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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 3, 1997

REGISTRATION NO. 333-36809

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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C3, INC.
(Exact name of registrant as specified in its charter)
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NORTH CAROLINA 3915 56-0308470
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)

3800 GATEWAY BOULEVARD, SUITE 310
MORRISVILLE, NC 27560
(919) 468-0399
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Office)
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JEFF N. HUNTER
PRESIDENT
C3, INC.
3800 GATEWAY BOULEVARD, SUITE 310
MORRISVILLE, NC 27560
(919) 468-0399
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)

COPIES TO:

DEBORAH H. HARTZOG DEBRA K. WEINER
WOMBLE CARLYLE SANDRIDGE & RICE, PLLC GROVER T. WICKERSHAM, P.C.
2505 MERIDIAN PARKWAY 430 CAMBRIDGE AVENUE
SUITE 300 SUITE 100
RESEARCH TRIANGLE PARK, NC 27713 PALO ALTO, CA 94306
(919) 484-2311 (650) 323-6400

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. []

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. []

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. []

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. []

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. []
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(A), MAY DETERMINE.

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2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED SEPTEMBER 30, 1997
2,000,000 SHARES

[LOGO]

C3, INC.

COMMON STOCK

All of the shares of Common Stock, no par value ("Common Stock"), of C3,
Inc. ("C3" or the "Company") offered hereby are being sold by the Company. Prior
to this offering, there has been no public market for the Common Stock. It is
currently estimated that the initial public offering price will be between
$12.00 and $15.00 per share. For information relating to the factors considered
in determining the initial offering price, see "Underwriting."

The Company has applied to have its Common Stock approved for quotation on
the Nasdaq National Market under the symbol "CTHR."

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING
ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

==================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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Per Share.............................. $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3)............................... $ $ $
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(1) Excludes a non-accountable expense allowance payable to Paulson Investment
Company, Inc., the representative (the "Representative") of the several
underwriters named herein (the "Underwriters"), equal to 1% of the total
price to the public of the shares being offered hereby. The Company has
agreed to issue to the Representative warrants (the "Representative's
Warrants") to purchase up to 200,000 shares of Common Stock for $
per share (120% of the initial public offering price of the shares offered
hereby). The Company has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $900,000,
including the Representative's non-accountable expense allowance.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
300,000 additional shares of Common Stock on the same terms as set forth
above solely to cover over-allotments, if any (the "Over-allotment Option").
If the Over-allotment Option is exercised in full, the Price to Public,
Underwriting Discount and the Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
---------------------

The shares of Common Stock are offered by the several Underwriters, subject
to receipt and acceptance by them, to prior sale and to their right to reject
orders in whole or in part. It is expected that delivery of certificates for the
shares will be made against payment therefor in New York City on or about
, 1997.
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PAULSON INVESTMENT COMPANY, INC.

THE DATE OF THIS PROSPECTUS IS , 1997.
3

DESCRIPTION OF FOLDOUT FACING FRONT COVER PAGE

The background of this graphic consists of a photograph of grayish brown
slate taken at close range. In the upper left hand corner, in three lines and
white lettering, are the words "THE HARDNESS, THE BRILLIANCE, THE FIRE YOU
EXPECT . . .", and in the bottom right hand corner are the words, in two lines
and white lettering, ". . . FROM AN UNEXPECTED NEW SOURCE." Scattered across the
mid-range of the graphic are eight loose lab-created moissanite gemstones, all
produced by the Company. Beneath this picture are the words "A sample of the
Company's promotional materials." Beneath this caption appears the Company's
name in its trademark stylized name logo, consisting of a large capital C,
similarly sized 3, with a geometric diamond shape to the right of, and
intersecting, the numeral "3". In the logo, the word "Inc." appears to the right
of the geometric diamond shape.

DESCRIPTION OF INSIDE FRONT COVER PAGE FOLDOUT

The inside front cover page foldout consists of a large single photograph.
The background of this graphic consists of a photograph of grayish brown slate
taken at close range. In the top middle of the graphic appears the Company's
trademark stylized moissanite gemstones logo. The logo consists of a black box
in which the word "MOISSANITE" appears in large silver capital letters,
traversed by an orange arc ending with a burst of light rays at the bottom right
corner of the box. The logo also includes the word "GEMSTONES" appearing
underneath the box in white capital letters approximately one-third of the size
of the letters used in "MOISSANITE." Underneath this logo are the words "CREATED
BY" in white capital letters approximately two-thirds of the size of the letters
used in "GEMSTONES" and the Company's stylized name logo, as described above.
Throughout the mid range of this page appear pictures of the Company's
lab-created gemstones. The photograph features a total of 13 loose lab-created
gemstones, one of which is held by jeweler's tweezers, and a total of 8
lab-created gemstones set in the following jewelry: two pairs of earrings, two
pendant necklaces, and one ring. In the bottom middle of this graphic appear the
following words in white lettering: "This jewelry features samples of the
Company's lab-created moissanite gemstones set in gold, silver or platinum. The
Company plans to distribute loose gemstones."

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OFFERED
HEREBY, INCLUDING THE ENTRY OF STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS
OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."

C3(TM), THE STYLIZED C3, INC. LOGO, THE STYLIZED LOGO FOR "MOISSANITE" AND THE
STYLIZED LOGO FOR "MOISSANITE GEMSTONES" ARE TRADEMARKS OF THE COMPANY. THIS
PROSPECTUS MAY CONTAIN CERTAIN OTHER TRADEMARKS AND SERVICE MARKS OF OTHER
PARTIES.
5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. Unless otherwise indicated, information in this Prospectus
(i) reflects the automatic conversion of all outstanding shares of 1996 Series A
Preferred Stock, no par value ("Series A Preferred Stock"), and 1997 Series B
Preferred Stock, no par value ("Series B Preferred Stock"), into an aggregate of
1,677,375 shares of Common Stock upon consummation of this offering; (ii)
reflects a 2.13-for-1 stock split affected in September 1997; and (iii) assumes
no exercise of the Over-allotment Option. See "Underwriting."

THE COMPANY

The Company is finalizing the development of, and intends to begin
marketing during the first half of 1998, colorless lab-created moissanite
gemstones which it will sell as a substitute for diamond in the jewelry market.
The physical properties of lab-created moissanite gemstones more closely match
those of diamond than any other known gemstone material. The Company believes
that its products are superior to other commercially available diamond
substitutes and intends to position its gemstone products as the ideal
substitute for diamond. The Company believes that its products will be
attractive to working women who desire an affordable alternative to diamond and
to middle and upper-income women who desire affordable "everyday" or "security"
jewelry.

Moissanite, also known by its chemical name, silicon carbide ("SiC"), is a
rare, naturally occurring mineral found primarily in meteorites. Moissanite and
diamond are both carbon-based minerals; moissanite is composed of silicon and
carbon while diamond is composed of carbon.

The Company's lab-created moissanite gemstones are made from crystals of
SiC grown by Cree Research, Inc. ("Cree") using patented and proprietary
technology. Cree has an exclusive license to the patent related to a process for
growing large single crystals of SiC. To the Company's knowledge, there are no
producers of SiC other than Cree that could supply lab-grown SiC crystals in
colors, sizes or volumes suitable for use as a diamond substitute. The Company
has undertaken a significant development program with Cree to develop a fully
repeatable process to grow SiC crystals in the desired diamond color grades and
sizes. The Company has certain exclusive licenses and supply rights with Cree
for SiC materials to be used for gemstone applications. In addition, the Company
has developed certain proprietary methods and processes for the production of
gemstones from lab-grown SiC crystals and has patent applications pending for
certain of these methods and processes. As a result, the Company believes that
its lab-created moissanite gemstones are proprietary products and that there are
technological barriers to prevent other competitors from developing or marketing
lab-created moissanite gemstones at affordable prices.

The Company currently intends to sell only loose lab-created gemstones,
rather than finished jewelry products, in round brilliant cuts of approximately
1/2 to 1 carat in colors and clarities comparable to those commonly used in
diamond jewelry. The Company plans to begin delivery of its products in the
first half of 1998 in selected cities in the United States and the Pacific Rim.
The Company believes that these market areas represent a significant portion of
the worldwide jewelry market and that consumers in these markets are relatively
accepting of diamond substitutes. The Company intends to grant exclusive
distribution rights to retail jewelry chains and high-volume independent retail
jewelry stores in certain U.S. cities and is exploring distribution arrangements
for the Pacific Rim.

The Company believes that neither visual inspection by jewelers who are not
trained gemologists nor commonly used test instruments reliably distinguish its
products from diamond. The Company recently began production of a
moissanite/diamond test instrument that distinguishes lab-created moissanite
gemstones from diamonds in the colors and clarities most commonly sold by retail
jewelers. The Company plans to introduce this new test instrument for sale to
jewelers, gemologists and pawnbrokers during the first half of 1998.

The Company was incorporated as a North Carolina corporation in June 1995.
The Company's principal executive offices are located at 3800 Gateway Boulevard,
Suite 310, Morrisville, North Carolina 27560, and its telephone number is (919)
468-0399.
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THE OFFERING

Common Stock offered.................. 2,000,000 shares

Common Stock outstanding after the
offering.............................. 5,938,476 shares(1)

Use of proceeds....................... For product development, acquisition
of manufacturing equipment, sales and
marketing, working capital and other
general corporate purposes. See "Use
of Proceeds."

Proposed Nasdaq National Market
symbol................................ CTHR
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(1) Excludes 1,009,066 shares of Common Stock issuable upon the exercise of
stock options outstanding at September 30, 1997. See "Dilution,"
"Management -- Stock Option Plans" and "Description of Capital Stock."

SUMMARY FINANCIAL DATA

PERIOD FROM
INCEPTION
(JUNE 28,
1995) SIX MONTHS ENDED
TO YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, --------------------
1995 1996 1996 1997
-------------- ----------------- -------- ---------

STATEMENT OF OPERATIONS DATA:
Revenues:................................... -- -- -- --
Operating expenses:
Marketing and sales....................... $10,313 $ 47,019 $ 8,017 $ 46,611
General and administrative(1)............. 10,024 131,097 48,069 316,154
Research and development.................. 6,052 236,047 68,115 452,571
Depreciation and amortization............. 798 3,618 1,306 6,649
------- -------- -------- ---------
Operating loss.............................. 27,187 417,781 125,507 821,985
Interest income, net........................ -- (35,173) (1,231) (113,376)
------- -------- -------- ---------
Net loss.................................... $27,187 $382,608 $124,276 $ 708,609
======= ======== ======== =========
Pro forma net loss per share................ $ 0.01 $ 0.14 $ 0.05 $ 0.17
======= ======== ======== =========
Shares used in computing pro forma net loss
per share(2).............................. 2,204,062 2,652,250 2,381,562 4,199,978

JUNE 30, 1997
---------------------------
ACTUAL AS ADJUSTED(3)
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BALANCE SHEET DATA:
Cash and equivalents........................................ $5,538,099 $29,938,099
Working capital............................................. 5,428,225 29,828,225
Total assets................................................ 5,661,920 30,061,920
Shareholders' equity........................................ 5,552,046 29,952,046

- ---------------

(1) For the six months ended June 30, 1997, includes $66,000 of compensation
expense related to the issuance of Common Stock to Cree pursuant to a stock
option agreement. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 5 of Notes to Financial
Statements.

(2) The calculation of shares for all periods reflects a 2.13-for-1 stock split
affected in September 1997 and the automatic conversion of the Series A
Preferred Stock and Series B Preferred Stock to be effected upon completion
of this Offering. See Notes 2 and 9 of Notes to Financial Statements.

(3) Adjusted to give effect to the sale by the Company of 2,000,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$13.50 per share, after deducting the underwriting discount and estimated
offering expenses and the application of net proceeds therefrom. See "Use of
Proceeds."
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RISK FACTORS

An investment in the shares of Common Stock being offered hereby involves a
high degree of risk. In addition to the other information set forth in this
Prospectus, the following risk factors should be considered carefully in
evaluating the Company and its business before purchasing any of the shares of
Common Stock offered hereby. This Prospectus contains certain forward-looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Prospectus should be read as being applicable to all
related forward-looking statements wherever they appear in this Prospectus. The
Company's actual results could differ materially from those discussed in this
Prospectus. Factors that could cause or contribute to such differences include
those discussed below, as well as those discussed elsewhere in this Prospectus.

LACK OF OPERATING HISTORY; DEVELOPMENT STAGE COMPANY

The Company, which was incorporated in June 1995, is in the development
stage and has not yet engaged in any revenue-producing business activities.
Accordingly, the Company has no operating history upon which an evaluation of
the Company and its prospects can be based. To date, the Company's principal
activities have been to develop a process for the production of colorless
lab-created moissanite gemstones and the infrastructure to support the rapid
commercialization of those products. The Company's business is subject to the
risks inherent in the transition from pilot production to commercial production.
Likewise, the Company's products are in an early stage of development and are
subject to the 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 the Company to complete development of its
products or to develop the ability to produce such products in commercial
quantities would have a material adverse effect on the Company's business,
operating results and financial condition. Accordingly, the Company's prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
technology-based companies operating with undeveloped and unproven products. To
address these risks, the Company must, among other things, respond to
competitive developments, attract and motivate qualified personnel, develop
market acceptance for its products, establish effective distribution channels,
effectively manage any growth that may occur and continue to upgrade its
technologies and successfully commercialize products incorporating such
technologies. See "Business" and "Management."

NEED FOR FURTHER PRODUCT DEVELOPMENT

Although the Company has produced small quantities of colorless lab-created
moissanite gemstones, the Company and its supplier of SiC crystals, Cree
Research Inc. ("Cree"), have not yet established a fully repeatable process for
producing lab-grown SiC crystals in the colors, sizes and volumes desired for
the Company's products. The Company intends to market lab-created gemstones in
the comparable diamond color grade range, according to the standards generally
accepted by the diamond industry for color using pregraded master color stones
("comparable diamond color grade"), of "G" through "J", but Cree has not yet
consistently achieved production of SiC crystals in this color range. The
Company's development agreement with Cree establishes milestones for developing
a fully repeatable process that will consistently grow SiC crystals in the
desired color grades, sizes and volumes. If Cree is unable to develop and
sustain a fully repeatable process for growing SiC crystals in the desired color
grades, sizes and volumes, the Company's business, operating results and
financial condition would be materially adversely affected. See "Business --
Dependence on Cree and Cree Technology" and "-- Products."

RELIANCE ON CREE RESEARCH, INC.

The Company is dependent on a single source, Cree, for development and
supply of SiC crystals. Cree has certain patents and other proprietary rights
relating to its process for growing large single crystals of SiC and its process
for growing colorless SiC crystals. The Company's effort to develop colorless
SiC crystals in colors, sizes and volumes suitable for use as lab-created
gemstones is concentrated entirely with Cree and is dependent on Cree's
expertise in SiC technology.

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8

Under the Company's Amended and Restated Exclusive Supply Agreement with
Cree dated June 6, 1997 (the "Exclusive Supply Agreement"), the Company is
obligated to buy from Cree and Cree is obligated to sell to the Company 50%, by
dollar volume, of the Company's requirements for SiC material for the production
of gemstones in each calendar quarter. Although the Company is only required to
purchase 50% of its SiC requirements from Cree, the Company believes that no
other SiC producer could supply crystals in the colors, sizes and volumes needed
for the Company's products. Therefore, the Company is, and expects for the
forseeable future to be, entirely dependent on Cree as its source for its
principal raw material.

Cree will have to build additional crystal growth capacity in order to grow
enough SiC crystals to meet the Company's anticipated requirements. Under the
Exclusive Supply Agreement, Cree may elect to have the Company purchase the
additional crystal growth systems that will be needed, and Cree would be
obligated to supply the Company 100% of the output from systems funded by the
Company. If, however, Cree elects to fund the cost of these additional growth
systems on its own, then there can be no assurance that Cree will supply the
Company with all of the output from these crystal growth systems or fill all of
the Company's orders for SiC crystals. Any delay or reduction in the
availability of SiC crystals could delay or limit the Company's ability to
deliver and sell its lab-created gemstones, which would have a material adverse
effect on the Company's business, operating results and financial condition.

The Company also obtains from Cree a component proprietary to Cree used in
the production of the Company's moissanite/diamond test instrument. The Company
believes that the test instrument may be important to building market acceptance
of the Company's lab-created gemstones. See "Business -- Manufacturing." If Cree
were unable to deliver this component in the quantities and at the times needed
by the Company, the Company's ability to provide the market with its test
instrument would be adversely affected.

Thus, the Company is dependent on Cree's ability to protect its patents and
other proprietary rights concerning the growth of SiC crystals, on Cree's
technological capabilities for the further development needed to deliver SiC
crystals acceptable to the Company, on Cree consistently producing and
delivering volumes of SiC crystals as and when needed by the Company and on
Cree's ability to supply the Company with components for its test instrument,
all of which are beyond the Company's control. Cree's failure to protect its
patents or other proprietary rights, to complete the desired development
objectives and to supply the Company with SiC crystals or components for its
moissanite/diamond test instrument would have a material adverse effect on the
Company's business, operating results and financial condition and could result
in a curtailment, suspension or cessation of the Company's business. See
"Business -- Dependence on Cree and Cree Technology."

UNDEVELOPED MARKETS; UNPROVEN ACCEPTANCE OF THE COMPANY'S PRODUCTS

There currently is no market among retail jewelers or consumers for
colorless lab-created moissanite gemstones, and the Company believes that retail
jewelers and consumers are generally unaware of the existence and attributes of
these lab-created gemstones. As is the case with any new or potential product,
market acceptance and demand are subject to a significant amount of uncertainty.
Although retail jewelers typically purchase finished jewelry rather than loose
gemstones, the Company plans to market loose lab-created gemstones to retailers.
The retailers will then select the jewelry into which the stones will be set and
will be responsible for completing the setting. The quality, design and
workmanship of the jewelry settings selected by retail jewelers, which will not
be within the Company's control, could impact the consumer's perception and
acceptance of the Company's lab-created gemstones. The Company's future
financial performance will depend upon consumer acceptance of the Company's
lab-created gemstones as a realistic and affordable substitute for diamond,
which may be impacted by (i) the jewelers' acceptance of lab-created gemstones
as a diamond substitute, (ii) the willingness of retail jewelers to purchase
loose stones and undertake setting of the loose stones, (iii) the ability of
retail jewelers to select jewelry settings that encourage consumer acceptance of
and demand for the Company's lab-created gemstones and (iv) the ability of
retail jewelers to set loose lab-created gemstones in jewelry with high quality
workmanship. The Company has not conducted extensive market tests to predict
retail jeweler or consumer reaction to its products.

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9

Because no market now exists for lab-created moissanite gemstones, it is
difficult to predict the future growth rate, if any, and the size of the market
for the Company's products. In order to build inventory to meet anticipated
future demand, the Company expects to place orders with Cree for SiC crystals in
advance of actual demand for the Company's products. As a result, the Company
may spend significant amounts of its capital to acquire additional SiC crystal
growth systems or to purchase crystals at a time when there is not demand for
the Company's products at a level to fund those expenditures.

The market for the Company's lab-created gemstones may never develop or may
develop at a slower pace than expected as a result of lack of acceptance of
lab-created gemstones by retail jewelers or by consumers. If the market fails to
develop or develops more slowly than expected, or if the Company's products do
not achieve significant market acceptance, the Company's business, operating
results and financial condition would be materially adversely affected. See
"Business -- Dependence on Cree and Cree Technology" and "-- Distribution,
Marketing and Sales."

