond jewelry by fostering the development of efficient distribution networks that stimulate demand, support the emergence of internationally recognized brands to meet consumer needs, supply clients with a consistent supply of rough diamonds and encourage and support additional investment in marketing and advertising programs with the goal of developing an industry led by advertising and marketing support.

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

          All current DTC sightholders have received notice of termination of the current contract effective December 31, 2007. It is expected that new sightholder appointments will be made in December 2007. The Company is hopeful it will be reappointed as a sightholder at that time. If the Company is not reappointed as a sightholder it could have a material adverse effect on its ability to purchase rough diamonds. The Company believes it is well positioned to benefit from these changes in the DTC approach to diamond marketing. However, there can be no assurance that this policy change will not have a material adverse effect on the Company’s operations.

          The Company has an agreement with AK ALROSA of Russia, which is the largest producer of rough diamonds in Russia. The Company’s cooperation arrangement with ALROSA is a significant part of its operations. Any interruption in the supply of diamonds from Russia could have a material adverse effect on the Company’s operations.

q. Stock Incentive Plans

          Through 2006, the Company accounted for its stock-based compensation plans using the intrinsic value method prescribed in Accounting Principles Board Opinion No.25 “Accounting for Stock Issued to Employees” and related interpretations. The following disclosures are computed as if the Company recorded compensation expense based on the fair value for stock–based awards or grants.

	Year ended May 31,
	2006		2005
Net income, as reported	$	1,528	$	5,230
Add: Compensation expense, net of related taxes		—		184
Deduct: Stock-based employee compensation expense determined under fair value method, net of related tax effects		522		509
Proforma net income	$	1,006	$	4,905
Earnings per share as reported:
Basic	$	0.18	$	0.62
Diluted	$	0.18	$	0.60
Basic and diluted earnings pro forma:
Basic	$	0.18	$	0.58
Diluted	$	0.12	$	0.57

          Effective June 1, 2006, the Company adopted SFAS No. 123(R), “Accounting for share-based Payment,” which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. Under SFAS 123(R), using the modified prospective method, compensation expense is recognized for all share-based payments granted prior to, but not yet vested as of June 1, 2006 and compensation cost for all share-based payments granted subsequent to June 1, 2006 based on the grant-date fair value in accordance with the provisions of SFAS No 123(R). During 2005 the Company’s Stock Option Committee modified the vesting period applicable to certain stock options granted in 2004. The effect of this modification was to accelerate the vesting of options which would have vested on December 15, 2006 to vest on May 31, 2006. The purpose of accelerating the vesting of these options was to mitigate the costs associated with adopting SAFS No 123 (R). The Company recognized incremental stock-based compensation expense of $0.1 million during 2007 as a result of the adoption of SFAS No 123(R), included in selling, general and adminstrative expense.

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r. Comprehensive Income/(loss)

          The Company reports “Comprehensive Income/(loss)” in accordance with Statement of Financial Accounting Standards No. 130, which requires foreign currency translation adjustments to be included in other comprehensive income. For the years ended May 31, 2007, 2006 and 2005, total comprehensive income/(loss) was $ (3.3) million, $1.3 million, and $5.3 million, respectively.

s. Reclassifications

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

t. New Accounting Pronouncements

          In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires financial statement recognition of the impact of a tax position if a position is more likely than not of being sustained on audit, based on the technical merits of the position. Additionally, FIN 48 provides guidance on measurement, derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The provisions of FIN 48 will be effective as of the beginning of the Company’s fiscal year 2008, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of FIN 48 on its financial position, results of operations and cash flows.

           In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact of SFAS 157 on its financial position, results of operations and cash flows.

           In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Asset and Financial Liability: Including an amendment of FASB Statement No. 115” (“SFAS 159”). The standard permits all entities to elect to measure certain financial instruments and other items at fair value with changes in fair value reported in earnings. SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. The Company is currently evaluating the impact of SFAS 159 on its financial position, results of operations and cash flows.

