Document:

Management Incentive Plan (2007)

 EXHIBIT 10.97 
 MANAGEMENT INCENTIVE PLAN 
 (2007) 
 The purpose of the Management Incentive Plan (the “Plan”) is to provide management with incentives for the successful execution of both short- and long-term plans that: 
  

	 	1.	Provide significant revenue growth, 

  

	 	2.	Maintain and increase the profitability of Charles & Colvard, Ltd. (the “Corporation”), 

  

	 	3.	Increase the public market valuation of the Corporation, and 

  

	 	4.	Develop the human, fiscal, and physical capacity to enable the Corporation to accelerate and maintain growth into the indefinite future. 

 The Board of Directors of the Corporation (“Board”) recognizes that there are currently four senior management positions that will play important roles in
achieving the stated goals. The Board has established specific goals for 2007 net sales, and net income, and has set strategic objectives for the Corporation. The Board has tasked these senior managers with the responsibility and accountability for
meeting both the annual goals and the strategic objectives. 
 As tangible incentives to the senior managers, the Board has determined that a short-term
incentive consisting of an annual cash bonus and a long-term incentive consisting of restricted stock awards should be offered to the indicated senior managers for attaining the defined goals. 
 Upon the completion of the annual audit by the Corporation’s outside accountants, each of the identified senior managers shall be eligible to receive cash bonuses
and restricted stock awards as defined in this Plan. Earning of the restricted stock awards will be subject to the senior manager’s continuing service to the Corporation as an employee for a minimum of three years following the date of grant of
the restricted stock, and as further defined in the documents that accompany the restricted stock awards. The restricted stock awards are intended to be a reward for the continuing achievement and success of the Corporation due to the senior
manager’s service and contributions. The base number of shares of the Corporation’s common stock which may be earned through a restricted stock awarded will be determined based on the closing price of the Corporation’s common stock on
December 31, 2006 (as adjusted for any stock splits or dividends prior to the issuance of a restricted stock award) and the restriction shall terminate on the third anniversary of the award date. Unless the Committee determines otherwise, if
the senior manager terminates employment, prior to the third anniversary of the restricted stock award, the stock award shall be forfeited and the senior manager shall have no right to the shares subject to the restricted stock award. 
 The individuals and titles of the individuals currently eligible for inclusion in the Plan are: 
  

			
	 Name
	 	 Title

	Robert S. Thomas	 	CEO
	James Braun	 	CFO & Vice President
	Dennis Reed	 	Executive Vice President and Chief Marketing Officer
	Steven Abate	 	Lead Director of Manufacturing

 The Committee, in its discretion, may determine that other senior managers of the Corporation may also be eligible to
participate in the Plan. Participation in the Plan in any one year does not guarantee the right to participate in any other year. 
 I. Short-Term
Incentive Opportunity 
 The short-term incentive portion of the Plan shall provide each eligible senior manager with the opportunity to earn up to 40% of
their total 2007 salary (excluding bonuses) for achieving goals for three separate components of the Corporation’s approved plans as approved by the Board. The maximum opportunity of 40% shall be prorated among the approved goals for:
(i) Key Objectives – 20%; (ii) Net Sales – 60%; and (iii) Net Income – 20% as shown on Table A below: 
 Table A - Short Term Incentive Opportunities 
  

								
	 Senior Manager A – Short-term Incentive Opportunity

	 Base Salary
	  	$	200,000	 	 		
	 STI (%)
	  	 	40	%	 		
	 STI ($)
	  	$	80,000	 	 		
	 Short-term Incentive Weighting
	  				 		
	 Key Objectives
	  	 	20	%	 	$	16,000
	 Net Sales
	  	 	60	%	 	$	48,000
	 Net Income
	  	 	20	%	 	$	16,000
		  	 	100	%	 	$	80,000

 Based upon management’s recommendation, the Committee has approved specific Key Objectives for each senior
manager with an appropriate weighting. The portion of the short-term incentive determined by the “Key Objectives” criteria shall be awarded based upon management’s recommendations, and the Committee’s determination, as to the
success of the senior manager in achieving the specific key objectives for that senior manager during 2007. An example is provided below: 
 Table B – Short-Term Incentive for Attaining Key Objectives 
  

					
	 Award Opportunity
	  

	 Base Salary
	  	$	200,000	 
	 Total Award Opportunity at Target (%)
	  	 	40	%
	 Total Award Opportunity at Target ($)
	  	$	80,000	 
		
	 Key Objectives as a % of Award
	  	 	20	%
	 Key Objectives at Target ($)
	  	$	16,000	 

