10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, 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, 2008

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 (State or other jurisdiction of incorporation or organization)	13-2728690 (IRS Employer Identification No.)
19 West 44th Street (Address of principal executive offices)	10036 (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
Common Stock ($1 par value)
Preferred Share Purchase Rights
Name of each exchange on which registered
American Stock Exchange
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, 2007 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 $23,869,514. As of August 20, 2008, 8,252,679 of the registrant’s common stock were outstanding

DOCUMENTS INCORPORATED BY REFERENCE

2008 definitive proxy statement to be filed with the Commission - incorporated by reference into Part III.

2008 Annual Report to Stockholders for the fiscal year ended May 31, 2008 to be filed with the Commission-incorporated by reference into Parts II and IV.

Part1

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 South Africa, Namibia, and Russia 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”) and its affiliated companies in Southern Africa, 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 currently 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 roughand 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 Manufacturing Company (PTY) 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. The Company is currently constructing a new cutting facility in Botswana.

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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, South Africa, Namibia, and Botswana, to a select group of clients (“sightholders”) which, according to published reports, number approximately 80, 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.

In 2007 all then existing DTC clients (“Sightholders”) received notification of termination effective in December. In April 2008 the DTC confirmed the list of Sightholders for the new three-year 2008 – 2011 Supplier of Choice contract period, which according to published reports number approximately 80. These arrangements mark a new approach to the DTC’s distribution of rough diamonds globally, with the establishment of independent joint-venture sales organizations including the DTC Botswana (DTCB) and the Namibia Diamond Trading Company (NDTC). The DTC in London continues to distribute rough to those Sightholders with sights in both London and Canada, and the restructured DTC South Africa distributes to Sightholders in South Africa. Because of its core strengths in the diamond industry, including technical ability, distribution and marketing ability, financial strength and ethical accountability, the Company has been appointed an approved Sightholder in London (LKI), Botswana (Lazare Kaplan Botswana PTY, Ltd.), Namibia (NAMGEM Trading) and South Africa (Nozala Diamonds PTY, LTD). Through its active beneficiation activities in southern Africa, the Company is well position to contribute to regional value added and technical skills transfer aspirations.

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 existing Namibian operations. Pending a satisfactory

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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 2009.

During the fourth quarter of fiscal 2004 the Company signed a four year technical cooperation agreement regarding the marketing of rough diamonds purchased in the informal sector 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 which includes exploration and development through various additional joint ventures.

The Company has 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 and markets 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 the Company’s opertaions.

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

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give a human face to the global market”. The Company will continue to join various industry and trade associations, such as The Council for Responsible Jewelry Practices, 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 Diamond BestPractices Principles Assurance Program.

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 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

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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 which the Company has traditionally sold as rough diamonds. The prices for these diamonds have been considerably more volatile since 1995. The Company believes that long-term these types of diamonds are more potentially vulnerable to synthetic substitution. Because the Company’s cutting operations focus 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’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.

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

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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, Singapore, Taiwan, Korea, China and Malaysia and recently throughout 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:

	2008		2007		2006
United States	16	%	15	%	13	%
Far East	11	%	8	%	7	%
Europe, Israel & Other	73	%	77	%	80	%
	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, 2008, the Company had 148 full-time employees. 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. DTC sales are conducted in London, South Africa, Namibia and Botswana to a select group of Sightholders, which, according to published reports number approximately 80, including the Company and its affiliates. 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, 2010 at an annual rental rate of 1,386,000 Hong Kong dollars (approximately $178,000).

The Company leases office space in Tokyo for a term expiring August 31, 2010 at an annual rental rate of 16,500,000 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 in good working order 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.

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In the Photoscribe-GIA-Benderly litigation the Company sought 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 sought to recover damages it suffered as a result of Mr. Benderly’s fraud.

GIA, Photoscribe and Benderly answered the Second Amended Complaint and denied liability for the charges made by the Company. GIA also filed counterclaims alleging non-infringement, invalidity and unenforceability of the patents-in-suit. Further, GIA 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 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 moved to strike this defense.

Photoscribe and David Benderly alleged counterclaims for non-infringement, invalidity and unenforceability of the patents-in-suit. Further, Photoscribe and Benderly asserted a counterclaim which charged the Company with an antitrust violation under Section 2 of the Sherman Act for monopolizing the laser inscription market. The antitrust claim was bifurcated from the main case and may be considered separately.

A two week trial of the Company’s contract and patent suit against Photoscribe, the GIA and David Benderly began in a federal district court on February 25, 2008. On March 7, 2008 the jury returned a verdict in which they found that all of the asserted claims of the Company’s patents, except one claim, were valid. However, the jury also found that the claims were not infringed by the defendants. The Company is considering its options in view of the verdict.

Prior to the conclusion of the trial the parties settled most of their contract claims, but certain issues that had been bifurcated still remain to be resolved. These include GIA’s liability for repair of the Company’s equipment that was returned after the license agreement, the fraud claim against Benderly, and the antitrust claim against the Company. Eventually, the fraud claim against Benderly was dropped, as was the antitrust claim against the Company.

At a bench trial held on April 16, 17 and May 1 and 2, the Court determined that the patents in the suit were unenforceable for inequitable conduct. On August 14, 2008, the Court held a hearing, after which the Court determined that due to the finding of inequitable conduct, the case was exceptional within the meaning of 35 U.S.C. § 285 and that the defendants should be awarded their reasonable attorneys fees. At this time, defendants have not made a formal request for a specific amount of fees and the Court has not made a finding of an amount. There still remains to be tried the issue of breach of the letter agreement by which GIA was to maintain in good working order certain laser equipment leased to it by the Company, but which did not work when it was returned to the Company. No date is currently scheduled for a bench trial on this issue.

The Company plans to vigorously seek to have the adverse rulings overturned. In particular, it plans to file post-trial motions to try to have the determination of non-infringement and invalidity overturned. In addition, the Company plans to appeal the jury verdict on the basis of errors committed by the trial court and the trial court’s finding of inequitable conduct.

Consistent with the opinion of counsel, the Company’s management believes it is likely that the finding of inequitable conduct will be reversed on appeal and; as such, any award of attorney’s fees would be vacated.

On September 1, 2006, Fifth Avenue Group, LLC (“Fifth Avenue”), a stockholder of the Company, filed a Complaint for a Declaratory Judgment and Other Relief in the Supreme Court of the State of New York, County of New York, against the Company and Mellon Investor Services. The Complaint seeks a declaratory judgment that 1,180,000 shares of the Company’s stock purchased by Fifth Avenue from the Company in a private sale in January 2002 are not “restricted stock” pursuant to Rule 144(k) of the Securities Exchange Act of 1934 and that any subsequent purchaser of such shares would not be subject to an irrevocable proxy granted to Messrs. Maurice and Leon Tempelsman by Fifth Avenue in connection with the private sale. The Company intends to vigorously pursue all defenses and counterclaims available to it.

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

None

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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	79
Leon Tempelsman	Vice Chairman of the Board and President	52
William H. Moryto	Vice President and Chief Financial Officer	50

All officers were elected by the Board of Directors at its meeting following the Annual Meeting of Stockholders held in November 2007. 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.

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.

On April 8, 2008, 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, 2009, shares of the Company’s common stock with an aggregate value not to exceed $2.0 million. On November 11, 2007, the Company affected a reverse / forward stock split of the Company stock, resulting in a cost savings to the Company and enabling a number of small shareholders to cash out their holdings of stock without incurring transaction costs. This transaction resulted in the Company adding 8,621 shares to treasury stock at an average cost of $8.06 per share.

The following graph compares the market performance of the Common Stock for the previous five fiscal years to the American Stock Exchange Market Value Index (the “AMEX Index”) and a peer group of companies in the fine jewelry and accessories industry (the “Peer Group”).

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The Peer Group consists of the following companies: A.T. Cross Company and Tiffany & Co. The Company’s management is of the opinion that despite the existence of some similarities between the group of companies comprising the Peer Group and the Company, the Company is unique because of the products that it produces, the markets in which its products are sold, and its position as the only publicly traded company in the United States predominately engaged in diamond cutting, polishing and rough trading. Thus, comparisons made between the Company and the Peer Group are not necessarily accurate or reliable and do not necessarily reflect the relative performance data for the Company’s primary competition.

(1) The cumulative total return for the securities comprising the Peer Group and the AMEX Index assumes the reinvestment of dividends. The total return for the Common Stock does not assume the reinvestment of dividends, since no dividends were declared on the Common Stock during the measurement period. The weighing of the securities comprising each index, according to their market capitalization, has been calculated at the end of each monthly period.

(2) The AMEX Index tracks the aggregate price performance of equity securities of companies traded on the American Stock Exchange. The Common Stock is traded on the American Stock Exchange.

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

I Debt and Interest Rate Risk

At May 31, 2008 and May 31, 2007, the Company had borrowings of $81.5 million and $121.6 million outstanding under various revolving credit agreements. Under its agreements, the Company may pay down and re-draw borrowings

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during the year at any time. The interest rates on these borrowings are variable and accordingly interest expense is impacted by both changes in interest rates and the level of outstanding borrowings. Increases in interest expense resulting from an increase in interest rates could adversely 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.

	($000's)	5/31/2008		5/31/2007
	Debt Catgory	Amount Outstanding	Wghtd Avg Rate	Amount Outstanding	Wghtd Avg Rate
	Revoving Credit Agreements:
(a)	Short Term Rates	40,800	5.01%	67,000	7.02%
(b)	Libor - 90 Days	40,088	4.28%	53,536	6.96%
(c)	Short Term Rates - Japanese Libor	571	2.56%	1,060	1.69%
	Total	81,459	4.63%	121,595	6.95%

(a) Borrowings 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 selected short-term LIBOR.

The applicable interest rate is contingent upon the method of borrowing selected by the Company.

(b) Borrowings are based on the 90 day Libor rate plus 160 basis points and are reset daily.

(c) Borrowings bear interest at 1% above the selected short-term Japanese LIBOR.

The Company believes that a 100 basis point increase in market interest rates occurring on May 31, 2008, would result in an increase in interest expense of approximately $0.4 million.

II Foreign Currency Risk

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, 2008 and May 31, 2007, the Company recognized cumulative foreign currency translation adjustments with regard to the activities of Lazare Kaplan Japan in the amount of $(0.2) million and $(0.8) million respectively, which are shown as a component of stockholders’ equity in the accompanying balance sheets.

III Commodity Risk

The principal commodity risk for the Company relates to market price fluctuations in diamonds and precious metals. The Company seeks to pass along price increases to its customers to mitigate this risk. The Company currently does not purchase or sell financial instruments for purpose of hedging commodity risk. At May 31, 2008, the Company had borrowings totaling approximately $81.5 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, 2008 and 2007, the Company recognized cumulative foreign currency translation adjustments with regard to the activities of Lazare Kaplan Japan in the amount of $(331,000) and $(766,000) 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

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(ii) Consolidated Statements of Operations for each of the three years in the period ended May 31, 2008.

(iii) Consolidated Balance Sheets as at May 31, 2008 and May 31, 2007.

(iv) Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended May 31, 2008.

(v) Consolidated Statements of Cash Flows for each of the three years in the period ended May 31, 2008.

(vi) Notes to Consolidated Financial Statements.

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

None.

Item 9A(T). Controls and Procedures

Evaluation of Disclosure 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 Exchange Act of 1934 [the “Exchange Act”]) as of the fiscal year ended May 31, 2008. The purpose of disclosure controls and procedures is to ensure that information required to be disclosed in our reports filed with or submitted to the Securities and Exchange Commission (the “SEC”) under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC rules and forms, and to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding disclosure.

Management’s Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (“Internal Control”). The Company’s Internal Control is a process designed under the supervision of the Company’s chief executive and chief financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles (“GAAP”).

As of May 31, 2008, management conducted an assessment of the effectiveness of the Company’s Internal Control based on the framework set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that the Company’s Internal Control as of May 31, 2008 is effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with GAAP.

15

This Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding Internal Control. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this Form 10-K.

The principal executive officer and principal financial officer also conducted an evaluation of the Company’s Internal Control to determine whether any changes in Internal Control occurred during the quarter ended May 31, 2008 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 Control during the quarter ended May 31, 2008 that has materially affected, or is reasonably likely to affect, the Company’s Internal Control.

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 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, 2008.

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.

16

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 September 4, 2008 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, 2008 also included the audits of the financial statement schedule listed in the accompanying index. 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 when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

BDO Seidman, LLP

New York, NY

September 4, 2008

17

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, 2008:
Allowance for doubtful accounts	$	846,000	$	823,000	$	—	$	(110,000	)(A)	$	1,559,000
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

(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.
	(h)	Certificate of Amendment of Certificate of Incorporation, dated as of November 12, 2007, filed with the Commission on Form 8-K on November 15, 2007.
	(i)	Certificate of Amendment of Certificate of Incorporation, dated as of November 12, 2007, filed with the Commission on Form 8-k on November 15, 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.

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(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 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.

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(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.
(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 International

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	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.
(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).

22

(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.
(aj)	Line of Credit Agreement between the Company, as Borrower, and Bank Leuimi USA, as Lender, dated as of September 30, 2007.
(ak)	Credit Facility Letter Agreement between the Company, as Borrower, and Bank Leuimi USA, as Lender, dated September 30, 2007.
(al)	Amendment to Revolving Credit Agreement between the Company, as Borrower, and ABN Amro Bank N.V., as Administrative Agent and Bank, dated as of February 21, 2008.
(am)	First Amended and Restated Finance Agreement between NamGem Trading BVI Limited and Overseas Private Investment Corporation, dated as of June 10, 2008.
(an)	Consignment and Guaranty Agreement among the Company, NamGem Trading BVI Limited and NamGem Trading BVBA, dated as of June 20, 2008.
(ao)	Subordination Agreement among the Company, NamGem Trading BVI Limited, NamGem Trading BVBA and Overseas Private Investment Corporation, dated as of August 18, 2008.
(ap)	Guaranty, dated as of July __, 2007, made by the Company in favor of ABN AMRO Bank N.V.
(aq)	Exclusive Sales Agreement dated December 10, 2007 by and among the Company, Lazare Kaplan Japan Inc. and Primo Japan Co. Ltd. – incorporated herein by reference to exhibit 10(aj) to the Company’s Quarterly Report on Form 10-Q for the fiscal period ended February 29, 2008, filed with the Commission on April 14, 2008. (Certain portions of this Agreement have been omitted pursuant to a request for confidential treatment.)
(ar)	License Agreement dated December 10, 2007 between the Company and Primo Japan Co. Ltd. – incorporated herein by reference to exhibit 10(ak) to the Company’s Quarterly Report on Form 10-Q for the fiscal period ended February 29, 2008, filed with the Commission on April 14, 2008. (Certain portions of this Agreement have been omitted pursuant to a request for confidential treatment.)

23

(13)	2007 Annual Report to Security Holders - incorporated herein by reference to the Company’s 2007 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.
(99.3)	Financial statements of Gulfdiam, pursuant to Rule 3-09 of Regulation S-X (to be filed at a later date)
(c)	Not applicable.

24

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, 2008

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 Board of Directors	August 29, 2008
(Maurice Tempelsman)
/s/ Leon Tempelsman	Vice Chairman of the Board of Directors and President (principal executive officer)	August 29, 2008
(Leon Tempelsman)
/s/ Lucien Burstein	Director	August 29, 2008
(Lucien Burstein)
/s/ Richard A. Berenson	Director	August 29, 2008
(Richard A. Berenson)
/s/ Robert A. Del Genio	Director	August 29, 2008
(Robert A. Del Genio)
/s/ William H. Moryto	Vice President and Chief Financial Officer (principal financial and accounting officer)	August 29, 2008
(William H. Moryto)

25

EX-10.(AJ)

LINEOF CREDIT AGREEMENT

Dated as of September 30, 2007

Between

LAZARE KAPLAN INTERNATIONAL INC.

as Borrower

and

BANKLEUMIUSA

as Bank Lender

TABLEOF CONTENTS

SECTION	HEADING	PAGE
SECTION 1.	DEFINITIONS	1
SECTION 2.	REVOLVING CREDIT FACILITY	9
Section 2.1.	Commitment to Lend	9
Section 2.1A.	Conversion Options	9
Section 2.2.	Interest	10
Section 2.3.	Repayments and Prepayments	10
SECTION 3.	INTENTIONALLY OMITTED
SECTION 4.	CHANGESIN CIRCUMSTANCES	11
Section 4.1.	Indemnity	11
SECTION 5.	FEESAND PAYMENTS	11
Section 5.1.	Revolving Credit Commitment Fees	11
Section 5.2	Intentionally Omitted
Section 5.3.	Payments	11
SECTION 6.	REPRESENTATIONSAND WARRANTIES	12
SECTION 7.	CONDITIONS PRECEDENT	14
Section 7.1.	Closing Conditions	14
Section 7.2.	Conditions to All Borrowings	15
SECTION 8.	COVENANTS	16
Section 8.1.	Affirmative Covenants	16
Section 8.2.	Negative Covenants	17
Section 8.3.	Financial Covenants	19
SECTION 9.	EVENTSOF DEFAULT; ACCELERATION	19
Section 9.1.	Events of Default	19
Section 9.2.	Intentionally Omitted
SECTION 10.	SETOFF	21
SECTION 11.	CHANGEIN CIRCUMSTANCES	22
Section 11.1.	Change of Law	22

Section 11.2.	Unavailability of Deposits or Inability to Ascertain, or Inadequacy of, LIBOR	22
Section 11.3.	Increased Cost and Reduced Return	22
Section 11.4.	Intentionally Omitted
Section 11.5.	Discretion of Bank as to Manner of Funding	23
SECTION 12.	EXPENSESAND INDEMNIFICATION	24
Section 12.1.	Expenses	24
Section 12.2.	Indemnification	24
Section 12.3.	Survival	25
SECTION 13.	SURVIVALOF COVENANTS, ETC.	25
SECTION 14.	ASSIGNMENT	25
SECTION 15.	BANK	24
Section 15.1.	Consultation with Experts	24
Section 15.2.	Liability of Bank; Credit Decision	24
SECTION 16.	NOTICES, ETC	26
SECTION 17.	GOVERNING LAW	26
SECTION 17.	HEADINGS	26
SECTION 19.	COUNTERPARTS	27
SECTION 20.	ENTIRE AGREEMENT, ETC	27
SECTION 21.	WAIVEROF JURY TRIAL	27
SECTION 22.	CONSENTS, AMENDMENTS, WAIVERS, ETC	27
SECTION 23.	SEVERABILITY	28
SECTION 24.	EXTENSIONOF TERMINATION DATE	28
Signature Pages		29

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LINEOF CREDIT AGREEMENT

This LINEOF CREDIT AGREEMENT (this “Agreement”) is made as of September 30, 2007 by and among LAZARE KAPLAN INTERNATIONAL INC. (the “Borrower” ), a Delaware corporation having its principal place of business at 19 West 44^th Street N.Y., N.Y. 10036 and BANK LEUMI USA, as a lender (“Bank”).

WHEREAS, the Borrower has requested that the Bank provide extensions of credit to the Borrower in the form of loans;

WHEREAS, the Bank is willing to extend credit to the Borrower in the form of loans, on the terms and subject to the conditions set forth in this Agreement;

NOW, THEREFORE, the Borrower hereby agrees with the Bank as follows:

SECTION 1. DEFINITIONS.

Certain capitalized terms are defined below:

Agreement: See preamble, which term shall include this Agreement and the schedules and exhibits hereto, all as amended and in effect from time to time.

Bank: See preamble.

Base Rate: With respect to Base Rate Loans hereunder with Bank, the higher of (i) the annual rate of interest announced from time to time by Bank at its head office as its “Reference Rate” for U. S. dollar loans and (ii) one-half of one percent (1/2%) above the Federal Funds Effective Rate.

Base Rate Loans: Loans bearing interest calculated by reference to the Base Rate.

Borrower: See preamble.

Borrowing: The total of Loans of a single type advanced, continued for an additional Interest Period, or converted from a different type into such type by Bank pursuant to this Agreement on a single date and, in the case of LIBOR Rate Loans, for a single Interest Period.

Business Day: Any day on which banks in New York, New York, are open for business generally, and, in the case of LIBOR Rate Loans, also a day which is a LIBOR Business Day.

Capital Expenditures: With respect to any Person for any period, the aggregate amount of all expenditures (whether paid in cash or accrued as a liability) by such Person during that period for the acquisition or leasing (pursuant to a Capitalized Lease) of fixed or capital assets or additions to property, plant or equipment (including replacements, capitalized repairs, and

improvements) which should be capitalized on the balance sheet of such Person in accordance with GAAP.

Capitalized Leases: Leases under which the Borrower is the lessee or obligor, the discounted, future rental payment obligations under which are required to be capitalized on the combined balance sheet of the Borrower in accordance with GAAP.

Charter Documents: In respect of any entity, the certificate or articles of incorporation or organization and the by-laws of such entity, or other constitutive documents of such entity.

Code: The Internal Revenue Code of 1986, as amended, and any successor statute thereto.

Commitment: The obligation of Bank to make Loans to the Borrower up to an aggregate outstanding principal amount not to exceed $7,800,000, as such amounts may be reduced from time to time or terminated according to the terms of this Agreement.

Consent: In respect of any person or entity, any permit, license or exemption from, approval, consent of, registration or filing with any local, state or federal governmental or regulatory agency or authority, required under applicable law.

Contingent Obligations: As to any Person, any obligation of such Person guaranteeing any Indebtedness, leases, dividends or other obligations (“primary obligations”) of any other Person (the “primary obligor”) in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (x) for the purchase or payment of any such primary obligation or (y) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the holder of such primary obligation against loss in respect thereof; provided, however, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith from time to time.

Controlled Group: All members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Code.

Conversion Request: A Notice given by the Borrower to Bank of the Borrower’s election to convert or continue a Loan therewith in accordance with Section 2.1A hereof.

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Current Liabilities: As determined in accordance with GAAP, consistently applied, and shall include, as of the date of determination thereof: (i) all Indebtedness payable on demand or maturing within one year after such date without any option on the part of the obligor to extend, renew or maintain as non-current beyond such year; (ii) final maturities, installments and prepayments of Indebtedness required to be made within one year after such date (in each case, except as set forth in the proviso below); and (iii) all other items (including taxes accrued as estimated and reserves for deferred income taxes) that in accordance with GAAP would be included on a balance sheet as current liabilities, provided, however, Current Liabilities shall not include: (A)  any portion of any other committed bank debt unless (and only to the extent) such amount is required to be repaid within nine months of such date of determination; and (B)  the Pegasus Liabilities.

Default: An event or act which, with the giving of Notice and/or the lapse of time, would become an Event of Default.

Drawdown Date: In respect of any Loan, the date on which such Loan is made to the Borrower, and the date on which any Loan is converted or continued in accordance with Section 2.lA hereof.

Duly Authorized Officer: The President of the Borrower or other officer or employee of any such party who is authorized by such party’s Board of Directors or an executive committee of such Board of Directors.

EBITDA: For any period, the sum of Net Income plus Interest Expense, plus income tax expense, plus depreciation and amortization expense to the extent such expense was deducted in arriving at Net Income for such period.

Environmental Claim: Any investigation, notice, violation, demand, allegation, action, suit, injunction, judgment, order, consent decree, penalty, fine, lien, proceeding or claim (whether administrative, judicial or private in nature) arising (a) pursuant to, or in connection with an actual or alleged violation of, any Environmental Law, (b) in connection with any Hazardous Material, (c) from any abatement, removal, remedial, corrective or response action in connection with a Hazardous Material, Environmental Law or order of a governmental authority or (d) from any actual or alleged damage, injury, threat or harm to health, safety, natural resources or the environment.

Environmental Laws: All laws pertaining to environmental matters, including without limitation, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Clean Water Act, the Federal Clean Air Act, the Toxic Substances Control Act, in each case as amended, and all rules, regulations, judgments, decrees, orders and licenses arising under all such laws.

ERISA: The Employee Retirement Income Security Act of 1974, as amended, and all rules, regulations, judgments, decrees, and orders arising thereunder.

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Eurocurrency Reserve Rate: For any day with respect to a LIBOR Rate Loan, the maximum rate (expressed as a decimal) at which any lender subject thereto would be required to maintain reserves under Regulation D of the Board of Governors of the Federal Reserve System (or any successor or similar regulations relating to such reserve requirements) against “Eurocurrency Liabilities” (as that term is used in Regulation D), if such liabilities were outstanding. The Eurocurrency Reserve Rate shall be adjusted automatically on and as of the effective date of any change in the Eurocurrency Reserve Rate.

Event of Default: Any of the events listed in Section 9 hereof.

Extraordinary Items of Income: Items which under GAAP are required to be accounted for as “extraordinary items” and items which the Borrower, in accordance with GAAP, accounts for as the “cumulative effect of a change in accounting principles.”

Federal Funds Effective Rate: For any day, the rate per annum equal to the Daily Effective Federal Funds Rate published for such day by the Federal Reserve.

Financials: In respect of any period, the balance sheet of the Borrower as at the end of such period, and the related statement of income and combined statement of cash flow for such period, each setting forth in comparative form the figures for the previous comparable fiscal period, all in reasonable detail and prepared in accordance with GAAP.

GAAP: Generally accepted accounting principles consistent with those adopted by the Financial Accounting Standards Board and its predecessor, (i) generally, as in effect from time to time, and (ii) for purposes of determining compliance by the Borrower with its financial covenants set forth herein, as in effect for the fiscal year ended May 31, 2007.

Guarantors: Each Subsidiary set forth on Schedule I hereto, or subsequently added as a party to the Guaranty Agreement pursuant to Section 8.1(i) hereof.

Guaranty Agreement: The guaranty agreement provided by the Guarantors substantially in the form attached hereto as Exhibit A.

Gulfdiam Obligation: Up to $50,000,000 of secured credit given by ABN AMRO Bank to Gulfdiam DMCC (a company incorporated in the United Arab Emirates), pursuant to which Borrower shall guarantee up to 50% of the net outstanding obligation from time to time.

Hazardous Materials: Any substance, chemical, compound, product, solid, gas, liquid, waste, byproduct, pollutant, contaminant or material which is hazardous or toxic, and includes, without limitation, (a) asbestos, polychlorinated biphenyls and petroleum (including crude oil or any fraction thereof) and (b) any material classified or regulated as “hazardous” or “toxic” or words of like import pursuant to Environmental Law.

Indebtedness: For any Person (without duplication) (a) all indebtedness of such Person for borrowed money, whether current or funded, or secured or unsecured, (b) all indebtedness for the deferred purchase price of property or services, (c) all indebtedness created or arising under

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any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of a default are limited to repossession or sale of such property), (d) all indebtedness secured by a purchase money mortgage or other Lien to secure all or part of the purchase price of property subject to such mortgage or Lien, (e) all obligations under leases which shall have been or must be, in accordance with GAAP, recorded as Capitalized Leases in respect of which such Person is liable as lessee, (f) any liability in respect of banker’s acceptances or Letters of Credit, (g) any indebtedness, whether or not assumed, secured by Liens on property acquired by such Person at the time of acquisition thereof, (h) all obligations under any so-called “synthetic lease” transaction entered into by such Person, (i) all obligations under any so-called “asset securitization” transactions entered into by such Person, and (j) all Contingent Obligations, it being understood that the term “Indebtedness” shall not include trade payables and accrued expenses arising in the ordinary course of business.

Inspection: See Section 8.1(g).

Interest Expense: With reference to any period, the sum of all net interest charges (including imputed interest charges with respect to Capitalized Lease Obligations and all amortization of debt discount and expense) of the Borrower and its Subsidiaries for such period determined on a consolidated basis in accordance with GAAP.

Interest Payment Date: (a) As to any Base Rate Loan, the last day of the calendar month of the Drawdown Date thereof, and (b) as to any LIBOR Rate Loan in respect of which the Interest Period is (i) three (3) months or less, the last day of such Interest Period and (ii) more than three (3) months, the date that is three (3) months from the first day of such Interest Period and, in addition, the last day of such Interest Period.

Interest Period: With respect to each Loan (a) initially, the period commencing on the Drawdown Date of such Loan and ending on the last day of one of the periods set forth below, as selected by the Borrower in a Loan Request (i) for any Base Rate Loan, the last day of the calendar month; and (ii) for any LIBOR Rate Loan, 1, 2, 3, 4, 5, or 6 months; and (b) thereafter, each period commencing on the last day of the immediately preceding Interest Period applicable to such Loan and ending on the last day of one of the periods set forth above, as selected by the Borrower in a Conversion Request or a Loan Request; provided that all of the foregoing provisions relating to Interest Periods are subject to the following:

(a) if any Interest Period with respect to a LIBOR Rate Loan would otherwise end on a day that is not a LIBOR Business Day, that Interest Period shall be extended to the next succeeding LIBOR Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding LIBOR Business Day;

(b) if any Interest Period with respect to a Base Rate Loan would end on a day that is not a Business Day, that Interest Period shall end on the next succeeding Business Day;

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(c) if the Borrower shall fail to give Notice as provided in Section 2.1A, the Borrower shall be deemed to have requested a conversion of the affected LIBOR Rate Loan to a Base Rate Loan, and the continuance of all Base Rate Loans as Base Rate Loans on the last day of the then current Interest Period with respect thereto;

(d) any Interest Period relating to any LIBOR Rate Loan that begins on the last LIBOR Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last LIBOR Business Day of a calendar month; and

(e) any Interest Period relating to any LIBOR Rate Loan that would otherwise extend beyond the Maturity Date shall end on the Maturity Date.

LIBOR Business Day: Any day on which commercial banks are open for international business (including dealings in U.S. dollar deposits) in London.

LIBOR Rate: For any Interest Period with respect to a LIBOR Rate Loan hereunder the rate of interest equal to (i) the rate determined by Bank at which U.S. dollar deposits for such Interest Period are offered to Bank by prime banks in the London interbank market as of 11:00 a.m. London time on the second LIBOR Business Day prior to the first day of such Interest Period, divided by (ii) a number equal to 1.00 minus the Eurocurrency Reserve Rate, if applicable.

LIBOR Rate Loans: Loans bearing interest calculated by reference to the LIBOR Rate.

LIBOR Rate Margin: One and sixty/one-hundredths of one percent (1.60%) per annum.

Liens: Any encumbrance, mortgage, pledge, hypothecation, charge, restriction or other security interest of any kind securing any obligation of any entity or person.

Loan: Any loan made or to be made to the Borrower pursuant to Section 2 hereof.

Loan Documents: This Agreement, any Note and the Guaranty Agreement, in each case as from time to time amended or supplemented.

Loan Request: See Section 2.1(b).

Material Domestic Subsidiary: Any Subsidiary organized under the laws of any state of the United States in which the Borrower or its Subsidiaries have invested $1,000,000 or more (or the foreign currency equivalent thereof).

Materially Adverse Effect: Any materially adverse effect on the financial condition or business operations of the Borrower or material impairment of the ability of the Borrower to perform its obligations hereunder or under any of the other Loan Documents.

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Maturity Date: The Termination Date, or such earlier date upon which all of the Obligations may become due and payable pursuant to the terms hereof.

Nedbank Loan: Up to $6,000,000 in Indebtedness of the Borrower and/or any Subsidiary thereof to Nedbank, Limited, South Africa, including any guaranties thereof by the Borrower or Subsidiaries of the Borrower.

Net Income: The net income (or deficit) of the Borrower, after deduction of all expenses, taxes and other proper charges, determined in accordance with GAAP, after eliminating therefrom all Extraordinary Items of Income.

Note(s): See Section 2.1.

Notice or Notices: All requests, demands and other communications, in writing (including telecopy communications), sent by registered or certified mail, return receipt requested, overnight delivery service, telecopy or hand delivery to the other party at that party’s Principal Office.

Obligations: All indebtedness, obligations and liabilities of the Borrower to pay principal or interest of the Loans, all fees and charges payable hereunder, and all other payment obligations of the Borrower or any of its Subsidiaries arising under or directly in relation to any Loan Document, in each case whether now existing or hereinafter arising, due or to become due, direct or indirect, absolute or contingent, and howsoever evidenced, held or acquired.

Pegasus: Pegasus Overseas Ltd., a company organized under the laws of the Bahamas, which is a subsidiary of the Borrower.

Pegasus Liabilities: The obligations and liabilities of Pegasus and its affiliates to Diamond Innovations and/or its affiliates (and their successors and assigns) pursuant to an agreement between the parties for sourcing and high pressure, high temperature processing of gem diamonds.

Person: Any individual, partnership, corporation, association, trust, joint venture, unincorporated organization, and any government, governmental department or agency or political subdivision thereof.

Principal Office: With respect to each party, the following addresses:

For Bank:

Bank Leumi USA

562 Fifth Avenue

New York, New York 10036

Attention: David Selove

Telecopier Number: (212) 626-1311

Telephone Number: (212) 626-1288

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For the Borrower:

Lazare Kaplan International Inc.

19 West 44^th Street

New York, New York 10036

Attention: William H. Moryto

Telecopier Number: 212-697-3197

Telephone Number: 212-857-7672

Release: Any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, disposing or migration into the environment.

Requirement of Law: In respect of any person or entity, any law, treaty, rule, regulation or determination of an arbitrator, court, or other governmental authority, in each case applicable to or binding upon such person or entity or affecting any of its property.

Subsidiary: In respect of any Person, any business entity of which such Person at any time owns or controls directly or indirectly more than fifty percent (50%) of the outstanding shares of stock having voting power, regardless of whether such right to vote depends upon the occurrence of a contingency.

Tangible Net Worth: The excess of (i) all assets of the Borrower determined in accordance with GAAP over (ii) all liabilities of the Borrower determined in accordance with GAAP, minus (iii) the sum of (A) the book value all intangibles determined in accordance with GAAP, including, without limitation, good will, patents and intellectual property, and (B) any write-up in the book value of assets since the most recent audited Financials in existence on the date hereof.

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

Total Dollar Outstandings: At any time of reference thereto, the sum of Loans outstanding at such time.

Total Funded Debt: At any time the same is to be determined, the aggregate of all Indebtedness of the Borrower and its Subsidiaries at such time, including all Indebtedness of any other Person which is directly or indirectly guaranteed by the Borrower (other than amounts guaranteed by Borrower in respect of the Gulfdiam Obligation and the Nedbank Loan) or any of its Subsidiaries or which the Borrower or any of its Subsidiaries has agreed (contingently or otherwise) to purchase or otherwise acquire or in respect of which the Borrower or any of its Subsidiaries has otherwise assured a creditor against loss.

Working Capital: At any time, current assets of the Borrower in accordance with GAAP less Current Liabilities.

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SECTION 2.REVOLVING CREDIT FACILITY.

Section2.1Commitment to Lend. (a) Upon the terms and subject to the conditions of this Agreement, Bank agrees to lend to the Borrower sums that the Borrower may request, from the date hereof until but not including the Termination Date, provided that the sum of the outstanding principal amount of all Loans from Bank (after giving effect to all amounts requested) shall not exceed Bank’s Commitment. LIBOR Rate Loans shall be in the minimum aggregate amount of $300,000 or whole multiples of $100,000 in addition thereto.

(b) The Borrower shall give to Bank, written Notice in the form of Exhibit B attached hereto of each Loan requested to be made by Bank hereunder (a “Loan Request”) (i) no later than 12:00 noon, New York time, on the proposed Drawdown Date of any Base Rate Loan and (ii) no less than three (3) LIBOR Business Days prior to the proposed Drawdown Date of any LIBOR Rate Loan. Each such Notice shall specify (A) the principal amount of the Loan requested, (B) the proposed Drawdown Date of such Loan (which must be a Business Day or a LIBOR Business Day, as the case may be), (C) the Interest Period for such Loan and (D) whether such Loan shall be a Base Rate Loan or a LIBOR Rate Loan. Each Loan Request shall be irrevocable and binding on the Borrower and shall obligate the Borrower to accept the Loan requested from Bank on the proposed Drawdown Date. Subject to the foregoing, so long as Bank’s Commitment is then in effect and the applicable conditions set forth in Section 7.2 hereof have been met, Bank shall advance the amount requested to the Borrower’s bank account as designated on the applicable Loan Request (or such other account as Bank may designate) in immediately available funds not later than the close of business on such Drawdown Date.

(c) The obligation of the Borrower to repay Bank the principal of the Loans and interest accrued thereon shall be evidenced by a promissory note (a “Note”) substantially in the form of Exhibit C attached hereto, dated as of the date hereof and completed with appropriate insertions. Such Note shall be executed and delivered by the Borrower and payable to the order of Bank, in form and substance satisfactory to Bank, in a principal amount equal to Bank’s Loan Commitment.

Section2.1A. Conversion Options. (a) The Borrower may elect from time to time to convert any outstanding Loan with Bank from a Base Rate Loan to a LIBOR Rate Loan or from a LIBOR Rate Loan to a Base Rate Loan, provided that (i) with respect to any such conversion of a LIBOR Rate Loan to a Base Rate Loan, the Borrower shall give Bank at least three (3) Business Days prior written Notice of such election; (ii) with respect to any such conversion of a LIBOR Rate Loan into a Base Rate Loan, such conversion shall only be made on the last day of the Interest Period with respect thereto; (iii) with respect to any such conversion of a Base Rate Loan to a LIBOR Rate Loan, the Borrower shall give Bank at least three (3) LIBOR Business Days prior written Notice of such election; and (iv) no Loan may be converted into a LIBOR Rate Loan when any Default or Event of Default has occurred and is continuing. All or any part of the outstanding Loans may be converted as provided herein, provided that any partial conversions shall be in an aggregate principal amount of $300,000 or a whole multiple of $100,000 in addition thereto. Each Conversion Request relating to the conversion of a Loan to a LIBOR Rate Loan shall be irrevocable by the Borrower.

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(b) Any Base Rate Loan or LIBOR Rate Loan may be continued as such upon the expiration of an Interest Period with respect thereto by compliance by the Borrower with the Notice provisions contained in Section 2.1A(a); provided that no LIBOR Rate Loan may be continued as such when any Default or Event of Default has occurred and is continuing, but shall be automatically converted to a Base Rate Loan on the last day of the first Interest Period relating thereto ending during the continuance of any Default or Event of Default. In the event that the Borrower fails to provide any such Notice with respect to the continuation of any LIBOR Rate Loan as such, then such LIBOR Rate Loan shall be automatically converted to a Base Rate Loan on the last day of the first Interest Period relating thereto.

(c) Any conversion to or from LIBOR Rate Loans shall be in such amounts and be made pursuant to such elections so that, after giving effect thereto, (i) the aggregate principal amount of all LIBOR Rate Loans having the same Interest Period shall not be less than $300,000 or a whole multiple of $100,000 in addition thereto.

Section2.2. Interest. So long as no Event of Default is continuing, 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 and each LIBOR 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 sum of (i) the LIBOR Rate determined for such Interest Period plus (ii) the LIBOR Rate Margin. The Borrower promises to pay interest on each Loan in arrears on each Interest Payment Date with respect thereto. While an Event of Default is continuing and Bank shall have exercised its rights pursuant to Section 9.1(2) hereof or in the case of an Event of Default under clause (h) or (i) of Section 9.1, amounts payable under any of the Loan Documents shall bear interest (compounded monthly and payable on demand in respect of overdue amounts) at a rate per annum which is equal to the Base Rate plus two percent (2%) until such amount is paid in full or (as the case may be) such Event of Default has been cured or waived in writing by Bank (after as well as before judgment).

Section2.3. Repayments and Prepayments. The Borrower hereby agrees to pay to Bank, no later than the Maturity Date, the entire unpaid principal of and interest on all Loans with Bank. 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 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 (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

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Loans outstanding shall exceed the Commitment, the Borrower shall immediately pay the amount of such excess to Bank. The Borrower may elect to reduce or terminate the Commitment with Bank 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 the 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 Commitment following such reduction or termination.

SECTION 3. INTENTIONALLY OMITTED

SECTION 4. CHANGESIN CIRCUMSTANCES, ETC..

Section4.1.Indemnity. The Borrower agrees to indemnify Bank and to hold Bank harmless from and against any loss, cost or expense (including loss of anticipated profits) that Bank may sustain or incur as a consequence of (i) default by the Borrower in payment of the principal amount of or any interest on any LIBOR Rate Loans as and when due and payable, including any such loss, cost or expense arising from interest or fees payable by Bank to lenders of funds obtained by it in order to maintain its LIBOR Rate Loans or the cost of breaking any swaps or other hedging agreements, (ii) default by the Borrower in making a borrowing or conversion after the Borrower has given (or is deemed to have given) a Loan Request or Conversion Request relating thereto in accordance with Section 2.1A, and (iii) the making of any payment of a LIBOR Rate Loan or the making of any conversion of any such Loan to a Base Rate Loan on a day that is not the last day of the applicable Interest Period with respect thereto, including interest or fees payable by Bank to lenders of funds obtained by it in order to maintain any such Loans or the cost of breaking any swaps or other hedging agreements.

SECTION 5. FEESAND PAYMENTS

Section5.1.Revolving Credit Commitment Fees. The Borrower shall pay to Bank a commitment fee at the rate per annum equal to one-fourth of one percent (1/4 of 1%) (computed on the basis of a year of 360 days and the actual number of days elapsed) on the average daily unused Commitment. Such commitment fee shall be payable quarter-annually in arrears on the last Business Day of each November, February, May and August in each year (commencing on the first such date occurring after the date hereof) and on the Termination Date, unless the Commitment is terminated in whole on an earlier date, in which event the commitment fee for the period to the date of such termination in whole shall be paid on the date of such termination.

Section5.2. INTENTIONALLY OMITTED

Section5.3. Payments. All payments to be made by the Borrower hereunder or under any of the other Loan Documents shall be made in U.S. Dollars in immediately available funds at the Bank’s Principal Office, without set-off or counterclaim and without any withholding or deduction whatsoever. Bank shall be entitled to charge any account of the Borrower with Bank for any sum due and payable by the Borrower to Bank hereunder or under any of the other Loan Documents. If any payment hereunder is required to be made on a day which is not a Business Day, it shall be paid on the immediately succeeding Business

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Day, with interest and any applicable fees adjusted accordingly. All computations of interest or fees payable hereunder shall be made by Bank on the basis of actual days elapsed and on a 360-day year.

SECTION 6. REPRESENTATIONSAND WARRANTIES

The Borrower represents and warrants to Bank on the date hereof, on the date of any Loan Request:

(a) the Borrower and each Subsidiary is duly organized, validly existing, and in good standing under the laws of its jurisdiction of incorporation and is duly qualified and in good standing in every other jurisdiction where it is doing business (except where the failure to so qualify in any such jurisdiction would not have a Materially Adverse Effect), and the execution, delivery and performance by the Borrower and each Subsidiary of the Loan Documents to which it is a party (i) are within its corporate authority, (ii) have been duly authorized, (iii) do not conflict with or contravene its Charter Documents;

(b) upon execution and delivery thereof, each Loan Document shall constitute the legal, valid and binding obligation of each of the Borrower and Guarantors party thereto, enforceable in accordance with its terms;

(c) the Borrower and each of its Subsidiaries has good and marketable title to all its material properties, subject only to Liens permitted hereunder, and possesses all assets, including intellectual properties, franchises and Consents, adequate for the conduct of its business as now conducted, without known conflict with any rights of others. The Borrower and its Subsidiaries maintain insurance with financially responsible insurers and copies of the Borrower’s primary Jewelers Block Policy and a schedule of other insurance policies have been previously delivered to Bank, covering such risks and in such amounts and with such deductibles as are customary in the Borrower’s business and are adequate;

(d) the Borrower has provided to Bank its Financials as at February 28, 2007, and for the third quarter then ended, as filed with the Securities and Exchange Commission, and such Financials are complete and correct and fairly present the position of the Borrower in accordance with GAAP applied consistent with the annual financial statements of the Borrower as filed with the Securities and Exchange Commission as at such date and for such period in accordance with GAAP consistently applied;

(e) since February 28, 2007, there has been no material adverse change of any kind in the business or financial condition of the Borrower which would have a Materially Adverse Effect;

(f) except as disclosed in the Financial statements referred to above, there are no legal or other proceedings or investigations pending or, to the knowledge of the Borrower, threatened against the Borrower before any court, tribunal or regulatory

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authority which would, if adversely determined, alone or together, have a Materially Adverse Effect;

(g)the execution, delivery and performance of its obligations, and the exercise of its rights under the Loan Documents by the Borrower and each Guarantor, including borrowing under this Agreement (i) do not require any Consents; and (ii) are not and will not be in conflict with or prohibited or prevented by (A) any Requirement of Law, or (B) any Charter Document, corporate minute or resolution, instrument, agreement or provision thereof, in each case binding on it or affecting its property;

(h) the Borrower and each Guarantor is not in violation of (i) any Charter Document, corporate minute or resolution, (ii) any instrument or agreement, in each case binding on it or affecting its property, or (iii) any Requirement of Law, in a manner which could have a Materially Adverse Effect, including, without limitation, all applicable federal and state tax laws, ERISA and Environmental Laws;

(i) all information furnished by or on behalf of the Borrower or any of its Subsidiaries in writing to Bank for purposes of or in connection with this Agreement, or any transaction contemplated herein, is true and accurate in all material respects and not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading in light of the circumstances under which such information was provided;

(j) all proceeds of Loans shall be used by the Borrower for working capital purposes and other general corporate purposes of the Borrower and its Subsidiaries and no part of the proceeds of any Loan or other extension of credit hereunder will be used by the Borrower or any Subsidiary thereof to purchase or carry any margin stock (within the meaning of the Regulations of the Board of Governors of the Federal Reserve System) or to extend credit to others for the purpose of purchasing or carrying any margin stock and neither the making of any Loan or other extension of credit hereunder nor the use of the proceeds thereof will violate or be inconsistent with the provisions of the Regulations of the Board of Governors of the Federal Reserve System and any successor to all or any portion of such regulations relating to Margin Stock; Margin Stock (as defined above) constitutes less than 25% of the value of those assets of the Borrower and its Subsidiaries that are subject to any limitation on sale, pledge or other restriction hereunder;

(k) the Borrower and each of its Subsidiaries has timely filed or caused to be timely filed all tax returns required to be filed by the Borrower and/or any of its Subsidiaries and the Borrower and each of its Subsidiaries has paid all taxes, assessments and other governmental charges payable by them other than taxes, assessments and other governmental charges which are not delinquent, and other than those contested in good faith and for which adequate reserves have been established in accordance with GAAP and as to which no Lien exists;

(l) the Borrower and each other member of its Controlled Group has fulfilled its obligations under the minimum funding standards of, and is in compliance in all

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material respects with, ERISA and the Code to the extent applicable to it and, other than a liability for premiums under Section 4007 of ERISA, has not incurred any liability to the PBGC or a Plan under Title IV of ERISA and the Borrower and its Subsidiaries have no unaccrued contingent liabilities with respect to any post-retirement benefits under a welfare plan, as defined in Section 3(i) of ERISA, other than liability for continuation coverage described in article 6 of Title 1 of ERISA;

(m) Schedule I correctly sets forth, as of the Closing Date, each Subsidiary of the Borrower, its respective jurisdiction of organization and the percentage ownership (direct and indirect) of the Borrower in each class of capital stock or other equity interests of each of its Subsidiaries and also identifies the direct owner thereof;

(n)       the Borrower and each of its Subsidiaries is in compliance with all applicable Environmental Laws and the requirements of any permits issued under such Environmental Laws; there are no pending or, to the best knowledge of the Borrower and its Subsidiaries after due inquiry, threatened Environmental Claims, including any such claims (regardless of materiality) for liabilities under CERCLA relating to the disposal of Hazardous Materials, against the Borrower or any of its Subsidiaries or any real property, including leaseholds, owned or operated by the Borrower or any of its Subsidiaries; there are no facts, circumstances, conditions or occurrences on any real property, including leaseholds, owned or operated by the Borrower or any of its Subsidiaries that, to the best knowledge of the Borrower and its Subsidiaries after due inquiry, could reasonably be expected (i) to form the basis of an Environmental Claim against the Borrower or any of its Subsidiaries or any such real property, or (ii) to cause any such real property to be subject to any restrictions on the ownership, occupancy, use or transferability of such real property by the Borrower or any of its Subsidiaries under any applicable Environmental Law; Hazardous Materials have not been Released on or from any real property, including leaseholds, owned or operated by the Borrower or any of its Subsidiaries where such Release, individually, may reasonably be expected to require in excess of $50,000 in response costs under any applicable Environmental Law; and

(o) neither the Borrower nor any Subsidiary is an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended, or a “public utility holding company” within the meaning of the Public Utility Holding Company Act of 1935, as amended.