UNDEVELOPED DISTRIBUTION CHANNELS

The Company currently plans to sell its products initially in selected
cities in the United States and the Pacific Rim. Although most loose gemstones
are sold to wholesalers or jewelry manufacturers, the Company initially intends
to sell its gemstones directly to retail jewelry chains and high-volume
independent retail jewelry stores in the United States under exclusive
distribution arrangements. In addition, the Company is exploring distribution
arrangements in the Pacific Rim. The Company must enter into distribution
agreements with and will be dependent upon a number of third parties for sales
of its lab-created moissanite gemstones to consumers. The Company has not yet
entered into distribution agreements with any retail jewelers or other
distributors. There can be no assurance that the Company will be able to enter
into distribution agreements with retail jewelers or other distributors, that
its strategy of eliminating dependence on gemstone wholesalers and jewelry
manufacturers will prove to be successful, or that jewelers or other
distributors will devote the efforts needed for successful distribution of the
Company's products. The inability of the Company to enter into favorable
arrangements with retail jewelers or other distributors or to achieve desired
distribution of its lab-created moissanite gemstones would have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business -- Product Distribution."

DEPENDENCE ON INTELLECTUAL PROPERTY

The Company is heavily dependent upon Cree's technology for SiC crystals
and is dependent upon its own technology for the production of lab-created
gemstones from SiC crystals. Cree is exclusively licensed to use the 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 pending for a process for growing colorless SiC. However, there can be no
assurance that any patents issued to or licensed by Cree will provide any
significant commercial protection to Cree or to the Company, that Cree will have
sufficient resources to prosecute its patents or that any patents will be upheld
by a court should the Company, Cree or Cree's licensor seek to enforce their
respective rights against an infringer. See "Business -- Dependence on Cree and
Cree Technology."

The Company has certain patent applications pending for lab-created
moissanite gemstones and also has an application pending on its
moissanite/diamond test instrument. Although one of the Company's pending patent
applications for lab-created moissanite gemstones has been rejected by the
United States Patent and Trademark Office (the "PTO") in its initial office
action, the Company intends to vigorously prosecute its patent applications.
There can be no assurance that any patent will be granted or that a patent, if
granted, will have any commercial or competitive value. See
"Business -- Intellectual Property of the Company."

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 Cree or the
Company. In addition, existing producers of SiC, existing producers of other
diamond simulants or other parties may develop new

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technologies for producing lab-created moissanite gemstones in a manner that
does not infringe patents owned or licensed by Cree or the Company.

The Company regards certain of its technology as critical to its business
and attempts to protect such technology under copyright and trade secret laws
and through the use of employee, customer and business partner confidentiality
agreements. Such measures, however, afford only limited protection, and the
Company may not be able to maintain the confidentiality of its technology.

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

DEPENDENCE ON THIRD PARTIES

In addition to its significant dependence on Cree and on third party
distribution channels, the Company's prospects depend upon its ability to
identify, reach agreements with and work successfully with other third parties.
In particular, the Company expects to rely on third parties to facet its
lab-created gemstones and manufacture components for and assemble its
moissanite/diamond test instrument. Faceting lab-created moissanite gemstones
requires different techniques than faceting diamond and other gemstones. There
can be no assurance that the Company can enter into contracts with faceting
vendors on terms satisfactory to the Company or that faceting vendors will be
able to provide faceting services in the quality and quantities required by the
Company. In addition, there can be no assurance that the Company will be
successful in identifying component manufacturers and assemblers for its
moissanite/diamond test instrument. Failure by the Company to achieve any of the
above would have a material adverse effect on the Company's business, operating
results and financial condition. See "Business -- Manufacturing."

COMPETITION

Competition in the market for gemstones is intense. The Company's planned
products face competition from established producers and sellers of diamonds,
synthetic gemstones and diamond simulants such as synthetic cubic zirconia. In
addition, other companies could seek to introduce synthetic diamonds or other
competing products or to develop competing processes for production of
lab-created moissanite gemstones. The Company believes that the more successful
it is in creating market acceptance for colorless lab-created moissanite
gemstones, the more competition can be expected to increase. Increased
competition could result in a decrease in the price charged by the Company for
its products or reduce demand for the Company's products, which would have a
material adverse effect on the Company's business, operating results and
financial condition. Further, the Company's current and potential competitors
have significantly greater financial, technical, manufacturing and marketing
resources and greater access to distribution channels than the Company. There
can be no assurance that the Company will be able to compete successfully with
its existing or potential competitors. See "Business -- Competition."

NEED FOR ADDITIONAL CAPITAL

The Company will require substantial additional capital to continue to
develop and improve the process for growing colorless SiC crystals in the
desired colors, sizes and volumes, to fund expansion of manufacturing capacity
to meet projected growth and to fund its expansion into new markets. The
Company's future capital requirements will depend on many factors, including the
speed at which the SiC crystal growth process can be refined and improved,
market acceptance of and demand for the Company's products and the timing of the
Company's expansion into new markets. The Company currently believes that its
existing capital resources, together with the proceeds of this offering and
interest earned thereon, will satisfy its capital requirements for at least the
12 months following this offering. However, there can be no assurance that
additional financing will not be required prior to such time. Moreover, there
can be no assurance that additional equity or debt financing, if required, will
be available on acceptable terms or at all. The inability of the Company to
obtain financing on acceptable terms when needed would have a material adverse
effect on the Company's business,

8
11

operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

INTERNATIONAL OPERATIONS

The Company intends to target certain international markets for its
products. In addition, it expects to use certain companies based outside the
United States to facet its lab-created moissanite gemstone products. Due to the
Company's reliance on development of foreign markets and use of foreign vendors,
the Company is subject to the risks of conducting business outside of the United
States. These risks include unexpected changes in, or impositions of,
legislative or regulatory requirements, delays resulting from difficulty in
obtaining export licenses, tariffs and other trade barriers and restrictions and
the burdens of complying with a variety of foreign laws and other factors beyond
the Company's control. The Company is also subject to general geopolitical risks
in connection with its international operations, such as political, social and
economic instability, potential hostilities and changes in diplomatic and trade
or business relationships. There can be no assurance that such factors will not
adversely affect the Company's operations in the future or require the Company
to modify its anticipated business practices.

GOVERNMENTAL REGULATION

The Company is subject to governmental regulations in the manufacture and
sale of lab-created moissanite gemstones and the moissanite/diamond test
instrument. In particular, the Federal Trade Commission (the "FTC") 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. The Company may be under close scrutiny both by
governmental agencies and by competitors in the gemstone industry, any of which
may challenge the Company's promotion and marketing of its gemstone products. If
the Company's production or marketing of its lab-created gemstones is challenged
by governmental agencies or competitors, or if regulations are issued that
restrict the ability of the Company to produce and market its products as
diamond substitutes, the Company's business, operating results and financial
condition could be materially adversely affected. See "Business -- Government
Regulation."

IMITATION MOISSANITE

If the Company's products achieve market acceptance, it is possible that
low-quality gemstones or synthetics could be marketed as lab-created moissanite.
The sale of low-quality products as lab-created moissanite could damage the
perception of lab-created moissanite gemstones as a realistic substitute for
diamond, damage the Company's reputation among retail jewelers and consumers and
result in a loss of consumer confidence in the Company's products. The
introduction of low-quality imitation moissanite gemstones and the inability of
the Company to limit the adverse effects thereof could have a material adverse
effect on the Company's business, operating results and financial condition.

MANAGEMENT OF RAPID GROWTH

The Company currently is experiencing a period of rapid and significant
growth, which is expected to continue over the next several years. This rapid
growth has placed and will continue to place a significant strain on the
Company's resources. The Company's ability to manage its growth effectively will
require it to implement and improve operational and financial systems and to
expand, train and manage its employee base. The Company also will be required to
manage multiple relationships with various suppliers, customers and other third
parties. The Company's future operating results will also depend on its ability
to expand its sales and marketing, research and development and administrative
support organizations. The Company's executive officers have no significant
experience in managing rapidly growing businesses. If the Company is unable to
manage growth effectively, the Company's business, financial condition and
results of operations would be materially adversely affected.

9
12

DEPENDENCE UPON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL

The Company's success depends in part upon retaining the services of
certain executive officers and other key employees. The Company has entered into
employment agreements with the Company's President, Chief Financial Officer,
Vice President of Marketing, Director of Technology, Director of Manufacturing
and Director of Sales. In addition, the Company intends to obtain "key man" life
insurance policies on its President and Chief Financial Officer, but each policy
is expected to provide coverage of only $1 million per individual. The loss of
the services of the Company's executive officers or other key employees could
have a material adverse effect on the Company's business, operating results and
financial condition. See "Management."

Because of the Company's early stage of development, the Company is also
dependent on its 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 of the Company to attract and retain additional qualified
personnel would materially adversely affect the Company's business, operating
results and financial condition.

OPERATING LOSSES

The Company had net losses of $27,187 for the period from June 28, 1995
(inception) to December 31, 1995, $382,608 for the year ended December 31, 1996
and $708,609 for the six months ended June 30, 1997. As of June 30, 1997, the
Company had an accumulated deficit of $1,118,404. The Company expects to incur
substantial additional costs to complete the development of its products and to
market and distribute such products. The Company expects to incur losses through
at least some or all of 1998, and there can be no assurance that the Company
will ever achieve profitability or, if achieved, that such profitability will be
sustained. See "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

POTENTIAL FOR FLUCTUATIONS IN QUARTERLY RESULTS

Because the Company has no operating history, management has very little
data upon which to base estimated operating revenues and expenses. The Company's
revenues will be affected by many factors, including those discussed in "Risk
Factors." At the same time, the Company's expenses will be growing to support
anticipated rapid expansion. The Company will likely experience substantial
quarterly fluctuations in its operating results. As a result, the Company
believes that period-to-period comparisons of its 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 the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Common Stock would likely be
materially adversely affected.

NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after this offering. The initial public
offering price will be determined by negotiation between the Company and the
Representative of the Underwriters. See "Underwriting."

The trading price of the Common Stock could be subject to wide fluctuations
in response to quarterly variations in operating results, changes in financial
estimates by securities analysts, announcements of technological innovations or
new products by the Company or its competitors, or other events or factors. In
addition, the stock market has experienced extreme price and volume fluctuations
that have particularly affected the market prices for many technology and small
capitalization companies. These broad market fluctuations may materially and
adversely affect the market price of the Common Stock.

10
13

SUBSTANTIAL DILUTION

Purchasers of the Common Stock offered hereby will incur immediate and
substantial dilution of approximately $8.47 per share in the pro forma net
tangible book value per share of the Common Stock from the initial public
offering price. See "Dilution."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of the Common Stock in the public market after this offering could
adversely affect the market price of the Common Stock. Following this offering,
there will be 5,938,476 shares of Common Stock outstanding, of which the
2,000,000 shares offered hereby (2,300,000 if the Over-allotment Option is
exercised in full) will be freely tradeable without restriction under the
Securities Act, except for shares acquired in this offering by "affiliates" of
the Company, as that term is defined in Rule 144 under the Securities Act. All
of the shares of Common Stock held by the officers, directors, director nominees
and beneficial owners of more than five percent of the Company's Common Stock,
aggregating 1,927,393 shares, are subject to lock-up agreements and may not be
sold or otherwise transferred until one year after the date of this Prospectus
unless sooner released by the Representative in its sole discretion. Upon
expiration of the lock-up agreements, all such shares of Common Stock will
become eligible for sale in the public market, subject to the provisions of Rule
144 or Rule 701. In addition, approximately 1,921,621 shares of Common Stock
outstanding prior to this offering and not subject to lock-up agreements will
become eligible for sale in the public markets under Rule 144, 90 days after the
effective date of this offering (the date on which these shares are assumed to
be eligible for resale is February 12, 1998). Moreover, the Company intends to
file registration statements under the Securities Act covering shares of Common
Stock reserved for issuance under stock option plans.

The Company has entered into an agreement under which holders of an
aggregate of 1,453,725 shares of Common Stock, which are to be issued at the
time of the offering upon the automatic conversion of the currently outstanding
Series B Preferred Stock, are entitled to cause the Company to register their
shares for sale and to participate in any future registration of securities
affected by the Company, subject to certain limitations and restrictions. See
"Shares Eligible For Future Sale" and "Description of Capital Stock --
Registration Rights."

BROAD DISCRETION OVER USE OF PROCEEDS

The principal purpose of this offering is to increase the Company's equity
capital to fund anticipated expenses for the development, production and
marketing and sale of the Company's lab-created gemstones. The Company currently
estimates that the net proceeds of this offering will be approximately $24.4
million and that $4.9 million (representing 20.0%) of such proceeds will be
allocated to working capital and other general corporate purposes. The Company's
management will have broad discretion to reallocate the use of the proceeds and
to direct the use of working capital without any action or approval of the
Company's shareholders. See "Use of Proceeds."

ANTI-TAKEOVER AND CERTAIN OTHER PROVISIONS

Certain provisions of the Company's Articles of Incorporation and Bylaws
could have the effect of making it more difficult for a third party to acquire,
or of discouraging a third party from attempting to acquire, control of the
Company or limit the price that third parties might be willing to pay in the
future for shares of the Company's Common Stock. See "Description of Capital
Stock -- Certain Anti-Takeover Provisions."

Under the terms of the Exclusive Supply Agreement, the Company is
prohibited from entering into exclusive marketing or distribution agreements
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 (collectively, the
"Prohibited Parties"). The agreement also prohibits the Company 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 the Company's Common Stock. In addition, this agreement
could prevent the Company from entering into certain potentially profitable
transactions with Prohibited Parties.

11
14

USE OF PROCEEDS

The net proceeds to be received by the Company from the sale of the Common
Stock offered hereby are estimated to be approximately $24.4 million
(approximately $28.2 million if the Over-allotment Option is exercised in full),
assuming an initial public offering price of $13.50 per share and after
deducting underwriting discounts and estimated offering expenses.

The Company intends to use approximately $5.5 million of the net proceeds
of this offering to fund research and development activities. Of this amount,
approximately $4.9 million will be paid to Cree under the Development Agreement
and $600,000 will be used to fund other aspects of the Company's development
efforts. The Company has reserved approximately $6.0 million of the net proceeds
of this offering to fund the acquisition of additional SiC crystal growth
systems from Cree, which the Company could be required to purchase for use by
Cree in supplying commercial production quantities of SiC crystals to the
Company. Under the Exclusive Supply Agreement, Cree has the option to require
the Company to purchase such systems from Cree at Cree's cost or to build such
systems itself and recoup its costs by incorporating the cost of the systems
into the cost of the SiC crystals purchased by the Company. See
"Business -- Dependence on Cree and Cree Technology." The Company has not
received any indication from Cree as to whether future capacity requirements
will be met at the Company's or Cree's expense. The Company also intends to use
approximately $1.9 million to purchase other equipment from unaffiliated third
parties. In addition, the Company plans to use approximately $6.1 million of the
net proceeds to fund its sales and marketing efforts.

The remaining net proceeds will be used for working capital and general
corporate purposes. Pending application of the net proceeds as set forth above,
the Company intends to invest the net proceeds in short-term, investment grade
debt securities. The Company reserves the right to reallocate the use of the net
proceeds of the offering to meet the business needs of the Company, which could
be required if Cree is unable to develop a fully repeatable process for growing
SiC crystals in desired colors, sizes and volumes, if market acceptance of
lab-created moissanite gemstones is slower than anticipated or if there are
unanticipated technological or other changes within the jewelry industry. The
Company currently believes that its existing capital resources, together with
the net proceeds of this offering and interest earned thereon, will satisfy the
Company's capital requirements at least through the 12 months following this
offering.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its capital
stock. The Company intends to retain its future earnings, if any, to fund the
development and growth of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future. Any future decision
concerning the payment of dividends on the Common Stock will depend upon the
results of operations, financial condition and capital expenditure plans of the
Company, as well as such other factors as the Board of Directors, in its sole
discretion, may consider relevant.

12
15

DILUTION

As of June 30, 1997, the Company had a pro forma net tangible book value of
approximately $5.5 million or $1.39 per share of Common Stock. "Pro forma net
tangible book value" represents the amount of total tangible assets less total
liabilities divided by the number of shares of Common Stock outstanding, after
giving effect to the 2.13-for-1 stock split affected in September 1997, and the
automatic conversion of the outstanding shares of the Series A Preferred Stock
and Series B Preferred Stock into an aggregate of 1,677,375 shares of Common
Stock. After giving effect to the sale of 2,000,000 shares of Common Stock in
this offering at an assumed initial public offering price of $13.50 per share,
and the receipt of the net proceeds therefrom, the pro forma net tangible book
value of the Company as of June 30, 1997 is approximately $29.9 million or $5.03
per share of Common Stock. This represents an immediate dilution of $8.47 per
share to new investors purchasing shares of Common Stock offered hereby. The
following table illustrates the per share dilution:

Assumed public offering price per share..................... $13.50
Pro forma net tangible book value per share as of June 30,
1997................................................... $1.39
Increase in net tangible book value per share attributable
to this offering....................................... 3.64
Pro forma net tangible book value per share after this
offering.................................................. 5.03
------
Dilution per share to new investors......................... $ 8.47
======

The following table summarizes as of June 30, 1997, after giving effect to
the 2.13-for-1 stock split in September 1997, the automatic conversion of the
Series A Preferred Stock and Series B Preferred Stock and the sale of 2,000,000
shares of Common Stock in this offering, the number of shares of Common Stock
purchased from the Company, the total consideration paid therefor and the
average price per share paid by the existing shareholders and by the new
investors purchasing shares of Common Stock in this offering, at an assumed
initial public offering price of $13.50 per share, before deduction of the
estimated underwriting discount and offering expenses payable by the Company:

SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------

Existing shareholders......... 3,938,476 66.3% $ 6,670,125 19.8% $ 1.96
New investors................. 2,000,000 33.7 27,000,000 80.2 13.50
--------- ---- ----------- ----
Total............... 5,938,476 100% $33,670,125 100%
========= ==== =========== ====

The foregoing tables assume no exercise of the Over-allotment Option and no
exercise of outstanding stock options to purchase Common Stock. There are (i)
661,791 shares of Common Stock issuable upon the exercise of options granted
under the 1996 Option Plan exercisable at a weighted average price of
approximately $3.95 per share and (ii) 37,275 shares of Common Stock issuable
upon the exercise of options granted to certain independent contractors with an
exercise price of approximately $1.88 per share. To the extent that any of these
options are exercised in the future, there will be further substantial dilution
to new investors. See "Management -- Stock Option Plans."

13
16

CAPITALIZATION

The following table sets forth the capitalization of the Company as of June
30, 1997 on an actual and pro forma basis. The pro forma capitalization gives
effect to a 2.13-for-1 stock split effected in September 1997, the automatic
conversion of the Series A Preferred Stock and Series B Preferred Stock into an
aggregate of 1,677,375 shares of Common Stock, an amendment to the Company's
articles of incorporation to be effective prior to completion of the offering
and the sale of 2,000,000 shares of Common Stock in this offering at an assumed
initial public offering price of $13.50 and the application of the estimated net
proceeds therefrom. See "Use of Proceeds." This information should be read in
conjunction with the Company's Financial Statements and the Notes thereto
appearing in this Prospectus.