											
	 Calculation of Key Objectives

	 Goals
	 	 Approved
 Weighting
	 	     Gate    
 = 50%
	 	     Target    
 = 100%
	 	 Performance
 Achieved
	 	 Payout

	 Individual Goal #1
	 	50%	 	     A    
 $4,000
	 	     B    
 $8,000
	 	“A”	 	$4,000
	 Individual Goal #1
	 	30%	 	     A    
 $2,400
	 	     B    
 $4,800
	 	Above “B”	 	$4,800
	 Individual Goal #1
	 	20%	 	     A    
 $1,600
	 	     B    
 $3,200
	 	 Between “A”
 and “B”
	 	$2,400
		 	 	 	 	 	 	 	 	 	 
	 Totals
	 	100%	 	 $8,000
     50%  
	 	 $16,000
     100%  
	 		 	 $11,200
     70%

 No short-term incentive for the Net Sales component shall be paid unless the Corporation attains 80% of the
approved Net Sales goal. Upon reaching 80% of the approved goal, the portion of the short-term incentive earned from “Net Sales” shall be determined as provided below: 
 Table C – Short-Term Incentive for Attaining Net Sales Goal 
  

							
	 Goal
 Achieved
(% of Net
Sales)
	 	Percent of
Maximum
Payment	 	 	Incentive
Dollars
Earned
	80%	 	25	%	 	$	12,000
	81%	 	28.75	%	 	$	13,800
	82%	 	32.50	%	 	$	15,600
	83%	 	36.25	%	 	$	17,400
	84%	 	40.00	%	 	$	19,200
	85%	 	43.75	%	 	$	21,000
	86%	 	47.50	%	 	$	22,800
	87%	 	51.25	%	 	$	24,600
	88%	 	55.00	%	 	$	26,400
	89%	 	58.75	%	 	$	28,200
	90%	 	62.5	%	 	$	30,000
	91%	 	66.25	%	 	$	31,800
	92%	 	70.00	%	 	$	33,600
	93%	 	73.75	%	 	$	35,400
	94%	 	77.50	%	 	$	37,200
	95%	 	81.25	%	 	$	39,000
	96%	 	85.00	%	 	$	40,800
	97%	 	88.75	%	 	$	42,600
	98%	 	92.50	%	 	$	44,400
	99%	 	96.25	%	 	$	46,200
	100%	 	100.00	%	 	$	48,000

 No short-term incentive shall be paid for the Net Income component unless the Corporation attains 80% of the approved Net
Income goal. Upon reaching 80% of the approved goal, the portion of the short term incentive from Net Income shall be determined as provided below. Net Income will include an accrual for both the total cash bonus under the Plan and an accrual for
the current year portion, if any, of compensation expense relating to the restricted stock awards. 
 Table D – Short-Term Incentive
for Attaining Net Income Goal 
  

							
	Goal Achieved
(% of Net
Income)	 	Percent of
Maximum
Payment	 	 	Incentive
Dollars
Earned
	80%	 	25	%	 	$	4,000
	81%	 	28.75	%	 	$	4,600
	82%	 	32.50	%	 	$	5,200
	83%	 	36.25	%	 	$	5,800
	84%	 	40.00	%	 	$	6,400
	85%	 	43.75	%	 	$	7,000
	86%	 	47.50	%	 	$	7,600
	87%	 	51.25	%	 	$	8,200
	88%	 	55.00	%	 	$	8,800
	89%	 	58.75	%	 	$	9,400
	90%	 	62.5	%	 	$	10,000
	91%	 	66.25	%	 	$	10,600
	92%	 	70.00	%	 	$	11,200
	93%	 	73.75	%	 	$	11,800
	94%	 	77.50	%	 	$	12,400
	95%	 	81.25	%	 	$	13,000
	96%	 	85.00	%	 	$	13,600
	97%	 	88.75	%	 	$	14,200
	98%	 	92.50	%	 	$	14,800
	99%	 	96.25	%	 	$	15,400
	100%	 	100.00	%	 	$	16,000

 In the event the Net Income goal is exceeded, the total dollar value of the short-term incentive award will be
calculated, and the total short-term incentive payment shall be modified to increase the total amount of the award up to a maximum of 200% as set out on Table E below: 

 Table E - Calculation of Short Term Incentive and Application of Modifier for Exceeding the Goal

  

			
	 % of Net
 Income Goal
 Achieved
	 	 Modifier applied
 to STI dollar
 value

	   101%
	 	101.00%
	   102%
	 	102.00%
	   103%
	 	103.00%
	   104%
	 	104.00%
	   105%
	 	105.00%
	   106%
	 	106.00%
	   107%
	 	107.00%
	   108%
	 	108.00%
	   109%
	 	109.00%
	 >110%
	 	110.00%
	 >115%
	 	121.25%
	 >120%
	 	132.50%
	 >125%
	 	143.75%
	 >130%
	 	155.00%
	 >135%
	 	166.25%
	 >140%
	 	177.50%
	 >145%
	 	188.75%
	 >150%
	 	200.00%