SECTION 7. CONDITIONS PRECEDENT.

Section7.1.Closing Conditions. In addition to the making of the foregoing representations and warranties and the delivery of the Loan Documents and such other documents and the taking of such actions as Bank may require at or prior to the time of executing this Agreement, the obligation of Bank to make the initial Loan is subject to the satisfaction of the following further conditions precedent:

(a) all proceedings in connection with the transactions contemplated hereby shall be in form and substance satisfactory to Bank shall have received all information

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and documents as it may have reasonably requested, including without limitation, the Charter Documents and good standing certificate of the Borrower and the resolutions of the boards of directors of the Borrower and the Guarantors authorizing the transactions contemplated hereby;

(b) Bank shall have received a Note in the amount of its Commitment;

(c) the Borrower and the Guarantors shall have provided certificates of incumbency and specimen signatures as to the officers authorized to sign the Loan Documents;

(d) Bank shall have received a legal opinion covering customary matters in an unsecured credit facility, satisfactory in form and substance to Bank, from counsel to the Borrower;

(e) Bank shall have received evidence of all hazard, property and liability insurance maintained by the Borrower and copies of the primary Jewelers Block insurance policy and such insurance shall be in such amounts and of such types as shall be satisfactory to Bank;

(f) no material adverse change shall have occurred in the business or financial condition of the Borrower since February 28, 2007;

(g) all legal matters incident to the execution and delivery of the Loan Documents should be satisfactory to Bank and its legal counsel.

Section7.2.Conditions to All Borrowings. The obligation of Bank to make any Loan is subject to the satisfaction of the following further conditions precedent:

(a) each of the representations and warranties of the Borrower to Bank herein, in any of the other Loan Documents or any documents, certificate or other paper or Notice in connection herewith shall be true and correct in all material respects as of the time made or claimed to have been made, except for representations and warranties that are made as of a certain date, which shall be true and correct in all material respects as of such date;

(b) no Default or Event of Default shall be continuing;

(c) Bank shall have received the most recent audited Financials of the Borrower and quarterly unaudited Financials; and

(d) there shall have been no change in the business, assets, financial condition of the Borrower since the date of the most recently delivered Financial Statements which would have a Materially Adverse Effect.

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SECTION 8. COVENANTS.

Section8.1. Affirmative Covenants. The Borrower agrees that so long as there are any Loans outstanding and until the termination of the Commitment and the payment and satisfaction in full of all the Obligations, the Borrower will comply with its obligations as set forth throughout this Agreement and will:

(a) furnish Bank: (i) as soon as available but in any event within one hundred and twenty (120) days after the close of each fiscal year, its audited and unqualified Financials for such fiscal year, certified by the Borrower’s outside accountants; (ii) as soon as available but in any event within sixty (60) days after the end of each fiscal quarter, unaudited Financials for such fiscal quarter certified by its chief financial officer; and (iii) together with the items required pursuant to clauses (i) and (ii) above, a certificate of the Borrower submitted by its Duly Authorized Officer thereof, in form and substance satisfactory to such Bank, (A) setting forth computations demonstrating compliance with the Borrower’s financial covenants set forth herein, (B) providing a schedule, setting forth the name of the lender and the amount, of the Borrower’s then outstanding unsecured Indebtedness, and (C) certifying that no Default or Event of Default has occurred, or if it has, the actions taken by the Borrower with respect thereto;

(b) keep true and accurate books of account in accordance with GAAP, maintain its current fiscal year;

(c) (i) maintain its corporate existence, business and material assets, (ii) keep its business and assets adequately insured, (iii) maintain its chief executive office in the United States, (iv) continue to engage in substantially the same lines of business, (v) comply with all Requirements of Law, including ERISA and Environmental Laws, the violation of any of which would have a Materially Adverse Effect and (vi) conduct annual physical inventory counts;

(d) notify Bank promptly in writing of (i)  the occurrence of any Default or Event of Default, (ii) any non-compliance with ERISA or any Environmental Law or proceeding in respect thereof which could have a Materially Adverse Effect, (iii) any change of address and (iv) any pending, or to the knowledge of the Borrower, threatened, litigation or similar proceeding affecting the Borrower, which litigation or proceeding could reasonably be expected to result in the imposition of a liability upon the Borrower in excess of $250,000, or any material adverse change in any such litigation or proceeding previously reported;

(e) use the proceeds of the Loans solely for working capital purposes and other general corporate purposes and not use the Loans for the carrying of “margin security” or “margin stock” within the meaning of Regulations U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and 224;

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(f) pay all taxes (including sales and withholding taxes) and other obligations as and when due except where contested in good faith and by appropriate proceedings for which the Borrower shall have set aside adequate reserves;

(g) permit Bank, and its duly authorized representatives and agents to visit and inspect (an “Inspection”) any of its property, corporate books and financial records annually, to examine and make copies of its books of accounts and other financial records, and to discuss its affairs, finances and accounts with, and to be advised as to the same by, its officers, employees and independent public accountants (and by this provision the Borrower hereby authorizes such accountants to discuss with Bank the finances and affairs of the Borrower and its Subsidiaries) at such reasonable times and intervals as Bank may designate, provided, however, if a Default or Event of Default has occurred and is continuing, Bank may conduct an Inspection at any time;

(h) cooperate with Bank, take such action, execute such documents, and provide such information as Bank may from time to time request in order further to effect the transactions contemplated by and the purposes of the Loan Documents;

(i) cause each Material Domestic Subsidiary created after the date hereof to become a Guarantor under the Guaranty Agreement; and

(j) at all times, maintain the Obligations owing to Bank on an equal and pari-passu basis with all other unsecured and unsubordinated Indebtedness of the Borrower from time to time outstanding, with Bank having the same rights and privileges as Borrower’s other unsecured and unsubordinated creditors.

Section8.2. Negative Covenants. The Borrower agrees that so long as there are any Loans outstanding and until the termination of the Commitment and the payment and satisfaction in full of all the Obligations, the Borrower will not:

(a) create, incur or assume any Indebtedness other than (i) Indebtedness to Bank, (ii) up to $70,000,000 in Indebtedness of the Borrower and/or Subsidiaries of the Borrower (including, without limitation, Material Domestic Subsidiaries) under lines of credit from Antwerp Diamond Bank, including guaranties by Subsidiaries of the Borrower, (iii) up to Five Hundred Fifty Million Yen in unsecured Indebtedness to ABN AMRO or any affiliate thereof in Japan, including guaranties by Subsidiaries of the Borrower (including, without limitation, Material Domestic Subsidiaries) in connection with such Indebtedness, (iv) up to $30,000,000 in unsecured Indebtedness to HSBC Bank USA, including guaranties by Subsidiaries of the Borrower (including, without limitation, Material Domestic Subsidiaries) in connection with such Indebtedness, (v) up to $6,000,000 in Indebtedness of the Borrower and/or any Subsidiary thereof to Nedbank, Limited, South Africa, including any guaranties thereof by the Borrower or Subsidiaries of the Borrower, (vi) up to $35,000,000 in Indebtedness of the Borrower and/or Subsidiaries of the Borrower (including without limitation, Material Domestic Subsidiaries) under lines of credit from ABN AMRO Bank (including without limitation guaranties by Subsidiaries of the Borrower, (vii) amounts guarantied by Borrower

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pursuant to the Gulfdiam Obligation, (viii) current liabilities of the Borrower not incurred through the borrowing of money or the obtaining of credit on an open account customarily extended, (ix) 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, and (x) other unsecured Indebtedness not in excess of $250,000.

(b) create or incur any Liens on any of the property or assets of the Borrower or its Subsidiaries except (i) Liens granted by Pegasus in favor of Diamond Innovations or an affiliate thereof and/or its successors and assigns (“Diamond Innovations”) on inventories of gem diamonds purchased by Pegasus from Diamond Innovations for processing; (ii) Liens securing taxes or other governmental charges not yet due; (iii) deposits or pledges made in connection with social security obligations; (iv) Liens of carriers, warehousemen, mechanics and materialmen, less than 120 days old as to obligations not yet due, (v) easements, rights-of-way, zoning restrictions and similar minor Liens which individually and in the aggregate do not have a Materially Adverse Effect and (vi) Liens granted by any Subsidiaries of the Borrower on the property of such Subsidiaries located outside the United States to secure Indebtedness permitted by Section 8.2(a) (ii) or Section 8.2 (a) (viii);

(c) make any investments which in the aggregate exceeds $150,000 in any one fiscal year, other than investments in: (i) marketable obligations of the United States maturing within one (1) year, (ii) certificates of deposit, bankers’ acceptances and time and demand deposits of Bank or of United States banks having total assets in excess of $1,000,000,000, (iii) investments in Northbank Diamonds Ltd., (iv) Subsidiaries or other equity investments existing on the date hereof, (v) investments by Pegasus (net of related contra-accounts and credits) in inventory of gem diamonds not to exceed $8,000,000 at any one time outstanding, (vi) investments by the Borrower after the date hereof in Subsidiaries and joint ventures in the ordinary course of Borrower’s business, provided, however, that the aggregate amount of such additional investments, at any one time outstanding shall not exceed 10% of the Tangible Net Worth of the Borrower and its Subsidiaries on a consolidated basis or (vii) such other investments as Bank may from time to time approve in writing;

(d) merge or consolidate with any other party (other than with Subsidiaries of the Borrower so long as the Borrower is the survivor), or enter into any stock acquisitions; enter into any wholly new lines of business or otherwise materially change the conduct of the Borrower’s business as presently conducted; or effect any significant change in the Borrower’s accounting practices or treatment except as may be permitted or required by GAAP;

(e) purchase, lease or otherwise acquire assets other than in the ordinary course, consistent with the past practices of the Borrower; or dispose of or sell assets other than (i) the sale of inventory and excess or obsolete equipment and other assets in the ordinary course of business and (ii) prior to the occurrence of a Default or an Event of Default, the sale of assets (other than inventory) on arms-length terms for fair value, provided that, in the case of Section 8.2(e) (ii) the amount of such assets sold or disposed

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of, when combined with all other such sales or other dispositions of assets, shall not exceed $500,000 in the aggregate during any fiscal year of the Borrower.

(f) make any repurchases of any capital stock or other securities of the Borrower in excess of $2,000,000 in the aggregate during any fiscal year of the Borrower;

(g) conduct transactions with Subsidiaries of the Borrower or other affiliates on anything other than an arm’s length basis and in the ordinary course of business consistent with the past practices of the Borrower; or

(h) make, or become obligated to make any Capital Expenditures, except that during any fiscal year the Borrower and its Subsidiaries may make, or become obligated to make, Capital Expenditures so long as the aggregate amount of such Capital Expenditures (net of proceeds from the sale of capital or fixed assets) does not exceed $4,000,000 in any fiscal year through fiscal year ending May 31, 2007, and $1,500,000 in any fiscal year thereafter.

Section8.3. Financial Covenants. The Borrower agrees that so long as there are any Loans outstanding and until the termination of the Commitment and the payment and satisfaction in full of all the Obligations, the Borrower will have or maintain, on a consolidated basis with its Subsidiaries:

(a) as of the end of each of its fiscal quarters, Working Capital of not less than Eighty Million Dollars ($80,000,000);

(b) as of the end of each of its fiscal quarters, Tangible Net Worth of not less than Eighty-five Million ($85,000,000);

(c) as of the end of each of its fiscal quarters, a ratio of Total Funded Debt to Tangible Net Worth at not more than 1.50 to 1.00; and

(d) as of the end of each of its fiscal years, commencing with the fiscal year beginning June 1, 2007, a ratio of EBITDA to Interest Expense of not less than 1.25 to 1.00.

SECTION 9. EVENTSOF DEFAULT; ACCELERATION.

Section9.1. Events of Default. If any of the following events (“Events of Default”) shall occur:

(a) the Borrower shall fail to pay when due and payable any principal of the Loans;

(b) the Borrower shall fail to pay interest on the Loans, any fee or any other sum due under any of the Loan Documents when required to be made hereby;

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(c) default by the Borrower in the payment or performance of any other obligation or agreement with the Bank relating to borrowed money after the expiration of any grace period provided for therein and the failure to cure any such default to the extent provided for therein;

(d) the Borrower shall fail to perform any term, covenant or agreement contained in Sections 8.1(e), 8.2 (other than 8.2(c) and (h)) and 8.3, provided, however, with regard to Section 8.3, if on any date (the “Compliance Date”) not later than 30 days after the earlier of (i) delivery by Bank to the Borrower of a Notice with respect to such default, or (ii) the date on which the Borrower first obtains actual knowledge of any such default, there shall have been contributed to the capital of the Borrower a sum in cash in immediately available funds (and as evidenced by such written instruments or documents as shall be reasonably satisfactory to Bank, upon satisfaction of which, such contribution shall be considered an addition to Net Income for the period tested), in an amount which, after giving effect thereto, would enable the Borrower to meet the requirements as in effect on the Compliance Date of the covenants of Section 8.3 giving rise to the default, then no Event of Default shall be deemed to have occurred under this Section 9.1(d) with respect to such default without any further action by Bank or the Borrower;

(e) the Borrower shall fail to perform any other term, covenant or agreement contained in the Loan Documents within thirty (30) days after Bank has given Notice of such failure to the Borrower, provided, however, that if such failure is cured within such period there shall be no Event of Default under this clause (e);

(f) any representation or warranty of the Borrower in the Loan Documents or in any certificate or Notice given in connection therewith shall have been false or misleading in any material respect at the time made or deemed to have been made;

(g) (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 Bank or ABN AMRO Bank) shall demand repayment of any Indebtedness payable on demand under any uncommitted borrowing facility;

(h) any of the Loan Documents shall be terminated or otherwise cease to be in full force and effect;

(i) any of the Borrower or its Subsidiaries (i) shall make an assignment for the benefit of creditors, (ii) shall be adjudicated bankrupt or insolvent, (iii) shall seek the appointment of, or be the subject of an order appointing, a trustee, liquidator or receiver as to all or part of its assets, (iv) shall commence, approve or consent to, any case or proceeding under any bankruptcy, reorganization or similar law and, in the case of an involuntary case or proceeding, such case or proceeding is not dismissed within sixty (60)

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days following the commencement thereof, or (y) shall be the subject of an order for relief in an involuntary case under federal bankruptcy law;

(j) any of the Borrower or its Subsidiaries shall be unable to pay its debts as they mature;

(k) there shall remain undischarged for more than thirty (30) days any final judgment or execution action against the Borrower or any of its Subsidiaries that, together with other final judgments and execution actions against the Borrower or any such Subsidiary exceeds $100,000 in the aggregate;

THEN, or at any time thereafter:

(1) In the case of any Event of Default under clause (i) or (j), (A) the Commitment shall automatically terminate and Bank shall be relieved of all further obligations, as provided herein, to make Loans to the Borrower, (B) the entire unpaid principal amount of the Loans, all interest accrued and unpaid thereon, all accrued and unpaid fees, and all other amounts payable hereunder and under the other Loan Documents shall automatically become forthwith due and payable, without presentment, demand, protest or Notice of any kind, all of which are hereby expressly waived by the Borrower; and

(2) In the case of any Event of Default other than (i) and (j), Bank may, by Notice to the Borrower, (A) terminate its Commitment, and/or (B) declare the unpaid principal amount of its Loans, all interest accrued and unpaid thereon, all accrued and unpaid fees and all other amounts payable hereunder and under the other Loan Documents to be forthwith due and payable, without presentment, demand, protest or further Notice of any kind, all of which are hereby expressly waived by the Borrower.

No remedy herein conferred upon Bank is intended to be exclusive of any other remedy and each and every remedy shall be cumulative and in addition to every other remedy hereunder, now or hereafter existing at law.

Section9.2. INTENTIONALLY OMITTED

SECTION 10. SETOFF.

Any deposits or other sums credited by or due from Bank to the Borrower (in whatever currency denominated) may, from and after an Event of Default, be applied to or set off by Bank against any principal, interest and any other amounts due and payable from the Borrower to Bank in respect of the Obligations at any time without Notice to the Borrower, or compliance with any other procedure imposed by statute or otherwise, all of which are hereby expressly waived by the Borrower.

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SECTION 11. CHANGEIN CIRCUMSTANCES.

Section11.1. Change of Law. Notwithstanding any other provisions of this Agreement or any Note, if at any time any change in applicable law or regulation or in the interpretation thereof makes it unlawful for Bank to make or continue to maintain any LIBOR Rate Loans or to perform its obligations as contemplated hereby, Bank shall promptly give notice thereof to the Borrower and Bank’s obligations to make or maintain LIBOR Rate Loans under this Agreement shall be suspended until it is no longer unlawful for Bank to make or maintain LIBOR Rate Loans. The Borrower shall prepay on demand the outstanding principal amount of any such affected LIBOR Rate Loans, together with all interest accrued thereon and all other amounts then due and payable to Bank under this Agreement; provided, however, subject to all of the terms and conditions of this Agreement, the Borrower may then elect to borrow the principal amount of the affected LIBOR Rate Loans from Bank by means of Base Rate Loans from Bank.

Section11.2. Unavailability of Deposits or Inability to Ascertain, or Inadequacy of, LIBOR. If on or prior to the first day of any Interest Period for any Borrowing of LIBOR Rate Loans:

(a) Bank determines that deposits in U.S. Dollars (in the applicable amounts) are not being offered to it in the interbank eurodollar market for such Interest Period, or that by reason of circumstances affecting the interbank eurodollar market adequate and reasonable means do not exist for ascertaining the applicable LIBOR, or

(b) Bank determines that the making or funding of LIBOR Rate Loans become impracticable, then Bank shall forthwith give notice thereof to the Borrower, whereupon until Bank notifies the Borrower that the circumstances giving rise to such suspension no longer exist, the obligations of Bank to make LIBOR Rate Loans shall be suspended.

Section11.3. Increased Cost and Reduced Return.

(a) If, on or after the date hereof, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Bank with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency:

(i) shall subject Bank to any tax, duty or other charge with respect to its LIBOR Rate Loans or its Notes or its obligation to make LIBOR Rate Loans or shall change the basis of taxation of payments to Bank of the principal of or interest on its LIBOR Rate Loans or any other amounts due under this Agreement or any other Loan Document in respect of its LIBOR Rate Loans, or its obligation to make LIBOR Rate Loans (except for changes in the rate of tax on the overall net income of Bank imposed by the jurisdiction in which Bank’s principal executive office is located); or

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(ii) shall impose, modify or deem applicable any reserve, special deposit or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding with respect to any LIBOR Rate Loans any such requirement included in an applicable Eurocurrency Reserve Rate) against assets of, deposits with or for the account of, or credit extended by, Bank or shall impose on Bank or on the interbank market any other condition affecting its LIBOR Rate Loans or its Notes, or its obligation to make LIBOR Rate Loans;

and the result of any of the foregoing is to increase the cost to Bank of making or maintaining any LIBOR Rate Loan or to reduce the amount of any sum received or receivable by Bank under this Agreement or under any other Loan Document with respect thereto, by an amount deemed by Bank to be material, then, within 30 days after demand by Bank, the Borrower shall be obligated to pay to Bank such additional amount or amounts as will compensate Bank for such increased cost or reduction.

(b) If, after the date hereof, Bank shall have determined that the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Bank with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has had the effect of reducing the rate of return on Bank’s capital as a consequence of its obligations hereunder to a level below that which Bank could have achieved but for such adoption, change or compliance (taking into consideration Bank’s policies with respect to capital adequacy) by an amount deemed by Bank to be material, then from time to time, within 30 days after demand by Bank, the Borrower shall pay to Bank such additional amount or amounts as will compensate Bank for such reduction.

(c) A certificate of Bank claiming compensation under this Section 11.3 and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive if reasonably determined. In determining such amount, Bank may use any reasonable averaging and attribution methods.

Section 11.4. Intentionally Omitted

Section 11.5. Discretion of Bank as to Manner of Funding. Notwithstanding any other provision of this Agreement, Bank shall be entitled to fund and maintain its funding of all or any part of its Loans in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder with respect to LIBOR Rate Loans shall be made as if Bank had actually funded and maintained each LIBOR Rate Loan through the purchase of deposits in the interbank eurodollar market having a maturity corresponding to such Loan’s Interest Period and bearing an interest rate equal to LIBOR for such Interest Period.

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SECTION 12. EXPENSESAND INDEMNIFICATION.

Section 12.1. Expenses. The Borrower agrees to pay (i) the reasonable costs of producing this Agreement, the other Loan Documents and the other agreements and instruments mentioned herein, (ii) any taxes (including any interest and penalties in respect thereto) payable by Bank (other than taxes based upon Bank’s net income) on or with respect to the transactions contemplated by this Agreement (the Borrower hereby agreeing to indemnify Bank with respect thereto), (iii) the reasonable legal fees, expenses and disbursements incurred in connection with the preparation or interpretation of the Loan Documents and other instruments mentioned herein, each closing hereunder, any amendments, modifications, approvals, consents or waivers hereto or hereunder, or the cancellation of any Loan Document upon payment in full in cash of all of the Obligations or pursuant to any terms of such Loan Document for providing for such cancellation, (iv) the reasonable fees, expenses and disbursements of Bank or any of its affiliates incurred by Bank or such affiliate in connection with the preparation or interpretation of the Loan Documents and other instruments mentioned herein, (v) all reasonable out-of-pocket expenses (including without limitation attorneys’ fees and costs, which attorneys may be employees of Bank, and consulting, accounting, appraisal, investment banking and similar professional fees and charges) incurred by Bank in connection with (A) the enforcement of or preservation of rights under any of the Loan Documents against the Borrower or its Subsidiaries or the administration thereof after the occurrence of a Default or Event of Default and (B) any litigation, proceeding or dispute whether arising hereunder or otherwise, in any way related to Bank’s relationship with the Borrower or any of its Subsidiaries.

Section12.2. Indemnification. The Borrower agrees to indemnify and hold harmless Bank and its respective affiliates (the “Indemnified Parties”) from and against any and all claims, actions and suits whether groundless or otherwise (“Claims”), and from and against any and all liabilities, losses, damages and expenses of every nature and character (“Losses”) arising out of this Agreement or any of the other Loan Documents or the transactions contemplated hereby including, without limitation, (i) any actual or proposed use by the Borrower or any of its Subsidiaries of the proceeds of any of the Loans, (ii) the reversal or withdrawal of any provisional credits granted by Bank upon the transfer of funds from lock box, bank agency or concentration accounts or in connection with the provisional honoring of checks or other items, (iii)  the Borrower or any of its Subsidiaries entering into or performing this Agreement or any of the other Loan Documents or (iv) with respect to the Borrower and its Subsidiaries and their respective properties and assets, the violation of any Environmental Law, the presence, disposal, escape, seepage, leakage, spillage, discharge, emission, release or threatened release of any toxic substances, oil or hazardous materials or other chemicals or substances regulated by Environmental Laws (“Hazardous Substances”) or any action, suit, proceeding or investigation brought or threatened with respect to any Hazardous Substances (including, but not limited to, claims with respect to wrongful death, personal injury or damage to property), or (v) any sales, use, transfer, documentary and stamp taxes (but excluding any taxes based upon or measured by the income or profits of Bank) and any recording and filing fees paid by Bank and which arise by reason of the transactions contemplated hereby or by any of the Loan Documents, in each case including, without limitation, the reasonable fees and disbursements of counsel and allocated costs of internal counsel incurred in connection with any such investigation, litigation or other proceeding; provided, however, that the Borrower shall not be obligated to indemnify any

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Indemnified Party for Claims or Losses arising out of (i) gross negligence or willful misconduct of the Indemnified Party, or (ii) any breaches by the Indemnified Party of its obligations under this Agreement or any of the Loan Documents. In litigation, or the preparation therefor, Bank and its respective affiliates shall be entitled to select its own counsel reasonably acceptable to the Borrower and, in addition to the foregoing indemnity, the Borrower agrees to pay promptly the reasonable fees and expenses of such counsel. If, and to the extent that the obligations of the Borrower under this Section 12.2 are unenforceable for any reason, the Borrower hereby agrees to make the maximum contribution to the payment in satisfaction of such obligations which is permissible under applicable law.

Section12.3. Survival. The covenants contained in this Section 12.3 shall survive payment or satisfaction in full of all other Obligations.

SECTION 13. SURVIVALOF COVENANTS, ETC.

All covenants, agreements, representations and warranties made herein, in any Note, in any of the other Loan Documents or in any documents or other papers delivered by or on behalf of the Borrower or any of its Subsidiaries pursuant hereto shall be deemed to have been relied upon by Bank, notwithstanding any investigation heretofore or hereafter made by Bank, and shall survive the making by Bank of any of the Loans, as herein contemplated, and shall continue in full force and effect so long as any amount due under this Agreement or any Note or any of the other Loan Documents remains outstanding or Bank has any obligation to make any Loans and for such further time as may be otherwise expressly specified in this Agreement. All statements contained in any certificate delivered to Bank at any time by or on behalf of the Borrower or any of its Subsidiaries pursuant hereto or in connection with the transactions contemplated hereby shall constitute representations and warranties by the Borrower or such Subsidiary hereunder.

SECTION 14. ASSIGNMENT.

The Borrower shall not assign or transfer any of its rights or obligations under any of the Loan Documents without the prior written Consent of Bank.

SECTION 15. BANK.

Section15.1. Consultation with Experts. Bank may consult with legal counsel, independent public accountants, and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the written advice of such counsel, accountants or experts.

Section15.2. Liability of Bank; Credit Decision. Neither Bank nor any of its directors, officers, agents or employees shall be liable for any action taken or not taken by it in connection with the Loan Documents or in the absence of its own gross negligence or willful misconduct. Neither Bank nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify: (i) any statement, warranty or representation made in connection with this Agreement, any other Loan Document or any Loan; (ii) the

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performance or observance of any of the covenants or agreements of the Borrower or any Subsidiary contained herein or in any other Loan Document; (iii) the satisfaction of any condition specified in Section 7 hereof; or (iv) the validity, effectiveness, genuineness, enforceability, perfection, value, worth or collectibility hereof or of any other Loan Document or of any other documents or writing furnished in connection with any Loan Document; and Bank makes no representation of any kind or character with respect to any such matter mentioned in this sentence. Bank may execute any of its duties under any of the Loan Documents by or through employees, agents, and attorneys-in-fact and shall not be answerable to the Borrower or any other Person for the default or misconduct of any such agents or attorneys-in-fact selected with reasonable care. Bank shall not incur any liability by acting in reliance upon any notice, consent, certificate, other document or statement (whether written or oral) believed by it to be genuine or to be sent by the proper party or parties. In particular and without limiting any of the foregoing, Bank shall have no responsibility for confirming the accuracy of any compliance certificate or other document or instrument received by it under the Loan Documents. Bank acknowledges that based upon information, investigations and inquiries as it deems appropriate, made its own credit analysis and decision to extend credit to the Borrower in the manner set forth in the Loan Documents. It shall be the responsibility of Bank to keep itself informed as to the creditworthiness of the Borrower and its Subsidiaries.

SECTION 16. NOTICES, ETC.

Except as otherwise expressly provided in this Agreement, all Notices and other communications made or required to be given pursuant to this Agreement or any Note shall be addressed to such parties’ Principal Office or such other address for Notice as such party shall have last furnished in writing to the Person giving Notice.

SECTION 17. GOVERNING LAW.

THIS AGREEMENT AND, EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED THEREIN, EACH OF THE OTHER LOAN DOCUMENTS ARE CONTRACTS UNDER THE LAWS OF THE STATE OF NEW YORK AND SHALL FOR ALL PURPOSES BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SAID STATE OF NEW YORK (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). THE BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR ANY FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURT AND SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON THE BORROWER BY MAIL AT THE ADDRESS SPECIFIED IN SECTION 16. THE BORROWER HEREBY WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT COURT.

SECTION 18. HEADINGS.

The captions in this Agreement are for convenience of reference only and shall not define or limit the provisions hereof.

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SECTION 19. COUNTERPARTS.

This Agreement and any amendment hereof may be executed in several counterparts and by each party on a separate counterpart, each of which when executed and delivered shall be an original, and all of which together shall constitute one instrument. In proving this Agreement it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom enforcement is sought.

SECTION 20. ENTIRE AGREEMENT, ETC.

The Loan Documents and any other documents executed in connection herewith or therewith express the entire understanding of the parties with respect to the transactions contemplated hereby. Neither this Agreement nor any term hereof may be changed, waived, discharged or terminated, except as provided in Section 22.

SECTION 21. WAIVER OF JURY TRIAL.

The Borrower hereby waives its right to a jury trial with respect to any action or claim arising out of any dispute in connection with this Agreement, any Note or any of the other Loan Documents, any rights or obligations hereunder or thereunder or the performance of which rights and obligations. Except as prohibited by law, the Borrower hereby waives any right it may have to claim or recover in any litigation referred to in the preceding sentence any special, exemplary, punitive or consequential damages or any damages other than, or in addition to, actual damages. The Borrower (i) certifies that no representative, Bank or attorney of Bank has represented, expressly or otherwise, that Bank would not, in the event of litigation, seek to enforce the foregoing waivers and (ii) acknowledges that Bank has been induced to enter into this Agreement, the other Loan Documents to which it is a party by, among other things, the waivers and certifications contained herein.

SECTION 22. CONSENTS, AMENDMENTS, WAIVERS, ETC.

Any Consent or approval required or permitted by this Agreement to be given by Bank may be given, and any term of this Agreement, the other Loan Documents or any other instrument related hereto or mentioned herein may be amended, and the performance or observance by the Borrower or any of its Subsidiaries of any terms of this Agreement, the other Loan Documents or such other instrument or the continuance of any Default or Event of Default may be waived (either generally or in a particular instance and either retroactively or prospectively) with, but only with, the written Consent of the Borrower and the written Consent of Bank. No course of dealing or delay or omission on the part of Bank in exercising any right shall operate as a waiver thereof or otherwise be prejudicial thereto. No Notice to or demand upon the Borrower shall entitle the Borrower to other or further Notice or demand in similar or other circumstances.

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SECTION 23. SEVERABILITY.

The provisions of this Agreement are severable and if any one clause or provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Agreement in any jurisdiction.

SECTION 24. EXTENSIONOF TERMINATION DATE.

The Borrower may annually request that Bank’s Commitment be extended for an additional one-year period by providing notice of such request to Bank no later than 40 days prior to November 30 of each year, commencing November 30, 2007. If a Bank agrees, in its individual and sole discretion, to extend its Commitment it will promptly notify the Borrower, in writing, of its decision to do so.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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INWITNESSWHEREOF, the undersigned have duly executed this Agreement as of the date first above written.

LAZARE KAPLAN INTERNATIONAL INC.
By:
	William H. Moryto Vice President and Chief Financial Officer

BANK LEUMI USA
By:
	Benjamin Naveh Executive Vice President -and-

By:
	David Selove Vice President

STATE OF NEW YORK }

} ss.:

COUNTY OF NEW YORK }

On the ____ day of October, 2007, before me, the undersigned, personally appeared WILLIAM H. MORYTO, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument.

Notary Public

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STATE OF NEW YORK }

} ss.:

COUNTY OF NEW YORK }

On the ____ day of October, 2007, before me, the undersigned, personally appeared BENJAMIN NAVEH, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument.

Notary Public

STATE OF NEW YORK }

} ss.:

COUNTY OF NEW YORK }

On the ____ day of October, 2007, before me, the undersigned, personally appeared DAVID SELOVE, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument.

Notary Public

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EXHIBIT A

GUARANTY

This Guaranty Agreement (the “Guaranty”) dated as of this 30th day of September, 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 BANK LEUMI USA ("Bank").

WITNESSETH THAT:

WHEREAS, LAZARE KAPLAN INTERNATIONAL INC., a Delaware corporation, (the “Borrower”) and Bank have entered into the Line of Credit Agreement, dated as of September 30, 2007 (such Line of Credit Agreement as the same may be amended, modified, supplemented, restated and/or replaced from time to time being hereinafter referred to as the “Bank Credit Agreement”), pursuant to which Bank has agreed, subject to certain terms and conditions, to extend credit and make certain other financial accommodations to the Borrower;

WHEREAS, pursuant to the Bank Credit Agreement, the Bank has required, among other things, that each Guarantor provide to Bank its payment guarantee of the credit facilities under the Bank Credit Agreement;

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 Bank 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 Bank 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 Bank and hereby covenants and agrees with Bank as follows:

Section1. All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Bank Credit Agreement.

Section2. Each Guarantor hereby jointly and severally guarantees to Bank, 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 Bank Credit Agreement (whether arising before or after the filing of a petition in bankruptcy), 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, and whether several, joint, or joint and several (the “Bank Obligations”), (b) any and all reasonable expenses and charges, legal or otherwise, suffered or

incurred by Bank, 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.

Section3. 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 Bank 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.

Section4. Each Guarantor agrees that, upon demand, such Guarantor shall pay to Bank for the benefit of Bank the full amount of the indebtedness hereby guaranteed then 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 Bank by the Borrower.

Section5. 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 Bank of the Guaranteed Indebtedness has been fully paid and satisfied and all commitments by Bank to extend any Guaranteed Indebtedness shall have expired or otherwise terminated. The payment by any Guarantor of any amount or amounts to Bank 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 Bank in enforcing this Guaranty have been paid and satisfied in full and all commitments by Bank to extend any Guaranteed Indebtedness shall have expired or otherwise terminated, and 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

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part thereof shall be held and taken to be merely payments to Bank reducing pro tanto the indebtedness hereby guaranteed.

Section6. 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 all commitments by Bank to extend any Guaranteed Indebtedness shall have expired or have been terminated. Bank 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.

Section7. 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 Bank.

Section8. The liability hereunder shall in no way be affected or impaired by (and Bank 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 any Loan Document 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 Bank of any security for or other guarantors upon any of the Guaranteed Indebtedness, or by any failure, neglect or omission on the part of Bank 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 Bank, 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 Bank, 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 Bank shall have the right to enforce this Guaranty against any Guarantor irrespective of whether or not other proceedings or steps seeking resort to or realization upon or from any of the foregoing are pending.

Section9. 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

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

Section10. 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 Bank any defense of waiver, release, discharge in bankruptcy, statute of limitations, resjudicata, 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 Bank 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.

Section11. If any payment applied by Bank 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.

Section12. 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 Bank 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.

Section13. 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.

Section14. 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 Bank given by United States certified or registered mail or by telecopy. Each such notice, request or other communication shall be effective (i) if given

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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 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.

Section15. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE LAW OF THE STATEOF 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 Bank. This Guaranty and every part thereof shall be effective upon delivery to Bank, without further act, condition or acceptance by Bank, shall be binding upon the Guarantors and upon the legal representatives, successors and assigns of the Guarantors, and shall inure to the benefit of Bank, their successors, legal representatives and assigns. The Guarantors waive notice of Bank’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.

Section20. 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, BYACCEPTINGTHEBENEFITSOFTHIS AGREEMENT, BANK HEREBYIRREVOCABLYWAIVESANYANDALLRIGHTTOTRIALBYJURYINANYLEGALPROCEEDINGARISINGOUTOFORRELATINGTOTHIS GUARANTYORTHETRANSACTIONSCONTEMPLATEDHEREBY.

[SIGNATURE PAGESTO GUARANTY AGREEMENTTOFOLLOW]

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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:
Address: _____________________________________	LAZARE KAPLAN EUROPE INC.
_____________________________________________ _____________________________________________	By:
_____________________________________________ Telecopier No. _________________________________		William H. Moryto Secretary

Address: _____________________________________	LAZARE KAPLAN JAPAN INC.
_____________________________________________ _____________________________________________	By:
_____________________________________________ Telecopier No. _________________________________		William H. Moryto Secretary

Address: _____________________________________	LAZARE KAPLAN AFRICA INC.
_____________________________________________ _____________________________________________	By:
_____________________________________________ Telecopier No. _________________________________		William H. Moryto Secretary

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STATE OF NEW YORK	}
	} ss.:
COUNTY OF NEW YORK	}

On the ____ day of October, 2007, before me, the undersigned, personally appeared WILLIAM H. MORYTO, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument.

Notary Public

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SCHEDULE I

TO

LAZARE KAPLAN INTERNATIONAL INC.

REVOLVING CREDIT AGREEMENT

DATEDSEPTEMBER 30, 2007

Subsidiary Guarantors	Jurisdiction of Organization	Percentage ownership of the Borrower in each class of capital stock or other equity interests
LAZARE KAPLAN EUROPE INC.	Delaware	100%
LAZARE KAPLAN JAPAN INC.	Delaware	100%
LAZARE KAPLAN AFRICA INC.	Delaware	100%

EXHIBIT B

_____________, 20__

Bank Leumi USA

562 Fifth Avenue

New York, New York 10036

Attention: David Selove

Re: Additional Borrowing Under Line of Credit

Ladies and Gentlemen:

We refer to our Promissory Note dated September 30, 2007, payable to your order in the face principal sum of $7,800,000 (the “Note”). We hereby request a borrowing from you under our revolving credit in the amount of $____________, which borrowing shall be made against and evidenced by the Note. The borrowing shall be delivered to our bank account no. [_____/_____] with you. We promise to pay such borrowing in accordance with the Note or upon termination of the Agreement or acceleration of the advances in accordance with the Agreement as hereinafter described.

We hereby elect the following interest rate for said borrowing:

Base Rate Loan: _____; or

Libor Rate Loan: _____, with Interest Period of ____ months.

In order to induce you to make the advance hereby requested, we hereby certify to you that as of the date hereof, each of our representations and warranties (except for representations and warranties that are made as of a certain date, which shall be true and correct in all material respects as of such date) in the Line of Credit Agreement dated as of September 30, 2007, currently in effect by and among LAZARE KAPLAN INTERNATIONAL INC., and BANK LEUMI USA (the “Agreement”) remains true and correct and we are in full compliance with all of the terms and conditions of the Agreement.

We hereby certify that the proceeds of this borrowing will be used solely for general working capital purposes in our business as presently conducted in the ordinary course.

LAZARE KAPLAN INTERNATIONAL INC.
By:
	Authorized Signature

EXHIBIT C

PROMISSORY NOTE

	New York, New York
$7,800,000	September 30, 2007

On December 1, 2008, FOR VALUE RECEIVED, the undersigned, LAZARE KAPLAN INTERNATIONAL INC., a Delaware corporation (the “Borrower”) promises to pay to the order of BANK LEUMI USA a t its office at 562 Fifth Avenue New York, N.Y. 10036 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 (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 a Line of Credit Agreement bearing even date herewith by and among the Borrower and Bank Leumi USA (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 the Bank to accelerate this payment of their 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.

LAZARE KAPLAN INTERNATIONAL INC.
By:
	William H. Moryto Vice President and Chief Financial Officer

EX-10.(AK)

September 30, 2007

Lazare Kaplan International Inc.

19 West 44^th Street

New York, New York 10036

Ladies and Gentlemen::

We are pleased to advise that Bank Leumi USA (“Bank”) holds available to Lazare Kaplan International Inc. (“Borrower”) a credit facility up to a maximum aggregate principal amount of $2,200,000.00 (the “Facility”) valid and available at our discretion and subject to the terms and conditions set forth below.

We note the Facility described herein is not a committed facility, no commitment fee will be charged, any advances under the Facility are made in the sole and absolute discretion of the Bank and the Bank may terminate the Facility at any time.

A. Terms and Conditions of Credit Facility:

(1) Borrower:	Lazare Kaplan International Inc.
(2)Amount:	$2,200,000.00 revolving facility. Funds may be borrowed, repaidand reborrowed.
	The Facility is provided in conjunction with a committed line of credit facility made available to Borrower by the Bank in the maximum aggregate principal amount of $7,800,000.00, the terms of which are set forth in a Line of Credit Agreement dated the date hereof between Borrower and the Bank (the “Line of Credit Agreement”).
(3) Maturity:	The Facility is payable on demand, but if no demand is made then the Facility shall be payable on December 1, 2007. Any requirements stated in this letter which must be complied with after the “Maturity” are premised upon the Bank agreeing to extend the Facility on the terms stated herein.

(4) Rates:	Short term revolving borrowing at either (a) the higher of (i) the Bank’s Reference Rate (“RR”) and (ii) one-half of one percent (1/2%) above the Federal Funds Effective Rate (“Fed Funds Rate”), or (b) at one to six month LIBOR (as elected by Borrower) + 1.60% per annum. The RR does not necessarily represent the lowest rate of interest charged by the Bank to customers. For any day, the Fed Funds Rate is the rate per annum equal to the Daily Effective Federal Funds Rate published for such day by the Federal Reserve. Loans made by the Bank under the Facility (“Loans”) shall be subject to the terms and conditions of a promissory note executed in connection with the Facility (the “Note”).
(5) Guarantors:	Lazare Kaplan Europe Inc., Lazare Kaplan Japan Inc. and Lazare Kaplan Africa Inc. (collectively, “Guarantors”).
	Should any guarantee extended in support of credit extensions made hereunder (the “Guarantees”) be cancelled, revoked or otherwise diminished in value in the opinion of the Bank, all liabilities of Borrower under the Facility to the Bank shall, without notice, be immediately due and payable and no further advances will be made hereunder.

B. Other Conditions:

1. All of the Affirmative Covenants set forth in Section 8.1 of the Line of Credit Agreement are incorporated herein by reference and shall be deemed applicable to the Facility, except that for the purposes of the Facility references contained therein to (i) “Loans” shall mean Loans made by the Bank under the Facility; (ii) “Default and Event of Default” shall mean a default or event of default under this letter or any of the Documents; (iii) “Materially Adverse Effect” shall mean any materially adverse effect on the financial condition or business operations of Borrower or material impairment of the ability of Borrower to perform its obligations under the Facility; (iv) “Loan Documents” shall mean this letter, the Note and the Guarantees, in each case as from time to time amended or supplemented; (v) “Guarantors” shall have the meaning ascribed herein; (vi) “Guaranty Agreement” shall mean the Guarantees; and (vii) “Obligations” shall refer to all indebtedness, obligations and liabilities of Borrower to pay principal or interest of the Loans made under the Facility, any fees and charges payable hereunder, and all other payment obligations of Borrower or any of its subsidiaries arising under or directly in relation to any of the Documents, in each case whether now existing or hereinafter arising, due or to become due, direct or indirect, absolute or contingent, and howsoever evidenced, held or acquired.

2. All of the Negative Covenants set forth in Section 8.2 of the Line of Credit Agreement are incorporated herein by reference and shall be deemed applicable to the Facility.

2

3. All of the Financial Covenants set forth in Section 8.3 of the Line of Credit Agreement are incorporated herein by reference and shall be deemed applicable to the Facility.

C. Events of Default:

Upon the occurrence of any of the following events:

(a) default by Borrower in making any payment of principal, interest, or any other sum payable under the Note when due; or

(b) default by Borrower in the performance of its obligations as set forth in Sections 8.1(e) and 8.2 (other than 8.2(c) and (h)) of the Line of Credit Agreement; or

(c) default by Borrower in the performance of its obligations as set forth in Sections 8.1 (other than Sections 8.1(e), 8.2(c) and (h)) and 8.3 of the Line of Credit Agreement, after the expiration of any grace period and the failure to cure any such default, in each case, as set forth in the Line of Credit Agreement; or

(d) default by Borrower in the performance of any other obligation, term or condition of the Facility or in any other agreement, document or instrument executed and delivered pursuant to or in connection with the Facility between Borrower and the Bank within thirty (30) days after the Bank has given notice of such failure to Borrower, provided, however, that if such failure is cured within such period there shall be no Event of Default under this clause (d); or

(e) the occurrence of an Event of Default under the Line of Credit Agreement, as defined therein;

then, in any such event, any or all of the following actions may be taken: The Bank may in its sole discretion and without presentment, demand, protest or notice to Borrower or any Guarantor, all of which are hereby waived, (i) declare all Loans and all indebtedness, obligations and liabilities owing in connection therewith due and payable and the same shall forthwith become due and payable without presentment, demand, protest or notice, (ii) curtail or eliminate the Facility and/or any or all of the Loans, and (iii) take whatever other action it shall deem appropriate as permitted by applicable law or by any agreement, document or instrument executed and delivered pursuant to or in connection with the Facility.