JUNE 30, 1997
--------------------------
ACTUAL PRO FORMA
----------- -----------

Shareholders' equity:
1996 Series A Preferred Stock, no par value; 105,000
shares authorized, 105,000 shares issued and
outstanding, actual; none authorized or issued and
outstanding, pro forma(1).............................. $ 593,271 $ --
1997 Series B Preferred Stock, no par value; 682,500
shares authorized, 682,500 shares issued and
outstanding, actual; none authorized or issued and
outstanding, pro forma(1).............................. 4,981,376 --
Preferred Stock, no par value; 4,212,500 shares
authorized, none issued and outstanding, actual;
10,000,000 authorized, none issued and outstanding, pro
forma.................................................. -- --
Common Stock, no par value; 10,000,000 shares authorized,
1,061,550 issued and outstanding, actual; 50,000,000
shares authorized, 5,938,476 issued and outstanding,
pro forma(1)(2)........................................ 1,095,803 31,070,450
Deficit accumulated during the development stage............ (1,118,404) (1,118,404)
----------- -----------
Total shareholders' equity(2)..................... 5,552,046 29,952,046
----------- -----------
Total capitalization......................... $ 5,552,046 $29,952,046
=========== ===========

- ---------------

(1) Net of related offering expenses. The Company intends to amend its articles
of incorporation prior to the completion of this offering to provide that
the shares will automatically convert into shares of Common Stock upon
consummation of this offering.
(2) Excludes (i) 37,275 shares of Common Stock issuable upon the exercise of
stock options granted to certain independent consultants with an exercise
price of approximately $1.88 per share, (ii) 661,791 shares of Common Stock
issuable upon the exercise of stock options granted under the 1996 Option
Plan with a weighted average exercise price of approximately $3.95 per share
and (iii) 310,000 shares of Common Stock issuable upon the exercise of stock
options granted under the 1997 Omnibus Plan with an exercise price equal to
the initial public offering price of the shares of Common Stock offered
hereby.

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17

SELECTED FINANCIAL DATA

The following selected statement of operations data for the period from
inception through December 31, 1995 and for the year ended December 31, 1996 and
the selected balance sheet data at December 31, 1995 and December 31, 1996 have
been derived from, and are qualified by reference to, the Company's financial
statements included elsewhere in this Prospectus, which have been audited by
Deloitte & Touche LLP, independent auditors. The selected statements of
operations data for the six month periods ended June 30, 1996 and June 30, 1997
and the selected balance sheet data at June 30, 1997 have been derived from the
Company's unaudited financial statements included elsewhere in this Prospectus.
In the opinion of management of the Company, such unaudited financial statements
have been prepared on a basis consistent with the audited financial information
and include all adjustments, consisting of normal recurring accruals, necessary
for a fair presentation of the results of such periods. The results of
operations for the six month period ended June 30, 1997 are not necessarily
indicative of the results of operations for the year ending December 31, 1997.
The selected financial data set forth below should be read in conjunction with
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere in
this Prospectus.

PERIOD FROM
INCEPTION
(JUNE 28, 1995)
TO YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, --------------------------
1995 1996 1996 1997
--------------- ------------ ----------- ------------

STATEMENT OF OPERATIONS DATA:
Revenues.................................... -- -- -- --
Operating expenses:
Marketing and sales....................... $ 10,313 $ 47,019 $ 8,017 $ 46,611
General and administrative(1)............. 10,024 131,097 48,069 316,154
Research and development.................. 6,052 236,047 68,115 452,571
Depreciation and amortization............. 798 3,618 1,306 6,649
---------- ---------- ---------- -----------
Operating loss.............................. 27,187 417,781 125,507 821,985
Interest income, net........................ -- (35,173) (1,231) (113,376)
---------- ---------- ---------- -----------
Net loss.................................... $ 27,187 $ 382,608 $ 124,276 $ 708,609
========== ========== ========== ===========
Pro forma net loss per share................ $ 0.01 $ 0.14 $ 0.05 $ 0.17
========== ========== ========== ===========
Shares used in computing pro forma net loss
per share(2).............................. 2,204,062 2,652,250 2,381,562 4,199,978

DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
------- ---------- ----------

BALANCE SHEET DATA:
Cash and equivalents........................................ $ 9,109 $1,167,458 $5,538,099
Working capital............................................. 8,355 1,161,603 5,428,225
Total assets................................................ 32,913 1,226,134 5,661,920
Shareholders' equity........................................ 22,813 1,213,279 5,552,046

- ---------------

(1) For the six months ended June 30, 1997, includes $66,000 of compensation
expense related to the January 2, 1997 issuance of Common Stock to Cree
pursuant to a stock option agreement. See Note 5 of Notes to Financial
Statements.

(2) The calculation of shares for all periods reflects a 2.13-for-1 stock split
affected in September 1997 and the automatic conversion of the Series A
Preferred Stock and Series B Preferred Stock to be affected upon completion
of this Offering. See Notes 2 and 9 of Notes to Financial Statements.

15
18

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

Since its organization in June 1995, the Company has devoted its resources
to funding research and development of colorless lab-created moissanite
gemstones, preliminary market research, qualifying potential retail jewelers and
other potential customers for distribution arrangements and assembling a
management team. As a development stage company, the Company is subject to all
the risks inherent in establishing a new business, including the risk that
full-scale operations may not occur.

The Company has not produced sales revenues to date and does not anticipate
having product sales until at least the first half of 1998. The Company has been
unprofitable since inception and anticipates that it will continue to incur
increasingly significant expenses as it transitions from the development stage
to full-scale production. Historic spending levels are not indicative of
anticipated future spending levels because the Company is entering a period in
which it will rapidly increase spending to refine its lab-created moissanite
gemstone products, exploit its technology, introduce its products into the
market, establish exclusive distribution channels, expand manufacturing
capacity, optimize SiC crystal yields and market its moissanite/ diamond test
instrument. For these reasons, the Company expects to continue operating at a
loss through at least some or all of 1998. Moreover, there can be no assurance
that the Company will ever achieve profitability or if profitability is
achieved, that such profitability can be sustained. See "Risk Factors -- Lack of
Operating History; Development Stage Company."

RESULTS OF OPERATIONS

Six Months ended June 30, 1997 compared with Six Months ended June 30,
1996. Research and development expenses for the six months ended June 30, 1997
increased by $384,456 over research and development expenses for the six months
ended June 30, 1996. The increase was attributable to expanded colorless SiC
crystal development efforts at Cree, internal development of prototype gemstone
pre-forming and faceting operations, qualifying of vendors for production and
development of production-quality prototypes of the moissanite/diamond test
instrument.

Marketing and sales expenses for the six months ended June 30, 1997
increased by $38,594 over expenses for the six months ended June 30, 1996. The
increase was due to the compensation expense of additional sales and marketing
staff hired since the prior period and the development of preliminary
advertising and marketing materials. Prior to May 1, 1996, the Company had no
paid employees.

General and administrative expenses for the six months ended June 30, 1997
increased by $268,085 over general and administrative expenses for the six
months ended June 30, 1996. The increase was primarily attributable to the
compensation expense of additional staff hired since the prior period and
occupancy expenses. The Company had no paid employees before May 1, 1996. Prior
to February 4, 1997, the Company conducted its operations from the home of two
of its founders and did not incur any lease or rent expenses during that time.
During this period in 1997, the Company also recognized $66,000 of compensation
expense related to the exercise of Cree's options to acquire 24,601 shares of
Common Stock on January 2, 1997.

Interest income for the six months ended June 30, 1997 increased by
$112,145 over interest income for the six months ended June 30, 1996. The
increase generally reflected interest earned on cash and cash equivalents,
consisting primarily of U.S. Treasury Bills and U.S. Treasury money market funds
acquired by investing the proceeds from the Company's Series A Preferred Stock
offering in August 1996 and its Series B Preferred Stock offering in January and
February 1997.

Year ended December 31, 1996 compared with Seven-Month Period ended
December 31, 1995. Research and development expenses for the year ended December
31, 1996 increased $229,995 over research and development expenses for the
seven-month period ended December 31, 1995. The increased expenses reflected the
commencement of the Company's external development of colorless SiC crystals
through Cree

16
19

and increased activity in the development of prototype lab-created gemstones and
a prototype moissanite/ diamond test instrument.

Marketing and sales expenses for the year ended December 31, 1996 increased
by $36,706 over similar expenses for the seven-month period ended December 31,
1995. The increase was primarily due to the compensation expense of additional
sales and marketing staff hired since the prior period. The Company had no paid
employees before May 1, 1996.

General and administrative expenses for the year ended December 31, 1996
increased by $121,073 over general and administrative expenses for the
seven-month period ended December 31, 1995. The increases were primarily due to
the compensation expense of additional staff hired since the prior period and
occupancy expenses. The Company had no paid employees before May 1, 1996. Prior
to February 4, 1997, the Company's operations were conducted from the home of
two of its founders; consequently, the Company did not incur any lease or rent
expenses prior to that time.

Interest income was $35,173 for the year ended December 31, 1996. The
Company had no interest income in the seven-month period ended December 31,
1995. The interest was earned on cash and equivalents, consisting primarily of
U.S. Treasury Bills and U.S. Treasury money market funds acquired by investing
the proceeds from the Company's sale of Common Stock in May 1996 and the
Company's Series A Preferred Stock offering in August 1996.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations since inception primarily through
private equity sales totaling approximately $6.6 million. As of June 30, 1997,
the Company had approximately $5.5 million of cash and equivalents. The
Company's business strategy requires a significant expenditure of funds for an
accelerated commercialization of colorless lab-created moissanite gemstones.
These expenditures are presently projected to total approximately $13.9 million
through the end of 1998. In addition, the Company intends to spend approximately
$5.5 million on research and development activities during that period. Actual
expenditures for accelerated commercialization and additional research and
development efforts could vary materially from these estimates.

In connection with its planned commercial introduction of lab-created
moissanite gemstones, the Company has placed its first commercial quantity order
with Cree for a number of SiC crystals that the Company believes will require
the acquisition of additional crystal growth systems. This order is contingent
on Cree meeting certain development milestones for color range and the
successful completion of this offering. See "Business -- Manufacturing -- Growth
of SiC Crystals." Under the terms of the Exclusive Supply Agreement, Cree has
the option of building the growth systems at its own cost or requiring the
Company to purchase the growth systems from Cree. If the contingencies are
satisfied and Cree requires the Company to purchase the growth systems, the
Company will be obligated to spend approximately $1.0 million to fund the
purchase of such growth systems. In addition, if Cree's development efforts and
the Company's internal sales projections are met, the Company anticipates
placing orders for a number of crystals in 1998 and following years that it
believes will require additional capacity at Cree to meet the Company's SiC
crystal requirements. If Cree requires the Company to purchase additional growth
systems, the Company will be obligated to spend approximately $5.0 million to
fund the purchase of such growth systems in 1998. The Company also intends to
spend approximately $1.9 million to purchase other equipment, including certain
automated and computerized equipment to slice and dice SiC crystals into
preforms. See "Use of Proceeds" and "Business -- Manufacturing."

The Company plans to engage in substantial marketing activities to support
the introduction of lab-created moissanite gemstones. Such activities may
include advertising campaigns, cooperative advertising with retail jewelers and
distributors and individualized jeweler training. The Company also intends to
launch a direct mail campaign to support the introduction of its
moissanite/diamond test instrument. The Company estimates that it will spend
approximately $6.1 million for sales and marketing activities through 1998.

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The actual amount and timing of the Company's future capital requirements
will depend on many factors, including the extent of continued progress in its
development programs, the magnitude of these programs, the costs involved in
filing, prosecuting, enforcing and defending patent claims, the appearance of
competing technological and market developments and the success of the Company's
sales and marketing efforts. There can be no assurance that the Company's future
capital requirements will not exceed the amounts projected by its current
operating plan.

The Company has no committed external sources of capital. Based on its
current operating plan, the Company anticipates that its existing capital
resources, together with the proceeds of this offering and interest earned
thereon, will be adequate to satisfy its capital requirements for at least the
12 months following this offering. There may be circumstances, however,
particularly a delay in the introduction of the Company's proposed products or
lower than anticipated sales, that might accelerate the use of the net proceeds
of this offering and the Company's existing capital resources. The Company may
be required to raise substantial additional funds in the future, through public
or private sources or other relationships. No assurance can be given that
additional financing will be available, or if available, that it will be
available on terms acceptable to the Company. See "Risk Factors -- Need for
Additional Capital."

DEFERRED COMPENSATION

Subsequent to June 30, 1997, the Company recognized deferred compensation
expense of approximately $2.9 million related to stock options granted in July
and August 1997. Upon completion of this offering, the stock options granted to
certain officers and directors will vest on December 31, 1997. As a result,
approximately $2.1 million of this deferred compensation expense will be
recognized in the quarter ending December 31, 1997. The remaining deferred
compensation expense, approximately $800,000, will be recognized over the
three-year vesting period of the remaining options. See Note 10 of Notes to
Financial Statements.

NET OPERATING LOSS CARRYFORWARD

As of December 31, 1996 the Company had a net operating loss ("NOL")
carryforward of approximately $147,000, which expires in 2011. 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 the Company's private equity offerings to date and
certain shareholder transactions, the utilization of the Company's NOL
carryforwards has become limited.

NEWLY ISSUED ACCOUNTING PRONOUNCEMENT

In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," was issued. This statement establishes standards for
computing and presenting earnings per share ("EPS") and applies to entities with
publicly held common stock or potential common stock. This Statement simplifies
the current standards for computing earnings per share, and makes them
comparable to international EPS standards. This Statement is effective for
financial statements issued for periods ending after December 15, 1997; earlier
application is not permitted. This Statement requires restatement of all prior
period EPS data presented. The implementation of this Statement will not have a
material impact on the Company's financial statements.

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BUSINESS

INTRODUCTION

Moissanite, also known by its chemical name, silicon carbide ("SiC"), is a
rare, naturally occurring mineral found primarily in meteorites. See
"-- Moissanite." Moissanite and diamond are both carbon-based minerals;
moissanite is composed of silicon and carbon while diamond is composed of
carbon.

The Company's lab-created moissanite gemstones are made from crystals of
SiC grown by Cree using patented and propriety technology. Cree has an exclusive
license to the patent related to a process for growing large single crystals of
SiC. To the Company's knowledge, there are no producers of SiC other than Cree
that could supply lab-grown SiC crystals in colors, sizes or volumes suitable
for use as a diamond substitute. The Company has certain exclusive licenses and
supply rights with Cree for SiC materials to be used for gemstone applications.
See "-- Dependence on Cree and Cree Technology." In addition, the Company has
developed certain proprietary methods and processes for the production of
gemstones from lab-grown SiC crystals and has patent applications pending for
certain of these methods and processes. See "-- Intellectual Property of the
Company." As a result, the Company believes that its lab-created moissanite
gemstones are proprietary products and that there are technological barriers to
prevent other competitors from developing or marketing lab-created moissanite
gemstones at affordable prices.

The Company and Cree are continuing their efforts to develop a fully
repeatable process to grow SiC crystals in colors, sizes and volumes desired for
the commercialization of lab-created gemstones. If the development objectives
are not fully accomplished, the Company believes it could market gemstones of
less than 1/2 carat in diamond color grades that have already been grown by
Cree, although at significantly lower average selling prices. Although the
Company has not yet begun to sell its products, the Company has begun qualifying
retail jewelry chains and high-volume independent retail jewelry stores in
selected U.S. cities to become exclusive distributors for sales anticipated to
begin in the first half of 1998. The Company is also evaluating alternatives for
distribution channels in the Pacific Rim and anticipates sales of its products
will also commence there in the first half of 1998.

There can be no assurance that the Company's development efforts will be
successful, that the Company will be able to enter into distribution agreements
with qualified retail jewelers on terms acceptable to the Company or that
consumers will accept the Company's lab-created gemstones as a diamond
substitute. See "Risk Factors," "-- Dependence on Cree and Cree Technology,"
"-- Product Distribution" and "-- Marketing and Sales."

INDUSTRY BACKGROUND

Overview. Gemstone materials can be grouped into three types: (i) natural
gemstone, which is found in nature; (ii) synthetic gemstone, which has the same
chemical composition and characteristics of natural gemstone but is created in a
lab and (iii) simulated or substitute material, which is similar in appearance
to the natural gemstone but does not have the same chemical composition. A
gemstone substitute should have physical properties similar to those of the
natural gemstone with which it compares and should be comparatively inexpensive.
The Company intends to market its products as the ideal substitute for diamond.

Diamond Jewelry Market. In 1996, worldwide retail diamond jewelry sales
were estimated to be in excess of $52 billion and diamond jewelry sales in the
United States were estimated to be $17.9 billion. In

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1996, approximately 29.5 million pieces of diamond jewelry were sold in the
United States, of which approximately 22.8 million pieces used settings other
than engagement rings.

The value of a diamond is determined by its carat size, cut, color and
clarity. Carat size refers to the weight of a diamond with one carat being
equivalent to 1/5 of a gram. The cut, or faceting of a rough diamond into a
gemstone, reveals the natural fire, brilliance and color of the stone. Color
refers to the amount of tint in a diamond. Clarity refers to the presence and
severity of inclusions (impurities trapped in the diamond during its formation)
and blemishes in a diamond.

The color grading scale, which is the standard generally accepted by the
diamond industry for color using pregraded master color stones, measures the
color of diamonds. The color grading scale consists of the letters "D" through
"Z". "D" is the designation given to a diamond that is completely colorless,
while a designation of "Z" is given to a colorless diamond that has a yellowish
tint visible to the naked eye. Colored diamonds, such as canary diamonds, use a
different grading scale. Retail jewelry stores most often sell diamonds within
the "G" to "M" range. In 1996, the median color grade of all diamonds sold was
within the range of "H" to "I".

The clarity grading scale, which is generally accepted by the diamond
industry, is used to identify the severity of defects. The clarity grading scale
is as follows: Flawless (a diamond that has no inclusions and only insignificant
blemishes that are invisible at 10x magnification); Very Very Slightly Included;
Very Slightly Included; Slightly Included; Imperfect-1; Imperfect-2; and
Imperfect-3 (large and/or numerous inclusions that are clearly visible to the
naked eye). Retail jewelry stores predominantly sell diamonds in the range of
Very Slightly Included to Imperfect-1. The clarity grade with the highest number
of diamonds sold in 1996 was Slightly Included.

The following table sets forth the matrix of wholesale prices for a one
carat round brilliant cut diamond of varying colors and clarities:

PER CARAT DIAMOND WHOLESALE PRICING(1)

COLOR
------------------------
CLARITY G/H I/J K/L
- ------- ------ ------ ------

Flawless.................................................... $7,450 $5,750 $4,750
Very, Very Slightly Included................................ 6,775 5,375 4,525
Very Slightly Included...................................... 6,125 4,925 4,125
Slightly Included........................................... 4,717 4,017 3,417

- ---------------

(1) Based on the September 5, 1997 Rapaport Diamond Report.

Diamond Synthetics and Substitutes. Although the technology to produce
synthetic diamonds has existed for over 40 years, synthetic diamonds have not
been used in significant quantities in jewelry. In 1955, The General Electric
Company ("GE") produced industrial-grade synthetic diamonds by subjecting
graphite to extreme pressure and heat. In 1970, GE announced that it had
produced colorless gemstone quality synthetic diamonds in carat weight. DeBeers,
Sumitomo Corporation and certain Russian producers have also produced gemstone
quality synthetic diamonds. However, the process for growing colorless gemstone
quality synthetic diamonds is far more expensive and time-consuming than growing
industrial-grade synthetic diamonds. The Company believes that it is not
commercially feasible to grow colorless gemstone quality synthetic diamonds at
the present time.

Treated diamonds, which are natural diamonds with imperfections or flaws
that have been altered in some manner to enhance their appearance, are also sold
in the jewelry industry. Diamonds with surface cracks may be filled with a
colorless substance to present a uniform appearance. The appearance of diamonds
containing inclusions, or foreign materials trapped in a diamond during its
formation, may be improved through the use of laser technology. Treated diamonds
are generally less expensive than diamonds of similar size, cut and color which
have not been treated.

