INDEMNIFICATION AGREEMENT

AGREEMENT, effective as of                      between Charles & Colvard, Ltd.,
a North Carolina corporation (the “Company”), and                      (the
“Indemnitee”).

WHEREAS, it is essential that the Company attract and maintain responsible,
qualified directors and officers; and

WHEREAS, the Indemnitee is a director and/or officer of the Company; and

WHEREAS, the Amended and Restated Bylaws of the Company (the “Bylaws”), subject
to certain conditions, provide that any person who at any time serves or has
served as a director or officer of the Company or of any wholly owned subsidiary
of the Company shall have the right to be indemnified and held harmless by the
Company to the fullest extent from time to time permitted by law against all
liabilities and litigation expenses in the event a claim shall be made or
threatened against that person in, or that person is made or threatened to be
made a party to, any proceeding arising out of that person’s status as such or
that person’s activities in any such capacity; and

WHEREAS, the Bylaws and the North Carolina Business Corporation Act, by their
nonexclusive nature, allow for contracts between the Company and its directors
and officers with respect to indemnification, which may include, without
limitation, provisions for recovery of reasonable costs, expenses and attorney
fees and provisions establishing reasonable procedures for determining and
enforcing indemnification rights.

WHEREAS, in order to induce Indemnitee to continue to serve as a director and/or
officer of the Company and in part to provide Indemnitee with specific
contractual assurance that the protection promised by the Bylaws will be
available to the Indemnitee (regardless of, among other things, any amendment to
or revocation of the Bylaws or any change in the composition of the Company’s
Board of Directors (the “Board”) or any acquisition transaction involving the
Company), the Company wishes to provide in this Agreement for the
indemnification of and the advancement of expenses to the Indemnitee to the
fullest extent permitted by law and as set forth in this Agreement, and, to the
extent insurance is maintained, for the continued coverage of Indemnitee under
the Company’s directors’ and officers’ liability insurance policies.

NOW, THEREFORE, in consideration of the premises and of the Indemnitee
continuing to serve the Company directly or, at its request, another enterprise,
and intending to be legally bound hereby, the parties hereto do hereby covenant
and agree as follows:

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1. CERTAIN DEFINITIONS

(a) “Change of Control” means if after the date hereof (i) a report on Schedule
13D shall be filed with the Securities and Exchange Commission pursuant to
Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”) disclosing that any person, other than the Company or any employee benefit
plan sponsored by the Company, is the beneficial owner (as the term is defined
in Rule 13d-3 under the Exchange Act) directly or indirectly, of twenty percent
or more of the total voting power represented by the Company’s then outstanding
Voting Securities (calculated as provided in paragraph (d) of Rule 13d-3 under
the Exchange Act in the case of rights to acquire Voting Securities); or
(ii) any person, other than the Company or any employee benefit plan sponsored
by the Company, shall purchase shares pursuant to a tender offer or exchange
offer to acquire any Voting Securities of the Company (or securities convertible
into such Voting Securities) for cash, securities or any other consideration,
provided that after consummation of the offer, the person in question is the
beneficial owner, directly or indirectly, of twenty percent or more of the total
voting power represented by the Company’s then outstanding Voting Securities
(all as calculated under clause (i)); or (iii) the shareholders of the Company
shall approve (A) any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation (other than a merger of
the Company in which holders of the shares of common stock of the Company, no
par value per share (the “Common Shares”) immediately prior to the merger have
the same proportionate ownership of Common Shares of the surviving corporation
immediately after the merger as immediately before), or pursuant to which Common
Shares of the Company would be converted into cash, securities or other
property, or (B) any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all or substantially all the assets of
the Company; or (iv) there shall have been a change in the composition of the
Board at any time during any consecutive twenty-four month period such that
“continuing directors” cease for any reason to constitute at least a majority of
the Board. For purposes of this clause, “continuing directors” means those
members of the Board who either were directors at the beginning of such
consecutive twenty-four month period or were elected by or on the nomination or
recommendation of at least a majority of the then-existing Board. So long as
there has not been a Change in Control within the meaning of clause (iv), the
Board may adopt by a majority vote of the “continuing directors” a resolution to
the effect that a prior Change of Control within the meaning of clauses (i) or
(ii) is no longer applicable for the purposes of future Expenses in connection
with future Proceedings to which this Agreement relates.