D. Loan Documents:

Borrower and Guarantors will be required to execute or cause to be executed and deliver or cause to be delivered to the Bank such instruments, documents, certificates, opinions and assurances (“Documents”) as the Bank might request in connection with the Facility on the basis outlined above, and in connection with Borrower’s authority and capacity to accept the Facility and execute the Documents; and Borrower will be required to take such other actions in connection with the Facility as the Bank might reasonably request. With respect to any financing Borrower may have with another financial institution or entity, Borrower agrees to advise the Bank of the specifics relating to any loan documentation delivered to such financial institution

3

after the date of this letter in support of credit accommodations existing at such institution at or prior to the date of this letter.

All instruments and documents required hereby or relating to Borrower’s and Guarantors’ capacity and authority to borrow and/or guarantee the Facility and to execute the documents relating thereto and such other documents, instruments, certificates, opinions and assurances as we may reasonably request, and all procedures in connection herewith shall be subject to our approval and the approval of our counsel as to form and substance.

The Documents supplement and otherwise expand upon what is set forth herein. Only to the extent that a provision of the Documents is in direct conflict with the terms and conditions of this letter will the Documents prevail. The terms and conditions of this letter will survive the execution of the Documents.

E. Assignment:

This letter is not assignable by operation of law or otherwise without our written consent.

The provisions of this letter and the Documents are severable and if any provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall not in any manner affect such provision in any other jurisdiction or any other provision of any of the Documents in any jurisdiction. This letter shall be governed by and construed in accordance with the laws of the State of New York.

F. Scope of Facility:

The foregoing is intended to provide a substantive outline of the Facility rather than a complete statement of all terms, conditions and documents which would be required in connection with the Loans described above. The continuing availability of the Facility is at all times subject to the Bank’s continuing satisfaction, as determined by the Bank in its sole and absolute discretion, with the business, affairs and financial condition of Borrower, Guarantors, and to Borrower’s and Guarantors’ compliance with the terms and conditions of the Documents and with the terms of this letter.

Any amendment or modification to this letter must be in writing and signed by Borrower and the Bank. All discussions relating to the terms and conditions of this Facility are deemed to have been incorporated into the terms of this letter.

Very truly yours, BANK LEUMI USA
By:
	Benjamin Nevah Executive Vice President

4

-and –
By:
	David Selove Vice President

AGREED TO AND ACCEPTED BY: BORROWER: LAZARE KAPLAN INTERNATIONAL INC.
By:
	William H. Moryto Vice President and Chief Financial Officer

GUARANTORS: LAZARE KAPLAN EUROPE INC.
By:
	William H. Moryto Secretary

LAZARE KAPLAN JAPAN INC.
By:
	William H. Moryto Secretary

LAZARE KAPLAN AFRICA INC.
By:
	William H. Moryto Secretary

5

STATE OF NEW YORK }

} ss.:

COUNTY OF NEW YORK }

On the ____ day of October, 2007, before me, the undersigned, personally appeared WILLIAM H. MORYTO, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument.

Notary Public

STATE OF NEW YORK }

} ss.:

COUNTY OF NEW YORK }

On the ____ day of October, 2007, before me, the undersigned, personally appeared BENJAMIN NAVEH, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument.

Notary Public

STATE OF NEW YORK }

} ss.:

COUNTY OF NEW YORK }

On the ____ day of October, 2007, before me, the undersigned, personally appeared DAVID SELOVE, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument.

Notary Public

6

EX-10.(AL)

WAIVER AND NINTH AMENDMENT

WAIVER AND NINTH AMENDMENT dated as of February 21, 2008 (this “Amendment”) with respect to the Revolving Credit Agreement, dated as of August 14, 2002 (as amended, the “Credit Agreement”) by and between Lazare Kaplan International Inc. (“Borrower”), as borrower and ABN AMRO Bank N.V., as Administrative Agent (the “Administrative Agent”) and as a Bank (the “Bank”).

WITNESSETH:

WHEREAS, pursuant to the Credit Agreement, the Bank has made Loans and other financial accommodations to the Borrower which remain outstanding;

WHEREAS, the Borrower has provided the Bank an audited copy of Borrower’s balance sheet and income statement as of and for the year ended May 31, 2007;

WHEREAS, the Specified Event of Default (as defined below) may occur; and

WHEREAS, the Borrower has requested that the Administrative Agent and the Bank waive the Specified Event of Default and the Administrative Agent and the Bank are willing to do so, but only on the terms and conditions set forth herein;

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

ARTICLE I

DEFINITIONS

Section 1.1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein have the meanings assigned in the Credit Agreement and the following terms shall have the following meanings:

“Effective Date”: the first date on which the conditions precedent specified in Article III of this Amendment shall have been satisfied or the satisfaction thereof shall have been waived in accordance with the terms hereof.

“Specified Event of Default”: the Event of Default which may arise under Section 9.1(c) of the Credit Agreement as a result of the Borrower’s failure to satisfy Section 8.3(d) of the Credit Agreement with respect to the fiscal year ended May 31, 2007.

ARTICLE II

WAIVER; AMENDMENT; AGREEMENTS

Section 2.1. Waiver. Subject to the terms and conditions hereof, the Administrative Agent and the Bank hereby agree to waive the Specified Event of Default.

Section 2.2. Amendment. (a) The definition of “Interest Period” shall be amended by deleting clause (i) in its entirety and inserting in lieu thereof the following:

“for any LIBOR Rate Loan, 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11 or 12 months”; and

(b) 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, 2009, or such later date as may be extended pursuant to Section 24 hereof.”

(c) Section 8.2(a) of the Credit Agreement is hereby amended by deleting it in its entirety and inserting in lieu thereof the following:

“create, incur or assume any Indebtedness other than (i) Indebtedness to the Banks, (ii) up to $70,000,000 in unsecured Indebtedness under lines of credit from Antwerp Diamond Bank, including guaranties by Subsidiaries of the Borrower (including, without limitation, Material Domestic Subsidiaries) in connection with such Indebtedness, (iii) up to Five Hundred and Fifty Million Yen in unsecured Indebtedness to ABN AMRO or any affiliate thereof in Japan, including guaranties by Subsidiaries of the Borrower (including, without limitation, Material Domestic Subsidiaries) in connection with such Indebtedness, (iv) current liabilities of the Borrower not incurred through the borrowing of money or the obtaining of credit on an open account customarily extended, (v) 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, (vi) other unsecured Indebtedness not in excess of $250,000, (vii) up to $20,000,000 in unsecured Indebtedness to HSBC Bank USA, (viii) up to $25,000,000 in unsecured Indebtedness to ABN AMRO or any affiliate thereof in the United Arab Emirates with respect to the Borrower’s guaranty of certain Indebtedness of Gulfidam DMCC; (ix) up to $10,000,000 in unsecured Indebtedness to Bank Leumi USA, including guaranties by Subsidiaries of the Borrower (including, without limitation, Material Domestic Subsidiaries) in connection with such Indebtedness; and (x) up to $6,000,000 in Indebtedness (which shall include all Indebtedness of Subsidiaries of Borrower) to Nedbank, Limited, South Africa, including guaranties by the Borrower and Subsidiaries of the Borrower in connection with such Indebtedness;”

(d) Section 8.2(b) of the Credit Agreement is hereby amended by inserting the following clause (vi) at the end thereof:

“(vii) Liens granted by Gulfidam DMCC in connection with the Indebtedness described in Section 8.2(a)(viii).”

(e) Section 8.3 of the Credit Agreement is hereby amended by: (i) inserting the following proviso at the end of thereof:

“provided, that, for the purpose of calculating compliance with any subsection of this Section 8.3 for any period, the definition of “Contingent Obligations” shall exclude up (i) to $6,000,000 in Indebtedness (which shall include all Indebtedness of Subsidiaries of Borrower) to Nedbank, Limited, South Africa, including guaranties by the Borrower and Subsidiaries of the Borrower in connection with such Indebtedness, and (ii) up to $25,000,000 of Indebtedness of Gulfdiam DMCC to ABN AMRO Bank N.V. (Dubai) guaranteed by the Borrower.,” and

(ii) deleting subsection (a) in its entirety and inserting in lieu thereof the following:

“(a) as of the end of each of its fiscal quarters, Working Capital of not less than eighty million dollars ($80,000,000);”.

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ARTICLE III

EFFECTIVE DATE

Section 3.1 Effective Date. This Amendment shall become effective upon the satisfaction of the following conditions precedent:

(a) the Borrower, the Administrative Agent and the Bank shall have executed and delivered this Amendment;

(b) legal matters incident to the execution and deliver of this Amendment shall be satisfactory to the Administrative Agent and its counsel;

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

(d) all of the representations and warranties set forth in Section 6 of the Credit Agreement shall be true and correct and the Borrower shall be in compliance with the terms and conditions of the Credit Agreement and, after giving effect to this Amendment, no Default or Event of Default has occurred under the Credit Agreement; and

(e) the Borrower shall have paid all invoiced and unpaid out-of-pocket costs and expenses of the Administrative Agent incurred in connection with the Borrower, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent.

Notwithstanding anything to the contrary in the foregoing Section 3.1, Section 2.1 and Sections 2.2(c), (d) and (e) of this Amendment shall be deemed effective as of August 28, 2007.

ARTICLE IV

INTERPRETATION

Section 4.1. Continuing Effect of the Credit Agreement. The Borrower, the Administrative Agent and the Bank hereby acknowledge and agree that the Credit Agreement shall continue to be and shall remain unchanged and in full force and effect in accordance with its terms, except as expressly modified hereby.

Section 4.2. No Waiver. Nothing contained in this Amendment (including, but not limited to Section 2.1) shall be construed or interpreted or is intended as a waiver of any Default or Event of Default (other than the Specified Event of Default) or of any rights, powers, privileges or remedies that the Administrative Agent or the Bank have or may have under the Credit Agreement, any other related document or applicable law on account of such Default or Event of Default (other than the Specified Event of Default).

ARTICLE V

MISCELLANEOUS

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Section 5.1. Representations and Warranties. The Borrower hereby represents and warrants as of the date hereof that, after giving effect to this Amendment, (a) no Default or Event of Default has occurred and is continuing and (b) all representations and warranties of the Borrower contained in the Credit Agreement are true and correct in all material respects with the same effect as if made on and as of such date (or if any such representation or warranty is expressly stated to have been made as of a specific date, as of such date).

Section 5.2. Counterparts. This Amendment may be executed by the parties hereto in any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument.

Section 5.4. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.

Section 5.5. Reservation of Rights. Notwithstanding anything contained in this Amendment, the Borrower acknowledges that the Administrative Agent and the Bank do not waive, and expressly reserve, the right to exercise, at any time, any and all of their rights and remedies under the Credit Agreement, any other related document and applicable law on account of any Default or Event of Default (other than Specified Event of Default).

Section 5.6. Waiver. The Borrower hereby releases, waives, and forever relinquishes all claims, demands, obligations, liabilities and causes of action of whatever kind or nature, whether known or unknown, which any of them has, may have, or might assert at the time of execution of this Amendment or in the future against the Administrative Agent, the Bank and/or their respective parents, affiliates, participants, officers, directors, employees, agents, attorneys, accountants, consultants, successors and assigns (collectively, the “Bank Group”), directly or indirectly, which occurred, existed, was taken, permitted or begun prior to the execution of this Amendment, arising out of, based upon, or in any manner connected with (i) any transaction, event, circumstance, action, failure to act or occurrence of any sort or type, whether known or unknown, with respect to the Credit Agreement, any other Loan Document and/or the administration thereof or the obligations created thereby, (ii) any discussions, commitments, negotiations, conversations or communications with respect to the refinancing, restructuring or collection of any obligations related to the Credit Agreement, any other Loan Document and/or the administration thereof or the obligations created thereby, or (iii) any matter related to the foregoing.

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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the date first above written.

LAZARE KAPLAN INTERNATIONAL INC.
By:
	Title:

ABN AMRO BANK N.V., as Bank and as Agent
By:
	Title:

By:
	Title:

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GUARANTOR’S ACKNOWLEDGEMENTAND 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 Waiver and Ninth 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

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EX-10.(AM)

EXECUTION COPY

FIRST AMENDED AND RESTATED FINANCE AGREEMENT

between

NAMGEM TRADING BVI LIMITED

and

OVERSEAS PRIVATE INVESTMENT CORPORATION

Dated as of June 10, 2008

OPIC/673-2006-061-IG

Table of Contents

		Page
ARTICLE I. DEFINITIONS		1
Section 1.01	Definitions	1
Section 1.02	Interpretation	11
Section 1.03	Project Cost; Financial Plan	11
ARTICLE II. AMOUNT AND TERMS OF THE LOAN		12
Section 2.01	Amount and Disbursement	12
Section 2.02	Commitment Fee	13
Section 2.03	Cancellation of the Commitment	13
Section 2.04	Interest	13
Section 2.05	Repayment of the Loan	14
Section 2.06	Voluntary Prepayment	14
Section 2.07	Mandatory Prepayment	14
Section 2.08	Facility Fee	15
Section 2.09	Maintenance Fee	15
Section 2.10	Taxes	15
Section 2.11	Miscellaneous	16
ARTICLE III. REPRESENTATIONS AND WARRANTIES		17
Section 3.01	Existence and Power of the Borrower	17
Section 3.02	Authority of the Borrower	17
Section 3.03	Financial Condition	18
Section 3.04	Capitalization of the Borrower and the Consignee	18
Section 3.05	Subsidiaries	18
Section 3.06	Liens and Indebtedness	18
Section 3.07	Taxes and Reports	19
Section 3.08	Defaults	19
Section 3.09	Litigation	19
Section 3.10	Compliance with Law; Corrupt Practices	19
Section 3.11	Property Interests, Etc.	20
Section 3.12	Environmental, Health and Safety Matters.	20
Section 3.13	Project Cost and Project Completion	20
Section 3.14	Disclosure	21
Section 3.15	Suspension and Debarment	21
Section 3.16	ERISA and Employees	21
Section 3.17	Other Liabilities	21
Section 3.18	Other Parties; Transaction Documents	22
Section 3.19	Proper Legal Form	22
Section 3.20	Compliance with Laws	22
Section 3.21	Investment Company Act	22
Section 3.22	Margin Regulation	22
Section 3.23	OPIC Reliance	23

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ARTICLE IV. CONDITIONS PRECEDENT TO DISBURSEMENT		23
Section 4.01	Corporate Authorization	23
Section 4.02	Funding Arrangements	23
Section 4.03	Transaction Documents	24
Section 4.04	Sponsor Investment	25
Section 4.05	Government Approvals	25
Section 4.06	Insurance	26
Section 4.07	Appointment of Agent	26
Section 4.08	Legal Opinions	26
Section 4.09	Independent Accountants	26
Section 4.10	Financial Statements	26
Section 4.11	OFAC Compliance	27
Section 4.12	Collateral Accounts	27
Section 4.13	Financial Model	27
ARTICLE V. CONDITIONS PRECEDENT TO THE CLOSING DATE AND EACH TRANSFER FROM DISBURSEMENT ACCOUNT		27
Section 5.01	Representations and Defaults	27
Section 5.02	Change in Circumstances	28
Section 5.03	Disbursement of Subordinated Loan on a Transfer Date	28
Section 5.04	Certification	28
Section 5.05	Financial Information	28
Section 5.06	Payment or Reimbursement of Expenses	28
ARTICLE VI. AFFIRMATIVE COVENANTS		29
Section 6.01	Project Execution	29
Section 6.02	Borrower Operations	29
Section 6.03	Maintenance of Rights, Compliance with Laws, and Internal Controls	29
Section 6.04	Government Approvals	30
Section 6.05	Insurance	30
Section 6.06	Accounting and Financial Management	31
Section 6.07	Financial Statements and Other Information	31
Section 6.08	Access to Records; Inspection; Meetings; Asset Management	32
Section 6.09	Notice of Default and Other Matters	33
Section 6.10	Security Documents	33
Section 6.11	Financial Ratios	33
Section 6.12	Environmental Compliance	34
Section 6.13	Management of Revenue Account	34
Section 6.14	Kimberley Process Certificates	34
Section 6.15	Ownership of Diamonds	34
Section 6.16	Anti-Corruption Handbook	35
ARTICLE VII. NEGATIVE COVENANTS		35
Section 7.01	Liens	35
Section 7.02	Indebtedness	35
Section 7.03	No Alteration of Agreements	36
Section 7.04	Distributions and Share Redemptions	36
Section 7.05	Conduct of Business with Affiliates	36
Section 7.06	Sale of Assets; Mergers	37

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Section 7.07	Lease Obligations	37
Section 7.08	Hedging Arrangements	37
Section 7.09	Ordinary Conduct of Business	37
Section 7.10	Worker Rights	38
Section 7.11	ERISA and Employees	38
Section 7.12	OFAC Compliance	39
Section 7.13	Bank Accounts	39
Section 7.14	No Other Powers of Attorney	39
ARTICLE VIII. DEFAULTS AND REMEDIES		39
Section 8.01	Events of Default	39
Section 8.02	Remedies upon Event of Default	42
Section 8.03	Borrower Consent to Suit	42
Section 8.04	Judgment Currency	44
Section 8.05	Immunity	44
ARTICLE IX. MISCELLANEOUS		44
Section 9.01	Notices	44
Section 9.02	English Language	45
Section 9.03	Governing Law	45
Section 9.04	Succession	45
Section 9.05	Survival of Agreements	46
Section 9.06	Integration; Amendments	46
Section 9.07	Severability	46
Section 9.08	No Waiver	46
Section 9.09	Waiver of Jury Trial	46
Section 9.10	Waiver of Litigation Payments	47
Section 9.11	Indemnity	47
Section 9.12	No Third Party Reliance; No Assignment	48
Section 9.13	Further Assurances	48
Section 9.14	Counterparts	48

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SCHEDULES
1.01	Application
1.03	Projected Financial Plan
4.09	Form of Authorization to Auditors
EXHIBITS
A	Form of Fixed Rate Promissory Note
B	Form of Disbursement Request
C	Form of Corporate Authorization Certificate (pursuant to Article IV)
D	Form of Disbursement/Transfer Certificate (pursuant to Article V)
E	Form of Drawstop Notice

FIRST AMENDED AND RESTATEDFINANCE AGREEMENT

This AGREEMENT, dated as of June 10, 2008, between NAMGEM TRADING BVI LIMITED, a company limited by shares organized and existing under the laws of the British Virgin Islands (the “Borrower”), and OVERSEAS PRIVATE INVESTMENT CORPORATION, an agency of the United States of America (“OPIC”),

WITNESSETH:

WHEREAS, the Borrower and OPIC entered into a finance agreement dated as of February 28, 2007 to provide for, among other things, the Loan referred to herein and wish to amend and restate such finance agreement in its entirety by entering into this Agreement.

WHEREAS, the Borrower intends to execute the Project (as hereinafter defined); and

WHEREAS, to secure a portion of the financing for the Project, the Borrower has requested that OPIC provide a credit facility to the Borrower in an amount up to $25,200,000 pursuant to Section 234(b) of the Foreign Assistance Act of 1961, as amended, which OPIC is willing to do on the terms and conditions set forth herein;

NOW, THEREFORE, in consideration of the premises and of the agreements contained herein, it is hereby agreed as follows:

ARTICLE I.

DEFINITIONS

Section 1.01 Definitions.

Unless otherwise provided, capitalized terms used herein shall have the definitions specified below:

“Affiliate” means, with respect to any Person, (i) any other Person that is directly or indirectly Controlled by, under common Control with or Controlling such Person, (ii) any other Person owning beneficially or controlling five percent (5%) or more of the equity interest in such Person, (iii) any officer or director of such Person, or (iv) any spouse or relative of such Person.

“Agreement” means this First Amended and Restated Finance Agreement between the Borrower and OPIC.

“Anti-Corruption Handbook” means the OPIC Anti-Corruption Policies and Strategies Handbook dated September 2006, posted on OPIC’s website at http://www.opic.gov/pubs/handbooks/guides/documents/opicanticorruptionhandbook0906.pdf.

“Anti-Money Laundering Laws” means (i) the USA Patriot Act of 2001, (Pub.L. No. 107-56), and (ii) any other law, regulation, order, decree or directive of any relevant jurisdiction having the force of law and relating to anti-money laundering.

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“Application” means the Borrower’s application to OPIC for the Loan, consisting of the Sponsor Disclosure Report dated July 29, 2004, the Commitment Letter and the items described in Schedule 1.01.

“Asset Management” has the meaning set forth in Section 6.08.

“Asset Manager” has the meaning set forth in Section 6.08.

“Authorized Officer” shall mean, with respect to any Person, its chairperson, managing director, president, secretary or treasurer, any vice president, assistant treasurer or assistant secretary or equivalent officers of such Person and any other officer designated in writing by such Person as having been authorized to execute and deliver this Agreement, the Notes, any of the other Transaction Documents to which it is or will be a party, or any other notice or instrument contemplated hereunder or thereunder.

“Borrower” has the meaning set forth in the preamble.

“Borrower Share Pledge and Retention Agreement” means a share pledge and retention agreement among the Shareholders, the Borrower, the Sponsor, the Collateral Agent and OPIC, satisfactory to OPIC in form and substance.

“Business Day” means any day other than (i) a Saturday, Sunday or day on which commercial banks are authorized by law to close in the City of New York or Washington, D.C., United States of America, and (ii) with respect to any payment, delivery, or communication to OPIC, a day on which OPIC is not open for business.

“Cash Flow” of the Borrower, for any period, means the sum of (i) its Net Income for such period, plus (ii) all interest expense, any expense for any Commitment Fee, Facility Fee and Maintenance Fee, and depreciation, amortization, deferred income taxes, and other non-cash expenses for such period (but only to the extent deducted in determining Net Income), minus (iii) any capital expenditure incurred in such period for repair or replacement of a capital asset, minus (iv) cash paid for Taxes (to the extent not excluded from Net Income).

“Certificate Interest Rate” has the meaning set forth in the Funding Documents.

“Charter Documents” means, in respect of any company, corporation, partnership, governmental agency or other enterprise, its founding act, charter, articles of incorporation and by-laws, memorandum and articles of association, statute, or similar instrument.

“Closing Date” means the Business Day on which the Disbursement is made.

“Code” means the Internal Revenue Code of 1986, as amended and in effect from time to time.

“Collateral” means all property that is subject or is intended to become subject to the Liens granted by the Share Pledge and Retention Agreement or the Security and Account Agreement.

“Collateral Accounts” has the meaning set forth in the Security and Account Agreement.

“Collateral Agent” means the financial institution serving as Collateral Agent under the Security and Account Agreement and the Share Pledge and Retention Agreement.

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“Commitment” means OPIC’s commitment to lend an amount not to exceed $25,200,000 less (i) the portion thereof which pursuant to Section 2.03 has been canceled or has been deemed canceled and (ii) any amounts repaid or prepaid.

“Commitment Fee” has the meaning set forth in Section 2.02.

“Commitment Letter” means the letter agreement between the Sponsor and OPIC, dated September 22, 2006, in which OPIC and the Sponsor have agreed that OPIC and the Borrower will enter into this credit facility, subject to the conditions stated therein.

“Commitment Period” means the period commencing on the date hereof and ending on the earlier of (i) the first date on which the amount of the Loan equals the amount of the Commitment, (ii) the date the Commitment shall have been cancelled or otherwise terminated, or reduced to zero, (iii) the Repayment Commencement Date, and (iv) February 28, 2010.

“Consignee” means NamGem Trading BVBA, a company organized and existing under the laws of the Kingdom of Belgium and a wholly owned subsidiary of the Borrower.

“Consignee Share Pledge and Retention Agreement” means a share pledge and retention agreement among the Borrower, the Consignee, the Collateral Agent and OPIC, satisfactory to OPIC in form and substance.

“Consignment and Guaranty Agreement” means an exclusive consignment agreement, in form and substance satisfactory to OPIC, among the Consignee, the Sponsor and the Borrower whereby (i) the Consignee shall (a) be obligated to take from and sell on consignment for the Borrower all diamonds owned by the Borrower and (b) guarantee to the Borrower the timely payment in respect of all diamonds purchased by the Borrower in an amount equal to the greater of (x) the selling price less the costs of manufacturing and marketing such diamonds and (y) the Purchase Price of such diamonds, regardless of whether such diamonds are actually delivered to, received by, or cut and polished by the Project Company, or delivered to or sold by the Sponsor or the Consignee, as the case may be, or lost, stolen, damaged or destroyed for any reason prior to such delivery or sale, and containing other terms satisfactory to OPIC, and (ii) the Sponsor shall provide an unconditional guarantee of the Consignee’s obligations under such agreement as set forth therein.

“Control” means possession, directly or indirectly, of the power to direct or cause the direction of the management of a Person, whether through the ownership of partnership interests or voting securities, by contract or otherwise.

“Cooperation Agreement” means the Cooperation Agreement among the Sponsor, the Project Company and NamDeb Diamond Corporation (Pty) Ltd., dated January 9, 2004.

“Corrupt Practices Laws” means (i) the Foreign Corrupt Practices Act of 1977 (Pub.L. No. 95-213, §§101-104), as amended, and (ii) any other law, regulation, order, decree or directive having the force of law and relating to bribery, kick-backs, or similar business practices.

“Costs of Defense” has the meaning set forth in Section 9.11.

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“Cutting and Polishing Operations” means the cutting and polishing in Namibia by the Project Company in accordance with the Cooperation Agreement of diamonds purchased by the Borrower pursuant to the Supply Agreement.

“Debt Service” means, for any period, the sum of all payments of principal and interest in respect of the Loan and all OPIC Fees during such period as reflected in certifications acceptable to OPIC.

“Debt Service Coverage Ratio” means, for any period, the result obtained by dividing (i) Cash Flow for such period by (ii) Debt Service for such period.

“Default Rate” has the meaning set forth in Section 2.04(b).

“Default Spread” means two percent (2%) per annum.

“Diamond Supplier” means Namibia Diamond Trading Company (Pty) Limited and such other Person satisfactory to OPIC, identified in a Supply Agreement as supplier of rough diamonds.

“Disbursement” means each advance of the proceeds of the Loan to the Borrower.

“Disbursement Account” has the meaning set forth in the Security and Account Agreement.

“Disbursement Request” means a request for disbursement of the Loan substantially in the form of Exhibit B, which shall include a certification as to the accuracy of all representations and warranties, the Borrower’s and Sponsor’s compliance with all terms of the Transaction Documents, the absence of any Event of Default or Potential Event of Default and such other matters as are addressed therein.

“Disbursement/Transfer Certificate” means a certificate of an Authorized Officer of the Borrower, substantially in the form of Exhibit D and otherwise in form and substance satisfactory to OPIC.

“Dollars” or “$” means United States dollars.

“Drawstop Notice” has the meaning set forth in Section 2.01(d).

“Eligible Costs” means costs not to exceed $2,520,000, which shall include costs incurred by any Obligor in connection with the preparation, negotiation and execution of the Transaction Documents (including fees payable to OPIC, OPIC’s counsel, any Obligor’s counsel, and other reasonable and documented out-of-pocket expenses) and other costs approved in writing by OPIC.

“Employee Benefit Plan” means any employee benefit plan within the meaning of §3(3) of ERISA maintained or contributed to by the Borrower or an ERISA Affiliate.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute and all rules and regulations promulgated thereunder.

“ERISA Affiliate” means any Person which is treated as a single employer with the Borrower under §414 of the Code.

“Event of Default” has the meaning set forth in Section 8.01.

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“Facility Fee” has the meaning set forth in Section 2.08.

“Finance Document” means each Loan Document, Security Document and Funding Document.

“Financial Model” has the meaning set forth in the Consignment and Guaranty Agreement.

“Financial Plan” has the meaning set forth in Section 1.03.

“Financial Statements” means, with respect to any Person, such Person’s semi-annual or annual balance sheet and statements of income, retained earnings, and sources and application of funds for such fiscal period, together with all notes thereto and with comparable figures for the corresponding period of its previous fiscal year, each prepared in Dollars in accordance with U.S. GAAP.

“Fiscal Semester” means each of the first and second six-month accounting periods of each Fiscal Year.

“Fiscal Year”means the accounting year of the Borrower, commencing each year on June 1 and ending on May 31 or such other period agreed to between the Borrower and OPIC.

“Funding Documents” has the meaning set forth in Section 4.02.

“Hedging Arrangement” means any interest rate or currency swap, future, option, cap, collar, ceiling, hedge, or other interest rate protection agreement or foreign exchange contract, or any other agreement or arrangement designed to protect against fluctuations in interest rates or currency values.

“Indebtedness” means with respect to any Person, at any date, all or any liabilities, obligations and reserves, contingent or otherwise, which, in accordance with U.S. GAAP, would be reflected as a liability on a balance sheet, including (i) any obligation created, incurred, issued or assumed by such Person for borrowed money or arising out of any credit facility or financial accommodation, (ii) any obligation created, incurred, issued or assumed by such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) any obligation created, incurred, issued or assumed by such Person to pay the deferred purchase price of property or services, (iv) any obligation created, incurred, issued or assumed by such Person under conditional sales or other title retention agreements, (v) the net aggregate rentals under any lease by such Person as lessee that under U.S. GAAP would be capitalized on the books of the lessee or is the substantial equivalent of the financing of the property so leased, (vi) any obligation created, incurred, issued or assumed by such Person to purchase securities or other property which arises out of or in connection with the sale of the same or substantially similar securities or property, (vii) any obligation created, incurred, issued or assumed by such Person secured by any Lien upon property of such Person even though such Person has not assumed or otherwise become liable for the payment thereof, (viii) any Indebtedness of others secured by a Lien on any asset of such Person, and (ix) any Indebtedness of others guaranteed, directly or indirectly, by such Person.

“Indemnified Person” has the meaning set forth in Section 9.11.

“Indemnity” has the meaning set forth in Section 9.11.

“Interest Period” means the period (i) from and including the day following the immediately preceding Payment Date or, if later, the Closing Date (ii) to and including the next succeeding Payment Date or, if earlier, the Loan Maturity Date.

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“Kimberley Process Certificate” means a forgery resistant certificate issued in respect of imported rough diamonds identifying such shipment as being in compliance with the Kimberley Process Certification Scheme implemented January 1, 2003.

“Lien” means any lien, pledge, mortgage, security interest, deed of trust, charge, assignment, hypothecation, title retention or other encumbrance on or with respect to, or any preferential arrangement having the practical effect of constituting a security interest with respect to the payment of any obligation with, or from the proceeds of, any asset or revenue of any kind.

“Litigation Payment” has the meaning set forth in Section 9.10.

“Loan” means, on any date, the aggregate of the outstanding unpaid principal amounts of the Notes then outstanding.

“Loan Cover Ratio” means, at any time, the ratio of (i) the sum of (a) the amount on deposit in the Revenue Account plus (b) accounts receivable of the Borrower (on terms not exceeding 120 days) for diamonds sold pursuant to the Consignment and Guaranty Agreement plus (c) Sales Receipts then held by the Consignee plus (d) the amount of the diamonds then owned by the Borrower (valued at their Purchase Price) to (ii) the Loan.

“Loan Documents” has the meaning set forth in Section 4.03.

“Loan Maturity Date” means the fifteenth Payment Date falling after the Repayment Commencement Date.

“Loan to Subordinated Loan Ratio” means, at any time, the result obtained by dividing (i) the aggregate principal amount of the Loan then outstanding (excluding Loan amounts on deposit in the Disbursement Account) by (ii) the aggregate principal amount of the Subordinated Loan then outstanding.

“Long-term Indebtedness” means, in accordance with U.S. GAAP, any Indebtedness, the final maturity of which, by its terms or by the terms of any agreement related to it, falls due more than one year after the date of its incurrence.

“Loss” has the meaning set forth in Section 9.11.

“Maintenance Fee” has the meaning set forth in Section 2.09.

“Material Adverse Effect” means a material adverse effect on (i) the Project, (ii) the business, operations, prospects, condition (financial or otherwise), or property of the Borrower, the Sponsor (only to the extent it would affect the ability of the Sponsor to perform its obligations in respect of the Project), any other Person whose continuing viability, because of its guaranty or other undertaking, is essential to the Project (only to the extent it would affect the ability of such Person to perform its obligations in respect of the Project), (iii) the ability of the Borrower or any other party to perform in a timely manner its material obligations under any of the Transaction Documents, (iv) the validity or enforceability of any material provision of any Transaction Document, (v) the rights and remedies of OPIC, if any, under any of the Transaction Documents, or (vi) the Liens under the Security Documents.

-7-

“Monthly Date” means the monthly anniversary of the fifth Business Day immediately preceding the Closing Date (or if such monthly anniversary is not a Business Day, then the immediately succeeding Business Day).

“NamGem Bermuda” means NamGem Trading (Bermuda) Limited, a wholly owned subsidiary of the Sponsor.

“Namibia” means the Republic of Namibia.

“Namibia Diamond Trading Company” means Namibia Diamond Trading Company Limited, a company organized and existing under the laws of Namibia.

“Net Income” means, with respect to any Person for any fiscal period, the net income of such Person for such period after Taxes but before extraordinary items, determined in accordance with U.S. GAAP.

“Note” means any promissory note issued by the Borrower pursuant to this Agreement substantially in the form of Exhibit A.

“Obligations” means each and every liability and other obligation of every type and description arising under or in connection with any of the Finance Documents which the Borrower may now or at any time hereafter owe to OPIC, whether such debt, liability or obligation now exists or is hereafter created or incurred, whether it is direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or sole, joint, several or joint and several, and including specifically, but not limited to, all indebtedness, liabilities and obligations of the Borrower under this Agreement.

“Obligor” means each of the Borrower, the Sponsor, NamGem Bermuda and the Consignee.

“OFAC List” means the Specially Designated Nationals and Blocked Persons List, as published by the United States Department of the Treasury Office of Foreign Asset Control from time to time, and available on the Internet at the following website:http:// www.treas.gov/offices/enforcement/ofac/sdn/tllsdn.pdf or any official successor website.

“OPIC” has the meaning set forth in the preamble.

“OPIC Fees” means the Commitment Fee, the Maintenance Fee, and the Facility Fee.

“OPIC Guaranty Fee” means one and one-half of one-percent (1.50%) per annum.

“OPIC Guaranty Payment” has the meaning set forth in Section 2.04(c).

“OPIC Note Interest Rate” has the meaning set forth in Section 2.04(a) or Section 2.04(c), as the case may be.

“OPIC Paying Agent” has the meaning set forth in the Funding Documents.

“OPIC Placement Agent” has the meaning set forth in the Funding Documents.

-8-

“OPIC Plaintiff” has the meaning set forth in Section 9.10.

“Payment Date” means the date falling on the six month anniversary of the Closing Date and each six-month anniversary after such date until the Loan and all amounts due hereunder or under the Note are paid in full, unless such date is not a Business Day, in which case the Payment Date will be the next succeeding Business Day.

“Permitted Indebtedness” has the meaning set forth in Section 7.02.

“Permitted Lien” has the meaning set forth in Section 7.01.

“Person” means and includes (i) an individual, (ii) a legal entity, including a partnership, a joint venture, a corporation, a limited liability company or partnership, a trust, and an unincorporated organization, and (iii) a government or any department or agency thereof.

“Potential Event of Default” means an event or condition that, with the passage of time or the giving of notice, or both, could constitute an Event of Default.

“Potential Loss” has the meaning set forth in Section 9.11.

“Project” means (i) the purchase by the Borrower under the Supply Agreement of rough diamonds which for cutting and polishing purposes will be delivered to the Project Company in Namibia in custody and safekeeping for the Borrower, (ii) the Cutting and Polishing Operations, and (iii) the sale on consignment or purchase by the Consignee of such diamonds when required in accordance with the Consignment and Guaranty Agreement, all as contemplated by the Project Documents and described in the Application.

“Project Company” means NamGem Diamond Manufacturing Company (Pty) Ltd., a company organized and existing under the laws of Namibia.

“Project Company Undertaking Agreement” means a Project Company Undertaking Agreement between the Project Company and the Borrower in form and substance satisfactory to OPIC.

“Project Contracts” has the meaning set forth in Section 7.10.

“Project Documents” has the meaning set forth in Section 4.03.

“Project Participant” means each of the Borrower, the Sponsor, NamGem Bermuda, the Consignee, the Project Company and the Diamond Supplier.

“Prudent Industry Practices” means those practices, methods and equipment that are commonly used in prudent engineering, design, construction, operation and maintenance in the diamond cutting and polishing industry in the United States and Namibia to design, engineer, construct, operate and maintain diamond cutting and polishing equipment lawfully and with safety, reliability, efficiency, operability and maintainability and, without limitation of the foregoing, in a manner compliant with applicable law, the World Bank Guidelines and all applicable governmental consents, licenses, approvals and authorizations.

“Purchase Price” of any rough diamonds means the price paid for such diamonds by the Borrower under the Supply Agreement.

-9-

“Regulation U” means Regulation U issued by the Board of Governors of the U.S. Federal Reserve System.

“Regulation X” means Regulation X issued by the Board of Governors of the U.S. Federal Reserve System.

“Repayment Commencement Date” means the Payment Date falling on the two year anniversary of the Closing Date.

“Revenue Account” has the meaning set forth in the Security and Account Agreement.

“Sales Receipts” has the meaning set forth in the Consignment and Guaranty Agreement.

“Security and Account Agreement” means the Security and Account Agreement among the Borrower, OPIC and the Collateral Agent satisfactory to OPIC in form and substance.

“Security Documents” has the meaning set forth in Section 4.03.

“Self-Monitoring Questionnaire” means that certain “Self-Monitoring Questionnaire for Insurance and Finance Projects” posted on OPIC’s website (http://www.opic.gov/pubs/forms/index.asp), as the same may be revised by OPIC from time to time.

“Share Pledge and Retention Agreement” means each of the Borrower Share Pledge and Retention Agreement and the Consignee Share Pledge and Retention Agreement.

“Shareholder” means each of NamGem Bermuda, any Person identified in the Borrower Share Pledge and Retention Agreement as a shareholder of the Borrower and any other Person who at any time becomes such a shareholder under and in accordance with the Borrower Share Pledge and Retention Agreement.

“Signing Date” means the date on the title page of this Agreement.

“Sponsor” means Lazare Kaplan International Inc., a corporation organized and existing under the laws of the State of Delaware.

“Sponsor Consent” means a written agreement with OPIC containing consent by the Sponsor and the Consignee to the assignment pursuant to the Security and Account Agreement of the Borrower’s right under the Consignment and Guaranty Agreement, in form and substance satisfactory to OPIC.

“Sponsor Disclosure Report” means OPIC’s form 129.

“Subordinated Lender” means (i) NamGem Bermuda, (ii) the Sponsor, (iii) any other Shareholder that accedes to the Subordination Agreement pursuant to a duly executed and delivered accession agreement related thereto or (iv) any other legal entity which is (A) Controlled by one of the Persons referred to in clauses (i) to (iii) above, (B) whose equity is not less than 50% legally and beneficially owned by such Person and (C) accedes to the Borrower Share Pledge and Retention Agreement pursuant to a duly executed and delivered accession agreement related thereto.

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“Subordinated Loan” means the aggregate principal amount of the loans outstanding from time to time under the Subordinated Loan Note.

“Subordinated Loan Note” means a promissory note or notes executed and delivered by the Borrower in favor of the Subordinated Lender, satisfactory to OPIC in form and substance, evidencing loans to the Borrower that are made by the Subordinated Lender and subordinated to the Loan in accordance with the Subordination Agreement.

“Subordination Agreement” means the Subordination Agreement among the Subordinated Lender, OPIC and the Borrower satisfactory to OPIC in form and substance.

“Supply Agreement” means a long-term rough diamond supply agreement between the Borrower and the Diamond Supplier providing that all diamonds delivered thereunder to the Project Company will at all times be the property of and under the control of the Borrower and containing other terms satisfactory to OPIC.

“Taxes” means present and future taxes, charges, fees, levies or other assessments, including all net income, gross income, gross receipts, sales, use, ad valorem, value added, turnover, transfer, franchise, profits, license, withholdings, payroll, employment, excise, estimated, severance, stamp duties, occupation, property or other taxes, customs duties, fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax, or additional amounts imposed by any taxing authority and any political subdivision, instrumentality, agency or similar body of any taxing authority, and all liabilities with respect thereto.

“Transfer” means a transfer of amounts on deposit in the Disbursement Account in accordance with this Agreement and the Security and Account Agreement to pay Project costs as permitted by Section 6.01(b).

“Transfer Date” means any Business Day on which a Transfer occurs.

“Transfer Request” means a written request for a Transfer substantially in the form of Exhibit A to the Security and Account Agreement.

“Transaction Documents” has the meaning set forth in Section 4.03.

“U.S. GAAP” means generally accepted accounting principles in the United States of America in effect from time to time, applied on a consistent basis both as to classification of items and amounts.

“U.S.Treasury Cost” means, with respect to any amount, the fixed borrowing cost that would be charged to OPIC for such amount by the United States Department of Treasury (which will approximate the interest rate on U.S. Treasury notes with a similar maturity). “Worker Rights Requirements” has the meaning set forth in Section 7.10.

“World Bank Guidelines” means the environmental, health and safety standards set forth in the International Finance Corporation’s 2003 Occupational Health and Safety Guidelines.

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Section 1.02 Interpretation.

In this Agreement, unless otherwise indicated or required by the context:

(a) Reference to and the definition of any document (including this Agreement and all Schedules and Exhibits) shall be deemed a reference to such document as it may be amended, supplemented, revised, or modified from time to time;

(b) References to any Person or Persons shall be construed as a reference to any successors or permitted assigns of such Person or Persons from time to time;

(c) All references to an “Article,” “Section,” “Schedule,” or “Exhibit” are to an Article or Section hereof or to a Schedule or an Exhibit attached hereto;

(d) The table of contents and Article and Section headings and other captions in this Agreement are for the purpose of reference only and do not limit or affect its meaning;

(e) Defined terms in the singular include the plural and vice versa, and the masculine, feminine or neuter gender includes all genders;

(f) Accounting terms used herein, but not defined in Section 1.01 have the respective meanings given to them under generally accepted accounting principles in the United States of America in effect from time to time, applied on a consistent basis both as to classification of items and amounts;

(g) The words “hereof,” “herein,” “hereunder,” and “hereto,” and words of similar import when used in this Agreement refer to this Agreement as a whole and not to any particular provision, Article, or Section of this Agreement, or to any Exhibit or Schedule hereto;

(h) The words “include,” “includes,” and “including” mean include, includes, and including “without limitation” and “without limitation by specification”;

(i) Any reference herein to a time of day means the time of day in the City of New York;

(j) Any reference herein to a notice means a written notice in the English language;

(k) Phrases such as “satisfactory to OPIC,” “in such manner as OPIC may determine,” “to OPIC’s satisfaction,” “at OPIC’s election,” “in OPIC’s judgment,” and phrases of similar import authorize and permit OPIC to approve, disapprove, act or decline to act in its sole discretion; and

(l) A reference to any Applicable Law includes any amendment or modification of such Applicable Law, any successor to such law and all regulations, rulings, and other Applicable Laws promulgated under such Applicable Law or any successor thereto.

Section 1.03 Project Cost; Financial Plan.

The total cost of the Project (including provisions for contingencies) is estimated to be the equivalent of $36,000,000, based on the financial plan set forth in Schedule 1.03 (the “Financial Plan”).

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ARTICLE II.

AMOUNT AND TERMS OF THE LOAN

Section 2.01 Amount and Disbursement.

(a) Commitment. Subject to the terms and conditions hereof, OPIC agrees to make, and the Borrower agrees to accept, a Loan for the Project in the principal amount of not more than $25,200,000. A Disbursement of the Loan shall only be made from the date hereof through the end of the Commitment Period. The Commitment shall not be revolving, and any portion of the Loan repaid or prepaid shall not be readvanced to the Borrower.

(b) Disbursement; Term. Subject to the satisfaction of the conditions set forth in Articles IV and V, the Borrower may request a single Disbursement by delivering a Disbursement Request to OPIC not less than twenty (20) Business Days prior to the Closing Date. The Disbursement shall be made available to the Borrower by wire transfer to the Disbursement Account and shall be evidenced by one or more (as OPIC may specify) Notes aggregating the principal amount of the Disbursement and dated the relevant Closing Date. All Notes shall be issued for a term ending on or before the Loan Maturity Date. The amount of the proposed Disbursement shall not exceed the amount of the Commitment.

(c) Amount of Disbursements. The Disbursement shall be in the full amount of the Commitment or (if less) shall be in an amount of not less than $5,000,000 and a multiple of $100,000.

(d) Transfers. Subject to the satisfaction of the conditions set forth in Article V, the Borrower may from time to time request a Transfer from the Disbursement Account of amounts on deposit therein by delivering to the Collateral Agent (with a copy to OPIC) a Transfer Request not less than twenty (20) Business Days prior to the requested Transfer Date. Without limiting any other term or condition of the Finance Documents, at any time prior to 5:00 p.m. New York time on the day prior to any requested Transfer Date, OPIC may issue a notice in the form of Exhibit E to the Borrower (with a copy to the Collateral Agent) notifying the Borrower that the relevant Transfer shall not be made (each such notice, a “Drawstop Notice”) if any applicable condition precedent set forth in Article IV or V of this Agreement or in the Security and Account Agreement or any other Finance Document is not satisfied or, having been satisfied, ceases in the determination of OPIC to be satisfied. A Drawstop Notice issued pursuant to this clause (d) shall remain in full force and effect until the event or condition that led to the issuance of such Drawstop Notice is remedied to the satisfaction of OPIC, whereupon such Drawstop Notice shall be deemed to be revoked and OPIC shall promptly notify the Borrower and the relevant Transfer shall thereafter be made on the requested Transfer Date; provided, however, that if such requested date is a date that is prior to or is less than two (2) Business Days after the date such notification is given, the Transfer Date shall be deemed to be the second Business Day after the date such notification is given and OPIC shall notify each such party that the relevant Transfer shall be made on such second Business Day. If a Drawstop Notice is not revoked on or prior to the date falling ten (10) Business Days following a requested Transfer Date, the relevant Transfer will not be made and the relevant Transfer Request shall be deemed to be revoked.

(e) Transfer Pro Rata with Subordinated Loan. The Transfer of the Loan from the Disbursement Account to the Revenue Account shall be made simultaneously and pro rata with Transfer of Subordinated Loan amounts such that the ratio of Loan to the Subordinated Loan amounts

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comprising such Transfer is not greater than 70:30 and such Transfer shall be used to pay Project costs in accordance with Section 5.03 and 6.01.

Section 2.02 Commitment Fee.

Commencing from February 28, 2007, and continuing through the Commitment Period, a commitment fee (the “Commitment Fee”) shall accrue on a daily basis at the rate of one quarter of one percent (.25%) per annum on the amount of the Commitment. Payment of the Commitment Fee shall be made in arrears to OPIC on the Closing Date (in which case, such Commitment Fee may be deducted by OPIC from the proceeds of the Disbursement.

