Q4 FY2005 Corporate Update Conference Call - December 22, 2005

James Braun - Chief Financial Officer

Good morning and thank you for joining us for today's conference call. Shortly I will discuss fourth quarter sales. Bob Thomas, Chairman, President and Chief Executive Officer, will moderate the question and answer session. A copy of my remarks and those of Bob Thomas will be available on our website, either www.moissanite.com or www.charlesandcolvard.com.

If you know of any financial professional who would like to attend one of our investor meetings please give Tony Schor at Investor Awareness a call.

The Board of Directors on December 21, 2005 declared a 25% stock dividend to be distributed on January 30, 2006 to shareholders of record on January 13, 2006. The stock dividend will provide shareholders as of the record date one share for every 4 shares owned and cash in lieu of fractional shares.

The Board of Directors yesterday also accelerated the vesting of certain outstanding stock options held by current employees and non-employee directors in order to reduce the impact of new accounting regulations that will take effect in 2006. As a result of this vesting acceleration, which became effective December 21, 2005, options to purchase approximately 107,000 shares of CTHR common stock that would otherwise have vested at various times within the next three years became fully vested.

The decision to accelerate these unvested options was made primarily to reduce compensation expense that would be recorded in future periods subsequent to December 31, 2005. The Company will record approximately $54,000 of expense in the fourth quarter of 2005 as the result of the accelerated vesting. The acceleration of the vesting of these stock options will reduce future compensation expense by approximately $522,000, of which $369,000 would have occurred in 2006.

We currently estimate that revenue for the fourth quarter of 2005 will be between $11,300,000 and $12,200,000 or approximately 30% to 40% ahead of last years $8,700,000.

I will now turn the call over to Bob Thomas, President, Chairman and Chief Executive Officer, who will moderate the question and answer portion of the call.

Robert Thomas - President and CEO

Thank you Jim. Good morning ladies & gentlemen. Thank you for being with us today.

I ended our last conference call by expressing my profound optimism for the future of our jewel, moissanite, and for our company, Charles & Colvard. I am here to report that I continue to be highly optimistic and I am extremely confident in our future.

We are extremely pleased with the projected revenue for the current quarter. We believe that we will report solid revenue growth and set a new record for quarterly revenue. By any measure 2005 must be considered as a very successful year for Charles & Colvard. In the past I have attempted to provide you with some understanding of our revenue cycle and the lack of forward visibility we have to near term revenue. Again, as I have stated repeatedly in past calls, we believe that our revenue cycle is still evolving, but that you should not confuse the retail sales cycle with the revenue cycle of Charles & Colvard. We have predicted in past calls that as retailers gain confidence in the category, they will order and stock moissanite jewelry further in advance of their best selling opportunities. We believe that our third quarter 2005 and projected current quarter revenue numbers reflect that circumstance, and we view it as a positive indicator that we are being successful in truly creating the moissanite category within the fine jewelry industry. Additionally, the existence of our memo or consignment programs at several important customers adds to the difficulty in projecting the revenue in any given three month period. In those programs, we do not report revenue until the retailer and manufacturing customer involved reports to us that the individual jewel has been sold at the retail level.

The developments in our business since the end of our last quarter confirm and reinforce what I have felt and attempted to express to you for several years. As we continue to execute our plan, more retailers are drawn to the moissanite opportunity, and together with those retailers and our manufacturing partners, we are building awareness, appreciation, and ultimately increased demand for our jewel.

Specifically;

Our efforts with Helzberg Diamonds in the previously announced test program have resulted in Helzberg deciding to begin an in-case program of fine moissanite jewelry in the first quarter of 2006. Moissanite jewelry will be introduced at approximately 40 Helzberg locations during the upcoming quarter, with a plan to continue the rollout to additional Helzberg locations during the year based on the success of the initial rollout. It is possible that fine moissanite jewelry will be available in all Helzberg locations by the end of 2006 or in early 2007.

Based on the results of our work with Gordon's Jewelers, the management of that division of the Zale Corporation has decided to continue the test distribution of moissanite in the first quarter of 2006. Additionally, the success of our program at Gordon's has not gone unnoticed by the other divisions of the Zale Corporation, as evidenced by another highly successful two day moissanite trunk show event held at a South Florida Zale's Outlet location earlier this month. That test was supported by our customer, K&G Creations.

Harry Ritchie, an upscale 3rd generation regional jewelry chain with 28 outlets in the Northwest has successfully introduced moissanite in each of their locations during the past three months, and we are most pleased to welcome this fine retailer to our growing list of moissanite retailers. Harry Ritchie is a member of the Leading Jewelers Guild.

Our manufacturing customers report that the other existing moissanite retailers that they supply are enjoying another successful selling season for moissanite. Finlay Enterprises, while experiencing some upheaval as a result of the Federated – May merger and consolidation, continues its successful introduction of the fine moissanite jewelry category to its host retail locations and fine jewelry customers. During 2006, we will continue to work to build this solid business relationship.

