UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K

(Mark One)
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934

For the fiscal year ended December 31, 2000

[ ] 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: 000-23329

Charles & Colvard, Ltd. (formerly C3, Inc.)
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(Exact name of Registrant as specified in its charter)

North Carolina 56-1928817
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(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)

3800 Gateway Boulevard, Suite 310, Morrisville, N.C. 27560
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (919) 468-0399
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Securities registered pursuant to Section 12(b) of the Act:

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

Common Stock, no par value per share
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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 ___

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].

The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 28, 2001 was $13,447,714. On February 28, 2000 there
were 13,447,714 outstanding shares of the Registrant's common stock.

DOCUMENT INCORPORATED BY REFERENCE

Certain portions of the Proxy Statement of the Registrant for the Annual Meeting
of Shareholders to be held on May 14, 2001 have been incorporated by reference
into Part III of this Annual Report on Form 10-K.

FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements that relate
to any plans, objectives, estimates and goals. Words such as "expects,"
"anticipates," "intends," "plans," "believes" and "estimates" and variations of
such words and similar expressions identify such forward-looking statements. Our
business is subject to numerous risks and uncertainties, including variability
in our quarterly operating results, an undeveloped market for our products,
limited distribution channels and our dependence on third parties. These and
other risks and uncertainties, many of which are addressed in more detail below
in the sections entitled "Business Risks" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," could cause our
actual results and developments to be materially different from those expressed
or implied by any of these forward-looking statements.

Part I

ITEM 1. BUSINESS

Introduction

We are Charles & Colvard, Ltd. (formerly C3, Inc.), a North Carolina corporation
that manufactures, markets and distributes Charles & Colvard created moissanite
jewels (also called moissanite or moissanite jewels) for sale in the worldwide
jewelry market. Moissanite, also known by its chemical name, silicon carbide
(SiC), is a rare, naturally occurring mineral found primarily in meteorites. As
the sole manufacturer of scientifically-made moissanite jewels, we are creating
a unique brand image which positions moissanite as a jewel in its own right,
distinct from all other jewels based on its fire, brilliance, luster, durability
and rarity.

Our moissanite jewels are made from SiC crystals grown by Cree, Inc. Cree has an
exclusive license to a patent related to a process for growing large single
crystals of SiC. We know of no other producers of SiC that could currently
supply lab-grown SiC crystals in qualities, sizes or volumes suitable for use as
moissanite jewels. We have certain exclusive licenses and supply rights with
Cree for SiC materials to be used for gemstone applications. One of our founders
and our former Chief Executive is a brother of the Chief Executive Officer of
Cree. Based on the shareholdings reported in Cree's Proxy Statement dated
September 27, 2000, certain of Cree's officers and directors own approximately
1.5% of our outstanding common stock.

From our inception in June 1995 through June 30, 1998, we were a development
stage enterprise, devoting our resources to fund research and development of
colorless, scientifically made moissanite jewels. At the same time, we assembled
a management team, conducted market research and developed our strategic
business plans. We began shipping moissanite to authorized retail jewelers in
Atlanta and Miami/Ft. Lauderdale during the second quarter of 1998. At that
time, we launched limited consumer-focused advertising and promotion activities
in those areas. In addition, we entered into exclusive distribution agreements
with a number of international distributors.

Through the first half of 1999, we limited our efforts to expand the
distribution of moissanite jewels as a result of insufficient product
availability and our lack of confidence in the quality of the SiC crystals we
were receiving. Late in the second quarter of 1999, we began to receive
indications that the quality of the SiC crystals was improving rapidly. The rate
of improvement in the quality of the SiC crystals continued to accelerate
through the end of 1999, far exceeding our expectations. At the same time, we
experienced a decline in sales of moissanite jewels during the third quarter of
1999 as a result of the following:

o a slow growth in the addition of domestic retailers;

o lack of targeted retailer-driven marketing programs abroad; and
o poor overall jewelry market performance in certain international
markets.

The improved supply of SiC crystals along with the decrease in sales led to a
significant increase in inventories of moissanite jewels. In December 1999, we
rescheduled approximately 50% of the expected shipments of SiC crystals from
Cree from the first half of 2000 to the second half of 2000. In addition, in
December 2000, we agreed with Cree on a framework for 2001, pursuant to which we
will be obligated to purchase SiC crystals only upon issuance and Cree's
acceptance of purchase orders.

With the improvements in the supply of saleable moissanite jewels, we launched
our strategic global marketing program in the fourth quarter of 1999 to spur
consumer awareness of moissanite jewels. During 2001, this program is being
refocused to emphasize use of public relations activities to increase consumer
brand awareness while reducing higher cost print and media advertising. In
addition, in March 2000, we entered into distribution agreements with Stuller
Settings, Inc. and Rio Grande, two of the largest suppliers of jewelry-related
products to the jewelry industry, for the North American distribution of
moissanite. We have also entered into several agreements with domestic jewelry
manufacturers. Through these agreements with Stuller, Rio Grande and jewelry
manufacturers and the brand awareness created by our marketing program, our goal
is to rapidly increase the introduction of moissanite into the domestic jewelry
market while maintaining average selling prices. However, because of the early
stage of development of these strategic efforts, we have no assurance that these
efforts will be successful.

We made significant investments in our branding program and in developing our
manufacturing and operational infrastructures during the fourth quarter of 1999
and through 2000, all in anticipation of future significant and rapid growth.
During the third and fourth quarters of 2000, we restructured our operations to
reduce our overall general and administrative expense levels in order to
conserve cash and attempt to position the Company to achieve profitability in
the future. Additionally, research and development expenses under the
Development Agreement with Cree were suspended effective as of January 2001.

Our strategy for 2001 is to become profitable during the year by achieving
modest growth in sales while reducing marketing and advertising costs,
maintaining our lower general and administrative expense levels and curtailing
research and development expenses. We believe that our sales can increase as the
distribution of moissanite jewels expands domestically and internationally. Our
management believes that our current infrastructure and stage of product
development can support a significant growth in sales. Although our goal is to
achieve profitability in 2001, we expect to continue operating at a loss through
at least some of 2001. Moreover, we cannot be sure that we will ever achieve or
sustain sales increases or profitability.

The Jewelry Market

In 1998 (most recently published data), worldwide retail jewelry sales exceeded
$100 billion, and jewelry sales in the United States were approximately $45
billion. In 1998, the volume of natural diamond, ruby, emerald and sapphire
imported into the U.S. for jewelry consumption exceeded 33 million carats. The
same year more than 175 million carats of other precious and semi-precious
gemstones and 275 million carats of synthetic gemstones were imported into the
U.S. In comparison, slightly more than 55,000 carats of moissanite were shipped
worldwide in 1999, demonstrating the rarity of this product.

Diamond Jewelry. In 1998, diamond jewelry sales were estimated to be in excess
of $54 billion worldwide and over $22 billion in the U.S. In 1998, approximately
70 million pieces of diamond jewelry were sold worldwide, of which nearly 34
million were sold in the U.S. Over 90% of the diamond jewelry pieces sold
domestically used settings other than engagement rings (i.e., pendants,
bracelets, other rings, earrings, etc.).

Distribution Channels. Traditionally, consumers have purchased jewelry through
independent and chain jewelry stores and department stores. However, in the past
two decades, non-traditional distribution channels such as catalog showrooms,
mass-market discounters, price clubs, mail order, TV shopping channels and
electronic commerce on the internet have emerged. Moissanite is primarily sold
to consumers through single and multiple location independent jewelry stores.
Approximately half of the estimated 40,000 retail jewelry outlets in the United
States are independent jewelry stores.

Moissanite

Moissanite is a rare, naturally occurring mineral found primarily in meteorites.
Naturally occurring moissanite is generally very small in size and dark green or
black in color and is not a commercially viable gemstone material. Therefore, we
expect only lab-grown SiC crystals to provide a meaningful source of moissanite
for jewels.

It is generally accepted that, in addition to carat size, the most important
characteristics of a gemstone are beauty, durability and rarity. The beauty of a
gemstone is determined by its color, brilliance, "fire" and luster. The
brilliance of a gemstone is measured by its refractive index, or the extent to
which it reflects light. The "fire" of a gemstone, or the breaking of light rays
into the spectrum of colors, is measured by its dispersion. Luster is the amount
of light that is reflected back to the observer from the surface of the
gemstone. The durability of a gemstone is determined by its hardness, or
resistance to scratching, and its toughness, or resistance to chipping or
cleaving. The gemstone's hardness also determines the extent to which brilliance
and "fire" can be highlighted by cutting with sharp, highly polished facets.
Rarity is the availability or perceived availability of a gemstone.

Moissanite jewels have unique fire, brilliance, luster, durability and rarity.
The refractive index and dispersion of moissanite jewels are higher than those
found in other fine gemstones. We believe that the hardness of moissanite jewels
is greater than all known gemstone materials except diamond. As a result,
moissanite jewels, like diamond, can be cut with sharp, highly polished facets
that accentuate their brilliance and "fire." The cutting specifications for
moissanite jewels are designed to maximize the brilliance and fire inherent in
the material. Additionally, we evaluate the finished jewels to exacting
standards with automated video-imaging equipment and specially trained quality
control personnel. Due to the very rare natural occurrence of moissanite and the
proprietary and technical limitations in producing mass quantities of jewel
quality moissanite, we believe that moissanite is among the rarest of jewels.

In addition, other physical properties of moissanite jewels compare favorably to
fine gemstones and will aid in jewelers' acceptance of our products. Moissanite
jewels, like diamond, can withstand high temperatures, which allows jewelers to
make extensive repairs to the jewelry setting without removing the jewel and to
use the same basic methods that are used to repair diamond jewelry.

Because of its unique atomic structure, moissanite can be grown in a variety of
colors including blue, green or yellow. Additionally, although none have been
produced to date, the color red is theoretically possible to grow. To date, we
have focused our development, manufacturing and distribution efforts on the
colorless form of moissanite although we have sold limited quantities of green
moissanite.

The following table compares the physical properties of moissanite jewels with
other fine gemstone materials:

Comparison Chart (1)

Hardness Refractive Specific
Description (Mohs Scale) (2) Toughness Index Dispersion Gravity
----------- ---------------- --------- ----- ---------- -------

Diamond 10 Excellent* 2.42 .044 3.52
C&C Created
Moissanite (3) 9.25-9.50 Excellent 2.65-2.69 .090-.104 3.14-3.22
Sapphire & Ruby 9 Excellent 1.76-1.78 .018 3.90-4.00
Emerald 7.5 Poor to Good 1.56-1.60 .014 2.69-2.75
*Except in cleavage directions.

1. Sources: Gemological Institute Of America, Gem Reference Guide For The GIA
Colored Stones, Gem Identification And Colored Stone Grading Courses 32-35,
65-82, 87-90 (1995); Cornelius S. Hurlburt, Jr. & Robert C. Kammerling,
Gemology 320-324 (2d Ed. 1991); Kirk-Othmer Encyclopedia Of Chemical
Technology 891-906 (4th Ed. 1994); Institution Of Electrical Engineers,
Properties Of Silicon Carbide (Gary L. Harris, Ed., 1995); Robert Webster,
Gems: Their Sources, Descriptions and Identification 889-940 (5th Ed.
1994); W. Von Muench, "Silicon Carbide" in Landolt-Boemstein Numerical Data
and Functional Relationships in Science and Technology, New Series, Group
III, Vol. 17C, pp. 403-416 and 585-592 (M. Schultz And H. Weiss, Eds.,
1984); Kurt Nassau, Shane F. McClure, Shane Elen & James E. Shigley,
"Synthetic Moissanite: A New Diamond Substitute" Gems & Gemology, Winter
1997, 260-275; Kurt Nassau. "Moissanite: A New Synthetic Gemstone
Material", Journal of Gemmology, 1999, 425-438; Kurt Nassau.

2. The Mohs Scale is a relative scale only, and quantitative comparisons of
different gemstone materials cannot be made directly using the Mohs Scale.
Moissanite gemstones are approximately one-half to one-third as hard as
diamond.

3. With the exception of the "Moissanite: A New Synthetic Gemstone Material"
and "Synthetic Moissanite: A New Diamond Substitute" articles, the physical
properties of moissanite jewels set forth in the preceding table utilized
materials from SiC crystals produced by parties other than the Cree or us.
These crystals had various sizes, colors and atomic structures that we
believe made them unsuitable for use as a gemstone. We have conducted tests
on the hardness, toughness and refractive index of samples of our jewels,
and the results of these tests are consistent with the results reported in
this table. Because we, through development programs with Cree, continue to
work toward improved quality of SiC crystals, the specific properties of
the moissanite jewels that may eventually be commercialized are not now
known. However, we believe that the physical properties of our moissanite
jewels will fall within the ranges of the moissanite shown in this table.

Products and Product Development

Moissanite Jewels. We primarily sell colorless moissanite jewels cut in a
variety of shapes including round, princess, radiant, oval, marquise, pear and
trillion shapes in sizes ranging from 2 to 9mm (approximately .05 to 2.3
carats). We have also distributed a limited quantity of green moissanite jewels
to evaluate the market potential of colored moissanite. We may elect to offer,
from time to time, additional cuts, sizes or colors of moissanite jewels.

Amended and Restated Exclusive Supply Agreement with Cree. On June 6, 1997, we
entered into an Amended and Restated Exclusive Supply Agreement (Exclusive
Supply Agreement) with Cree pursuant to which we have agreed to purchase from
Cree at least 50%, by dollar volume, of our SiC crystal requirements for the
production of gemstones in each calendar quarter during the term of the
Agreement and Cree has agreed to supply this amount of crystals to us. Although
we are obligated to purchase only

50% of our requirements from Cree, we do not believe there are currently any
other alternative sources of supply for SiC crystals suitable for gemstones.
Therefore, at the present time, we are dependent on Cree as our sole source of
supply of lab-grown SiC crystals. Under the Exclusive Supply Agreement, Cree has
agreed not to sell SiC crystals for gemstone applications to anyone other than
us. The Exclusive Supply Agreement sets the price for SiC crystals at Cree's
loaded manufacturing cost plus a margin, which margin may increase if the price
of crystals declines below a specified amount. In December 2000, we agreed with
Cree on a framework for purchases of SiC crystals during 2001. Under the terms
of the Agreement, we will be obligated to purchase SiC crystals only upon
issuance and Cree's acceptance of purchase orders. The price paid to Cree will
be based upon a set price per gram for specified SiC crystals. We have issued
purchase orders for approximately $400,000 of SiC crystals during the second
quarter of 2001.

Under the terms of the Exclusive Supply Agreement, when our orders for SiC
crystals exceed the capacity of the existing crystal growth systems, Cree may,
at its sole discretion, require us to purchase the additional growth systems
needed or fund the cost of the systems on its own and recoup its costs by
incorporating the costs of the additional systems into the cost of the SiC
crystals. If we fund the costs of the crystal growth systems, Cree must use 100%
of the output from these systems for our needs, unless the excess production
exceeds our then-current needs, in which case Cree may sell such SiC crystals to
any of its other customers for any use other than jewel applications. The title
to these crystal growth systems passes to Cree once we have fully depreciated
them. In May 2000, we sold our crystal growth equipment to Cree for $5 million.
If Cree elects to fund the cost of additional growth systems on its own, we have
no assurance that Cree will sell all of the output from these crystal growth
systems to us or fill all of our orders, but Cree will be obligated to use the
capacity to supply the quantities that we are required to purchase.
Additionally, when Cree adds new crystal growth systems, we must commit to
purchase all of the output of the new systems for at least six months. Any delay
or reduction in the availability of SiC crystals could delay or limit our
ability to deliver and sell our moissanite jewels, which would have a material
adverse effect on our operating results.

The Exclusive Supply Agreement also restricts us from entering into numerous
types of arrangements with certain parties. See "Marketing and Distribution --
Distribution." The Agreement has an initial term through June 2005, which may be
extended for an additional ten years by either party if an order threshold is
met. We have met this order threshold and expect to extend the term of the
Agreement.

Amended and Restated Development Agreement with Cree. On July 1, 1998, we
entered into an Amended and Restated Development Agreement (Development
Agreement) with Cree in order to increase the yield of useable material in each
SiC crystal manufactured by Cree for use in the production of moissanite jewels.
In June 1998, Cree began to produce 2-inch crystals, and in March 1999 Cree
produced a 3-inch crystal meeting mutually agreed upon volumes of useable
material. A 3-inch crystal can produce approximately twice as many moissanite
jewels as a 2-inch crystal with the same percentage yield of useable material.
Future activities under the development program will focus on improving the
manufacturing process for 3-inch crystals, with continued efforts to maximize
the crystal volume and quality. The Development Agreement establishes
performance milestones, primarily focused on yield improvement, and contemplates
that we, along with Cree, will revise the performance milestones annually to
provide both parties with more flexibility to pursue further color and yield
improvements on both 2-inch and 3-inch diameter crystals. In conjunction with
the December 2000 agreement regarding the framework for SiC crystal purchases
during 2001, effective January 1, 2001, our funding obligation under the
Development Agreement is suspended through June 30, 2001. We spent $1.4 million
under development arrangements with Cree in 2000, $2.4 million in 1999 and $3.1
million in 1998.