  

					
	Amount Earned	 
	 Key Objectives
	  	$	11,200	 
	 Net Sales
	  	$	44,400	 
	 Net Income
	  	$	16,000	 
		  	 	 	 
		  	$	71,600	 
	 Net Income Modifier
	  			
	 Net Income at 108% of Goal
	  	 	108	%
		  	 	 	 
		  	$	77,328	 

 II. Long-Term Incentive Opportunity 
 As additional incentive and motivation, and to provide for stability and continuity of service among the senior leadership of the Corporation, the Board hereby establishes a long-term incentive opportunity for the
indicated senior managers of the Corporation to earn restricted stock awards. The restricted stock awards shall be awarded based on the Corporation’s attainment of its Net Income goal for 2007. The base number of restricted shares available to
each senior manager shall be determined based on 75% of the senior manager’s 2007 total salary (excluding any bonuses otherwise earned) divided by the closing price of the Corporation’s common stock on December 31, 2006 (as adjusted
for any stock splits or dividends prior to the issuance of a restricted stock award). Table F below provides an example of the base number of restricted shares available to each senior manager in the long-term incentive portion of the Plan.

 Table F – Example of Calculation of Restricted Stock 
  

					
	 Long-term Incentive Opportunity
	  

	 Senior Manager’s Total 2007 Salary
	  	$	200,000	 
	 LTI (%)
	  	 	75	%
	 LTI ($)
	  	$	150,000	 
	 12/30/05 Stock Price (example only)
	  	$	25.00	 
	 # Restricted Shares available
	  	 	6,000	 
	 Long-term Incentive Weighting
	  			
	 Net Income
	  	 	100	%

 Based on the actual Net Income of the Corporation for 2007, the Corporation will make a restricted stock award to
each senior manager with the base number of restricted shares modified as set out in Table G below. 
 Table G – Determination of the
Number of Restricted Shares to be Awarded 
  

							
	 Percent of
 Goal
 Achieved
	 	% of LTI Value to be Awarded	 	 Percent
 of Goal
 Achieved
	 	 % of LTI Value to
 be
 Awarded

	   80%
	 	  50.0%	 	101%	 	105.0%
	   81%
	 	  52.5%	 	102%	 	110.0%
	   82%
	 	  55.0%	 	103%	 	115.0%
	   83%
	 	  57.5%	 	104%	 	120.0%
	   84%
	 	  60.0%	 	105%	 	125.0%
	   85%
	 	  62.5%	 	106%	 	130.0%
	   86%
	 	  65.0%	 	107%	 	135.0%
	   87%
	 	  67.5%	 	108%	 	140.0%
	   88%
	 	  70.0%	 	109%	 	145.0%
	   89%
	 	  72.5%	 	110%	 	150.0%
	   90%
	 	  75.0%	 	111%	 	155.0%
	   91%
	 	  77.5%	 	112%	 	160.0%
	   92%
	 	  80.0%	 	113%	 	165.0%
	   93%
	 	  82.5%	 	114%	 	170.0%
	   94%
	 	  85.0%	 	115%	 	175.0%
	   95%
	 	  87.5%	 	116%	 	180.0%
	   96%
	 	  90.0%	 	117%	 	185.0%
	   97%
	 	  92.5%	 	118%	 	190.0%
	   98%
	 	  95.0%	 	119%	 	195.0%
	   99%
	 	  97.5%	 	120%	 	200.0%
	 100%
	 	100.0%	 		 	

										
	 Examples of Percent of Goal Accomplished
	  

	 Net Income
	  	79	%	 	80	%	 	108	%
	 Long-term Incentive Opportunity
	  			 			 		
	 Number of Restricted Shares at Net Income Goal
	  	6,000	 	 	6,000	 	 	6,000	 
	 Percentage Earned
	  	0	 	 	50	%	 	140	%
	 LTI (#)
	  	0	 	 	3,000	 	 	8,400	 