(b) “Expenses” mean expenses of every kind incurred in connection with a
Proceeding, including counsel fees. Expenses shall include, without limitation,
court costs, transcript costs, fees of experts, witness fees, travel expenses,
duplicating costs, printing and binding costs, telephone and fax charges,
postage, delivery service charges, costs associated with procurement of surety
bonds or loans or other costs associated with the stay of a judgment, penalty or
fine, and all other disbursements or expenses of the types customarily incurred
in connection with prosecuting, defending, preparing to prosecute or defend,
investigating, or being or preparing to be a witness in a Proceeding.

 

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(c) “Independent Counsel” means a lawyer or law firm that is experienced in
matters of corporation law and neither presently is, nor in the past five years
has been, retained to represent: (i) the Company or the Indemnitee in any
matter, or (ii) any other party to the Proceeding giving rise to a claim for
indemnification hereunder. Notwithstanding the foregoing, the term “Independent
Counsel” shall not include any person who, under the applicable standards of
professional conduct then prevailing, would have a conflict of interest in
representing either the Company or the Indemnitee in an action to determine
Indemnitee’s rights under this Agreement. Independent Counsel may be, but need
not be, a member(s) of the bar of the State of North Carolina.

(d) “Proceeding” means any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, and
whether or not brought by or on behalf of the Company, including all appeals
therefrom. A “Proceeding” may be instituted by another party, or by or in the
right of the Company, or by the Indemnitee. The term “Proceeding” shall also
include any preliminary inquiry or investigation that the Indemnitee in good
faith believes might lead to the institution of a “Proceeding.”

(e) “Reviewing Party” means any appropriate person or body consisting of (i) a
member or members of the Board; (ii) any other person or body duly appointed by
the Board who is not a party to the particular Proceeding for which the
Indemnitee is seeking indemnification; or (iii) Independent Counsel.

(f) “Voting Securities” means any securities of the Company that vote generally
in the election of directors.

2. TERM OF AGREEMENT: This Agreement shall continue until and terminate upon the
later of (i) the tenth anniversary after the date that the Indemnitee shall have
ceased to serve as a director or officer of the Company (or in any other
capacity in respect of which he or she has rights of indemnification hereunder);
or (ii) the final termination of all pending Proceedings in respect of which
Indemnitee is granted rights of indemnification or advancement of Expenses
hereunder, including any Proceeding commenced by the Indemnitee to enforce the
Indemnitee’s rights under this Agreement.

3. RIGHT TO INDEMNIFICATION AND ADVANCE; HOW DETERMINED IF UNSUCCESSFUL.

(a) Right to Indemnification. Subject to Subsection (c) below, in the event the
Indemnitee was, is or becomes a party to or witness or other participant in, or
is threatened to be made a party to or witness or other participant in, a
Proceeding arising out of Indemnitee’s present or former status as a director or
officer of the Company, or Indemnitee having served at the request of the
Company as a director, officer, employee, trustee, agent or fiduciary of another
corporation, joint venture, employee benefit plan, trust or other enterprise,
the Company shall indemnify the Indemnitee to the fullest extent permitted by
law in effect on the date hereof (and to such greater extent as applicable law
may hereafter permit) against the obligation to pay any and all Expenses,
judgments, settlements, penalties, or fines (including any interest assessed,
and

 

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including any excise tax assessed with respect to an employee benefit plan)
incurred on account of or with respect to such Proceeding. To the extent not
previously paid by Expense Advance under subsection (b) below, such
indemnification shall be made as soon as practicable after determination that
Indemnitee is entitled thereto, but in any event no later than sixty (60) days
after such determination. This Agreement shall be effective as well with respect
to any such Proceedings that relate to acts or omissions occurring or allegedly
occurring prior to the execution of this Agreement, and regardless of whether
the Company may have been incorporated in a different jurisdiction at the time
of such acts or omissions.