Moissanite/Diamond Test Instrument. Jewelry industry employees commonly rely on
gemstone test instruments using thermal properties to distinguish diamond from
other gemstones or diamond simulants such as synthetic cubic zirconia. Because
the thermal properties of moissanite jewels are relatively close to those of
diamond, such instruments have not reliably differentiated between diamond and
moissanite

jewels. Although gemologists trained in the physical properties of moissanite
jewels may find a number of ways to distinguish moissanite from diamond, we
believe that a moissanite/diamond test instrument must be available to jewelers
and pawnbrokers to help prevent fraud.

Our moissanite/diamond test instrument, the Tester Model 590, which
distinguishes moissanite jewels from diamonds in the colors and clarities most
commonly sold by retail jewelers, is used in conjunction with existing thermal
test instruments. A number of other companies have introduced devices that claim
to distinguish moissanite jewels from diamonds at retail prices comparable to
the Tester Model 590. We cannot be sure that a significant market will develop
for our test instrument, that other competing devices will not be introduced or
that other readily available means will not be developed for effectively
distinguish moissanite jewels from diamond.

We have achieved our goal of assuring a reliable means for the jewelry industry
to distinguish moissanite from diamond. Therefore, we may seek other
distribution opportunities for the test instrument to allow us to focus
primarily on the marketing and distribution of moissanite jewels.

Moissanite/Diamond Test Instrument Component. Under a letter agreement
(Instrument Agreement) dated February 12, 1996, Cree is the sole supplier of a
proprietary component used in our Tester Model 590. Under the Instrument
Agreement, which expires in 2016, we are obligated to purchase all of our
requirements for that component from Cree, and Cree must sell those components
exclusively to us. In addition, we are obligated to pay Cree a royalty of 2.5%
of net sales of all test instruments incorporating the Cree component. Although
to date Cree has supplied a sufficient quantity of this component, if Cree were
to fail to deliver this component, as required, we would not be able to
manufacture additional test instruments.

Intellectual Property

Intellectual Property of the Company. We have U.S. product and method patents
for moissanite jewels, expiring in 2015, under which we have broad, exclusive
rights to manufacture, use and sell moissanite jewels in the United States. We
have pending applications for these same patents in a number of foreign
jurisdictions. In addition, we have a U.S. apparatus and method patent for the
Tester Model 590, expiring in 2016, that covers the physical structure and the
testing techniques employed in the Tester Model 590. This patent gives us
exclusive rights to manufacture and sell the Tester Model 590 in the United
States. We also have other patents and patent applications pending related to
certain methods of producing moissanite jewels and related technologies. In
addition, we have certain trademarks and pending trademark applications that
support the Charles & Colvard moissanite branding strategy. Although we intend
to enforce our patent and trademark rights and vigorously prosecute all our
patent applications, we cannot be sure that such actions will be successful,
that any additional patents will be issued, that any issued patent will not be
challenged, invalidated or circumvented or that any issued patent will have any
competitive or commercial value.

Our success and our ability to compete successfully depends heavily upon our
proprietary technology. In addition to our patents and pending patents, we rely
on trade secret laws and employee, consultant and customer confidentiality
agreements to protect certain aspects of our technology. We cannot be sure that
we will be able to protect our proprietary technology from disclosure or that
others will not develop technologies that are similar or superior to our
technology.

While we have not received any claims that our products or processes infringe on
the proprietary rights of third parties, we have no assurance that third parties
will not assert such claims against us with respect to our existing and future
products. Litigation to determine the validity of any third party's claims could
result in significant expense and divert the efforts of our technical and
management personnel, whether or not such litigation is determined in our favor.
In the event of an adverse result of any such litigation, we could be required
to expend significant resources to develop non-infringing technology or to
obtain

licenses for, and pay royalties on the use of, the technology subject to the
litigation. We have no assurance that we would be successful in such development
or that any such license would be available on commercially reasonable terms.

Proprietary Technology of Cree. Cree, our current source for development and
supply of lab-grown SiC crystals, has developed or licensed numerous proprietary
processes for the growth of SiC crystals for use in semiconductor, laser and
other applications. Our founders recognized the potential use of SiC as a
moissanite jewel and obtained the exclusive right to purchase SiC crystals from
Cree for moissanite jewels and gemological instrumentation. We believe that Cree
is currently the only producer of SiC crystals in sizes and qualities suitable
for commercial production of moissanite jewels. Cree has significant proprietary
rights related to its processes for growing SiC crystals, including an exclusive
license on a patent for a process of growing large single crystals of SiC. This
patent expires in years ranging from 2006 to 2011, depending on the country in
which issued. In addition, Cree has a patent for a process for growing colorless
SiC and other patents relating to certain aspects of its SiC crystal growth
process. To further protect its proprietary SiC crystal growth process, Cree
internally produces the crystal growth systems used to produce its SiC crystals.
We have a royalty-free, perpetual license to use the technology covered by
Cree's colorless SiC patent in moissanite jewel applications.

We depend heavily for our success on Cree's technology and ability to
successfully produce SiC crystals suitable for the production of Charles &
Colvard created moissanite.

Manufacturing

The production of moissanite jewels includes the following steps:

o growing SiC crystals;
o designing shapes with proportions unique to moissanite jewels;
o cutting crystals into preforms that will yield jewels of an approximate
carat weight and millimeter size;
o faceting preforms into jewels; and
o inspecting, sorting and grading faceted jewels.

Growth of SiC Crystals. Cree grows SiC crystals for us in accordance with the
terms of the Exclusive Supply Agreement, as amended. Under the Exclusive Supply
Agreement, Cree is required to sell to us all of the crystals grown in a
specified number of crystal growth systems without charging us for such crystal
growth systems. In addition, Cree must sell to us all the crystals grown in the
crystal growth systems acquired by us from Cree, unless Cree's capacity exceeds
our then-current needs, in which case Cree may sell SiC crystals produced by
these systems to any of its other customers for any use other than moissanite
jewel applications. Currently, we are not using 100% of our available crystal
growth capacity at Cree. We may increase our production capacity from Cree upon
appropriate notice to Cree. If we order a quantity of crystals that will require
Cree to acquire additional crystal growth systems, Cree may elect, in its sole
discretion, to have us purchase the additional growth systems that will be
needed or to fund the costs on its own and recoup its costs by incorporating the
costs of the systems into the cost of the SiC crystals sold to us.

We routinely evaluate the yield and quality of saleable moissanite jewels from
SiC crystals being produced by Cree. The yield of saleable moissanite jewels
from each crystal is the most significant factor affecting the volume and cost
of moissanite jewels available for sale. Yield of saleable moissanite jewels is
dependent on the quality of the crystals. Improvements in crystal quality
increase the volume, or yield, of moissanite jewels from a crystal and decrease
the cost of each moissanite jewel produced.

From mid-1999 to mid-2000, Cree showed marked improvement in SiC crystal
quality, resulting in an increased yield of saleable jewels from both 2-inch and
3-inch diameter crystals that far exceeded our expectations. Beginning in
mid-2000, as we reduced our production with Cree, the crystal quality
stabilized.

Designing Shapes with Proportions Unique to Moissanite Jewels. Maximizing the
light reflecting from a faceted moissanite jewel requires the design of shapes
with unique proportions and angles. We create proprietary designs, using
computer modeling, to display the maximum light reflection based on the optical
properties (i.e., refractive index, dispersion and luster) of moissanite jewels.
The first shape we developed applying these computer models was a unique version
of the round brilliant cut. Most recently, we have designed oval, marquise, pear
and heart fancy shapes that eliminate dark areas commonly found in other
gemstones with similar cuts. We believe these proprietary designs are the basis
for the superior optical performance quality observed in faceted moissanite
jewels.

Preforms. We divide all SiC crystals through slicing and dicing processes into
preforms in sizes suitable for faceting into predetermined calibrated-size
moissanite jewels. We use readily available automated and computerized equipment
along with proprietary technology developed in-house to slice and dice crystals
into preforms. We believe that this equipment will enable us to maximize the
number of preforms we can obtain from each SiC crystal.

Faceting Moissanite Jewels. The faceting of preforms is a critical stage in
obtaining quality jewels. The techniques and skills used in faceting moissanite
jewels differ somewhat from those used in faceting diamonds and other gemstones.
We currently outsource the faceting of our moissanite jewels, other than
faceting for research and product development purposes, which we conduct
internally. We have three suppliers of volume faceting services, all located in
Asia, and we have been satisfied with the capabilities and performance of these
three suppliers. We intend during 2001 to source faceting services primarily
from two of these existing suppliers, and we will depend on their ability to
provide an adequate quantity of quality faceted moissanite jewels. We cannot be
sure that they will be able to continue to produce our quality specifications
for faceting and meet our quantity and time requirements.

We have entered into a multi-year agreement with our primary supplier of
faceting services, John M. Bachman, Inc. (JMB). Pursuant to this agreement and
related amendments, we advanced $380,000 to JMB to expand the production
facilities of its affiliate which facets our moissanite jewel preforms.
Approximately $40,000 of the advanced funds remains outstanding as of February
28, 2001, and JMB is repaying these funds through reductions to the per piece
cutting charges. We have a right of first refusal to acquire any excess gemstone
cutting capacity from JMB's affiliate and any equity securities offered by JMB
or its affiliate. The term of our agreement with JMB is through December 31,
2003; however, we have the right to terminate the agreement at any time upon 90
days written notice. Under this agreement, JMB has agreed to grant, and to cause
its affiliates to grant, to us a perpetual, non-exclusive, royalty-free license
to use any inventions or proprietary information developed by or for JMB or its
affiliates that is useful in the faceting of moissanite jewels.

Inspection, Sorting and Grading. Once faceted moissanite jewels are currently
returned to us, we inspect, sort and grade them. During this stage, specially
trained personnel individually examine and grade each moissanite jewel against
certain quality parameters. In addition, we process a sample of each batch
through an image analyzer for exacting quality control. This phase of
manufacturing is relatively labor-intensive and requires skills not readily
available in the general work force. In the future, we may elect to outsource
certain portions of this stage of the manufacturing process to an independent
third party. Any third parties to which these processes are outsourced will be
required to adhere to our rigorous quality control and monitoring standards. We
have no assurance that we will be able to hire or retain sufficient numbers of
appropriately skilled personnel for this phase of manufacturing, find and enter
into acceptable agreements with third party vendors or that such vendors will be
able to provide accurate inspection, sorting and grading services on a timely
basis.

Moissanite/Diamond Test Instrument. We contracted with an unaffiliated third
party for the assembly of our moissanite/diamond test instrument from components
produced by third parties. The initial production runs are complete, and we
believe that, except for a component containing a proprietary semiconductor chip
made by Cree, the components and assembly functions would be readily available
from a wide variety of other suppliers for additional production volumes.

Marketing and Distribution

Marketing

Domestic. We continued to expand distribution channels throughout 2000, and we
are receiving valuable feedback from both our distribution and manufacturing
partners as how to refine our marketing to address both retail jewelers and
consumers. Beginning in the fourth quarter of 1999 and continuing throughout
2000, we executed a global marketing strategy, initially focusing on advertising
to our target consumer (working females ages 25-55) in the US. We focused that
advertising on network and cable television, in-theater movie advertising and
print advertising, primarily in high-end fashion magazines.

We believe our 2000 marketing and advertising strengthened the image and
reputation of moissanite and Charles & Colvard, and while we did not receive an
immediate or direct increase in our sales, the advertising helped introduce
moissanite to consumers. The advertising also encouraged more retailers to carry
the product and provided support to our existing customers. We believe that the
marketing and advertising program resulted in a consistent and positive message
for moissanite and set the stage for our future public relations and advertising
efforts, positioning moissanite as a unique and desirable product in a crowded
jewelry marketplace.

Public relations activities have been an integral and important component of our
marketing strategy. Key public relations activities in 2000 included the
following:

o developing relationships with various celebrities to wear jewelry
featuring Charles & Colvard created moissanite jewels;
o generating coverage in fashion and popular press; and
o developing news stories to be carried on local television news
programs.

We believe that the value of celebrities wearing moissanite is the trend-setting
ability of these individuals who will expand awareness among influential
Hollywood celebrities, drive consumer demand and help us in our efforts to
expand distribution.

Our press coverage during 2000 included 46 television stories, 82 newspaper
articles and 69 magazine articles (consumer, jewelry trade and marketing trade).
For example, in 2000 moissanite jewels were featured in People, Marie Claire,
Reuters News Service, and ABC's "The View," "E Entertainment Television" and FOX
Television. The corresponding gross consumer impressions from this coverage in
2000 exceeded 28 million in the U.S. alone.

Our domestic goal for 2001 is to create more consumer impressions for moissanite
than were achieved in 2000 while making smaller investments in advertising. We
will focus on public relations programs concentrating on grassroots marketing
and thought leadership with women influential to our target market.
Additionally, we will continue to focus on generating consumer impressions
through newspaper and magazine articles and television news segments. For
example, in February 2001, moissanite jewels were featured in an article in USA
Today and on ABC's "20/20" news program. These two pieces alone earned gross
consumer impressions in excess of 16 million.

We have also planned limited, focused advertising in Professional Jeweler and
similar jewelry trade publications during 2001. In addition, we have
participated or plan to participate in the following jewelry trade shows for the
first half of 2001:

o JCK Orlando (late January)
o Professional Jeweler, Fine Jewelry Show at Tucson (early February)
o SJTA, Atlanta Jewelry Show (late February)
o JCK Las Vegas (early June)

International. Internationally, we work with our distributors to develop
appropriate advertising and marketing campaigns targeting specific geographic
regions, building on the marketing themes developed in the US. Pursuant to our
international distribution agreements, we provide co-op incentives to use
approved advertising that supports the brand image for Charles & Colvard created
moissanite. The exclusive distributors are responsible for all advertising and
marketing efforts and expenses in their territories. We may provide other
advertising and promotion incentives in other international markets to grow
jewelry trade and consumer awareness.

We plan to advertise to the international jewelry trade through GEMKEY and
Jewelry News Asia. During the first half of 2001, we plan to participate in
Messe Basel, the largest and most prestigious international jewelry show.

Distribution

Domestic. We believe that moissanite is best sold through retail channels in
which the retailer has an adequate opportunity to effectively educate the
consumer on moissanite's unique qualities.

We began shipping moissanite to our authorized retail jewelers in Atlanta and
Miami/Ft. Lauderdale during the second quarter of 1998, and, in July 1998, we
launched limited consumer-focused advertising and promotion activities in those
areas. During the second half of 1998, and through the first half of 1999, we
limited our efforts to expand the distribution of moissanite jewels as a result
of insufficient product availability and our lack of confidence in the quality
of the SiC crystals we were receiving. As our confidence in our supply of
moissanite increased, we attempted to expand the number of retailers carrying
moissanite during the second half of 1999. However, we were not able to increase
the number of these jewelers necessary to achieve our business objectives.

By the end of 1999, 237 domestic independent jewelers were carrying Charles &
Colvard created moissanite. Sales in 1999 to our independent jewelers totaled
approximately $4.1 million. In order to more rapidly expand the distribution of
moissanite, in May 2000 we transitioned from selling moissanite jewels directly
to independent retail jewelers to allowing independent retail jewelers to access
loose moissanite jewels and moissanite jewelry through respected, established
jewelry distributors. We have entered into distribution agreements for North
America with two large distributors, Stuller Settings, Inc. and Rio Grande, and
certain jewelry manufacturers. Established in 1970, Stuller is one of the
world's largest suppliers of jewelry-related products, providing over 100,000
different items to the jewelry industry. Through its innovative manufacturing
and distribution techniques, Stuller provides timely delivery of its products to
over 40,000 retail jewelry customers, primarily in North America. Stuller's
products include findings (jewelry ready to have a gemstone mounted in it),
finished jewelry, loose diamonds, colored gemstones, tools and supplies and
metals. Rio Grande was started over 50 years ago and is a respected industry
leader in jewelry manufacture and distribution. Rio Grande carries over 24,000
products for the jewelry trade, and the Rio Grande Gems & Findings catalog is
the largest catalog of its type in the world. Rio Grande's customer-base is
primarily focused on manufacturers of jewelry from independent jewelers that
create custom jewelry to the largest manufacturers of jewelry in North America.