Section 2.03 Cancellation of the Commitment.

At any time prior to the Closing Date, the Borrower may cancel all or any part of the Commitment upon thirty (30) days prior written notice to OPIC.

Any part of the Commitment not disbursed on the Closing Date or (if there is no Disbursement) at the end of the Commitment Period shall be deemed to have been then canceled.

Section 2.04 Interest.

(a) OPIC Note Interest Rate. On each Payment Date, commencing with the first such date after the Closing Date, the Borrower shall pay interest in arrears to the order of OPIC on the daily outstanding principal balance of the Note, less any amount of principal on which interest is payable at the Default Rate pursuant to Section 2.04(b), at a rate per annum, subject to Section 2.04(c), equal to the sum of the following (subject to Section 2.04(c), the “OPIC Note Interest Rate”):

(i) the Certificate Interest Rate; and

(ii) the OPIC Guaranty Fee.

Notwithstanding anything to the contrary in the foregoing, interest due pursuant to this Section 2.04(a) on the first Payment Date may be paid from the Loan proceeds as contemplated by Section 6.01.

(b) Default Interest. Subject to Section 2.04(c), if the Borrower fails to pay in full when due any amount of principal or interest on the Note, the Borrower shall, on demand, or, if no demand, on each Payment Date, pay interest in arrears to the order of OPIC on the amount of the defaulted payment, from the date of such payment default until the date on which such defaulted amount is paid full, at a rate per annum (the “Default Rate”), in lieu of the OPIC Note Interest Rate and to the extent permitted by applicable law, equal to the sum of the following:

(i) the OPIC Note Interest Rate, adjusted as provided in Section 2.04(c); and

(ii) the Default Spread.

(c) OPIC-Funded Interest Rate. If OPIC shall have made payment of any principal, interest or other guaranteed amount on account of a defaulted payment pursuant to OPIC’s guaranty under the Funding Documents (an “OPIC Guaranty Payment”), then, with respect to the amount of such

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OPIC Guaranty Payment, the OPIC Note Interest Rate from the date of such OPIC Guaranty Payment to the date of payment in full to OPIC of the amount of such OPIC Guaranty Payment may, at OPIC’s option, be converted to a fixed rate of interest equal to the sum of the following:

(i) the Treasury Cost; and

(ii) the OPIC Guaranty Fee,

and the Borrower shall, on demand, pay to OPIC the amount of such OPIC Guaranty Payment, together with interest thereon at the Default Rate, adjusted as provided in this Section 2.04(c).

Section 2.05 Repayment of the Loan.

The Borrower shall repay the Loan in sixteen (16) equal installments payable on each Payment Date commencing on the Repayment Commencement Date and ending on the Loan Maturity Date.

Section 2.06 Voluntary Prepayment.

Subject to the requirements of the Funding Documents and any redemption premium payable in relation thereto, on any date following the last day of the Commitment Period, the Borrower may, upon thirty (30) Business Days’ prior notice to OPIC, prepay the Loan in whole or in part without premium or penalty. The amount of any such voluntary prepayment shall be applied to the repayment schedule provided for in Section 2.05 in the inverse order of maturity.

Section 2.07 Mandatory Prepayment.

(a) The Borrower shall prepay the outstanding principal amount of the Loan in an amount equal to the amount by which the aggregate of:

(i) the amount of cash distributions paid by the Borrower to the Shareholders in respect of any of its capital stock, including dividends and share redemptions referred to in Section 7.04, in any Fiscal year; plus

(ii) the amount of payments by the Borrower to the Shareholders referred to in Section 7.05 in such Fiscal Year; plus

(iii) the amount of any other payments by the Borrower to the Shareholders in such Fiscal Year (excluding any scheduled payments of principal and interest in respect of the Subordinated Loan and any amounts reimbursed to the Sponsor for Eligible Costs),

exceeds fifty percent (50%) of its Net Income for the preceding Fiscal Year, as reflected in the Borrower’s audited Financial Statements.

(b) The Borrower shall prepay the outstanding principal amount of the Loan in an amount equal to the amount of any Loan proceeds remaining on deposit in the Disbursement Account on February 28, 2010.

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(c) Each Loan prepayment made pursuant to this Section 2.07 shall be subject to any redemption premiums or other amounts payable pursuant to the Funding Documents.

Section 2.08 Facility Fee.

The Borrower shall pay to OPIC on the Closing Date a facility fee (the “Facility Fee”) in the amount of $126,000, which may be deducted by OPIC from the proceeds from the Disbursement.

Section 2.09 Maintenance Fee.

The Borrower shall pay to OPIC an annual administrative fee (the “Maintenance Fee”) in the amount of $12,000 on the first Payment Date and on each anniversary thereof, so long as any portion of the Loan remains outstanding.

Section 2.10 Taxes.

(a) All sums payable by the Borrower hereunder or under the Notes, whether of principal, interest, fees, expenses or otherwise, shall be paid in full, free of any deductions or withholdings for any and all Taxes. In the event that the Borrower is prohibited by law from making payments hereunder or under the Notes free of such deductions or withholdings, then the Borrower shall pay such additional amount as may be necessary in order that the actual amount received after such deduction or withholding shall equal the full amount stated to be payable hereunder or under the Notes.

(b) The Borrower shall pay directly to all appropriate taxing authorities any and all present and future Taxes, and all liabilities with respect thereto imposed by law or by any taxing authority on or with regard to any aspect of the transactions contemplated by this Agreement or the execution and delivery of this Agreement or the Notes, except for any Taxes or other liabilities that the Borrower is contesting in good faith by appropriate proceedings and for which adequate cash reserves have been made in accordance with U.S. GAAP, provided that the Borrower hereby indemnifies OPIC and holds OPIC harmless from and against any and all liabilities, fees or additional expense with respect to or resulting from any delay in paying, or omission to pay, Taxes. Within thirty (30) days after the payment by the Borrower of any such Taxes, the Borrower shall furnish OPIC with the original or a certified copy of the receipt evidencing payment thereof, together with any other information OPIC may reasonably require to establish to its satisfaction that full and timely payment of such Taxes has been made.

(c) OPIC shall notify the Borrower of any payment of Taxes required or requested of it and shall give due consideration to any advice or recommendation given in response thereto by the Borrower, and upon notice from OPIC that Taxes or any liability relating thereto (including penalties and interest) have been paid, the Borrower shall pay or reimburse OPIC therefor within thirty (30) days of such notice.

(d) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 2.10 shall survive the payment in full of principal and interest hereunder and under the Notes.

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Section 2.11 Miscellaneous.

(a) Payment or Reimbursement of Expenses. The Borrower shall pay or reimburse OPIC, upon request, OPIC’s reasonable out-of-pocket costs and expenses incurred in connection with the negotiation, preparation, execution and delivery, and implementation of this Agreement, the Notes, and the other Transaction Documents, including (i) the reasonable fees and expenses of outside legal counsel and business consultants, and (ii) the costs of communications, the preparation of any documents, the authentication, registration and recordation of any of the Transaction Documents, the preparation of bound volumes and CDs of the Transaction Documents for OPIC’s use, and the termination of the Liens created pursuant to the Security Documents. The Borrower shall also reimburse OPIC upon demand for all costs and expenses (including attorneys’ fees and expenses, fees for the services of third parties, such as third party loan servicing agencies, to administer and otherwise effect collection of the Loan, and the cost of travel) incurred by OPIC in preserving in full force and effect or enforcing its rights hereunder or under any of the Transaction Documents or incurred in connection with the modification, amendment or waiver of any provision of any such document, including release of the Liens in favor of OPIC arising under the Security Documents. For the avoidance of doubt, this provision shall not preclude the application of proceeds of the Loan to the payment of Eligible Costs in accordance with Section 6.01(b).

(b) Currency and Place of Payment. All payments required hereunder shall be made in Dollars in immediately available funds without any offset or deduction for Taxes or otherwise to the OPIC Paying Agent as provided for in the Funding Documents or, as the case may be, to OPIC at the following address:

If sent by wire transfer (via a United States domestic bank):

U.S. Treasury Department

ABA No. 0210-3000-4 TREASNYC/CTR/BNF=AC71000001

OBI=OPIC Loan No. 673-2006-061-IG

If sent by express mail or courier:

Nations Bank Operations Center

Corporate Bank Operations

3 SSE

6000 Feldwood Road

College Park, GA 30349

Attn: OPIC Lockbox 198177

If sent by standard mail:

Overseas Private Investment Corporation

P.O. Box 198177

Atlanta, GA 30384

(c) Computation of Interest on Notes and Fees. Except as otherwise provided herein or in the Funding Documents or in any Note, interest (including interest calculated at the OPIC Note Interest Rate and the Default Rate) shall accrue as set forth in the Note, and the Commitment Fee and any other

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fees shall accrue on a daily basis and shall be computed on the basis of 360-day years based on twelve (12) 30-day months.

(d) Application of Payments to OPIC. Payments received by OPIC under this Agreement or with respect to any Note shall be applied to amounts due under this Agreement and under the Notes in such manner as OPIC may determine to be appropriate, notwithstanding any instruction to the contrary from the Borrower.

ARTICLE III.

REPRESENTATIONS AND WARRANTIES

The Borrower represents, covenants, and warrants to OPIC, as of the date hereof, as of the Closing Date and as of each Transfer Date (both before and after making the Disbursement or the relevant Transfer, as the case may be) that:

Section 3.01 Existence and Power of the Borrower.

(a) The Borrower is a company limited by shares duly organized, validly existing, and in good standing under the laws of the British Virgin Islands. The Borrower is duly authorized to do business in each jurisdiction in which its business makes such authorization necessary, has the requisite power to own and operate its properties, to carry on its business as it is now being conducted and as proposed to be conducted in respect of the Project, to incur Indebtedness and create Liens on its properties and to execute, deliver, and perform its obligations under this Agreement, the Notes, and each of the other Transaction Documents to which it is or will be a party.

(b) The Borrower’s Charter Documents have not been amended since the date of its formation.

Section 3.02 Authority of the Borrower.

The Borrower’s execution, delivery, and performance of its obligations under this Agreement, the Notes, and each of the other Transaction Documents to which it is or will be a party: (i) have been duly authorized by all necessary corporate action, (ii) will not violate any applicable law, regulation or ruling of any governmental authority, and (iii) will not breach, or result in or require the creation of any Lien upon its property (except Permitted Liens), or cause a default under, any of its Charter Documents or any agreement or other requirement by which it or any of its properties may be bound or affected. The execution and delivery by the Borrower of this Agreement, the Notes, and each of the other Transaction Documents to which it is or will be a party will cause each such respective instrument to constitute a direct, unconditional, legal, valid, and binding obligation of the Borrower enforceable in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, or other similar laws affecting the enforcement of creditors’ rights generally or general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law). Except for consents referred to in Section 3.10, no consent of any other Person, including any shareholder of the Borrower, is required in connection with the execution, delivery, performance, validity, or enforceability of any of the Transaction Documents. The Borrower’s obligations hereunder and under the Notes will rank not less than pari passu with all of the Borrower’s other Indebtedness and obligations except for

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Indebtedness that is mandatorily preferred by applicable law, provided that such Indebtedness is not Indebtedness covered by clauses (i) through (ix) of the definition thereof.

Section 3.03 Financial Condition.

As of the date of this Agreement, neither the Borrower nor the Consignee has any contingent obligation, liability for Taxes, material or long-term commitment, or outstanding Indebtedness of any kind. As of the date of this Agreement, no dividend or other distribution has been declared or paid to the Shareholders.

Section 3.04 Capitalization of the Borrower and the Consignee.

(a) As of the date hereof, the authorized capital of the Borrower consists of 50,000 shares of stock, of which ten (10) shares are issued and outstanding. All such capital stock of the Borrower has been duly authorized and validly issued, and is fully paid and nonassessable and is free from all Liens (except Permitted Liens). There are no outstanding subscriptions, options, warrants, calls, agreements, preemptive rights, acquisition rights, redemption rights or any other rights or claims of any character that restrict the transfer of, require the issuance of, or otherwise relate to any class of the capital stock of the Borrower. As of the date hereof, one hundred percent (100 %) of the capital stock of the Borrower is owned beneficially and of record by NamGem Bermuda.

(b) As of the date hereof, all ownership interests of the Consignee have been duly authorized and validly issued, and are fully paid and nonassessable and are free from all Liens (except Permitted Liens). There are no outstanding subscriptions, options, warrants, calls, agreements, preemptive rights, acquisition rights, redemption rights or any other rights or claims of any character that restrict the transfer of, require the issuance of, or otherwise relate to any class of the ownership interests of the Consignee. As of the date hereof, one hundred percent (100 %) of the ownership interests of the Consignee are owned beneficially and of record by the Borrower.

Section 3.05 Subsidiaries.

Except for the shares of stock referred to in Section 3.04(b), neither the Borrower nor the Consignee owns or otherwise controls any voting stock of, or have any ownership interest in, any other Person, including any other corporation or partnership.

Section 3.06 Liens and Indebtedness.

(a) The Security Documents are, or upon filing and registration will be, effective to create in favor of OPIC legal, valid, binding and perpetual first priority Liens on the Collateral, and such Liens are, or upon filing and registration will be, prior and superior to the rights of any other Person holding any Lien on the Collateral and enforceable against the Obligors and all such other Persons whether now existing or hereafter arising. None of the Liens created by the Security Documents on the Collateral upon execution and delivery of the Security Documents are susceptible to avoidance on liquidation or insolvency or any other bankruptcy proceeding. The Borrower has not received any notice of any adverse claims by any Person in respect of the ownership of or entitlement to any part of the Collateral or any other assets of the Borrower or the Consignee , and the distribution of the proceeds resulting from the enforcement of the Liens thereon will be governed by the terms of the applicable Finance

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Documents. Neither the Borrower nor the Consignee has outstanding, nor are they contractually bound to create, any Lien on or with respect to, any of their respective properties, rights or revenues, except Permitted Liens.

(b) Neither the Borrower nor the Consignee has any outstanding Indebtedness other than Permitted Indebtedness.

Section 3.07 Taxes and Reports.

All tax returns and reports of the Borrower and the Consignee required by law to be filed in any jurisdiction, have been duly filed for periods ending prior to the date of this Agreement, and all Taxes due or reasonably anticipated to become due in respect of the Borrower or the Consignee, or any assets, income, or franchises of the Borrower or the Consignee have been duly paid or have been adequately provided for on their respective books, other than those presently payable without penalty or interest in relation to which adequate reserves have been made in accordance with U.S. GAAP.

Section 3.08 Defaults.

No Event of Default or Potential Event of Default has occurred and is continuing. None of the Borrower, the Consignee or any other party is in breach of any provision of any contract to which the Borrower or the Consignee is a party, which breach could have a Material Adverse Effect.

Section 3.09 Litigation.

No action, suit, other legal proceeding, arbitral proceeding or investigation is pending and no judgment or order has been issued by or before any domestic or foreign court or governmental authority or in any arbitral or other forum or is threatened, against any Obligor or any of their respective properties or rights that (i) relates to any of the transactions contemplated by this Agreement or any other Transaction Document, or (ii) has, or if adversely determined could have, a Material Adverse Effect.

Section 3.10 Compliance with Law; Corrupt Practices.

(a) The Borrower is conducting its business in compliance with all applicable laws, regulations, and authorizations of all relevant governmental authorities, non-compliance with which could have a Material Adverse Effect, and in compliance with its Charter Documents. Other than those consents, licenses, approvals, and authorizations required in the future and which the Borrower has no reason to believe will not be granted in the ordinary course on or prior to the date when required, the Borrower has duly obtained all consents, licenses, approvals, and authorizations and has effected all declarations, filings, and registrations necessary for the due execution, delivery, and performance of this Agreement and each of the other Transaction Documents to which it is or will be a party.

(b) Without limiting the effect of clause (a), the Borrower and its respective officers, directors, employees, and agents have complied with all applicable Corrupt Practices Laws in obtaining any consents, licenses, approvals, authorizations, rights, and privileges in respect of the Project and are otherwise conducting the business of the Borrower and its participation in the Project in compliance with applicable Corrupt Practices Laws. The Borrower’s internal management and accounting practices and controls are adequate to ensure compliance with applicable Corrupt Practices Laws.

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(c) The Borrower has not paid and is not obligated to pay any fee or commission to any broker, finder, or intermediary for or on account of arranging the financing of the transactions contemplated by the Transaction Documents, except for the fees payable under Sections 2.02, 2.08 and 2.09.

(d) The Borrower is in compliance with the applicable requirements of (i) the Anti-Money Laundering Laws, and (ii) regulations issued by the U.S. Treasury Department’s Office of Foreign Assets Controls.

(e) None of the Borrower’s directors, members of senior management, ultimate beneficial owners of the Borrower, or principal third parties with whom the Borrower is engaged in business, is a Person included in the OFAC List.

(f) An Authorized Officer of the Borrower has read and understands the Anti-Corruption Handbook.

Section 3.11 Property Interests, Etc.

All easements, leasehold and other property interests, and all utility and other services, means of transportation, facilities, other materials and other rights that can reasonably be expected to be necessary for the execution of the Project (including, to the Borrower’s knowledge after due inquiry, the Cutting and Polishing Operations) in accordance with applicable requirements of law and the Transaction Documents (including gas, electrical, water and sewage services and facilities) have been procured or are commercially available to the Project, and, to the extent appropriate, arrangements have been made on commercially reasonable terms for such easements, interests, services, means of transportation, facilities, materials and rights. The Borrower owns or has the right to use all licenses, permits, franchises, patents, copyrights, trademarks, and trade names, or rights thereto, necessary for the execution of the Project (including, to the Borrower’s knowledge after due inquiry, the Cutting and Polishing Operations) and there have been no infringements or other hindrances with respect to the foregoing.

Section 3.12 Environmental, Health and Safety Matters.

The Borrower has duly complied with, and its business, operations, assets, equipment, property, leaseholds, and other facilities are materially in compliance with, the provisions of all applicable environmental, health and safety laws, codes and ordinances, and all rules and regulations promulgated thereunder, including the World Bank Guidelines. The Borrower (i) has been issued and will maintain all required permits, licenses, certificates and approvals relating to, and (ii) has received no complaint, order, directive, claim, citation or notice by any governmental authority or any Person with respect to: (A) air emissions, (B) discharges to surface water or ground water, (C) noise emissions, (D) solid or liquid waste disposal, (E) the use, generation, storage, transportation or disposal of toxic or hazardous substances or wastes, or (F) other environmental, health or safety matters.

Section 3.13 Project Cost and Project Completion.

As of the date hereof, the Borrower’s good faith estimate of the total cost of the Project (including provisions for contingencies) is the equivalent of $36,000,000 based on the Financial Plan set forth in Schedule 1.03.

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Section 3.14 Disclosure.

(a) All documents, reports or other written information (including the Application, this Agreement, and the other Transaction Documents) pertaining to the Borrower or the Project (including, to the Borrower’s knowledge after due inquiry, the Cutting and Polishing Operations) that have been furnished by or on behalf of the Borrower to OPIC are true and correct and do not contain any material misstatement of fact or omit to state a material fact or any fact necessary to make the statements contained herein or therein not materially misleading. There is no fact known to the Borrower, after investigation and inquiry, including pending or threatened litigation or arbitration, that has not been disclosed to OPIC in writing, the existence of which could have a Material Adverse Effect. No condition has arisen since the date of the Application that has or could have a Material Adverse Effect.

(b) Except for events occurring after the date of this Agreement and disclosed in writing to OPIC, no force majeure event or similar event as the same may be defined in any Project Document relating to the performance by the Borrower or, to the knowledge of the Borrower, any other Person party to a Project Document has occurred and is continuing under any Project Document.

Section 3.15 Suspension and Debarment.

No event has occurred and no condition exists that is likely to result in the debarment or suspension of the Borrower from contracting with the government of the United States of America or any agency or instrumentality thereof, and the Borrower is not now and has not been subject to any such debarment or suspension.

Section 3.16 ERISA and Employees.

Neither the Borrower nor the Consignee sponsors, maintains, administers, contributes to, participates in, or has any obligation to contribute to or any liability under any Employee Benefit Plan, and it never has sponsored, maintained, administered, contributed to, participated in, or had any obligation to contribute to or any liability under any Employee Benefit Plan.

Section 3.17 Other Liabilities.

(a) Neither the Borrower nor the Consignee is a party to or is committed to enter into any contract other than the Transaction Documents.

(b) Neither the Borrower nor the Consignee has engaged in any business other than such business resulting from the implementation of the Transaction Documents to which it is a party and participating in the transactions contemplated thereby and has not traded or incurred any liabilities other than in connection with its participation in the transactions contemplated by the Transaction Documents.

(c) Except as provided in the Transaction Documents, neither the Borrower nor the Consignee is a party to any contracts or agreements with, or obliged with respect to any other commitments to, whether or not in the ordinary course of business, any Affiliate of the Borrower or the Consignee.

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Section 3.18 Other Parties; Transaction Documents.

(a) To the Borrower’s knowledge after due inquiry, each of the Transaction Documents constitutes, or upon execution and delivery will constitute, the legal, valid, and binding obligation of each party thereto (other than the Borrower) enforceable against such party in accordance with its terms, subject to bankruptcy, insolvency, reorganization, or other similar laws affecting creditors’ rights and general principles of equity.

(b) None of the Transaction Documents has been amended, modified, or terminated, except in accordance with this Agreement or as disclosed to OPIC and consented to in writing by OPIC.

Section 3.19 Proper Legal Form.

Each of the Loan Documents, the Security Documents, the Subordinated Loan Note and the Consignment and Guaranty Agreement is or upon execution will be, and to the knowledge of the Borrower the Project Company Undertaking Agreement is, without further action, in proper legal form for the enforcement thereof against any party thereto in the jurisdiction of incorporation or establishment of such party, in the British Virgin Islands and in New York. Any judgment for the payment of money against the Borrower obtained in the courts of the State of New York or the courts of the United States for the Southern District of New York relating to this Agreement or any other Transaction Document pursuant to which the Borrower has submitted to the jurisdiction of such courts upon following appropriate procedures in the British Virgin Islands is enforceable in the courts of the British Virgin Islands.

Section 3.20 Compliance with Laws.

The Borrower is in compliance with all applicable laws in all material respects. No notice of any violation of any laws has been issued, entered, or received by the Borrower and the Borrower does not have any knowledge after due inquiry of any action or investigation of any kind for any possible violation of any law by the Borrower, the Sponsor, the Consignee or for any material violation of any law by any other Project Participant.

Section 3.21 Investment Company Act.

Neither the Borrower nor any Affiliate is an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

Section 3.22 Margin Regulation.

No part of the proceeds of the Loan will be used for purchasing or carrying any margin stock within the meaning of Regulation U or X or for any purposes that violate the regulations of the Board of Governors of the Federal Reserve System.

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Section 3.23 OPIC Reliance.

The Borrower acknowledges that it makes the representations and warranties in Article III with the intention of inducing OPIC to enter into this Agreement and that OPIC enters into this Agreement on the basis of, and in full reliance on, each of such representations and warranties.

ARTICLE IV.

CONDITIONS PRECEDENT TO DISBURSEMENT

Unless OPIC otherwise agrees in writing, the obligation of OPIC to make a Disbursement of the Loan is subject to the prior fulfillment, to OPIC’s satisfaction, of the following conditions precedent and to their continued fulfillment on the Closing Date:

Section 4.01 Corporate Authorization.

OPIC shall have received a certificate of an Authorized Officer of the Borrower, the Sponsor and the Consignee, dated the Closing Date, substantially in the form of Exhibit C and otherwise in form and substance satisfactory to OPIC:

(a) attaching a copy of each of the Charter Documents of such Person, as amended to date, certifying that the attached copies are true and complete and in full force and effect as of the Closing Date, together with evidence satisfactory to OPIC that such documents have been approved by the competent governmental agencies and authorities in the jurisdiction of formation of such Person;

(b) attaching a copy of the resolutions of the Board of Directors of such Person, and of all documents evidencing any other necessary corporate action (each such resolution and document satisfactory to OPIC in form and substance), authorizing it to execute, deliver and perform the this Agreement, the Notes, and each of the other Transaction Documents and any other agreement or instrument contemplated hereby or thereby to which such Person is or will be a party and to engage in the transactions contemplated hereby or thereby, and certifying that the attached copies are true and complete and in full force and effect as of the Closing Date; and

(c) certifying the names, titles and specimen signatures of the Persons who are authorized to execute and deliver on behalf of such Person this Agreement, the Notes, and each of the other Transaction Documents to which such Person is or will be a party and all other notices or instruments contemplated hereunder or thereunder.

Section 4.02 Funding Arrangements.

Suitable arrangements shall have been made for funding the Disbursement (all agreements and documents required in connection with such funding arrangements are collectively referred to herein as the “Funding Documents”) in accordance with the Funding Documents, which funding arrangements and Funding Documents shall be satisfactory to OPIC in form and substance, including satisfaction by the Borrower of all conditions precedent to the obligations of any other party to the Funding Documents and performance by the Borrower of all other obligations on its part to be performed prior to the making of the Disbursement pursuant to any Transaction Document including the issuance of Notes in connection therewith.

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Section 4.03 Transaction Documents.

OPIC shall have received the following documents, each of which shall be satisfactory to OPIC in form and substance, each of which shall have been duly executed by the parties thereto and each of which shall be unconditional and in full force and effect in accordance with its terms without default:

(a) OPIC shall have received duly executed originals (or, at OPIC’s election, a true and complete copy) of each of the following agreements and documents (the “Loan Documents”):

(i) this Agreement;

(ii) any Notes issued in connection with the Disbursement; and

(iii) the Subordination Agreement.

(b) OPIC shall have received duly executed originals (or, at OPIC’s election, a true and complete copy) of the following agreements and documents (the “Security Documents”), whereby the payment of all Obligations is secured by valid and enforceable first Liens on the Collateral described therein:

(i) each Share Pledge and Retention Agreement;

(ii) the Security and Account Agreement;

(iii) the Sponsor Consent;

(iv) documentation creating and perfecting in favor of OPIC a valid and enforceable first ranking Lien on all of the Borrower’s insurance proceeds; and

(v) all such other agreements, documents or actions which in the opinion of special legal counsel to OPIC, are necessary or advisable to secure the Obligations with valid and enforceable first priority Liens on the Collateral, in each jurisdiction deemed applicable by OPIC to the Project.

Each such Lien (i) to the extent it arises or attaches under the Uniform Commercial Code of any jurisdiction in the United States, shall be perfected and (ii) in all other cases, shall be effective and enforceable against the Borrower and all third parties (including any holder of a subsequently established Lien, any holder of a fixed or floating charge, and any other transferee for or not for value, in bulk, by operation of law, for the benefit of creditors, or otherwise but excluding holders of Permitted Liens). Each of the Security Documents shall be in full force and effect and shall have been duly filed and registered or recorded in every jurisdiction in which such filing and registration or recording is necessary to make valid and effective the Liens intended to be created or perfected thereby, and the rights of OPIC thereunder, and OPIC shall have received evidence satisfactory to it that such filing and registration or recording has been made.

(c) OPIC shall have received copies of the final execution version of each of the following agreements, each of which shall be satisfactory to OPIC in form and substance, shall have been duly executed by the parties thereto and shall have been certified by an Authorized Officer of the Borrower

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as being true and complete and in full force and effect in accordance with its terms and without default (the “Project Documents”):

(i) the Subordinated Loan Note;

(ii) the Consignment and Guaranty Agreement;

(iii) the Supply Agreement;

(iv) the Project Company Undertaking Agreement;

(v) the Cooperation Agreement;

(vi) an updated Sponsor Disclosure Report from the Sponsor; and

(vii) each other contract, agreement, document or other instrument relating to the Project entered into between the Borrower and any other Project Participant.

(d) OPIC shall be satisfied based on its review of the Project Documents with the rights available to monitor compliance with the Project Company Undertaking Agreement and remedies available upon any breach thereof.

(e) OPIC shall have received duly executed originals (or, at OPIC’s election, a true and complete copy) of each of the Funding Documents.

The Loan Documents, the Security Documents, the Project Documents, and the Funding Documents, together with any other agreements or instruments pursuant to which the Loan or any portion thereof is made to the Borrower, are collectively referred to herein as the “Transaction Documents.” Any other agreement or document identified by OPIC in a written notice to the Borrower after the date hereof as a “Transaction Document” shall also be considered a Transaction Document.

Section 4.04 Sponsor Investment.

OPIC shall have received satisfactory evidence, which evidence shall include certificates of the Borrower’s independent accountants and certified copies of relevant stock certificates, that each of the Borrower and the Consignee has been fully capitalized in accordance with applicable laws, that the Shareholders identified in the Borrower Share Pledge and Retention Agreement together hold legal and beneficial title to one hundred percent (100%) of the capital stock of the Borrower, that any transfer of any shares or other equity interest to any Shareholder other than the Shareholders identified in the Borrower Share Pledge and Retention Agreement shall have occurred in accordance with the Borrower Share Pledge and Retention Agreement, and that the Borrower holds legal and beneficial title to one hundred percent (100%) of the capital stock of the Consignee.

Section 4.05 Government Approvals.

OPIC shall have received copies, certified by an Authorized Officer of the Borrower as true and complete and in full force and effect, of any registration, declaration, filing or governmental consent, license, approval, authorization or permit necessary or advisable in the determination of OPIC for (i) the

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approval of the Project by the Government of Namibia for purposes of OPIC’s guaranty under the Funding Documents, (ii) if required, the registration of the Loan with the central bank of any government having jurisdiction with respect thereto and the receipt of all foreign exchange consents necessary for the payment of all amounts due under this Agreement, (iii) this Agreement, the Loan, the Note(s), and the other Transaction Documents, and the payment of all amounts due or to become due with respect thereto free and clear of any Taxes, and (iv) the due execution, delivery, validity, and enforceability of, and the performance by each Project Participant of each Transaction Document to which it is or will be a party together with a list of all such registrations and governmental consents.

Section 4.06 Insurance.

OPIC shall have received a copy of the insurance policy or policies required by Section 6.05, showing the Borrower’s endorsement as loss payee as its interests may appear (except with respect to any third party liability policies), together with evidence that such policy or policies is in full force and effect without default.

Section 4.07 Appointment of Agent.

OPIC shall have received evidence that: (i) the agent for service of process referred to in Section 8.03 has been duly appointed and holds such appointment without reservation until six months after the Loan Maturity Date, together with evidence of the prepayment in full of the fees of such agent, and (ii) the agents for service of process referred to in the Security and Account Agreement, each Share Pledge and Retention Agreement, the Consignment and Guaranty Agreement and each of the Funding Documents have each been duly appointed and each holds such appointment without reservation until six months after the Loan Maturity Date, together with evidence of the prepayment in full of the fees of such agent.

Section 4.08 Legal Opinions.

OPIC shall have received written opinions, dated not more than three (3) Business Days prior to such Closing Date, in form and substance satisfactory to OPIC: of (i) Allen & Overy LLP, its special legal counsel in New York, (ii) special legal counsel in the British Virgin Islands acceptable to OPIC, (iii) Hills Stern & Morley LLP, the Borrower’s and Sponsor’s special legal counsel in the United States, and (iv) counsel qualified in such other jurisdictions relevant to the Project as OPIC may require.

Section 4.09 Independent Accountants.

The Borrower shall irrevocably authorize, in the form of Schedule 4.09, its independent accountants (whose fees and expenses shall be for the account of the Borrower) to communicate directly with OPIC at any time regarding the Borrower’s accounts and operations, and OPIC shall have received a copy of such authorization.

Section 4.10 Financial Statements.

OPIC shall have received (i) a copy of the Borrower’s opening Financial Statements certified by the chief financial officer (or other officer) of the Borrower as complete and correct, fairly presenting the

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financial condition of the Borrower as at the date thereof, (ii) copies of the two most recent audited Financial Statements in respect of the two most recent fiscal years of the Sponsor required to be delivered pursuant to the Share Pledge and Retention Agreement, together with the certificates and information required to be delivered by the Sponsor thereunder (assuming the Share Pledge and Retention Agreement had been in effect at the end of each such fiscal year), (iii) copies of the most recent unaudited Financial Statements in respect of the most recent Fiscal Semester of the Sponsor required to be delivered pursuant to the Share Pledge and Retention Agreement, together with the certificates and information required to be delivered by such Persons thereunder (assuming the Share Pledge and Retention Agreement had been in effect at the end of each such fiscal quarter), and (iv) a certificate of an Authorized Officer of each of the Borrower and the Sponsor stating that no material adverse change in the consolidated assets, liabilities, operations or financial condition of such Person has occurred since the date of such financial statements or other financial information delivered by it pursuant to clause (i), (ii) or (iv) above.

Section 4.11 OFAC Compliance.

The Borrower shall have furnished OPIC evidence of compliance with the provisions set forth in 3.10(e) in the form of a list of the Borrower’s directors, members of senior management, ultimate beneficial owners of the Borrower, and principal third parties with whom the Borrower is engaged in business and a certification by an Authorized Officer of the Borrower that no such Person is included in the OFAC List.

Section 4.12 Collateral Accounts.

OPIC shall have received satisfactory evidence that the Collateral Agent has established the Collateral Accounts as provided in the Security and Account Agreement.

Section 4.13 Financial Model.

OPIC shall have received an update of the Financial Model in form and substance satisfactory to it.

ARTICLE V.

CONDITIONS PRECEDENT TO THE CLOSING DATE AND EACH TRANSFER FROM DISBURSEMENT ACCOUNT

Unless OPIC otherwise agrees in writing and save as otherwise provided herein, it shall be a condition precedent to the Disbursement and to the Borrower’s right to each Transfer from the Disbursement Account that each of the following conditions be satisfied on the Closing Date or any requested Transfer Date, as the case may be:

Section 5.01 Representations and Defaults.

(a) The representations and warranties set forth in Article III shall be true and correct in all material respects on such date, except that any representation or warranty that relates expressly to an earlier date shall be deemed made only as of such earlier date, and on such date no Event of Default or Potential Event of Default shall have occurred and be continuing.

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(b) All representations and warranties made by each Obligor in any Transaction Document are true and correct in all material respects on and as of such date with the same effect as if those representations and warranties had been made on and as of such date.

Section 5.02 Change in Circumstances.

On such date, no circumstance shall exist, and no change of law or regulation of any governmental authority shall have occurred, that could have a Material Adverse Effect.

Section 5.03 Disbursement of Subordinated Loan on a Transfer Date.

With respect to each Transfer, OPIC shall have received written confirmation from the Collateral Agent that the Subordinated Loan shall have been disbursed in an amount such that after giving effect to such Transfer the Loan to Subordinated Loan Ratio does not exceed the ratio set out in Section 6.11.

Section 5.04 Certification.

The Borrower shall have furnished OPIC with a Disbursement/Transfer Certificate of an Authorized Officer of the Borrower dated the date of the Disbursement or a Transfer Date, as the case may be, substantially in the form of Exhibit D and otherwise in form and substance satisfactory to OPIC: (i) certifying the satisfaction of the conditions set forth in Sections 5.01 and 5.02, (ii) setting forth, in the case of any Transfer, the Project costs to which such Transfer will be applied and certifying that the proceeds of such Transfer will be applied in accordance with the Financial Plan and (except to the extent applied to Eligible Costs) will be applied solely to the purchase of rough diamonds against delivery of such diamonds and, to the extent applicable, a corresponding Kimberley Process Certificate in accordance with the terms and conditions of the Supply Agreement and the Security and Account Agreement, (iii) certifying, in the case of any Transfer, that such Transfer, consisting of Loan proceeds and proceeds of the Subordinated Loan (pro rata in accordance with the Loan to Subordinated Loan Ratio) will be applied to the payment of such Project costs, and (iv) setting forth, in the case of any Transfer, the Project costs to which any prior Transfers have been applied, together with evidence satisfactory to OPIC that all such proceeds have been applied to the payment of Project costs or Eligible Costs, as applicable.

Section 5.05 Financial Information.

Not less than ten (10) Business Days before the date of the Disbursement or a Transfer Date, as the case may be, OPIC shall have received any Financial Statements, reports, and other information that the Borrower, pursuant to Section 6.07, would otherwise be required to furnish to OPIC on or before such date.

Section 5.06 Payment or Reimbursement of Expenses.

All fees and other amounts due to OPIC with respect to the making of the Loan, and all other amounts payable or reimbursable by the Borrower in connection with the making of the Loan, shall have been paid (except to the extent any fees may be withheld from the proceeds of the Disbursement in accordance with Sections 2.02 and 2.08), including, (i) the Commitment Fee, (ii) the Facility Fee, (iii) the Maintenance Fee, (iv) any Taxes payable pursuant to Section 2.10, and (v) any amounts payable pursuant

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to Section 2.11(a), including the fees and expenses of OPIC’s legal counsel and business consultants and the costs of registration and recordation of any of the Transaction Documents.

ARTICLE VI.

AFFIRMATIVE COVENANTS

Unless OPIC otherwise agrees in writing, so long as the Commitment shall remain outstanding and until all amounts due and to become due hereunder and under the Notes shall have been paid in full, the Borrower covenants and agrees as follows:

Section 6.01 Project Execution.

The Borrower shall (a) execute the Project promptly and diligently and (to the extent applicable to its activities under the Transaction Documents) in accordance with Prudent Industry Practices and (b) transfer the proceeds of the Loan and the Subordinated Loan to be applied exclusively to the purchase of rough diamonds in accordance with the terms and conditions of the Supply Agreement (except to the extent applied to (i) Eligible Costs, (ii) the payment of interest due on the first Payment Date pursuant to Section 2.04(a), or (iii) other expenses of the Borrower which shall not exceed $10,000 per month).

Section 6.02 Borrower Operations.

(a) The Borrower shall duly and punctually perform its obligations under this Agreement, the Notes, and each of the other Transaction Documents to which it is a party. The Borrower shall conduct its operations on the basis of customary commercial practice and arm’s-length arrangements, with due diligence and efficiency and under the supervision of qualified and experienced management. The Borrower shall repair, replace, and protect each of its assets so that its business can be conducted properly at all times.

(b) The Borrower shall (i) maintain and preserve its existence as a company limited by shares under the laws of the British Virgin Islands and all rights, privileges and franchises necessary in the normal conduct of its business and necessary to perform all of its obligations and exercise all rights, discretion, and remedies available to it under or in connection with all Transaction Documents with due diligence in accordance with Prudent Industry Practices (ii) cause the Consignee to maintain and preserve its existence as a company limited by shares under the laws of the Kingdom of Belgium; and (iii) maintain (and cause the Consignee to maintain) its existence as a single-purpose company engaged only in activities related to the execution of the Project.

(c) The Borrower shall at all times (i) continue to directly own not less than one hundred percent (100%) of each class of stock in the Consignee carrying the right to vote and of all other equity interests issued by the Consignee and (ii) directly retain Control of the Consignee.

Section 6.03 Maintenance of Rights, Compliance with Laws, and Internal Controls.

The Borrower shall (i) acquire, maintain, and renew all rights, contracts, powers, privileges, leases, lands, sanctions, licenses, trademarks, patents, and franchises necessary for the conduct of its business and the performance of its obligations hereunder and under the other Transaction Documents,

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(ii) conduct its business in compliance with all applicable laws and directives of governmental authorities having force of law, including applicable Anti-Money Laundering Laws, applicable environmental standards and Corrupt Practices Laws, and (iii) duly pay before they become overdue all Taxes except amounts being contested in good faith by appropriate proceedings diligently pursued for which adequate cash reserves shall have been established. The Borrower further covenants that should OPIC notify the Borrower of its concerns that there has been a violation of the provisions of clause (ii) above or of Section 3.10(b), the Borrower shall cooperate in good faith with OPIC and its representatives in determining whether such a violation has occurred, and shall respond promptly and in reasonable detail to any notice from OPIC, and shall furnish documentary support for such response upon OPIC’s request.

Section 6.04 Government Approvals.

The Borrower shall (and shall cause the Consignee to) obtain, and shall at all times maintain in full force and effect, all material registrations, declarations, filings, and governmental consents, licenses, approvals, authorizations, and permits (including, but not limited to, those listed in Schedule 4.05) necessary for the performance by the Borrower of this Agreement, the Notes, and each of the other Transaction Documents to which it is or will be a party.

Section 6.05 Insurance.

(a) Insurance. The Borrower shall maintain or cause to be maintained in effect all-risks Jewelers Block insurance with respect to the rough diamonds purchased for the Project, in such form (including the form of the loss payable clauses) and with such insurers as shall be selected by or for the Borrower and approved by OPIC (such approval not to be withheld unreasonably), such insurance to be in an amount covering one hundred percent (100%) of the replacement cost of such diamonds (regardless of whether such diamonds are in the possession of the Project Company, the Borrower or the Sponsor), provided that such insurance shall be on a “no co-insurance/agreed-amount” basis.

All insurance policies required hereby shall name the Borrower as loss payee as its interests may appear and shall provide that any applicable payment thereunder shall be made to the Borrower as sole loss payee for deposit into the Collateral Account. Upon receipt by the Borrower of any such proceeds, it shall immediately notify OPIC thereof.

(b) Evidence of Insurance. On or before the date of the Disbursement hereunder and thereafter at least 10 days before the renewal of any insurance policy, until all obligations of the Borrower under the Loan Documents shall have been indefeasibly and irrevocably paid in full, the Borrower shall furnish to OPIC (i) certificates of insurance or binder, in a form acceptable to OPIC, evidencing all of the insurance required by the provisions of this Section 6.05 with such certificates/binders identifying insurers, types of insurance, insurance limits, deductibles, policy term and the special provision for such insurance required by this Section 6.05, and (ii) a certificate signed by an Authorized Officer of the Borrower stating that such insurance complies with the terms hereof.

(c) Premiums. The Borrower shall notify OPIC in writing promptly of any default in the payment of any premiums or any other act or omission on the part of the Borrower or the Project Company which might invalidate or render unenforceable, in whole or in part, any such insurance.

(d) Policy Conditions. All policies shall provide that, if such insurance is canceled, terminated, or materially changed for any reason whatsoever (other than non-payment of premium), the

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insurers will promptly notify the Borrower and any such cancellation, termination or change shall not be effective for sixty (60) days after receipt of such notice, and appropriate certification shall be made to the Borrower by each insurer with respect thereto.

Section 6.06 Accounting and Financial Management.

(a) The Borrower shall (i) maintain adequate management information and cost control systems, (ii) maintain a system of accounting, (iii) prepare its Financial Statements in accordance with U.S. GAAP, (iv) engage independent internationally recognized accountants satisfactory to OPIC, (v) notify OPIC of any change in such accountants and the reason therefor, and (vi) no later than thirty (30) days after any change in such accountants, issue an irrevocable authorization, in the form of Schedule 4.10, to the new accountants and provide a copy thereof to OPIC. Without limiting the foregoing, the Borrower shall maintain the systems described in clauses (i) and (ii) and related management and accounting policies in a manner adequate to ensure compliance with applicable Corrupt Practices Laws.

(b) The Borrower shall make arrangements satisfactory to OPIC for overseeing the financial operations of the Borrower and the Consignee, including its cash management, accounting and financial reporting, and for overseeing the Borrower’s relationship with its lenders and independent accountants; such arrangements may include, but shall not be limited to, employing a chief financial officer (or similar officer) to oversee the financial operations of the Borrower and the Consignee.

Section 6.07 Financial Statements and Other Information.

At its cost the Borrower shall furnish to OPIC each of the following documents:

(a) Within sixty (60) days after the end of each Fiscal Semester (including the second (2nd) Fiscal Semester) of each Fiscal Year, its unaudited Financial Statements and a comparison between (i) such Financial Statements and the projections for such Fiscal Semester furnished pursuant to Section 6.07(d) below, and (ii) actual financial ratios and the financial ratios required by Section 6.11, all certified by the chief financial officer (or similar officer) of the Borrower as fairly presenting the financial condition, results of operations, and cash flow of the Borrower for the period then ended, together with such officer’s certificate that his or her review has not disclosed the existence of an Event of Default or a Potential Event of Default, or, if any Potential Event of Default then exists, specifying the nature and period of existence thereof and what action the Borrower has taken or proposes to take with respect thereto;

(b) Within one hundred twenty (120) days after the end of each Fiscal Year, its audited Financial Statements together with a certificate by the independent accountants reporting thereon describing briefly the scope of their examination (which shall include a review of the relevant terms of this Agreement) and certifying whether their examination has disclosed the existence of an Event of Default or a Potential Event of Default, and if so, specifying the nature and period of existence thereof;

(c) Within one hundred twenty (120) days after the end of each Fiscal Year, a report certified by an Authorized Officer setting forth in reasonable detail all transactions between the Borrower, the Project Company, the Sponsor, the Consignee and other Project Participants (including all diamond purchase and sale transactions between the Borrower and other Project Participants and the date and price at which such transactions occurred);

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(d) Not later than forty-five (45) days prior to the beginning of each Fiscal Year, an annual operating forecast for the Borrower, including its projected semi-annual financial statements for such Fiscal Year, together with a statement of the assumptions on which such forecast is based;

(e) Within ninety (90) days after the end of each Fiscal Year, the Self-Monitoring Questionnaire, certified by an Authorized Officer as true and complete;

(f) Copies of all management letters and other annual or interim audit reports submitted to the Borrower by its independent accountants and such other information and data with respect to the Borrower, its assets, operations and the Project (including supporting information as to compliance with this Agreement) as OPIC may reasonably request from time to time; and

(g) On or before each Monthly Date, a copy of the Calculation Certificate (as defined in the Consignment and Guaranty Agreement) delivered to the Borrower by the Consignee pursuant to Section 2.03(c)(iii) of the Consignment and Guaranty Agreement.

Section 6.08 Access to Records; Inspection; Meetings; Asset Management.

(a) The Borrower shall, upon request of OPIC, give, or cause to be given, to any representatives, agents, or contractors of OPIC, including any Asset Manager pursuant to clause (b) below, access during normal business hours to, and permit them to: (i) examine, copy and make extracts from, any and all records and documents in the possession or subject to the control of the Borrower relating to its operations and financial affairs, including financial statements (ii) communicate with employees, agents and/or contractors of the Borrower who have or may have knowledge of matters with respect to which OPIC seeks information, and (iii) inspect any of its facilities or properties. If OPIC so requests, the Borrower shall give OPIC not less than fifteen (15) days’ notice of, and shall permit an Authorized Officer or agent of OPIC to attend and/or to receive the minutes of, each meeting of its shareholders and of its directors.