 Each award shall require the senior manager to remain in service to the Corporation as a senior manager,
consultant or Director for three full years from the date of the award. Unless the Committee determines otherwise, upon termination of employment prior to the third anniversary of the restricted stock award, the stock award will be forfeited and the
senior manager shall have no right to the shares subject to the restricted stock award. 
 III. Terms and Conditions of the Plan 
 Unless otherwise stated, the following terms and conditions apply to any incentives awarded under the Plan: 
 A. Administration of the Plan 
 1. The
Plan shall be administered by the Board or, upon its delegation, by the Committee. For the purposes of the Plan, the term “Committee” shall, unless otherwise required by applicable law, refer to the Board and, upon its delegation to the
Committee of all or part of its authority to administer the Plan, to the Committee. 
 2. In addition to action by meeting in accordance with
applicable law, any action of the Committee with respect to the Plan may be taken by a written instrument signed by all of the members of the Committee and any such action so taken by written consent shall be as fully effective as if it had been
taken by a majority of the members at a meeting duly held and called. Subject to the provisions of the Plan, the Committee shall have full and final authority in its discretion to take any action with respect to the Plan including, without
limitation, the authority (a) to determine all matters relating to any awards under the Plan, including selection of individuals to be granted awards, the types of awards, the number of shares of Common Stock, if any, subject to an award, and
all terms, conditions, restrictions and limitations of an award; (b) to prescribe the form or forms of any agreements, if any, evidencing any awards granted under the Plan; (c) to establish, amend and rescind rules and regulations for the
administration of the Plan; and (d) to construe and interpret the Plan and any agreements evidencing awards granted under the Plan, to establish and interpret rules and regulations for administering the Plan and to make all other determinations
deemed necessary or advisable for administering the Plan. In addition, except to the extent otherwise required under Internal Revenue Code (“Code”) Section 409A, related regulations or other guidance, the Committee shall have
authority, in its sole discretion, to accelerate the date that any award that was not otherwise exercisable or vested shall become exercisable or vested in whole or in part without any obligation to accelerate such date with respect to any other
awards granted to any recipient. In addition, the Committee shall have the authority and discretion to establish terms and conditions of awards (including but not limited to the establishment of subplans) as the Committee determines to be necessary
or appropriate to conform to the applicable requirements or practices of jurisdictions outside of the United States. 

 B. Board Authority to Reduce or Eliminate Awards 
 The Committee shall have full authority to reduce or eliminate all awards hereunder. Unless the Committee determines otherwise, a participant who terminates employment
for any reason prior to the completion of the time period on which an award is based or vesting period applicable to the award shall not be eligible for the award. 
 C. Source of Restricted Stock Awards 
 Provided sufficient shares remain for issuance, any restricted stock awards
made under the Plan shall be issued under and pursuant to the 1997 Omnibus Stock Plan of Charles & Colvard, Ltd. as amended, or any subsequent incentive stock plan approved by the Corporation and its shareholders (collectively the
“Omnibus Plan”). With respect to any restricted stock awards made under the Plan, all terms, conditions, and requirements of such Omnibus Plan are incorporated into the Plan by reference. For any restricted stock awards, to the extent that
there is a contradiction between the Plan and the Omnibus Plan or an ambiguity as to the provisions of the Plan, the terms of such Omnibus Plan shall control. All shares issued under the Plan shall are to be drawn from the shares reserved under such
Omnibus Plan for issuance of awards. 
 D. Compliance with Code Section 409A 
 1. Notwithstanding any other provision in the Plan or an award to the contrary, if and to the extent that Section 409A of the Code is deemed to apply
to the Plan or any award granted under the Plan, it is the general intention of the Corporation that the Plan and all such awards shall comply with Code Section 409A, related regulations or other guidance, and the Plan and any such award shall,
to the extent practicable, be construed in accordance therewith. Deferrals of shares or cash distributable pursuant to the Plan in a manner that would cause Code Section 409A to apply shall not be permitted. Without in any way limiting the
effect of the foregoing, in the event that Code Section 409A, related regulations or other guidance require that any special terms, provisions or conditions be included in the Plan or any award, then such terms, provisions and conditions shall,
to the extent practicable, be deemed to be made a part of the Plan or award, as applicable. Further, in the event that the Plan or any award shall be deemed not to comply with Code Section 409A or any related regulations or other guidance, then
neither the Corporation, the Board nor its or their designees or agents shall be liable to any participant or other person for actions, decisions or determinations made in good faith. 
 2. Without limiting the effect of Section D.1., herein, except to the extent otherwise required or permitted under Code Section 409A, related
regulations or other guidance, distributions of benefits pursuant to awards under the Plan must be made no later than the later of (a) the date that is 2-1/2 months from the end of the employee’s first taxable year in which the amount is
no longer subject to a substantial risk of forfeiture; or (b) the date that is 2-1/2 months from the end of the Corporation’s first taxable year in which the amount is no longer subject to a substantial risk of forfeiture. 