Additionally, we have entered into arrangements with several jewelry
manufacturers that design and manufacture lines of jewelry containing moissanite
jewels. We have granted these jewelry manufacturers non-exclusive rights to sell
their lines of jewelry to independent retail jewelers as well as jewelry store
chains and department stores that meet certain predetermined criteria. Jewelry
retailers have access to loose moissanite jewels from Stuller and Rio Grande and
to jewelry containing moissanite jewels from Stuller and these jewelry
manufacturers.

We believe that moissanite jewels provide retailers with an opportunity to earn
a profit margin comparing favorably to other jewelry products and allow the
retailer to distinguish our product line from other jewelers in the highly
competitive retail jewelry market. We also believe these margins create
incentives for retailers to maximize their sales and promotional efforts,
resulting in additional consumer demand for our moissanite jewels. To date,
those jewelers that carry and promote moissanite have reported significant
success with the product.

We believe that distributing moissanite jewels through Stuller and Rio Grande as
well as certain jewelry manufacturers and designers provides retail jewelers
with maximum flexibility to develop their businesses with moissanite. Those
jewelers that prefer to create their own jewelry to meet the needs of their
individual market areas will be able to purchase the loose jewels through
Stuller or Rio Grande, with which many of them already have relationships. Those
jewelers that wish to purchase finished jewelry for sale in their store may do
so either through Stuller or any of the jewelry manufacturers working with
moissanite.

The quality, design and workmanship of the settings chosen by Stuller,
manufacturers, designers and retailers affects consumer perception and
acceptance of our products, and our control over these elements is limited to
our pricing policy. Beyond that, we believe that the success of Charles &
Colvard created moissanite will be determined by the power and the precision of
our brand-building program. We continue to evaluate the most appropriate
structure for distribution in North America and may, in certain circumstances,
enter into additional distribution arrangements, including arrangements with
selected department stores and distribution channels such as moissanite retail
stores, catalog sales or internet sales.

International. We currently distribute moissanite jewels in substantially all of
Western Europe and certain territories in Southeast Asia. We have approximately
30 international distributors and intend to increase this number. All sales to
international customers are denominated in U.S. dollars. Generally, we require
full payment before merchandise is shipped to these customers. However, once a
customer has established a purchase history, we may grant net 30 day payment
terms to our international customers.

The Exclusive Supply Agreement with Cree prohibits us, without Cree's consent,
from entering into an exclusive marketing or distribution agreement with DeBeers
or any party that Cree reasonably believes is affiliated with any of the
following parties:

o DeBeers;
o the Central Selling Organization (the international cartel of diamond
producers);
o any party whose primary business is the development, manufacture,
marketing or sale of diamond gemstones; or
o any non-gemstone and non-jewelry industry competitor of Cree.

These provisions may limit our potentially available avenues of distribution and
could prevent us from entering into certain potentially profitable transactions.

Diamond/Moissanite Test Instrument. We sell our moissanite/diamond test
instrument directly to jewelers, gemologists and pawnbrokers through direct
mailings, advertisements in trade publications and at trade shows. We shipped
approximately 1400 instruments in 2000. In addition, we have retained
non-exclusive distributors to distribute the test instrument in some U.S.
markets and through exclusive distribution agreements in certain territories
internationally. We may enter into other distribution agreements, or may
license, form joint ventures or sell certain rights to the test instrument as we
deem appropriate.

Competition

Moissanite jewels. Gemstone materials can be grouped into three types:

o natural gemstone, which is found in nature;
o synthetic gemstone, which has the same chemical composition and
characteristics of natural gemstone but is created in a lab; and
o simulated or substitute material, which is similar in appearance to
natural gemstone but does not have the same chemical composition.

Our moissanite jewel, which is positioned as a unique new jewel, may compete
with fine gemstones such as ruby, sapphire, emerald and tanzanite as well as
with natural and treated diamonds and existing synthetic gemstones such as
synthetic cubic zirconia. We may also face competition from additional gemstones
such as synthetic diamonds, synthetic diamond films and other sources of
synthetic moissanite not presently available in qualities, sizes and volumes
suitable for use as gemstones. Most of the suppliers of diamonds and other fine
gemstones, as well as the suppliers of synthetic gemstones, have substantially
greater financial, technical, manufacturing and marketing resources and greater
access to distribution channels.

The worldwide market for large, uncut high-quality diamonds is significantly
consolidated through the Central Selling Organization, a cartel led by DeBeers.
The cartel has a major impact on the worldwide supply and pricing of these
diamonds at both the wholesale and retail levels. Although we believe that our
jewels appeal primarily to the consumer who would not otherwise purchase
comparable diamond jewelry, diamond producers may undertake additional marketing
or other activities designed to protect the diamond jewelry market against sales
erosion from consumer acceptance of moissanite jewels.

We may also face competition from treated diamonds. Treated diamonds, which are
natural diamonds with imperfections or flaws that have been altered in some
manner to enhance their appearance, are presently available in the jewelry
industry and are generally less expensive than diamonds of similar size, cut and
color, which have not been altered. Synthetic diamond in gemstones or film form
may also become available in the marketplace and compete with our jewels.
Synthetic diamonds are regularly produced for industrial applications, but we
believe that gemstone quality synthetic diamonds presently cannot be produced at
prices competitive with those currently offered for our colorless moissanite
jewels. The primary producers of these synthetic diamonds are DeBeers, Sumitomo
and GE. There are also a number of Russian producers of synthetic diamonds for
industrial uses. In addition, development-stage companies, such as the Gemesis
Corporation headquartered in Florida, are working to develop cost effective
means of producing gem quality synthetic diamonds. Synthetic diamond films can
be grown at commercially viable prices in thicknesses that can be applied to
other surfaces, but these films adhere well to only a few minerals such as
diamond, silicon and SiC (moissanite). There could, however, be technological
advances that would enable competitively priced synthetic diamond in gemstone or
film form to be offered.

Although we believe that our products have a proprietary position, we could face
competition from other companies that develop competing SiC technologies. Some
of these technologies could be developed by

producers of SiC used for other industrial applications. Manufacturers of
industrial SiC products include The Carborundum Corporation, for abrasive uses,
and Cree, Siemens AG, ABB and Northrup Grumman Corporation, for semiconductor
uses. We believe that Cree is currently the only supplier of SiC crystals in
colors, sizes and volumes suitable for gemstone applications, and we believe
that the patents owned or pending by Cree or us provide substantial
technological, legal and cost barriers to other companies' development of
colorless moissanite jewels. It is possible, however, that these or other
producers of SiC could develop SiC crystals suitable for gemstone applications
and produce moissanite jewels until we could obtain judicial enforcement of our
patent rights.

We may also face competition from synthetic cubic zirconia, the principal
existing diamond simulant and, to a lesser degree, other synthetic gemstones.
The largest producer of synthetic cubic zirconia gemstones is Signity, a new
company formed by the merger of Swarogem (a subsidiary of D. Swarovski & Co.)
and Golay Buchel. In addition, there are a significant number of other producers
of jewelry containing synthetic gemstones. Three of the largest retailers of
synthetic cubic zirconia jewelry in the United States are QVC, Home Shopping
Network and Wal-Mart. Some of the major retailers of synthetic cubic zirconia,
including QVC, have captive manufacturing divisions that produce synthetic cubic
zirconia jewelry. These producers and sellers may see their markets being eroded
by the introduction of our moissanite jewels. We believe that price is the
primary basis upon which these products will compete with our moissanite jewels.

We intend to compete primarily on the basis that the unique qualities of our
moissanite jewels are distinct from all other jewels based on their fire,
brilliance, luster and durability. In addition, we believe that the Charles &
Colvard created moissanite brand, which is being developed pursuant to our
strategic global marketing program, will create a long-term competitive
advantage for our products. Additionally, we believe that moissanite jewels have
a significant cost advantage over other fine gemstones, especially in the
one-carat size and larger. Our competitive success depends on the following:

o the willingness and ability of our jewelry distributors and other
jewelry suppliers, manufacturers and designers to market and promote
moissanite jewels to the retail jewelry trade;
o the willingness of distributors, retailers and others in the channel of
distribution to purchase loose moissanite jewels and the willingness of
manufacturers, designers and retail jewelers to undertake setting of
the loose jewels;
o the ability of manufacturers, designers and retail jewelers to select
jewelry settings that encourage consumer acceptance of and demand for
our jewels;
o the ability of jewelry manufacturers and retail jewelers to set loose
moissanite jewels in jewelry with high quality workmanship; and
o the ability of retail jewelers to effectively market and sell
moissanite jewelry to consumers.

We cannot be sure that we will be able to obtain the materials and services
needed to deliver our products or to otherwise compete successfully in the
marketplace.

Moissanite/Diamond Test Instrument. Our proprietary, patented moissanite/diamond
test instrument, the Tester Model 590, faces competition from other devices that
distinguish moissanite jewels from diamond. The Tester Model 590, working in
conjunction with existing thermal test instruments, readily distinguishes loose
moissanite jewels and moissanite jewels set in jewelry from diamond in the
colors and clarities most often sold by jewelers. Our competitors may introduce
less expensive devices, or gemologists trained in the physical properties of
moissanite jewels may develop less expensive methods of distinguishing
moissanite jewels from diamond. We have no assurance that a market for
moissanite/diamond test instruments will develop or that we will be able to
successfully compete in that market, if it develops.

Government Regulation

Our products are subject to regulation by the Federal Trade Commission (FTC).
The FTC has issued regulations and guidelines governing the marketing of
synthetic gemstones and other gemstones similar to diamond that require such
gemstones to be clearly identified in any promotional or marketing materials.
While we intend to comply fully with all FTC regulations, we cannot be sure that
the FTC or a competitor will not challenge our promotional or marketing
activities. Such a challenge could result in significant expense and divert the
efforts of our management, whether or not such challenge is resolved in our
favor. If our actions were found to be in violation of FTC regulations, we could
be forced to suspend marketing and sales of our products and could incur
significant expenses in developing new marketing strategies and materials that
would not violate FTC regulations. We cannot be sure that we would be successful
in developing new marketing strategies and materials that would comply with FTC
regulations or that such strategies, once developed, would allow us to market
our products profitably.

Employees

At March 1, 2001, we had 34 employees. We believe that our future prospects will
depend, in part, on our ability to retain our current employees and to obtain
additional management, marketing, sales, manufacturing, scientific and technical
personnel. Competition for such personnel is substantial, and the number of
persons with relevant experience is limited. None of our employees is
represented by a labor union. We believe that our employee relations are good.

Business Risks

In addition to the other information in this Form 10-K, you should carefully
consider the following important factors that in some cases have affected, and
in the future could affect, our actual performance and results and could cause
our actual results of operations to differ materially from those expressed in
any of our forward-looking statements.

We have sustained operating losses since inception, we have an accumulated
deficit and we may not achieve profitability.

We incurred substantial operating losses from our inception through December 31,
2000, with an accumulated deficit of approximately $24.3 million as of December
31, 2000. Such losses resulted principally from:

o slower than anticipated sales growth and market acceptance of
moissanite jewels;
o greater than anticipated marketing and advertising expenses to achieve
sales growth;
o the costs of development of sales, marketing and distribution channels;
o research and development costs for silicon carbide (SiC) crystals and
moissanite jewels;
o difficulties obtaining SiC crystals from its sole supplier in desired
qualities, sizes and volume; and
o growth in general and administrative expenses until recent periods.

We may incur significant operating losses in the future as we continue our
marketing, sales, distribution and other strategic efforts. There can be no
assurance that we will be able to successfully commercialize our products or
that profitability will be achieved or, if achieved, that such profitability
will be sustained.

If we cannot maintain adequate operating capital, our business will suffer.

We had substantially less liquidity at December 31, 2000 than we had on December
31, 1999. At December 31, 2000, our cash and cash equivalents have decreased to
approximately $3.8 million. Although we raised approximately $6.2 million in
February 2001 through our sale of common stock to shareholders, a continuation
of operating losses may eliminate our remaining cash balances in future periods.
On a going forward basis, operations may not provide sufficient internally
generated cash flows to meet our projected requirements. In order to achieve
positive cash flows, we have implemented plans designed to improve sales,
effectively manage our overhead costs, advertising expenditures and other
expenses, as well as reduce raw material purchases and existing inventories.
However, we may not achieve these goals and we cannot be sure that we will be
able to continue to finance our operations.

Sources for needed capital have not yet been identified and may not be
available.

Although we recently raised approximately $6.2 million through the sale of
common stock to shareholders, the net proceeds from this sale, combined with
internally generated cash, may not be sufficient to enable us to market
moissanite jewels and conduct operations, in which event we will have to seek
additional capital from other sources. We have been unsuccessful in securing
other means of financing in recent periods and we may not be successful in
obtaining financing in future periods. To the extent, if any, that we are able
to obtain equity capital from other sources, the issuance of more shares of
stock may dilute the economic interest of then current shareholders and will
dilute their voting interests. To the extent, if any, that we are able to obtain
debt financing, the terms of such financing may be expensive and may subject us
to covenants that materially restrict us.

We overbuilt our inventory position.

During 1999 and 2000, we overbuilt our inventory position in anticipation of
substantially greater sales growth than we have experienced to date. As of
December 31, 2000, our inventories were approximately $23.1 million. This has
placed a serious drain on our cash resources and will continue to do so unless
we can effectively manage future growth of inventories by reducing purchases of
raw materials from our supplier and by increasing sales. If and to the extent
that we determine that the asset value of our inventory is less than its book
value, it will be necessary for us to charge the reduction in asset value of
such inventory against our earnings.

Our business operations could be adversely affected if we do not manage our
growth effectively.

We have experienced rapid growth in sales and such growth may continue in the
future if the commercialization of moissanite jewels is successful. During 2000,
the Company shifted its distribution and advertising strategy to place more
emphasis on marketing through jewelry distributors and to control advertising
and overhead expenditures. Periods of rapid growth place a significant strain on
our personnel and other resources, particularly when the Company needs to manage
its liquidity and cash expenditures carefully. Our strategy will require us to
achieve rapid growth while curtailing expenditures and motivating our employee
base. We also will be required to manage multiple relationships with various
customers and other third parties. Our executive officers have limited prior
experience in managing rapidly growing businesses under these circumstances. If
we are unable to manage growth effectively, our business, financial condition
and results of operations would be materially adversely affected.

We have a limited operating history which may impact our ability to achieve
market acceptance of our products and our ability to produce our products.

We incorporated in June 1995, and we were in the developmental stage through
June 30, 1998. We are in the process of commercializing moissanite jewels,
building consumer brand awareness and growing distribution channels for our
jewels. The timing or existence of any significantly increased revenues is
dependent on market acceptance of moissanite jewels, increasing distribution and
sales, and continued

improvements in the yield of jewels in the qualities, sizes and volumes desired
from each SiC crystal. Our business is also subject to risks inherent in rapid
increases in sales and production levels. Likewise, our products are subject to
risks inherent in the development and marketing of new products, including
unforeseen design, manufacturing or other problems or failure to develop market
acceptance. Failure by us to expand distribution and achieve market acceptance
of our products or to develop the ability to produce our products in higher
quantities and qualities would have a material adverse effect on our business,
operating results and financial condition. Accordingly, our prospects must be
considered in light of the risks and difficulties frequently encountered by
companies in their early stage of development, particularly technology-based
companies, operating in the early stages of manufacturing and distributing
unproven products.

Our future financial performance depends upon consumer acceptance of our
products which is unproven at this time.

We believe that many retail jewelers and most consumers are not generally aware
of the existence and attributes of moissanite jewels. The market for moissanite
jewels among retail jewelers and consumers is in the early stages of development
as we shipped approximately 69,000 carats during the year ended December 31,
2000. As is the case with any new product, market acceptance and demand are
subject to a significant amount of uncertainty. Our future financial performance
will depend upon greater consumer acceptance of the Company's moissanite jewels
as distinct from all other jewels based on their fire, brilliance, luster,
durability and rarity. In addition, consumer acceptance may be impacted by
retail jewelers' and jewelry manufacturers' acceptance of moissanite jewels. We
market loose jewels which jewelry distributors, manufacturers and retailers set
in jewelry which in turn is then further distributed or sold to consumers. The
quality, design and workmanship of the jewelry settings selected by retail
jewelers, which is not within our control, could impact the consumer's
perception and acceptance of our jewels. Thus, our future financial performance
may be impacted by:

If our products do not receive greater market acceptance, our business,
operating results and financial condition would be materially adversely
affected.