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Industry experience has shown that certain diamond substitutes have
achieved market acceptance with consumers. Synthetic cubic zirconia, which is
often considered to be the first diamond substitute to possess physical
characteristics reasonably similar to diamond, gained rapid acceptance among
consumers after its introduction in 1976. The absence of any proprietary rights
in the process for producing synthetic cubic zirconia allowed a number of
producers to enter the market shortly after its introduction. As a result of
these factors, the wholesale price of synthetic cubic zirconia decreased by 90%
in the four years following its introduction.

Synthetic cubic zirconia initially was not well accepted by jewelers.
Industry publications suggest that jewelers historically believed that sales of
diamond simulants, such as synthetic cubic zirconia, might cause a decrease in
diamond sales. Reports of diamond sales following the introduction of synthetic
cubic zirconia fail to show, however, that synthetic cubic zirconia
significantly depressed diamond sales. The Gemological Institute of America has
stated that many jewelers have found that some purchasers of diamond simulants
return to upgrade their jewelry to diamond.

Based on consumer acceptance of other diamond simulants, the Company
believes that a market does exist for a realistic substitute for diamond in
jewelry. The Company believes that its products are superior to other
commercially available diamond simulants because the physical properties of
lab-created moissanite gemstones more closely match those of diamond than any
other known gemstone material. There can, however, be no assurance that
consumers will accept the Company's products as a substitute for diamond in
jewelry or that no other more realistic diamond substitutes will become
available. See "Risk Factors -- Undeveloped Markets; Unproven Acceptance of the
Company's Products."

BUSINESS STRATEGY

The Company has developed a business strategy for achieving commercial
production and widespread market acceptance for its lab-created gemstones. The
key components of this strategy include:

Exploit Proprietary Technology. The Company has undertaken a development
program with Cree under which Cree is refining its patented core SiC technology
in order to produce large lab-grown SiC crystals in the comparable diamond color
grades "G" through "J" by a fully repeatable process. See "-- Dependence on Cree
and Cree Technology."

Develop Market Recognition. The Company plans to position its gemstone
products as the ideal substitute for diamond. The Company believes that
lab-created gemstones will be attractive to working women who desire an
affordable alternative to diamond and to middle and upper-income women who
desire affordable "everyday" or "security" jewelry. See "-- Distribution,
Marketing and Sales."

Establish Exclusive Distribution Channels. The Company plans to enter into
exclusive distribution agreements in 1998 with selected retail jewelry chains
and high-volume independent retail jewelry stores located in certain U.S. cities
and is exploring distribution options for the Pacific Rim. Exclusive
distribution rights are intended to enable retailers to distinguish themselves
from competitors in the highly competitive jewelry market, which the Company
believes will encourage the retailers to focus on and promote the sale of the
Company's gemstone products. See "-- Distribution, Marketing and Sales."

Rapidly Expand Manufacturing Capacity. The Company is committed to rapidly
expand the capacity at Cree for producing colorless SiC crystals for gemstones.
Although the Company has certain rights under the Exclusive Supply Agreement
with Cree to cause Cree to expand capacity as needed to meet the Company's
orders for lab-grown SiC crystals, under certain circumstances, Cree's supply
obligation may be limited. See "-- Dependence on Cree and Cree Technology" and
"-- Manufacturing."

Optimize SiC Crystal Yield. After a fully repeatable process has been
developed for producing SiC crystals in comparable diamond color grades, sizes
and volumes desired for initial commercial production of the Company's colorless
lab-created moissanite gemstones, Cree will seek to expand SiC crystal size
while maintaining crystal color uniformity and volume. This development program
is intended to optimize the productivity of the crystal growth process and
minimize the per carat materials cost of the Company's colorless lab-created
moissanite gemstones. See "-- Dependence on Cree and Cree Technology."

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Provide Reliable Test Instruments. The Company believes that a practical,
readily available method of distinguishing colorless lab-created moissanite
gemstones from diamond will be needed by persons who are not trained gemologists
to prevent fraud, which may aid in establishing market acceptance of the
Company's gemstone products. Because the Company's tests indicate that neither
visual inspection nor commonly used testing devices reliably distinguish
colorless lab-created moissanite gemstones from diamond, the Company has begun
to produce a test instrument that distinguishes colorless lab-created moissanite
gemstones from diamonds in the colors and clarities most commonly sold by retail
jewelers. See "-- Products."

During the balance of 1997 and the first half of 1998, the Company will
continue to monitor closely Cree's program to develop a fully repeatable process
for producing SiC crystals with uniform color in the comparable diamond color
grades "G" through "J", with at least 50% in the comparable diamond color grades
"G" to "H". There can be no assurance that this portion of the development will
be accomplished during this time frame or at all. Once the targeted color grades
and uniformity are consistently achieved, the Company will continue to closely
monitor the on-going development program to increase crystal size while
maintaining color grade and uniformity. See "-- Dependence on Cree and Cree
Technology."

If Cree achieves the desired color grades, the Company anticipates placing
production orders for SiC crystals with Cree during the balance of 1997 and the
first half of 1998 that will require the expansion of Cree's manufacturing
capacity through the addition of numerous crystal growth systems. Under the
Exclusive Supply Agreement, Cree may elect to pay the cost of building the
growth systems itself and build this cost into the price of SiC crystals sold to
the Company or to require the Company to pay for the growth systems to be built
by Cree and maintained at Cree's facilities. See "-- Dependence on Cree and Cree
Technology" and "-- Manufacturing." Because Cree has not indicated which
alternative it will elect, the Company has budgeted a portion of the proceeds of
this offering to fund the acquisition of the crystal growth systems anticipated
to be needed. See "Use of Proceeds," "Risk Factors" and "-- Manufacturing." The
Company also anticipates making other equipment purchases of approximately $1.9
million for its own facility. See "Use of Proceeds." During this same time
period, the Company will continue to assess whether additional vendors of
faceting services are needed and to enter into contracts with vendors to provide
such services as needed to meet demand.

During the remainder of 1997 and the first half of 1998, the Company will
be developing its marketing program for introducing gemstone products for sale
in the first half of 1998. See "-- Marketing and Sales." Through the balance of
1997, the Company's sales force will continue to implement its strategy for
establishing product distribution channels. The Company currently anticipates
that it will begin to offer exclusive distribution arrangements in early 1998.
Assuming Cree has achieved production of SiC crystals in the comparable diamond
color grades, sizes and volumes desired by the Company, the Company will
continue to evaluate and select additional retailers or other distribution
channels for its products during the remainder of 1998.

MOISSANITE

Moissanite is a rare, naturally occurring mineral which is found primarily
in meteorites. The naturally occurring moissanite that has been found has
generally been very small in size and dark green or black in color and is not a
commercially viable gemstone material. Therefore, only lab-grown SiC crystals
are expected to provide a meaningful source of moissanite for gemstones.

The Company believes that lab-created moissanite gemstones have numerous
features that make them a superior substitute for diamond in jewelry and that
will result in market demand for the Company's products. It is generally
accepted that, in addition to carat size, the most important characteristics of
a gemstone are its beauty and durability. The beauty of a colorless diamond is
determined by the absence of color as well as the diamond's brilliance and
"fire." 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. The
gemstone's hardness also determines the extent to which brilliance and "fire"
can be highlighted by cutting with sharp, highly polished facets. The durability
of a gemstone is determined by the gem's hardness, or resistance to scratching,
and its toughness, or resistance to chipping or cleaving.

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25

Because of SiC's physical properties, lab-created moissanite gemstones
compare favorably to diamond for beauty and durability. The unique atomic
structure of SiC allows it to be grown in a wide variety of colors, including
colors within the commercially desirable portion of the diamond grading scale.
Colorless lab-created moissanite gemstones display a brilliance very similar to
that of diamond, with a refractive index that is greater than diamond and closer
to diamond than any other hard mineral. The dispersion of colorless lab-created
moissanite gemstones is also higher than diamond. The hardness of lab-created
moissanite gemstones is greater than all known gemstone materials except
diamond. As a result, lab-created moissanite gemstones, like diamond, can be cut
with sharp, highly polished facets that accentuate their brilliance and "fire."

An initial study indicates that the physical appearance of lab-created
moissanite gemstones is quite similar to diamond. In 1996, the Company
commissioned a market survey of 30 jewelry stores in the Midwest region of the
United States. In the survey, personnel at 28 out of 30 jewelry stores
mistakenly identified one of the Company's lab-created moissanite gemstones set
in a pendant as diamond. This study represents only one survey, and there can be
no assurance that other surveys would provide similar findings or that any
commercial market will develop for the Company's products.

The Company believes that other physical properties of lab-created
moissanite gemstones are similar to diamond and will aid in jewelers' acceptance
of its products as a diamond substitute. Because the specific gravity, or
density, of lab-created moissanite gemstones is very close to that of diamond,
the size of a 1 carat lab-created moissanite gemstone is virtually
indistinguishable from a 1 carat diamond by the naked eye. In addition,
lab-created moissanite gemstones, like diamond, can withstand high temperatures.
This property allows jewelers to make extensive repairs to the jewelry setting
without removing the stone and to use the same methods that are used to repair
diamond jewelry.

The Company believes that the physical properties of lab-created moissanite
gemstones make it a more attractive substitute for diamond than synthetic cubic
zirconia. Because it has a lower refractive index than diamond, synthetic cubic
zirconia is relatively easy to distinguish from diamond in most applications.
The difference is noticeable in larger size round brilliant cut gemstones and
particularly in gemstones cut with certain facet arrangements, such as emerald
or baguette cut gemstones. In addition, as a result of their relative softness,
synthetic cubic zirconia gemstones show signs of wear over time. Substantial
degradation of the facets, which does not occur to the same degree in diamond or
lab-created moissanite gemstones, results in a marked reduction in brilliance.

The following table compares the physical properties of lab-created
moissanite gemstones with other gemstone materials:

GEMSTONE MATERIAL COMPARISON(1)

HARDNESS REFRACTIVE SPECIFIC
GEMSTONE MATERIAL (MOHS SCALE)(2) TOUGHNESS INDEX DISPERSION GRAVITY
----------------- --------------- --------- ---------- ---------- ---------

Diamond....................... 10 Good* 2.42 .044 3.52
Lab-Created Moissanite(3)..... 9.25-9.50 Excellent 2.65-2.69 .090-.104 3.14-3.21
Sapphire & Ruby............... 9 Excellent 1.76-1.78 .018 3.90-4.00
Synthetic Cubic Zirconia...... 8.0-8.5 Good 2.09-2.18 .060 5.60-6.06
Emerald....................... 7.5 Poor to 1.56-1.60 .014 2.69-2.75
Good

- ---------------

* In cleavage direction, otherwise excellent.
(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 3 (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
FUNC-

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TIONAL RELATIONSHIPS IN SCIENCE AND TECHNOLOGY, NEW SERIES, GROUP III, VOL.
17C, PP. 403-416 AND 585-592 (M. Schultz and H. Weiss, eds., 1984).
(2) The Mohs Scale is approximately logarithmic and quantitative comparisons of
different gemstone materials cannot be made directly using the Mohs Scale.
Lab-created moissanite gemstones are approximately one-third as hard as
diamond and synthetic cubic zirconia is approximately one-sixth as hard as
diamond. Lab-created moissanite gemstones are approximately twice as hard as
synthetic cubic zirconia.
(3) The physical properties of lab-created moissanite gemstones set forth in the
preceding table utilized materials from SiC crystals produced by parties
other than the Company or Cree. These crystals had various sizes, colors and
atomic structures that the Company believes made them unsuitable for use as
a diamond substitute. The Company has conducted tests on the hardness,
toughness and refractive index of samples of its lab-created gemstones, and
the results of these tests are consistent with the results reported in this
table. Because Cree and the Company have not yet developed a fully
repeatable process for producing gemstone quality SiC crystals in the
comparable diamond color grade range of "G" through "J", the specific
properties of the lab-created moissanite gemstones that will eventually be
commercialized are not now known. However, the Company believes that the
physical properties of its lab-created moissanite gemstones will fall within
the ranges of the lab-created moissanite shown in this table.

PRODUCTS

The Company expects to sell lab-created moissanite gemstones of 1/2 to 1
carat primarily in the comparable diamond color grade range of "G" through "J"
and in the comparable diamond clarity grade range of Flawless through Slightly
Included. Cree has grown pilot samples of SiC crystals in these colors and
clarities and has undertaken a significant development program, funded by the
Company, to develop a fully repeatable process to grow SiC crystals in the
desired color, size and volume. If Cree is not successful in its development
efforts, the Company intends to manufacture, from SiC crystals grown by Cree
using its existing processes, and sell lab-created moissanite gemstones
primarily in colors lower than its target color grade range and primarily in
sizes smaller than 1/2 carat but at significantly lower average selling prices.
The development efforts for such smaller, less expensive stones has been
completed, and no significant barriers exist to prevent the Company from
manufacturing and selling such stones, if necessary. There can be no assurance
that Cree will successfully complete its planned development efforts or that a
market will develop for lab-created gemstones of any color or size.

The Company currently intends to sell only loose lab-created gemstones
rather than finished jewelry products. See "-- Distribution, Marketing and
Sales." Initially, the Company plans to market round brilliant cut stones, which
are frequently used in rings, earrings, pendants and bracelets. Over time, the
Company may elect to expand its product lines by offering additional cuts or
colored lab-created gemstones. To date, Cree has produced pilot samples of
gemstone quality SiC crystals in green, blue and amber.

The Company has not yet determined the price at which it will market its
products. As the Company seeks to establish distribution channels, it is
conducting preliminary market research in its target markets. The Company
intends to determine the price of its lab-created gemstones after assessing the
response from its potential customers. There can be no assurance that the
Company will be able to sell its products at the prices ultimately established
by the Company or at any other prices that would be profitable to the Company.

Gemstone test instruments most commonly used by jewelry experts rely on
thermal properties to distinguish diamond from other gemstones or diamond
simulants such as synthetic cubic zirconia. Because the thermal properties of
lab-created moissanite gemstones are relatively close to those of diamond, such
instruments have not, to date, been able to reliably differentiate between
diamond and lab-created moissanite gemstones. Although gemologists trained in
the physical properties of lab-created moissanite gemstones may find a number of
ways to distinguish lab-created moissanite from diamond, the Company believes
there will be a need to introduce a readily available moissanite/diamond test
instrument concurrent with the introduction of lab-created moissanite gemstones
to help prevent fraud. The availability of this type of test instrument also may
aid market acceptance of its lab-created gemstones.

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The Company anticipates introducing its moissanite/diamond test instrument
for sale during the first half of 1998. This instrument, which distinguishes
moissanite gemstones from diamonds in the colors and clarities most commonly
sold by retail jewelers, would be used in conjunction with existing thermal test
instruments. A patent application by the Company is pending for this
moissanite/diamond test instrument. There can be no assurance that a market will
develop for the Company's test instrument or that other readily available means
will not be developed which can effectively distinguish lab-created moissanite
gemstones from diamond.

DEPENDENCE ON CREE AND CREE TECHNOLOGY

Cree, the Company's source for development and supply of lab-grown SiC
crystals, has developed or licensed numerous patented processes for the growth
of SiC crystals. The technology was initially developed for SiC uses in
semiconductors. The founders of the Company recognized the potential use of SiC
crystal for lab-grown gemstones, and the Company has obtained the exclusive
right to purchase SiC crystals from Cree for gemstones and gemological
instrumentation. The Company believes that Cree is the only producer of SiC
crystals in sizes suitable for commercial production of gemstones. In addition,
Cree is the only producer of SiC known by the Company to be developing colorless
SiC crystals suitable for use as a diamond substitute.

Cree has significant proprietary rights related to its processes for
growing SiC crystals. Cree has an exclusive license on the 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 other patents relating to aspects of its SiC crystal growth process. To
further protect its proprietary SiC crystal growth process, Cree internally
produces, with proprietary confidential technology, the crystal growth systems
used in its SiC crystal production. In addition, Cree has a pending patent
application for a process of growing colorless SiC crystals. The Company has a
royalty-free, perpetual license for the use in gemstone applications of the
technology covered by this pending patent application.

The Company's success and ability to compete is heavily dependent upon
Cree's proprietary technology. However, there can be no assurance that Cree will
be able to protect its proprietary technology from disclosure or that others
will not develop technologies that are similar or superior to its technology.
See "Risk Factors -- Dependence on Intellectual Property."

On June 6, 1997, the Company entered into the Exclusive Supply Agreement
and a Development Agreement (the "Development Agreement") with Cree. Under the
Development Agreement and the Exclusive Supply Agreement, the Company has
concentrated both its development expenditures and its source of supply for SiC
crystals with Cree. As a result, the business of the Company will be highly
dependent on Cree's performance under these agreements. The processes and other
technology developed by Cree under the Development Agreement are expected to
have application in Cree's development of SiC technology generally, and will be
owned by and available to Cree for all uses other than gemstone applications. In
addition, the payment terms under the Exclusive Supply Agreement provide margins
and certain financial incentives to Cree that the Company believes provide
appropriate business and economic incentives for Cree to perform its obligations
under the Development Agreement and the Exclusive Supply Agreement.

Under the Development Agreement, Cree is developing a fully "repeatable
process" for producing SiC crystals in comparable diamond color grades "G"
through "J", with at least 50% in the "G" to "H" range. To date, Cree has
repeatedly produced crystals of consistent, uniform quality in the comparable
diamond color grades "L" through "N" and has produced samples in the comparable
diamond color grades "G" through "K". If Cree has not developed a fully
"repeatable process" by January 1, 1998, during the 10-day period ending on
January 10, 1998, the Company may elect to reduce its funding obligations under
the Development Agreement by 50% or terminate the Development Agreement. The
Development Agreement also establishes additional milestones for crystal
production in future years, and the Company has the right to terminate the
Agreement if those milestones are not met by Cree. The Development Agreement
also provides for a five-year focused development effort by Cree to increase
crystal size while maintaining color grade and uniformity. Provided the target
specifications for crystal size and color grade are met, over the five-year
period of the Development Agreement the Company could be obligated to fund
approximately $12 million of development work. See "Use of Proceeds."

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Under the Exclusive Supply Agreement, Cree has agreed not to sell
moissanite crystals for gemstone uses to anyone other than the Company. The
Company has agreed to purchase from Cree at least 50%, by dollar volume, of the
Company's requirements for SiC material for the production of gemstones in each
calendar quarter. Cree is obligated to supply this amount of material to the
Company. Although the Company is obligated to purchase only 50% of its
requirements from Cree, the Company does not believe there are any other
alternative sources of supply for SiC crystals suitable for gemstones.
Therefore, the Company expects to be dependent on Cree as its sole source of
supply of SiC crystals. The price for SiC crystals is set at Cree's loaded
manufacturing cost plus a margin, which margin may increase if the price of
crystals declines below a specified amount.

Cree will have to build additional crystal growth systems in order to meet
the Company's anticipated SiC crystal requirements. Under the Exclusive Supply
Agreement, Cree may elect to have the Company 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
purchased by the Company. If the Company funds the costs of the crystal growth
systems, Cree must supply the Company with 100% of the output from these
systems. If Cree elects to fund the cost of these additional growth systems on
its own, there can be no assurance that Cree will supply the Company with all of
the output from these crystal growth systems or fill all of the Company's
orders. Any delay or reduction in the availability of SiC crystals could delay
or limit the Company's ability to deliver and sell its lab-created gemstones,
which would have a material adverse effect on the Company.

The Exclusive Supply Agreement also restricts the Company from entering
into numerous types of arrangements with identified parties. See
"-- Distribution, Marketing and Sales" and "Description of Capital
Stock -- Certain Anti-Takeover Provisions." 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 $1.0 million. The Company expects to
meet this order threshold and to extend the term of the Agreement.

Cree is also the sole supplier of a component of the Company's
moissanite/diamond test instrument that is proprietary to Cree. If Cree were to
fail to deliver this component, as required, the Company would not be able to
manufacture its test instrument. A lack or shortage of test instruments could
impact market acceptance of the Company's lab-created moissanite gemstones.