 E. Applicable Law 
 The Plan shall be governed by and construed in accordance with the laws of the State of North Carolina, without regard to the conflicts of laws provisions of any state, and in accordance with applicable federal laws
of the United States. 
 F. Amendment and Termination of the Plan 
 1. The Plan and any award may be amended or terminated at any time by the Board or the Committee. No action to amend or terminate the Plan or an award
shall permit the acceleration of the time or schedule or any payment of amounts deemed to involve the deferral of compensation under Code Section 409A, except as may be otherwise permitted under Section 409A, related regulations or other
guidance. 
 2. Without limiting the effect of Section F.1., herein, the Board shall have unilateral authority to amend the Plan and any
award (without participant consent) to the extent necessary to comply with applicable laws, rules or regulations or changes to applicable laws, rules or regulations (including but not limited to Code Section 409A, federal securities laws or
related regulations or other guidance). 
 G. No Right or Obligation of Continued Employment 
 Nothing contained in the Plan shall require the Corporation or a related corporation to continue the employment or service of an employee, nor shall any such individual
be required to remain in the employment or service of the Corporation or a related corporation. Except as otherwise provided in the Plan (or Omnibus Plan, if applicable), all rights of a participant with respect to any award shall terminate upon the
participant’s termination of employment or service with the corporation. 
 H. Compliance with Laws 
 The Board may impose such restrictions on any shares or other payments or awards hereunder as it may deem advisable, including without limitation restrictions under the
Securities Act of 1933, as amended (the “Securities Act”), under the requirements of any stock exchange or similar organization and under any blue sky, state or foreign securities laws applicable to such shares. Notwithstanding any other
Plan provision to the contrary, the Corporation shall not be obligated to issue, deliver or transfer shares of Common Stock under the Plan, make any other distribution of benefits under the Plan or take any other action, unless such delivery,
distribution or action is in compliance with all applicable laws, rules and regulations (including but not limited to the requirements of the Securities Act). The Corporation may cause a restrictive legend to be placed on any certificate issued
hereunder in such form as may be prescribed from time to time by applicable laws and regulations or as may be advised by legal counsel. 
 I.
Unfunded Plan; No Effect on Other Plans 
 1. The Plan shall be unfunded, and the Corporation shall not be required to create a trust
or segregate any assets that may at any time be represented by awards under the Plan. The Plan shall not establish any fiduciary relationship between the Corporation and any employee or other person. Neither an employee nor any other person shall,
by reason of the 

 
Plan, acquire any right in or title to any assets, funds or property of the Corporation or any related corporation, including, without limitation, any
specific funds, assets or other property that the Corporation or any related corporation, in their discretion, may set aside in anticipation of a liability under the Plan. A participant shall have only a contractual right to the Common Stock or
other amounts, if any, payable under the Plan, unsecured by any assets of the Corporation or any related corporation. Nothing contained in the Plan shall constitute a guarantee that the assets of such entities shall be sufficient to pay any benefits
to any person. 
 2. The amount of any compensation deemed to be received by a participant pursuant to an award shall not constitute
compensation with respect to which any other employee benefits of such participant are determined, including, without limitation, benefits under any bonus, pension, profit sharing, life insurance or salary continuation plan, except as otherwise
specifically provided by the terms of such plan or as may be determined by the Board or Committee. 
 3. The adoption of the Plan shall not
affect any other compensation plans in effect for the Corporation or any related corporation, nor shall the Plan preclude the Corporation from establishing any other forms of compensation for employees or service providers of the Corporation or any
related corporation. 
  

	 	J.	Withholding; Tax Matters 

 1. The Corporation shall
withhold, or shall require the participant to pay the Corporation in cash, the amount of any local, state, federal, foreign or other tax or other amount required by any governmental authority to be withheld and paid over by the Corporation to such
authority for the account of the participant. 
 2. The Corporation makes no warranties or representations with respect to the tax
consequences (including but not limited to, income tax consequences) related to the transactions contemplated by this Plan. A participant should consult with his or her own attorney, accountant, and/or tax advisor regarding the decision to
participate in the Plan and the consequences thereof. The Corporation has no responsibility to take or refrain from taking any actions in order to achieve a certain tax result for any participant.Quarterly & Annual Incentive Plan for Non-Officer Employees (2007)