We are substantially dependent on the distribution of our jewels in North
America through Stuller Settings, Inc. and Rio Grande.

In March 2000, we entered into distribution agreements with two of the largest
national wholesale distributors, Stuller Settings, Inc. and Rio Grande, for
distribution of moissanite jewels throughout the entire North American market.
There is no assurance, however, that our distribution arrangements with Stuller
and Rio Grande will sufficiently increase sales. Although we entered into
arrangements with certain jewelry manufacturers which contemplate the
distribution of moissanite jewelry to United States jewelry retailers, we
anticipate that the vast majority of moissanite jewels sold by us in North
America

will be distributed through Stuller and Rio Grande. Therefore, we are
substantially dependent upon Stuller and Rio Grande for distribution of
moissanite jewels in North America.

Historically, the North American market has accounted for a substantial portion
of our moissanite jewel sales. In the event that our distribution arrangements
with Stuller and Rio Grande fail to maintain and increase the current level of
North American sales, our revenues would be materially adversely affected.

We have limited channels by which our jewelry can be distributed.

We began shipping moissanite to jewelry retailers in June 1998, which grew to
237 locations primarily concentrated in certain cities along the eastern
seaboard, Texas and California by the end of 1999. While repeat sales (three or
more purchases) had been made to approximately 1400 jewelry retailers as of
February 28, 2001, we are emphasizing expanding the domestic distribution of
moissanite jewels through the distribution agreements with Stuller and Rio
Grande and agreements with jewelry manufacturers and jewelry designers. There
can be no assurance that we will be successful in expanding distribution through
such agreements. Neither can there be any assurance that we will be able to
enter into additional agreements with other distributors, manufacturers or
designers on terms acceptable to us or that such other distributors will be
successful in their efforts to market our jewels to retailers or consumers. The
inability to achieve our desired distribution of moissanite jewels or our
inability to successfully market moissanite jewels to jewelers or consumers
would have a material adverse effect on our business, operating results and
financial condition.

We are subject to certain risks due to our international distribution channels
and vendors.

Charles & Colvard created moissanite jewels are currently being distributed in
substantially all of Western Europe and certain territories in Southeast Asia.
We currently have a total of approximately 30 distributors internationally. We
intend to expand the number of international markets for our products. In
addition, we expect to continue to use certain companies based outside the
United States to facet our moissanite jewels. Due to our reliance on development
of foreign markets and use of foreign vendors, we are subject to the risks of
conducting business outside of the United States. These risks include the
following:

o unexpected changes in, or impositions of, legislative or regulatory
requirements;
o delays resulting from difficulty in obtaining export licenses;
o tariffs and other trade barriers and restrictions; and
o the burdens of complying with a variety of foreign laws and other
factors beyond our control.

Additionally, while all foreign transactions are denominated in U.S. dollars,
foreign currency fluctuations could impact demand for our products or the
ability of our foreign suppliers to continue to perform. We are also subject to
general geopolitical risks in connection with our international operations, such
as political, social, religious and economic instability, potential hostilities
and changes in diplomatic and trade or business relationships.

Further, some of these distributors operate relatively small businesses and may
not have the financial stability to assure their continuing presence in their
markets. There can be no assurance that the foregoing factors will not adversely
affect our operations in the future or require us to modify our anticipated
business practices.

We currently depend upon a single source for the supply of SiC crystals.

We currently depend on a single source, Cree Inc. (Cree), for the supply of SiC
crystals. Cree has certain proprietary rights relating to its process for
growing large single crystals of SiC and its process for growing colorless SiC
crystals. Under our Exclusive Supply Agreement with Cree, we are obligated to
buy from Cree, and Cree is obligated to sell to us, 50%, by dollar volume, of
our requirements for SiC material for the production of gemstones in each
calendar quarter. Although we are only required to purchase 50% of our SiC
requirements from Cree, we do not currently believe that any other SiC producer
could readily supply crystals in the qualities, sizes and volumes needed for our
products. Therefore, at the present time, we are wholly dependent on Cree as our
sole source for our principal raw material.

While Cree has improved its production processes and is currently producing SiC
crystals sufficient to meet the Company's requirements, the Company experienced
difficulties in the past in obtaining crystals from Cree in the quality, sizes
and volumes that it desired. The Company from time to time enters into purchase
agreements with Cree with respect to the specific timing, pricing and other
terms of future delivery of SiC crystals and our purchase commitments. As a
result of an accelerated improvement in quality in 1999 at the same time that
the Company experienced sales growth that was slower than it anticipated, the
Company's inventories significantly increased pursuant to its prior purchase
commitments. There can be no assurance that Cree will be able to continue to
produce and supply the Company with raw materials of sufficient quality, sizes
and volumes nor that the Company will negotiate purchase commitments that enable
it to manage its inventories and raw material costs effectively.

We rely upon our ability to protect our intellectual property.

We have U.S. product and method patents for moissanite jewels under which we
have broad, exclusive rights to manufacture, use and sell moissanite jewels in
the United States. We have applications pending in a number of foreign
jurisdictions for these same patents. We believe that these patents create
substantial technological barriers to our potential competitors. We also have
other patents and patent applications pending related to certain methods of
producing moissanite jewels and related technologies. There can be no assurance
that any other patents will be granted or that any issued patent will have any
commercial or competitive value.

At the present time, we are also dependent on Cree's technology for the
production of SiC crystals. Cree is exclusively licensed to use a patent
concerning a process for growing large single crystals of SiC, has certain
patents of its own relating to growth of large single crystals of SiC and has a
patent for a process for growing colorless SiC crystals.

There can be no assurance that any patents issued to or licensed by or to us or
Cree will provide any significant commercial protection to us or Cree, that we
or Cree will have sufficient resources to prosecute our respective patents or
that any patents will be upheld by a court should we, Cree or Cree's licensor
seek to enforce our respective rights against an infringer. The existence of
valid patents does not prevent other companies from independently developing
competing technologies. Existing producers of SiC or others may refine existing
processes for growing SiC crystals or develop new technologies for growing large
single crystals of SiC or colorless SiC crystals in a manner that does not
infringe patents owned or licensed by or to us or Cree. In addition, existing
producers of SiC, existing producers of other synthetic or natural gemstones or
other parties may develop new technologies for producing moissanite jewels in a
manner that does not infringe patents owned or licensed by or to us or Cree.

As a result of the foregoing factors, existing and potential competitors may be
able to develop products that are competitive with or superior to our products,
and such competition could have a material adverse effect on our business,
operating results and financial condition.

Our success depends upon our ability to identify, reach agreements with and work
successfully with third parties.

In addition to our current dependence on Cree and on third party distribution
channels, our prospects depend upon our ability to identify, reach agreements
with and work successfully with other third parties. In particular, we rely on
third parties to facet our jewels. Faceting moissanite jewels requires different
techniques than faceting diamond and other gemstones. There can be no assurance
that we can maintain our relationships with our faceting vendors on terms
satisfactory to us or that faceting vendors will continue to be able to provide
faceting services in the quality and quantities required by us or that we will
be able to find suitable replacements if we are unable to maintain such
relationships. Our failure to achieve any of the above would have a material
adverse effect on our business, operating results and financial condition.

Governmental regulation and oversight might adversely impact our operations.

We are subject to governmental regulations in the manufacture and sale of
moissanite jewels. In particular, the Federal Trade Commission has the power to
restrict the offer and sale of products that could deceive or have the tendency
or effect of misleading or deceiving purchasers or prospective purchasers with
regard to the type, kind, quality, character, origin or other characteristics of
a diamond. We may be under close scrutiny both by governmental agencies and by
competitors in the gemstone industry, any of which may challenge our promotion
and marketing of our moissanite jewel products. If our production or marketing
of moissanite jewels is challenged by governmental agencies or competitors, or
if regulations are issued that restrict our ability to produce and market our
products, our business, operating results and financial condition could be
materially adversely affected.

Our reputation amongst jewelers and consumers could be damaged if low-quality
gemstones or synthetics are marketed as moissanite.

If market acceptance of our products continues to grow, it is possible that
low-quality gemstones or other synthetics could be marketed as moissanite. The
sale of low-quality products as moissanite could damage the perception of
moissanite as a unique jewel that compares favorably to other fine gemstones
like diamond, ruby and emerald. This could damage our reputation among retail
jewelers and consumers and result in a loss of consumer confidence in our
products. The introduction of low-quality imitation moissanite jewels and our
inability to limit the adverse effects thereof could have a material adverse
effect on our business, operating results and financial condition.

The success of our operations depends in part upon attracting and retaining key
personnel, and we do not currently have a Chief Financial Officer.

Our success depends in part upon retaining the services of certain executive
officers and other key employees. We have entered into employment agreements
with our Chief Executive Officer and President, Robert S. Thomas, Vice President
of Manufacturing, Earl R. Hines, Director of Domestic Sales, Mark D. Scanlan and
Director of International Sales, Joseph Ambar. We do not maintain "key man" life
insurance policies on any of our executive officers or key employees. In
February 2000, our Chief Financial Officer, Mark W. Hahn, resigned from the
Company. We have hired a temporary employee to perform the financial and
accounting services, but we are searching for a permanent replacement. The loss
of the services of other executive officers or other key employees or our
inability to find a new chief financial officer in the near future could have a
material adverse effect on our business, operating results and financial
condition.

Due to our early stage of development, we are also dependent on our ability to
recruit, retain and motivate personnel with technical, manufacturing and
gemological skills. There are a limited number of personnel with these
qualifications and competition for such personnel is intense. The inability to
attract

and retain additional qualified personnel would materially adversely affect our
business, operating results and financial condition.

Our Common Stock price has been and may continue to be volatile.

The market price of our common stock ranged between a high sales price of $18.00
per share and a low sales price of $.8125 since the Company's initial public
offering in 1997 and may continue to be highly volatile and subject to wide
fluctuations in response to factors including the following, some of which are
beyond our control:

o actual or anticipated variations in our quarterly operating results;

o changes in financial estimates by security analysts;

o underperformance against analysts' estimates; and

o fluctuations in the stock market in general and technology and small
capitalization stocks in particular.

In light of our limited operating history, there is very little data upon which
to estimate operating revenues and expenses. Our revenues are affected by many
unpredictable factors. We will likely continue to experience substantial
quarterly fluctuations in our operating results. As a result, we believe that
period-to-period comparisons of our results of operations are not necessarily
meaningful and should not be relied upon as an indication of future performance.
Moreover, it is likely that in some future quarters our operating results will
be below the expectations of public market analysts and investors. In such
event, the price of our common stock would likely be materially adversely
affected.

The fluctuations in prices and volumes of the stock market in general and stocks
of technology companies in particular have been extreme from time to time. This
volatility is often unrelated or disproportionate to the operating performance
of these companies. These broad market fluctuations may adversely affect the
market price of our common stock, regardless of our actual operating
performance.

We do not expect to pay Common Stock dividends.

We have not paid cash dividends in the past and do not expect to pay cash
dividends on our common stock for the foreseeable future. In determining whether
to pay dividends, our Board of Directors will consider many factors, including
our earnings, capital requirements and financial condition.

The market price of our common shares could decline if we do not meet the
requirements for continued listing on NASDAQ.

Our shares of common stock are traded on the Nasdaq National Market, which has
adopted rules that establish criteria for initial and continued listing of
securities. To comply with the continued listing criteria of the Nasdaq National
Market, a company must comply with at least one of two sets of rules. Under one
set of rules, a company must maintain at least $4,000,000 of net tangible
assets, have at least 750,000 publicly held shares with a market value of over
$5,000,000 and not have a minimum bid price under $1.00 per share. Under another
set of rules, a company must maintain a market capitalization of at least
$50,000,000, or total assets and total revenue of at least $50,000,000 each for
the most recently completed fiscal year or two of the three most recently
completed fiscal years. A market price of our common stock which remains below
$1.00 per share or future losses from operations could cause us to fail to meet
the Nasdaq listing criteria and result in delisting from the Nasdaq National
Market in the future. If our common stock is delisted from the Nasdaq National
Market, trading in our common stock could be conducted on the Nasdaq SmallCap
Market or on an electronic bulletin board established for securities that do not
meet the Nasdaq listing requirements. If our common stock were delisted from the
Nasdaq National Market and were not listed on the Nasdaq SmallCap Market, it
would be subject to the

so-called penny stock rules that impose restrictive sales practice requirements
on broker-dealers who sell those securities. Consequently, delisting, if it
occurred, could affect the ability of shareholders to sell their common stock in
the secondary market. The restrictions applicable to shares that are delisted,
as well as the lack of liquidity for shares that are traded on an electronic
bulletin board, may adversely affect the market price of such shares.

Some anti-takeover provisions of our charter documents, agreements and plans may
delay or prevent a takeover of our Company.

A number of provisions of our articles of incorporation and bylaws deal with
matters of corporate governance and the rights of shareholders. Certain of these
provisions may be deemed to have an anti-takeover effect and may delay or
prevent takeover attempts not first approved by the Board of Directors
(including takeovers that certain shareholders may deem to be in their best
interests). These provisions also could delay or frustrate the removal of
incumbent directors or the assumption of control by shareholders. We believe
that these provisions are appropriate to protect our interests and all of our
shareholders.

Under the terms of the Exclusive Supply Agreement, we are prohibited from
entering into an exclusive marketing or distribution agreement with DeBeers or
its affiliates or the Central Selling Organization (the international cartel of
diamond producers) or any party whose primary business is the development,
manufacture, marketing or sale of diamond gemstones or any non-gemstone and
non-jewelry industry competitor of Cree. The agreement also prohibits us from
entering into certain merger, acquisition, sale of assets, or similar
transactions with a prohibited party. These provisions of the Exclusive Supply
Agreement could limit the price that third parties might be willing to pay in
the future for some or all of the shares of our common stock. In addition, this
agreement could prevent us from entering into certain potentially profitable
transactions with such prohibited parties.

On February 21, 1999, we adopted a Shareholder Rights Plan under which all
shareholders of record as of March 8, 1999, received rights to purchase shares
of a new series of Preferred Stock. Each share of common stock issued after
March 8, 1999 has received the same rights.

The Rights Plan is designed to enable all of our shareholders to realize the
full value of their investment and to provide for fair and equal treatment for
all shareholders in the event that an unsolicited attempt is made to acquire us.
The adoption of the Rights Plan is intended as a means to guard against abusive
takeover tactics and is not in response to any particular proposal. The rights,
which expire in 2009, will be exercisable only if a person or group acquires 20%
or more of our common stock or announces a tender offer for 20% or more of the
common stock. If a person or group acquires 20% or more of our common stock, all
shareholders except the purchaser will be entitled to acquire our common stock
at a 50% discount. The effect will be to discourage acquisitions of more than
20% of our common stock without negotiations with the Board.

The rights will trade with our common stock, unless and until they are separated
upon the occurrence of certain future events. Our Board of Directors may redeem
the rights prior to the expiration of a specified period following the
acquisition of more than 20% of our common stock.

ITEM 2. PROPERTIES

We lease approximately 26,500 square feet of mixed-use space (general office,
light manufacturing and laboratory) in the Research Triangle Park area of North
Carolina from an unaffiliated third party. This space houses our executive
offices, sales offices and research and development facilities. We believe that
comparable mixed-use space could be obtained from other parties on terms
substantially the same as

the current lease. Our management considers this space to be sufficient for our
foreseeable needs over the next 12 months.

ITEM 3. LEGAL PROCEEDINGS

We are not a party to any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable.

Part II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Our common stock is traded on the NASDAQ National Market under the symbol
"CTHR." The following table presents, for the periods indicated, the high and
low sales prices of our common stock, as reported by the NASDAQ National Market.
As of March 1, 2001, there were 221 shareholders of record of the common stock.

2000 1999
-------------- -------------- -------------- --------------
High Low High Low
---- --- ---- ---

First Quarter $ 8.63 $ 6.00 $ 17.88 $ 8.13
Second Quarter 7.88 5.25 18.00 10.00
Third Quarter 7.63 3.50 17.25 10.00
Fourth Quarter 4.13 1.00 11.00 5.88

We have never paid dividends on our capital stock. We intend to retain earnings,
if any, for use in our business and do not anticipate paying any cash dividends
in the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

The following selected statement of operations data for the years ended December
31, 2000, 1999 and 1998, and the selected balance sheet data at December 31,
2000 and 1999 have been derived from, and are qualified by reference to, our
financial statements included elsewhere in this report which have been audited
by Deloitte & Touche LLP, independent auditors. The selected statement of
operations data for the years ended December 31, 1997 and 1996 and the selected
balance sheet data at December 31, 1998, 1997 and 1996 have been derived from
audited financial statements not included herein. The selected financial data
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements and Notes thereto included elsewhere in this report.