The President of the Company and one of the founders of the Company are the
brothers of the Chief Executive Officer of Cree. After this offering, Cree and
certain of its officers and directors will own approximately 3.9% of the
outstanding Common Stock. See "Certain Transactions."

INTELLECTUAL PROPERTY OF THE COMPANY

The Company has applied for a number of patents related to the production
of lab-created moissanite gemstones. The Company has pending patent applications
for lab-created moissanite gemstones and its moissanite/diamond test instrument.
Although the Company intends to vigorously prosecute all its patent
applications, there can be no assurance that such actions will be successful,
that any patents will be issued, that such patents, if issued, will not be
challenged, invalidated or circumvented or that such patents, if issued, will
have any competitive or commercial value.

The Company's success and ability to compete successfully is heavily
dependent upon its proprietary technology. In addition to its pending patents,
the Company relies on trade secret laws and employee, consultant and customer
confidentiality agreements to protect certain aspects of its technology. There
can be no assurance that the Company will be able to protect its proprietary
technology from disclosure or that others will not develop technologies that are
similar or superior to its technology. See "Risk Factors -- Dependence on
Intellectual Property."

While the Company has not received any claims that its products or
processes infringe on the proprietary rights of third parties, there can be no
assurance that third parties will not assert such claims against the Company
with respect to its existing and future products. In the event of litigation to
determine the validity of

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any third party's claims, such litigation could result in significant expense to
the Company and divert the efforts of the Company's technical and management
personnel, whether or not such litigation is determined in favor of the Company.
In the event of an adverse result of any such litigation, the Company could be
required to expend significant resources to develop non-infringing technology or
to obtain licenses to, and pay royalties on the use of, the technology which is
the subject of the litigation. There can be no assurance that the Company would
be successful in such development or that any such license would be available on
commercially reasonable terms.

MANUFACTURING

The production of lab-created moissanite gemstones includes (i) growing SiC
crystals, (ii) cutting crystals into preforms that will yield gemstones of an
approximate carat size, (iii) faceting preforms into gemstones and (iv)
inspecting, sorting and grading faceted gemstones. The processes for SiC crystal
growth are under continuing development by Cree, and the Company is engaged in
pilot production of lab-created moissanite gemstones at its own facilities as
part of its product development efforts.

Growth of SiC Crystals. The Company intends to source all of its SiC
crystals from Cree under the Exclusive Supply Agreement for the foreseeable
future. See "-- Dependence on Cree and Cree Technology."

In connection with the anticipated market introduction of its lab-created
gemstones in the first half of 1998, the Company has placed a contingent order
with Cree for a number of SiC crystals that the Company believes will exceed the
capacity of the crystal growth systems now in use. The order is contingent on
Cree meeting the milestones under the Development Agreement for color range and
on the Company's successful completion of this offering. Cree has not yet
informed the Company whether Cree will purchase some or all of the additional
crystal growth systems or require the Company to do so. If Cree's development
milestones are met, the Company would also place orders for a number of crystals
in the remainder of 1998 and following years that it believes would require the
use of a significant number of additional crystal growth systems. There can be
no assurance that Cree will meet its development milestones or that the Company
will be able to sell lab-created moissanite gemstones in accordance with its
objectives.

In an effort to have adequate quantities of its lab-created gemstones
available to meet anticipated market demand, the Company expects to place orders
with Cree for SiC crystals in advance of actual demand for the product. As a
result, the Company may spend significant amounts of its capital to acquire
additional crystal growth systems or purchase SiC crystals at a time when there
is no existing demand to justify such expenditures. If the Company
underestimates demand, the Company may be unable to rapidly increase its
production of lab-created moissanite gemstones to satisfy the demand as a result
of the several months that may elapse between the Company placing an order for
crystals and the time that additional growth systems needed could begin
producing crystals.

Preforms. The Company divides all SiC crystals through slicing and dicing
processes into preforms in carat sizes suitable for faceting into predetermined
calibrated-size gemstones. The Company plans to acquire readily available
automated and computerized equipment used in the semiconductor industry to slice
and dice crystals into preforms. The Company believes that this equipment will
enable it to maximize, with minimal additional investment or employee training,
the number of preforms obtained from each SiC crystal.

Faceting Gemstones. The faceting of preforms is a critical stage in
obtaining quality gemstones. The techniques and skills used in faceting
lab-created moissanite gemstones differ somewhat from those used in faceting
diamonds. The Company intends to outsource all faceting of gemstones for
commercial production and will continue internal faceting for research and
development. The Company has entered into an agreement with John M. Bachman,
Inc. ("JMB") under which an affiliate of JMB will facet lab-created moissanite
preforms. Pursuant to this agreement, the Company has advanced certain funds to
JMB to expand production capability at its affiliate. The Company has committed
to supply certain minimum quantities of preforms to JMB, and JMB has agreed to
have such quantities faceted to mutually agreed specifications at agreed upon
prices. The agreement renews annually unless sooner terminated by either party
upon no less than 60 days notice prior to the end of the then applicable term or
due to breaches of the agreement or the occurrence of certain other events.
Under this agreement, JMB has agreed to grant, and to cause its affiliates to
grant, to the

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Company 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 lab-created moissanite gemstones.

The Company has identified two additional suppliers of faceting services,
has qualified their faceting skills on a sample basis and intends to assess
these other vendors' production capabilities over the next year. There is,
however, no assurance that these vendors will be suitable for reliable supply
arrangements or that the Company will be able to enter into agreements with
these additional vendors or with other reliable, quality faceting providers on
terms acceptable to the Company. Even if these agreements can be reached, the
Company intends during the early stages of commercialization of its products to
source faceting services primarily from JMB and will be dependent on JMB's
ability to provide an adequate quantity of quality faceted lab-created
moissanite gemstones. The Company has not begun placing commercial production
orders with JMB, and therefore is unable to assess, with certainty, whether JMB
will be able to produce faceted lab-created moissanite gemstones to the
Company's quality specifications and within the Company's quantity and time
requirements.

Inspection, Sorting and Grading. Faceted lab-created moissanite gemstones
are returned to the Company for inspection, sorting and grading. During this
stage, specially trained personnel individually examine and grade each faceted
lab-created moissanite gemstone for color, cut and clarity to ensure that it
meets the Company's quality control standards. This phase of manufacturing is
relatively labor-intensive and requires skills not readily available in the
general work force. There can be no assurance that the Company will be able to
hire or retain sufficient numbers of appropriately skilled personnel for this
phase of manufacturing.

Test Instrument. The Company has contracted with an unaffiliated third
party for the assembly of the moissanite/diamond test instrument from components
produced by third parties. The Company believes that, other than with respect to
the chip described below, the components and assembly functions would be readily
available from a wide variety of other suppliers. The test instrument relies
upon a proprietary semiconductor chip that the Company obtains from Cree under a
letter agreement dated February 12, 1996 which expires in 2016 (the "Instrument
Agreement"). The Instrument Agreement obligates the Company to purchase all of
the chips used in the test instrument from Cree and gives the Company the
exclusive right to purchase those chips from Cree. The Company will pay Cree a
royalty of 2 1/2% of net sales of all test instruments incorporating the Cree
chip.

DISTRIBUTION, MARKETING AND SALES

The Company plans to introduce 1/2 to 1 carat round brilliant lab-created
moissanite gemstones for sale in certain large cities in the United States and
Pacific Rim in the first-half of 1998. The Company has targeted the United
States and the Pacific Rim because it believes that these markets represent a
significant portion of the worldwide jewelry market and are markets that are
relatively accepting of diamond substitutes. In connection with the planned
product introduction, the Company has begun pre-qualifying selected retail
jewelry chains and high-volume independent retail jewelry stores in targeted
U.S. cities as exclusive distributors and is exploring distribution options in
the Pacific Rim. The Company is currently evaluating the most appropriate
structure for the exclusive distribution agreements and may, in certain
circumstances, enter into other types of distribution agreements. The final
selection of retailers and the nature and scope of the exclusive arrangements
will be based on the responses received by the Company. The Company currently
anticipates that it will begin to offer exclusive distribution arrangements in
early 1998.

The Company believes that marketing loose stones will allow retail jewelers
to individually select the most appropriate jewelry settings for their
individual market areas. The sale of round brilliant cut stones also provides
the jeweler with a wide range of uses for the stones in rings, earrings,
pendants and bracelets. However, consumer perception and acceptance of the
Company's products will be directly impacted by the quality, design and
workmanship of the settings chosen by the retailers, and the Company will have
no control over these individual decisions.

The Company believes that exclusive distribution agreements will provide
retailers with an opportunity to earn a profit margin that compares favorably to
other jewelry products and will allow the retailer to distinguish its product
line from other jewelers in the highly competitive retail jewelry market. The
Company also believes

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that the profit margins associated with its products will create incentives for
these retailers to maximize their sales and promotions efforts resulting in
additional consumer demand for the Company's lab-created gemstones. As the
Company's supply of lab-created moissanite gemstones increases, the Company
plans to increase the number of markets in which its products are available and
the number of retailers handling its products. After the introduction of
lab-created moissanite gemstones in its target markets, the Company's sales
staff will divide its time between providing sales support to its existing
network of retailers and entering into new target markets and new distribution
arrangements.

The Company plans to market its moissanite/diamond test instrument directly
to jewelers, gemologists and pawnbrokers. Distribution of the test instrument
will be supported by direct mailings and advertisements in trade publications.
The Company may retain non-exclusive distributors to distribute the test
instrument in some markets or enter into other distribution agreements as it
deems appropriate.

The Exclusive Supply Agreement prohibits the Company, without Cree's
consent, from entering into exclusive marketing or distribution agreements with
DeBeers or any party that Cree reasonably believes is affiliated with DeBeers;
the Central Selling Organization (the international cartel of diamond
producers); 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. These provisions may limit the avenues of
distribution potentially available to the Company and could prevent the Company
from entering into certain potentially profitable transactions.

The Company intends to develop a comprehensive marketing strategy to
support the introduction of its products in its target markets. The Company's
marketing efforts are expected to highlight the similarities of lab-created
moissanite gemstones and diamond and contrast their relative prices. The Company
expects to develop advertising campaigns for the jewelry trade and for the
consumer because the Company believes that a successful introduction of its
lab-created gemstones is dependent upon having a network of retailers committed
to aggressively market the Company's products. The Company's marketing strategy
is expected to include cooperative advertising with jewelers or other
distributors, point of purchase displays, jeweler or distributor training in
selling lab-created moissanite gemstones and providing other marketing support
services. In addition, the Company's corporate communications manager is
responsible for developing media interest in and generating positive media
reports on lab-created moissanite gemstones.

COMPETITION

Competition in the market for gemstones is intense. The Company's
lab-created moissanite gemstones compete with natural and treated diamonds and
existing synthetic gemstones such as synthetic cubic zirconia presently in
commercial distribution. The Company may also face competition from additional
gemstones such as synthetic diamonds, synthetic diamond films and other sources
of synthetic moissanite not presently available in colors, sizes and volumes
suitable for use as gemstones. Most of the suppliers of diamonds and existing
synthetic gemstones, as well as the potential suppliers of other synthetic
gemstones, have substantially greater financial, technical, manufacturing and
marketing resources and greater access to distribution channels than the
Company.

The worldwide market for uncut 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 diamonds at both the
wholesale and retail levels. Although the Company believes that its gemstones
will 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 lab-created moissanite gemstones.

Synthetic diamond in gemstones or film form may also become available in
the marketplace as an alternative to the Company's gemstones. Synthetic diamonds
are regularly produced for industrial applications, and 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. The Company
believes that gemstone grade synthetic diamonds presently cannot be produced at
prices competitive with those expected to be offered for the Company's colorless
lab-created moissanite gemstones. There could, however, be

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technological advances that would enable competitively priced synthetic diamonds
of comparable grade to be offered.

Currently, synthetic diamond films can be grown at commercially viable
prices in thicknesses that can be applied to other surfaces. The films, however,
adhere well to only a few minerals such as diamond, silicon and SiC
(moissanite). If the technology to attach a synthetic diamond film to other
colorless minerals is improved, the resulting film-covered gemstone could
compete with moissanite as a substitute for diamond.

The Company's products will face competition from synthetic cubic zirconia,
the principal existing diamond simulant. Two of the largest producers of
synthetic cubic zirconia gemstones are D. Swarovski & Co. and Golay Buchel. In
addition, there are a significant number of other producers of synthetic cubic
zirconia jewelry. 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
the Company's lab-created moissanite gemstones. The Company believes that price
is the primary basis upon which these products will compete with its lab-created
moissanite gemstones.

Although the Company believes that its products have a proprietary
position, it could face competition from other companies who develop competing
SiC technologies. Some of these technologies could be spawned by producers of
SiC used for other industrial applications. Manufacturers of industrial SiC
products include The Carborundum Corporation (abrasive uses) and Cree, Siemens
AG, ABB and Northrup Grumman Corporation (semiconductor uses). The Company
believes that Cree is presently the only supplier of SiC crystals in colors,
sizes and volumes suitable for gemstone applications and believes that the
patents owned or pending by Cree or the Company provide substantial
technological and cost barriers to other companies' development of colorless
lab-created moissanite gemstones. It is possible, however, that these or other
producers of SiC could develop, by other processes, SiC crystals suitable for
gemstone applications and, if developed, these SiC crystals could be used by
others to produce lab-created moissanite gemstones.

The Company intends to compete primarily on the basis that the unique
qualities of its lab-created moissanite gemstones provide a substitute for
diamond that is superior to existing substitutes at a significant cost advantage
to diamond. Its ability to compete successfully is dependent on its ability to:
(i) achieve jeweler and consumer acceptance of its products; (ii) obtain
quantities of lab-grown SiC crystals in acceptable color and quality from Cree;
(iii) obtain reliable and high quality faceting services from third parties;
(iv) respond to market entries of other gemstone materials with technological or
cost improvements; and (v) meet consumer demand for its lab-created moissanite
gemstones. There can be no assurance that the Company will be able to obtain the
materials and services needed to deliver its products or to otherwise be able to
compete successfully in the marketplace.

GOVERNMENT REGULATION

The Company's products will be subject to regulation by the FTC. The FTC
has issued regulations and guidelines governing the marketing of diamond
simulants and substitutes that require diamond simulants and substitutes to be
clearly identified as such in any promotional or marketing materials. While the
Company intends to comply fully with all FTC regulations, there can be no
assurance that the FTC or a competitor will not challenge the Company's
promotional or marketing activities. Such a challenge could result in
significant expense to the Company and divert the efforts of the Company's
management and marketing personnel, whether or not such challenge is resolved in
favor of the Company. If the Company's actions were found to be in violation of
FTC regulations, the Company could be forced to suspend marketing and sales of
its products and could incur significant expenses in developing new marketing
strategies and materials that would not violate FTC regulations. There can be no
assurance that the Company would be successful in developing new marketing
strategies and materials that would comply with FTC regulations or that such
strategies, once developed, would allow the Company to market its products
profitably.

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FACILITIES

The Company leases approximately 12,700 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. The Company
believes that comparable mixed use space could be obtained from other parties on
terms substantially the same as the Company's current lease. This space is
considered by management to be sufficient for the Company's foreseeable needs
over the next 12 to 24 months.

EMPLOYEES

At September 29, 1997, the Company had 24 full-time employees, two
part-time employees, three temporary employees and two independent contractors.
The Company believes that its future prospects will depend, in part, on its
ability to obtain additional management, scientific and technical personnel.
Competition for such personnel is intense, and the number of persons with
relevant experience is limited. None of the Company's employees is represented
by a labor union. The Company believes that its employee relations are good.

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MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The directors, executive officers, nominees for director and key employees
of the Company are as follows:

DIRECTORS AND EXECUTIVE OFFICERS AGE POSITION
- -------------------------------- --- --------

Jeff N. Hunter............................... 40 President and Chairman of the Board
Mark W. Hahn................................. 35 Chief Financial Officer, Treasurer
and Secretary
Martin J. DeRoy.............................. 50 Vice President of Marketing
Thomas G. Coleman............................ 37 Director of Technology
Kurt Nassau.................................. 70 Director
Howard Rubin................................. 72 Director
Frederick A. Russ............................ 53 Director
Kurt Leutzinger.............................. 46 Director Nominee
David B. Stewart............................. 34 Director Nominee
Ollin B. Sykes............................... 46 Director Nominee
KEY EMPLOYEES
- ---------------------------------------------
Renee McCullen............................... 38 Director of Sales
Earl R. Hines................................ 60 Director of Manufacturing

JEFF N. HUNTER, one of the founders of the Company, has served as the
Company's President and Chairman of the Board since June 1996 and as a director
since the Company's inception in June 1995. Mr. Hunter served as Treasurer and
Secretary of the Company from June 1995 to June 1996. From July 1980 to May
1996, he was employed in various capacities with North Carolina State
University, including as Director of Business, Finance and Research
Administration for the College of Engineering. Mr. Hunter received his Master of
Science degree in management science from North Carolina State University.

MARK W. HAHN has served as the Chief Financial Officer of the Company since
October 1996 and as Treasurer and Secretary since August 1997. From January 1984
to October 1996, Mr. Hahn was employed with Ernst & Young LLP, including as
Senior Manager in the Entrepreneurial Services Group. He earned his Bachelor of
Business Administration degree with concentrations in accounting and finance
from the University of Wisconsin in Milwaukee and is a Certified Public
Accountant.

MARTIN J. DEROY has served as Vice President of Marketing since September
1997. From October 1990 to September 1997, Mr. DeRoy was employed as Marketing
Director of Friedman's Inc., a retail jewelry chain with approximately 375
stores. He earned a Bachelor of Science degree in business administration, with
a major in advertising and public relations and a minor in marketing and
merchandise, at Youngstown State University.

THOMAS G. COLEMAN has served as Director of Technology of the Company since
March 1997. From August 1996 to March 1997, Mr. Coleman provided technical
consulting services to the Company. Mr. Coleman co-founded Cree and was employed
by Cree as a senior process development engineer from December 1987 to July
1995. He earned an electronic technology degree from Patterson Technical
College.

KURT NASSAU has served as a director of the Company since August 1996 and
has provided consulting services to the Company since April 1997. Since August
1990, Dr. Nassau has served as the President of Nassau Consultants where he
specializes in advising companies on gemology and color. Dr. Nassau is a former
Distinguished Research Scientist with AT&T Bell Labs and is the author of 16
patents and 4 books on gemology and the science of color. Dr. Nassau earned his
Ph.D. in physical chemistry at the University of Pittsburgh and is a former
20-year member of the Board of Governors of the Gemological Institute of
America.

HOWARD RUBIN became a director of the Company in November 1996 and a
consultant to the Company in February 1997. Since 1992, he has served as
President of GemDialogue Systems, Inc., a consulting

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company which provides jewelry appraisal and gemological training services to
jewelers and business process improvement services to jewelry manufacturers. Mr.
Rubin received a graduate gemology degree from the Gemological Institute of
America in 1959.

FREDERICK A. RUSS has served as a director of the Company since November
1996. Dr. Russ has served as Dean of the College of Business Administration at
the University of Cincinnati since September 1994. From July 1989 to September
1994, he was Marketing Department Head and Professor of Marketing at the
University of Cincinnati. Dr. Russ served on the Board of Directors of Cree from
1988 to 1992. He earned his Ph.D. in industrial administration at
Carnegie-Mellon University.