 EXHIBIT 10.98 
 QUARTERLY & ANNUAL INCENTIVE PLAN FOR NON-OFFICER EMPLOYEES (2007) 
 The Board of Directors (the “Board”) recognizes that each
employee plays an important role in the growth and financial success of Charles & Colvard, Ltd. (the “Corporation”) and wishes to provide each of those employees with meaningful incentives to work to accomplish the goals
established by the Board on an annual basis. This Quarterly & Annual Incentive Plan for Non-Officer Employees (the “Plan”) outlines the provisions of those incentives. 
 I. General Incentives 
 Effective January 1, 2007, each full time employee, including the employees of the Hong
Kong subsidiary, who is not a participant in another annual incentive plan, shall be eligible to receive five days’ pay and a stock option award for 60 shares of the common stock of the Corporation (“Common Stock”) for each fiscal
quarter when both the operating income and revenue goals of the Corporation are achieved. Should the Corporation achieve the quarterly operating income goal, but fail to meet the quarterly revenue target, each employee shall receive three days’
pay and a stock option award for 30 shares of Common Stock. Sales staff employees are eligible to receive the stock option awards, but shall not be eligible for the cash portion of this incentive because they are eligible to receive other cash
bonuses based on their individual and team sales results. For purposes of this incentive plan, the Hong Kong employees will be judged on the results of the Hong Kong subsidiary budget only. 
 Additionally, each employee shall be eligible to receive an additional incentive based on the annual results of the Corporation. Should the Corporation attain the annual
goals for operating income and revenue, irrespective of whether one or more of the quarterly goals are not attained, the employee shall receive five days’ pay and a stock option award for 60 shares of Common Stock. Should the Corporation reach
the operating income for the year, but fail to reach the revenue goal, the employee shall be awarded three days’ pay and a stock option award for 30 shares of Common Stock. 
 The restrictions on the stock awarded under this incentive program will require the individual to remain an employee on a continuous basis, and shall vest over a three-year period, one third each on the anniversary
date of the award, so that the award will vest in full on the third anniversary of the date of grant and have an expiration date on the tenth anniversary of the award date. Unless the Committee determines otherwise, if the employment of the employee
is terminated for any reason (whether by the Corporation or the employee) prior to vesting of his stock option award, the unvested portion(s) of his stock option award shall be forfeited and the employee shall have no right to the shares subject to
the unvested portion of the award. 
 II. Director Level Incentives 
 There are several key positions representing important leadership roles in the Corporation; the contributions of the individuals occupying these positions are critical to the success of the Corporation. For 2007,
these positions are: Director of Manufacturing; Director of Information 

 
Technology; Quality Process Engineer; Controller; and Managing Director, Asia. For purposes of the Plan, the Managing Director, Asia will be judged on the
results of the Hong Kong subsidiary budget only. 
 The Committee, in its discretion, may determine that individuals occupying other positions within the
Corporation may also be eligible to participate in the Plan. Participation in the Plan in any one year does not guarantee the right to participate in any other year. 
 The Committee wishes to provide each of the employees in these positions with meaningful incentives to work to accomplish the goals established by the Board on an annual basis. The following outlines the provisions of
those incentives. 
 Effective January 1, 2007, each of those employees shall be eligible to receive five days’ pay and a stock option award for
100 shares of Common Stock for each fiscal quarter when both the operating income and revenue goals of the Corporation are achieved. Should the Corporation achieve the operating income goal, but fail to meet the revenue target, each employee shall
receive three days’ pay and a stock option award for 50 shares of Common Stock. The Sales Directors are eligible for the stock option awards, but shall not be eligible for the cash portion of this incentive because they are eligible to receive
other cash bonuses based on their individual and team sales results. 
 Additionally, each of these employees shall be eligible to receive an additional
incentive based on the annual results of the Corporation. Should the Corporation attain the annual goals for operating income and revenue, irrespective of whether one or more of the quarterly goals is not attained, the employee shall receive five
days’ pay and a stock option award for 100 shares of Common Stock. Should the Corporation reach the operating income for the year, but fail to reach the revenue goal, the employee shall be awarded three days’ pay and a stock option award
for 50 shares of Common Stock. The Sales Directors are eligible for the stock option awards, but shall not be eligible for the quarterly cash portion of this incentive because they are eligible to receive other cash bonuses based on their individual
and team sales results. 
 The restrictions on the stock options awarded under this incentive program will require the individual to remain an employee on a
continuous basis and shall vest over a three-year period, one third each on the anniversary date of the award, so that the award will vest in full on the third anniversary of the date of grant. Unless the Committee determines otherwise, if the
employment of the employee is terminated for any reason (whether by the Corporation or the employee), the unvested portion(s) of his stock option award shall be forfeited and the employee shall have no right to the shares subject to the unvested
portion of the award. 
 Director Level Employees – Additional Cash Incentives 
 Additionally, each director level employee as defined above (excluding Sales Directors) shall be eligible to receive up to 25% of their actual base salary for the year as a further incentive to accomplish the goals
established for the Company by the Board of Directors and Senior Management. 
 The opportunity for each such director will be defined for each director and
the award shall be granted based on the successful execution of the operating and strategic plan as adopted by the Company Board of Directors. 