CHARLES & COLVARD, LTD. (FORMERLY C3, INC.)

Year Ended December 31
------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------- -------------- --------------- ------------- ------------

Statements of Operations Data
Net sales $12,795,125 $ 12,272,907 $ 4,026,309 $ --- $ ---
Cost of goods sold 5,828,319 6,405,887 2,913,208 --- ---
-------------- -------------- --------------- ------------- ------------
Gross profit 6,966,806 5,867,020 1,113,101 --- ---

Operating expenses:
Marketing and sales 9,348,272 6,410,042 2,989,737 535,329 47,019
General and administrative (1) 3,372,083 3,039,595 2,671,445 2,744,898 134,715
Research and development 1,439,526 2,710,692 4,001,740 2,111,062 236,047
Other 313,538 --- --- --- ---
-------------- -------------- --------------- ------------- ------------
Total operating expenses 14,473,419 12,160,329 9,662,922 5,391,289 417,781
-------------- -------------- --------------- ------------- ------------

Operating loss 7,506,613 6,293,309 8,549,821 5,391,289 417,781

Interest income, net (428,081) (1,141,626) (1,816,333) (471,130) (35,173)
-------------- -------------- --------------- ------------- ------------

Net loss $ 7,078,532 $ 5,151,683 $ 6,733,488 $ 4,920,159 $ 382,608
============== ============== =============== ============= ============

Basic and diluted net loss per share (2) $ 0.99 $ 0.73 $ 0.97 $ 1.73 $ 0.19
============== ============== =============== ============= ============
Shares used in computing basic and
diluted net loss per share (3) 7,167,088 7,040,891 6,954,600 2,845,773 2,036,813
============== ============== =============== ============= ============

December 31
------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- -------------- ------------- -------------- ------------

Balance Sheet Data
Cash and equivalents $ 3,826,402 $ 13,161,665 $ 32,004,045 $ 43,980,385 $ 1,167,458
Working capital 25,937,806 26,709,142 33,887,496 43,687,405 1,161,603
Total assets 29,607,994 36,780,902 40,168,323 44,873,089 1,226,134
Shareholders' equity 26,859,784 33,494,143 37,996,332 44,046,281 1,213,279

1. Compensation expense related to the issuance of stock options for 2000,
1999, 1998 and 1997 was $149,368, $282,572, $527,811 and $1,632,804,
respectively. See Note 5 of Notes to Financial Statements. In addition, for
the year ended December 31, 1997, general and administrative expense
includes $66,000 of compensation expense related to the January 2, 1997
issuance of common stock to Cree pursuant to a stock option.

2. The per share calculation does not reflect the 6,246,735 shares issued as
of February 21, 2001 pursuant to our offering of nontransferable
subscription rights to our shareholders.

3. The calculation of shares for all periods reflects a 2.13-for-1 common
stock split effected in September 1997. The calculation also gives effect
to the automatic conversion of the Series A Preferred Stock and Series B
Preferred Stock into 2.13 shares of common stock for each share of
Preferred Stock effective upon completion of the Company's initial public
offering.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION

All statements, trend analysis and other information contained in the following
discussion relative to markets for our products and trends in revenue, gross
margins and anticipated expenses levels, as well as other statements, including
words such as "anticipate," "believe," "plan," "estimate," "expect" and "intend"
and other similar expressions constitute forward-looking statements. Our
business is subject to business and economic risks and uncertainties, and our
actual results of operations may differ materially from those expressed or
implied in the forward-looking statements. The following discussion and the
Section entitled "Business Risks" describes some, but not all, of the factors
that could cause these differences.

Overview

We manufacture, market and distribute Charles & Colvard created moissanite
jewels (also called moissanite or moissanite jewels) for sale in the worldwide
jewelry market. Moissanite, also known by its chemical name, silicon carbide
(SiC), is a rare, naturally occurring mineral found primarily in meteorites. As
the sole manufacturer of scientifically-made moissanite jewels, our strategy is
to create a unique brand image which positions moissanite as a jewel in its own
right, distinct from all other jewels based on its fire, brilliance, luster,
durability and rarity.

Through the first half of 1999, we limited our efforts to expand the
distribution of moissanite jewels as a result of limited product availability
and our lack of confidence in the quality of the SiC crystals we were receiving.
Late in the second quarter of 1999, we began to receive indications that the
quality of the SiC crystals was improving rapidly. The rate of improvement in
the quality of the SiC crystals continued to accelerate through the end of 1999,
far exceeding our expectations. At the same time, we experienced a decline in
shipments of moissanite jewels during the third quarter of 1999 as a result of
the following:

o a slow growth in the addition of domestic retailers;
o lack of targeted retailer-driven marketing programs abroad; and
o poor overall jewelry market performance in certain international
markets.

The improved supply of SiC crystals along with the decrease in sales led to a
significant increase in inventories of moissanite jewels. In December 1999, we
agreed with Cree to reschedule approximately 50% of the expected shipments of
SiC crystals from the first half of 2000 to the second half of 2000.

Through these agreements with Stuller, Rio Grande and jewelry manufacturers and
the brand awareness created by our marketing program, our goal is to rapidly
increase the introduction of moissanite into the domestic jewelry market while
maintaining average selling prices. However, because of the early stage of
development of these strategic efforts, we have no assurance that these efforts
will be successful.

In October 2000, we established a wholly-owned subsidiary in Hong Kong, Charles
& Colvard HK Ltd., for the purpose of gaining better access to the important Far
Eastern markets. Mrs. Ellen Lau was hired in July 2000 for the purpose of
representing the company in this market. The importance of having a presence in
this market is twofold; Hong Kong is the headquarters city for a very large
number of jewelry manufacturing companies with sales and distribution worldwide,
and Hong Kong is the gateway to the markets of Mainland China. Mrs. Lau has over
15 years experience in the jewelry industry in Hong Kong and, is a trained
gemologist, with extensive jewelry marketing experience. We do not anticipate
establishing additional subsidiaries in the near future.

As discussed below, the shift in our domestic distribution strategy may affect
our historical relationships between revenues and expenses as well as our
liquidity and capital requirements.

Results of Operations

Year ended December 31, 2000 compared with Year ended December 31, 1999.

Net sales were $12,795,125 for the year ended December 31, 2000 compared to
$12,272,907 for the year ended December 31, 1999, an increase of $522,218 or
4.3%. Our net sales of moissanite jewels and jewelry increased to approximately
$12,630,000 in 2000 from approximately $11,680,000 in 1999. Shipments of
moissanite jewels increased in 2000 to approximately 69,000 carats from
approximately 55,000 carats in 1999. Increased shipments of moissanite jewels
were offset by a reduction in the average selling price of moissanite jewels as
we experienced the effects of the volume purchase discounts offered to our new
domestic distribution and manufacturing partners. Our new partners began their
distribution efforts of moissanite during the second quarter of 2000. Their
respective customer bases are beginning to be introduced to Charles & Colvard
created moissanite. Our distribution goal is to increase carat shipments to
these distributors significantly over time while keeping average selling prices
stable with any variation dependant upon the mix of sizes sold.

Our gross profit margin was 54.4% for the year ended December 31, 2000 compared
to 47.8% for the year ended December 31, 1999. The increased gross margin rate
relates to significantly improved yield

of moissanite jewels from SiC crystals, which was partially offset by a
reduction in the per carat average selling price of moissanite jewels in 2000.

Marketing and sales expenses were $9,348,272 for the year ended December 31,
2000 compared to $6,410,042 for the year ended December 31, 1999, an increase of
$2,938,230 or 45.8%. The increase resulted primarily from the media placement
costs associated with our strategic global marketing program launched in the
fourth quarter of 1999 and co-op advertising programs with our customers. We
expensed approximately $4,100,000 of media costs in 2000 related to the
strategic global marketing program, which was designed to increase consumer
awareness and included advertising on national cable television, national
magazines, network television and movie theaters in certain targeted markets. We
believe our advertising efforts in 2000 strengthened the image and reputation of
moissanite and Charles & Colvard, and while we did not receive an immediate or
direct increase in sales volume, the advertising did help introduce moissanite
to consumers and provide support to our customers. Our marketing goal for 2001
is to create more consumer impressions for moissanite than were achieved in 2000
while using lower cost approaches such as public relations activities and media
editorial coverage.

General and administrative expenses were $3,372,083 for the year ended December
31, 2000 compared to $3,039,595 for the year ended December 31, 1999, an
increase of $332,488 or 10.9%. The increase resulted primarily from an increase
in our allowance for uncollectible accounts and increased rent on our expanded
facility.

Research and development expenses were $1,439,526 for the year ended December
31, 2000 compared to $2,710,692 for the year ended December 31, 1999, a decrease
of $1,271,166 or 46.9%. The decrease resulted primarily from cost savings
related to the reduction of development efforts by Cree effective September 1,
1999, from a funding level of $240,000 per month to $120,000 per month.
Effective January 1, 2001, we have suspended our development efforts with Cree
through June 30, 2001.

Other expenses for the year ended December 31, 2000 amounted to $313,538 which
resulted primarily from the loss on the sale of crystal growth equipment to Cree
and the disposition of certain other assets.

Net interest income was $428,081 for the year ended December 31, 2000 compared
to $1,141,626 for the year ended December 31, 1999, a decrease of $713,545 or
62.5%. This decrease resulted from lower interest income earned on lower cash
balances due primarily to the use of the invested proceeds from our initial
public offering in November 1997.

Year ended December 31, 1999 compared with Year ended December 31, 1998.

Net sales were $12,272,907 for the year ended December 31, 1999 compared to
$4,026,309 for the year ended December 31, 1998, an increase of $8,246,598 or
204.8%. Our net sales of moissanite jewels and jewelry increased to
approximately $11,680,000 in 1999 from approximately $3,285,000 in 1998.
Additionally, during the first half of 1998, we operated as a development stage
enterprise, and sales of moissanite jewels during that period of $324,000 were
netted against research and development expenses on the operating statement
because many of the jewels were associated with our research and development
program. The increase resulted primarily from expanded distribution of
moissanite jewels.

Our gross profit margin was 47.8% for the year ended December 31, 1999 compared
to 27.6% for the year ended December 31, 1998. The increase resulted from higher
yields of moissanite jewels from SiC crystals purchased from Cree, thereby
lowering the cost per carat.

Marketing and sales expenses were $6,410,042 for the year ended December 31,
1999 compared to $2,989,737 for the year ended December 31, 1998, an increase of
$3,420,305 or 114.4%. The increase was due primarily to the development and
introduction of the strategic global marketing program, including the creative
and production efforts supporting the specific advertising messages that were

launched in the fourth quarter of 1999, as well as compensation and other
expenses related to additional staff.

General and administrative expenses were $3,039,595 for the year ended December
31, 1999 compared to $2,671,445 for the year ended December 31, 1998, an
increase of $368,150 or 13.8%. The increase resulted primarily from increased
use of professional services and increased insurance and taxes on our increasing
fixed assets.

Research and development expenses were $2,710,692 for the year ended December
31, 1999 compared to $4,001,740 for the year ended December 31, 1998, a decrease
of $1,291,048 or 32.3%. The decrease resulted primarily from cost savings
related to a more focused development effort late in 1998 and from the reduction
of development efforts effective September 1, 1999, from a funding level of
$240,000 per month to $120,000 per month.

Net interest income was $1,141,626 for the year ended December 31, 1999 compared
to $1,816,333 for the year ended December 31, 1998, a decrease of $674,707 or
37.1%. This decrease resulted from lower interest income earned on lower cash
balances due primarily to the use of the invested proceeds from our initial
public offering in November 1997.

Liquidity and Capital Resources

We have financed our operations since inception primarily through the net
proceeds of our initial public offering of common stock in November 1997 and,
prior to such offering, through private equity sales. Net proceeds from our
initial public offering were $41.1 million. In 2000, we used approximately $9.6
million to fund operations. At December 31, 2000, we had $3.8 million of cash
and cash equivalents and $25.9 million of working capital.

On February 21, 2001, we completed a Rights Offering to our shareholders,
raising $6.2 million in gross proceeds. The net proceeds of this offering will
be used for working capital purposes.

In addition to the use of all of the crystal growth systems that Cree is
required to provide at its expense under the Exclusive Supply Agreement, during
1998 and 1999, we ordered a quantity of crystals that required additional
crystal growth systems to be added. As permitted under the Exclusive Supply
Agreement, Cree elected to have us purchase those systems. During 1998 and 1999,
we paid approximately $3.4 and $2.6 million, respectively, to Cree for these
systems. We routinely evaluate the size and quality of SiC crystals being
produced by Cree in assessing our plans for larger orders which will require the
acquisition of additional crystal growth systems. Under the terms of the
Exclusive Supply Agreement, Cree has the option, in its sole discretion, of
building the growth systems at its own cost or requiring us to purchase the
growth systems from Cree. Under a letter agreement dated December 22, 1999, we
agreed with Cree to shift approximately 50% of the SiC crystal purchases
scheduled for the first half of 2000 to the second half of 2000. We purchased
approximately $10.6 million of SiC crystals during 2000. In December 2000, we
agreed with Cree on a framework for purchases of SiC crystals during 2001. Under
the terms of the Agreement, we will be obligated to purchase SiC crystals only
upon issuance and Cree's acceptance of purchase orders. We have committed to
purchase approximately $400,000 of SiC crystals during the second quarter of
2001. The price paid to Cree will be based upon a set price per gram for
specified SiC crystals.

In May 2000, we agreed to sell our crystal growth equipment to Cree, Inc. for $5
million. This transaction resulted in a loss on disposal of fixed assets of
approximately $177,000 in the second quarter of 2000. The $5 million receivable
from Cree was reduced by purchases of SiC crystals from Cree during 2000.

The 4-year Development Agreement with Cree, as amended, requires us to fund a
development program at Cree for $1.44 million annually through June 30, 2002.
Either party may terminate the agreement if Cree does not meet the annual
performance milestone or if the parties do not mutually agree on the performance
milestones for the ensuing year. Effective January 1, 2001, our funding
obligation under the Development Agreement is suspended through June 30, 2001.

We have no committed external sources of additional capital, and we have
experienced negative cash flow from operating activities since inception. During
2000, we used approximately $9.6 million in cash to fund operating activities
which resulted primarily from our net loss and increase in inventories. As
discussed above, we have raised additional capital and dramatically reduced our
SiC crystal purchase commitments for 2001. Additionally, we have restructured
our operations to reduce our overall expense level. We believe that our sales
can increase as the distribution of moissanite jewels expands domestically and
internationally. Our management believes that our current infrastructure and
stage of product development can support a modest growth in sales. Although our
goal is to achieve profitability in 2001, we expect to continue operating at a
loss through at least part of 2001. Moreover, we cannot be sure that we will
achieve or sustain sales increases or profitability.

Net Operating Loss Carryforward

As of December 31, 2000, we had a net operating loss (NOL) carryforward of
approximately $20.7 million, which expires between 2010 and 2015. In accordance
with Section 382 of the Internal Revenue Code of 1986, as amended, a change in
equity ownership of greater than 50% within a three-year period will result in
an annual limitation on our ability to utilize our NOL carryforwards that were
created during tax periods prior to the change in ownership. As a result of
various equity offerings and certain shareholder transactions, the utilization
of our NOL carryforwards has become limited, but we do not believe this
limitation will have a material effect on our ability to utilize the NOL
carryforward.

Newly Adopted Accounting Pronouncements

On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
SAB No. 101 provides guidance on the recognition, presentation and disclosures
of revenue in financial statements filed with the Commission and is required to
be implemented no later than the fourth quarter of fiscal 2000. The adoption of
SAB No. 101 did not have a material effect on our consolidated financial
statements.

Newly Issued Accounting Pronouncements

In June 1998, Statement of Financial Accounting Standards (FAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, was issued. This
statement establishes standards for valuing and reporting at fair value all
derivative instruments as either assets or liabilities. FAS 133, as amended by
FAS 137, is effective January 1, 2001. The adoption of FAS 133 did not have a
material effect on our consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We believe that our exposure to market risk for changes in interest rates is not
significant because our investments are limited to highly liquid instruments
with maturities of three months or less. At December 31, 2000, we had
approximately $3.5 million of short-term investments classified as cash and
equivalents. All of our transactions with international customers and suppliers
are denominated in U.S. dollars.