KURT LEUTZINGER has been nominated and has consented to serve as a director
of the Company. It is anticipated that Mr. Leutzinger will be elected a director
of the Company at a special shareholders meeting in October 1997 (the "Special
Meeting"). Since July 1997, Mr. Leutzinger has been employed as Vice President
of Finance and Chief Financial Officer of Abgenix, Inc., a company engaged in
the business of antibody therapeutics. From June 1987 to July 1997, he was Vice
President and Portfolio Manager for GE Investment Corporation ("GEIC"), a wholly
owned investment management subsidiary of General Electric Company. Mr.
Leutzinger earned a Master of Business Administration degree in finance from New
York University.

DAVID B. STEWART has been nominated and has consented to serve as a
director of the Company. It is anticipated that Mr. Stewart will be elected a
director of the Company at the Special Meeting. Since November 1992, Mr. Stewart
has held various positions at GEIC and currently is an Investment Manager in its
Private Equity Group. He earned his Bachelor of Arts degree in economics from
the University of New Hampshire.

OLLIN B. SYKES has been nominated and has consented to serve as a director
of the Company. It is anticipated that Mr. Sykes will be elected a director of
the Company at the Special Meeting. Since December 1984, he has served as the
president of Sykes & Company, P.A., a regional accounting firm specializing in
accounting, tax and financial advisory services. Mr. Sykes earned his Bachelor
of Science degree in accounting at Mars Hill College and is a Certified Public
Accountant and a Certified Management Accountant.

RENEE MCCULLEN has served as Director of Sales of the Company since August
1997. From May 1983 to September 1996, she was employed in various capacities
with Art Carved Class Rings, a company engaged in the wholesale jewelry
business, most recently as Regional Vice President and Regional Sales Manager.
Ms. McCullen earned a Bachelor of Science degree in business administration,
with a concentration in marketing, at East Carolina University.

EARL R. HINES has served as Director of Manufacturing of the Company since
March 1997. From April 1996 to March 1997, Mr. Hines was a lapidary consultant
to the Company. From March 1990 to March 1997, Mr. Hines owned and operated
GemCrafters of Raleigh, a business that focused on cutting colored gemstones and
repairing and appraising jewelry. Mr. Hines retired from IBM in 1990 with more
than 30 years of service, including as Manufacturing Systems Manager.

The Company, C. Eric Hunter, a founder and beneficial owner of 17.8% of the
Common Stock outstanding after this offering, General Electric Pension Trust
("GEPT") and certain other shareholders of the Company are party to a
shareholders agreement (the "Shareholders Agreement"). Under the Shareholders
Agreement, as long as GEPT owns shares of Common Stock or Series B Preferred
Stock, Mr. Hunter and the other shareholders who are parties to the Shareholders
Agreement have agreed to vote all of their shares of Common Stock in favor of
the election of one individual designated by GEPT as a director. The
Shareholders Agreement further provides that, after the consummation of this
offering and so long as GEPT owns shares of Common Stock, the Company will (i)
nominate and recommend for election as a director one individual designated by
GEPT who shall be reasonably acceptable to the Company, (ii) if a GEPT nominee
is not a director, provide GEPT's designee with a copy of any information
distributed to the Board and allow that designee to attend and participate, but
not vote, in all meetings of the Board and (iii) not increase the size of the
Board without GEPT's consent, which will not be unreasonably withheld. GEPT has
consented to an

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increase in the size of the Board to seven directors. Mr. Stewart has been
nominated as a director pursuant to the Shareholders Agreement for election to
the Board at the Special Meeting. The Shareholders Agreement will terminate on
the earlier of (i) March 28, 2007 or (ii) the date on which GEPT no longer owns
any shares of Common Stock or Series B Preferred Stock.

Directors are elected annually to serve for one-year terms and until their
successors are duly elected and qualified. The bylaws allow, at any time there
are nine or more directors, the Board to be divided into three classes of
directors serving three-year terms which expire in consecutive years for each
class of directors. Executive officers of the Company are appointed annually by
the Board of Directors and serve until their successors are elected and
qualified. Mr. Sykes is a second cousin once removed of Jeff N. Hunter.
Otherwise, there are no family relationships among any of the directors or
officers of the Company.

BOARD COMMITTEES

The Board of Directors presently has a standing Executive Committee and
intends to appoint at a meeting in October 1997 two additional standing
committees: a Compensation Committee and a Finance and Audit Committee. The
Executive Committee is authorized to act on behalf of the Board during the
intervals between meetings of the full board subject to certain statutory
restrictions. Jeff N. Hunter and Kurt Nassau compose the Executive Committee.
The Compensation Committee will recommend to the Board the compensation of the
officers and salaried employees of the Company and, upon delegation of such
authority from the Board, will administer the Company's stock option plans. See
"-- Stock Option Plans." The Finance and Audit Committee will be responsible for
reviewing and evaluating the Company's financing plans, reviewing the scope and
results of audits and other services provided by the Company's independent
accountants and determining the adequacy of the Company's internal controls and
other financial reporting matters. Each committee has or will have at least two
non-employee directors.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

To date, the Board of Directors has made all determinations with respect to
executive officer compensation. No interlocking relationships exist between the
Company's Board of Directors and the board of directors or compensation
committee of any other company, nor has any such interlocking relationship
existed in the past. Dr. Nassau and Mr. Rubin each have a consulting agreement
with the Company. See "-- Compensation of Directors." Dr. Nassau has purchased
and holds securities of the Company. See "Certain Transactions" and "Principal
Shareholders."

COMPENSATION OF DIRECTORS

The Company does not presently pay cash fees to its directors but does
reimburse all non-employee directors for expenses incurred in their capacity as
directors. The Company has granted to each non-employee director and director
nominee or, in the case of the GEPT nominee, to GEPT options to purchase an
aggregate of 30,560 shares of Common Stock. Options to purchase 25,560 shares
were granted under the 1996 Option Plan (the "1996 Directors Options") and
options to purchase 5,000 shares were granted under the 1997 Omnibus Plan,
subject to shareholder approval of the 1997 Omnibus Plan and the consummation of
this offering (the "1997 Directors Options").

The 1996 Directors Options become exercisable in three equal, annual
installments beginning on the first anniversary of the date of grant and
expiring on the tenth anniversary of the date of grant, although some of these
options will vest in full on December 31, 1997 if this offering is completed
prior to that date. The 1996 Directors Options were granted at the prices and on
the dates described below. In July 1996, Dr. Nassau was granted an option to
purchase 17,040 shares at an exercise price of approximately $1.88 per share. In
September 1996, Mr. Rubin was granted an option to purchase 17,040 shares at an
exercise price of approximately $2.70 per share. In October 1996, Dr. Russ was
granted an option to purchase 17,040 shares at an exercise price of
approximately $2.70 per share. In April 1997, GEPT was granted an option to
purchase 17,040 shares at an exercise price of approximately $3.45 per share. In
July 1997, GEPT, Dr. Nassau, Mr. Rubin and Dr. Russ were each granted an option
to purchase 8,520 shares at an exercise price of

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37

approximately $4.81 per share and Messrs. Leutzinger and Sykes were each granted
an option to purchase 25,560 shares at an exercise price of approximately $4.81
per share. The options granted in July 1997 to GEPT and the non-employee
directors will become exercisable in full on December 31, 1997 if this offering
is completed prior to that date. See "-- Stock Option Plans -- 1996 Option
Plan."

The 1997 Directors Options were all granted in September 1997 at an
exercise price equal to the initial public offering price of the shares of
Common Stock offered hereby. Fifteen percent of each of the 1997 Directors
Options vest on the date of the consummation of this offering. The remaining 85%
of each of the 1997 Directors Options vests in the event the Company achieves
certain specified sales, earnings or margin criteria prior to December 31, 2001.
Each of the 1997 Directors Options expires on the tenth anniversary of the date
of grant. See "-- Stock Option Plans -- 1997 Omnibus Plan."

In February 1997, the Company entered into a letter agreement with
GemDialogue Systems, Inc., a corporation owned by Mr. Rubin ("GSI"), pursuant to
which Mr. Rubin provides consulting services to the Company on staff training in
gemological and jewelry trade skills, market research and other matters. Under
the letter agreement, the Company pays GSI a monthly retainer of $1,000 and Mr.
Rubin is obligated to provide two days of consulting per month. GSI is also
entitled to be reimbursed for any expenses incurred in connection with Mr.
Rubin's consulting activities. The Company will pay GSI $500 per day for any
consulting services in excess of two days per month. If the Company does not
require two days of consulting time in any given month, the excess time
accumulates, and the Company has the option of waiving the monthly retainer
until the accumulated time has been used or extending the term of the letter
agreement without charge until the accumulated time is used. The letter
agreement has an initial term of one year. At September 22, 1997, the Company
had paid GSI a total of $7,000 (excluding expense reimbursements) and there were
no accumulated days of unused consulting time. In September 1997, as additional
consideration for consulting services, the Company issued Mr. Rubin an option to
purchase 15,000 shares of Common Stock pursuant to the 1997 Omnibus Plan with
substantially the same terms as the 1997 Directors Options.

The Company entered into a letter agreement with Dr. Nassau effective April
1997 pursuant to which Dr. Nassau provides consulting services to the Company on
gemstone color, gemological science and other matters. The terms of the letter
agreement with Dr. Nassau are substantially the same as the terms of the letter
agreement with GSI. At September 22, 1997, the Company had paid Dr. Nassau a
total of $4,750 (excluding expense reimbursements) and there were no accumulated
days of unused consulting time. In September 1997, as additional consideration
for his consulting services, the Company issued Dr. Nassau an option to purchase
15,000 shares of Common Stock pursuant to the 1997 Omnibus Plan with
substantially the same terms as the 1997 Directors Options.

Dr. Nassau is also assisting the Company in the development of certain of
its intellectual property and inventions and, in May 1997, executed an agreement
with the Company whereby he agreed to assign to the Company all intellectual
property rights concerning the development, manufacture, production, design or
marketing of any consumer or industrial applications for SiC created by him. The
agreement also provides that, for a one year period beginning on the termination
of his service as a director of the Company, Dr. Nassau will not serve as an
officer, director, engineer, designer or manager of any entity that engages in
the business of developing, manufacturing, producing, designing or marketing SiC
material as gemstones or gemological testing instruments. The Company granted
Dr. Nassau an option to purchase 25,560 shares of Common Stock at an exercise
price of approximately $3.45 per share in consideration of this agreement. Dr.
Nassau's option becomes exercisable in three equal, annual installments
beginning on the first anniversary of the date of grant and expires on the tenth
anniversary of the date of grant.

In July 1997, the Company entered into a consulting agreement with Ollin B.
Sykes, a director nominee of the Company, pursuant to which Mr. Sykes may
provide finance and business development services to the Company at fees
mutually agreed upon by Mr. Sykes and the Company. Mr. Sykes is also entitled to
be reimbursed for any expenses incurred in connection with his consulting
services. The consulting agreement has an initial term of five years. Mr. Sykes
has performed certain consulting services for the Company without charge and,
consequently, the Company has paid no cash consulting fees to Mr. Sykes. In
connection with the execution of this consulting agreement, the Company granted
Mr. Sykes an option to purchase 17,040 shares

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38

of Common Stock at an exercise price of approximately $4.81 per share. When
issued, Mr. Sykes' option was scheduled to vest in three equal, annual
installments beginning on the first anniversary of the date of grant. In
September 1997 the Company made Mr. Sykes' option exercisable in full on
December 31, 1997 if this offering is completed prior to that date. Mr. Sykes'
option expires on the tenth anniversary of the date of grant. In September 1997,
as additional consideration for his consulting services, the Company granted Mr.
Sykes an option to purchase 23,000 shares of Common Stock pursuant to the 1997
Omnibus Plan with substantially the same terms as the 1997 Directors Options.

In September 1997, the Company issued Dr. Russ an option to purchase 5,000
shares of Common Stock pursuant to the 1997 Omnibus Plan with substantially the
same terms as the 1997 Directors Options. The option was issued in consideration
of the sales, marketing and strategic consulting services that Dr. Russ has
performed on behalf of the Company without compensation.

EXECUTIVE COMPENSATION

The following table sets forth certain information regarding compensation
paid during the Company's fiscal year ended December 31, 1996 to each individual
who served as chief executive officer of the Company during that fiscal year. No
executive officer of the Company received salary and bonus in excess of $100,000
in 1996.

SUMMARY COMPENSATION TABLE

LONG TERM
COMPENSATION
AWARDS
---------------------
ANNUAL SECURITIES UNDERLYING
FISCAL COMPENSATION OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR SALARY (NO. OF SHARES)
- --------------------------- ------ ------------ ---------------------

Jeff N. Hunter........................................... 1996 $26,833 51,120
President and Chairman of the Board
Paula K. Berardinelli(1)................................. 1996 $25,733 12,780
Former President and former Chairman of the Board

- ---------------

(1) Dr. Berardinelli began a one-year unpaid leave of absence on May 1, 1997.
Dr. Berardinelli served as President and Chairman of the Board of the
Company from June 1995 to May 1996 and as Vice President of Sales and
Marketing from June 1996 to April 1997. Dr. Berardinelli currently has a
consulting agreement with the Company and is entitled to return to a
position comparable to her prior position as Vice President of Sales and
Marketing at the conclusion of her leave of absence. Dr. Berardinelli is the
wife of Jeff N. Hunter, President and Chairman of the Board.

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with Jeff N. Hunter,
President and Chairman of the Board, Mark W. Hahn, Chief Financial Officer,
Treasurer and Secretary, Martin J. DeRoy, Vice President of Marketing, Thomas G.
Coleman, Director of Technology, Renee McCullen, Director of Sales, and Earl R.
Hines, Director of Manufacturing.

Under the agreement with Mr. Hunter, which expires May 31, 2000, Mr. Hunter
is entitled to receive a base salary of $110,000 per year and to participate in
the Company's incentive compensation plan. If the Company terminates Mr.
Hunter's employment without cause, Mr. Hunter is entitled to receive, for the
remaining term of his employment agreement, annual compensation equal to the
highest annual compensation (including all cash bonuses and other cash-based
benefits) received by him during the immediately preceding three calendar years
(the "Termination Consideration"), and the Company will take such action as may
be required to vest any unvested benefits under any employee stock-based or
benefit plan. If the Company experiences a change of control and Mr. Hunter
voluntarily terminates his employment following a reduction in his
responsibilities, pay or position, or if his employment is terminated following
such change in control, the

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39

Company is obligated to pay Mr. Hunter a lump sum equal to approximately three
times his Termination Consideration and to continue his benefits for a period of
two years, and any unvested benefits under any employee benefit plan will
immediately vest and become exercisable. Upon the termination of his employment
with the Company, Mr. Hunter is prohibited from competing with the Company or
attempting to solicit the Company's customers or employees for a period of one
year.

Mr. Hahn's employment agreement, which expires July 29, 2002, entitles Mr.
Hahn to receive a base salary of $95,000 per year, which base salary shall
increase to $122,000 per year upon the consummation of this offering, and to
participate in the Company's incentive compensation plan. Mr. Hahn has rights
substantially the same as those granted to Mr. Hunter in the event his
employment is terminated without cause or in the event of a change in control.
Upon the termination of his employment with the Company, Mr. Hahn is prohibited
from competing with the Company or attempting to solicit the Company's customers
or employees for a period of one year.

By action of the Board of Directors, in the event of a change in control of
the Company, all stock options granted pursuant to the 1996 Option Plan will
immediately vest and become exercisable. As a result, the options granted to Mr.
Hunter and Mr. Hahn under the 1996 Option Plan pursuant to their respective
employment agreements or otherwise will vest and become immediately exercisable
upon any change in control of the Company.

The Company has adopted an annual incentive compensation plan (the "Annual
Plan") whereby eligible employees are entitled to receive a cash bonus based on
the Company's performance in 1998. Each eligible employee is assigned a target
bonus equal to 20% to 70% of such employee's base salary. If the Company's net
revenues and pre-tax income meet or exceed the Company's targeted performance
level, each eligible employee will receive 100% of his or her target bonus. The
Annual Plan provides for increasing cash bonuses if the Company's net revenues
and pre-tax income exceed specified amounts. If pre-tax income is positive, but
below the targeted level, the employee's target bonus shall be reduced on a
linear basis. No bonuses will be earned or paid if the Company does not achieve
positive pre-tax income.

OPTION GRANTS TO CERTAIN EXECUTIVE OFFICERS

The following table sets forth for each of the persons named in the Summary
Compensation Table certain information concerning stock options granted during
the year ended December 31, 1996.

INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ----------------------
NAME GRANTED FISCAL 1996 SHARE DATE 5% 10%
- ---- ---------- ------------- --------- ---------- --------- ----------

Jeff N. Hunter.................. 51,120(1) 48% $1.88 5/31/06 $60,374 $152,999
Paula K. Berardinelli........... 12,780(2) 12% $1.88 5/31/06 $15,093 $ 38,250

- ---------------

(1) The option vests and becomes exercisable in three equal installments on each
of the first three anniversaries of the date of grant (June 1, 1996) and
expires to the extent not exercised on May 31, 2006.
(2) The option vested and became exercisable on April 30, 1997 and expires to
the extent not exercised on May 31, 2006.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years) and is calculated by assuming that the stock
price on the date of grant as determined by the Board of Directors
appreciates at the indicated annual rate compounded annually for the entire
term of the option and that the option is exercised and sold on the last day
of its term for the appreciated price. The 5% and 10% assumed rates of
appreciation are derived from the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of the
future Common Stock price.

In July 1997, the Board of Directors granted the following options pursuant
to the 1996 Option Plan: Jeff N. Hunter -- 51,120 shares; and Paula K.
Berardinelli -- 12,780 shares each at an exercise price of

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40

approximately $4.81. When issued, Mr. Hunter's option was scheduled to vest and
become exercisable in three equal, annual installments beginning on the first
anniversary of the date of grant, but in September 1997, the Company made Mr.
Hunter's option exercisable in full on December 31, 1997 if this offering is
completed prior to that date. Dr. Berardinelli's option vests and becomes
exercisable upon the completion of this offering. These options expire on the
tenth anniversary of the date of grant. See "-- Stock Option Plans -- 1996
Option Plan."

In September 1997, subject to shareholder approval of the 1997 Omnibus Plan
and the completion of this offering, the Board of Directors granted to Mr.
Hunter an option to purchase 70,000 shares of Common Stock pursuant to the 1997
Omnibus Plan at an exercise price equal to the initial public offering price of
the shares of Common Stock offered hereby. Fifteen percent of the option vests
and becomes exercisable on the completion of this offering. The remaining 85% of
the option vests in the event that the Company achieves certain specified sales,
earnings or profit margin goals prior to December 31, 2001. The option expires
on the tenth anniversary of the date of grant. See "-- Stock Option
Plans -- 1997 Omnibus Plan."

STOCK OPTION PLANS

1996 Option Plan

The 1996 Stock Option Plan of C3, Inc., as subsequently amended (the "1996
Option Plan"), was originally adopted by the Board of Directors and approved by
the shareholders of the Company effective as of June 1, 1996. The 1996 Option
Plan provides for the grant of options to purchase up to 777,450 shares of
Common Stock, subject to adjustment upon the occurrence of certain events
affecting the Company's capitalization, to the Company's key employees,
officers, directors and independent contractors. The Company currently has no
plans to award additional options under the 1996 Option Plan.

The 1996 Option Plan is administered by the Board of Directors, which
determines, subject to the provisions of the 1996 Option Plan, to whom and at
what time options may be granted, the per share exercise price, the duration of
each option, the number of shares subject to each option, the rate and manner of
exercise and the timing and form of payment. The Board of Directors has
determined that, in the event of a change in control of the Company, all stock
options granted pursuant to the 1996 Option Plan will immediately vest and
become exercisable.