(b) Expense Advance. In connection with any such Proceeding, if so requested by
the Indemnitee, the Company shall advance, within ten (10) business days of such
request, any and all reasonable Expenses to the Indemnitee (an “Expense
Advance”), subject to Subsection (c) below. The secretary shall promptly forward
notice of such request to all directors. Within 10 days after forwarding of the
request, any disinterested director may call a meeting of all disinterested
directors to review the reasonableness of the Expenses so requested. No advance
shall be made if a majority of disinterested directors affirmatively determines
that an item or items of Expenses are unreasonable in amount, but any remaining
Expenses shall be advanced. An Expense Advance shall be made without awaiting
the results of the Proceeding giving rise to the Expenses or the outcome of any
further Proceeding to determine the Indemnitee’s right to indemnification
hereunder, and without making any preliminary determination as to the
Indemnitee’s state of mind at the time of the activities in question.
Notwithstanding the foregoing, the Company shall not be obligated to indemnify
under this Section 3 a person made a party to a Proceeding if (i) the Indemnitee
is not successful within the meaning of Section 6 and (ii) the appropriate
Reviewing Party specified in subsection (e) below shall have affirmatively
determined (in a written opinion in any case in which Independent Counsel
referred to in Section 4 hereof is involved, a copy of which shall be delivered
to the Indemnitee) that the Indemnitee’s activities in question were at the time
taken known or believed by him to be clearly in conflict with the best interests
of the Company.

(c) Reimbursement by Indemnitee. The obligation of the Company promptly to make
an Expense Advance(s) pursuant to subsection (b) above shall be enforceable by
the Indemnitee in summary judicial proceedings; but shall be subject, however,
to the condition subsequent that if, when and to the extent the Reviewing Party
may subsequently determine that the Indemnitee’s activities were at the time
taken known or believed by him to be clearly in conflict with the best interests
of the Company, then the Company shall be entitled to be reimbursed by the
Indemnitee for all such amounts theretofore advanced. The obligation of the
Indemnitee to make such reimbursement shall be unsecured and without interest.
The Indemnitee hereby undertakes so to reimburse the Company, the receipt of
which unsecured and interest free undertaking is hereby accepted by the Company
as the sole condition of advancing the Indemnitee’s Expenses pursuant to
subsection (b) above. If the Indemnitee has commenced legal or arbitration
proceedings to secure a determination that the Indemnitee should be indemnified
hereunder, the Indemnitee shall not be required to reimburse the Company for any
Expense Advance until a final determination is made by the court or the
arbitrators, as the case may be, that the Indemnitee’s activities were at the
time taken known or believed by him to be clearly in conflict with the best
interests of the Company.

 

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(d) Proceedings Initiated by Indemnitee. Notwithstanding anything in this
Agreement to the contrary, prior to any Change in Control (other than one
approved in advance by a majority of the Board who were elected by the
shareholders prior to the Change of Control), the Indemnitee shall not have any
right to indemnification or Expense Advance pursuant to this Agreement in
connection with any Proceeding initiated by the Indemnitee unless the Board has
authorized or consented to the initiation of such Proceeding or where the
primary purpose of the Proceeding is to enforce the Indemnitee’s rights under
this Agreement.

(e) Reviewing Party. If there has not been a Change in Control, the Reviewing
Party shall be as determined by the Board, either in the specific case or under
procedures adopted by the Board. If there has been a Change in Control (other
than one approved in advance by a majority of the Board who were elected by the
shareholders prior to such Change in Control), the Reviewing Party shall be the
Independent Counsel referred to in Section 4.