2. Property, Plant and Equipment

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

	May 31,
	2007		2006
Land and buildings	$	2,328	$	2,115
Leasehold improvements		2,637		2,633
Machinery, tools and equipment		7,793		8,775
Furniture and fixtures		1,317		1,357
Computer hardware, software and equipment		7,995		8,257
		22,070		23,137
Less accumulated depreciation and amortization		14,789		14,819
	$	7,281	$	8,318

Depreciation and amortization rates:

Buildings	2 to 3.7	%
Leasehold improvements	3.7 to 20	%
Machinery, tools and equipment	10 to 25	%
Furniture and fixtures	10 to 20	%
Computer hardware, software and equipment	10 to 33	%

          Depreciation and amortization expense for 2007, 2006 and 2005 was $1.5 million, $1.3 million and $1.2 million, respectively.

3. Income Taxes

          The items comprising the Company’s net deferred tax assets are as follows (in thousands):

	May 31,
	2007			2006
Deferred tax assets:
Operating loss and other carryforwards	$	11,325		$	8,801
Other		1,998			2,004
Deferred tax liabilities:
Depreciation		(942	)		(1,141	)
		12,381			9,664
Less: Valuation allowance		(858	)		(133	)
Net deferred tax assets	$	11,523		$	9,531

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

	Year ended May 31,
	2007			2006			2005
Current:
Federal	$	—		$	408		$	98
State and local		105			277			117
Foreign		112			138			136
		217			823			351
Deferred:
Federal, state and local		(1,992	)		(1,585	)		2,289
	$	(1,775	)	$	(762	)	$	2,640

          Income/(loss) before income taxes from the Company’s domestic and foreign operations (in thousands):

	Year ended May 31,
	2007			2006			2005
Domestic	$	(5,936	)	$	(4,647	)	$	6,008
Foreign		1,185			5,413			1,862
	$	(4,751	)	$	766		$	7,870

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

		2007			2006			2005
Tax provision / (benefit) at statutory rate	$	(1,615	)	$	260		$	2,676
(Decrease) / increase in taxes resulting from:
Differential attributable to foreign operations		(291	)		(1,724	)		(497	)
Tax on repatriated dividends		—			408			—
State and local taxes, net of Federal benefit		104			267			443
Permanent items		27			27			18
Tax provision	$	(1,775	)	$	(762	)	$	2,640

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

Year		Net Operating Losses
2019	$	8,690
2020		298
2021		120
2022		10,190
2023		25
2026		4,066
2027		5,509
	$	28,898

          In addition, the Company has New York State and New York City net operating loss carryforwards of approximately $16.9 million each, expiring from 2022 through 2027.

4. Accounts Payable and Other Current Liabilities

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

		2007		2006
Accounts payable	$	21,693	$	6,608
Advances and other		43,282		42,458
Accrued expenses		10,715		6,705
	$	75,690	$	55,771

          Advances and other, primarily relating to the purchase, manufacture and sale of inventory, includes $31.3 million and $12.0 million payable to two parties for 2007. For 2006, $22.5 million and $15.4 million was payable to two parties.

5. Lines of Credit

          The Company has a $25.0 million and a $45.0 million unsecured, uncommitted line of credit with a bank. Borrowings under both lines bear interest at a rate 160 basis points above the 90 day LIBOR. As of May 31, 2007 and 2006, the balance outstanding under both lines was $53.5 million and $40.8 million, respectively. Borrowings under these lines are available for the Company’s working capital requirements and are payable on demand.

          The Company has a $35.0 million long-term unsecured, committed revolving loan agreement and a $10.0 million unsecured, uncommitted credit agreement. The Company may borrow under the committed facility (including up to $1.0 million under letters of credit, $0.7 million issued at May 31, 2007) through December 1, 2008. The loan term may be

26

extended in one year increments commencing November 30, 2007, subject to the consent of the lending banks. Borrowings under both agreements bear interest at (a) the higher of the banks base rate or one half of one percent above the Federal Funds Effective Rate, or (b) 160 basis points above LIBOR. The applicable interest rate is contingent upon the method of borrowing selected by the Company. The proceeds of these facilities are available for working capital purposes. The loan agreements contain certain provisions that require, among other things, (a) maintenance of defined levels of working capital, net worth and profitability, (b) limitations on borrowing levels, investments and capital expenditures and (c) limitations on dividends and the repurchase of treasury shares. As of May 31, 2007 and 2006, the balance outstanding under both facilities was $41.0 million and $38.0 million, respectively.