Under the 1996 Option Plan, no option granted to an optionee who was an
employee of the Company at the time of grant may be exercised unless the
optionee (i) is, at the time of exercise, an employee of the Company and has
been an employee continuously since the date the option was granted or (ii) was,
within 90 days prior to the date of exercise, an employee of the Company and,
prior to the optionee's termination as an employee, had been an employee
continuously since the date the option was granted. The employment relationship
of an employee is treated as continuing intact for any period that the optionee
is on military or sick leave or other bona fide leave of absence, provided that
the period of such leave does not exceed 90 days, or, if longer, as long as the
optionee's right to reemployment is guaranteed either by statute or by contract.
The employment relationship of an optionee shall also be treated as continuing
intact while the optionee is not in active service because of "disability" as
defined in the 1996 Option Plan. If the employment of an optionee is terminated
because of a "disability" or death, the option may be exercised to the extent
exercisable on the date of the optionee's termination of employment (the
"Termination Date") for a period ending on the earlier of (i) the first
anniversary of the optionee's Termination Date or (ii) the expiration of the
option period. The Board of Directors may, in its discretion, accelerate the
date for exercising all or any part of an option which was not otherwise
exercisable on the Termination Date. In the event of the optionee's death, the
option will be exercisable by those person or persons who acquired the right to
exercise the option by will or by the laws of intestate succession.

Options granted to a non-employee director of the Company may be exercised
only if the optionee (i) is, at the time of exercise, a director of the Company
and has been a director continuously since the date the option was granted or
(ii) was, within 90 days prior to the date of exercise, a director of the
Company and, prior to the optionee's termination as a director, had been a
director continuously since the date the option was granted. If membership on
the Board of Directors is terminated because of death, the option may be
exercised

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to the extent exercisable on the date of the optionee's death for a period
ending on the earlier of (i) the first anniversary of the optionee's death or
(ii) the expiration of the option period. In the event of the optionee's death,
the option will be exercisable by such person or persons as shall have acquired
the right to exercise the option by will or by the laws of intestate succession.

At September 29, 1997, the Company had granted pursuant to the 1996 Option
Plan options to purchase 348,681 shares of Common Stock to employees (including
certain officers, see "-- Option Grants to Certain Executive Officers" and
"Principal Shareholders"), options to purchase 117,150 shares of Common Stock to
non-employee consultants and options to purchase 195,960 shares of Common Stock
to non-employee directors and director nominees (see "-- Compensation of
Directors" and "Principal Stockholders"). All of such options remain
outstanding. The exercise prices of options granted under the 1996 Option Plan
range from approximately $1.88 to approximately $7.63 per share, with a weighted
average of $3.95 per share. At September 29, 1997, none of these options has
been exercised. In addition, the Company has issued options (the "Consultant
Options") to purchase an additional 37,275 shares of Common Stock to certain
independent consultants in connection with the provision of services to the
Company. All of these options are currently exercisable at an exercise price of
approximately $1.88 and expire between May 25, 2001 and June 6, 2001.

1997 Omnibus Plan

In September 1997, the Board of Directors adopted the 1997 Omnibus Stock
Plan of C3, Inc. (the "1997 Omnibus Plan") and recommended its approval to the
Company's shareholders. The 1997 Omnibus Plan is subject to approval by the
shareholders of the Company, which approval must occur, if at all, within 12
months of the adoption of the plan by the Board of Directors. Awards granted
prior to shareholder approval are conditioned upon and shall be effective only
upon approval of the 1997 Omnibus Plan by the shareholders of the Company on or
before such date.

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. Initially, a maximum of 477,979
shares of Common Stock may be delivered pursuant to awards granted under the
1997 Omnibus Plan, and the Board of Directors has reserved that number of shares
for this purpose. 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.

The 1997 Omnibus Plan is presently administered by the Board of Directors,
but upon appointment of the Compensation Committee the Board of Directors
intends to authorize that committee to administer the 1997 Omnibus Plan. The
Compensation Committee will have authority to take any action with respect to
the plan and to determine all matters relating to awards, including selection of
individuals to be granted awards, the types of awards, the number of shares of
Common Stock subject to an award, and the terms, conditions, restrictions and
limitations of an award. The Compensation Committee may delegate to the
Company's chief executive officer the authority to grant awards. The 1997
Omnibus Plan may be amended or terminated at any time by the Board of Directors,
subject to the following: (i) no amendment or termination may adversely affect
the rights of an award recipient with respect to an outstanding award without
the recipient's consent; and (ii) shareholder approval is required of any
amendment that would increase the number of shares issuable under the 1997
Omnibus Plan (except to the extent of adjustments, as discussed above), or
materially change the requirements for eligibility, unless such approval is not
required under applicable law or rules.

Stock appreciation rights ("SARs") may be granted with respect to all or a
portion of the shares of Common Stock subject to a related option or may be
granted separately. Upon exercise of an SAR, a participant is entitled to
receive from the Company consideration equal to the excess of the fair market
value of a share of Common Stock on the date of exercise over the SAR price
(subject to certain plan limitations).

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The consideration may be paid in cash, shares of Common Stock (valued at fair
market value on the date of the SAR exercise), or a combination of cash and
shares of Common Stock.

Restricted awards may also be granted as the Compensation Committee may
determine. A restricted award may consist of a restricted stock award or a
restricted unit, or both. Restricted awards are payable in cash or whole shares
of Common Stock (including restricted stock), or partly in cash and partly in
whole shares of Common Stock, in the discretion of the Compensation Committee.

The 1997 Omnibus Plan also provides that, upon a change of control of the
Company (as defined in the 1997 Omnibus Plan), all options and SARs outstanding
as of the date of the change of control shall become fully exercisable, any
restrictions applicable to any restricted awards shall be deemed to have
expired, and restricted awards shall become fully vested and payable to the
fullest extent of the original award. In the event of a merger, share exchange,
or other business combination affecting the Company in which the Board of
Directors or the surviving or acquiring corporation takes actions which, in the
opinion of the Compensation Committee, are equitable or appropriate to protect
the rights and interest of participants under the plan, the Compensation
Committee may determine that any or all awards shall not vest or become
exercisable on an accelerated basis.

At September 29, 1997, the Board of Directors had granted, subject to
shareholder approval of the 1997 Omnibus Plan and the completion of this
offering, options to purchase 196,000 shares of Common Stock to employees
(including certain officers, see "-- Option Grants to Certain Executive
Officers"), options to purchase 26,000 shares of Common Stock to non-employee
consultants and options to purchase 88,000 shares of Common Stock to
non-employee directors (see "-- Compensation of Directors"). All these options
remain outstanding. The exercise price of these options will be equal to the
initial public offering price of the shares of Common Stock offered hereby.

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PRINCIPAL SHAREHOLDERS

The following table sets forth information with respect to the beneficial
ownership of Common Stock as of September 29, 1997, and as adjusted to reflect
the sale of shares of Common Stock offered hereby, by (i) each person known by
the Company to own beneficially five percent or more of the Company's
outstanding shares of Common Stock; (ii) each director and director nominee of
the Company; (iii) the executive officers named in the Summary Compensation
Table; and (iv) all current directors, director nominees and executive officers
as a group. Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission (the "Commission"). In computing the
number of shares beneficially owned by a person and the percentage ownership of
that person, shares of Common Stock subject to options or warrants held by that
person that are currently exercisable or that are or may become exercisable
within 60 days of the date of this table are deemed outstanding. Such shares,
however, are not deemed outstanding for the purposes of computing the percentage
ownership of any other person. Except as indicated in the footnotes to this
table and pursuant to applicable community property laws, each shareholder named
in the table has sole voting and investment power with respect to the shares set
forth opposite such shareholder's name.

PERCENTAGE OF
COMMON STOCK CLASS PRIOR PERCENTAGE OF
BENEFICIALLY TO CLASS AFTER
NAME(1) OWNED OFFERING OFFERING
- ------- ------------ ------------- -------------

C. Eric Hunter(2)....................................... 1,054,627 26.8% 17.8%
General Electric Pension Trust(3)....................... 578,512 14.7% 9.7%
Jeff N. Hunter(4)....................................... 197,940 5.0% 3.3%
Paula K. Berardinelli(5)................................ 195,960 4.9% 3.3%
Ollin B. Sykes(6)....................................... 81,412 2.1% 1.4%
Kurt Nassau(7).......................................... 12,407 * *
Howard Rubin(8)......................................... 8,680 * *
Frederick A. Russ(9).................................... 7,180 * *
Kurt Leutzinger(10)..................................... 750 * *
Directors, Director Nominees and Executive Officers as a
Group (9 persons)(11)................................. 524,984 12.6% 8.5%

- ---------------

* Indicates less than one percent
(1) Unless otherwise indicated, the address of each person is 3800 Gateway
Boulevard, Suite 310 Morrisville, NC 27560.
(2) Includes 23,430 shares of Common Stock held jointly by Mr. Hunter and his
wife, Jocelyn Hunter. Mr. Hunter has shared voting and investment power
over such shares. Mr. Hunter, one of the founders of the Company, was one
of the founders of Cree and was formerly the President and Chief Executive
Officer of Cree. Mr. Hunter's mailing address is 3104 Hillsborough Street,
Box 189, Raleigh, North Carolina 27607.
(3) Includes 750 shares of Common Stock issuable upon exercise of options
granted under the 1997 Omnibus Plan. The address of General Electric
Pension Trust is 3003 Summer Street, Stamford, Connecticut 06904.
(4) Includes (i) 170,400 shares of Common Stock held jointly by Mr. Hunter and
his wife, Paula K. Berardinelli, over which Mr. Hunter has shared voting
and investment power and (ii) 27,540 shares of Common Stock issuable upon
exercise of options granted under the 1996 Option Plan and 1997 Omnibus
Plan. See "Management -- Stock Option Plans." Does not include 25,560
shares of Common Stock issuable to Dr. Berardinelli upon exercise of
options granted under the 1996 Option Plan. Mr. Hunter disclaims beneficial
ownership of such shares.
(5) Includes (i) 170,400 shares of Common Stock held jointly by Dr.
Berardinelli and her husband, Jeff N. Hunter, over which Dr. Berardinelli
has shared voting and investment power and (ii) 25,560 shares of Common
Stock issuable upon exercise of options granted under the 1996 Option Plan.
See "Management -- Stock Option Plans -- 1996 Option Plan." Does not
include 27,540 shares of Common Stock issuable upon exercise of options
granted to Mr. Hunter under the 1996 Option Plan and 1997 Omnibus Plan. Dr.
Berardinelli disclaims beneficial ownership of such shares.

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(6) Includes (i) 14,910 shares of Common Stock held by the Sykes & Co., P.A.
Profit Sharing Plan & Trust and (ii) 4,200 shares of Common Stock issuable
upon exercise of options granted under the 1997 Omnibus Plan. See
"Management -- Compensation of Directors" and "-- Stock Option
Plans -- 1997 Omnibus Plan."
(7) Includes (i) 3,727 shares of Common Stock held jointly by Dr. Nassau and
his wife, Julia Nassau, over which Dr. Nassau has shared voting and
investment power and (ii) 8,680 shares of Common Stock issuable upon
exercise of options granted under the 1996 Option Plan and 1997 Omnibus
Plan. See "Management -- Compensation of Directors" and "-- Stock Option
Plans."
(8) Includes 8,680 shares of Common Stock issuable upon exercise of options
granted under the 1996 Option Plan and 1997 Omnibus Plan. See
"Management -- Compensation of Directors" and "-- Stock Option Plans."
(9) Includes 7,180 shares of Common Stock issuable upon exercise of options
granted under the 1996 Option Plan and 1997 Omnibus Plan. See
"Management -- Compensation of Directors" and "-- Stock Option Plans."
(10) Includes 750 shares of Common Stock issuable upon exercise of options
granted under the 1997 Omnibus Plan. See "Management -- Compensation of
Directors" and "-- Stock Option Plans -- 1997 Omnibus Plan."
(11) Includes (i) 174,127 shares of Common Stock over which certain directors,
director nominees and executive officers have shared voting and investment
power and (ii) 229,980 shares of Common Stock issuable upon exercise of
options granted under the 1996 Option Plan and 1997 Omnibus Plan. See
"Management -- Compensation of Directors" and "-- Stock Option Plans."

CERTAIN TRANSACTIONS

PRIVATE PLACEMENT TRANSACTIONS

Since the incorporation of the Company in June 1995, the Company has
issued, in private placement transactions, shares of stock as follows (in each
case, before giving effect to the 2.13-for-1 stock split): 250,000 shares of
Common Stock at $4.00 per share in cash; 105,000 shares of Series A Preferred
Stock at $5.75 per share in cash; and 682,500 shares of Series B Preferred Stock
at $7.35 per share in cash. The Company has also issued shares of Common Stock
to certain founders of the Company and to Cree. See "-- Transactions with
Cree -- Other Transactions" and "-- Other Transactions." Each outstanding share
of Common Stock was split into 2.13 shares of Common Stock in September 1997,
and the outstanding shares of Series A Preferred Stock and Series B Preferred
Stock will automatically be converted into an aggregate of 1,677,375 shares of
Common Stock upon the consummation of this offering. The holders of shares of
Series B Preferred Stock are entitled to certain registration rights with
respect to the Common Stock issued or issuable upon conversion thereof. See
"Description of Capital Stock -- Registration Rights." The following table sets
forth the number of shares of Common Stock, Series A Preferred Stock and Series
B Preferred Stock purchased by the Company's directors, executive officers and
five percent shareholders and their respective affiliates and the number of
shares of Common Stock issuable, giving effect to the stock split and the
conversion of the Series A Preferred Stock and Series B Preferred Stock:

COMMON
SERIES A SERIES B STOCK AFTER
COMMON PREFERRED PREFERRED SPLIT AND
INVESTOR STOCK(1) STOCK(1) STOCK(1) CONVERSION(1)
- -------- --------- --------- --------- -------------

General Electric Pension Trust(2)..... -- -- 271,250 577,762
Ollin B. Sykes(3)..................... 10,000 -- 26,250 77,212
F. Neal Hunter(4)..................... 26,000 7,000 -- 70,290
Thomas G. Coleman(5).................. 10,000 5,250 5,250 43,665
C. Eric Hunter(6)..................... 7,500 3,500 1,750 27,157
William J. Sykes, Jr.(7).............. -- -- 8,750 18,637
Mark Harrill(8)....................... 5,000 -- 1,750 14,377
Monica R. Hunter(9)................... 5,000 -- -- 10,650
Robert Angel(10)...................... 2,500 -- -- 5,325
Annabel C. Harrill(11)................ 2,500 -- -- 5,325
Kurt Nassau(12)....................... -- -- 1,750 3,727

See footnotes on following page.

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- ---------------

(1) Each share of outstanding Common Stock was split into 2.13 shares of Common
Stock in September 1997 and each share of outstanding Series A Preferred
Stock and Series B Preferred Stock will be automatically converted into
2.13 shares of Common Stock contemporaneously with the consummation of this
offering. Only the last column gives effect to these transactions.
(2) David B. Stewart, who is a director nominee of the Company, is an
investment manager at General Electric Investment Company which is the
investment advisor to GEPT.
(3) Includes 7,000 shares of Series B Preferred Stock owned by Sykes & Company,
P.A. Profit Sharing Plan and Trust of which Mr. Sykes is sole trustee.
(4) Mr. Hunter is the President, CEO and a director of Cree and the brother of
Jeff N. Hunter, who is President and Chairman of the Board of the Company,
and C. Eric Hunter, who is the beneficial owner of 17.8% of the Company's
Common Stock, giving effect to this offering.
(5) Mr. Coleman is the Director of Technology of the Company.
(6) Includes 7,500 shares of Common Stock and 3,500 shares of Series A
Preferred Stock owned jointly by Mr. Hunter and his wife, Jocelyn Hunter.
Mr. Hunter is the brother of Jeff N. Hunter.
(7) Includes 8,750 shares of Series B Preferred Stock owned jointly by Mr.
Sykes and his wife, Joyce M. Sykes. Mr. Sykes is the brother of Ollin B.
Sykes, a director nominee of the Company.
(8) Includes (i) 5,000 shares of Common Stock owned jointly by Mr. Harrill and
his wife, Melissa W. Harrill and (ii) 1,750 shares of Series B Preferred
Stock owned by Foscoe Realty and Development Corporation, Inc., of which
Mr. Harrill is the sole shareholder. Mr. Harrill is the step-brother of
Jeff N. Hunter and C. Eric Hunter.
(9) Dr. Hunter was, at the time of purchase, a sister-in-law of Jeff N. Hunter
and C. Eric Hunter.
(10) Mr. Angel is the brother-in-law of Jeff N. Hunter and C. Eric Hunter.
(11) Includes 2,500 shares of Common Stock owned jointly by Mrs. Harrill and her
husband, James Edward Harrill. Mrs. Harrill is the mother of Jeff N. Hunter
and C. Eric Hunter.
(12) Includes 1,750 shares of Series B Preferred Stock owned jointly by Dr.
Nassau, who is a director, and his wife, Julia Nassau.

TRANSACTIONS WITH CREE

The Company is heavily dependent on Cree and Cree's technology. See
"Business -- Dependence on Cree and Cree Technology." Jeff N. Hunter, one of the
founders of the Company, President and Chairman of the Board, and C. Eric
Hunter, one of the founders of the Company and the beneficial owner of 17.8% of
the Common Stock outstanding after this offering, are the brothers of F. Neal
Hunter, the Chief Executive Officer of Cree. C. Eric Hunter was one of the
founders of Cree and was the President and Chief Executive Officer of Cree prior
to the time of any transactions between the Company and Cree. In May 1995, Mr.
Hunter entered into a consulting and noncompetition agreement with Cree
effective from July 1995 through July 1998 under which Cree is entitled to
request Mr. Hunter to provide consulting services. Mr. Hunter has agreed that
during the term of the agreement, he will not, among other activities, provide
services to, or have certain interests or positions in, businesses engaged in
the production of SiC substrates, the distribution of SiC substrates not
produced or purchased from Cree, or research and development in SiC substrates.
Cree and certain of its officers and directors will own approximately 3.9% of
the Common Stock outstanding after this offering. GEPT, which is the beneficial
owner of 9.7% of the Common Stock after giving effect to the automatic
conversion of the 1997 Series B Preferred Stock and this offering, currently is
also the beneficial owner of approximately 10.4% of the outstanding common stock
of Cree.

Exclusive Supply Agreement

On June 6, 1997, the Company and Cree entered into the Exclusive Supply
Agreement. See "Business -- Dependence on Cree and Cree Technology" for a more
detailed description of the terms of the Exclusive Supply Agreement. Under the
provisions of the Exclusive Supply Agreement, the Company has agreed to purchase
from Cree at least 50%, by dollar volume, of the Company's requirements for SiC
crystals for the production of gemstones in each calendar quarter. Cree is
obligated to supply this amount of materials to the Company, and Cree has agreed
not to sell SiC crystals to anyone other than the Company for gemstone use.

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The price for SiC crystals is equal to Cree's loaded manufacturing cost plus a
margin, which margin may increase if the price of crystals falls below a
specified amount.

Under the Exclusive Supply Agreement, Cree may elect to have the Company
purchase the additional growth systems that will be required to meet the
Company's anticipated demand for SiC crystals or Cree may fund the costs of
these systems on its own and recoup its costs by incorporating the costs of the
systems into the cost of the SiC crystals purchased by the Company. If Cree
elects to have the Company purchase the additional crystal growth systems, such
systems must remain at Cree's facilities and ownership of such systems will
transfer to Cree when the Company has fully depreciated their cost.

The Exclusive Supply Agreement also prohibits the Company from entering
into certain types of arrangements with certain specified parties. See
"Description of Capital Stock -- Certain Anti-Takeover Provisions." 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 expects to meet this threshold and extend the term of
the Agreement.