(f) Arbitration Following Change of Control. If there has been a Change in
Control and any dispute arises under this Agreement, the parties agree that at
the Indemnitee’s option such dispute shall be resolved by binding arbitration
proceedings in accordance with the rules of the American Arbitration Association
and the results of such proceedings shall be conclusive on both parties and
shall not be subject to judicial interference or review on any ground
whatsoever, including without limitation any claim that the Company was
wrongfully induced to enter into this Agreement to arbitrate such a dispute. The
Company shall pay the cost of any arbitration proceedings under this Agreement.
The Indemnitee shall be entitled to advancement of his Expenses in connection
with such proceedings and, notwithstanding anything to the contrary in
subsection (c) above, the Indemnitee shall be obligated to reimburse the Company
for his Expenses in connection with such arbitration proceedings only if it is
finally and specifically determined by the arbitrators that the Indemnitee’s
position in initiating the arbitration was frivolous and completely without
merit. The arbitrators shall have the authority to award Expenses (including,
for clarification, counsel fees)

4. INDEPENDENT COUNSEL.

(a) Selection Following Change of Control. The Company agrees that if there is a
Change in Control of the Company (other than a Change of Control which has been
approved in advance by a majority of the Board who were elected by the
shareholders prior to such Change in Control), then with respect to all matters
thereafter arising concerning the rights of the Indemnitee to indemnity payments
and Expense Advances under the Bylaws, this Agreement or any other agreement,
bylaw or provision of the Company’s Restated Articles of Incorporation (the
“Charter”) now or hereafter in effect relating to indemnification, the Company
shall (unless otherwise agreed by the Indemnitee) seek legal advice exclusively
from Independent Counsel selected by the Indemnitee and approved by the Company
(in accordance with Subsection (b) below). Such counsel, among other things,
shall render its written opinion to the Company and to the Indemnitee as to
whether the Indemnitee is entitled to be indemnified under this Agreement. The
Company agrees to pay the reasonable fees and expenses of the Independent
Counsel and fully to indemnify the Independent Counsel against any and all
reasonable expenses (including attorneys’ fees), claims, liabilities and damages
arising out of or relating to this Agreement or the Independent Counsel’s
engagement pursuant hereto.

 

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(b) Objection to Selection. Following written notice by the Indemnitee to the
Company of the initial selection of Independent Counsel by the Indemnitee the
Company may within fourteen (14) days deliver to the Indemnitee a written
objection to such selection. Such objection may be asserted only on the ground
that the Independent Counsel selected does not satisfy the definition of
Independent Counsel in subsection 1(c) and the objection shall set forth with
particularity the factual basis for such assertion. Absent a proper and timely
objection, the person, persons or firm selected shall act as Independent
Counsel. If such written objection is made, the Indemnitee may select alternate
Independent Counsel in the same manner as the initial selection. If the Company
objects to the alternate selection within fourteen (14) days of written notice
thereof, the Indemnitee may either seek a judicial determination that such
objections were inappropriate or else the Indemnitee may direct that the Company
select Independent Counsel by lot from among those firms that have a North
Carolina office comprised of more than 25 attorneys and have a rating of “AV” or
better in the then current Martindale-Hubbell Law Directory. Such selection by
lot shall be made by the principal financial officer of the Company in the
presence of the Indemnitee (and the Indemnitee’s legal counsel, or either or
neither of them as the Indemnitee may elect). Such law firms shall be contacted
in the order of their selection, requesting each firm to accept engagement to
make the determination required, until one of such firms accepts such
engagement.