(b) The Borrower shall cooperate in good faith with OPIC in the event that OPIC chooses, at its own expense, to exercise its right to assign or otherwise transfer the duties associated with the monitoring, management and administration of the Loan (“Asset Management”) to a third party which shall act as an agent of OPIC (the “Asset Manager”) in addressing such matters as any Asset Manager may require, including providing such information and documents relating to the Borrower and the Liens secured pursuant to the Security Documents as OPIC may reasonably request in connection with such Asset Management.

(c) The Borrower shall at all times permit the Asset Manager to benefit from all of the rights of OPIC hereunder, and any provision hereof that requires that any notice, report, statement, financial ratio or financial requirement be acceptable to OPIC shall be deemed to mean that such notice, report, statement, financial ratio, or financial requirement be acceptable to such Asset Manager; any provision hereof that requires or permits a determination or the application of OPIC’s discretion shall be deemed to require or permit a determination or the application of the discretion of such Asset Manager; and any indemnity or agreement to pay any fee or reimburse any expense of OPIC shall be deemed to be an indemnity or agreement to pay any fee or reimburse the expenses of such Asset Manager, in each case as if such Asset Manager had been included in such provision.

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Section 6.09 Notice of Default and Other Matters.

The Borrower shall immediately, notify OPIC of (i) the occurrence of each Event of Default and of each known Potential Event of Default and any steps the Borrower is taking to remedy such situation, (ii) any actions, suits, other legal proceedings or arbitral proceedings against the Borrower that involve claims aggregating more than the equivalent of $100,000 or might otherwise have a Material Adverse Effect, and (iii) the occurrence of any other condition or event (including government action) that could have a Material Adverse Effect and any steps the Borrower is taking to remedy such situation.

Section 6.10 Security Documents.

The Borrower at its cost shall take all actions necessary to maintain each of the Security Documents in full force and effect and enforceable in accordance with its terms and to preserve, protect, and perfect the Liens of the Security Documents on the Collateral, including (i) making filings and recordations, (ii) executing and delivering statements, instruments, powers of attorney and other documents, (iii) paying fees and other charges, (iv) issuing supplemental documentation and continuation statements, (v) discharging Liens adversely affecting the rights of OPIC in the Collateral, (vi) publishing or delivering notice to third parties, (vii) depositing title documents, and (viii) taking actions necessary to ensure that all after-acquired property of the Borrower with respect to any part of the Collateral or proceeds thereof is subject to a valid and enforceable first-ranking Lien in favor of OPIC (all as may be necessary or desirable in the determination of OPIC for such purpose).

For the avoidance of doubt, in the event any government authority issues or adopts new laws, decrees, resolutions, orders, procedures, or rules relating to the creation, preservation, registration, perfection, protection, or enforcement of security interests in assets of the same character as those covered by the Loan Documents and Security Documents, or issues any clarifications of existing laws, decrees, resolutions, orders, procedures, or rules relating to the same, the Borrower shall (at its own expense) execute and deliver all such additional amendments, assignments, certificates, instruments, notifications, or other documents and give further assurances and do all other acts and things as OPIC shall reasonably request or as may be provided for in such new laws, decrees, resolutions, orders, procedures or rules or any clarifications of the same, to create, preserve, register, perfect, protect or enforce the security interest provided for in the Loan Documents and Security Documents. All actions to be performed by the Borrower shall be taken by the Borrower within ninety (90) days after the issuance and applicability of such laws, decrees, resolutions, orders, procedures, or rules or any clarifications of the same to OPIC’s security interest as provided in the preceding sentence (whether by receipt of notice from OPIC or otherwise).

Section 6.11 Financial Ratios.

The Borrower shall maintain the following financial ratios: (i) commencing with the second Fiscal Semester beginning not less than twelve (12) months after the date of the Disbursement, a Debt Service Coverage Ratio for the immediately preceding two Fiscal Semesters taken as a single accounting period of not less than 1.25:1.00, (ii) commencing with the first Fiscal Semester beginning not less than twelve (12) months after the date of the Disbursement, and measured as of the end of such Fiscal Semester and each Fiscal Semester thereafter a Loan Cover Ratio of not less than 1.25:1.00, and (iii) a Loan to Subordinated Loan Ratio at all times of not greater than 70:30. The Borrower shall, as provided in Section 6.07(a) deliver to OPIC not later than sixty (60) days after the end of each Fiscal Semester of the Borrower, a certificate executed by the chief financial officer (or similar officer) of the Borrower

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setting forth in reasonable detail all information necessary to calculate and determine the financial ratios in this Section 6.11 and certifying that the Borrower is in compliance with the covenant levels contained in clauses (i), (ii) and (iii) of the preceding sentence. For purposes of this Section 6.11, the ratios and amounts referred to shall be calculated on the basis of information set forth in the Financial Statements.

Section 6.12 Environmental Compliance.

The Borrower shall, and shall cause the Project Company to, comply with, and shall conduct its business, operations, assets, equipment, property, leaseholds, and other facilities in compliance with, the World Bank Guidelines, and with respect to Project activities in Namibia the provisions of all applicable environmental, health and safety laws, codes and ordinances of Namibia, and all rules and regulations promulgated thereunder. The Borrower shall, and shall cause the Project Company to, maintain all required permits, licenses, certificates and approvals relating to: (i) air emissions, (ii) discharges to surface water or ground water, (iii) noise emissions, (iv) solid or liquid waste disposal, (v) the use, generation, storage, transportation or disposal of toxic or hazardous substances or wastes, or (vi) other environmental, health or safety matters. The Borrower shall, and shall cause the Project Company to, notify OPIC immediately, and in no event later than 48 hours after the Borrower or the Project Company should have become aware through the exercise of reasonable due diligence and care, of any accident at the Project site that results in the loss of life or that has, or that could reasonably be foreseen to have a material adverse impact on the environment. The Borrower shall submit to OPIC within 30 days after the occurrence of such event a summary report thereof.

Section 6.13 Management of Revenue Account.

The Borrower shall (a) ensure (through its exercise of rights set forth in the Consignment and Guaranty Agreement) that during the period from each date falling five (5) Business Days prior to each Payment Date up to and including such Payment Date the amount on deposit in the Revenue Account shall be sufficient to pay all amounts due and owing in respect of the Obligations on such Payment Date (as evidenced by an account statement delivered electronically to OPIC on the first day of each such period), (b) cause to be deposited into the Revenue Account all proceeds from the sale of any diamonds (except to the extent otherwise provided in the Consignment and Guaranty Agreement) and (c) without limiting clause (a) above, ensure that no payments are made from the Revenue Account other than (i) for Debt Service or other Obligations, (ii) to purchase rough diamonds in accordance with the Supply Agreement, (iii) pursuant to Section 7.04 or 7.05, (iv) to pay Taxes and other expenses (not to exceed $10,000 per month), or (v) as otherwise expressly permitted under the Security and Account Agreement.

Section 6.14 Kimberley Process Certificates.

The Borrower shall ensure that each shipment of rough diamonds sold to the Borrower shall be delivered to the Project Company in custody and safekeeping for the Borrower and each such imported shipment shall be accompanied by a duly executed Kimberley Process Certificate (and that the Project Company Undertaking Agreement at all times contains an identical covenant of the Project Company).

Section 6.15 Ownership of Diamonds.

The Borrower shall ensure that each shipment of rough diamonds sold to the Borrower shall be delivered to the Project Company in custody and safekeeping for the Borrower and shall, at the request of

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OPIC from time to time, provide evidence satisfactory to OPIC demonstrating the Borrower’s legal and beneficial ownership of any diamonds purchased by it (whether then held in custody and safekeeping for it by the Project Company or otherwise).

Section 6.16 Anti-Corruption Handbook.

The Borrower shall provide a copy of the Anti-Corruption Handbook to (i) all officers of the Borrower directly involved in the management of the Project and (ii) all shareholders with ten percent (10%) or more of ownership in the Borrower directly involved in the management of the Project.

ARTICLE VII.

NEGATIVE COVENANTS

Unless OPIC otherwise agrees in writing, so long as the Commitment shall remain outstanding and until all amounts due and to become due hereunder and under the Notes shall have been paid in full, the Borrower covenants and agrees as follows:

Section 7.01 Liens.

The Borrower shall not (and shall not permit the Consignee to) create, assume or otherwise permit to exist any Lien on any of its properties or assets, whether now owned or hereafter acquired, or in any proceeds or income therefrom, except for the following (each of which is a “Permitted Lien”):

(a) the Liens created under the Security Documents or pursuant to any of the other Transaction Documents;

(b) Liens for Taxes or other Liens imposed by law, such as mechanics’, materialmen’s, landlords’, warehousemen’s, and carriers’ Liens, and other similar Liens (“Statutory Liens”), securing obligations incurred in the ordinary course of business that are not yet overdue or that are being contested in good faith by appropriate proceedings and for which appropriate reserves have been established;

(c) Liens under workers’ compensation, unemployment insurance, or similar legislation; and

(d) judgment and other similar Liens arising in connection with court proceedings, provided that (i) the execution or other enforcement of such Liens is effectively stayed, appropriate reserves have been established for the claims secured thereby, and such claims secured thereby are being actively contested in good faith and by appropriate proceedings and (ii) such judgment or proceedings do not constitute or give rise to an Event of Default or Potential Event of Default.

Section 7.02 Indebtedness.

The Borrower shall not (and shall not permit the Consignee to) incur, assume, guarantee, or permit to exist or otherwise become liable for Indebtedness other than the following (each of which is a “Permitted Indebtedness”):

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(a) the Loan;

(b) the Subordinated Loan which shall be subordinated to the Loan pursuant to the terms of the Subordination Agreement;

(c) obligations to the Sponsor referred to in Section 7.05(b); and

(d) accounts receivable from the Consignee referred to in clause (b) of the definition of Loan Cover Ratio.

Section 7.03 No Alteration of Agreements.

The Borrower shall not (and shall not permit the Consignee to) terminate, amend, or grant any waiver of, or assign or transfer or consent to the assignment or transfer of any of the respective duties or obligations under, any of its Charter Documents or any provision of any of the Transaction Documents to which it is a party (other than amendments or waivers, either to correct manifest error or which are of a formal, minor, or technical nature and do not change materially any Person’s rights or obligations, provided that the Borrower promptly gives OPIC notice of such amendment or waiver), or consent to any change in any party to any Transaction Document.

Section 7.04 Distributions and Share Redemptions.

The Borrower shall not (and shall not permit the Consignee to) (a) declare or pay any dividends or make any other distributions on any shares of any class of its capital stock (other than dividends payable solely in shares of its capital stock), or purchase, acquire, redeem or retire (directly or indirectly through any subsidiary of the Borrower) any of such shares or (b) make any payment in respect of the Subordinated Loan in either case until all amounts due or to become due hereunder or under the Notes shall have been paid in full; provided, however, that after the Repayment Commencement Date shall have occurred, the Borrower may make scheduled payments of principal and interest in respect of the Subordinated Loan and may declare or pay dividends or make any other distributions on any shares of its capital stock or purchase, acquire, redeem, or retire any such shares, but only if such payments or distributions are made in accordance with the Security and Account Agreement and if, after giving effect to each such payment: (i) no Event of Default or Potential Event of Default shall have occurred and be continuing; and (ii) the Borrower shall be in compliance with the financial ratios set forth in Section 6.11.

Section 7.05 Conduct of Business with Affiliates.

(a) The Borrower shall not conduct any business or enter into any business transaction with the Shareholders, the Sponsor, the Project Company or any Affiliate thereof, unless such transaction is (i) pursuant to a Transaction Document, or (ii) otherwise approved in writing by OPIC; and in each case is on an arm’s length basis and subject to the reporting requirement set forth in Section 6.07(c).

(b) Except for amounts permitted under Section 7.04, the Borrower shall not (and shall not permit the Consignee to) pay, or incur or assume any obligation to pay, any amount to the Shareholders, the Sponsor, the Project Company or any Affiliate thereof, including salaries, bonuses, commissions, management fees, consulting fees, technical assistance fees and debt service; provided, however, that

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the Borrower may make such payments to the Consignee and the Sponsor subject to and in accordance with the Consignment and Guaranty Agreement and the Security and Account Agreement if, after giving effect to each such payment: (i) no Event of Default or Potential Event of Default shall have occurred and be continuing; and (ii) the Borrower shall be in compliance with the financial ratios set forth in Section 6.11.

Section 7.06 Sale of Assets; Mergers.

The Borrower shall not:

(a) sell, assign, convey, lease or otherwise dispose of all or a substantial part of its assets or properties, whether now owned or hereafter acquired (other than sales of diamonds in the ordinary course of business);

(b) dissolve, liquidate, or otherwise cease to do business;

(c) create any subsidiaries;

(d) acquire by purchase or otherwise any of the shares of capital stock or assets of another Person; or

(e) merge or consolidate with any Person or re-organize or spin off assets in any manner.

Section 7.07 Lease Obligations.

The Borrower shall not enter into any agreement or arrangement to acquire by lease the use of any property or equipment of any kind.

Section 7.08 Hedging Arrangements.

The Borrower shall not enter into any Hedging Arrangement.

Section 7.09 Ordinary Conduct of Business.

The Borrower shall not:

(a) engage in any business other than those related to the Project;

(b) materially change the nature or scope of the Project;

(c) change its Charter Documents in a manner that would be inconsistent with the provisions of any of the Transaction Documents;

(d) change its name or take any other action that might adversely affect the Liens created by the Security Documents;

(e) enter into any partnership, profit-sharing, or royalty agreement or other similar arrangement whereby the Borrower’s income or profits are, or might be, shared with any other Person;

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(f) purchase any equity securities of, make or permit to exist any loans or advances to, invest or acquire any interest whatsoever in, or assume, guarantee, endorse, or otherwise become directly or contingently liable for any obligation or Indebtedness of, any Person, except as expressly permitted pursuant to the Transaction Documents;

(g) issue or undertake to issue any ownership interest, quota, capital stock (including preferred stock), securities, or rights or interests except in accordance with the Charter Documents in connection with a capital increase, provided that any quotas or shares issued as a result of such capital increase become subject to a pledge in favor of OPIC in form and substance satisfactory to OPIC and are issued to a Person approved in writing by OPIC; or

(h) change its Fiscal Year.

Section 7.10 Worker Rights.

The Borrower (and its officers, agents and representatives) shall (i) not take any action to prevent its employees from lawfully exercising their right of association and their right to organize and bargain collectively, (ii) observe applicable laws relating to a minimum age for employment of children, acceptable conditions of work with respect to minimum wages, hours of work and occupational health and safety, (iii) not use forced labor, (iv) not take any action on the basis of the right of association or on the basis of organization and collective bargaining activities or membership that may result in the termination, suspension, demotion or transfer of any employee by it, (v) not require any employee to work more than 45 standard hours of work per week (not including overtime work) and to guarantee employees a weekly 36-hour rest period, and (vi) pay at least the official minimum wage, if established by the appropriate governmental authorities during the term of the Project (the “Worker Rights Requirements”). The Borrower shall require each of its Project contractors to comply with the Worker Rights Requirements with respect to employees of such Project contractors, and of employees of their respective subcontractors, performing work under contracts between the Borrower and the Project contractor (“Project Contracts”) in Namibia. In the event information concerning non-compliance or potential non-compliance with the Worker Rights Requirements with respect to employees under any Project Contract comes to the attention of a responsible officer of the Borrower, the Borrower shall give prompt notice thereof to OPIC. The Borrower shall: (i) at all times (including after the expiry of the ninety-day period referred to in (ii)) use all reasonable efforts, including remediation, to cure or to cause the relevant Project contractor to cure such non-compliance, and (ii) terminate such Project contractor’s Project Contract unless such non-compliance is cured within ninety (90) days after such notice. Notwithstanding the foregoing, neither the Borrower nor any of its Project contractors shall be responsible for non-compliance with the Worker Rights Requirements resulting from actions of the government of Namibia.

Section 7.11 ERISA and Employees.

Neither the Borrower nor any ERISA Affiliate shall sponsor, maintain, administer, contribute to, participate in or have any obligation to contribute to any Employee Benefit Plan.

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Section 7.12 OFAC Compliance.

The Borrower shall ensure that none of the Borrower’s directors, members of senior management, ultimate beneficial owners of the Borrower, or principal third parties with whom the Borrower is engaged in business, shall be a Person included in the OFAC List.

Section 7.13 Bank Accounts.

The Borrower will not open or maintain any bank accounts or security accounts (as such term is defined in Section 8-501 of the UCC) other than the Collateral Accounts.

Section 7.14 No Other Powers of Attorney.

The Borrower will not execute or deliver any powers of attorney (other than powers of attorney for signatories of documents permitted by the Transaction Documents and limited purpose powers of attorney necessary in the ordinary course of its business), fiduciary transfer agreements or similar documents, instruments or agreements, except to the extent such documents, instruments or agreements comprise part of the Security Documents, are permitted by the Transaction Documents or relate to the performance of ministerial tasks in the ordinary course of business.

ARTICLE VIII.

DEFAULTS AND REMEDIES

Section 8.01 Events of Default.

The occurrence and continuation of any of the following events or circumstances shall constitute an “Event of Default” hereunder:

(a) The Borrower fails to pay in accordance with the terms of any Finance Document (i) any amount of principal of the Loan when the same becomes due and payable (whether at scheduled maturity, pursuant to any mandatory prepayment or otherwise), (ii) any interest on the Loan when the same becomes due and payable in accordance with the terms thereof, or (iii) any other Obligation when the same becomes due and payable in accordance with the terms thereof;

(b) The Borrower fails to pay when due any principal of or interest on any of its Indebtedness (other than the Subordinated Loan and the Loan) when due (whether at scheduled maturity, required prepayment, acceleration, demand, or otherwise) and such failure continues beyond the grace period, if any, applicable thereto; or a default occurs under any agreement or instrument evidencing, or under which the Borrower or the Sponsor, as the case may be, has outstanding at the time, any such Indebtedness and such default continues beyond the grace period, if any, applicable thereto, if the effect of such default is to accelerate or (in the case of the Borrower) to permit the acceleration of the maturity of such Indebtedness or any such Indebtedness shall be declared to be due and payable, or required to be prepaid, prior to the stated maturity thereof as a result of a default or similar adverse event (and, in the case of the Sponsor, such Indebtedness is outstanding in an amount in excess of $30,000,000);

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(c) Any representation, warranty, or certification made by or on behalf of any Obligor in this Agreement or any other Finance Document, or by any Project Participant in any Transaction Document or by any Project Participant in any notice or other certificate, document, Financial Statement or other statement delivered pursuant hereto or thereto (including any Transfer Request, Disbursement Request or Disbursement/Transfer Certificate), proves to have been incorrect or misleading in any material respect when made;

(d) The Borrower fails to comply with any covenant or provision set forth in Section 6.09, Section 6.10, Section 6.11 or Article VII, the Project Company fails to perform its obligations under the Project Company Undertaking Agreement, the Consignee or the Sponsor fail to perform when due any of their respective obligations under the Consignment and Guaranty Agreement, or the Sponsor or the Consignee fail to perform when due any of their respective obligations under the Sponsor Consent;

(e) The Borrower fails to comply with or perform any of its obligations under this Agreement other than those referred to in Sections 8.01(a), (b), (c) and (d) above, and such failure continues for thirty (30) days after the occurrence thereof;

(f) Any authorization, consent, or approval of any governmental agency or public authority necessary for the execution, delivery or performance of this Agreement, the Notes, or any of the other Transaction Documents or for the validity or enforceability of any of the Project Participants’ obligations under any of the Transaction Documents is not effected or given or is withdrawn or ceases to remain in full force and effect;

(g) This Agreement, the Notes, or any of the other Transaction Documents at any time for any reason is revoked, terminated, or ceases to be in full force and effect, or is declared to be unlawful or void or is repudiated, or the validity or enforceability hereof or thereof is at any time contested by (i) the Borrower, the Sponsor or the Project Company or (ii) any other Person and, in the case of (ii) only, any such repudiation or contest continues for a period of thirty (30) days, or, in the case of the Security Documents, ceases to give or provide the respective Liens, rights, titles, remedies, powers, or privileges intended to be created thereby;

(h) Any governmental authority condemns, nationalizes, seizes, or otherwise expropriates any substantial portion of the property, assets, or the capital stock of the Borrower or the Project Company (in addition to any portion of the Project Company directly or indirectly owned by such governmental authority as of the date hereof) or assumes custody or control of such property, assets or capital stock or takes any action for the dissolution or disestablishment of the Project Company that would prevent the Project Company or its officers from carrying on any material part of its business or operations;

(i) The Borrower or any other Project Participant fails to comply with or perform any of its material obligations or undertakings set forth in any Transaction Document (other than any such obligation or undertaking referred to in clauses (a) to (h) above) and such failure continues for thirty (30) days after the occurrence thereof;

(j) The Borrower, the Consignee or the Sponsor (or any successor in interest thereto), (i) requests a moratorium or suspension of payment of debts from any court, (ii) institutes proceedings or takes any form of corporate action to be liquidated or adjudicated bankrupt or insolvent, (iii) applies for or consents to the appointment of, a receiver, trustee, custodian, intervenor, or liquidator of itself or of all or a substantial part of its assets, (iv) files a voluntary petition in bankruptcy, admits in writing

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that it is unable to pay its debts as they become due, or generally fails to pay its debts as they become due, (v) makes a general assignment for the benefit of creditors, (vi) files a petition or answer seeking reorganization or arrangement with creditors or to take advantage of any bankruptcy or insolvency laws (or similar laws of any jurisdiction), or (vii) files an answer admitting the material allegations of, or consents to, or defaults in answering, a petition filed against it in any bankruptcy, reorganization, or insolvency proceeding where such action or failure to act will result in a determination of bankruptcy or insolvency against it;

(k) Without its application, approval, or consent, a proceeding is instituted in any court of competent jurisdiction or by or before any government or governmental agency of competent jurisdiction, seeking in respect of the Borrower or the Sponsor (or any successor in interest thereto): adjudication in bankruptcy, reorganization, dissolution, winding up, liquidation, a composition or arrangement with creditors, a readjustment of Indebtedness, the appointment of a trustee, receiver, liquidator, or the like of it or of all or any substantial part of its property or assets, or other like relief in respect of it under any bankruptcy, reorganization, or insolvency law (or similar laws of any jurisdiction); and, if such proceeding is being contested by it in good faith, the same continues undismissed for a period of 60 days;

(l) An attachment or analogous process is levied or enforced upon or issued against any of the assets of the Borrower or the Sponsor for an amount in excess of the equivalent of $1,000,000 (in the case of the Borrower) or $30,000,000 (in the case of the Sponsor) and is not discharged within thirty (30) days;

(m) Any other event occurs which under any applicable law would have an effect analogous to any of those events listed in Section 8.01(j) through Section 8.01(l);

(n) Any final judgment or judgments, decree, order or arbitral award for the payment of money in an aggregate amount in excess of $500,000 or its equivalent in another currency is rendered against the Borrower, and such judgment or judgments, decree, order, or arbitral award is not satisfied or discharged within 60 days of entry;

(o) The Sponsor at any time ceases to directly or indirectly hold fifty percent (50%) of the legal and beneficial title to the equity of the Borrower or ceases to directly or indirectly Control the Borrower, or any Shareholder at any time sells any capital stock of the Borrower, or the Borrower at any time ceases to directly hold one hundred percent (100%) of the legal and beneficial title to the equity of the Consignee, except in any such case as expressly permitted pursuant to the relevant Share Pledge and Retention Agreement;

(p) Any environmental claim shall have been asserted against the Borrower or any other party to the Transaction Documents, and such claim could have a Material Adverse Effect;

(q) Any event shall have occurred that, in the reasonable judgment of OPIC, could have a Material Adverse Effect;

(r) Any acts of war (whether declared or undeclared), revolution, insurrection, civil war, strife of a lesser degree, terrorism, or sabotage occur that cause the destruction, disappearance, or physical damage of all, or a substantial portion of, the assets of the Borrower or prevent the Borrower, the Sponsor, or the Project Company from carrying on its business or operations or any material part thereof and such event, if it does not involve all the assets or operations of the Borrower, has or in the

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reasonable judgment of OPIC could have a Material Adverse Effect, taking into account the Borrower’s insurance coverage;

(s) Except pursuant to the Security Documents, the Borrower or the Project Company ceases to have the right to possess or use the Project site, as applicable, or any material portion thereof for the purpose of owning, constructing, maintaining and operating the Project in the manner (and to the extent) contemplated by the Transaction Documents or shall be prevented from using any of the same, and such loss of right has or could reasonably be expected to have a Material Adverse Effect;

(t) A moratorium applicable to the export of diamonds shall be declared by the Government of Namibia or a moratorium applicable to the Loan shall be declared by any governmental authority having jurisdiction in respect of any indebtedness owed by the Borrower to OPIC; or

(u) The Borrower or the Project Company voluntarily abandons the Project.

Section 8.02 Remedies upon Event of Default.

(a) If any Event of Default (other than an Event of Default referred to in Sections 8.01(j) or (k)) has occurred and is continuing, OPIC may at any time do any one or more of the following: (i) suspend or terminate the Commitment, (ii) declare, by written demand for payment to the Borrower, any portion or all of the Loan to be due and payable, whereupon such portion of the Loan, together with interest accrued thereon and all other amounts due under this Agreement, the Notes, and the other Transaction Documents, shall immediately mature and become due and payable, without any other presentment, demand, diligence, protest, notice of acceleration, or other notice of any kind, all of which the Borrower hereby expressly waives, (iii) exercise rights and remedies under the Security Documents, (iv) set-off and apply all monies on deposit in the Collateral Accounts to the satisfaction of the Obligations, or (v) without notice of default or demand, proceed to protect and enforce its rights and remedies by appropriate proceedings, whether for damages or the specific performance of any provision of this Agreement, any Note, or any other Transaction Document, or in aid of the exercise of any power granted in this Agreement, any Note, any other Transaction Document, or by law, or may proceed to enforce the payment of any Note.

(b) Upon the occurrence of an Event of Default referred to in Sections 8.01(j) or (k), (i) the Commitment shall automatically be terminated and (ii) the Loan, together with interest accrued thereon and all other amounts due under this Agreement, the Notes, and the other Transaction Documents, shall immediately mature and become due and payable, without any other presentment, demand, diligence, protest, notice of acceleration, or other notice of any kind, all of which the Borrower hereby expressly waives.

Section 8.03 Borrower Consent to Suit.

The Borrower hereby irrevocably and unconditionally:

(a) submits for itself and its property in any legal action or proceeding relating to this Agreement or any other Finance Document, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the Courts of the State of New York, the courts of the United States of America for the Southern District of New York, the courts of the United

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States of America located in the District of Columbia, the courts of any other jurisdiction where it or any of its property may be found, and appellate courts from any thereof;

(b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same;

(c) appoints (which appointment shall take effect on or prior to the date of the Disbursement) CT Corporation at its address at 111 Eighth Avenue, 13th Floor, New York, New York 10011 as its agent for service of process in relation to proceedings before any courts located in the State of New York in connection with this Agreement for the term of the Loan plus an additional six months;

(d) agrees to maintain an agent for service of process in the State of New York until the Commitment has terminated and the Loan and all other amounts payable under this Agreement have been finally, irrevocably, and indefeasibly repaid in full;

(e) agrees that failure by a process agent to notify the Borrower of the process will not invalidate the proceedings concerned;

(f) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Borrower at its address set forth in Section 9.01 or at such other address of which OPIC shall have been notified pursuant thereto;

(g) agrees that if the appointment of any person mentioned in clause (c) above ceases to be effective, the Borrower shall immediately appoint a further person in the State of New York to accept service of process on its behalf in the State of New York, and, if the Borrower does not appoint a process agent within fifteen (15) days, OPIC is entitled and authorized to appoint a process agent for the Borrower by notice to the Borrower;

(h) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction;

(i) agrees that judgment against it in any such action or proceeding shall be conclusive and may be enforced in any other jurisdiction with or without the U.S. by suit on the judgment or otherwise as provided by law, a certified or exemplified copy of which judgment shall be conclusive evidence of the fact and amount of the Borrower’s obligation;

(j) waives any present or future objection to any such action, suit or proceeding in any such venue, and irrevocably consents and submits unconditionally to the non-exclusive jurisdiction of any such court for itself and in respect of any of its property;

(k) irrevocably waives any claim in any such court that any such action, suit, or proceeding brought therein has been brought in an inconvenient forum; and

(l) covenants and agrees not to resist enforcement of any such final judgment in any jurisdiction where OPIC commences enforcement proceedings.

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Section 8.04 Judgment Currency.

This is an international loan transaction in which the specification of Dollars is of the essence, and such currency shall be the currency of account in all events. The payment obligation of the Borrower hereunder and under the Notes shall not be discharged by an amount paid in another currency, whether pursuant to a judgment or otherwise, to the extent that the amount so paid on prompt conversion to Dollars in the United States of America under normal banking procedures does not yield the amount of Dollars then due. In the event that any payment by the Borrower, whether pursuant to a judgment or otherwise, upon conversion and transfer, does not result in the payment of such amount of Dollars at the place such amount is due, OPIC shall be entitled to demand immediate payment of, and shall have a separate cause of action against the Borrower for, the additional amount necessary to yield the amount of Dollars then due. In the event OPIC, upon the conversion of such judgment into Dollars, shall receive (as a result of currency exchange rate fluctuations) an amount greater than that to which it was entitled, the Borrower shall be entitled to immediate reimbursement of the excess amount.

Section 8.05 Immunity.

The Borrower represents and warrants that it is subject to civil and commercial law with respect to its obligations under this Agreement, the Notes, and each of the other Transaction Documents to which it is a party, that the making and performance of this Agreement, the Notes, and such other Transaction Documents and the borrowings by the Borrower pursuant hereto constitute private and commercial acts rather than governmental or public acts and that neither the Borrower nor any of its properties or revenues has any right of immunity from suit, court jurisdiction, attachment prior to judgment, attachment in aid of execution of a judgment, set-off, execution of a judgment or from any other legal process with respect to its obligations under this Agreement, the Notes, and such other Transaction Documents. To the extent that the Borrower may hereafter be entitled, in any jurisdiction in which judicial proceedings may at any time be commenced with respect to this Agreement, any Note or any other Transaction Document to which it is a party, to claim for itself or its revenues or assets any such immunity, and to the extent that in any such jurisdiction there may be attributed to the Borrower such an immunity (whether or not claimed), the Borrower hereby irrevocably agrees not to claim and hereby irrevocably waives such immunity. The foregoing waiver of immunity shall have effect under the United States Foreign Sovereign Immunities Act of 1976.

ARTICLE IX.

MISCELLANEOUS

Section 9.01 Notices.

Each notice, demand, report, or other communication relating to this Agreement shall be in writing, shall be hand-delivered or sent by mail (postage prepaid), telegram or facsimile transmission (with a copy by mail to follow, receipt of which copy shall not be required to effect notice), and shall be deemed duly given when sent to the following addresses, or to such other address or number as each party shall have last specified by notice to the other parties:

To the Borrower:

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NamGem Trading BVI Limited

c/o/ Lazare Kaplan International Inc.

19 W. 44th Street

New York, NY 10036

(Attn: William Moryto, Chief Financial Officer)

(Facsimile: (212) 857-7560)

To OPIC:

Overseas Private Investment Corporation

1100 New York Avenue, N.W.

Washington, D.C. 20527

United States of America

(Attn: Vice President, Small and Medium Enterprise Finance) [prior to Disbursement]

(Attn: Director, Portfolio Management) [after Disbursement]

Re: LKI-Namibia (OPIC/673-2006-061-IG)

(Facsimile: 1-202-408-9866)

(Facsimile: 1-202-408-9862) [after Disbursement]

Either party may, by written notice to the other, change the address to which such communications should be sent to it.

Section 9.02 English Language.

All documents to be furnished or communications to be given or made under this Agreement, the Notes, and each of the other Transaction Documents to which the Borrower is a party shall be in the English language or, if in another language, shall be accompanied by a translation into English certified by an Authorized Officer of the Borrower, which translation shall be the governing version between the Borrower and OPIC.

Section 9.03 Governing Law.

THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

Section 9.04 Succession.

This Agreement shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto, provided that the Borrower shall not, without the prior written consent of OPIC, assign or delegate all or any part of its interest herein or obligations hereunder.

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Section 9.05 Survival of Agreements.

Each agreement, representation, warranty, and covenant contained or referred to in this Agreement shall survive any investigation at any time made by OPIC and shall survive the Disbursement of the Loan, except for changes permitted hereby, and, save as otherwise provided in Sections 2.10 and 9.11, shall terminate only when all amounts due or to become due under this Agreement and the Notes are paid in full.

Section 9.06 Integration; Amendments.

This Agreement embodies the entire understanding of the parties hereto and supersedes all prior negotiations, understandings and agreements between them with respect to the subject matter hereof. The provisions of this Agreement may be waived, supplemented or amended only by an instrument in writing signed by an Authorized Officer of the Borrower and OPIC.

Section 9.07 Severability.

If any provision of this Agreement is prohibited or held to be invalid, illegal or unenforceable in any jurisdiction, the parties hereto agree to the fullest extent permitted by law that (i) the validity, legality and enforceability of the other provisions in such jurisdiction shall not be affected or impaired thereby, and (ii) any such prohibition, invalidity, illegality or unenforceability shall not render such provision prohibited, invalid, illegal, or unenforceable in any other jurisdiction. If, and to the extent that, the obligations of any party under the Section 9.11 are unenforceable for any reason, such party agrees to make the maximum contribution to the payment and satisfaction thereof as is permissible under applicable law.

Section 9.08 No Waiver.

(a) No indulgence granted by OPIC and no failure or delay by OPIC in exercising any right, power or remedy shall operate as a waiver thereof or otherwise impair any of its rights, powers or remedies. No single or partial exercise of any such right shall preclude any other or further exercise thereof or the exercise of any other legal right. No waiver of any such right shall be effective unless given in writing.

(b) The rights, powers, and remedies provided for herein are cumulative and are not exclusive of any other rights, powers, or remedies provided by law. The assertion or employment of any right, power, or remedy hereunder, or otherwise, shall not prevent the concurrent assertion of any other appropriate right, power, or remedy.

Section 9.09 Waiver of Jury Trial.

THE BORROWER AND OPIC EACH HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP BETWEEN THEM ESTABLISHED BY THIS AGREEMENT, THE NOTES, ANY OTHER TRANSACTION DOCUMENT AND ANY OTHER

-47-

INSTRUMENT, DOCUMENT OR AGREEMENT ENTERED INTO IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

Section 9.10 Waiver of Litigation Payments.

In the event that any action or lawsuit is initiated by or on behalf of OPIC in any jurisdiction against the Borrower or any other party to any Transaction Document, the Borrower, to the fullest extent permissible under applicable law, irrevocably waives its right to, and agrees not to request, plead, or claim that OPIC and its successors, transfers, and assigns (any such Person, an “OPIC Plaintiff”) post, pay, or offer, any cautio judicatum solvi bond, litigation bond, or any other bond, fee, payment, or security measure provided for by any provision of law applicable to such action or lawsuit (any such bond, fee, payment, or measure, a “Litigation Payment”), and the Borrower further waives any objection that it may now or hereafter have to an OPIC Plaintiff’s claim that such OPIC Plaintiff should be exempt or immune from posting, paying, making or offering any such Litigation Payment.

Section 9.11 Indemnity.

The Borrower shall, at all times, indemnify and hold harmless OPIC and its directors, officers, and employees (each, an “Indemnified Person”) in connection with any Loss (as defined below) and any Costs of Defense (as defined below) (the “Indemnity”). The term “Loss” shall mean any losses, claims, damages, penalties, or other costs relating to the Loan, this Agreement, the Commitment Letter, any other Transaction Document, or the Project to which an Indemnified Person may become subject. The term “Costs of Defense” shall mean costs, fees, and expenses incurred by or imposed on any Indemnified Person in defending, analyzing, settling, or resolving a Loss or Potential Loss (as defined below), and the expenses associated with the making of any affirmative claim in connection therewith. The term “Potential Loss” shall mean any event, fact, condition, or circumstance that is reasonably likely to give rise to a Loss. The Indemnity shall not apply to the extent that a court or arbitral tribunal with jurisdiction over the Loss and each Indemnified Person who has a Loss or Costs of Defense in connection therewith renders a final determination that the Loss or Costs of Defense resulted from (a) the gross negligence or willful misconduct of the Indemnified Person, or (b) OPIC’s failure to perform any act required of it relating to the Loan. The Indemnity is independent of and in addition to (i) any rights of any party hereto in connection with any Loss or Costs of Defense, and (ii) any other agreement, and shall survive the execution, modification, and amendment of this Agreement and the other Transaction Documents, the expiration, cancellation, or termination of the Commitment, the disbursement and repayment of the Loan, and the provisions of any other indemnity. Any exclusion of an obligation to pay any amount under this Section shall not affect the requirement to pay such amount under any other Section hereof or under any other agreement. OPIC and each Indemnified Person shall have the right to control its, his, or her defense, provided, however, that each Indemnified Person shall: (a) notify the Borrower in writing as soon as practicable of any Loss, Potential Loss, or Cost of Defense, and (b) keep the Borrower reasonably informed of material developments with respect thereto. In exercising the right and power to control his, her, or its actions in connection with a Loss or Potential Loss, including a decision to settle any such Loss, each Indemnified Person shall, taking into account the nature and policies of such Indemnified Person (i) consult with the Borrower, and (ii) act as such Indemnified Person would act if the Costs of Defense or settlement were to be paid by such Indemnified Person. The Borrower acknowledges and agrees that each Indemnified Person is an express, third-party beneficiary of the Borrower’s obligations under this Section 9.11.

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Section 9.12 No Third Party Reliance; No Assignment.

The Borrower may not assign this Agreement or any rights hereunder to any Person or entity. This Agreement is for the sole benefit of the Borrower and OPIC, and no other Person (other than the Indemnified Persons) shall be a direct or indirect beneficiary of, be entitled to rely hereon, or have any direct or indirect cause of action or claim in connection with this Agreement or any of the Transaction Documents.

Section 9.13 Further Assurances.

From time to time, the Borrower shall execute and deliver to OPIC such additional documents as OPIC may require to carry out the purposes of this Agreement or the Transaction Documents or to preserve and protect OPIC’s rights as contemplated herein or therein.

Section 9.14 Counterparts.

This Agreement may be executed in counterparts, each of which when so executed and delivered shall be deemed an original and all of which together shall constitute one and the same instrument.

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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed and delivered on its behalf by its Authorized Officer as of the date first above written.

NAMGEM TRADING BVI LIMITED

By: 

Its:

OVERSEAS PRIVATE INVESTMENT CORPORATION
By:
Its:
	Small and Medium Enterprise Finance

S 1

Schedule1.01

Application

The Application consists of the following:

1) The OPIC Form 115 (together with all attachments and exhibits) delivered to OPIC under cover letter dated April 18, 2006.

2) Revised business plan delivered to OPIC under email cover dated February 20, 2007.

S 2

Schedule1.03

Projected Financial Plan

Project Costs	Cost (U.S. $ 000’s)
Rough Diamonds		$	33,500,000
Eligible Costs			2,520,000
Total Project Cost				$	36,000,000

Project Financing	Amount (U.S. $ 000’s)
Senior Loan
OPIC	$	25,200,000
Total Loan			$	25,200,000
Subordinated Loan
Sponsor	$	10,800,000
Total Subordinated Loan			$	10,800,000
Total Project Financing			$	36,000,000

S 3

Schedule4.09

FORM OF AUTHORIZATION TO AUDITORS

[ON BORROWER LETTERHEAD]

[Date]

[Borrower’s independent accountants]

[Address]

Re: Auditor’s Authorization

Ladies and Gentlemen:

NamGem Trading BVI Limited (the “Borrower”) has entered into the First Amended and Restated Finance Agreement, dated as of June 10, 2008 (the “Finance Agreement”), between the Borrower and Overseas Private Investment Corporation (“OPIC”). Capitalized terms used in this letter but not defined herein shall have the meanings ascribed to such terms under the Finance Agreement.

Pursuant to Section 4.09 of the Finance Agreement, the Borrower hereby authorizes [Borrower’s independent accountants] to communicate directly with officers and designated representatives of OPIC and [______________], or such other firm of independent public accountants as OPIC may from time to time appoint as their independent accountants.

Please acknowledge your acceptance of this authorization by signing below in the space provided.

S 4

VERY TRULY YOURS,

NamGem Trading BVI Limited

BY:

NAME:

TITLE:

ACKNOWLEDGED AND ACCEPTED BY:

[BORROWER’S INDEPENDENT ACCOUNTANTS]

BY: 

Name:

Exhibit A

[FORM OF PROMISSORY NOTE]

NAMGEM TRADING BVI LIMITED

FIXED RATE PROMISSORYNOTE

SERIES 673-2006-061-IG

_________________, ____

No. ____

FOR VALUE RECEIVED, NamGem Trading BVI Limited, a company limited by shares organized under the laws of the British Virgin Islands (the “Borrower”), hereby promises to pay to the order of the Overseas Private Investment Corporation, an agency of the United States of America (“OPIC”) or any subsequent holder of this Promissory Note, the Original Principal Amount hereof together with interest at the rates applicable hereto as hereinafter provided, in lawful currency of the United States of America and in immediately available funds, at the office of [Name of Paying Agent], as paying agent (in such capacity, together with its successors and permitted assigns, the “OPIC Paying Agent”) specified in the Funding and OPIC Guaranty Agreement dated as of [•] (as amended, supplemented or modified from time to time, the “OPIC Funding Agreement”) among the Borrower, the OPIC Paying Agent, [Name of Placement Agent], as placement agent (in such capacity, together with its successors and permitted assigns, the (“OPIC Placement Agent”) and OPIC.

Original Principal Amount as of date of issue	Twenty Five Million Two Hundred Thousand and 00/100 Dollars ($25,200,000).
OPIC Note Interest Rate	A fixed rate equal to ___% per annum, being equal to Certificate Interest Rate plus the OPIC Guaranty Fee.
Principal Payment Dates	[•] day of [Months] of each year (or if any such day is not a Business Day, the next succeeding Business Day), from and including [First Principal Payment Date] to and including the Maturity Date.
Scheduled Principal Payments	The payments of principal determined in accordance with Schedule I hereto.
Interest Payment Dates	[•] day of [Months] of each year (or if any such day is not a Business Day, the next succeeding

A-2

	Business Day).
Maturity Date	[Maturity Date].

As used herein, the following capitalized terms shall have the meanings specified:

Accrued Interest	All accrued and unpaid interest on the Principal Balance of this Promissory Note.
Business Day	Any day other than (i) a Saturday, Sunday or day on which commercial banks are authorized by law to close in the City of New York or Washington, D.C., United States of America, (ii) for purposes of notices, communications or deliveries to OPIC, a day on which OPIC is closed, and (iii) for purposes of payments to OPIC, a day on which OPIC or the United States Department of Treasury is closed.
Certificate Interest Rate	A fixed rate determined in accordance with Section 4.05(a) of the Funding Agreement.
Day Count Convention Designated Prepayment Date	360-day years consisting of twelve (12) 30-day months. (i) Any Business Day specified by OPIC or (ii) any Business Day specified by the Borrower, as the case may be, in a notice delivered to the OPIC Paying Agent pursuant to Section 4.04 of the OPIC Funding Agreement as the date on which payment of a Prepayment Amount is to be made with respect to this Promissory Note.
Interest Payment Dates	The interest payment dates stated above.
Interest Period	Either (i) the period of time commencing on the date hereof to but excluding the first Interest Payment Date, or (ii) the period of time commencing on the immediately preceding Interest Payment Date to but excluding the first to occur of the next succeeding Interest Payment Date and the Maturity Date, as the case may be.
Maturity Date	The maturity date stated above.
OPIC Finance Agreement	The First Amended and Restated Finance Agreement dated as of June 10, 2008, between the Borrower and OPIC (as amended, supplemented, or otherwise modified and in effect from time to time).
OPIC Guaranty Fee	1.50% per annum.

A-3

OPIC Note Interest Rate	The OPIC note interest rate stated above.
OPIC Placement Agreement	The OPIC Placement Agency Agreement dated as of [_______], among the Borrower, OPIC, the OPIC Paying Agent, and the OPIC Placement Agent.
Original Principal Amount	The principal amount stated above.
Original Principal Payment Date	With respect to the Principal Balance of this Promissory Note, or the portion thereof to be prepaid on a Designated Prepayment Date, the date on which such Principal Balance or portion thereof, would have been paid if it were not prepaid on the Designated Prepayment Date.
Payment Date	The Maturity Date, any Designated Prepayment Date, any Interest Payment Date or any Principal Payment Date.
Payment Value	The value determined by discounting the Prospective Prepayment at the Reinvestment Rate for the maturity corresponding to the remaining average life of the Principal Balance of this Promissory Note or the portion thereof to be prepaid on a Designated Prepayment Date.
Prepayment Amount	An amount equal to the sum of (i) the Principal Balance of this Promissory Note or potion thereof to be prepaid on the applicable Designed Prepayment Date plus (ii) Accrued Interest at the OPIC Note Interest Rate to but excluding such Designated Prepayment Date plus (iii) the applicable Redemption Premium.
Principal Balance	As of any date of determination, the Original Principal Amount less all payments of principal made prior to such date.
Principal Payment Dates	The principal payment dates stated above.

A-4

Prospective Prepayment	The sum of: (i)       the prospective Accrued Interest that would have accrued (but for the prepayment on the applicable Designated Prepayment Date) on the Principal Balance of this Promissory Note, or the portion thereof to be prepaid on such Designated Prepayment Date, for the period beginning on such Designated Prepayment Date and ending on the date immediately preceding the Original Principal Payment Date; plus (ii)      the Principal Balance of this Promissory Note or the portion thereof to be prepaid on the applicable Designated Prepayment Date.
Redemption Premium	For any Designated Prepayment Date, an amount equal to the excess, if any, of:
	(i)       the Payment Value; over (ii)      the Principal Balance of this Promissory Note or any portion thereof to be prepaid on such Designated Prepayment Date. No Redemption Premium shall be due with respect to any payment on the Maturity Date (or, if any such date is not a Business Day, on the next succeeding Business Day). NO ASSURANCE IS GIVEN THAT THE REDEMPTION PREMIUM WILL COMPENSATE THE HOLDER OF THIS PROMISSORY NOTE FULLY FOR ANY COSTS OR LOSSES RESULTING FROM PREPAYMENT.
Redemption Premium Determination Date	The second (2nd) Business Day preceding the applicable Designated Prepayment Date.