 Should the Company reach or exceed the budgeted goal for net income, each director level employee shall receive 10% of
their base salary. If the Company exceeds its Net Income goal these directors will be paid an additional 15% of their salary (for a total of 25% as defined in the first paragraph above) if they complete a minimum of three specific and measurable
tasks that will be defined at the beginning of the plan year. These tasks will be weighted at 5% each, or at the corresponding percentage based on the number of tasks assigned to that specific employee. 
 III. Terms and Conditions of the Plan 
 Unless otherwise stated, the
following terms and conditions apply to any incentives awarded under the Plan: 
  

	 	A.	Administration of the Plan 

 1. The Plan shall be
administered by the Board or, upon its delegation, by the Committee. For the purposes of the Plan, the term “Committee” shall, unless otherwise required by applicable law, refer to the Board and, upon its delegation to the Committee of all
or part of its authority to administer the Plan, to the Committee. 
 2. In addition to action by meeting in accordance with applicable law,
any action of the Committee with respect to the Plan may be taken by a written instrument signed by all of the members of the Committee and any such action so taken by written consent shall be as fully effective as if it had been taken by a majority
of the members at a meeting duly held and called. Subject to the provisions of the Plan, the Committee shall have full and final authority in its discretion to take any action with respect to the Plan including, without limitation, the authority
(a) to determine all matters relating to any awards under the Plan, including selection of individuals to be granted awards, the types of awards, the number of shares of Common Stock, if any, subject to an award, and all terms, conditions,
restrictions and limitations of an award; (b) to prescribe the form or forms of any agreements evidencing any awards granted under the Plan; (c) to establish, amend and rescind rules and regulations for the administration of the Plan; and
(d) to construe and interpret the Plan and any agreements evidencing awards granted under the Plan, to establish and interpret rules and regulations for administering the Plan and to make all other determinations deemed necessary or advisable
for administering the Plan. In addition, except to the extent otherwise required under Internal Revenue Code (“Code”) Section 409A, related regulations or other guidance, the Committee shall have authority, in its sole discretion, to
accelerate the date that any award that was not otherwise exercisable or vested shall become exercisable or vested in whole or in part without any obligation to accelerate such date with respect to any other awards granted to any recipient. In
addition, the Committee shall have the authority and discretion to establish terms and conditions of awards (including but not limited to the establishment of subplans) as the Committee determines to be necessary or appropriate to conform to the
applicable requirements or practices of jurisdictions outside of the United States. 
  

	 	B.	Board Authority to Reduce or Eliminate Awards 

 The Board shall have
full authority to reduce or eliminate all awards hereunder. Unless the Committee determines otherwise, a participant who terminates employment for any reason prior to the completion of the time period on which an award is based or vesting period
applicable to the award shall not be eligible for the award. 

	 	C.	Source of Stock option Awards 

 Provided sufficient shares remain
for issuance, any stock option awards made under the Plan shall be issued under and pursuant to the 1997 Omnibus Stock Plan of Charles & Colvard, Ltd. as amended, or any subsequent incentive stock plan approved by the Corporation and its
shareholders (collectively the “Omnibus Plan”). With respect to any stock option awards made under the Plan, all terms, conditions, and requirements of such Omnibus Plan are incorporated into the Plan by reference. For any stock option
awards, to the extent that there is a contradiction between the Plan and such Omnibus Plan or an ambiguity as to the provisions of the Plan, the terms of such Omnibus Plan shall control. All shares issued under the Plan shall be drawn from the
shares reserved under such Omnibus Plan for issuance of awards. 
  

	 	D.	Compliance with Code Section 409A 

 1.
Notwithstanding any other provision in the Plan or an award to the contrary, if and to the extent that Section 409A of the Code is deemed to apply to the Plan or any award granted under the Plan, it is the general intention of the Corporation
that the Plan and all such awards shall comply with Code Section 409A, related regulations or other guidance, and the Plan and any such award shall, to the extent practicable, be construed in accordance therewith. Deferrals of shares or cash
distributable pursuant to the Plan in a manner that would cause Code Section 409A to apply shall not be permitted. Without in any way limiting the effect of the foregoing, in the event that Code Section 409A, related regulations or other
guidance require that any special terms, provisions or conditions be included in the Plan or any award, then such terms, provisions and conditions shall, to the extent practicable, be deemed to be made a part of the Plan or award, as applicable.
Further, in the event that the Plan or any award shall be deemed not to comply with Code Section 409A or any related regulations or other guidance, then neither the Corporation, the Board nor its or their designees or agents shall be liable to
any participant or other person for actions, decisions or determinations made in good faith. 
 2. Without limiting the effect of Section
D.1., herein, except to the extent otherwise required or permitted under Code Section 409A, related regulations or other guidance, distributions of benefits pursuant to awards under the Plan must be made no later than the later of (a) the
date that is 2-1/2 months from the end of the employee’s first taxable year in which the amount is no longer subject to a substantial risk of forfeiture; or (b) the date that is 2-1/2 months from the end of the Corporation’s first
taxable year in which the amount is no longer subject to a substantial risk of forfeiture. 
  