Item 8. Financial Statements and Supplementary Data

Index to Financial Statements

Page
----

Independent Auditors' Report 31

Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 32

Consolidated Balance Sheets as of December 31, 2000 and 1999 33

Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998 34

Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 35

Notes to Consolidated Financial Statements 36

Financial Statement Schedule
- ----------------------------

Schedule II - Valuation and Qualifying Accounts 45

All other schedules are omitted due to the absence of the conditions under which
they are required or because the required information is included within the
financial statements or the notes thereto included in Item 8.

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
Charles & Colvard, Ltd.
Morrisville, North Carolina

We have audited the accompanying consolidated balance sheets of Charles &
Colvard, Ltd. (formerly C3, Inc.) (the "Company") as of December 31, 2000 and
1999, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2000. Our audits also included the financial statement schedule listed in
the Index at Item 8. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2000
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. Also, 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.

DELOITTE & TOUCHE LLP

Raleigh, North Carolina
February 22, 2001

CHARLES & COLVARD, LTD.
(FORMERLY C3, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31
----------------------------------------------------------
2000 1999 1998
----------------- ---------------- ----------------

Net sales $ 12,795,125 $ 12,272,907 $ 4,026,309
Cost of goods sold 5,828,319 6,405,887 2,913,208
----------------- ---------------- ----------------
Gross profit 6,966,806 5,867,020 1,113,101

Operating expenses:
Marketing and sales 9,348,272 6,410,042 2,989,737
General and administrative (Note 5) 3,372,083 3,039,595 2,671,445
Research and development 1,439,526 2,710,692 4,001,740
Other expenses 313,538 --- ---
----------------- ---------------- ----------------
Total operating expenses 14,473,419 12,160,329 9,662,922
----------------- ---------------- ----------------

Operating loss 7,506,613 6,293,309 8,549,821

Interest income, net (428,081) (1,141,626) (1,816,333)
----------------- ---------------- ----------------

Net loss $ 7,078,532 $ 5,151,683 $ 6,733,488
================= ================ ================

Basic and diluted net loss per share
(Note 2) $ 0.99 $ 0.73 $ 0.97
================= ================ ================

Weighted-average common shares,
basic and diluted (Note 2) 7,167,088 7,040,891 6,954,600
================= ================ ================

See notes to consolidated financial statements.

CHARLES & COLVARD, LTD.
(FORMERLY C3, INC.)
CONSOLIDATED BALANCE SHEETS

December 31
-----------------------------------
2000 1999
---------------- ---------------

Assets
Current Assets:
Cash and equivalents $ 3,826,402 $ 13,161,665
Accounts receivable, net of allowance for doubtful accounts
of $320,000 and $70,000 respectively 1,468,041 1,331,528
Interest receivable 18,890 74,999
Inventory, net (Note 2) 23,071,416 14,767,888
Prepaid expenses and other assets 301,267 659,821
---------------- ---------------

Total current assets 28,686,016 29,995,901

Equipment, net (Note 3) 552,272 6,292,221

Patent and license rights, net (Note 3) 369,706 492,780
---------------- ---------------

$ 29,607,994 $ 36,780,902
================ ===============

Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable:
Cree, Inc. (Note 7) $ 1,147,718 $ 2,305,218
Other 847,428 627,704
Accrued expenses and other liabilities 640,068 235,107
Deferred revenue 112,996 118,730
---------------- ---------------

Total current liabilities 2,748,210 3,286,759

Commitments (Note 7)

Shareholders' Equity (Notes 4 and 5):
Common stock, no par value; 50 million shares authorized;
7,200,979 and 7,098,911 shares issued and outstanding at
December 31, 2000 and 1999, respectively 49,226,697 48,757,702
Additional paid-in capital--stock options 1,926,744 1,951,566
Accumulated deficit (24,293,657) (17,215,125)
---------------- ---------------

Total shareholders' equity 26,859,784 33,494,143
---------------- ---------------

$ 29,607,994 $ 36,780,902
================ ===============

See notes to consolidated financial statements.

CHARLES & COLVARD, LTD.
(FORMERLY C3, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Common Stock Additional
------------------------- Paid-in
Number Capital Total
Of Stock Accumulated Shareholders'
Shares Amount Options Deficit Equity
------ ------ ------- ------- ------

Balance at
January 1, 1998 6,938,476 47,743,431 1,632,804 (5,329,954) 44,046,281
Exercise of stock
options 54,833 405,975 (250,247) ---- 155,728
Compensation
expense related
to stock options ---- ---- 527,811 ---- 527,811
Net loss ---- ---- ---- (6,733,488) (6,733,488)
----------------------------------------------------------------------------------------
Balance at
December 31, 1998 6,993,309 48,149,406 1,910,368 (12,063,442) 37,996,332
Exercise of stock
options 105,602 608,296 (241,374) ---- 366,922
Compensation
expense related
to stock options ---- ---- 282,572 ---- 282,572
Net loss ---- ---- ---- (5,151,683) (5,151,683)
----------------------------------------------------------------------------------------
Balance at
December 31, 1999 7,098,911 48,757,702 1,951,566 (17,215,125) 33,494,143
Exercise of stock
options 102,068 468,995 (174,190) ---- 294,805
Compensation
expense related
to stock options ---- ---- 149,368 ---- 149,368
Net loss ---- ---- ---- (7,078,532) (7,078,532)
----------------------------------------------------------------------------------------
Balance at
December 31, 2000 7,200,979 $49,226,697 $1,926,744 $(24,293,657) $26,859,784
========================================================================================

See notes to consolidated financial statements.

CHARLES & COLVARD, LTD.
(FORMERLY C3, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31
---------------------------------------------------------------
2000 1999 1998
------------------ ------------------ -------------------

Operating Activities
Net loss $ (7,078,532) $ (5,151,683) $ (6,733,488)
Adjustments:
Depreciation and amortization 569,986 741,402 223,708
Stock option compensation 149,368 282,572 527,811
Loss on disposal of long term assets 336,958 69,934 ----
Change in provision for uncollectable
accounts 250,000 ---- ----
Changes in assets and liabilities:
Accounts receivable (386,513) (784,607) (542,623)
Interest receivable 56,109 46,277 56,378
Inventory (3,303,528) (11,675,440) (2,813,846)
Prepaid expenses and other assets 358,554 (365,024) (221,523)
Accounts payable (937,776) 1,003,165 1,125,461
Accrued expenses and other liabilities 404,961 11,859 223,248
Deferred revenue (5,734) 99,744 (3,526)
------------------ ------------------ -------------------
Net cash used in operating activities (9,586,147) (15,721,801) (8,158,400)

Investing Activities
Purchases of equipment (23,771) (3,159,625) (3,827,322)
Patent and license rights costs (62,600) (327,876) (146,346)
Proceeds from sale of long term assets 42,450 ---- ----
------------------ ------------------ -------------------
Net cash used in investing activities (43,921) (3,487,501) (3,973,668)

Financing Activities
Stock options exercised 294,805 366,922 155,728
------------------ ------------------ -------------------
Net cash provided by financing activities 294,805 366,922 155,728
------------------ ------------------ -------------------

Net change in cash and equivalents (9,335,263) (18,842,380) (11,976,340)

Cash and equivalents at beginning of year 13,161,665 32,004,045 43,980,385
------------------ ------------------ -------------------
Cash and equivalents at end of year $ 3,826,402 $ 13,161,665 $ 32,004,045
================== ================== ===================

Supplemental non-cash investing activity:
In May 2000, the Company sold its crystal growth equipment to Cree, Inc.
(Cree) for $5,000,000. The $5 million receivable from this transaction was
reduced by future purchases from Cree.

Supplemental non-cash operating activity:
During the twelve months ended December 31, 2000, there were approximately
$5.0 million of inventory purchases financed by the receivable from Cree.

See notes to consolidated financial statements.

CHARLES & COLVARD, LTD. (FORMERLY C3, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--YEARS ENDED DECEMBER 31, 2000,
1999 AND 1998

1. Organization and Basis of Presentation

Charles & Colvard, Ltd. (formerly C3, Inc.) ("the Company"), was incorporated in
North Carolina on June 28, 1995, and manufactures, markets and distributes
Charles & Colvard created moissanite jewels (hereinafter referred to as
moissanite or moissanite jewels) for sale in the jewelry market. Moissanite,
also known by its chemical name, silicon carbide (SiC), is a rare, naturally
occurring mineral found primarily in meteorites. Moissanite is being positioned
as a jewel in its own right, distinct from all other jewels based on its fire,
brilliance, luster, durability and rarity and it is being marketed to working
women ages 25-55 with an annual household income in excess of $50,000.

From its inception in June 1995 through June 30, 1998, the Company was a
development stage enterprise that devoted its resources to fund research and
development of colorless, scientifically made moissanite jewels. At the same
time, the Company assembled a management team, conducted market research and
developed its strategic business plans. The Company began shipping moissanite to
authorized retail jewelers in Atlanta and Miami/Ft. Lauderdale during the second
quarter of 1998. At that time it launched limited consumer-focused advertising
and promotion activities in those areas. In addition, the Company entered into
exclusive distribution agreements with a number of international distributors.

Through the first half of 1999, the Company limited its efforts to expand the
distribution of moissanite jewels as a result of limited product availability
and the lack of confidence the Company had regarding the quality of the SiC
crystals it was receiving. Late in the second quarter of 1999, the Company began
to receive indications that the quality of the SiC crystals it was receiving was
improving rapidly. The rate of improvement in the quality of the SiC crystals
continued to accelerate through the end of 1999, far exceeding the Company's
expectations. At the same time, the Company experienced a decline in shipments
of moissanite jewels during the third quarter of 1999 as a result of a slower
than expected rate of adding retailers, lack of targeted retailer-driven
marketing programs abroad, and poor overall jewelry market performance in
certain international markets. The improved supply of SiC crystals along with
the decrease in sales led to a significant increase in inventories of moissanite
jewels. With the improvements in the supply of saleable moissanite jewels, the
Company launched its strategic global marketing program in the fourth quarter of
1999 to spur consumer awareness of this new category of jewel. In addition, in
2000, the Company entered into business relationships with certain domestic
jewelry manufacturers and gemstone distributors to accelerate the distribution
of moissanite jewels.

In October 2000, the Company established a wholly-owned subsidiary in Hong Kong,
Charles & Colvard HK Ltd., for the purpose of gaining better access to the
important Far Eastern markets. All intercompany accounts have been eliminated.
The Company does not anticipate establishing additional subsidiaries in the near
future.

The Company made significant investments in its branding program and in
developing its manufacturing and operational infrastructures during the fourth
quarter of 1999 and through 2000, all in anticipation of future significant and
rapid growth. During the third and fourth quarters of 2000, the Company
restructured its operations to reduce its overall general and administrative
levels in order to conserve cash and attempt to position the Company to achieve
profitability in the future. Additionally, research and development expenses
under the Development agreement with Cree were suspended effective as of January
2001. The Company's strategy for 2001 is to become profitable during the year by
achieving modest growth in sales while reducing marketing and advertising costs,
maintaining its lower general and administrative expense levels and curtailing
research and development expenses. The Company believes its sales can increase
as the distribution of moissanite jewels expands domestically and
internationally. Management believes that the Company's current infrastructure
and stage of product development can support a significant growth in sales.
Although the Company's goal is to achieve profitability in 2001,

the Company expects to continue operating at a loss through at least part of
2001. Moreover, there can be no assurance that the Company will ever achieve
sales increases or profitability

All the Company's activities are within a single business segment. Export sales
aggregated approximately $4.6 million, $6.7 million and $1.6 million in 2000,
1999 and 1998 respectively.

2. Summary of Significant Accounting Policies

Cash and Equivalents
The Company considers all money market accounts, debt instruments purchased with
an original maturity of three months or less, and other highly liquid
investments to be cash equivalents.

Inventory
Inventories are stated at the lower of cost or market determined on a first in,
first out basis. Finished goods are shown net of a reserve of $270,000 for
excess jewelry inventory at December 31, 2000. Test instruments are shown net of
a reserve for excess inventory of $500,000 and $242,000, respectively.

December 31
------------------------------------------------
2000 1999
---------------------- ---------------------
Moissanite
Raw materials $ 1,482,969 $ 371,843
Work-in-process 3,105,096 5,779,326
Finished goods 18,411,563 8,127,119
---------------------- ---------------------
22,999,628 14,278,288

Test instruments 71,788 489,600
---------------------- ---------------------

Total Inventory $ 23,071,416 $ 14,767,888
====================== =====================

Equipment
Equipment is recorded at cost and depreciated on the straight-line method based
on estimated useful lives of three to 12 years. Leasehold improvements are
amortized on the straight-line method over the life of the related lease.

Patents and License Rights
The Company capitalizes costs associated with obtaining patents issued or
pending for inventions and license rights related to the manufacture of
moissanite jewels and moissanite jewel test instruments. Such costs are
amortized over 17 years.

Accounting for Long-Lived Assets
The Company accounts for long-lived assets in accordance with Statement of
Financial Accounting Standards No. 121 ("FAS 121"), Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. The
Company evaluates the recoverability of its long-lived assets for financial
impairment whenever events or changes in circumstances indicate that the
carrying value of such assets may not be fully recoverable. Based on these
evaluations, there were no significant adjustments to the carrying value of
long-lived assets in 2000 or 1999.

Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk are primarily cash equivalents and trade receivables. The Company
maintains cash and cash equivalents with high quality financial institutions and
invests in low risk securities including U.S. Treasury bills, money market
funds, and government agency notes.

Trade receivables potentially subject the Company to credit risk. The Company
extends credit to its customers based upon an evaluation of the customer's
financial condition and credit history and

generally does not require collateral. During 2000, one customer accounted for
approximately 26% of the Company's sales. At December 31, 2000, that same
customer accounted for approximately $900,000 of accounts receivable. At
December 31, 1999, a different customer accounted for approximately 12% of the
Company's revenue and at December 31, 1999, no customer accounted for 10% or
more of total accounts receivable.

Revenue Recognition

Revenue is generally recognized when products are shipped. From time to time,
the Company ships certain items on "memo" terms. For goods shipped on memo
terms, the customer receives title to the goods and assumes the risk of loss,
however they have absolute right of return during the specified memo period. The
Company recognizes revenue on these transactions upon the earlier of 1) the
customer informing the Company that it will keep the product or 2) the
expiration of the memo period.

Advertising Costs
Advertising production costs are expensed as incurred. Media placement costs are
expensed over the period the advertising appears. Advertising expenses for the
years ended December 31, 2000, 1999 and 1998 amounted to approximately
$5,710,000, $2,920,000 and $750,000, respectively. At December 31, 2000, there
were no prepaid advertising costs included in prepaid expenses and other assets.
At December 31, 1999, prepaid expenses and other assets included approximately
$215,000 of prepaid advertising costs.

Research and Development
All research and development costs are expensed as incurred.

Stock Compensation
The Company's stock option plans are accounted for in accordance with Accounting
Principles Board Opinion No. 25 ("APB 25"), Accounting for Stock Issued to
Employees. The Company follows the disclosure requirements of Statement of
Financial Accounting Standards No. 123 ("FAS 123"), Accounting for Stock Based
Compensation.

Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 ("FAS 109"), Accounting for Income Taxes.
Under FAS 109, deferred income taxes are recognized for the tax consequences of
"temporary" differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount that is
more likely than not expected to be realized. As of December 31, 2000 and 1999,
the net deferred tax assets have been fully reserved.

Net Loss Per Share
The Company reports its net loss per share in accordance with the Statement of
Financial Accounting Standards No. 128 ("FAS 128"), Earnings Per Share. FAS 128
requires the presentation of both basic and diluted earnings per share,
regardless of materiality, unless per share amounts are equal. Basic loss per
share computations are based on the weighted-average common shares outstanding.
Diluted loss per share computations include the dilutive effect, if any, of
stock options and warrants using the treasury stock method.

Warrants to purchase 300,000 shares of common stock at $18 per share, and
options outstanding at December 31, 2000 to purchase 1,225,668 shares of common
stock (exercise prices ranging from $1.38 - $16.44), were excluded from the
computation of diluted loss per share because either the options' exercise price
was greater than the average market price of the common shares or the effect of
inclusion of such amounts would be anti-dilutive to loss per share.

Newly Adopted Accounting Pronouncements

Newly Issued Accounting Pronouncements

In June 1998, Statement of Financial Accounting Standards No. 133 ("FAS 133"),
Accounting for Derivative Instruments and Hedging Activities, was issued. This
statement establishes standards for valuing and reporting at fair value all
derivative instruments as either assets or liabilities. FAS 133, as amended by
FAS 137, is effective January 1, 2001. The adoption of FAS 133 did not have a
material effect on the Company's consolidated financial statements.