A-5

Reinvestment Rate	With respect to the Principal Balance of this Promissory Note of the portion thereof to be prepaid on a Designated Prepayment Date, the yield to maturity implied by the sum of (x) 0.25% per annum plus (y) the arithmetic mean of the rates published for the five (5) Business Days preceding the applicable Redemption Premium Determination Date in the weekly statistical release designated H.15 (519) (or any successor publication) of the Board of Governors of the Federal Reserve System under the caption “US Government Securities—Treasury Constant Maturities” opposite the maturity corresponding to the remaining average life of the Prepayment Amount. If no maturity exactly corresponding to such remaining average life shall appear therein, yields for the closest published maturities which are greater and less than such remaining average life shall be calculated pursuant to the foregoing sentence and the Reinvestment Rate shall be interpolated from such yields on a straight-line basis, rounding in each of such relevant periods, to the nearest month.
Remaining Term	The number of years (rounded to the nearest one-twelfth) from the applicable Redemption Premium Determination Date to the Original Principal Payment Date.
Scheduled Principal Payments	The scheduled principal payments stated above.

All other capitalized terms used and not otherwise defined herein shall have their respective meanings set forth in the OPIC Funding Agreement.

1. Principal Payments. The Original Principal Amount of this Promissory Note shall be due and payable in consecutive Scheduled Principal Payments on the respective Principal Payment Dates until payment in full of the Original Principal Amount hereof; provided, however, that the last such payment shall be due no later than the Maturity Date and shall be in an amount necessary to repay in full the Principal Balance hereof. The Borrower irrevocably authorizes OPIC to endorse on Schedule I attached to this Promissory Note the Principal Balance from time to time of the OPIC Loan, together with notations of prepayments of principal received by OPIC in respect thereof, which endorsements shall, in the absence of manifest error, be prima facie evidence as to the outstanding Principal Balance of such OPIC Loan; provided, however, that any delay or failure of OPIC to make any such recordation or endorsement shall not affect the obligations of the Borrower to make a payment when due of any amount owing hereunder in respect of the OPIC Loan. No failure by OPIC to make such recordation and no error in such notation or recordation shall discharge or affect the obligation of the Borrower to make payments and perform its obligations in accordance with the terms of the other Loan Documents.

2. Interest Payments. Subject to the provisions of Section 2.04 of the OPIC Finance Agreement, and Section 4.01(b) of the OPIC Funding Agreement, the Borrower shall pay to the OPIC

A-6

Paying Agent, for the benefit of the holder hereof, interest on the Principal Balance from and including the date hereof until payment in full at the OPIC Note Interest Rate, in arrears, on each Interest Payment Date, commencing upon the first such date after the date hereof.

3. Calculation of  Interest. Interest on the Principal Balance shall (a) accrue daily at the OPIC Note Interest Rate for each Interest Period and (b) be calculated on the basis of the Day Count Convention.

4. Method and Application of Payment. All payments hereunder shall be made in Dollars by wire transfer of immediately available funds, without any offset, withholding or deduction for taxes or otherwise, in accordance with written instructions given by the holder to the OPIC Paying Agent or, in the case of the OPIC Guaranty Fee, the Borrower. Whenever any Payment Date under this Promissory Note shall fall on any day that is not a Business Day, the payment due on such Payment Date shall be made on the next succeeding Business Day. All payments shall be applied in the order of priority set forth in the OPIC Funding Agreement.

5. Additional Provisions. This Promissory Note is issued under and is subject to the provisions of (a) the OPIC Finance Agreement and (b) the OPIC Funding Agreement. No reference herein to the OPIC Finance Agreement or to the OPIC Funding Agreement and no provision of this Promissory Note, the OPIC Finance Agreement or the OPIC Funding Agreement shall alter or impair the obligation of the Borrower to pay the principal of, interest on, and all other amounts due pursuant to this Promissory Note as provided herein.

6. Prepayments and Premiums. The Borrower may make voluntary prepayments of the OPIC Loan, and shall make mandatory prepayments of the OPIC Loan, subject to the payment of the applicable Redemption Premiums and otherwise on the terms and conditions set forth in the OPIC Finance Agreement and the OPIC Funding Agreement.

7. Gross-up for Covered Taxes. All amounts payable hereunder shall be paid in full, free of any deduction or withholding for any present or future taxes, levies, imposts, stamp duties, fees, deductions, charges, withholdings or other liabilities with respect thereto.

8. Default Interest. Subject to the provisions of Section 2.04 of the OPIC Finance Agreement, if the Borrower fails to pay when due any amount of principal of or interest or Redemption Premium, if any, on this Promissory Note, the Borrower shall pay default interest on such amount, on demand, at the Default Interest Rate, and such interest shall accrue from the date on which such default amount became due and payable (whether on a Payment Date, by acceleration, or otherwise) at such rate and shall be payable on the last day of each month succeeding such due date and on the date when such defaulted amount is paid in full.

9. Amendments and Modifications. This Promissory Note may be amended, supplemented or modified only by an instrument in writing signed by duly authorized representatives of the holder of this Promissory Note and the Borrower.

10. Governing Law. THIS PROMISSORY NOTE SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

[SIGNATURE PAGE FOLLOWS]

A-7

IN WITNESS WHEREOF, the Borrower acting by its duly authorized representative has caused this Promissory Note to be executed and delivered as of the date hereof.

NAMGEM TRADING BVI LIMITED

as the Borrower

By: 

Its:

ScheduleI

to Promissory Note

SCHEDULE OF PRINCIPAL PAYMENTS

NAMGEM TRADING BVI LIMITED

Date Amount of
Disbursement Scheduled
Principal
Payment Principal
Prepayment
Amount Unpaid
Principal
Balance Percentage
Amount

Exhibit B

FORM OF

DISBURSEMENT REQUEST

(pursuant to Section2.01(b))

[BORROWER LETTERHEAD]

[Date]

Overseas Private Investment Corporation

1100 New York Avenue, N.W.

Washington, D.C. 20527

United States of America

Attention:          [Vice President, Small and Medium Enterprise Finance][for Disbursement]

[Director, Portfolio Management][after Disbursement]

with a copy to Treasurer

Disbursement Request

Dear Sir or Madam:

Reference is made to the First Amended and Restated Finance Agreement between NamGem Trading BVI Limited (the “Borrower”) and Overseas Private Investment Corporation (“OPIC”) dated as of June 10, 2008 (the “Finance Agreement”). Except as otherwise provided, capitalized terms used herein shall have the meanings set forth in the Finance Agreement.

Pursuant to Section 2.01(b) of the Finance Agreement, notice is hereby given that the undersigned requests a Disbursement of the Loan as follows:

Amount of Disbursement: $[_____]

Closing Date:  [Not less than 20 Business Days from the date OPIC receives this Disbursement Request]

The proceeds of the Disbursement shall be deposited into the Disbursement Account.

B-2

As of the Closing Date, each of the conditions precedent to this Disbursement set forth in Articles IV and V will be satisfied.

Very truly Yours,

NAMGEM TRADING BVI LIMITED

By: 

Its:

Exhibit C

FORM OF

CORPORATE AUTHORIZATION CERTIFICATE

(pursuant to Article IV)

[COMPANY LETTERHEAD]

Officer’s Certificate

Pursuant to Article IV

I, [__________], Corporate Secretary of [_______________], a [__________] organized and existing under the laws of [____________] (the “Company”), DO HEREBY CERTIFY that:

1. Attached hereto as Exhibit A is a true and complete copy of the Charter Documents of the Company, as amended to date, which are in full force and effect as of the date hereof, together with [__________], evidencing that such documents have been approved by the competent governmental agencies and authorities in [____________].

2. Attached hereto as Exhibit B are true and complete copies of resolutions duly adopted by the Board of Directors of the Company [and of all documents evidencing any other necessary corporate or shareholder action taken by the Company] to authorize the execution, delivery and performance of the [list each Transaction Document to which the applicable Person is or will be a party] and each of the other Transaction Documents to which it is or will be a party, and such resolutions are in full force and effect without amendment as of the date hereof.

3. The following named individuals whose specimen signatures and titles are set forth opposite their names are authorized to execute and deliver on behalf of the Company the [list each Transaction Document to which the applicable Person is or will be a party], each of the other Transaction Documents to which the Company is or will be a party and all other notices or instruments contemplated in the foregoing documents:

C-2

Name	Title	Specimen Signature
Name	Title	Specimen Signature
Name	Title	Specimen Signature

4. Attached hereto as Exhibit C are true and complete copies of each Transaction Document to which the Company is a party, each of which has been duly executed by the parties thereto and each of which is unconditional and in full force and effect in accordance with its terms without default as of the date hereof.

5. Attached hereto as Exhibit D are true and complete copies of each registration, declaration, filing or governmental consent, license, approval, authorization or permit required in accordance with Section 4.05 of the Finance Agreement, which are in full force and effect as of the date hereof.

WITNESS my hand this [_____] day of [__________], 200[__].

[Name]
Corporate Secretary

I, [__________], the [Chairperson and Chief Executive Officer] of the Company, DO HEREBY CERTIFY that [Name of Corporate Secretary] is, and at all times since [__________], 200[__] has been, duly elected and qualified as Corporate Secretary of the Company, and that the signature of such Corporate Secretary set forth above is true and genuine.

WITNESS my hand this [_____] day of [__________], 200[__].

[Name]
[Chairperson and Chief Executive Officer]

C-3

)

) ss:

)

I, _____________________________, a notary public in and for ___________, DO HEREBY CERTIFY that [Name], an Authorized Officer of _____________ (the “Company”), personally appeared before me in said ____________, personally known to me and known by me to be the person who executed on behalf of the Company the [Document] annexed hereto, who acknowledged the same to be [his/her] own free act and deed and the free act and deed of the Company, and that he had the necessary authority to do so. I DO FURTHER CERTIFY that [Name], Corporate Secretary of the Company, personally appeared before me in said ____________, personally known to me and known by me to be the person who executed on behalf of the Company the Certificate of Corporate Secretary annexed hereto, who acknowledged the same to be [his/her] own free act and deed and the free act and deed of the Company, and that [he/she] had the necessary authority to do so.

Given under my hand and [notarial] seal this [_____] day of [__________], 200[__].

Exhibit D

FORM OF

DISBURSEMENT/TRANSFER CERTIFICATE

(pursuant to Article V)

[BORROWER LETTERHEAD]

Officer’s Certificate

Pursuant to Article V

I, [__________], Corporate Secretary of NamGem Trading BVI Limited, a company limited by shares organized and existing under the laws of the British Virgin Islands (the “Borrower”), DO HEREBY CERTIFY that:

A. I am familiar with the terms of the First Amended and Restated Finance Agreement between the Borrower and Overseas Private Investment Corporation (“OPIC”), dated as of June 10, 2008 (the “Finance Agreement”) (capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Finance Agreement);

B. I have read the covenants, representations, warranties and agreements of the Borrower contained in the Finance Agreement and have been represented by counsel in connection with the Finance Agreement; and

C. I have made or caused to be made such examination or investigation as is necessary to enable me to express an informed opinion as to the matters set forth below;

and pursuant to Article V of the Finance Agreement DO HEREBY CERTIFY that:

1. the representations and warranties set forth in Article III of the Finance Agreement and the representations and warranties made by each Obligor in any Transaction Document are true and correct in all material respects on the date hereof as if made on the date hereof, and no Event of Default or Potential Event of Default exists on the date hereof;

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2. as of the date hereof, the Borrower and the Sponsor are in compliance with all terms of the Transaction Documents;

3. as of the date hereof, no circumstance exists, or change of law or regulation of any governmental authority has occurred, that would have a Material Adverse Effect;

4. [With respect to each Transfer Date:,

a. attached hereto as Exhibit A is a schedule setting forth the Project costs to which the present Transfer, together with disbursement of the Subordinated Loan referred to in paragraph 4(b) below, will be applied;

b. the Sponsor has heretofore disbursed proceeds of the Subordinated Loan to the Disbursement Account in an amount such that after giving effect to such Transfer the Loan to Subordinated Loan Ratio does not exceed the ratio set out in Section 6.11 of the Finance Agreement;

c. the present Transfer will be applied in accordance with the Financial Plan and will be applied solely to (a) the purchase of rough diamonds against delivery of such diamonds and, to the extent applicable, a corresponding Kimberley Process Certificate in accordance with the terms and conditions of the Supply Agreement and the Security and Account Agreement, (b) the payment of Eligible Costs (including OPIC Fees) the details of which are specified in Exhibit A, (c) the payment of interest due on the first Payment Date as specified in Exhibit A, and (d) the payment of other expenses of the Borrower, the details of which are specified in Exhibit A and do not (when added to any other expenses paid in the same calendar month from the Disbursement Account) exceed $10,000; and

d. the proceeds of all previous Transfers have been applied as set forth in Exhibit A to the Disbursement/Transfer Certificate delivered in connection therewith.]

WITNESS my hand this [_____] day of [__________], 200[__].

[Name]
Corporate Secretary

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I, [__________], the [Chairperson and Chief Executive Officer] of the

Borrower, DO HEREBY CERTIFY that [Name of Corporate Secretary] is, and at all times since [__________], 200[__] has been, duly elected and qualified as Corporate Secretary of the Borrower, and that the signature of such Corporate Secretary set forth above is true and genuine.

WITNESS my hand this [_____] day of [__________], 200[__].

[Name]
[Chairperson and Chief Executive Officer]

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Country of [_____]   )

City of [_____]   ) ss:

Embassy of the United   )

States of America   )

On this the _____ day of __________, 20__, ______________________, an Authorized Officer of NamGem Trading BVI Limited (the “Borrower”), known to me (or satisfactorily proven) to be the person whose name is subscribed to the within instrument and that he or she has freely and voluntarily executed the same for the purpose therein contained.

In witness whereof I hereunto set my hand and official seal.

Exhibit E

FORM OF

DRAWSTOP NOTICE

(pursuant to Section 2.01(e))

[OPIC LETTERHEAD ]

Date: __________________

Requested [Disbursement/Transfer] Date: __________________

NamGem Trading BVI Limited

c/o/ Lazare Kaplan International Inc.

19 W. 44th Street

New York, NY 10036

Attention: William Moryto, Chief Financial Officer

Re: LKI-Namibia (OPIC/673-2006-061-IG) – Drawstop Notice

Ladies and Gentlemen:

1. This drawstop notice (this “Drawstop Notice”) is delivered to you pursuant to Section 2.01(e) of the First Amended and Restated Finance Agreement dated as of June 10, 2008 (the “Finance Agreement”), between NamGem Trading BVI Limited, a company limited by shares organized and existing under the laws of the British Virgin Islands (the “Borrower”), and Overseas Private Investment Corporation, an agency of the United States of America (“OPIC”). Except as otherwise provided, capitalized terms used herein shall have the meanings set forth in the Finance Agreement.

2. Reference is made to the Transfer Request delivered by the Borrower dated [___________]. This Drawstop Notice constitutes a notice that the relevant Transfer(s) requested in such Transfer Request from the Disbursement Account shall not be granted for one or more of the following reasons: (i) an applicable condition precedent in Section(s) [__] set forth in Article IV or V of the Finance Agreement is not satisfied or, having been satisfied, ceases in the determination of OPIC to be satisfied, or (ii) an applicable condition precedent set forth in the Security and Account Agreement or any other Finance Document, is not satisfied or, having been satisfied, ceases in the determination of OPIC to be satisfied.

3. This Drawstop Notice shall remain in full force and effect until the event that led to the issuance of this Drawstop Notice is remedied to the satisfaction of OPIC, whereupon this Drawstop Notice shall be deemed to be revoked.

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IN WITNESS WHEREOF, the undersigned has executed this Drawstop Notice as of the day and year first above written.

OVERSEAS PRIVATE INVESTMENT CORPORATION
By:
Its:
	Small and Medium Enterprise Finance

cc: US Bank National Association

EX-10.(AN)

EXECUTION COPY

CONSIGNMENT AND GUARANTY AGREEMENT

among

NAMGEM TRADING BVI LIMITED,

NAMGEM TRADING BVBA,

and

LAZARE KAPLAN INTERNATIONAL INC.,

Dated as of June 20, 2008

CONSIGNMENT AND GUARANTY AGREEMENT

AGREEMENT dated as of June 20, 2008, between NAMGEM TRADING BVI LIMITED, an international business company organized and existing under the laws of the British Virgin Islands (“Consignor”), NAMGEM TRADING BVBA, a company organized and existing under the laws of the Kingdom of Belgium (“Consignee”), and LAZARE KAPLAN INTERNATIONAL INC., a corporation organized and existing under the laws of the State of Delaware (“LKI”).

Recitals:

A. LKI, NamGem Diamond Manufacturing Company (Pty) Ltd (“NamGem”), and NamDeb Diamond Corporation (Pty) Ltd (“Namdeb”) are parties to a cooperation agreement dated January 9, 2004 (the “Cooperation Agreement”);

B. Consignor has entered into a finance agreement, dated as of February 28, 2007, as amended and restated by the Amended and Restated Finance Agreement dated as of June 10, 2008 (as the same may be further amended, modified, or supplemented, and from time to time in effect, the “Finance Agreement”), with Overseas Private Investment Corporation (“OPIC”), an agency of the United States of America, pursuant to which OPIC has agreed subject to the terms and conditions set forth in the Finance Agreement to make available to Consignor a credit facility in an aggregate principal amount of up to $25,200,000;

C. Consignor is a Controlled affiliate of LKI, established for the purpose of acquiring the size and quality of rough diamonds sufficient to meet the financial requirements under the Finance Agreement;

D. Consignee is a wholly-owned subsidiary of Consignor, established for the purpose of the sale and marketing of all of the diamonds that are acquired by Consignor pursuant to the Supply Agreement (as defined below);

E. Consignor is a party to a supply agreement (the “Supply Agreement”) with Namibia Diamond Trading Company (Proprietary) Limited (“NDTC”) pursuant to which NTDC agrees, subject to the terms and conditions of the Supply Agreement, to supply rough diamond stones to Consignor as provided therein;

F. It is a condition, among others, to OPIC’s commitment to provide financing pursuant to the Finance Agreement that Consignee enter into this Agreement providing for the sale of diamonds purchased by Consignor pursuant to the Supply Agreement; and

G. It is a further condition, among others, to OPIC’s commitment to provide financing pursuant to the Finance Agreement that LKI guarantee as provided herein that the Consignor receives an amount in respect of the sale of diamonds not less than the Purchase Price paid by Consignor for such diamonds, which guaranty LKI is willing to provide;

NOW THEREFORE, in consideration of the premises and of the agreements contained herein, it is hereby agreed as follows:

ARTICLE I.

DEFINITIONS; INTERPRETATION.

Section 1.01 Definitions.

(a) Unless otherwise defined herein, all capitalized terms used herein shall have their respective meanings defined in Section 1.01 of the Finance Agreement.

(b) The following capitalized terms used herein shall have the definitions specified below:

“Additional Payment” has the meaning set forth in Section 2.06(a).

“Additional Payment Obligation” has the meaning set forth in Section 2.06(a).

“Aggregate Distributions” means as of any date the aggregate amount of distributions and other transfers made from the Collateral Account other than transfers made either to pay Debt Service or to purchase diamonds pursuant to the Supply Agreement.

“Appointment” has the meaning set forth in Section 2.01(a)(ii).

“Base Amount” has the meaning set forth in Section 2.06(a)(ii).

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“BPP” means NDTC’s Best Practice Principles and associated Assurance Programme, as the same may be from time to time amended.

“Calculation Certificate” means the calculation certificate to be delivered by Consignee to Consignor pursuant to Section 2.03(c)(iii), which certificate shall be substantially in the form of Exhibit A.

“Calculation Date” means the last calendar day of each month.

“Closed Sales” means sales of diamonds such that title has transferred to the buyer thereof and sales proceeds therefor have been received by Consignee.

“Consigned Diamonds” means all of the diamonds that Consignor delivers to Consignee less any of such diamonds that have been sold or that have been returned to Consignor at Consignor’s request.

“Consignee” has the meaning set forth in the preamble.

“Consignor” has the meaning set forth in the preamble.

“Cumulative Rough Cost” means for any Calculation Date the aggregate Purchase Price during the period commencing on the date of the first Disbursement through and including the applicable Rough Diamond Purchase Date (regardless of whether such diamonds are actually delivered to or received by or cut and polished by the Project Company or delivered to or sold by Consignee or LKI, or are lost, stolen, damaged, or destroyed for any reason prior to such delivery or sale).

“Cooperation Agreement” has the meaning set forth in the recitals.

“Delivery List” means the list accompanying each shipment of Consigned Diamonds and identifying the contents and value of each such shipment.

“Finance Agreement” has the meaning set forth in the recitals.

“Financial Model” means the financial model attached at Schedule 1.

“Guaranteed Obligations” has the meaning set forth in Section 3.01.

“Guaranty Termination Date” has the meaning set forth in Section 3.01.

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“LKI” has the meaning set forth in the preamble.

“Manufacturing Costs” means, in respect of each delivery of Consigned Diamonds, the documented costs paid by or invoiced to LKI corresponding to labor and associated costs (including labor costs payable to NamGem not to exceed $150 per carat of rough diamond that is cut and polished by NamGem), duty costs, certification costs, transportation, insurance, bad debt on sales of Consigned Diamonds, and other costs as invoiced by LKI for or allocated to such diamonds.

“Marketing Commission” means as of any Calculation Date an amount equal to two percent (2%) of Sales Receipts received during the immediately preceding calendar month.

“Maximum Amount” has the meaning set forth in Section 2.06(a)(ii).

“Namdeb” has the meaning set forth in the recitals.

“NamGem” has the meaning set forth in the recitals.

“Negative Carry” means, as of any date, with respect to the daily balance on deposit in the Disbursement Account during the period ending on such date an amount equal to the difference between interest calculated at a rate per annum equal to the Note Interest Rate on such balance and interest or other income accrued during such period (but only to the extent that such interest or other income is less than the Note Interest Rate) on Permitted Investments in the Disbursement Account.

“Payment Default” means an Event of Default caused by the Borrower’s failure to pay in full any regularly scheduled installment of principal of or interest on the Loan in accordance with the terms of any Finance Document.

“Reasonable and Prudent Management” shall mean that degree of skill, diligence, prudence, and foresight that would reasonably and ordinarily be expected from a manager skilled and experienced in the provision and evaluation of management services in relation to the operation, administration, physical support, and related services in respect of a project of a similar size, type, and complexity as the Project under the same or similar circumstances.

“Remittance Date” has the meaning set forth in Section 2.05.

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“Rough Diamond Purchase Date” means for any Calculation Date the last day of the month that is eight (8) months prior to such Calculation Date.

“Sale Receipts” means, with respect to any Closed Sales, the gross sale price received by Consignee from the buyers.

“Transaction Costs” means, while amounts remain on deposit in the Disbursement Account, all Obligations, excluding the Loan, interest thereon, and Eligible Expenses.

Section 1.02 Interpretation.

The principles of interpretation set forth in Section 1.02 of the Finance Agreement shall apply to this Agreement as if set forth herein.

ARTICLE II.

CONSIGNMENT

Section 2.01 Appointment.

(a) Subject to the terms and conditions of this Agreement:

(i) Consignor irrevocably appoints Consignee, with effect from the date of the first Disbursement, to act as Consignor’s exclusive agent in respect of the sale of all Consigned Diamonds and to perform the duties as set forth herein, all in accordance with the terms and conditions of this Agreement; and

(ii) Consignee hereby accepts such appointment (the “Appointment”).

(b) The initial term of this appointment shall continue until one year after the Loan Maturity Date. Thereafter, this appointment shall continue until either Consignee or Consignor receives written notice of termination from the other party.

(c) In consideration for the services provided by Consignee, Consignor shall pay a Marketing Commission. The Marketing Commission is payable as provided in Section 2.05.

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Section 2.02 Exclusive Ownership; Authority.

The Consigned Diamonds are and shall at all times until sale by Consignee be the sole and exclusive property of Consignor. Title to all Consigned Diamonds shall remain in Consignor’s name until Consignee has sold such Consigned Diamonds on terms to the buyer or buyers thereof. At any time and on written demand by Consignor, Consignee shall return the Consigned Diamonds to Consignor. Consignee shall not represent to any Person for any reason that the Consigned Diamonds belong to Consignee or to any Person other than Consignor. Consignee shall not, and acknowledges that it has no right to, create or allow to be created any Liens in favor of any third party on any of the Consigned Diamonds.

Section 2.03 Delivery.

(a) From time to time following the Appointment Consignor shall deliver (or cause to be delivered) to Consignee, and Consignee shall accept, all diamonds (whether rough, cut, or polished) that Consignor obtains pursuant to the Supply Agreement.

(b) The Consignor shall:

(i) deliver diamonds to such delivery point as Consignor and Consignee shall agree in writing;

(ii) for each delivery, provide a signed Delivery List that identifies the Consigned Diamonds; and

(iii) provide:

(A) an itemization of associated Manufacturing Costs; and

(B) to the extent applicable, associated Kimberley Process Certificates and associated warranty declarations.

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(c) Consignee shall:

(i) accept all diamonds delivered by or on behalf of Consignor, which diamonds Consignee shall keep segregated from any other diamonds (whether rough, cut, or polished) owned or held by Consignee;

(ii) execute and deliver to Consignor appropriate documentation indicating Consignee’s receipt of the Consigned Diamonds and acceptance of the identification as set forth in the associated Delivery List; and

(iii) on each Remittance Date deliver to Consignor (a copy of which Consignor will deliver to OPIC), a certificate setting forth as of the immediately preceding Calculation Date:

(A) the aggregate amount of cash remitted by Consignee to Consignor in respect of diamond sales by Consignee;

(B) the aggregate amount of all Additional Payments received by Consignor;

(C) Aggregate Distributions;

(D) Cumulative Rough Cost; and

(E) the Negative Carry;

in each case for the period from the date of the first Disbursement to such Calculation Date.

(d) Both Consignor and Consignee agree to comply with BPP.

Section 2.04 Sale of Consigned Diamonds; Sales Receipts.

(a) Consignee shall use commercially reasonable efforts consistent with good international gem trading practices to arrange sales of the Consigned Diamonds at best available market prices as determined by Consignee exercising reasonable judgment.

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(b) Consignor shall timely execute and deliver all instruments and documents customary or necessary to enable the transportation, marketing, and sale of Consigned Diamonds by Consignee.

(c) Pending payment and distribution as provided in Section 2.05, Consignee shall receive and hold all Sales Receipts, on behalf of Consignor in Dollars or Dollar-indexed funds at a financial institution satisfactory to the parties and segregated from all other funds of Consignee.

Section 2.05 Application of Sales Receipts.

On or before the 15^th calendar day of each calendar month or if such day is not a Business Day, then the immediately succeeding Business Day (a “Remittance Date”), Consignee shall pay on behalf of Consignor, the following amounts from Sales Receipts received during the preceding calendar month as follows:

(a) first, to LKI in an amount equal to all Manufacturing Costs that remain unpaid since the last Remittance Date, provided that such amount shall not exceed the amount of Manufacturing Costs projected to be incurred prior to such date as set forth in the Financial Model; and

(b) second, to Consignee in an amount equal to earned Marketing Commissions attributable to Closed Sales in the preceding calendar month; and

(c) third, to Consignor, all remaining amounts attributable to Closed Sales for the preceding calendar month;

provided, that if Consignee has received written notice from OPIC that a Payment Default has occurred and is continuing and until such notice is rescinded in writing by OPIC, Consignee shall pay the full amount of Sales Receipts to Consignor without making any payments pursuant (a) and (b) above.

Section 2.06 Additional Payment; Transfer to Consignee.

(a) If:

(i) as of (x) the date occurring five (5) Business Days prior to any Payment Date Consignor has insufficient funds to pay Debt Service then due and payable (whether at scheduled maturity or by reason of acceleration) or (y) any Remittance Date falling after Consignee has

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received written notice from OPIC that an Event of Default has occurred and is continuing and until such notice has been rescinded in writing by OPIC, Consignor has insufficient funds to pay any principal or interest then due and payable in respect of the Loan (whether at scheduled maturity or by reason of acceleration) or any OPIC Fees or other amounts due and payable to OPIC as of such Remittance Date; and

(ii) the sum of (A)(x) the aggregate amount of cash received by Consignor in respect of diamond sales by Consignee and (y) the aggregate amount of all Additional Payments (as defined below), if any, received by Consignor prior to such date minus (z) the amount of Aggregate Distributions (the result of such calculation being the “Base Amount”) is less than (B) the Cumulative Rough Cost plus the amount of Negative Carry (each as of the immediately preceding Calculation Date and all as shown in the certificate for such Calculation Date delivered pursuant to Section 2.03(c)(iii)) plus (but only to the extent that there are amounts on deposit in the Disbursement Account) any Transaction Costs then due and owing (the “Maximum Amount”),

then Consignee unconditionally and irrevocably agrees to pay to Consignor an amount equal to the difference between the Base Amount and the Maximum Amount (such amount, an “AdditionalPayment” and Consignee’s obligation to pay such amount an “Additional Payment Obligation”).

(b) If pursuant to Section 2.06(a), Consignee makes an Additional Payment to Consignor, then Consignor will transfer (but only to the extent available) to Consignee title to Consigned Diamonds selected by Consignee and Consignor and valued at an amount equivalent in value to such Additional Payment; provided, that the unavailability of diamonds shall not relieve Consignee of its obligation to make any Additional Payment due to Consignor, and its obligation to make each Additional Payment shall be absolute and unconditional irrespective of (i) whether diamonds are actually delivered to or received by or cut or polished by the Project Company or delivered to or sold by Consignee or LKI, or are lost, stolen or destroyed for any reason, (ii) any lack of validity or enforceability of this Agreement or any other document or agreement or instrument relating hereto, (iii) any release or amendment or waiver of or consent to or failure to enforce any rights against or security over assets of Consignor, Consignee, or any other Person, (iv) any incapacity or lack of powers or authority of Consignor, or (v) any impossibility or impractibility of performance, illegality, force majeure, act or failure to act of any Governmental Authority, or any other circumstance, which might constitute a legal or equitable defense or discharge in respect of such obligation. If and to the extent that diamonds of such value are not available for transfer

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in respect of any Additional Payment, then such Additional Payment shall be treated as a loan subordinated to the Loan on the same terms as a Subordinated Loan.

Section 2.07 Payment Instructions.

Consignee shall make all payments and remittances to Consignor in accordance with the Sponsor Consent. Consignee shall pay to LKI the Manufacturing Costs in accordance with LKI’s written instructions from time to time to Consignee.

Section 2.08 Segregation of Goods; No Liens.

Consignee shall keep all of the Consigned Diamonds that it may from time to time receive segregated from any other diamonds, whether rough cut or polished, owned or held by Consignee.

Section 2.09 Recordkeeping and Reporting.

Consignee shall maintain records of all Consigned Diamonds received by it and of all proceeds received in respect of all Consigned Diamonds, whether in the form of Sales Receipts or insurance proceeds or otherwise. Not later than sixty (60) days after the end of each Fiscal Semester, Consignee shall provide to Consignor a detailed summary of all of Consignee’s transactions in respect of the Consigned Diamonds during the immediately preceding Fiscal Semester, including the amount of all Manufacturing Costs, Marketing Commissions, and other expenses paid in respect thereof, the date of each such transaction, and the amount remitted to LKI or Consignor in respect of such transaction. Consignee further agrees to provide to Consignor such information and documents as Consignor may from time to time request related to the performance, costs, and results of Consignee’s marketing activities and to permit Consignor to inspect any of Consignee’s facilities or properties. Consignor may inspect the Consigned Diamonds upon request.

ARTICLE III.

GUARANTY

Section 3.01 Guaranty Obligation.

LKI unconditionally and irrevocably guarantees to Consignor the full payment of all amounts due under Section 2.05 and 2.06(a) and the performance of all other obligations as and when due under this Agreement (the “Guaranteed Obligations”). In the event that Consignee fails to pay or perform any

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Guaranteed Obligation when due, then LKI will itself pay or perform such Guaranteed Obligation, and it shall not be a condition to LKI’s obligation hereunder to perform or observe any Guaranteed Obligation (or to cause the same to be performed or observed) that the Consignor shall have first made any request of or demand upon or given any notice to LKI or have instituted any action or proceeding against LKI. This is a continuing guaranty and remains in full force on LKI and effective from the date hereof until all Indebtedness under the Finance Agreement has been paid in full or otherwise settled (the “Guaranty Termination Date”). On the Guaranty Termination Date, all of LKI’s obligations under this Agreement shall terminate.

Section 3.02 Enforcement.

(a) Consignor may proceed to enforce the obligations of LKI under Section 3.01 without first pursuing or exhausting any right or remedy which Consignor may have against Consignee or against any other Person.

(b) LKI shall make all payments and remittances to Consignor in accordance with the Sponsor Consent.

Section 3.03 Nature of the Obligations.

The obligations of LKI hereunder shall be absolute and unconditional irrespective of:

(i) any lack of validity or enforceability or the discharge (by any Person, including a trustee in bankruptcy) of the Guaranteed Obligations, this Agreement, or any document or any other agreement or instrument relating hereto;

(ii) any acceptance, release or amendment or waiver of, or consent to, departure from, or refusal or neglect to perfect, take up or enforce, any rights against, or security over assets of, Consignor, Consignee, or any other Person;

(iii) any failure to obtain any authorization or approval from or other action by, or to notify or file with, any Governmental Authority required in connection with the performance of such obligations by Consignee or LKI;

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(iv) any time, forbearance, extension or waiver granted to, or composition or compromise with, Consignor, Consignee, LKI, or any other Person;

(v) any disability, incapacity or lack of powers, authority or legal personality of or dissolution or change in the members or status of Consignor, Consignee, LKI, or any other Person;

(vi) any avoidance, postponement, discharge, reduction, non-provability, or other similar circumstance affecting any obligation of the Consignee under this Agreement resulting from any bankruptcy, insolvency, receivership, liquidation or dissolution proceedings or other Applicable Law; or

(vii) any impossibility or impracticality of performance, illegality, force majeure, any act of any Governmental Authority or any other circumstance which might constitute a legal or equitable defense available to, or a discharge of LKI, or any other circumstance, event or happening whatsoever, whether foreseen or unforeseen and whether similar or dissimilar to anything referred to above in this Agreement.

Section 3.04 Waivers.

LKI hereby unconditionally waives presentment, demand, diligence, filing of claims with a court in the event of insolvency or bankruptcy of the Consignor, any offset or counterclaim or other right, defense, or claim based on, or in the nature of, any obligation now or later owed to LKI by Consignee or Consignor and any right to require a proceeding first against Consignor, Consignee or any other Person, and waives protests, all notices (including notice of default of the Consignor), and all demands whatsoever of any kind to which LKI might otherwise be entitled under Applicable Law with respect to the Guaranteed Obligations.

Section 3.05 Reinstatement of Guaranty.

The payment obligations of LKI pursuant to Article III shall remain in full force and effect or shall be reinstated, as the case may be, if and to the extent that at any time any payment by the Consignee of any amount due and guaranteed hereunder is rescinded or must be returned, in whole or in part, in case of the bankruptcy, insolvency, or reorganization of the Consignee or otherwise, as if such payment had never been made by the Consignee.

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Section 3.06 Rights upon Payment.

Upon payment in respect of any Guaranteed Obligations by LKI constituting all or a portion of an Additional Payment, Consignor shall transfer to LKI (but only to the extent available) title to Consigned Diamonds selected by LKI and Consignor and valued at an amount equivalent in value to such Additional Payment (or portion thereof); provided, that the unavailability of diamonds shall not relieve LKI of its obligation to pay or perform such Guaranteed Obligations, and its obligation to make such payment shall be absolute and unconditional irrespective of whether rough diamond stones or any other stones are actually delivered to, received by, or cut and polished by the Project Company, or delivered to or sold by LKI or Consignee, or lost, stolen, damaged or destroyed for any reason prior to such delivery or sale.

ARTICLE IV.

MANAGEMENT OF OPERATIONS.

Section 4.01 Management of Operations.

LKI undertakes and agrees, acting in accordance with Reasonable and Prudent Management, to:

(a) provide or cause to be provided (whether or not LKI is compensated therefor) each of Consignor and Consignee with qualified and experienced management personnel, officers and directors from its staff or other sources and such other administrative and physical support as are necessary or appropriate to enable the Consignor and Consignee to execute the Project promptly and diligently and (to the extent applicable to their activities under the Transaction Documents) in accordance with Prudent Industry Practices; and

(b) actively cause the management personnel, officers and directors referred to in sub-clause (a) above to effectively manage and supervise the Project and use its best endeavors to cause such management personnel, officers and directors to carry out their duties in accordance with applicable laws, Prudent Industry Practices and Reasonable and Prudent Management.

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ARTICLE V.

MISCELLANEOUS

Section 5.01 Notices.

Each notice, demand, or other communication relating to this Agreement shall be in writing, shall be hand-delivered or sent prepaid by mail or overnight delivery service or facsimile transmission (with a copy by mail to follow, receipt of which copy shall not be required to effect notice), and shall be deemed duly given when sent to the following addresses:

To the Consignee:

NamGem Trading BVBA

c/o/ Lazare Kaplan International Inc.

19 W. 44^th Street

New York, NY 10036

Attn.: William Moryto, Chief Financial Officer

Facsimile: (212) 857-7560

To the Consignor:

NamGem Trading BVI Limited

c/o/ Lazare Kaplan International Inc.

19 W. 44^th Street

New York, NY 10036

Attn.: William Moryto, Chief Financial Officer

Facsimile: (212) 857-7560

To LKI:

Lazare Kaplan International Inc.

19 W. 44^th Street

New York, NY 10036

Attn.: William Moryto, Chief Financial Officer

Facsimile: (212) 857-7560

Either party may, by written notice to the other, change the address to which such notices, demands, or other communications should be sent to it.

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Section 5.02 Consent to Suit.

Each of LKI, Consignor and Consignee hereby irrevocably and unconditionally:

(a) submits for itself and its property in any legal action or proceeding relating to this Agreement or any other Finance Document, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the Courts of the State of New York, the courts of the United States of America for the Southern District of New York, the courts of the United States of America located in the District of Columbia, the courts of any other jurisdiction where it or any of its property may be found, and appellate courts from any thereof;

(b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same;

(c) appoints (which appointment shall take effect on or prior to the date of the first Disbursement) CT Corporation System, at its address at 111 Eighth Avenue, New York, NY 10011 as its agent for service of process in relation to proceedings before any courts located in the State of New York in connection with this Agreement for the term of the Loan plus an additional six months;

(d) agrees to maintain an agent for service of process in the State of New York until the Commitment has terminated and the Loan and all other amounts payable under this Agreement have been finally, irrevocably, and indefeasibly repaid in full;

(e) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to it at its address set forth in Section 5.01 or at such other address of which OPIC shall have been notified pursuant thereto;

(f) agrees that failure by a process agent to notify it of the process will not invalidate the proceedings concerned;

(g) agrees that if the appointment of any person mentioned in clause (c) above ceases to be effective, it shall immediately appoint a further person in the State of New York to accept service of

15

process on its behalf in the State of New York and, if it does not appoint a process agent within fifteen (15) days, LKI is entitled and authorized to appoint a process agent for it by notice to it;

(h) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction;

(i) agrees that judgment against it in any such action or proceeding shall be conclusive and may be enforced in any other jurisdiction with or without the United States of America by suit on the judgment or otherwise as provided by law, a certified or exemplified copy of which judgment shall be conclusive evidence of the fact and amount of its obligation;

(j) waives any present or future objection to any such action, suit or proceeding in any such venue, and irrevocably consents and submits unconditionally to the non-exclusive jurisdiction of any such court for itself and in respect of any of its property;

(k) irrevocably waives any claim in any such court that any such action, suit, or proceeding brought therein has been brought in an inconvenient forum; and

(l) covenants and agrees not to resist enforcement of any such final judgment in any jurisdiction where enforcement proceedings are commenced.

Section 5.03 Immunity.

Each of the parties hereto represents and warrants that it is subject to civil and commercial law with respect to its obligations under this Agreement, that the making and performance of this Agreement constitute private and commercial acts rather than governmental or public acts and that neither it nor any of its properties or revenues has any right of immunity from suit, court jurisdiction, attachment prior to judgment, attachment in aid of execution of a judgment, set-off, execution of a judgment or from any other legal process with respect to its obligations under this Agreement. With respect to any party hereto, to the extent that it may hereafter be entitled, in any jurisdiction in which judicial proceedings may at any time be commenced with respect to this Agreement to claim for itself or its revenues or assets any such immunity, and to the extent that in any such jurisdiction there may be attributed to it such an immunity (whether or not claimed), it hereby irrevocably agrees not to claim and hereby irrevocably waives such immunity. The foregoing waiver of immunity shall have effect under the United States Foreign Sovereign Immunities Act of 1976.

16

Section 5.04 Integration; Severability.

This Agreement embodies the entire understanding of the parties hereto and supersedes all prior negotiations, understandings and agreements between them with respect to the subject matter hereof. If any provision of this Agreement is prohibited or held to be invalid, illegal or unenforceable in any jurisdiction, the parties hereto agree to the fullest extent permitted by law that (i) the validity, legality and enforceability of the other provisions in such jurisdiction shall not be affected or impaired thereby, and (ii) any such prohibition, invalidity, illegality or unenforceability shall not render such provision prohibited, invalid, illegal, or unenforceable in any other jurisdiction.

Section 5.05 Waiver of Jury Trial.

EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP BETWEEN THEM ESTABLISHED BY THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

Section 5.06 Counterparts.

This Agreement may be executed in counterparts, each of which when so executed and delivered shall be deemed an original and all of which together shall constitute one and the same instrument.

Section 5.07 GOVERNING LAW.

THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

[Signatures on next page]

17

IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed and delivered on its behalf by its Authorized Officer as of the date first above written.

CONSIGNOR:

NAMGEM TRADING BVI LIMITED
 

By: 

Its:

CONSIGNEE:

NAMGEM TRADING BVBA
 

By: 

Its:

LKI:

LAZARE KAPLAN INTERNATIONAL INC.
 

By: 

Its:

Schedule 1

Financial Model

[Attached]

Exhibit A

To the Consignment and Guaranty Agreement

Form of Calculation Certificate

(Pursuant to Section 2.03(c)(iii) of the Consignment and Guaranty Agreement)

This Calculation Certificate is furnished to NamGem Trading BVI Limited, an international business company organized and existing under the laws of the British Virgin Islands (“Consignor”), pursuant to Section 2.03(c)(iii) of the Consignment and Guaranty Agreement, dated as of June 20, 2008 (the “Consignment and Guaranty Agreement”), by and among Consignor, Consignee, and Lazare Kaplan International Inc., a corporation organized and existing under the laws of the State of Delaware. Unless otherwise defined herein, capitalized terms have the meanings assigned thereto in the Consignment and Guaranty Agreement. The undersigned, _______________, [Vice President ] of NamGem BVBA, a company organized and existing under the laws of the Kingdom of Belgium ( “Consignee”) does hereby certify, on behalf of Consignee and not individually, that as of [the Calculation Date immediately preceding the relevant Remittance Date]:

1. The aggregate amount of cash remitted by Consignee to Consignor in respect of diamond sales by Consignee on or prior to such Calculation Date is $[_________________].

2. The aggregate amount of all Additional Payments received by Consignor on or prior to such Calculation Date is $[________________].

3. Aggregate Distributions on or prior to such Calculation Date is $[________________].

4. The Cumulative Rough Cost as of such Calculation Date is $[_______________].

5. The Negative Carry on or prior to such Calculation Date is $[_______________].

IN WITNESS WHEREOF, I have signed this certificate as of [the relevant Remittance Date].

NAMGEM TRADING BVBA

By: 

Its:

EX-10.(AO)

EXECUTION COPY

SUBORDINATION AGREEMENT

among

NAMGEM TRADING (BERMUDA) LIMITED,

LAZARE KAPLAN INTERNATIONAL INC.,

NAMGEM TRADING (BVI) LIMITED

and

OVERSEAS PRIVATE INVESTMENT CORPORATION

Dated as of August 18, 2008

OPIC/673-2006-061-IG

SUBORDINATION AGREEMENT

SUBORDINATION AGREEMENT (the “Agreement”), dated as of August 18, 2008, by and among NAMGEM TRADING (BERMUDA) LIMITED, a company organized and existing under the laws of Bermuda (“NamGem Bermuda”), LAZARE KAPLAN INTERNATIONAL INC., a corporation organized and existing under the laws of the State of Delaware, United States of America (the “Sponsor”), NAMGEM TRADING (BVI) LIMITED, a company limited by shares organized and existing under the laws of the British Virgin Islands (the “Borrower”), and OVERSEAS PRIVATE INVESTMENT CORPORATION, an agency of the United States of America (“OPIC”).

RECITALS

(l) OPIC and the Borrower have entered into the First Amended and Restated Finance Agreement dated as of June 10, 2008 (the “Finance Agreement”) pursuant to which OPIC has agreed to provide a credit facility of up to $25,200,000 to the Borrower subject to the terms and conditions set forth in the Finance Agreement.

(2) The Borrower may hereafter become indebted to the Subordinated Lender(s) in the principal amount of $10,800,000, evidenced by a promissory note or notes substantially in the form attached hereto as Exhibit A (each a “Subordinated Loan Note”), as permitted under subsection 7.02(b) of the Finance Agreement.

(3) It is a condition precedent to the obligation of OPIC to make the Loan under the Finance Agreement that the Subordinated Lenders and the Borrower shall have executed and delivered this Agreement.

NOW, THEREFORE, in consideration of the premises and of the agreements contained herein, the Subordinated Lenders and the Borrower each hereby agrees with OPIC as follows:

1. Definitions; Interpretation.

(a) Capitalized terms used herein shall have the meanings given them in the Finance Agreement, unless otherwise specified herein.

(b) As used herein, the following terms shall have the following meanings:

“Accession Agreement” means an agreement duly executed and delivered in substantially the form of Exhibit B hereto.

“Senior Agreements” means, collectively, the Loan Documents, the Security Documents and the Funding Documents.

“Senior Obligations” means all obligations of the Borrower now or hereafter existing under any Senior Agreement, whether for principal, interest, fees, premium, expenses or otherwise. Without limitation, the Senior Obligations shall include interest that accrues, or

that would accrue but for the operation of an automatic stay or similar provision, after the filing of a petition initiating any proceeding referred to in Section 4(a) hereof.