	 	E.	Applicable Law 

 The Plan shall be governed by and
construed in accordance with the laws of the State of North Carolina, without regard to the conflicts of laws provisions of any state, and in accordance with applicable federal laws of the United States. 
  

	 	F.	Amendment and Termination of the Plan 

 1. The Plan
and any award may be amended or terminated at any time by the Board or the Committee. No action to amend or terminate the Plan or an award shall permit the acceleration of the time or schedule or any payment of amounts deemed to involve the deferral
of compensation under Code Section 409A, except as may be otherwise permitted under Section 409A, related regulations or other guidance. 

 2. Without limiting the effect of Section F.1., herein, the Board shall have unilateral authority to
amend the Plan and any award (without participant consent) to the extent necessary to comply with applicable laws, rules or regulations or changes to applicable laws, rules or regulations (including but not limited to Code Section 409A, federal
securities laws or related regulations or other guidance). 
  

	 	G.	No Right or Obligation of Continued Employment 

 Nothing contained
in the Plan shall require the Corporation or a related corporation to continue the employment or service of an employee, nor shall any such individual be required to remain in the employment or service of the Corporation or a related corporation.
Except as otherwise provided in the Plan (or Omnibus Plan, if applicable), all rights of a participant with respect to any award shall terminate upon the participants termination of employment or service with the Corporation. 
  

	 	H.	Compliance with Laws 

 The Board may impose such restrictions on
any shares or other payments or awards hereunder as it may deem advisable, including without limitation restrictions under the Securities Act of 1933, as amended (the “Securities Act”), under the requirements of any stock exchange or
similar organization and under any blue sky, state or foreign securities laws applicable to such shares. Notwithstanding any other Plan provision to the contrary, the Corporation shall not be obligated to issue, deliver or transfer shares of Common
Stock under the Plan, make any other distribution of benefits under the Plan or take any other action, unless such delivery, distribution or action is in compliance with all applicable laws, rules and regulations (including but not limited to the
requirements of the Securities Act). The Corporation may cause a restrictive legend to be placed on any certificate issued hereunder in such form as may be prescribed from time to time by applicable laws and regulations or as may be advised by legal
counsel. 
  

	 	I.	Unfunded Plan; No Effect on Other Plans 

 1. The
Plan shall be unfunded, and the Corporation shall not be required to create a trust or segregate any assets that may at any time be represented by awards under the Plan. The Plan shall not establish any fiduciary relationship between the Corporation
and any employee or other person. Neither an employee nor any other person shall, by reason of the Plan, acquire any right in or title to any assets, funds or property of the Corporation or any related corporation, including, without limitation, any
specific funds, assets or other property that the Corporation or any related corporation, in their discretion, may set aside in anticipation of a liability under the Plan. A participant shall have only a contractual right to the Common Stock or
other amounts, if any, payable under the Plan, unsecured by any assets of the Corporation or any related corporation. Nothing contained in the Plan shall constitute a guarantee that the assets of such entities shall be sufficient to pay any benefits
to any person. 
 2. The amount of any compensation deemed to be received by a participant pursuant to an award shall not constitute
compensation with respect to which any other employee benefits of such participant are determined, including, without limitation, benefits under any 

 
bonus, pension, profit sharing, life insurance or salary continuation plan, except as otherwise specifically provided by the terms of such plan or as may be
determined by the Board or Committee. 
 3. The adoption of the Plan shall not affect any other compensation plans in effect for the
Corporation or any related corporation, nor shall the Plan preclude the Corporation from establishing any other forms of compensation for employees or service providers of the Corporation or any related corporation. 
  

	 	J.	Withholding; Tax Matters 

 1. The Corporation shall
withhold, or shall require the participant to pay the Corporation in cash, the amount of any local, state, federal, foreign or other tax or other amount required by any governmental authority to be withheld and paid over by the Corporation to such
authority for the account of the participant. 
 2. The Corporation makes no warranties or representations with respect to the tax
consequences (including but not limited to, income tax consequences) related to the transactions contemplated by this Plan. A participant should consult with his or her own attorney, accountant, and/or tax advisor regarding the decision to
participate in the Plan and the consequences thereof. The Corporation has no responsibility to take or refrain from taking any actions in order to achieve a certain tax result for any participant.

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