Reclassification

Certain 1999 and 1998 amounts have been reclassified to conform with the 2000
presentation.

3. Equipment and Patent and License Rights

Equipment balances are summarized as follows:

December 31
----------------------------------
2000 1999
--------------- --------------
Machinery and equipment $ 251,517 $ 6,391,946
Computer equipment 359,115 435,847
Furniture and fixtures 242,046 212,412
Leasehold improvements 90,467 101,890
Construction in progress -- 28,227
--------------- --------------
Total 943,145 7,170,322
Accumulated depreciation (390,873) (878,101)
--------------- --------------
Total equipment, net $ 552,272 $ 6,292,221
=============== ==============

Depreciation expense for 2000, 1999 and 1998 was $473,122, $648,565, and
$210,293, respectively.

Patent and license rights balances are summarized as follows:

December 31
----------------------------------
2000 1999
--------------- --------------
Patent and license rights $ 430,546 $ 605,049
Accumulated amortization (60,840) (112,269)
--------------- --------------
Patent and license rights, net $ 369,706 $ 492,780
=============== ==============

4. Preferred Stock

The Company has authorized 10 million shares of preferred stock, no par value.
The preferred stock may be issued from time to time in one or more series.

On February 21, 1999 the Company adopted a Shareholder Rights Plan under which
all shareholders of record as of March 8, 1999 received rights to purchase
shares of a new series of Preferred Stock. The adoption of this plan is intended
as a means to guard against abusive takeover tactics. The rights will be
exercisable only if a person or group acquires or announces a tender offer to
acquire 20% or more of the Company's common stock. Under the plan all
shareholders except the purchaser will be entitled to acquire the Company's
common stock at a 50% discount. The rights will trade with the Company's common
stock, unless and until they are separated upon the occurrence of certain future
events. In addition, the rights attached to the 6,246,735 shares of common stock
recently issued pursuant to the Company's offering of nontransferable
subscription rights.

5. Stock Option Plans

In 1996, the Company adopted the 1996 Stock Option Plan of C3, Inc. ("1996
Option Plan") under which options to acquire 777,450 common shares, reduced by
the number of options granted outside the 1996 Option Plan, may be granted to
key employees, directors and independent consultants. Under the 1996 Option
Plan, both incentive and non-qualified options may be granted under terms and
conditions established by the compensation committee of the board of directors.
The exercise price for incentive options will be the fair market value of the
related common stock on the date the option is granted. Options granted under
the 1996 Option Plan generally vest equally over a three-year period and have
terms of 10 years. The Company currently has no plans to award additional
options under the 1996 Option Plan.

In 1997, the Company adopted the 1997 Omnibus Stock Plan of C3, Inc. (the "1997
Omnibus Plan"). The 1997 Omnibus Plan authorizes the Company to grant stock
options, stock appreciation rights and restricted awards (collectively,
"awards") to selected employees, independent contractors and directors of the
Company and related corporations in order to promote a closer identification of
their interests with those of the Company and its shareholders. The maximum
number of shares of common stock for which awards may be granted under the 1997
Omnibus Plan may be increased from time to time to a number of shares equal to
(i) 20% of the shares of common stock outstanding as of that time less (ii) the
number of shares of common stock subject to outstanding options under the 1996
Option Plan. The number of shares reserved for issuance under the 1997 Omnibus
Plan may also be adjusted upon certain events affecting the Company's
capitalization. Options granted under the 1997 Omnibus Plan generally vest over
three to five-year periods and have terms of 10 years. The Board of Directors
has reserved 930,912 shares for the 1997 Omnibus Plan.

The following is a summary of activity for the Company's two stock option plans:

1996 Option Plan 1997 Omnibus Plan
---------------------------- ----------------------------
Weighted Weighted
Number Average Number Average
Of Exercise of Exercise
Shares Price Shares Price
------------ ------------ ------------ -------------

1998
Outstanding at beginning of year 661,791 $ 3.95 477,000 $ 14.61
Granted ---- ---- 195,000 8.94
Exercised 93,379 4.97 ---- ----
Canceled 13,547 3.66 48,366 14.67
------------ ------------ ------------ -------------
Outstanding at end of year 554,865 3.78 623,634 12.83

1999
Granted ---- ---- 175,800 11.19
Exercised 92,620 3.49 2,333 10.10
Canceled ---- ---- 56,853 13.09
------------ ------------ ------------ -------------
Outstanding at end of year 462,245 3.83 740,248 12.43

2000
Granted ---- ---- 208,900 4.41
Exercised 102,068 2.89 ---- ----
Canceled ---- ---- 110,282 8.98
------------ ------------ ------------ -------------
Outstanding at end of year 360,177 $ 4.10 838,866 $ 10.88
============ ============ ============ =============

During 1996, the Company granted options to acquire 37,275 shares of common
stock to certain consultants. These options, which were granted prior to the
establishment of formal plans, are immediately exercisable, have a term of five
years, and an exercise price of $1.88 per share. During 2000, none of these
options were exercised. As of December 31, 2000, 26,625 of these options are
outstanding.

The following summarizes information about stock options outstanding at December
31, 2000:

Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------ --------------------------------
Weighted-
Average
Outstanding Remaining Weighted- Exercisable Weighted-
Range of as of Contractual Average as of Average
Exercise Price 12/31/2000 Life Exercise Price 12/31/2000 Exercise Price
- ---------------------------- -------------- ------------- ---------------- -------------- ----------------

$0.00- $1.64 32,000 9.9 $ 1.3750 --- $ ---
$1.65- $3.28 129,667 5.5 $ 2.4172 97,767 $ 2.3282
$3.29- $4.93 289,035 5.7 $ 4.4960 289,035 $ 4.4960
$4.94- $6.57 117,800 6.8 $ 5.3750 13,000 $ 5.3750
$6.58- $8.22 67,300 6.3 $ 7.7392 46,965 $ 7.8589
$8.23- $9.86 121,899 5.7 $ 8.9018 98,531 $ 8.9101
$9.87-$11.51 14,600 6.6 $ 10.8100 14,600 $ 10.8100
$11.52-$13.14 --- --- $ --- --- $ ---
$13.15-$14.79 173,267 5.8 $ 13.8581 170,000 $ 13.8648
$14.80-$16.44 280,100 5.3 $ 15.0005 143,250 $ 15.0010
-------------- ------------- ---------------- -------------- -------------
1,225,668 5.9 $ 8.6946 873,148 $ 8.5985
============== ============= ================ ============== =============

In accordance with APB 25, and the provision of FAS 123 as applicable to
consultants, the Company recorded compensation expense of approximately
$149,000, $283,000 and $528,000 during 2000, 1999 and 1998, respectively,
relating to stock options granted with exercise prices less than market value or
granted to consultants. Had compensation expense for all stock options been
determined consistent with FAS 123, rather than APB 25, the Company's net loss
and loss per share for the years ended December 31, 2000, 1999 and 1998 would
have been increased to the pro forma amounts indicated below:

2000 1999 1998
--------------------- -------------------- ------------------

Net loss, as reported $ 7,078,532 $ 5,151,683 $ 6,733,488
Pro forma net loss 7,316,709 6,029,709 7,525,000
Basic and diluted net loss per share:
As reported $ 0.99 $ 0.73 $ 0.97
Pro forma 1.02 0.86 1.08

The fair value of each option grant is estimated on the grant date using a
Black-Scholes option pricing model. The valuations for the years ended December
31, 2000, 1999 and 1998 were based on the following assumptions:

2000 1999 1998
--------------- --------------- --------------

Weighted-average grant date fair value $ 4.04 $ 8.46 $ 7.46
Weighted-average expected lives (in years) 7.00 7.00 9.98
Risk-free interest rate 4.74% 6.65% 5.13%
Dividend yield 0% 0% 0%
Volatility factor 1.723 .766 .782

In connection with the Company's initial public offering on November 14, 1997,
the Company issued warrants to the underwriter to purchase 300,000 shares of
common stock at a price of $18 per share. The warrants are exercisable for a
period of four years beginning November 14, 1998.

6. Income Taxes

The Company accounts for income taxes under the liability method in accordance
with FAS 109. Under the liability method, deferred income taxes are recognized
for the tax consequences of "temporary differences" by applying enacted
statutory tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities.

Significant components of the Company's deferred tax assets and liabilities are
as follows:

December 31
--------------------------------------------
2000 1999
----------------- -----------------

Federal and state loss carryforwards $ 7,977,000 $ 5,993,000
Benefit of research tax credits 416,000 360,000
Reserves and accruals 478,000 189,000
Depreciation (41,000) (366,000)
----------------- -----------------
Total deferred tax assets 8,830,000 6,176,000

Less valuation allowance (8,830,000) (6,176,000)
----------------- -----------------

Net deferred tax assets $ ---- $ ----
================= =================

A reconciliation between expected income taxes, computed at the statutory
federal income tax rate (34%) applied to pretax accounting income, and the
income taxes included in the statements of operations for the years ended
December 31, 2000, 1999 and 1998 follows:

2000 1999 1998
--------------- --------------- ----------------

Anticipated income tax
benefit at the statutory federal rate $ (2,407,000) $ (1,752,000) $ (2,290,000)
State income tax benefit,
net of federal tax effect (322,000) (264,000) (344,000)
Research tax credits (61,000) (126,000) (142,000)
Compensation expense--stock options 58,000 111,000 164,000
Other 125,000 71,000 9,000
Increase in valuation allowance 2,607,000 1,960,000 2,603,000
--------------- --------------- ----------------
Income tax (benefit) expense $ ---- $ ---- $ ----
=============== =============== ================

At December 31, 2000, the Company has operating and economic loss carryforwards
of approximately $20,700,000 expiring through 2015, which can be offset against
future federal and state taxable income. In accordance with Section 382 of the
Internal Revenue Code of 1986, as amended, a change in equity ownership of
greater than 50% of the Company within a three-year period results in an annual
limitation on the Company's ability to utilize its NOL carryforwards that were
created during tax periods prior to the change in ownership. As a result of
various equity offerings and certain shareholder transactions, the utilization
of the Company's NOL carryforwards has become limited, however, the Company does
not believe this limitation will have a material effect on the Company's ability
to utilize the NOL carryforward.

Based on the Company's assessment of the future net realizable value of deferred
tax assets, a valuation allowance has been provided as it is more likely than
not that sufficient taxable income will not be generated to realize certain
temporary differences and tax credit carryforwards. Additionally, at December
31, 2000, approximately $350,000 of the valuation allowance was attributable to
the potential tax benefit of stock option transactions, which will be credited
directly to common stock if realized.

7. Commitments

Operating Lease
The Company leases approximately 12,700 square feet of mixed use space from an
unaffiliated third party at a base cost of approximately $10,700 per month, plus
contingent rentals based on the Company's proportionate share of the lessor's
operating costs, as defined in the lease agreement. The lease expires August 31,
2004, however, the Company may cancel the lease effective August 31, 2002 by
delivering to the lessor written notice nine months prior to the cancellation
date and by paying a cancellation fee of $36,000. The lease provides for
escalations of the base rent throughout the lease term, up to $11,700 at
September 1, 2003.

In September 1999, the Company entered into an agreement to sublease
approximately 13,807 square feet of office space, contiguous to its existing
space from an unaffiliated third party at a base cost of approximately $12,100
per month, plus contingent rentals based on the Company's proportionate share of
the lessor's operating costs, as defined in the lease agreement. The lease
expires on October 30, 2002.

The future minimum lease payments, including the $36,000 cancellation fee, are
as follows: $275,000 in 2001, $245,000 in 2002, totaling $520,000. Rental
expense incurred for operating leases and leases whose terms are less than one
year in duration for 2000, 1999, and 1998 was approximately $405,000, $215,000,
and $153,000, respectively.

Purchase Commitment
On June 6, 1997, the Company entered into an Amended and Restated Exclusive
Supply Agreement ("Exclusive Supply Agreement") and a Development Agreement with
Cree, a related company. The

Exclusive Supply Agreement has an initial term of ten years which may be
extended for an additional ten years by either party if the Company orders in
any 36-month period SiC crystals with an aggregate purchase price in excess of
$1 million. The Company has met this order threshold and expects to extend the
term of the Exclusive Supply Agreement. In connection with the Exclusive Supply
Agreement, the Company has committed to purchase a minimum of 50% (by dollar
volume) of its requirements for SiC crystals from Cree. If the Company's orders
require Cree to expand beyond specified production levels, the Company must
commit to purchase certain minimum quantities. In December 2000 the Company and
Cree agreed on a framework for purchases of SiC crystals during 2001. Under the
terms of the Agreement, the Company will be obligated to purchase SiC crystals
only upon issuance and Cree's acceptance of purchase orders. The Company has
committed to purchase approximately $400,000 of SiC crystals during the second
quarter of 2001. The price paid to Cree for each SiC crystal will be based on a
sliding scale depending on the quality of each crystal received. The Company is
totally dependent on Cree to supply SiC crystals for its production process. If
the Company is unable to obtain SiC crystals from Cree, its operations would be
materially adversely affected.

The July 1, 1998 Development Agreement, which replaces the June 1997 Development
Agreement and the 1998 Supplemental Development Agreement, provides for a
four-year development effort by Cree to increase the yield of useable material
in each SiC crystal manufactured by Cree for use by the Company in the
production of moissanite jewels. The Company was initially obligated to pay Cree
approximately $2.88 million annually through June 30, 2002 under this agreement
which was reduced to $1.44 million annually effective October 1, 1999. However,
either party may terminate the agreement if Cree does not meet the annual
performance milestones or if the Company and Cree do not mutually agree on the
performance milestones for the ensuing year. Effective January 1, 2001 the
Company's funding obligations under the Development Agreement is suspended
through June 30, 2001.

During 2000, 1999, and 1998, the Company made purchases from Cree of
approximately $12.0 million, $16.2 million and $7.6 million, respectively, for
SiC materials and research and development costs.

8. Selected Quarterly Data (Unaudited)

Quarters Ended
--------------------------------------------------------------------------
3/31 6/30 9/30 12/31
--------------------------------------------------------------------------

Year Ended December 31, 2000

Net Sales $ 3,011,250 $ 3,647,621 $ 2,874,329 $ 3,261,925
Gross Profit 1,634,502 1,991,190 1,474,707 1,866,407
Net Loss 2,110,161 1,250,510 1,060,711 2,657,150
Basic & Diluted Net Loss Per share 0.30 0.17 0.15 0.37

Year Ended December 31, 1999

Net Sales $ 3,229,464 $ 3,533,612 $ 2,169,539 $ 3,340,292
Gross Profit 1,133,886 1,901,935 1,220,004 1,611,195
Net Loss 706,431 380,605 1,447,413 2,617,234
Basic & Diluted Net Loss Per share 0.10 0.05 0.21 0.37

9. Subsequent Event

On February 21, 2001 the Company completed a Rights Offering to its
shareholders. The company raised approximately $6.2 million in gross proceeds as
a result of the exercise by shareholders of rights to purchase common stock at
$1.00 per share. The Company issued an aggregate of 6,246,735 shares of common
stock and will have a total of 13,447,714 shares of common stock issued and
outstanding as of February 21, 2001. The net proceeds will be used for working
capital purposes.

Schedule II

Charles & Colvard, Ltd.

Valuation and Qualifying Accounts

Additions Collections of
Balance at Charged to Accounts
Year ended Beginning of Costs and Previously Deductions/ Balance at
December 31 Period Expenses Written Off Write Offs End of Period
- --------------------- --------------- --------------- ----------------- --------------- ---------------

Allowance for
Doubtful
Accounts
2000 $ 70,000 $ 301,562 $ ---- $ 51,562(1) $ 320,000
1999 $ 77,000 $ 2,298 $ ---- $ 9,298(1) $ 70,000
1998 $ ---- $ 77,607 $ ---- $ 607(1) $ 77,000

Reserve for
Excess
Inventory
2000 $ 242,115 $ 527,885 $ ---- $ ---- $ 770,000
1999 $ 132,000 $ 224,083 $ ---- $113,968(2) $ 242,115
1998 $ ---- $ 132,000 $ ---- $ ---- $ 132,000

Allowance for
Returns
2000 $ 66,000 $ 84,000(3) $ ---- $ ---- $ 150,000
1999 $ 34,004 $ 31,996(3) $ ---- $ ---- $ 66,000
1998 $ ---- $ 34,004(3) $ ---- $ ---- $ 34,004

(1) Accounts written off as uncollectible.
(2) Adjustments to reserve to reflect estimated net realizable value of
remaining inventory.
(3) Charged against sales

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

None.
Part III

Item 10. Directors and Executive Officers of the Registrant

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management

Item 13. Certain Relationships and Related Transactions

The information called for in items 10 through 13 is incorporated by reference
from our definitive proxy statement relating to our annual meeting of
shareholders, which will be filed with the Securities and Exchange Commission
within 120 days after the end of fiscal 2000.