“Subordinated Lender” means (i) NamGem Bermuda, (ii) the Sponsor, (iii) any other Shareholder that accedes to this Agreement pursuant to a duly executed and delivered Accession Agreement or (iv) any other legal entity which is (A) Controlled by one of the Persons referred to in clauses (i) to (iii) above, (B) whose equity is not less than 50% legally and beneficially owned by such Person and (C) accedes to this Agreement pursuant to a duly executed and delivered Accession Agreement.

“Subordinated Debt” means all indebtedness of the Borrower to a Subordinated Lender under each Subordinated Loan Note or any other Subordinated Loan Document, and any and all other indebtedness now or at any time or times hereafter owing by the Borrower, or any successor or assign of the Borrower, including without limitation, a receiver, trustee or debtor-in-possession, to a Subordinated Lender, whether such indebtedness is absolute or contingent, direct or indirect and howsoever evidenced, including without limitation, all interest thereon, including pre-petition and post-petition interest, fees premiums and expenses and any other charges or amounts payable by the Borrower to a Subordinated Lender in respect thereof.

“Subordinated Loan Documents” means each Subordinated Loan Note and each other agreement, contract, document or other instrument relating to the Subordinated Debt or the Subordinated Loan Note entered into between the Borrower and a Subordinated Lender.

(c) (i) reference to and the definition of any document (including this Agreement) shall be deemed a reference to such document as it may be amended, supplemented, revised, or modified from time to time;

(ii) all references to a “Section,” “Schedule,” or “Exhibit” are to a Section hereof or to a Schedule or an Exhibit attached hereto and made a part hereof;

(iii) the section headings, and other captions in this Agreement are for the purpose of reference only and do not limit or affect its meaning;

(iv) defined terms in the singular shall include the plural and vice versa; and

(v) the words “hereof,” “herein,” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement; the headings in this Agreement are for the purpose of reference only and do not limit or affect its meaning.

2.AgreementtoSubordinate. The Subordinated Debt is and shall be, to the extent and in the manner hereinafter set forth, subordinate and junior in right of payment to the prior payment in full in Dollars of the Senior Obligations.

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3. NoClaim or Payment.

(a) No part of the Subordinated Debt shall have any claim to any assets of the Borrower on a parity with or prior to the claim of the Senior Obligations.

(b) Unless and until the Senior Obligations shall have been paid in full in cash or cash equivalents, no Subordinated Lender shall ask, demand, sue for, take or receive from the Borrower, and the Borrower shall not make, give or permit, directly or indirectly, in cash or other property, or by set-off, redemption, purchase or in any other manner, any payment or prepayment of, or collateral security for, all or any of the Subordinated Debt; provided that, from after the Repayment Commencement Date, a Subordinated Lender may receive, and the Borrower may make, scheduled payments of principal of and interest on the Subordinated Loan Note in accordance with the terms of such note, if, at the time of making such payment and immediately after giving effect thereto, (i) no Event of Default or Potential Event of Default shall have occurred and be continuing; (ii) the Borrower shall be in compliance with the financial ratios set forth in Section 6.11 of the Finance Agreement; and (iii) such payment may be made in accordance with section 5 of the Security and Account Agreement.

4.InFurtheranceofSubordination.

(a) (i) In the event of any distribution, division or application, voluntary or involuntary, by operation of law or otherwise, of all or any part of the assets or business of the Borrower to creditors of the Borrower, or (ii) upon any indebtedness of the Borrower becoming due and payable by reason of any dissolution, liquidation or other winding up of the Borrower or its business, or by reason of any sale, receivership, insolvency, reorganization or bankruptcy proceedings, assignment for the benefit of creditors, or any arrangement or proceeding by or against the Borrower for any relief under any bankruptcy, reorganization or insolvency law or laws or any law relating to the relief of debtors, readjustment of indebtedness or composition, or any other marshalling of the assets and liabilities of the Borrower, any payment or distribution of any kind (whether in cash, property or securities) which otherwise would be payable or deliverable upon or with respect to the Subordinated Debt shall be paid or delivered directly to OPIC for application (in the case of cash) to, or as collateral (in the case of non-cash property or securities) for, the payment or prepayment of the Senior Obligations, until the Senior Obligations shall have been paid in full in Dollars.

(b) All payments or distributions on or with respect to the Subordinated Debt which are received by a Subordinated Lender contrary to the provisions of this Agreement shall be received in trust for the benefit of OPIC, shall be segregated from other funds and property held by such Subordinated Lender and shall be forthwith paid over to OPIC in the same form as so received (with any necessary endorsement) to be applied (in the case of cash) to, or held as collateral (in the case of non-cash property or securities) for, the payment or prepayment of the Senior Obligations in accordance with the terms of the Senior Agreements.

(c) Each Subordinated Lender irrevocably authorizes and empowers OPIC, in connection with any proceeding or distribution described in subsection 4(a) hereof, to demand, sue for, collect and receive every such payment or distribution referred to in such subsection and give acquittance therefor, and to file claims and proofs of claim in any statutory or non-statutory

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proceeding and to take such other proceedings, in its own name, or in the name of the Subordinated Lender or otherwise, as OPIC may deem necessary or advisable for the enforcement of this Agreement.

(d) OPIC is hereby authorized to demand specific performance of this Agreement, whether or not the Borrower shall have complied with any of the provisions hereof applicable to it, at any time when a Subordinated Lender shall have failed to comply with any of the provisions of this Agreement applicable to it. Each Subordinated Lender hereby irrevocably waives any defense based on the adequacy of a remedy at law, which might be asserted as a bar to such remedy of specific performance.

5.No Commencement of Any Proceeding. Unless and until the Senior Obligations shall have been paid in full in Dollars, no Subordinated Lender shall (i) commence, or join with any other creditor (other than OPIC) in commencing, any proceeding referred to in subparagraph 4(a) above or any other proceeding to enforce or collect the Subordinated Debt or (ii) accelerate the maturity of all or any part of the Subordinated Debt.

6.RightsofSubrogation. No payment or distribution to OPIC pursuant to the provisions of this Agreement shall entitle a Subordinated Lender to exercise any rights of subrogation in respect thereof until the Senior Obligations shall have been paid in full in Dollars.

7.No Amendments to Subordinated Debt Documents. No provision of the Subordinated Loan Documents shall be amended, modified, supplemented or waived without the prior written consent of OPIC, if the effect thereof would be to (i) increase the amount of, or advance the scheduled date of payment or prepayment of any portion of, the principal of the Subordinated Debt; (ii) increase the rate of interest on, or premiums, fees or other amounts payable in respect of, the Subordinated Debt, or (iii) otherwise make any agreement, covenant, default or event of default in any Subordinated Loan Document materially more burdensome to the Borrower.

8. SubordinationLegend;FurtherAssurances.

(a) The Borrower and each Subordinated Lender will cause each Subordinated Loan Note and any other instrument evidencing the Subordinated Debt to be endorsed with the following legend:

“The indebtedness evidenced by this instrument is subordinated to the prior payment in full of the Senior Obligations (as defined in the Subordination Agreement hereinafter referred to) pursuant to, and to the extent provided in, the Subordination Agreement dated as of August 18, 2008 by and among the maker hereof, the payee named herein and Overseas Private Investment Corporation.”

The Borrower and each Subordinated Lender will further mark its books of account in such manner as shall be effective to give proper notice of the effect of this Agreement.

(b) The Borrower and each Subordinated Lender will, at its expense and at any time and from time to time, promptly execute and deliver all further instruments and documents (including without limitation powers of attorney, assignments and proofs of claim), and promptly take all

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further action (including, without limitation, filing proofs of claim and taking other actions to collect the Subordinated Debt) that may be necessary or desirable, or that OPIC may request, in order to protect any right or interest granted or purported to be granted hereby or to enable OPIC to exercise and enforce its rights and remedies hereunder. Each Subordinated Lender hereby irrevocably makes, constitutes and appoints OPIC (and any officer of OPIC or any person designated by OPIC for that purpose) as its true and lawful proxy and attorney-in-fact (and agent-in-fact), with full authority in the place and stead of the Subordinated Lender, and in the name of the Subordinated Lender or otherwise, with full power of substitution, to take any action and to execute any instrument that OPIC may deem necessary or advisable to accomplish the foregoing. Each Subordinated Lender hereby acknowledges that the constitution and appointment of such proxy and attorney-in-fact are coupled with an interest and are irrevocable. Each Subordinated Lender hereby ratifies and confirms all that said attorney-in-fact may do or cause to be done by virtue of any provision of this Agreement.

9. AgreementbytheBorrower. The Borrower shall not make any payment of any of the Subordinated Debt in contravention of, or take any other action inconsistent with the provisions of, this Agreement.

10. RepresentationsandWarranties. The Borrower and each Subordinated Lender hereby represents and warrants that (i) the execution, delivery and performance by it of this Agreement have been duly and validly authorized by all necessary action and (ii) this Agreement has been duly and validly executed and delivered by it and constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms.

11. Amendments,Etc. No amendment or waiver of any provision of this Agreement nor consent to any departure of a Subordinated Lender or the Borrower therefrom shall in any event be effective unless the same shall be in writing and signed by OPIC, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

12. Expenses. The Borrower and each Subordinated Lender jointly and severally agree to pay, upon demand, to OPIC the amount of any and all expenses, including the reasonable fees and expenses of its counsel, which OPIC may incur in connection with the exercise or enforcement of any of its rights or interests hereunder.

13. NoWaiver;Remedies. No failure on the part of OPIC to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law.

14. Subordination Not Impaired.

(a) Without further consent by or notice to a Subordinated Lender, and without impairing, abridging, releasing or affecting the subordination provided for herein, (i) any demand for payment of any of the Senior Obligations may be rescinded in whole or in part, and any of the Senior Obligations, or the liability of Borrower or any other party upon or for any part thereof, or any collateral security or guaranty therefor or right of offset with respect thereto may, from time to time,

-5-

in whole or in part, be renewed, extended, modified, accelerated, compromised, waived, surrendered, or released; (ii) any document or instrument evidencing or governing the terms of any Senior Obligations or any collateral security documents or guaranties or documents in connection therewith may be amended, modified, waived, supplemented or terminated, in whole or in part, as OPIC may deem advisable, and any collateral security at any time held by OPIC for the payment of any of the Senior Obligations may be sold, exchanged, waived, surrendered or released; (iii) OPIC may exercise or refrain from exercising any right, remedy or power granted by any document or instrument creating, evidencing or otherwise relating to the Senior Obligations, or at law, in equity, or otherwise, with respect to the Senior Obligations, or any collateral security lien (legal or equitable), held, given or intended to be given therefor (including, without limitation, the right to perfect any lien or security interest created in connection therewith); and (iv) any balance of funds with any bank or other institution at any time standing to the credit of Borrower or any guarantor of any of the Senior Obligations may, from time to time, in whole or in part, be surrendered or released, all as OPIC may deem advisable.

(b) OPIC shall not be prejudiced in its right to enforce the subordination contained herein in accordance with the terms hereof by any act or failure to act on the part of Borrower or failure by the Borrower to provide a Subordinated Lender with any notice whatsoever.

(c) OPIC shall be conclusively presumed to have acquired all Senior Obligations, whether now outstanding or hereafter created, in reliance on the terms of this Agreement.

15. ContinuingAgreement;TransferofNotes.

(a) This Agreement is a continuing agreement and shall (i) remain in full force and effect until the Senior Obligations shall have been paid in full in cash or cash equivalents, and continue to be effective, or be reinstated, as the case may be, if at any time any payment of all or any part of the Senior Obligations is rescinded or must otherwise be returned upon the insolvency, bankruptcy or reorganization of the Borrower, all as though such payment had not been made, (ii) be binding upon each Subordinated Lender, the Borrower and their respective successors and assigns, and (iii) inure to the benefit of and be enforceable by OPIC and its successors and assigns.

(b) No holder of Subordinated Debt will sell, assign, pledge or otherwise dispose of any of the Subordinated Debt without the prior written consent of OPIC.

16. Notices. Any notice hereunder shall be in writing and shall be hand-delivered or sent by mail (postage prepaid), telegram or facsimile transmission (with a copy by mail to follow, receipt of which copy shall not be required to effect notice), and shall be deemed duly given when sent to the following addresses, or to such other address or number as each party shall have last specified by notice to the other parties:

To the Borrower:

NamGem Trading (BVI) Limited

c/o Lazare Kaplan International Inc.

19 W. 44th Street

New York, NY 10036

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(Attn: William Moryto, Chief Financial Officer)

(Facsimile: (212) 857-7560)

To OPIC:

Overseas Private Investment Corporation

1100 New York Avenue, N.W.

Washington, D.C. 20527

United States of America

(Attn: Vice President, Small and Medium Enterprise Finance) [prior to Disbursement]

(Attn: Director, Portfolio Management) [after Disbursement]

Re: LKI (OPIC/673-2006-061-IG)

(Facsimile: (202) 408-9866)

(Facsimile: (202) 408-9862) [after Disbursement]

To NamGem Bermuda:

NamGem Trading (Bermuda) Limited

c/o Lazare Kaplan International Inc.

19 W. 44th Street

New York, NY 10036

(Attn: William Moryto, Chief Financial Officer)

(Facsimile: (212) 857-7560)

To the Sponsor:

Lazare Kaplan International Inc.

19 W. 44th Street

New York, NY 10036

(Attn: William Moryto, Chief Financial Officer)

(Facsimile: (212) 857-7560)

To each other Subordinated Lender:

At the address specified by each Subordinated Lender in the Accession Agreement executed and delivered by it.

Each party may, by written notice to the other, change the address to which such communications should be sent to it.

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17. GoverningLaw. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK OF THE UNITED STATES OF AMERICA.

18. JurisdictionandConsenttoSuit. The Borrower and each Subordinated Lender hereby irrevocably and unconditionally:

(a) submits for itself and its property in any legal action or proceeding relating to this Agreement, a Subordinated Loan Note or any other Subordinated Loan Document, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the Courts of the State of New York, the courts of the United States of America for the Southern District of New York, the courts of the United States of America located in the District of Columbia, the courts of any other jurisdiction where it or any of its property may be found, and appellate courts from any thereof;

(b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same;

(c) appoints (which appointment shall take effect on or prior to the date of the Disbursement) CT Corporation System at its address at 111 Eighth Avenue, 13th Floor, New York, New York, 10011 as its agent for service of process in relation to proceedings before any courts located in the State of New York in connection with this Agreement for the term of the Subordinated Debt plus an additional six months;

(d) agrees to maintain an agent for service of process in the State of New York until the Commitment has terminated and the Senior Obligations and all other amounts payable under the Finance Agreement have been finally, irrevocably, and indefeasibly repaid in full;

(e) agrees that failure by a process agent to notify it of the process will not invalidate the proceedings concerned;

(f) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to it at its address set forth in Section 16 above or at such other address of which OPIC shall have been notified pursuant thereto;

(g) agrees that if the appointment of any person mentioned in clause (c) above ceases to be effective, it shall immediately appoint a further person in the State of New York to accept service of process on its behalf in the State of New York, and, if it does not appoint a process agent within fifteen (15) days, OPIC is entitled and authorized to appoint a process agent for it by notice to it;

(h) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction;

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(i) agrees that final judgment against it in any such action or proceeding shall be conclusive and may be enforced in any other jurisdiction within or outside of the U.S. by suit on the judgment or otherwise as provided by law, a certified or exemplified copy of which judgment shall be conclusive evidence of the fact and amount of its obligation;

(j) waives any present or future objection to any such action, suit or proceeding in any such venue, and irrevocably consents and submits unconditionally to the non-exclusive jurisdiction of any such court for itself and in respect of any of its property;

(k) irrevocably waives any claim in any such court that any such action, suit, or proceeding brought therein has been brought in an inconvenient forum; and

(l) covenants and agrees not to resist enforcement of any such final judgment in any jurisdiction where OPIC commences enforcement proceedings.

19. Waiver of Jury Trial. Each Subordinated Lender, the Borrower and OPIC each hereby irrevocably waives, to the fullest extent permitted by law, any right to have a jury participate in resolving any dispute arising out of, in connection with, related to, or incidental to the relationship between them established by this Agreement.

20. Severability. If any provision of this Agreement is prohibited or held to be invalid, illegal, or unenforceable in any jurisdiction, the parties hereto agree to the fullest extent permitted by law that the validity, legality and enforceability of the other provisions in such jurisdiction shall not be affected or impaired thereby, and any such prohibition, invalidity, illegality or unenforceability shall not render such provision prohibited, invalid, illegal, or unenforceable in any other jurisdiction.

21. Counterparts. This Agreement may be executed in separate counterparts, each of which when so executed and delivered shall be deemed an original, and all of which together shall constitute one and the same instrument.

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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be duly executed and delivered as of the date first above written.

NAMGEM TRADING (BERMUDA) LIMITED

By:

Name:

Title:

LAZARE KAPLAN INTERNATIONAL INC.

By:

Name:

Title:

NAMGEM TRADING (BVI) LIMITED

By:

Name:

Title:

OVERSEAS PRIVATE INVESTMENT
CORPORATION

By:

Name:

Title:

Exhibit A

FORM OF SUBORDINATED LOAN NOTE

THE INDEBTEDNESS EVIDENCED BY THIS INSTRUMENT IS SUBORDINATED TO THE PRIOR PAYMENT IN FULL OF THE SENIOR OBLIGATIONS (AS DEFINED IN THE SUBORDINATION AGREEMENT HEREINAFTER REFERRED TO) PURSUANT TO, AND TO THE EXTENT PROVIDED IN, THE SUBORDINATION AGREEMENT DATED AS OF AUGUST 18, 2008, BY AND AMONG THE BORROWER NAMED HEREIN, THE SUBORDINATED LENDER NAMED HEREIN, AND OVERSEAS PRIVATE INVESTMENT CORPORATION.

NAMGEM TRADING (BVI) LIMITED

PROMISSORY NOTE

US$[] Dated as of 

FOR VALUE RECEIVED, NAMGEM TRADING (BVI) LIMITED, a BVI business company organized and existing under the laws of the British Virgin Islands (the “Borrower”) by this promissory note (the “Subordinated Loan Note”) hereby promises subject to the Subordination Agreement (as defined below) and the subordination provisions hereof to pay to the order of [NAME] (the “Subordinated Lender”) at [LOCATION], on each Payment Date (as such term is defined herein), the principal sum of [AMOUNT] in approximately equal installments on each Payment Date (as hereinafter defined) and to pay interest on the principal balance hereof from time to time outstanding, on each Interest Payment Date (as hereinafter defined) at a per annum rate of interest of [_____%] (the “Subordinated Note Interest Rate”).

This Subordinated Loan Note is the Subordinated Loan Note referred to in the Subordination Agreement among the Borrower, each Subordinated Lender party thereto, and Overseas Private Investment Corporation, dated as of August 18, 2008 (as amended or supplemented, the “Subordination Agreement”). Unless otherwise defined herein, capitalized terms are used herein as therein defined.

Subject to the terms of the Subordination Agreement and the subordination provisions herein, the principal balance hereof together with interest thereon shall be due and payable in approximately equal installments on each [__________] and [__________] (each such date a “Payment Date”) commencing on [date corresponding to the Repayment Commencement Date] with the last such installment due on [DATE]; provided that the Borrower shall make such payment only if at the time of making such payment and immediately after giving effect thereto (i) no Event of Default or Potential Event of Default shall have occurred and be continuing; (ii) the Borrower shall be in compliance with the financial ratios set forth in Section 6.11 of the Finance Agreement; and (iii) such payment is made in accordance with section 5 of the Security and Account Agreement. Interest shall accrue on the daily outstanding principal balance hereof at the

Subordinated Note Interest Rate in arrears commencing on the date hereof and extending up to, but not including the next Payment Date and extending up to but not including the next Payment Date. The Subordinated Note Interest Rate will be calculated on the basis of the actual number of days elapsed (including the first day, but excluding the last day) over a year of 365 days.

In the event that any amount of the principal hereof or accrued interest on this Subordinated Loan Note is not paid in full when due (whether at stated maturity, by acceleration or otherwise), the Borrower shall pay to the Subordinated Lender on demand interest on such unpaid amount (to the extent permitted by applicable law) for the period from the date such amount was due until the date such amount shall have been paid in full at an interest rate per annum equal to (x) 2.0% per annum above the Subordinated Note Interest Rate until the end of the then current Interest Period, and (y) thereafter 2.0% per annum above the Subordinated Note Interest Rate.

All payments received hereunder shall be applied in the manner and order of priority determined by the Subordinated Lender in its sole discretion.

Whenever any payment falls due on a day which is not a Business Day, the due date for payment shall be extended to the next following Business Day.

All payments to be made by the Borrower under this Subordinated Loan Note shall be made in United States Dollars in immediately available and freely transferable funds no later than 11:00 A.M. (New York City time) on the date on which due, without set-off, counterclaim, deduction, or withholding on account of taxes.

Each Subordinated Lender, by its acceptance hereof, agrees that all amounts of principal, interest and other obligations payable under this Subordinated Loan Note shall be, to the extent and in the manner set forth in the Subordination Agreement and this Subordinated Loan Note, subordinate and junior in right of payment to the prior payment in full in Dollars of the Senior Obligations. Notwithstanding the foregoing provisions, in the event the Borrower shall make any payment or distribution on account of this Subordinated Loan Note at a time not permitted by the terms of the Subordination Agreement and this Subordinated Loan Note, such payment or distribution shall be received and held in trust for OPIC by the Subordinated Lender and shall be paid forthwith over to OPIC for application to the payment of Senior Obligations remaining unpaid until all such Senior Obligations shall have been paid in full. The provisions of this paragraph shall cease to be effective upon the payment in full of all Senior Obligations and the termination of all commitments in respect of the Senior Obligations. Subject to the terms hereof, and unless the Borrower is otherwise notified in writing by the holder of this Note, the time for making any payment which is due and payable hereunder at any time or times shall be automatically extended by the holder of this Note.

The Subordinated Lender may not declare any amount to be due and payable under this Subordinated Loan Note prior to its scheduled maturity or take any action, judicial or otherwise, to enforce collection of any amounts due under this Subordinated Loan Note until all Senior Obligations shall have been paid in full in Dollars and all commitments in respect of such Senior Obligations have been terminated.

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Each of the Borrowers and each endorser, guarantor and surety of this Subordinated Loan Note, and each other person liable or who shall become liable for all or any part of the indebtedness evidenced by this Subordinated Loan Note:

(a) waives demand, presentment, protest, notice of protest, notice of dishonor, diligence in collection, notice of nonpayment and all notices of a like nature;

(b) consents to (i) the release of any or all other persons from liability, whether primary or contingent, for the indebtedness evidenced by this Subordinated Loan Note or for any related obligations; and (ii) the granting of any other indulgences to any such person; and

(c) consents to (i) all renewals, extensions or modifications of this Subordinated Loan Note (including any affecting the time of payment), and (ii) all advances under this Subordinated Loan Note.

Any such renewal, extension, modification, advance, release, surrender, exchange, substitution, taking or indulgence may take place without notice to any such person, and, whether or not any such notice is given, shall not impair the liability of any such person.

Any failure by the Subordinated Lender to exercise any right under this Subordinated Loan Note arising or existing as a result of the failure of the Borrower to repay amounts outstanding hereunder when due or any delay in such exercise, shall not constitute a waiver of the right to exercise such right at a later time so long as such payment default shall remain uncured, and shall not constitute a waiver of the right to exercise such right if any other payment default shall occur. The acceptance by the Subordinated Lender of the payment of any sum due and payable under this Subordinated Loan Note after the date specified for such payment shall not be a waiver of the Subordinated Lender’s right to require prompt payment when due of all other sums payable under this Subordinated Loan Note or of the Subordinated Lender’s right to declare a default for failure to make prompt payment in full.

The Borrower will reimburse and indemnify the Subordinated Lender for all reasonable out-of-pocket expenses, all either before or after obtaining judgment on or with respect to any amounts payable hereunder, including but not limited to reasonable attorneys’ fees and disbursements, incurred or expended in connection with the preparation, negotiation, interpretation or delivery of this Subordinated Loan Note or any amendment hereof or with the enforcement or collection of any obligations or the satisfaction of any indebtedness of the Borrower hereunder, whether or not proceedings are instituted in any court of competent jurisdiction, or in connection with any litigation, proceeding or dispute hereunder, or any “work-out” (referring to the administration of the Subordinated Debt during the continuance of a default or an event that with the giving of notice or passage of time or both would constitute a default) in any way relating to the Subordinated Loan evidenced hereby.

This Subordinated Loan Note and the rights and obligations of the parties hereunder shall be governed by , and construed in accordance with, the laws of the State of New York.

THE SUBORDINATED LENDER AND THE BORROWER EACH HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY

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RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP BETWEEN THEM ESTABLISHED BY THIS SUBORDINATED LOAN NOTE.

Executed as of this ____ day of _______.
NAMGEM TRADING (BVI) LIMITED
By:
	(Signature)
Name:
	(Print)
Title:
	(Print)

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Exhibit B

FORM OF ACCESSION AGREEMENT

ACCESSION AGREEMENT dated as of _____________, by and among each of the undersigned.

Reference is made to the SUBORDINATION AGREEMENT dated as of August 18, 2008, by and among NAMGEM TRADING (BERMUDA) LIMITED, a company organized and existing under the laws of Bermuda (“NamGem Bermuda”), LAZARE KAPLAN INTERNATIONAL INC., a corporation organized and existing under the laws of the State of Delaware, United States of America (the “Sponsor”), NAMGEM TRADING (BVI) LIMITED, a company limited by shares organized and existing under the laws of the British Virgin Islands (the “Borrower”), and OVERSEAS PRIVATE INVESTMENT CORPORATION, an agency of the United States of America (“OPIC”) (the “Agreement”). Terms used and not otherwise defined herein have the meanings assigned to them in the Agreement.

The undersigned hereby agree that, with effect from the date hereof, ________________________, (the “New Subordinated Lender”) has acceded to the Agreement in its capacity as a Subordinated Lender and is bound by the terms of the Agreement as fully as if named therein as a Subordinated Lender. The New Subordinated Lender hereby confirms that (a) each of the representations and warranties contained in the Agreement are true and correct on the date hereof with respect to it in its capacity as a Subordinated Lender, and (b) its address for notices for purposes of the Agreement is set forth in Schedule I hereto.

This Accession Agreement shall be governed by and construed in accordance with the laws of the State of New York, United States of America.

This Accession Agreement may be executed in counterparts, each of which when so executed and delivered shall be deemed an original and all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, each party hereto has caused this Accession Agreement to be executed and delivered on its behalf by its duly authorized representative as of the date first above written.

NAMGEM TRADING (BERMUDA) LIMITED

By:

Name:

Title:

LAZARE KAPLAN INTERNATIONAL INC.

By:

Name:

Title:

NAMGEM TRADING (BVI) LIMITED

By:

Name:

Title:

OVERSEAS PRIVATE INVESTMENT
CORPORATION

By:

Name:

Title:

[NEW SUBORDINATED LENDER]

By:

Name:

Title:

Schedule I to Accession Agreement

[Name of New Subordinated Lender]:

[Address]

(Attn.: [_____])

(Facsimile: [_____])

EX-10.(AP)

GUARANTY

This GUARANTY (as amended, supplemented, amended and restated or otherwise modified from time to time, this “Guaranty”), dated as of July __, 2007 is made byLazare Kaplan International Inc., a Delaware corporation (the “Guarantor”), in favor of ABN AMRO Bank N.V. (the “Bank”).

WITNESSETH:

WHEREAS, pursuant to a facility letter, dated as of January 21, 2007 (together with the Terms and Conditions set forth on Schedule 1 (the “Terms and Conditions”), as the same may be amended, supplemented, amended and restated or otherwise modified from time to time, the “Facility Letter”), among Gulfdiam DMCC, an entity organized under the laws of the United Arab Emirates (the “Borrower”), the Bank has made certain facilities as set forth in Section 2 to the Facility Letter(the “Facilities”) available to the Borrower and the advances thereunder (the “Advances”); and

WHEREAS, as a condition precedent to the availability of the Facilities and the making Advances under the Facility Letter, the Guarantor is required to execute and deliver this Guaranty;

NOW THEREFORE, for good and valuable consideration the receipt of which is hereby acknowledged, and in order to induce the Bank to make Facilities available to the Borrower and the Advances thereunder, the Guarantor agrees, for the benefit of the Bank, as follows.

ARTICLE I

DEFINITIONS

SECTION 1.1. Certain Terms. The following terms (whether or not underscored) when used in this Guaranty, including its preamble and recitals, shall have the following meanings (such definitions to be equally applicable to the singular and plural forms thereof):

“Borrower” is defined in the preamble.

“Facility Letter” is defined in the first recital.

“Guarantor” is defined in the preamble.

“Guaranty” is defined in the preamble.

“Liabilities” all indebtedness, obligations and liabilities of the Borrower to pay principal or interest of the Advances drawn under the Facilities and all fees and charges payable thereunder, and all other payment obligations of the Borrower or arising under or directly in relation to the Facility Letter, in each case whether now existing or hereinafter arising, due or to become due, direct or indirect, absolute or contingent, and howsoever evidenced, held or acquired.

SECTION 1.2. Facility Letter Definitions. Unless otherwise defined herein or the context otherwise requires, terms used in this Guaranty, including its preamble and recitals, have the meanings provided in the Facility Letter.

ARTICLE II

GUARANTY PROVISIONS

SECTION 2.1. Guaranty. The Guarantor hereby absolutely, unconditionally and irrevocably

(a) guarantees the full and punctual payment when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise, of all Liabilities of the Borrower now or hereafter existing, whether for principal, interest (including interest accruing at the then applicable rate provided in the Facility Letter after the occurrence of any default set forth in Section 10 of the Terms and Conditions to the Facility Letter, whether or not a claim for post-filing or post-petition interest is allowed under applicable law following the institution of a proceeding under bankruptcy, insolvency or similar laws), fees, expenses or otherwise (including all such amounts which would become due but for the operation of the automatic stay under Section 362(a) of the United States Bankruptcy Code, 11 U.S.C. §362(a), and the operation of Sections 502(b) and 506(b) of the United States Bankruptcy Code, 11 U.S.C. §502(b) and §506(b)); providedthat the aggregate amount payable by the Guarantor under this Guaranty shall not exceed the lesser of the following: (a) $25,000,000, and (b) an amount equal to 50% of the aggregate amount of Liabilities outstanding on the date that any demand for payment is made under this Guaranty; and

(b) indemnifies and holds harmless the Bank for any and all costs and expenses (including reasonable attorneys’ fees and expenses) incurred by the Bank in enforcing any rights under this Guaranty.

This Guaranty constitutes a guaranty of payment when due and not of collection, and the Guarantor specifically agrees that it shall not be necessary or required that the Bank exercise any right, assert any claim or demand or enforce any remedy whatsoever against the Borrower or any other Person before or as a condition to the obligations of the Guarantor hereunder.

Notwithstanding anything to the contrary in the foregoing and otherwise in this Guaranty, the Bank shall not demand payment under this Guaranty and the Guarantor shall not be obligated to pay any amounts due under this Guaranty until the earlier to occur of: (x) the date which is six months following either (1) the Bank’s demand for repayment from the Borrower of any amount due under the Facility Letter or (2) an event of default shall occur under Section 10(E) of the Terms and Conditions with respect to the Borrower; provided that the Bank has notified the Guarantor in writing of such demand for repayment and the amount to be repaid to the Bank by the Borrower remains outstanding, (y) an event of default shall occur under Section 10(E) of the Terms and Conditions to the Facility Letter with respect to the Guarantor and (z) any of the following: (1) any indebtedness of the Guarantor (except for indebtedness owed to trade creditors in an aggregate amount less than $1,000,000) shall not be paid when due (including the

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expiration of any grace period applicable thereto), (2) the maturity of any indebtedness of the Guarantor (except for indebtedness owed to trade creditors in an aggregate amount less than $1,000,000) shall be accelerated or (3) any event of default shall have been declared by any of the Guarantor’s lenders with respect to any indebtedness of the Guarantor and such event of default shall be continuing.

SECTION 2.2. Reinstatement, etc. The Guarantor hereby agrees that this Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment (in whole or in part) of any of the Liabilities is invalidated, declared to be fraudulent or preferential, set aside, rescinded or must otherwise be restored by the Bank, including upon the occurrence of any “Event of Default” set forth in Section 10 of the Terms and Conditions to the Facility Letter or otherwise, all as though such payment had not been made.

SECTION 2.3. Guaranty Absolute, etc. This Guaranty shall in all respects be a continuing, absolute, unconditional and irrevocable guaranty of payment, and shall remain in full force and effect so long as the Liabilities remain outstanding. The Guarantor guarantees that the Liabilities of the Borrower will be paid strictly in accordance with the terms of the Facility Letter and any Security Document under which they arise, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of the Bank with respect thereto. The liability of the Guarantor under this Guaranty shall be absolute, unconditional and irrevocable irrespective of:

(a) any lack of validity, legality or enforceability of the Facility Letter or any other Security Document;

(b) the failure of the Bank (i) to assert any claim or demand or to enforce any right or remedy against the Borrower or any other Person (including any other guarantor) under the provisions of the Facility Letter, any Security Document or otherwise, or (ii) to exercise any right or remedy against any other guarantor (including the Guarantor) of, or collateral securing, any Liabilities;

(c) any change in the time, manner or place of payment of, or in any other term of, all or any part of the Liabilities, or any other extension, compromise or renewal of any Liability;

(d) any reduction, limitation, impairment or termination of any Liabilities for any reason, including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to (and the Guarantor hereby waives any right to or claim of) any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality, irregularity, compromise, unenforceability of, or any other event or occurrence affecting, any Liabilities or otherwise;

(e) any amendment to, rescission, waiver, or other modification of, or any consent to or departure from, any of the terms of any Loan Document;

(f) any addition, exchange or release of any collateral or of any Person that is a guarantor (including the Guarantor hereunder) of the Liabilities, or any surrender or non-

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perfection of any collateral, or any amendment to or waiver or release of or addition to, or consent to or departure from, any other guaranty held by the Bank securing any of the Liabilities; or

(g) any other circumstance which might otherwise constitute a defense available to, or a legal or equitable discharge of, the Borrower, any surety or any guarantor.

SECTION 2.4. Setoff. The Guarantor hereby irrevocably authorizes the Bank, without the requirement that any notice be given to the Guarantor (such notice being expressly waived by the Guarantor), upon the occurrence of any event specified in the last sentence of Section 2.1, to set-off and appropriate and apply to the payment of the Liabilities (whether or not then due, and whether or not the Bank has made any demand for payment of the Liabilities), any and all balances, claims, credits, deposits (general or special, time or demand, provisional or final), accounts or money of the Guarantor then or thereafter maintained with the Bank. The Bank agrees to notify the Guarantor promptly after any such setoff and application made by the Bank; provided, however, that the failure to give such notice shall not affect the validity of such setoff and application. The rights of the Bank under this Section are in addition to other rights and remedies (including other rights of setoff under applicable law or otherwise) which the Bank may have.

SECTION 2.5. Waiver, etc. The Guarantor hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Liabilities and this Guaranty and any requirement that the Bank protect, secure, perfect or insure any lien, or any property subject thereto, or exhaust any right or take any action against any obligor or any other Person (including any other guarantor) or entity or any collateral securing the Liabilities, as the case may be.

SECTION 2.6. Postponement of Subrogation, etc. The Guarantor agrees that it will not exercise any rights which it may acquire by way of rights of subrogation under this Guaranty or the Facility Letter, nor shall the Guarantor seek or be entitled to seek any contribution or reimbursement from any other obligor, in respect of any payment made hereunder, under the Facility Letter or otherwise, until after the payment in full of the Liabilities. Any amount paid to the Guarantor on account of any such subrogation rights prior to the payment in full of the Liabilities shall be held in trust for the benefit of the Bank and shall immediately be paid and turned over to the Bank in the exact form received by the Guarantor (duly endorsed in favor of the Bank, if required), to be credited and applied against the Liabilities, whether matured or unmatured, in accordance with Section 2.7; provided, however, that if the Guarantor has made payment to the Bank of all or any part of the Liabilities and the Liabilities have been paid in full, then at the Guarantor’s request, the Bank will, at the expense of the Guarantor, execute and deliver to the Guarantor appropriate documents (without recourse and without representation or warranty) necessary to evidence the transfer by subrogation to the Guarantor of an interest in the Liabilities resulting from such payment. In furtherance of the foregoing, at all times prior to the payment in full of the Liabilities, the Guarantor shall refrain from taking any action or commencing any proceeding against the Borrower or any other obligor (or its successors or assigns, whether in connection with a bankruptcy proceeding or otherwise) to recover any amounts in the respect of payments made under this Guaranty to the Bank.

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SECTION 2.7. Payments; Application. The Guarantor hereby agrees with the Bank as follows:

(a) The Guarantor agrees that all payments made by the Guarantor hereunder will be made in Dollars to the Bank, without set-off, counterclaim or other defense and in accordance with Section 5 of the Terms and Conditions to the Facility Letter, free and clear of and without deduction for any taxes and that the provisions of such Section are hereby incorporated into and made a part of this Guaranty by this reference as if set forth herein; provided, that references to the “Borrower” in such Section shall be deemed to be references to the Guarantor, and references to “this Agreement” in such Section shall be deemed to be references to this Guaranty.

(b) All payments made hereunder shall be applied upon receipt (i) first, to the payment of fees and expenses of the Bank due and owing pursuant to Section 3 of the Terms and Conditions to the Facility Letter and Section 2.1(b) of this Guaranty, (ii) second, after payment in full of the amounts specified in clause (b)(i), to the payment of all interest and fees owing with respect to the Facilities and the Advances thereunder and all costs and expenses owing to the Bank pursuant to the terms of the Facility Letter, until paid in full, (iii) third, after payment in full of the amounts specified in clauses (b)(i) and (b)(ii), to the payment of the principal amount of the Facilities and the Advances thereunder then outstanding, including amounts owing to the Bank and any obligations then owing for contingent liabilities, (iv) fourth, after payment in full of the amounts specified in clauses (b)(i) through (b)(iii), to the payment of all other Liabilities owing to the Bank, and (v) fifth, after payment in full of the amounts specified in clauses (b)(i) through (b)(iv), to the Guarantor or any other Person lawfully entitled to receive such surplus.

SECTION 2.8. Ranking. The obligations of the Guarantor pursuant to this Guaranty and are and will at all times be direct and unconditional general obligations of the Guarantor and rank and will at all times rank in right of payment and otherwise at least pari passu with all other unsecured obligations of Guarantor whether now existing or hereafter outstanding. The Guarantor agrees that, except for liens currently existing pursuant to the Guarantor’s existing credit facilities relating to deposits or other funds held by or otherwise under the control of such creditors and otherwise as permitted by Section 8.2(b) of the Revolving Credit Agreement dated as of August 14, 2002 between the Guarantor, Bank Leumi USA and the Bank, as the same may be amended, restated or modified from time to time, it will not create or suffer to exist any lien on any of its property securing any obligations unless such lien secures the Liabilities on an equal and ratable basis with such other obligations.

ARTICLE III

REPRESENTATIONS AND WARRANTIES

SECTION 3.1. Representations. In order to induce the Bank to enter into the Facility Letter and make Facilities and Advances available thereunder, the Guarantor represents and warrants to the Bank as set forth below.

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(a) The representations and warranties contained in Section 9 of the Terms and Conditions to the Facility Letter (it being assumed for the purpose of this representation that any reference to the Borrower or the Facility Letter in such Section shall instead be deemed to refer to the Guarantor or this Guaranty, respectively), are true and correct in all material respects, each such representation and warranty set forth in such Section (insofar as applicable as aforesaid) and all other terms of the Facility Letter to which reference is made therein, together with all related definitions and ancillary provisions, being hereby incorporated into this Guaranty by this reference as though specifically set forth in this Article.

(b) The Guarantor has knowledge of the Borrower’s financial condition and affairs and has adequate means to obtain from the Borrower on an ongoing basis information relating thereto and to the Borrower’s ability to pay and perform the Liabilities, and agrees to assume the responsibility for keeping so informed for so long as this Guaranty is in effect. The Guarantor acknowledges and agrees that the Bank shall have no obligation to investigate the financial condition or affairs of the Borrower for the benefit of the Guarantor nor to advise the Guarantor of any fact respecting, or any change in, the financial condition or affairs of the Borrower that might become known to the Bank at any time, whether or not the Bank knows or believes or has reason to know or believe that any such fact or change is unknown to the Guarantor, or might (or does) materially increase the risk of the Guarantor as guarantor, or might (or would) affect the willingness of the Guarantor to continue as a guarantor of the Liabilities.

(c) It is in the best interests of the Guarantor to execute this Guaranty inasmuch as the Guarantor will derive substantial direct and indirect benefits from the Facilities and the Advances made thereunder from time to time to the Borrower by the Bank pursuant to the Facility Letter, and the Guarantor agrees that the Bank is relying on this representation in agreeing to make the Advances under the Facilities to the Borrower.

ARTICLE IV

COVENANTS, ETC.

SECTION 4.1. Covenants. The Guarantor covenants and agrees that, at all times prior to the payment in full of the Liabilities, it will perform, comply with and be bound by all of the agreements, covenants and obligations contained in Sections 4(a), 4(b), 4(e) and 4(g) of the Facility Letter (it being assumed for the purpose of this covenant that any reference to the Borrower in such Sections shall instead be deemed to refer to the Guarantor), each such agreement, covenant and obligation and all other terms of the Facility Letter to which reference is made in this Article, together with all related definitions and ancillary provisions, being hereby incorporated into this Guaranty by this reference as though specifically set forth in this Article.

ARTICLE V

MISCELLANEOUS PROVISIONS

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SECTION 5.1. Loan Document. This Guaranty is executed pursuant to the Facility Letter and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions thereof.

SECTION 5.2. Binding on Successors, Transferees and Assigns; Assignment. This Guaranty shall be binding upon the Guarantor and its successors, transferees and assigns and shall inure to the benefit of and be enforceable by the Bank and its successors, transferees and assigns; provided, however, that the Guarantor may not (unless otherwise permitted under the terms of the Facility Letter) assign any of its obligations hereunder without the prior written consent of the Bank. Without limiting the generality of the foregoing, the Bank may assign or otherwise transfer (in whole or in part) any Advance held by it to any other Person, and such other Person shall thereupon become vested with all rights and benefits in respect thereof granted to the Bank under the Facility Letter and this Guaranty or otherwise (subject to any contrary provisions of the Facility Letter).

SECTION 5.3. Amendments, etc. No amendment to or waiver of any provision of this Guaranty, nor consent to any departure by the Guarantor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Bank and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

SECTION 5.4. Notices. All notices and other communications provided for hereunder shall be in writing (including facsimile communication) and mailed, telecopied or delivered to the Guarantor at 19 West 44^th Street, 16^th Floor, New York, NY 10036, Attn: William H. Moryto, Chief Financial Officer, if such notice or communication is to the Bank, to the address for the Bank set forth in the Facility Letter. All such notices and other communications, when mailed and properly addressed with postage prepaid or if properly addressed and sent by pre-paid courier service, shall be deemed given when received; any such notice or communication, if transmitted by facsimile, shall be deemed given when the confirmation of transmission thereof is received by the transmitter.

SECTION 5.5. No Waiver; Remedies. In addition to, and not in limitation of, Section 2.3 and Section 2.5, no failure on the part of the Bank to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law.

SECTION 5.6. Captions. Section captions used in this Guaranty are for convenience of reference only, and shall not affect the construction of this Guaranty.

SECTION 5.7. Severability. Wherever possible each provision of this Guaranty shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Guaranty shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Guaranty.

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SECTION 5.8. Governing Law, Entire Agreement, etc. THIS GUARANTY SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEWYORK (INCLUDING FOR SUCH PURPOSE SECTIONS 5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK). THIS GUARANTY, THE SECURITY DOCUMENTS AND THE FACILITY LETTER CONSTITUTE THE ENTIRE UNDERSTANDING AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND SUPERSEDE ANY PRIOR AGREEMENTS, WRITTEN OR ORAL, WITH RESPECT THERETO. IN FURTHERANCE OF THE FOREGOING, THE GUARANTOR ACKNOWLEDGES AND AGREES THAT THE BANK HAS NOT (IN WRITING OR ORALLY) STATED TO THE GUARANTOR THAT ANY PROVISION OF THIS GUARANTY WOULD NOT BE ENFORCED (OR SOUGHT TO BE ENFORCED) AGAINST THE GUARANTOR OR ANY OF ITS PROPERTIES BY THE BANK, AND THE GUARANTOR WILL NOT ASSERT ANY CONTRARY POSITION AS A DEFENSE AGAINST ITS LIABILITIES AND OBLIGATIONS UNDER THIS GUARANTY.

SECTION 5.9. Forum Selection and Consent to Jurisdiction. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS GUARANTY OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE BANK OR THE GUARANTOR SHALL BE BROUGHT AND MAINTAINED IN THE COURTS OF THE STATE OF NEWYORK, NEWYORK COUNTY OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEWYORK; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY PROPERTY MAY BE BROUGHT, AT THE BANK’S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH PROPERTY MAY BE FOUND. THE GUARANTOR HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, NEW YORK COUNTY AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEWYORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. THE GUARANTOR IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEWYORK. THE GUARANTOR HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE GUARANTOR HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO

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ITSELF OR ITS PROPERTY, THE GUARANTOR HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS LIABILITIES AND OBLIGATIONS UNDER THIS GUARANTY AND THE OTHER LOAN DOCUMENTS.

SECTION 5.10. Counterparts, etc. This Guaranty may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. A copy of this Guaranty executed and delivered by facsimile shall be effective as delivery of an originally executed counterpart of this Guaranty.

SECTION 5.11. Counsel Representation. THE GUARANTOR ACKNOWLEDGES AND AGREES THAT IT HAS BEEN REPRESENTED BY COMPETENT COUNSEL IN THE NEGOTIATION OF THIS GUARANTY, AND THAT ANY RULE OR CONSTRUCTION OF LAW ENABLING THE GUARANTOR TO ASSERT THAT ANY AMBIGUITIES OR INCONSISTENCIES IN THE DRAFTING OR PREPARATION OF THE TERMS OF THIS GUARANTY SHOULD DIMINISH ANY RIGHTS OR REMEDIES OF THE BANK ARE HEREBY WAIVED BY THE GUARANTOR.