At JCPenney, our largest retail customer (as measured in both number of outlets and in net retail sales) the fine moissanite jewelry category enjoys continued success. Without divulging specific information, it is fair to say that our category, as it moves from infancy to adolescence at JCPenney is becoming increasingly important to the overall fine jewelry business at this important and successful retailer. We expect that others have, and will continue to notice and appreciate our successful partnership with JCPenney. We believe that to be true both domestically and internationally.

As I stated above, by any reasonable measure, 2005 has been a hugely successful year for Charles & Colvard, and we believe that the gains made in 2005 are the result of the careful execution of our efforts to build distribution and revenue, while maintaining profitability. We intend to build on that success in 2006.

In the last conference call with investors, I indicated that I would attempt to describe our intentions for 2006 and our vision of the future at this time.

First, for the immediate future, we believe that now is the time to adjust our objectives and bring our resources to bear on slightly different goals for 2006. Domestically, our emphasis will become more aimed at building the sales volumes at established retail outlets as opposed to the overriding focus being on gaining new distribution. We have been successful at establishing a significant number of retail sales outlets at geographic points that roughly cover the continental United States. Although some areas of the country remain "underserved" in fine moissanite jewelry outlets, we believe that we must now work to more firmly establish the category with the retail doors that we have gained to date. We will work to assist each of our current retail partners to build the category and their moissanite sales by spending to build and support what some would call the primary demand for fine moissanite jewelry.

Our sales and marketing efforts will be targeted to help the existing moissanite retailers more fully develop and grow their moissanite businesses. Our efforts will include, but not be limited too, increased advertising, initiating a new Public Relations effort, lead by a newly-hired Public Relations Firm, continuous sales training for the retail sales associates at our retail partners, and individually tailored promotional efforts for specific retailers. We will support those retailers and manufacturers who embrace, endorse, and support the marketing position we have adopted for moissanite. We will be less supportive of those who do not follow the Charles & Colvard created marketing position and message. While our focus will change slightly, we fully expect that we will continue to gain new distribution during the year, with an approximate goal of adding 1000 new domestic outlets.

We fully understand the consequences of our choices and our plans.

The timing of revenue recognition for our company, and the rate of our growth is likely to become more uneven as we shift our focus. The initial stocking orders we enjoy from new distribution will be less of a factor in our growth than in the most recent periods. Our revenue goal for 2006 is to grow revenues by an amount roughly equal to the absolute dollar amount of our growth in 2005, but we freely acknowledge that it is difficult to predict what our revenues might be in any given quarter or whether we will ultimately achieve our revenue goal. We do strongly believe, and I personally, have great confidence that we will experience strong revenue growth in 2006 and beyond. But, I will not attempt to predict in what specific time period that growth will be evidenced in the reported revenue. Again, the growth may be more uneven as compared to the relatively stable growth rate experienced during the first three quarters of 2005.

Internationally, in 2006 we will maintain our commitment to Asia and commit additional resources in England and continental Europe. We understand and accept that our growth in those markets will likely continue to be slow, not unlike the early periods here in the United States, but by insisting that our distribution partners understand and support our marketing positioning we believe that they will start to gain a meaningful presence for moissanite jewelry in their markets.

In describing our vision for the more intermediate future for Charles & Colvard and fine moissanite jewelry, I will repeat what I have said for almost five years. We have the luxury of offering a jewel that does what a jewel is supposed to do better than any other. We are not forced to exaggerate or hype our claims for the jewel, it simply performs better than any other hard jewel. The unique combination of fire, brilliance and durability that is found in moissanite brings attention to the wearer better than any other jewel. The combination of beauty and durability creates a truly unique value proposition for jewelry consumers wherever they reside. For women in Bali, Taipei, Milan, Toledo or Tupelo, as our primary market or consumer, the self-purchasing woman, discovers fine moissanite jewelry, she loves the big, bold look, the compliments, and she appreciates the value proposition. I firmly believe that women the world over will reward themselves with moissanite and purchase moissanite jewelry in ever increasing numbers in the months and years ahead.

The estimated worldwide wholesale market for all faceted jewels is approximately $30 Billion US dollars annually. If we can capture a one percent market share, Charles & Colvard will be a $300 million US dollar revenue company. You may be interested to note that our experience at retailers who have offered moissanite for at least one year, demonstrates that the fine moissanite jewelry contribution to their total revenue is greater than one percent.

I do not promise a straight line growth to that revenue goal, but I do commit the efforts of everyone associated with the company, and the other resources at our disposal, to reach that level of success. We look forward to overcoming the obstacles to our progress as we continue to work to build this business and increase the value of the shares you hold in Charles & Colvard.

We will now respond to your questions and comments.