5. INDEMNIFICATION FOR ENFORCEMENT EXPENSES. The Company shall indemnify the
Indemnitee against any and all Expenses (including attorneys’ fees) and, if
requested by the Indemnitee, shall (within ten 10) business days of such
request) advance such Expenses to the Indemnitee, which are incurred by the
Indemnitee in connection with any Proceeding initiated by the Indemnitee for:
(i) indemnification or advancement of Expenses by the Company under the North
Carolina Business Corporation Act (the “NCBCA”), the Bylaws, the Charter, this
Agreement, or any other agreement or Company bylaw, Charter provision, vote of
shareholders or resolution of the Board now or hereafter in effect relating to
indemnification; or (ii) recovery under any directors’ and officers’ liability
insurance policies maintained by the Company. The Indemnitee shall reasonably
cooperate with the person, persons or entity making the determination with
respect to the Indemnitee’s entitlement to indemnification under this Agreement.
Any out-of-pocket expenses incurred by the Indemnitee in so cooperating shall be
borne by the Company (irrespective of the determination as to the Indemnitee’s
entitlement to indemnification) and the Company hereby indemnifies and agrees to
hold the Indemnitee harmless therefrom.

6. SUCCESS; PARTIAL INDEMNITY, ETC. Notwithstanding any other provision of this
Agreement, to the extent that the Indemnitee has been successful on the merits
or otherwise in defense of any or all claims made against him in a Proceeding or
in defense of any issue or matter therein, including dismissal without
prejudice, the Indemnitee shall be indemnified against all Expenses incurred in
connection therewith. If the Indemnitee is entitled under any provision of this
Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, settlements, penalties or fines paid as a result of a
Proceeding but not, however, for all of the total amount thereof, the Company
shall nevertheless indemnify the Indemnitee for the portion thereof to which it
is determined the Indemnitee is entitled.

 

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7. BURDEN OF PROOF. In connection with any determination by the Reviewing Party
or otherwise as to whether the Indemnitee is entitled to be indemnified
hereunder, the person or persons or entity or body making such determination
shall presume that the Indemnitee is entitled to indemnification under this
Agreement and the burden of overcoming such presumption shall be on the Company.
The termination of any Proceeding by judgment, order, settlement (whether with
or without court approval) or conviction, or upon a plea of nolo contendere, or
its equivalent, shall not create a presumption that the Indemnitee’s activities
were at the time taken known or believed by him to be clearly in conflict with
the best interests of the Company, or that a court has determined that
indemnification is not permitted. In addition, neither the failure of the
Reviewing Party to have made a determination as to the Indemnitee’s state of
mind, nor an actual determination by the Reviewing Party that the Indemnitee had
a state of mind prior to the commencement of arbitration (if applicable) or
legal proceedings to secure a determination that the Indemnitee should be
indemnified under this Agreement and applicable law, shall be a defense to the
Indemnitee’s claim or create a presumption of any kind. The knowledge and/or
actions, or failure to act, of any director, officer, agent, fiduciary or
employee of the Company shall not be imputed to the Indemnitee for purposes of
determining the right to indemnification under this Agreement.

8. NONEXCLUSIVITY, ETC. The rights of the Indemnitee hereunder shall be in
addition to any other rights the Indemnitee may have under the Bylaws, the
Charter, the NCBCA, any other agreement, a vote of shareholders or a resolution
of the Board or otherwise. To the extent that a change in the NCBCA (whether by
statute or judicial decision) permits greater indemnification by agreement than
would be afforded currently under the Bylaws, the Charter and this Agreement, it
is the intent of the parties that the Indemnitee shall enjoy by this Agreement
the greater benefits so afforded by such change.

9. CONTRIBUTION. In the event the indemnification provided for in Section 3 of
this Agreement is unavailable to the Indemnitee in connection with any
Proceeding under any Federal law, the Company, in lieu of indemnifying the
Indemnitee, shall contribute to the Expenses incurred by the Indemnitee in such
proportion as deemed fair and reasonable by the Reviewing Party, in light of all
the circumstances of the Proceeding giving rise to such Expenses, in order to
reflect (i) the relative benefits received by the Company and the Indemnitee as
a result of the event(s) and/or transaction(s) giving rise to such Proceeding;
and (ii) the relative fault of each.

10. LIABILITY INSURANCE. To the extent the Company maintains an insurance policy
or policies providing directors’ and officers’ liability insurance, the
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any Company
director or officer.