SECTION 5.12. Waiver of Jury Trial. THE GUARANTOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS GUARANTY OR ANY OTHER LOAN DOCUMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE BANK OR THE GUARANTOR. THE GUARANTOR ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE BANK ENTERING INTO THE FACILITY LETTER AND THE SECURITY DOCUMENTS.

IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be duly executed and delivered by its authorized officer as of the date first above written.

LAZARE KAPLAN INTERNATIONAL INC.
By:
	Title:

ACCEPTED AND AGREED:

ABN AMRO BANK N.V.

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By:
	Title:

By:
	Title:

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EX-13

Exhibit 13

LAZARE KAPLAN INTERNATIONAL INC.

2008

ANNUAL REPORT

Lazare Kaplan International Inc. 2008 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 “The Lazare Diamond^®.” Lazare 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, 2008 as filed with the Securities and Exchange Commission, will be made available to stockholders without charge. Requests should be directed to Investor Relations, Lazare Kaplan International Inc., 19 West 44^th Street, New York, New York 10036.

Annual Meeting

November 6, 2008

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

	Fiscal2008
	High			Low
First		$	8.85		$	7.00
Second			11.33			6.95
Third			10.15			7.36
Fourth			9.95			7.65

	Fiscal2007
	High			Low
First		$	9.70		$	7.88
Second			9.98			7.61
Third			10.95			8.40
Fourth			10.10			7.56

As of August 20, 2008 there were 61 stockholders of record of the 8,252,679 issued and outstanding shares of the common stock of the Company, including CEDE & Co. and other institutional holders who held an aggregate of 3,649,001 shares of common stock as nominees for an undisclosed number of beneficial holders.

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To Our Shareholders:

The company’s fiscal year ending May 31, 2008 saw dramatic change in the overall economic environment – particularly in the United States where a substantial percentage of GDP is driven by consumer spending. The housing and mortgage crisis, serious structural issues and liquidity problems in the financial industry, stock market declines and tightening availability of credit coming on top of unprecedented increases in fuel and food prices, diminished the availability of consumer discretionary resources and the consumers’ willingness to spend on non-essential purchases. While we have confidence in the resilience and strength of the American economy and its capacity to self correct, it will take some time to work through the serious problems it now confronts. Economic conditions in other parts of the world – China, India, and the Middle East among others – remain buoyant. However we do not feel that they will be unaffected as the United States economy works through its challenges. While consumer spending in these new, well to do markets is growing and is benefiting the diamond and jewelry industry, it is insufficient to make up for the decline in U.S. demand. While the company’s global diversification strategy is serving it well and acts as a buffer, market uncertainties make it necessary to continue to manage the Company’s operations with prudence, paying particular attention to liquidity, expenses and the balance sheet.

The Company’s revenue in fiscal year 2008 was $369.7 million as compared to $434.4 million for fiscal year 2007. Net profit after taxes was $7.2 million as compared to a loss of $3.0 million for fiscal 2007.

Although the diamond industry continues to evolve irreversibly from a supply driven model to a demand driven one, the demand and pricing of rough diamonds continues to outpace demand and pricing for polished diamonds. And while there are justified exceptions for specific qualities and sizes where availability is limited, we do not believe that the present overall pattern is sustainable over the long run. The immediate consequences of this inexplicable pricing anomaly are pressure on manufacturing margins and overleveraged financing of a growing polished diamond inventory in the pipe line. An adjustment in the price curve of rough diamonds to more closely follow the price curve of polished diamonds is unavoidable, particularly in these times when demand is reduced and credit is tight.

As forecast, the rough diamond industry is moving from its historical center in London to the producing countries in Southern Africa – particularly Botswana. The DTC – the largest supplier of rough diamonds - is moving its sorting and aggregating functions to Botswana. At the same time, it is accommodating a limited number of sightholders in Botswana, Namibia and South Africa to comply with the political decisions of these governments to encourage a local beneficiation industry. The company has been granted cutting licenses by the Governments of all three countries and these operations are, or will be, supplied by the DTC, within the framework of DTC’s commitment to the Governments of Botswana, Namibia and South Africa to make a sufficient and increasing quantity of suitable rough diamonds available to the local cutting industry. The company’s relationship with the DTC continues to be satisfactory and the company is one of the sightholders that have a three year supply agreement.

Construction of the Company’s well located building that will house the new manufacturing operation in Botswana is nearing completion. State of the art equipment has been ordered and is scheduled for timely delivery; a first group of workers is in training; LKI Puerto Rico is providing some of the technical management; and LKI New York is assisting in the establishment of systems. The company expects the Botswana facility to be operational before year end. Though the company has a commitment for rough diamond supply to begin as soon as it is operational, that supply is inadequate and will have to be renegotiated with Botswana DTC with the assistance of the Botswana Government. The Government of Botswana is looking to establish a viable, sustainable local beneficiation industry, and this can only be achieved by making substantial investments, deploying technical and marketing skills as well as a reliable assurance of an adequate and suitable supply of rough diamonds.

In Namibia, NamGem has stepped up its manufacturing capacity and efficiency and has

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achieved a skill level that enables it to cut and polish the majority of rough diamonds supplied to it. The restructuring of NamGem ownership is nearly complete, as are the negotiations with the U.S. Government’s Overseas Private Investment Corporation (OPIC). This pioneering ten years $25.2 million line of project financing is based on the economic viability of the project, an adequate supply of the appropriate quantity and quality of rough diamonds and encompasses as well as a development component to encourage local employment and skills.

In South Africa, LKI’s joint venture with a broad based women’s empowerment consortium, Nozala Diamonds, continues to develop. While it is in the forefront of the cutting industry in implementing the spirit and substance of the Government of South Africa’s stated policy and legislation mandating local empowerment and value addition through beneficiation, its further growth is dependent principally on the availability of the right quantity and quality of rough diamonds.

Angola’s economy, now benefiting from peace and high oil prices, is growing at an exceptionally rapid rate. Building on its established track record, LKI expanded its activities in purchasing and marketing rough diamonds from the informal and formal sectors in conjunction with Sodiam – the parastatal legally charged with marketing rough diamonds produced in Angola. Additional field work in exploration for new Kimberlite deposits is continuing in geologically interesting areas, as well as a diversification in construction. LKI continues it’s participation in a corporate responsibility program in Lunda Norte. This post war, three year, reconstruction project is a groundbreaking public/private partnership with U.S. AID and other participants. Considerable and noticeable progress is being made in implementation on the ground.

Russia continues to be a major rough diamond producer and increasingly is focused on developing independent channels of rough diamond distribution as its sales agreement with DTC approaches its end.

LKI’s position in Russia remains anchored by its agreement and successful cooperation with the country’s major diamond mining company AK Alrosa for local processing and international distribution of polished diamonds. The existing ten year agreement is expiring in the coming year and discussions are under way to modify and expand the relationship to include rough as well as polished diamonds.

While the company anticipates a further market slowdown in U.S. sales of diamonds and jewelry, it continues its efforts to expand market share by working closely with the quality jewelry stores that stock and market the company’s ideal cut “Lazare Diamond” brand. At the same time the Company is expanding its outreach in the international markets where consumer demand remains more active. In this light, the company has come to a 30 year agreement with a major diamond and jewelry marketer in Japan to be the exclusive supplier of branded Lazare Diamonds for the expanding chain of Lazare stores.

The company has also broadened its product offering to include fine quality commercial cut diamonds and has expanded its bulk sale capacity in wholesale markets. The Company has signed an exclusive agreement for jewelry design with Bondanza, a well established jewelry designer, and it expects to step up sales of jewelry with particular emphasis on high diamond content and simplicity of design.

LKI has been and remains attentive to the size and composition of its diamond and jewelry inventory and management will continue to give particular attention to this area of operations.

The company’s Bellataire® line of HPHT processed diamonds continues to be a niche product with an increased demand for larger diamonds. The Company continues to review growth possibilities that are limited by supply constraints of suitable rough diamonds.

The Company has and will continue to defend its intellectual property and technical innovations. While it is disappointed that it did not prevail in the trial on the validity of its laser patents, it is its intention to further pursue all available legal avenues.

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The Company’s polishing factory in Puerto Rico, while it continues to specialize in precision diamond cutting, is also increasingly fulfilling its functions as a service center and a provider of technical support for operations in Botswana, Namibia and South Africa.

The Company remains committed to upholding the standards and values of transparency, accountability and good corporate citizenship. The company’s operations are aligned not only with such binding measures as the U.S.A. Patriot Act and Kimberly Process, but also with voluntary systems of warranty disclosure and proactive engagement developed by such bodies as the World Diamond Council and the United Nations Global Compact.

While the Company does not expect overall economic conditions to improve rapidly, it is well satisfied with its strategic positioning. The investments made will enable it to benefit from the opportunities and manage the risks brought about by the structural changes taking place in the diamond industry.

To effectively pursue its objectives and implement its policies, the Company relies on the performance, professionalism and dedication of its employees all over the world. In this important area the Company is well served by its people and we thank all our employees for their efforts and achievements during the past year.

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

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Selected Financial Data

(In thousands, except share and per share data )	2008		2007			2006		2005		2004
Net sales	$	369,671	$	434,406		$	528,045	$	421,411	$	235,775
Income/(loss) before income tax provision/(benefit)	$	9,754	$	(4,751	)	$	766	$	7,870	$	3,273
Net income/(loss)	$	7,198	$	(2,976	)	$	1,528	$	5,230	$	2,399
Basic earnings/(loss) per share (based on the weighted average number of shares)	$	0.87	$	(0.36	)	$	0.18	$	0.62	$	0.28
Diluted earnings/(loss) per share (based on the weighted average number of shares)	$	0.86	$	(0.36	)	$	0.18	$	0.60	$	0.28
At May 31: Total assets	$	244,430	$	290,283		$	263,712	$	250,284	$	180,712
Long-term debt, long-term portion	$	35,571	$	36,060		$	64,176	$	60,000	$	34,726
Working capital	$	108,646	$	105,438		$	143,724	$	141,556	$	110,599
Stockholders' equity	$	100,575	$	92,997		$	95,796	$	96,305	$	92,416

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

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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, 2008. 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 “2008”, “2007” and “2006” refer to the fiscal years ended May 31, 2008, 2007 and 2006, 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 DTC periodically appoints clients – known as “Sightholders” – who are among the world’s leading diamantaires, and are carefully chosen for their ability to add value to the diamonds sold by the DTC. 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 four year technical assistance and cooperation agreement signed in April 2004 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 fiscal 2005. During fiscal 2006, the Company’s rough buying operations expanded to include buying in the Angolan formal sector. During the second fiscal quarter of 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 which includes exploration and development through various additional joint ventures.

The Company has a ten year agreement signed in March 1999 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.

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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 subsequently entered into a financing agreement. 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 2009.

The Company has 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 fiscal 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 is currently constructing a new cutting facility in Gaborone, Botswana.

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 only sells and markets 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

2008 Compared to 2007

Net Sales

Net sales in 2008 and 2007 were $369.7 million and $434.4 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 partially offset by increased polished sales.

Polished diamond revenues in 2008 were $165.8 million, as compared to $143.3 million in 2007. This increase reflects increased sales of both branded and fine cut commercial diamonds. Factors contributing to the increase in polished sales include increased selling efforts in Europe and the Middle East, higher rough diamond prices which the Company passed along to customers as higher polished diamond selling prices and the consolidation in 2008 of the operations of a joint venture formally accounted for on the equity method ($7.3 million).

Rough diamond sales in 2008 were $203.9 million, as compared to $291.1 million in 2007. The decrease in rough diamond sales primarily 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 and decreased rough sourcing. Rough diamond revenue for 2007 includes $1.0 million received in connection with certain sourcing and financing initiatives.

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Gross Profit

During 2008, gross margin on net polished sales was 11.3% compared to 9.9% in 2007. The increase in polished gross margin reflects higher gross margins earned on both branded and fine cut commercial diamonds largely attributable to improved rough diamond sourcing and sales mix, and price increases which the Company has passed on to its customers. Polished gross margin for 2008 reflects reduced revenue and margin derived from laser inscription fees (see “Legal Proceedings”).

Rough gross margin during 2008 was 6.8% compared to 3.0% in the prior year. Increased rough gross margin reflects a favorable trading market in which buyers, anticipating future price increases, readily pursue rough diamonds in the category which the Company typically trades.

As a result of the foregoing, overall gross margin percentage during 2008 was 8.9% compared to 5.3% in 2007.

Other Income

During 2008, the Company entered into a license agreement pursuant to which the Company granted an exclusive thirty year license to use certain of its intellectual property in Japan solely in connection with the sale, distribution, promotion, and advertisement of branded diamonds, branded diamond jewelry, and other products bearing a “Lazare Diamond” logo within Japan for a one-time fee ($4.7 million net of legal and other costs).

Selling, General and Administrative Expenses

Selling, general and administrative expenses for 2008 were $31.1 million, as compared to $25.7 million for 2007. The increase for 2008 primarily reflects increased legal costs associated with litigation the Company initiated to protect certain of its intellectual property rights. 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.

Interest Expense

Interest expense for 2008 was $5.3 million, as compared to $5.9 million for 2007. This decrease primarily reflects lower levels of borrowing in connection with reduced inventory and receivable levels and lower interest rates during 2008.

Equity in (Income) / Loss of Joint Ventures

The Company has 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 $8.7 million and $3.9 million for 2008 and 2007, respectively.

Income Tax

The Company’s effective tax rate for 2008 was 25.6%. The difference between the effective tax rate and the statutary tax rate is primarily attributable to the earnings of foreign operations which are taxable in lower tax rate jurisdictions. The Company’s 2007 income tax benefit primarily reflects its ability to carryforward certain operating losses for U.S. income tax purposes.

Earnings Per Share

Basic and fully diluted earnings/ (loss) per share were $0.87 and $0.86 for 2008, as compared to $(0.36) for 2007. 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.

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

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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 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.

New Accounting Pronouncements

The Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes “(FIN 48) effective June 1, 2007. FIN 48 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 impact of adopting FIN 48 on the Company’s financial position, results of operations and cash flows was immaterial.

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

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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, with the exception of all non-financial assets and liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, which will be effective for years beginning after November 15, 2008. The Company is currently evaluating the impact of SFAS No. 157 on its financial position, results of operations and cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Asset and Financial Liability: Including an amendment of FASB Statement No. 115” (“SFAS No. 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 No. 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 No. 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, 2008 and 2007, the Company recognized cumulative foreign currency translation adjustments with regard to the activities of Lazare Kaplan Japan in the amount of $(331,000) and $(766,000), respectively, which are shown as a component of stockholders’ equity in the accompanying balance sheets.

Liquidity—Capital Resources

The Company generated $40.5 million of cash flow from operations for 2008 and used $9.3 million in operating activities in 2007. The Company’s provided cash flow from operations in 2008 primarily through reduced accounts receivables, which were used to reduce corporate borrowings and trade liabilities. The Company’s usage of cash flow from operations in 2007, funded by an increase in borrowings, was primarily used to expand inventory sourcing and support increased sales volume.

The primary sources and uses of operating cash flow by the Company relate to the purchase and sale of diamonds.

Rough diamond buying operations commonly involve the commitment of significant monies for opportunistic purchases of groups of diamonds. Rough trading requires accumulation, sorting and aggregation of purchases for resale, generally in large volume transactions. The timing of sales depends on both the Company’s ability to source adequate quantities of similar categories of diamonds and the balance of supply and demand in the broader market.

By comparison, polished diamond operations involve a substantially longer holding period during which the Company manufactures, grades and sells individual diamonds to customers, generally in transactions involving a relatively small number of diamonds.

Payment for rough diamonds which the Company sources directly from producers are generally required to be made at, or prior to, title transfer. Open market purchases of both rough and polished diamonds, which the Company uses to supplement its inventories, are generally paid for over time based on negotiated terms.

As a result of the foregoing, the Company’s cash flow and changes in operating assets and liabilities can vary significantly between fiscal periods depending on the source, mix and timing of diamonds the Company purchases.

At May 31, 2008 accounts receivable were $94.1 million compared to $134.0 million at May 31, 2007. The decrease in accounts receivable primarily reflects lower current period sales and shorter customer payment terms granted in connection with certain foreign rough trading sales.

During the period ended May 31, 2008 inventory was reduced by $3.1 million reflecting lower levels of polished diamonds offset in part by higher levels of rough diamonds. The reduction in polished diamond inventory primarily reflects efforts by the Company to reduce inventory carrying costs. Increased levels of rough diamonds are primarily attributable to the timing of purchases.

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During the period ended May 31, 2008 accounts payable and other current liabilities decreased approximately $13.7 million primarily reflecting the timing of payments by the Company.

The Company’s working capital at May 31, 2008 was $108.6 million as compared to $105.4 million at May 31, 2007.

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, 2008 and 2007 the balance outstanding under both lines was $39.1 million and $53.5 million, respectively. Borrowings under these lines are available for the Company’s working capital requirements and are payable on demand.

The Company has long-term unsecured, committed revolving loan agreements in the amount of $35.0 million and unsecured, uncommitted credit agreements in the amount of $10.0 million. The Company may borrow under the committed facilities (including up to $1.0 million under letters of credit, $0.6 million issued at May 31, 2008) through December 1, 2009. The loan term for the committed facilities may be extended in one-year increments commencing November 30, 2008, subject to the consent of the lending banks. Borrowings under the 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, 2008 and 2007, the balance outstanding under the facilities was $35.8 million and $41.0 million, respectively.

The Company has an additional unsecured, committed revolving loan agreement with a bank. The maximum amount available under the facility is $5.0 million and $30.0 million at May 31, 2008 and May 31, 2007, respectively. 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 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, 2008 and 2007, the balance outstanding under the facilities was $5.0 million and $26.0 million, respectively. This facility expired on June 30, 2008.

A subsidiary of the Company maintains a loan facility which enables it to borrow up to 520 million Japanese yen (approximately $4.7 million U.S. dollars) at an interest rate 1% above the Japanese yen LIBOR through November 2009. 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, 2008 and 2007 the balance outstanding under this facility was $0.6 million and $1.1 million U.S. dollars, respectively.

A majority owned subsidiary of the Company also maintains $3.0 million line of credit relating to a joint diamond cutting and polishing operation in South Africa. The balance outstanding as of May 31, 2008 was approximately $1.0 million with a portion of this debt (approximately $0.5 million) guaranteed by the Company’s partner.

The Company also guarantees a portion of debt related to a joint Angolan rough trading operation ($ 25.0 million at May 31, 2008). The fair value of the guarantees 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.

Long-term debt of $35.6 million outstanding at May 31, 2008 is scheduled to be repaid in the fiscal year ended May 31, 2010. At May 31, 2008, the Company was in compliance with its debt covenants. At May 31, 2007 the Company had received waivers from its lenders, as the Company was not in compliance with an annual financial covenant under certain of its loan facilities.

The following table includes aggregate information about the Company’s contractual

12

obligations including interest as of May 31, 2008 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	$	88.1	$	48.9	$	39.2	$	—	$	—
Operating Leases		7.8		0.8		2.0		1.3		3.7
Total Contractual Cash Obligations	$	95.9	$	49.7	$	41.2	$	1.3	$	3.7

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 $100.6 million at May 31, 2008 as compared to $93.0 million at May 31, 2007. This increase primarily reflects current year results of operations. No dividends were paid to stockholders during 2008 or 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 recoverabil ity 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 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

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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 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 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 2009.

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 agreement, the Company granted a security interest to DI in POL’s diamond inventory amounting to $6.4 million at May 31, 2008.

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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 BestPractices 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”) and its affiliated companies in Southern Africa, 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 the Company’s operations.

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. In 2007 all then existing DTC clients (“Sightholders”) received notification of termination effective in December. In April 2008 the DTC confirmed the list of Sightholders for the new three-year 2008 – 2011 Supplier of Choice contract period, which according to published reports number approximately 80. These arrangements mark a new approach to the DTC’s distribution of rough diamonds globally, with

15

the establishment of independent joint-venture sales organizations including the DTC Botswana (DTCB) and the Namibia Diamond Trading Company (NDTC). The DTC in London continues to distribute rough to those Sightholders with sights in both London and Canada, and the restructured DTC South Africa distributes to Sightholders in South Africa. Because of its core strengths in the diamond industry, including technical ability, distribution and marketing ability, financial strength and ethical accountability, the Company has been appointed an approved Sightholder in London (LKI), Botswana (Lazare Kaplan Botswana PTY, Ltd.), Namibia (NAMGEM Trading) and South Africa (Nozala Diamonds PTY, LTD). Through its active beneficiation activities in southern Africa, the Company is well position to contribute to regional value added and technical skills transfer aspirations.

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 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.

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’s operations.

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Consolidated Statements of Operations

		Year ended May 31,
(In thousands, except share and per share data )		2008			2007			2006
Net sales	$	369,671		$	434,406		$	528,045
Cost of sales		336,950			411,523			498,197
		32,721			22,883			29,848
Other Income		4,755
		37,476			22,883			29,848
Selling, general and administrative expenses		31,085			25,691			24,759
		6,391			(2,808	)		5,089
Interest expense, net of interest income		(5,295	)		(5,856	)		(3,786	)
Equity in income / (loss) of joint ventures		8,658			3,913			(537	)
Income / (loss) before income tax provision and minority interest		9,754			(4,751	)		766
Income tax provison/(benefit)		2,494			(1,775	)		(762	)
Minority Interest		(62	)		—			—
NET INCOME / (LOSS)	$	7,198		$	(2,976	)	$	1,528
EARNINGS / (LOSS) PER SHARE
Basic earnings / (loss) per share	$	0.87		$	(0.36	)	$	0.18
Average number of shares outstanding during the period		8,255,408			8,207,006			8,291,413
Diluted earnings / (loss) per share	$	0.86		$	(0.36	)	$	0.18
Average number of shares outstanding during the period, assuming dilution		8,343,657			8,207,006			8,569,661

See notes to consolidated financial statements.

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Consolidated Balance Sheets

	May 31,
(In thousands, except share data)		2008			2007
Assets
CURRENT ASSETS:
Cash and cash equivalents	$	8,815		$	7,869
Accounts receivable, less allowance for doubtful accounts ($1,559 and $846 in 2008 and 2007, respectively)		94,057			133,989
Inventories, net:
Rough stones		29,442			14,300
Polished stones		79,555			97,767
Total inventories		108,997			112,067
Prepaid expenses and other current assets		2,386			10,750
Deferred tax assets-current		2,271			1,989
TOTAL CURRENT ASSETS		216,526			266,664
Property, plant and equipment, net		6,475			7,281
Investments in unconsolidated joint ventures		11,521			2,863
Other assets		2,974			3,941
Deferred tax assets, net		6,934			9,534
	$	244,430		$	290,283
Liabilities and Stockholders’ Equity
CURRENT LIABILITIES:
Accounts payable and other current liabilities	$	61,995		$	75,690
Current portion of long-term debt and lines of credit		45,885			85,536
TOTAL CURRENT LIABILITIES		107,880			161,226
Long-term debt		35,571			36,060
TOTAL LIABILITIES		143,451			197,286
COMMITMENTS AND CONTINGENCIES		––			––
MINORITY INTEREST		404			––
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 8,948,845 and 8,946,845 in 2008 and 2007, respectively		8,949			8,947
Additional paid-in capital		63,104			63,090
Cumulative translation adjustment		(331	)		(766	)
Retained earnings		34,522			27,324
		106,244			98,595
Less treasury stock, 696,166 and 687,545 shares at cost in 2008 and 2007, respectively		(5,669	)		(5,598	)
TOTAL STOCKHOLDERS’ EQUITY		100,575			92,997
	$	244,430		$	290,283

See notes to consolidated financial statements.

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Consolidated Statements of Cash Flows

	Year ended May 31,
(In thousands )		2008			2007			2006
Cash Flows from Operating Activities:
Net income / (loss)	$	7,198		$	(2,976	)	$	1,528
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		1,645			1,518			1,310
Provision for uncollectible accounts		809			358			168
Loss from sale of fixed assets		2			—			—
Compensation expense - noncash		—			124			—
Deferred income taxes		2,318			(1,992	)		(1,585	)
Minority Interest		62			—			—
Equity in earnings of unconsolidated affiliates		(8,658	)		(3,913	)		537
Changes in operating assets and liabilities:
Accounts receivable		39,627			(42,944	)		(4,581	)
Rough and polished inventories		3,700			21,047			(8,530	)
Prepaid expenses and other current assets		8,098			2,013			(944	)
Other assets		965			(2,489	)		(124	)
Accounts payable and other current liabilities		(15,263	)		19,919			(21,470	)
Net cash provided by / (used in) operating activities		40,503			(9,335	)		(33,691	)
Cash Flows from Investing Activities:
Capital expenditures		(515	)		(460	)		(1,839	)
Net cash used in investing activities		(515	)		(460	)		(1,839	)
Cash Flows from Financing Activities:
Borrowings on revolving credit facilities		16,356			3,000			35,407
Repayments on revolving credit facilities		(42,102	)		(6,316	)
Increase / (decrease) in borrowings on demand facilities		(14,547	)		12,767
Purchase of treasury stock		(71	)		(511	)		(1,968	)
Proceeds from exercise of stock options		16			905			115
Net cash provided by / (used in) financing activities		(40,348	)		9,845			33,554
Effect of exchange rate changes on cash		1,306			(341	)		(184	)
Net increase/(decrease) in cash and cash equivalents		946			(291	)		(2,160	)
Cash and cash equivalents at beginning of year		7,869			8,160			10,320
Cash and cash equivalents at end of year	$	8,815		$	7,869		$	8,160
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest	$	5,532		$	5,558		$	3,363
Income taxes	$	82		$	211		$	508

See notes to consolidated financial statements.

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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, 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
Comprehensive loss:
Net Income		—		—		—			7,198			—			7,198
Foreign currency translation		—		—		435			—			—			435
Comprehensive loss															7,633
Exercise of stock options, 2,000 shares issued		2		14		—			—			—			16
Purchase of treasury stock, 8,621 shares		—		—		—			—			(71	)		(71	)
Balance, May 31, 2008	$	8,949	$	63,104	$	(331	)	$	34,522		$	(5,669	)	$	100,575

See notes to consolidated financial statements.

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Notes to Consolidated Financial Statements

Years ended May 31, 2008, 2007 and 2006

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 all significant subsidiaries and all material intercompany balances and transactions have been eliminated. The equity method of accounting is used for investments in associated companies in which the Company generally has an interest of 50% or less. The Company evaluates its investments in associated companies in accordance with FIN 46 (R) “Consolidation of Variable Interest Entities—An Interpretation of ARB No. 51”. In these notes to consolidated financial statements, the years “2008”, “2007” and “2006” refer to the fiscal years ended May 31, 2008, 2007 and 2006, 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, 2008, 2007 and 2006 are set forth below:

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	2008		2007		2006
United States	16	%	15	%	13	%
Far East	11	%	8	%	7	%
Europe, Israel & Other	73	%	77	%	80	%
	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, 2008, 2007 and 2006. Where the Company believes profitability can be 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 18.8% and 34.1% of accounts receivable at May 31, 2008 and 2007.

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. Revenue Arrangements with Multiple Deliverables

In evaluating multiple element arrangements, the Company considers whether the components of the arrangement represent separate units of accounting as defined in Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). In accordance with EITF 00-21, the Company recognizes revenue for delivered elements only when the delivered element has stand-alone value and has objective and reliable evidence of fair value for each undelivered element. If the fair value of any undelivered element included in a multiple element arrangement cannot be objectively determined, revenue is deferred until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements, or such elements are insignificant. Application of this standard requires subjective determinations and requires management to make judgements about the fair value of the individual elements and whether such elements are separable from the other aspects of the contractual relationship.

e. 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.

f. Cash and Cash Equivalents

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

g. Inventories

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

h. 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.

i. 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.

j. 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.

k. 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.

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l. 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 $2.2 million, $2.3 million and $2.6 million in 2008, 2007 and 2006, respectively.

m. Shipping and Handling:

Shipping and handling costs incurred by the Company to deliver product to customers, $0.3 million in 2008, $0.3 million in 2007 and $0.4 million in 2006, are classified in the Company’s income statement as selling, general and administrative expense.

n. Equity Investments

The Company utilizes the equity method of accounting to record its proportionate share of income and losses from joint ventures. The equity method of accounting is used for investments in associated companies in which the Company generally has an interest of 50% or less. The Company evaluates its investments in associated companies in accordance with FIN 46 (R) “Consolidation of Variable Interest Entities—An Interpretation of ARB No. 51”.

o. 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.

The Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes “(FIN 48) effective June 1, 2007. FIN 48 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 impact of adopting FIN 48 on the Company’s financial position, results of operations and cash flows was immaterial.

p. 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.

	2008	2007	2006
Average number of shares outstanding during the period	8,255,408	8,207,006	8,291,413
Effect of dilutive stock options	88,249	—	278,248
Average number of shares outstanding during the period assuming dilution	8,343,657	8,207,006	8,569,661

Antidilutive options of approximately 240,000 and 601,800 were not included in the computation of diluted earnings per share, for fiscal 2008 and 2006, respectively, because the exercise price of the options was greater than the average market price of the common shares. Antidilutive options of 926,451 were not included in the computation of dilutive

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earnings per share for 2007 because the Company had a net loss for the year.

q. 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 the Company’s operations.

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.

In 2007 all then existing DTC clients (“Sightholders”) received notification of termination effective in December. In April 2008 the DTC confirmed the list of Sightholders for the new three-year 2008 – 2011 Supplier of Choice contract period, which according to published reports number approximately 80. These arrangements mark a new approach to the DTC’s distribution of rough diamonds globally, with the establishment of independent joint-venture sales organizations including the DTC Botswana (DTCB) and the Namibia Diamond Trading Company (NDTC). The DTC in London continues to distribute rough to those Sightholders with Sights in both London and Canada, and the restructured DTC South Africa distributes to Sightholders in South Africa. Because of its core strengths in the diamond industry, including technical ability, distribution and marketing ability, financial strength and ethical accountability, the Company has been appointed an approved Sightholder in London (LKI), Botswana (Lazare Kaplan Botswana PTY, Ltd.), Namibia (NAMGEM Trading) and South Africa (Nozala Diamonds PTY, LTD). Through its active beneficiation activities in southern Africa, the Company is well positioned to contribute to regional value added and technical skills transfer aspirations.

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.

If the Company were to lose its sightholder status, it could have a material adverse effect on the Company’s ability to purchase rough diamonds and could 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

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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.

r. 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
Net income, as reported	$	1,528
Add: Compensation expense, net of related taxes		—
Deduct: Stock-based employee compensation expense determined under fair value method, net of related tax effects		522
Proforma net income	$	1,006
Earnings per share as reported:
Basic	$	0.18
Diluted	$	0.18
Basic and diluted earnings pro forma:
Basic	$	0.12
Diluted	$	0.12

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 administrative expense.

s. 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, 2008, 2007 and 2006, total comprehensive income/ (loss) was $7.6 million, $(3.3) million, and $1.3 million, respectively.

t. Reclassifications

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

u. New Accounting Pronouncements

The Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) effective June 1, 2007. FIN 48 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 impact of adopting FIN 48 on the Company’s financial position, results of operations and cash flows was immaterial.

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, with the exception of all non-financial assets and liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, which will be effective for years beginning after November 15, 2008. The Company is currently evaluating the impact of SFAS No. 157 on its financial position, results of operations and cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Asset and Financial Liability: Including an amendment of

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FASB Statement No. 115” (“SFAS No. 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 No. 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 No. 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,
	2008		2007
Land and buildings	$	2,346	$	2,328
Leasehold improvements		2,637		2,637
Machinery, tools and equipment		8,423		7,793
Furniture and fixtures		1,310		1,317
Computer hardware, software and equipment		8,018		7,995
		22,734		22,070
Less accumulated depreciation and amortization		16,259		14,789
	$	6,475	$	7,281

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	%

3. Income Taxes

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

	May 31,
	2008			2007
Deferred tax assets:
Operating loss and other carryforwards	$	10,369		$	11,115
Accounts Receivable Reserve		474			210
Other		154			1,998
Deferred tax liabilities:
Depreciation		(934	)		(942	)
		10,063			12,381
Less: Valuation allowance		(858	)		(858	)
Net deferred tax assets	$	9,205		$	11,523

The valuation allowance primarily relates to state net operating losses where realization is uncertain due to certain restrictions placed on utilization.

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

	Year ended May 31,
	2008		2007			2006
Current:
Federal	$	—	$	(168	)	$	408
State and local		26		105			277
Foreign		150		112			138
		176		49			823
Deferred:
Federal, state and local		2,318		(1,824	)		(1,585	)
	$	2,494	$	(1,775	)	$	(762	)

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

	Year ended May 31,
	2008		2007			2006
Domestic	$	1,716	$	(5,936	)	$	(4,647	)
Foreign		8,038		1,185			5,413
	$	9,754	$	(4,751	)	$	766

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

	2008			2007			2006
Tax provision / (benefit) at statutory rate	$	3,316		$	(1,615	)	$	260
(Decrease) / increase in taxes resulting from:
Differential attributable to foreign operations		(1,220	)		(291	)		(1,724	)
Tax on repatriated dividend		—			—			408
State and local taxes, net of Federal benefit		343			104			267
Permanent items		55			27			27
Tax provision	$	2,494		$	(1,775	)	$	(762	)

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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		12,036
	$	35,425

In addition, the Company has New York State and New York City net operating loss carryforwards of approximately $18.0 million each, expiring from 2022 through 2027.

The Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes “(FIN 48) effective June 1, 2007. FIN 48 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 impact of adopting FIN 48 on the Company’s financial position, results of operations and cash flows was immaterial.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The Company and its subsidiaries file income tax returns in international jurisdictions in addition to U.S. federal, state and local income tax jurisdictions. Based upon the statute of limitations the Company is no longer subject to U.S. federal tax examinations by tax authorities for years prior to fiscal 2005.

4. Accounts Payable and Other Current Liabilities

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

	2008		2007
Accounts payable	$	6,555	$	21,693
Advances and other		46,076		43,282
Accrued expenses		9,364		10,715
	$	61,995	$	75,690

Advances and other, primarily relating to the purchase, manufacture and sale of inventory, includes $36.4 million and $9.7 million payable to two parties for 2008. For 2007, $31.3 million and $12.0 million was payable to two parties.

5. Credit Agreements

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, 2008 and 2007 the balance outstanding under both lines was $39.1 million and $53.5 million, respectively. Borrowings under these lines are available for the Company’s working capital requirements and are payable on demand.

The Company has long-term unsecured, committed revolving loan agreements in the amount of $35.0 million and unsecured, uncommitted credit agreements in the amount of $10.0 million. The Company may borrow under the committed facilities (including up to $1.0 million under letters of credit, $0.7 million issued at May 31, 2008) through December 1, 2009. The loan term for the committed facilities may be extended in one-year increments commencing November 30, 2008, subject to the consent of the lending banks. Borrowings under the 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 prov isions 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, 2008 and 2007, the balance outstanding under the facilities was $35.8 million and $41.0 million, respectively.

The Company has an additional unsecured, committed revolving loan agreement with a bank. The maximum amount available under the facility is

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$5.0 million and $30.0 million at May 31, 2008 and May 31, 2007, respectively. 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 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, 2008 and 2007, the balance outstanding under the facilities was $5.0 million and $26.0 million, respectively. This facility expired on June 30, 2008.

A subsidiary of the Company maintains a loan facility which enables it to borrow up to 520 million Japanese yen (approximately $4.7 million U.S. dollars) at an interest rate 1% above the Japanese yen LIBOR through November 2009. 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, 2008 and 2007 the balance outstanding under this facility was $0.6 million and $1.1 million U.S. dollars, respectively.

A majority owned subsidiary of the Company also maintains $3.0 million line of credit relating to a joint diamond cutting and polishing operation in South Africa. The balance outstanding as of May 31, 2008 was approximately $1.0 million with a portion of this debt (approximately $0.5 million) guaranteed by the Company’s partner.

The Company also guarantees a portion of debt related to a joint Angolan rough trading operation ($25.0 million at May 31, 2008). The fair value of the guarantees is immaterial.

Long-term debt of $35.6 million outstanding at May 31, 2008 is scheduled to be repaid in the fiscal year ended May 31, 2010.

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. At May 31, 2008 the Company had outstanding borrowings of $81.5 million at a weighted average interest rate of 4.63%.

6. Stock Incentive Plans

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. No future grants may be made under the 1997 Plan, although outstanding options may continue to be exercised.

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 accordance with SFAS No. 123 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 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(R) “Accounting for Share-Based Payment.”

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

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		2008		2007		2006
Risk-free interest rate		n/a		n/a		n/a
Expected option life		5 years		5 years		5 years
Expected volatility		––		––		––
Expected dividends per share	$	––	$	––	$	––
Options granted		––		––		––
Weighted average estimated fair value per share	$	––	$	––	$	––
Total intrinsic value of options exercised	$	3,500	$	102,921	$	63,350

A summary of the Plans’ activity for the year ended May 31, 2008 is as follows:

	Number of shares		Weighted average price per share		Weighted average remaining contractual life remaining	Aggregate intrinsic value
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
Options expired/cancelled	(93,700	)	$	10.34
Options issued	––		$	––
Options exercised	(2,000	)	$	8.00
Outstanding - May 31, 2008	830,751	*	$	8.29
Non-vested	100,000		$	7.77	6.95	$	133,000
Vested	730,751		$	8.10	3.84	$	964,839
Total	830,751	*	$	8.06	4.21	$	1,097,839

* Includes 175,000 warrants of which 75,000 are vested and 100,000 will vest upon meeting certain contigent conditions.

As of May 31, 2008 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, 2008 (in thousands):

Year	Operating leases
2009		843
2010		778
2011		623
2012		633
2013		633
Thereafter		4,303
	$	7,813

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, 2008, 2007 and 2006 was approximately, $1.0 million for each year.

As of May 31, 2008, approximately $6.4 million of inventory owned by Pegasus Overseas, Ltd., a wholly owned subsidiary, is subject to a security interest by a third party.

During 2006 and 2007, the Company filed complaints in the United States District Court for the Southern District of New York against Photoscribe Technologies, Inc. (“Photoscribe”), the Gemological Institute of America (the “GIA”) and Mr. Benderly, President of Photoscribe. The complaints asserted, among other things, infringement of the Company’s intellectual property rights by Photoscribe, GIA and Benderly with respect to two of the Company’s patents (the “patents-in-suit”). In addition, the complaint asserted certain contract violations by GIA.

GIA, Photoscribe and Benderly answered the complaint and denied liability for the charges made by the Company. GIA also filed counterclaims alleging, among other things, non-infringement, invalidity and unenforceability of the patents-in-suit. Photoscribe and Benderly alleged counterclaims for, among other things, non-infringement, invalidity and unenforceability of the patents-in-suit.

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A trial of the Company’s contract and patent suit against Photoscribe, GIA and Benderly began in a federal district court in February 2008. Prior to the conclusion of the trial the parties settled most of their contract claims. In March 2008 the jury returned a verdict in which they found that all of the asserted claims of the Company’s patents, except one claim, were valid. However, the jury also found that the claims were not infringed by the defendants. The Company is considering its options in view of the verdict.

At a bench trial held in April and May 2008, the Court determined that the patents in the suit were unenforceable for inequitable conduct. In August 2008, the Court held a hearing, after which the Court determined that due to the finding of inequitable conduct, the case was exceptional within the meaning of 35 U.S.C. § 285 and that the defendants should be awarded their reasonable attorneys fees. At this time, defendants have not made a formal request for a specific amount of fees and the Court has not made a finding of an amount. There still remains to be tried an issue of breach of an agreement by which GIA was to maintain in good working order certain laser equipment leased to it by the Company, but which did not work when it was returned to the Company. No date is currently scheduled for a bench trial on this issue.

The Company plans to vigorously seek to have the adverse rulings overturned. In particular, it plans to file post-trial motions to try to have the determination of non-infringement and invalidity overturned. In addition, the Company plans to appeal the jury verdict on the basis of errors committed by the trial court and the trial court’s finding of inequitable conduct.

Consistent with the opinion of counsel, the Company’s management believes it is likely that the finding of inequitable conduct will be reversed on appeal and; as such, any award of attorney’s fees would be vacated.

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 anticipates making a contribution in the 2008 plan year. The Company did not make a matching contribution in 2007 or 2006.

9. Other Income

During 2008, the Company entered into a perpetual license agreement for the use of certain of its intellectual property in Japan solely in connection with the sale, distribution, promotion, and advertising of branded diamonds, branded jewelry, and other products bearing a “Lazare Diamond” logo within Japan for a one-time fee ($4.7 million net of legal and other costs). As of the effective date of the license agreement the Company had fulfilled all of its obligations there under. Subject to the licensee’s continuing compliance with the terms of the license agreement, the licensee’s rights are exclusive for a period of thirty years. The licensee may not transfer its rights and obligations under the license agreement without the prior written consent of the Company, which consent shall not be unreasonably withheld.

In addition to the license agreement, the Company and licensee are parties to an exclusive sales agreement. Under this agreement, the Company will provide branded product to the licensee for resale in Japan throughout the term of the license agreement. Product sold under the exclusive sales agreement is priced at fair market value, consistent with the Company’s past practice.

30

10. Geographic Segment Information

Revenue, gross profit and income/(loss) before income tax provision (and minority interest where applicable) for each of the three years in the period ended May 31, 2008 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, 2008
Net sales to unaffiliated customers	$	109,580		$	229,041	$	13,949	$	17,101		$	––		$	369,671
Transfers between geographic areas		107,844			58		113,481		––			(221,383	)		––
Total revenue	$	217,424		$	229,099	$	127,430	$	17,101		$	(221,383	)	$	369,671
Gross Profit		17,658			3,028		8,043		3,979			13			32,721
Depreciation Expense		1,077			73				61						1,211
Interest Expense		4,189			814		208		84						5,295
Income from equity method investees		8,658													8,658
Income/(loss) before income taxes and minority interest		1,716			265		6,996		764			13			9,754
Investment in equity method investees		11,520													11,520
Identifiable assets at May 31, 2008		162,911			49,877		22,957		8,720			(35	)		244,430
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
Depreciation Expense		1,246			71				62						1,379
Interest Expense		4,772			1,030				54						5,856
Income from equity method investees		3,913													3,913
Income/(loss) before income taxes		(11,518	)		316		6,356		89			6			(4,751	)
Investment in equity method investees		3,437													3,437
Identifiable assets at May 31, 2007		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
Depreciation Expense		1,069			70				35						1,174
Interest Expense		3,048			707				31						3,786
Income from equity method investees		(537	)												(537	)
Income/(loss) before income taxes		(1,382	)		297		1,881		(45	)		15			766
Investment in equity method investees		(476	)												(476	)
Identifiable assets at May 31, 2006		167,267			58,600		29,081		8,819			(55	)		263,712

31

Revenue and gross profit for each of the three years in the period ended May 31, 2008 classified by product were as follows (in thousands):

	Polished		Rough		Total
Year ended May 31, 2008
Net Sales	$	165,752	$	203,919	$	369,671
Gross Profit	$	18,766	$	13,955	$	32,721
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

11. 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. The equity method of accounting is used for investments in associated companies in which the Company generally has an interest of 50% or less. The Company evaluates its investments in associated companies in accordance with FIN 46 (R) “Consolidation of Variable Interest Entities”. 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)

	2008		2007		2006
Revenues	$	569,617	$	416,151	$	128,784
Gross profit		58,161		36,395		1,238
Income/(loss) before tax		28,355		13,682		(633	)
Net income/(loss)		28,355		13,682		(633	)
Current assets		124,045		88,381		13,154
Non-current assets		763		1,285		410
Current liabilities		96,418		77,530		8,547
Non-current liabilities		12,436		12,123		––

The Company’s evaluation of its investments in associated companies in accordance with FIN 46 (R) “Consolidation of Variable Interest Entities—An Interpretation of ARB No. 51” identified two variable interest entities included in the results above in which the Company was not the primary beneficiary. The Company has a 30% equity investment in Gemang Diamantes Angola Ltd. and Gulfdiam DMCC. The Company’s estimated maximum exposure to a loss as a result of its involvement with these entities are its investment of $13.8 million, advances and receivables of $13.3 million and a guarantee of a portion of one entity’s debt up to $25.0 million. The Company’s investments in unconsolidated joint ventures also includes a 50% interest in Bellataire. Additionally, the Company has consolidated the operations of Nozala Diamonds, Ltd. as of and for the year ended May 31, 2008 based on the consolidation criteria outlined in FIN 46 (R). As of May 31, 2007, Nozala Diamonds Ltd. was accounted for under the equity method of accounting, and was not consolidated due to its immateriality to the financial statements. The amount of consolidated retained earnings represented by the undistributed earnings of our unconsolidated joint ventures as of May 31, 2008 was $11.5 million.

12. Sale of Common Stock

During 2008 and 2007, the Company purchased 8,621 and 63,334 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.

13. Transactions with related parties

32

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 2008, 2007 and 2006 were $0.2 million, $0.9 million and $0.6 million, respectively.

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

14. Quarterly Results of Operations (Unaudited)

The following is a summary of the results of operations for the years ended May 31, 2008 and 2007 (in thousands, except per share data):

	First			Second			Third		Fourth
2008
Net sales	$	102,593		$	90,528		$	82,169	$	94,381
Gross profit	$	8,293		$	6,349		$	8,296	$	9,783
Net income	$	420		$	291		$	3,309	$	3,178
Basic earnings per share	$	0.05		$	0.04		$	0.40	$	0.39
Diluted earnings per share	$	0.05		$	0.03		$	0.40	$	0.38
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

33

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, 2008 and 2007 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended May 31, 2008. 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, 2008, and 2007 and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2008, in conformity with accounting principles generally accepted in the United States.

BDO Seidman, LLP

New York, NY

September 4, 2008

34

Corporate Information

Corporate Headquarters 19 West 44^th Street
New York, New York 10036
Telephone (212) 972-9700 Directors and Officers 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 Registrar and Transfer Agent 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

35

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

Exhibit 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, 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) 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

d) 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, 2008
	By:	/s/ Leon Tempelsman
		Leon Tempelsman President and Chief Executive Officer

EX-31.2

Exhibit 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, 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) 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

d) 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, 2008
	By:	/s/ William H. Moryto
		William H. Moryto Vice President and Chief Financial Officer

EX-32.1

Exhibit 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, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Leon Tempelsman, 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, 2008
	By:	/s/ Leon Tempelsman
		Leon Tempelsman President and Chief Executive Officer

EX-32.2

Exhibit 32.2

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, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William H. Moryto, 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, 2008
	By:	/s/ William H. Moryto
		William H. Moryto Vice President and Chief Financial Officer