          The Company maintains an additional unsecured, committed revolving loan agreement with a bank. At May 31, 2007 the maximum amount available under the facility was $30.0 million. The maximum borrowing limit permitted under the facility is scheduled to reduce to $20.0 million on June 30, 2007, with further reductions of $1.0 million at the end of September, October and November 2007, $7.0 million on December 31, 2007 and $5.0 million on each of March 31, 2008 and June 30, 2008. Borrowings under this agreement bear interest at (a) the higher of the banks base rate or one half of one percent above the Federal Funds Effective Rate, or (b) 160 basis points above LIBOR. The applicable interest rate is contingent upon the method of borrowing selected by the Company. The proceeds of this facility are available for working capital purposes. The loan agreement contains certain provisions that require, among other things, (a) maintenance of defined levels of working capital, net worth and profitability, (b) limitations on borrowing levels, investments and capital expenditures and (c) limitations on dividends and the repurchase of treasury shares. Borrowings under this loan agreement amounted to $26.0 million and $29.2 million at May 31, 2007 and 2006, respectively.

          A subsidiary of the Company maintains a loan facility which enables it to borrow up to 520 million Japanese yen (approximately $4.3 million U.S. dollars) at an interest rate 1% above the Japanese yen LIBOR through November 2008. Borrowings under the facility are available for working capital purposes. The Company guarantees repayment of amounts borrowed. Borrowings under the loan are used in support of its operations in Japan. As of May 31, 2007 and 2006, the balance outstanding under this facility was $1.1 million and $4.2 million U.S. dollars, respectively.

          The weighted average interest rate for all outstanding borrowings under the Company’s credit facilities was 6.9% at May 31, 2007.

          Long-term debt of $36.1 million outstanding at May 31, 2007 is scheduled to be repaid in the fiscal year ended May 31, 2009. At May 31, 2007 the Company was not in compliance with an annual financial covenant under certain of its loan facilities. The Company has since received waivers from its lenders.

          The Company guarantees a portion of certain indebtedness ($0.1 million at May 31, 2007) relating to a joint diamond cutting and polishing operation in South Africa. The fair value of the guarantee is immaterial.

          The Company’s long-term facilities do not contain subjective acceleration clauses or require the Company to utilize a lock box whereby remittances from the Company’s customers reduce the debt outstanding.

6. Stock Incentive Plans

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

          A Long-Term Stock Incentive Plan was approved by the Board of Directors on April 10, 1997 (the 1997 Plan). The 1997 Plan has reserved 1,350,000 shares of the common stock of the Company for issuance to directors, officers, key employees and consultants of the Company and its subsidiaries.

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

          Prior to 2007, the Company did not recognize compensation expense when the exercise price of the Company’s stock options equals the market price of the underlying stock on the date of the grant. In

27

accordance with SFAS123(R) the Company has provided pro forma information regarding net income and earnings per share as if the Company had accounted for its employee stock options under the fair value method of the Statement. For purposes of pro forma disclosures, the Company estimated the fair value of stock options granted in 2006 and 2005 at the date of the grant using the Black-Scholes option pricing model. The estimated fair value of the options is amortized as an expense over the options’ vesting period for the pro forma disclosures. Commencing with its first quarter 2007 the Company began recording compensation expense under Statement of Financial Accounting Standards No. 123 (“SFAS123”) “Accounting for Stock-Based Compensation.”