11. PERIOD OF LIMITATIONS. No legal action shall be brought and no cause of
action shall be asserted by or in the right of the Company against the
Indemnitee, the

 

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Indemnitee’s spouse, heirs, executors or personal or legal representatives after
the expiration of two (2) years from the date of accrual of such cause of
action, and any claim or cause of action of the Company shall be extinguished
and deemed released unless asserted by the timely filing of a legal action
within such two-year period; provided, however, that if any shorter period of
limitations is otherwise applicable to any such cause of action such shorter
period shall govern.

12. PROCEDURES VALID. The Company shall be precluded from asserting in any
judicial proceeding or arbitration commenced pursuant to this Agreement that the
procedures and presumptions of this Agreement are not valid, binding and
enforceable and shall stipulate in any such court or before any such arbitrator
that the Company is bound by all the provisions of this Agreement. If a
determination is made that the Indemnitee is entitled to indemnification, the
Company shall be bound by such determination in any judicial proceeding or
arbitration

13. AMENDMENTS, ETC. No supplement, modification or amendment of this Agreement
shall be binding unless executed in writing by both of the parties hereto. No
waiver of any of the provisions of this Agreement shall be deemed or shall
constitute a waiver of any other provisions hereof (whether or not similar) nor
shall such waiver constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the waiving party.

14. SUBROGATION. In the event of payment under this Agreement, the Company shall
be subrogated to the extent of such payment to all of the rights of recovery of
the Indemnitee, who shall execute an appropriate document in favor of the
Company to secure such rights.

15. NO DUPLICATION OF PAYMENTS. The Company shall not be liable under this
Agreement to make any payment in connection with any Proceeding to the extent
the Indemnitee has otherwise actually received payment (under any insurance
policy, the Charter, the Bylaws or otherwise) of the amounts otherwise
indemnifiable hereunder.

16. BINDING EFFECT, ETC. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective
successors, assigns (including any direct or indirect successor by purchase,
merger or consolidation or otherwise to all or substantially all of the business
and/or assets of the Company), spouses, heirs, executors and personal and legal
representatives. This Agreement shall continue in effect regardless of whether
the Indemnitee continues to serve as a director or officer of the Company or of
any other entity at the Company’s request. In the event of his demise, this
Agreement shall be enforceable by the Indemnitee’s legal representatives as
fully as if the Indemnitee had survived.

17. SEVERABILITY; HEADINGS; PRONOUNS. The provisions of this Agreement shall be
severable in the event that any of the provisions hereof (including any
provision within a single section, paragraph or sentence) is held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable in any
respect, and the validity and enforceability of any such provision in every
other respect and of the remaining provisions hereof shall not be in any way
impaired and shall remain enforceable to the fullest extent permitted by law.
The headings of the Sections of this Agreement are inserted for convenience only
and shall

 

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not be deemed to constitute part of this Agreement or to affect the construction
thereof. The masculine pronoun wherever used in this Agreement includes the
corresponding feminine pronoun.

18. NOTICE OF PROCEEDINGS; NOTICES. The Indemnitee agrees promptly to notify the
Company in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter that may be subject to indemnification or advancement of Expenses
covered hereunder. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given
(i) upon delivery if delivered by hand and receipted for by the party to whom
said notice or other communication shall have been directed, or (ii) on the
third business day after mailing if mailed by certified or registered mail with
postage prepaid, and addressed as follows: If to the Indemnitee, as shown after
the Indemnitee’s signature below; and if to the Company, to Corporate Secretary,
Charles & Colvard, Ltd., 300 Perimeter Park Drive, Suite A, Morrisville, North
Carolina 27560 or such other address as may have been furnished in writing to
the Indemnitee by the Company or to the Company by the Indemnitee, as the case
may be.

19. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of North Carolina applicable
to contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.

 

CHARLES & COLVARD, LTD. By:  

 

Name:   Title:   INDEMNITEE

 

 

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