Part IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) (1) and (2) Financial statements and financial statement schedule--the
financial statements, financial statements schedule, and report of independent
accountants are filed as part of this report (see Index to Financial Statements
at Part II Item 8 on page 30 of this Form 10-K).

(a) (3) The following exhibits have been or are being filed herewith and are
numbered in accordance with Item 601 of Regulation S-K:

Exhibit
Number Description
3.1 Amended and Restated Articles of Incorporation of C3, Inc. which is
hereby incorporated by reference to Exhibit 3.1 to the Registration
Statement on Form S-1 of C3, Inc. (File No. 333-36809).

3.2 Articles of Amendment of C3, Inc., as filed with the Secretary of State
of North Carolina on February 23, 1999.

3.3 Amended and Restated Bylaws of C3, Inc. which is hereby incorporated by
reference to Exhibit 3.2 to the Registration Statement on Form S-1 of
C3, Inc. (File No. 333- 36809).

3.4 Articles of Amendment to the Company's Articles of Incorporation, as
filed May 17, 2000

4.1 Specimen Certificate of common stock.

4.2 Form of Representative's Warrant which is hereby incorporated by
reference to Exhibit 4.2 to the Registration Statement on Form S-1 of
C3, Inc. (File No. 333- 36809).

4.3 Rights Agreement dated as of February 22, 1999 between C3, Inc. and
First Union National Bank as Rights Agent which includes the Form of
Rights Certificate as Exhibit A.

10.1 Consulting Agreement, dated May 1, 1997, between Kurt Nassau and C3,
Inc. which is hereby incorporated by reference to Exhibit 10.1 to the
Registration Statement on Form S-1 of C3, Inc. (File No. 333-36809).+

10.2 Letter Agreement, dated May 17, 1997, between Kurt Nassau and C3, Inc.
which is hereby incorporated by reference to Exhibit 10.2 to the
Registration Statement on Form S-1 of C3, Inc. (File No. 333-36809).+

10.3 Letter Agreement, dated February 17, 1997, between Howard Rubin and C3,
Inc. which is hereby incorporated by reference to Exhibit 10.3 to the
Registration Statement on Form S-1 of C3, Inc. (File No. 333-36809).+

10.4 Independent Contractor Agreement, dated May 1, 1997, between Paula K.
Berardinelli and C3, Inc. which is hereby incorporated by reference to
Exhibit 10.4 to the Registration Statement on Form S-1 of C3, Inc.
(File No. 333-36809).+

10.5 Independent Contractor Agreement, dated September 3, 1997, between C.
Eric Hunter and C3, Inc. which is hereby incorporated by reference to
Exhibit 10.5 to the Registration Statement on Form S-1 of C3, Inc.
(File No. 333-36809).

10.6 Independent Contractor Agreement dated July 10, 1997 between Ollin B.
Sykes and C3, Inc. which is hereby incorporated by reference to Exhibit
10.6 to the Registration Statement on Form S-1 of C3, Inc. (File No.
333-36809).+

10.7 Employment Agreement, dated June 1, 1997, between Jeff N. Hunter and
C3, Inc. which is hereby incorporated by reference to Exhibit 10.7 to
the Registration Statement on Form S-1 of C3, Inc. (File No.
333-36809).+

10.8 Employment Agreement, dated July 30, 1997, between Mark W. Hahn and C3,
Inc. which is hereby incorporated by reference to Exhibit 10.8 to the
Registration Statement on Form S-1 of C3, Inc. (File No. 333-36809).+

10.9 Employment Agreement, dated September 15, 1997, between Martin J. DeRoy
and C3, Inc. which is hereby incorporated by reference to Exhibit 10.9
to the Registration Statement on Form S-1 of C3, Inc. (File No.
333-36809).+

10.10 Employment Agreement, dated March 1, 1997, between Thomas G. Coleman
and C3, Inc. which is hereby incorporated by reference to Exhibit 10.10
to the Registration Statement on Form S-1 of C3, Inc. (File No.
333-36809).+

10.11 Amended and Restated Exclusive Supply Agreement, dated June 6, 1997,
between Cree Research, Inc. and C3, Inc. which is hereby incorporated
by reference to Exhibit 10.11 to the Registration Statement on Form S-1
of C3, Inc. (File No. 333-36809).*

10.12 Development Agreement, dated as of June 6, 1997, between Cree Research,
Inc. and C3, Inc. which is hereby incorporated by reference to Exhibit
10.12 to the Registration Statement on Form S-1 of C3, Inc. (File No.
333-36809).*

10.13 Letter Agreement, dated July 14, 1997, between Cree Research, Inc. and
C3, Inc. which is hereby incorporated by reference to Exhibit 10.13 to
the Registration Statement on Form S-1 of C3, Inc. (File No.
333-36809).*

10.14 Letter Agreement, dated January 31, 1996, between Cree Research, Inc.
and C3, Inc. which is hereby incorporated by reference to Exhibit 10.14
to the Registration Statement on Form S-1 of C3, Inc. (File No.
333-36809).*

10.15 1996 Stock Option Plan of C3, Inc. (as amended October 27, 1997) which
is hereby incorporated by reference to Exhibit 10.15 to the
Registration Statement on Form S-1 of C3, Inc. (File No. 333-36809).+

10.16 1997 Omnibus Stock Plan of C3, Inc. which is hereby incorporated by
reference to Exhibit 10.16 to the Registration Statement on Form S-1 of
C3, Inc. (File No. 333- 36809).+

10.17 Restricted Stock Agreement, dated June 30, 1995, between Jeff N. Hunter
and Paula K. Berardinelli and C3, Inc. which is hereby incorporated by
reference to Exhibit 10.17 to the Registration Statement on Form S-1 of
C3, Inc. (File No. 333-36809).+

10.18 Shareholders Agreement, dated March 18, 1997, between General Electric
Pension Trust, C. Eric Hunter and C3, Inc. which is hereby incorporated
by reference to Exhibit 10.18 to the Registration Statement on Form S-1
of C3, Inc. (File No. 333-36809).

10.19 Registrations Rights Agreement, dated March 18, 1997, between General
Electric Pension Trust and C3, Inc. which is hereby incorporated by
reference to Exhibit 10.19 to the Registration Statement on Form S-1 of
C3, Inc. (File No. 333-36809).

10.20 Agreement, dated September 24, 1997, between John M. Bachman, Inc. and
C3, Inc. which is hereby incorporated by reference to Exhibit 10.20 to
the Registration Statement on Form S-1 of C3, Inc. (File No.
333-36809).*

10.21 Agreement, dated September 12, 1997, between QMD, Inc. and C3, Inc.
which is hereby incorporated by reference to Exhibit 10.21 to the
Registration Statement on Form S-1 of C3, Inc. (File No. 333-36809).*

10.22 1997 Declaration of Amendment to 1997 Omnibus Stock Plan of C3, Inc.
which is hereby incorporated by reference to Exhibit 99.3 to the
Registration Statement on Form S-8 of C3, Inc. (File No. 333-43613).+

10.23 Supplemental Development Agreement, dated January 8, 1998, between Cree
Research, Inc. and C3, Inc. which is hereby incorporated by reference
to Exhibit 10.23 to the Annual Report on Form 10-K of C3, Inc. for the
fiscal year ended December 31, 1997.*

10.24 Letter Agreement, dated January 8, 1998, between Cree Research, Inc.
and C3, Inc. which is hereby incorporated by reference to Exhibit 10.24
to the Annual Report on From 10-K of C3, Inc. for the Fiscal year ended
December 31, 1997.*

10.25 Amended and Restated Development Agreement, dated July 1, 1998 between
Cree Research, Inc. and C3, Inc. which is hereby incorporated by
reference to Exhibit 10.25 to the Quarterly Report on Form 10-Q of C3,
Inc. for the quarter ended June 30, 1998.*

10.26 Letter Agreement dated, July 14, 1998, between Cree Research, Inc. and
C3, Inc. which is hereby incorporated by reference to Exhibit 10.26 to
the Quarterly Report on Form 10-Q of C3, Inc. for the quarter ended
June 30, 1998.*

10.27 Employment Agreement, dated April 6, 1998, between Mark Kellam and C3,
Inc. which is hereby incorporated by reference to Exhibit 10.27 to the
Quarterly Report on Form 10-Q of C3, Inc. for the quarter ended
September 30, 1998.+

10.28 First Amendment to Agreement, dated March 23, 1998 between John M.
Bachman, Inc. and C3, Inc. which is hereby incorporated by reference to
Exhibit 10.28 to the Quarterly Report on Form 10-Q of C3, Inc. for the
quarter ended September 30, 1998.*

10.29 Second Amendment to Agreement, dated September 28, 1998 between John M.
Bachman, Inc. and C3, Inc. which is hereby incorporated by reference to
Exhibit 10.29 to the Quarterly Report on Form 10-Q of C3, Inc. for the
quarter ended September 30, 1998.*

10.30 1998 Declaration of Amendment to 1996 Stock Option Plan of C3, Inc.
which is hereby incorporated by reference to Exhibit 10.30 to the
Annual Report on Form 10K of C3, Inc. for the fiscal year ended
December 31, 1998. +

10.31 1998 Declaration of Amendment to 1997 Omnibus Stock Plan of C3, Inc.,
which is hereby incorporated by reference to Exhibit 10.31 to the
Annual Report on Form 10K of C3, Inc. for the fiscal year ended
December 31, 1998. +

10.32 Employment Agreement, dated March 1, 1999, between Robert Thomas and
C3, Inc., which is hereby incorporated by reference to Exhibit 10.32 to
the Annual Report on Form 10K of C3, Inc. for the fiscal year ended
December 31, 1998. +

10.33 Employment Agreement, dated May 1, 1999, between Mary Katherine
Rafferty and C3, Inc., which is hereby incorporated by reference to
Exhibit 10.33 to the Quarterly Report on Form 10-Q of C3, Inc. for the
quarter ended March 31, 1999. +

10.34 Letter Agreement, dated May 3, 1999 between Cree Research, Inc. and C3,
Inc., which is hereby incorporated by reference to Exhibit 10.34 to the
Quarterly Report on Form 10-Q of C3, Inc. for the quarter ended March
31, 1999. *

10.35 Licensing Agreement, dated October 10, 1998, between C. Eric Hunter and
C3, Inc., which is hereby incorporated by reference to Exhibit 10.35 to
the Quarterly Report on Form 10-Q of C3, Inc. for the quarter ended
March 31, 1999. *

10.36 Third Amendment to Agreement, dated June 16, 1999, between John M.
Bachman, Inc. and C3, Inc., which is hereby incorporated by reference
to Exhibit 10.36 to the Quarterly Report on Form 10-Q of C3, Inc. for
the quarter ended June 30, 1999. *

10.37 Fourth Amendment to Agreement, dated October 5, 1999, between John M.
Bachman, Inc. and C3, Inc., which is hereby incorporated by reference
to Exhibit 10.37 to the Quarterly Report on Form 10-Q of C3, Inc. for
the quarter ended September 30, 1999. *

10.38 Employment Agreement, dated November 1, 1999 between David Fudge and
C3, Inc., which is hereby incorporated by reference to Exhibit 10.38 to
the Quarterly Report on Form 10-Q of C3, Inc. for the quarter ended
September 30, 1999. +*

10.39 Letter Agreement dated December 22, 1999 between Cree, Inc. and C3,
Inc. which is hereby incorporated by reference to Exhibit 10.39 to the
Annual Report on form 10K of C3, Inc. for the year ended December 31,
1999.*

10.40 Letter Agreement dated March 16, 2000 between Stuller Settings, Inc.
and C3, Inc. which is hereby incorporated by reference to Exhibit 10.40
to the Annual Report on form 10K of C3, Inc. for the year ended
December 31, 1999.*

10.41 Letter Agreement dated March 15, 2000 between The Bell Group, d/b/a Rio
Grande and C3, Inc. which is hereby incorporated by reference to
Exhibit 10.41 to the Annual Report on form 10K of C3, Inc. for the year
ended December 31, 1999.*

10.42 Letter Agreement dated May 14, 2000 between Cree, Inc. and C3, Inc.
which is hereby incorporated by reference to Exhibit 10.42 to the
Quarterly Report on Form 10Q of C3, Inc. for the quarter ended March
31, 2000.*

10.43 2000 Declaration of Amendment to 1996 Omnibus Stock Plan of C3, Inc.+

10.44 2000 Declaration of Amendment to 1997 Omnibus Stock Plan of C3, Inc.+

23.1 Consent of Deloitte & Touche LLP

27.1 Financial Data Schedule - Fiscal year ended December 31, 2000.

* The registrant has requested that certain portions of this exhibit be given
confidential treatment.

+ Denotes a management contract or compensatory plan or arrangement.

SIGNATURES

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.

Charles & Colvard, Ltd. (formerly C3, Inc.)

By: /s/ Robert S. Thomas Date: 3/26/01
---------------------- -------
Robert S. Thomas, President & CEO

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.

By: /s/ Robert S. Thomas Date: 3/26/01
-------------------- -------
Robert S. Thomas
President & Chief Executive Officer
(Principal executive and financial officer)

By: /s/ Earl R. Hines Date: 3/26/01
----------------- -------
Earl R. Hines
(Principal accounting officer)

By: /s/ Richard Hartigan, Jr. Date: 3/26/01
------------------------- -------
Richard Hartigan, Jr.
Director

By: /s/ Barbara Kotlikoff Date: 3/26/01
--------------------- -------
Barbara Kotlikoff
Director

By: /s/ Kurt Nassau Date: 3/26/01
----------------------- -------
Kurt Nassau
Director

By: /s/ Walter J. O'Brien Date: 3/26/01
--------------------- -------
Walter J. O'Brien
Director

By: /s/ Cecil D. Raynor Date: 3/26/01
------------------- -------
Cecil D. Raynor
Director

By: /s/ Frederick A. Russ Date: 3/26/01
--------------------- -------
Frederick A. Russ
Director

By: /s/ Ollin B. Sykes Date: 3/26/01
------------------ -------
Ollin B. Sykes
Director

EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-K
OF
CHARLES & COLVARD, LTD. (FORMERLY C3, INC.)
Exhibit
Number Description

3.1 Amended and Restated Articles of Incorporation of C3, Inc. which is
hereby incorporated by reference to Exhibit 3.1 to the Registration
Statement on Form S-1 of C3, Inc. (File No. 333-36809).

3.2 Articles of Amendment of C3, Inc., as filed with the Secretary of State
of North Carolina on February 23, 1999.

3.3 Amended and Restated Bylaws of C3, Inc. which is hereby incorporated by
reference to Exhibit 3.2 to the Registration Statement on Form S-1 of
C3, Inc. (File No. 333- 36809).

3.4 Articles of Amendment to the Company's Articles of Incorporation, as
filed May 17, 2000

4.1 Specimen Certificate of common stock.

4.2 Form of Representative's Warrant which is hereby incorporated by
reference to Exhibit 4.2 to the Registration Statement on Form S-1 of
C3, Inc. (File No. 333-36809).

4.3 Rights Agreement dated as of February 22, 1999 between C3, Inc. and
First Union National Bank as Rights Agent which includes the Form of
Rights Certificate as Exhibit A.

10.14 Letter Agreement, dated July 14, 1997, between Cree Research, Inc. and
C3, Inc. which is hereby incorporated by reference to Exhibit 10.13 to
the Registration Statement on Form S-1 of C3, Inc. (File No.
333-36809).*

10.16 1997 Omnibus Stock Plan of C3, Inc. which is hereby incorporated by
reference to Exhibit 10.16 to the Registration Statement on Form S-1 of
C3, Inc. (File No. 333- 36809).+

10.33 Employment Agreement, dated March 1, 1999, between Robert Thomas and
C3, Inc., which is hereby incorporated by reference to Exhibit 10.32 to
the Annual Report on Form 10K of C3, Inc. for the fiscal year ended
December 31, 1998. +

10.43 2000 Declaration of Amendment to 1996 Omnibus Stock Plan of C3, Inc.+

10.44 2000 Declaration of Amendment to 1997 Omnibus Stock Plan of C3, Inc.+

23.1 Consent of Deloitte & Touche LLP

27.1 Financial Data Schedule - Fiscal year ended December 31, 2000.

* The registrant has requested that certain portions of this exhibit be given
confidential treatment.

+ Denotes a management contract or compensatory plan or arrangement.