          The following summarizes the assumptions used to estimate the fair value of stock options granted in each year:

	2007		2006		2005
Risk-free interest rate		n/a		n/a		3.85	%
Expected option life		5 years		5 years		5 years
Expected volatility		—		—		30.30	%
Expected dividends per share	$	—	$	—	$	—
Options Granted		—		—		360,000
Weighted average estimated fair value per share	$	—	$	—	$	2.81
Total intrinsic value of options exercised	$	102,921	$	63,350	$	706,453

          A summary of the Plans’ activity for the year ended May 31, 2007 is as follows:

	Number of shares			Weighted average price per share		Weighted average remaining contractual life remaining		Aggregate Intrinsic Value
Outstanding - May 31, 2004		1,158,683		$	8.21
Options expired/cancelled		(9,300	)	$	7.72
Options issued		360,000		$	9.31
Options exercised		(169,265	)	$	6.70
Outstanding - May 31, 2005		1,340,118		$	8.70
Options expired/cancelled		(17,001	)	$	6.61
Options issued		—		$	—
Options exercised		(18,666	)	$	6.23
Outstanding - May 31, 2006		1,304,451		$	8.70
Options expired/cancelled		(252,500	)	$	11.25
Options issued		—		$	—
Options exercised		(125,500	)	$	7.20
Outstanding - May 31, 2007		926,451	*	$	8.29
Non-Vested		100,000		$	7.77		7.95	$	93,000
Vested		826,451		$	8.36		4.37	$	284,829
Total		926,451	*	$	8.29		4.76	$	377,829
* Includes 190,000 warrants of which 90,000 are vested and 100,000 will vest upon meeting certain contigent conditions.

           As of May 31, 2007 there was no unrecognized compensation costs related to non-vested awards.

7. Commitments and Contingencies

          Future minimum payments (excluding sub-lease income) under noncancelable operating leases with initial terms of more than one year consist of the following at May 31, 2007 (in thousands):

Year	Operating Leases
2008	$	789
2009		665
2010		599
2011		623
2012		633
Thereafter		4,935
	$	8,244

          In June 2003, the Company entered into a lease for office space which serves as its corporate headquarters. The term of the lease is through September 30, 2019 at an average annual base rental rate of approximately $0.6 million per year.

           Rental expense, including additional charges paid for increases in real estate taxes and other escalation charges and credits for the years ended May 31, 2007, 2006, and 2005 was approximately, $1.0 million, $1.0 million and $0.9 million, respectively. As of May 31, 2007 approximately $11.5 million of inventory owned by Pegasus Overseas, Ltd., a wholly owned subsidiary, is subject to a security interest by a third party.

As of May 31, 2007 approximately $11.5 million of inventory owned by Pegasus Overseas, Ltd., a wholly owned subsidiary, is subject to a security interest by a third party.

8. Profit Sharing Plan

          The Company has a profit sharing and retirement plan subject to Section 401(k) of the Internal Revenue Code. The plan covers all full-time employees in the United States and Puerto Rico who complete at least one year of service. Participants may contribute up to a defined percentage of their annual compensation through salary deductions. The Company intends to match employee contributions in an amount equal to $0.50 for every pretax dollar contributed by the employee up to 6% of the first $20,000 of compensation, provided the Company’s pretax earnings for the fiscal year that ends in the plan year exceed $3.5 million. The Company did not make a matching contribution in 2006 and does not anticipate making a contribution for the 2007 plan year. The Company made a matching contribution for the 2005 plan year of approximately $40,000.

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9. Geographic Segment Information

          Revenue, gross profit and income/(loss) before income tax provision for each of the three years in the period ended May 31, 2007 and identifiable assets at the end of each of those years, classified by geographic area, which was determined by where sales originated from and where identifiable assets are held, were as follows (in thousands):

	North America			Europe		Africa			Far East			Elimi- nations			Consoli- dated
Year ended May 31, 2007
Net sales to unaffiliated customers	$	98,701		$	318,365	$	1,000		$	16,340		$	—		$	434,406
Transfers between geographic areas		105,887			—		184,220			—			(290,107	)		—
Total revenue	$	204,588		$	318,365	$	185,220		$	16,340		$	(290,107	)	$	434,406
Gross profit	$	13,764		$	2,938	$	2,252		$	3,923		$	6		$	22,883
Income/(loss) before income taxes	$	(11,518	)	$	316	$	6,356		$	89		$	6		$	(4,751	)
Identifiable assets at May 31, 2006	$	151,452		$	92,441	$	38,609		$	7,829		$	(48	)	$	290,283
Year ended May 31, 2006
Net sales to unaffiliated customers	$	103,914		$	390,599	$	17,196		$	16,336		$	—		$	528,045
Transfers between geographic areas		147,120			524		232,498			9			(380,151	)		—
Total revenue	$	251,034		$	391,123	$	249,694		$	16,345		$	(380,151	)	$	528,045
Gross profit	$	21,281		$	2,593	$	2,174		$	3,785		$	15		$	29,848
Income/(loss) before income taxes	$	(1,382	)	$	297	$	1,881		$	(45	)	$	15		$	766
Identifiable assets at May 31, 2006	$	167,267		$	58,600	$	29,081		$	8,819		$	(55	)	$	263,712
Year ended May 31, 2005
Net sales to unaffiliated customers	$	108,378		$	295,743	$	—		$	17,290		$	—		$	421,411
Transfers between geographic areas		167,634			1,501		113,610			45			(282,790	)		—
Total revenue	$	276,012		$	297,244	$	113,610		$	17,335		$	(282,790	)	$	421,411
Gross profit	$	28,189		$	2,601	$	(931	)	$	4,818		$	57		$	34,734
Income/(loss) before income taxes	$	8,175		$	365	$	(1,231	)	$	504		$	57		$	7,870
Identifiable assets at May 31, 2005	$	153,640		$	59,096	$	29,964		$	7,654		$	(70	)	$	250,284

Revenue and gross profit for each of the three years in the period ended May 31, 2007 classified by product were as follows (in thousands):

	Polished		Rough		Total
Year ended May 31, 2007
Net sales	$	143,342	$	291,064	$	434,406
Gross profit	$	14,199	$	8,684	$	22,883
Year ended May 31, 2006
Net sales	$	149,767	$	378,278	$	528,045
Gross profit	$	20,606	$	9,242	$	29,848
Year ended May 31, 2005
Net sales	$	156,904	$	264,507	$	421,411
Gross profit	$	25,480	$	9,254	$	34,734

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10. Investments in Unconsolidated Joint Ventures

          The Company utilizes the equity method of accounting to record its proportionate share of income and losses from joint ventures. During 2007 and 2006 the Company entered into several joint venture agreements relating to sourcing, cutting, polishing, processing and sales of diamonds. Combined condensed financial information concerning the Company’s unconsolidated joint venture activities is as follows: (in thousands)

	2007		2006
Revenues	$	416,151	$	128,784
Gross profit		36,395		1,238
Income/(loss) before tax		13,682		(633	)
Net income/(loss)		13,682		(633	)
Current assets		88,381		13,154
Non-current assets		1,285		410
Current liabilities		77,530		8,547
Non-current liabilities		12,123		—

11. Sale of Common Stock

          During 2007 and 2006 the Company purchased 63,334 and 216,838 shares, respectively, of its common stock which was shown as a reduction of stockholders’ equity.

          In February 2002, pursuant to a stock purchase agreement (“SPA”), the Company sold 1,305,000 shares of its common stock, consisting of 1,180,000 of previously repurchased treasury shares and 125,000 authorized but unissued shares, in a private transaction. The SPA provides for, among other things, a ten-year standstill period whereby the purchaser and its affiliates will not acquire 24.9% or more of the outstanding shares of common stock, participate in any proxy disputes or transfer their stock except as provided for in the SPA. In connection therewith, the purchaser delivered an irrevocable proxy to the Chairman and President of the Company to vote the 1,180,000 shares, subject to certain limitations, through February 2010.

12. Transactions with related parties

          A member of the Company’s Board of Directors is of counsel to a law firm which serves as counsel to the Company. Amounts paid to the law firm during 2007, 2006 and 2005 were $0.9 million, $0.6 million and $0.5 million, respectively.

          During 2006 and 2005 the Company sold approximately $0.4 and $1.7 million, respectively, of jewelry to a relative of a non-employee member of the Company’s Board of Directors.

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13. Quarterly Results of Operations (Unaudited)

          The following is a summary of the results of operations for the years ended May 31, 2007 and 2006 (in thousands, except per share data):

	First			Second			Third		Fourth
2007
Net sales	$	138,884		$	94,411		$	104,257	$	96,854
Gross profit	$	5,245		$	4,929		$	7,277	$	5,432
Net income/(loss)	$	(1,825	)	$	(1,363	)	$	58	$	154
Basic earnings/(loss) per share	$	(0.22	)	$	(0.17	)	$	0.01	$	0.02
Diluted earnings/(loss) per share	$	(0.22	)	$	(0.17	)	$	0.01	$	0.02
2006
Net sales	$	138,856		$	96,275		$	157,912	$	135,002
Gross profit	$	8,982		$	6,054		$	8,909	$	5,903
Net income/(loss)	$	908		$	(407	)	$	510	$	517
Basic earnings/(loss) per share	$	0.11		$	(0.05	)	$	0.06	$	0.06
Diluted earnings/(loss) per share	$	0.10		$	(0.05	)	$	0.06	$	0.06

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Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Lazare Kaplan International Inc.
New York, NY

          We have audited the accompanying consolidated balance sheets of Lazare Kaplan International Inc. as of May 31, 2007 and 2006 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended May 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

          We conducted our audits in accordance with 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 Lazare Kaplan International Inc. at May 31, 2007 and 2006 and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2007, in conformity with accounting principles generally accepted in the United States.

BDO Seidman, LLP

New York, NY
August 28, 2007

32

Corporate Information

Corporate Headquarters	Directors and Officers	Registrar and Transfer Agent
19 West 44th Street New York, New York 10036 Telephone (212) 972-9700	Maurice Tempelsman Director; Chairman of the Board Leon Tempelsman Director; Vice Chairman of the Board and President Lucien Burstein Director; Secretary Of Counsel Warshaw Burstein Cohen Schlesinger & Kuh, LLP (attorneys) Richard A. Berenson Director; Former Managing Partner Berenson & Company, LLP Robert A. Del Genio Director; Co-Founder Conway, Del Genio, Gries & Company, LLC William H. Moryto Vice President and Chief Financial Officer	BNY Mellon Shareholder Services 480 Washington Boulevard Jersey City, NJ 07310-1900 Counsel Warshaw Burstein Cohen Schlesinger & Kuh, LLP 555 Fifth Avenue New York, New York 10017 Registered Public Accounting Firm BDO Seidman, LLP 330 Madison Avenue New York, New York 10017

33

EX-21

EXHIBIT 21

LIST OF SUBSIDIARIES OF
LAZARE KAPLAN INTERNATIONAL INC.

NAME	ORGANIZED UNDER LAWS OF
Lazare Kaplan Europe Inc.	Delaware
Lazare Kaplan Belgium, N.V.	Belgium
Lazare Kaplan Africa Inc.	Delaware
Lazare Kaplan Japan Inc. (Tokyo Branch)	Japan
Pegasus Overseas Ltd.	Bahamas
Pegasus Overseas LLC	Delaware
POCL Bvba	Belgium
POCL, N.V	Belgium
Bellataire Inc.	Delaware

EX-31.1

CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF
THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Leon Tempelsman, President and Chief Executive Officer of Lazare Kaplan International Inc., certify that:
1. I have reviewed this Annual Report on Form 10-K of Lazare Kaplan International Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
	a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 29, 2007	By: /s/ Leon Tempelsman
	Leon Tempelsman President and Chief Executive Officer

EX-31.2

CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF
THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, William H. Moryto, Vice President and Chief Financial Officer of Lazare Kaplan International Inc., certify that:
1. I have reviewed this Annual Report on Form 10-K of Lazare Kaplan International Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
	a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 29, 2007	By: /s/ William H. Moryto
	William H. Moryto Vice President and Chief Financial Officer

EX-32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002

          In connection with the Annual Report of Lazare Kaplan International Inc. (the “Company”) on Form 10-K for the fiscal year ended May 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Leon Tempelsman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 29, 2007	By: /s/ Leon Tempelsman
	Leon Tempelsman President and Chief Executive Officer

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002

          In connection with the Annual Report of Lazare Kaplan International Inc. (the “Company”) on Form 10-K for the fiscal year ended May 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William H. Moryto, Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 29, 2007	By: /s/ William H. Moryto
	William H. Moryto Vice President and Chief Financial Officer