Development Agreement

The Company is concentrating all of its development efforts with Cree under
the Development Agreement. For a full description of the Development Agreement,
see "Business -- Dependence on Cree and Cree Technology." If Cree is successful
in meeting the development milestones set forth in the Development Agreement,
the Company will be obligated to pay Cree approximately $12 million over the
five year term of the Development Agreement. In addition, if Cree meets certain
development milestones by January 1, 1998, the Company will pay Cree a $200,000
bonus.

Other Cree Transactions

In June 1995, the Company granted to Cree the right to purchase one percent
of the outstanding Common Stock of the Company for an aggregate consideration of
$500. The Company retained the right to waive the consideration and issue the
stock at any time during the option period. In January 1997, the Company issued
24,601 shares of Common Stock to Cree in satisfaction of these obligations. See
Note 5 of Notes to Financial Statements.

In January 1996, the Company and Cree entered into a letter agreement under
which the Company agreed to assist Cree in prosecuting its patent application
for a particular process of producing colorless SiC crystals, and Cree granted
the Company an irrevocable nonexclusive royalty-free license to use that process
in connection with the manufacture, use and sale of lab-created moissanite
gemstones. Under this agreement, the Company is obligated to reimburse Cree for
all legal expenses incurred by Cree in preparing, filing, prosecuting and
maintaining any patents issued in connection with that process for producing
colorless SiC crystals.

Under a February 1996 letter agreement, the Company has agreed to purchase
all of its requirements for the semiconductor chip component of its
moissanite/diamond test instrument from Cree, and Cree granted the Company the
exclusive right to purchase such chips for use in gemstone analysis and
verification equipment. The Company is obligated to purchase all of its
requirements for such chips from Cree at prices that may not exceed Cree's then
current list price for such chips and to pay Cree a royalty of 2 1/2% of net
sales of all test instruments incorporating the Cree chip. The letter agreement
has a term of twenty years.

In February 1997, the Company subleased approximately 3,000 square feet of
mixed use space from Real Color Displays, Inc., a wholly owned subsidiary of
Cree. The lease agreement had an initial term ending in January 1998 and
provided for annual lease payments of $24,000 and a one-time payment of $6,000
for leasehold improvements. The Company intends to terminate this arrangement in
October 1997.

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OTHER TRANSACTIONS

In connection with the formation of the Company on June 28, 1995, the
Company issued 1,465,440 shares of Common Stock to C. Eric Hunter, a founder of
the Company and brother of Jeff N. Hunter, for an aggregate consideration of
$50,000. On June 28, 1995, the Company also issued to Jeff N. Hunter, a founder
of the Company, President and Chairman of the Board and Paula K. Berardinelli, a
founder of the Company, former President and Chairman of the Board and wife of
Jeff N. Hunter, as joint tenants with rights of survivorship, 170,400 shares of
Common Stock in consideration of services to be performed by them as officers of
the Company. See Note 3 of Notes to Financial Statements.

In connection with the financing of the Company during its start-up phase,
the Company borrowed funds and issued promissory notes to certain founders to
evidence such borrowings. In November 1995, the Company issued a note in the
principal amount of $10,000 to C. Eric Hunter. In January 1996, the Company
issued a note in the principal amount of $3,000 to Jeff N. Hunter and Paula K.
Berardinelli. In February 1996, the Company issued a promissory note in the
principal amount of $50,000 to C. Eric Hunter. All of these notes, which were
unsecured and bore interest at the rate of seven percent per annum, have been
paid in full. See Note 8 of Notes to Financial Statements.

In August 1996, the Company entered into a consulting agreement with Thomas
G. Coleman, now the Director of Technology and an executive officer of the
Company, pursuant to which Mr. Coleman provided consulting services related to
the dicing of SiC crystals into lab-created moissanite gemstones for fees to be
mutually agreed upon plus expenses. The consulting agreement was terminated in
March 1997 when Mr. Coleman became an employee of the Company. During the term
of the agreement, the Company did not make any payments to Mr. Coleman. As
additional consideration for the consulting services to be performed by Mr.
Coleman, the Company granted Mr. Coleman an option to purchase 31,950 shares of
Common Stock at an exercise price of approximately $2.70. Mr. Coleman's option
was originally scheduled to vest and become exercisable in three equal
installments on each of the first three anniversaries of the date of grant. The
Company subsequently made these options exercisable in full upon the
consummation of this offering. Mr. Coleman's options expire on the tenth
anniversary of the date of grant.

In May 1997, the Company entered into a consulting agreement with Paula K.
Berardinelli pursuant to which Dr. Berardinelli may provide marketing, sales,
management, organizational and other services to the Company for fees to be
mutually agreed upon plus expenses. From June 1996 to May 1997, Dr. Berardinelli
served as Vice President of Sales and Marketing of the Company, and the
consulting agreement was entered into in connection with Dr. Berardinelli
commencing a one-year unpaid leave of absence. If Dr. Berardinelli elects to
return to the Company, she will be entitled to a position comparable to her
prior position as Vice President of Sales and Marketing. To date, the Company
has not requested that Dr. Berardinelli perform consulting services under the
agreement and, consequently, has paid no fees to Dr. Berardinelli. Dr.
Berardinelli is the wife of Jeff N. Hunter, the President and Chairman of the
Board of the Company.

In September 1997, the Company entered into a consulting agreement with C.
Eric Hunter pursuant to which Mr. Hunter will assist the Company in filing,
prosecuting and maintaining certain patents relating to the Company's
technology. The Company is obligated to pay Mr. Hunter a monthly consulting fee
of $1,800, and the first such payment is due in November 1997. The consulting
agreement has an initial term of two years.

The Company has entered into employment agreements with certain of its
executive officers and consulting agreements with certain of its directors and
director nominees. The Company has also granted options to purchase Common Stock
under the 1996 Option Plan and 1997 Omnibus Plan to certain executive officers,
directors and director nominees. See "Management -- Employment Agreements,"
"-- Director Compensation" and "-- Stock Option Plans."

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DESCRIPTION OF CAPITAL STOCK

Upon completion of this offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, no par value, and
10,000,000 shares of Preferred Stock, no par value (the "Preferred Stock"), of
which 5,938,476 shares of Common Stock and no shares of Preferred Stock will be
issued and outstanding. All outstanding shares of Common Stock are, and the
shares of Common Stock offered hereby will be, when issued, duly authorized,
validly issued, fully paid and nonassessable shares of Common Stock of the
Company.

COMMON STOCK

The holders of Common Stock are entitled to one vote per share on all
matters on which the holders of Common Stock are entitled to vote and do not
have cumulative voting rights in the election of directors. Holders of Common
Stock are entitled to receive dividends when, as and if declared by the
Company's Board of Directors out of funds legally available therefor. In the
event of the liquidation, dissolution or winding up of the Company, holders of
Common Stock will be entitled to share ratably in the assets, if any, available
for distribution after payment of all creditors and the liquidation preferences
on any outstanding shares of Preferred Stock. Holders of Common Stock have no
preemptive rights to subscribe for any additional securities of any class which
the Company may issue, nor any conversion, redemption or sinking fund rights.
The rights and privileges of holders of Common Stock are subject to the
preferences of any shares of Preferred Stock that the Company may issue in the
future.

NEW PREFERRED STOCK

The Company may issue shares of Preferred Stock in one or more series as
may be determined by the Company's Board of Directors, who may establish, from
time to time, the number of shares to be included in each series, may fix the
designation, powers, preferences and rights of the shares of each such series
and any qualifications, limitations or restrictions thereof, and may increase or
decrease the number of shares of any such series without any further vote or
action by the shareholders. Any Preferred Stock so issued by the Board of
Directors may rank senior to the Common Stock with respect to the payment of
dividends or amounts upon liquidation, dissolution or winding up of the Company,
or both. In addition, any such shares of Preferred Stock may have class or
series voting rights. Moreover, under certain circumstances, the issuance of
Preferred Stock or the existence of the unissued Preferred Stock may tend to
discourage or render more difficult a merger or other change in control of the
Company. See "Risk Factors -- Anti-Takeover and Certain Other Provisions."

SERIES A PREFERRED STOCK AND SERIES B PREFERRED STOCK

At September 29, 1997, the Company has issued and outstanding 105,000
shares of Series A Preferred Stock and 682,500 shares of Series B Preferred
Stock. The Company intends to amend its articles of incorporation prior to the
completion of this offering to provide that contemporaneously with the effective
date of this offering, the outstanding shares of Series A Preferred Stock and
Series B Preferred Stock will be converted automatically into an aggregate of
1,677,375 shares of Common Stock pursuant to their terms, and thereafter no
shares of the Series A Preferred Stock or the Series B Preferred Stock will be
outstanding. No dividends have been or will be declared or paid on the Series A
Preferred Stock or Series B Preferred Stock.

CERTAIN ANTI-TAKEOVER PROVISIONS

Articles of Incorporation and Bylaws

A number of provisions of the Company's 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. The Company
believes that these provisions are appropriate to protect the interests of the
Company and all of its shareholders.

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Certain Business Combinations. The Company's articles of incorporation
require that any business combination, as defined in the articles, to be entered
into by the Company with a person or entity beneficially owning 10% or more of
the Company's outstanding voting shares (an "Interested Shareholder") be
approved by the affirmative vote of the holders of at least two-thirds of the
outstanding voting shares, including a majority of the outstanding voting shares
held by persons other than such Interested Shareholder and its affiliates, or,
alternatively, by two-thirds of certain members of the Board of Directors not
affiliated with such Interested Shareholder, unless all of the holders of the
Common Stock receive in the business combination an amount of consideration per
share equal to or greater than the highest price paid by the Interested
Shareholder in acquiring any of its holdings of Common Stock and the transaction
meets certain other minimum price requirements. The business combinations that
are subject to these provisions include a merger or share exchange with an
Interested Shareholder, sales to an Interested Shareholder of assets of the
Company having a value of $5.0 million or more and the issuances or transfers to
an Interested Shareholder by the Company or any of its subsidiaries of equity
securities of the Company or such subsidiary having a value of $5.0 million or
more. These provisions will make a takeover of the Company more difficult and
may have the effect of diminishing the possibility of certain types of
"front-end loaded" acquisitions of the Company or other unsolicited attempts to
acquire the Company.

Advance Notice Requirements for Shareholder Proposals and Director
Nominations. The Company's bylaws provide that a special meeting of
shareholders may be called only by the Board of Directors and certain designated
officers of the Company. Special meetings may not be called by the shareholders.
The Company's bylaws establish advance notice procedures for shareholder
proposals and the nomination, other than by or under the direction of the Board
of Directors or a committee thereof, of candidates for election as directors.
These procedures provide that the notice of shareholder proposals and
shareholder nominations for the election of directors be in writing, contain
certain specified information and be received by the Secretary of the Company
(i) in the case of an annual meeting that is called for a date that is within 30
days before or after the anniversary date of the immediately preceding annual
meeting of shareholders, not less than 60 days nor more than 90 days prior to
such anniversary date, and (ii) in the case of an annual meeting that is called
for a date that is not within 30 days before or after the anniversary date of
the immediately preceding annual meeting or, in the case of a special meeting of
shareholders, not later than the close of business on the tenth day following
the day on which notice of the date of the meeting was mailed or public
disclosure of the date of the meeting was made, whichever occurs first. These
provisions may preclude some shareholders from bringing matters before the
shareholders at any annual or special meeting, including making nominations for
directors.

Amendment of Articles and Bylaws. Subject to the North Carolina Business
Corporation Act, the Company's articles of incorporation may be amended by the
affirmative vote of a majority of the outstanding shares entitled to vote
thereon. Notwithstanding the foregoing, at a time that one or more Interested
Shareholders exist, the amendment or repeal of certain provisions of the
articles relating to the shares which the Company shall have authority to issue,
the approval of certain business combinations as described above and certain
other matters require the affirmative vote of the holders of two-thirds of the
Company's voting securities, unless approved by two-thirds of the certain
members of the Board of Directors not affiliated with the Interested
Shareholder, other than securities held by an Interested Shareholder. The
articles further provide that at a time that one or more Interested Shareholders
exist, certain provisions of the bylaws relating to the size and composition of
the Board of Directors and meetings of shareholders may be amended by the
shareholders, only by the affirmative vote of the holders of two-thirds of the
outstanding shares of voting securities, unless approved by two-thirds of the
certain members of the Board of Directors not affiliated with the Interested
Shareholder. Moreover, the articles provide that the Board of Directors may
repeal, amend or adopt any bylaw adopted, amended or repealed by the
shareholders. These provisions will make it more difficult for shareholders to
amend the articles or bylaws.

Exclusive Supply Agreement

The terms of the Exclusive Supply Agreement prohibit the Company from
entering into exclusive marketing or distribution agreements with DeBeers or its
affiliates or the Central Selling Organization, which is the international
diamond cartel, or any party whose primary business is the development,
manufacture,

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marketing or sale of diamond gemstones or any non-gemstone and non-jewelry
industry competitor of Cree (collectively, the "Prohibited Parties"). The
agreement also prohibits the Company from entering into certain merger,
acquisition, asset sale or similar transactions with a Prohibited Party. The
Exclusive Supply Agreement may prevent the Company from entering into certain
potentially profitable transactions with the Prohibited Parties and may limit
the price that third parties might be willing to pay for some or all of the
shares of the Company's Common Stock.

ANTI-TAKEOVER LEGISLATION

Pursuant to the Company's articles of incorporation, the Company has
elected not to be governed by the North Carolina Control Share Act, which
restricts the right of certain shareholders who acquire specified amounts of
Common Stock from voting those shares without certain approval by other
shareholders of the Company, and the North Carolina Shareholder Protection Act,
which imposes certain requirements for approval of transactions between the
Company and a shareholder beneficially owning in excess of 20% of the Common
Stock.

REGISTRATION RIGHTS

The Company has entered into an agreement under which the current holders
of Series B Preferred Stock (the "Investor Holders") are entitled to certain
rights as described below with respect to the registration under the Securities
Act of 1933, as amended (the "Securities Act"), of the sale of up to 1,453,725
shares of Common Stock which will be issued upon the conversion of the Series B
Preferred Stock (the "Registrable Securities"). Subject to certain exceptions,
if the Company proposes to register the sale of any Common Stock for its own
account or the account of others, the Investor Holders are entitled to notice of
such registration and to include the Registrable Securities therein at the
Company's expense. The Company has obtained waivers of the foregoing rights from
the Investor Holders in connection with this offering. After March 18, 1998,
Investor Holders owning at least 40% of the Registrable Securities may require
the Company to file a registration statement at the Company's expense with
respect to the Registrable Securities held by the Investor Holders, and the
Company must use its diligent best efforts to affect such registration. The
Investor Holders may not require the Company to file more than two registration
statements pursuant to their demand registration rights. The foregoing
registration rights are subject to certain conditions and limitations, including
(i) the right of the Company not to affect a requested registration during the
90 days following this offering, (ii) the right of the Company not to affect a
requested registration during the 180 days following a request for such
registration if the Board of Directors determines that such registration would
be seriously detrimental to the Company and (iii) the right of the underwriters
of an offering to limit the number of Registrable Securities in the offering,
unless other holders of the Company's securities are permitted to include their
securities in such offering. Certain of the Investor Holders are subject to
additional limitations with respect to the exercise of registration rights under
certain contractual provisions agreed to with the Representative in connection
with this offering. See "Underwriting."

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Company's Common Stock is First
Union National Bank. Its address is 230 South Tryon Street, Charlotte, NC
28288-1179, and its telephone number at this location is 704-383-5406.

LISTING

The Company has applied for inclusion of the Common Stock on the Nasdaq
National Market under the symbol "CTHR."

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for the Common Stock.
Future sales of substantial amounts of Common Stock in the public market could
adversely affect market prices prevailing from time to time. Furthermore,
because only a limited number of shares will be available for sale shortly after
this offering as a result of certain contractual and legal restrictions on
resale as described below, sales of substantial amounts of Common Stock in the
public market after the restrictions lapse could adversely affect the prevailing
market price and the ability of the Company to raise equity capital in the
future.

Upon completion of this offering, the Company will have outstanding an
aggregate of 5,938,476 shares of Common Stock, assuming no exercise of the
Over-allotment Option and no exercise of outstanding options to purchase Common
Stock. Of these shares, the 2,000,000 shares sold in this offering will be
freely tradeable without restriction or further registration under the
Securities Act (except for any shares purchased by "affiliates," as that term is
defined in Rule 144 under the Securities Act ("Affiliate")). Of the remaining
shares of Common Stock, the Company believes that 1,927,393 shares (the
"Affiliate Shares") will be held by Affiliates and 2,011,083 shares (the
"Nonaffiliate Shares") will be held by nonaffiliates of the Company. All of such
shares of Common Stock are "restricted securities" as that term is defined in
Rule 144 under the Securities Act ("Restricted Shares"). Restricted Shares may
be sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144 (including Rule 144(k)) or 701
promulgated under the Securities Act, which rules are summarized below or if
another exemption from registration is available. Pursuant to the provisions of
Rules 144 (including Rule 144(k)) and 701, the Company believes Restricted
Shares will be available for sale in the public market as follows: (i) no
Restricted Shares will be eligible for immediate sale on the date of this
Prospectus; (ii) 1,921,621 Nonaffiliate Shares will be eligible for sale 90 days
after the effective date of this offering (the date on which these shares will
be eligible for resale is assumed to be February 12, 1998); (iii) 1,927,393
Affiliate Shares will be eligible for sale upon expiration of lock-up agreements
one year after the date of this Prospectus; and (iv) 89,462 Nonaffiliate Shares
will become eligible for sale upon the expiration of their one-year holding
periods between February 13, 1998 and March 7, 1998.

Beginning 90 days after the completion of this offering, the holders of
1,453,725 shares of Common Stock issued upon the automatic conversion of the
Series B Preferred Stock, or their transferees, will be entitled to cause the
Company to register their shares for sale and participate in any future
registration of securities affected by the Company. See "Description of Capital
Stock -- Registration Rights." Registration of such shares under the Securities
Act would result in such shares becoming freely tradeable without restriction
under the Securities Act (except for shares purchased by Affiliates) immediately
upon the effectiveness of such registration.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 59,384 shares immediately after this
offering); or (ii) the average weekly trading volume of the Common Stock on the
Nasdaq National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale. Sales under Rule 144 are also
subject to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an Affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years (including the holding period of any
prior owner except an Affiliate), is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144; therefore, unless otherwise restricted, "144(k)
shares" may be sold immediately upon the completion of this offering. In
general, under Rule 701 of the Securities Act as currently in effect, any
employee, consultant or advisor of the Company who purchased shares from the
Company in connection with a compensatory stock or option plan or other written
compensation agreement is eligible to resell such shares 90 days after the
effective date of this offering in

49
52

reliance on Rule 144, but without compliance with certain restrictions,
including the holding period, contained in Rule 144.

All of the Common Shares held by the Company's officers, directors,
director nominees and beneficial owners of more than five percent of the
Company's Common Stock, aggregating 1,927,393 shares, are subject to lock-up
agreements with the Underwriters and may not be sold or otherwise transferred
until one year after the date of this Prospectus without the consent of the
Representative. The Representative may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to these
lock-up agreements.

The Company intends to file registration statements under the Securities
Act covering shares of Common Stock reserved for issuance under the 1996 Option
Plan and the 1997 Omnibus Plan. Based on the number of options outstanding under
the 1996 Omnibus Plan and the number of shares reserved for issuance under the
1997 Omnibus Plan, such registration statements would cover approximately
1,139,770 shares. See "Management -- Stock Option Plans." Such registration
statements are expected to be filed and become effective as soon as practicable
after the effective date of this offering. Accordingly, shares registered under
such registration statements will, subject to Rule 144 volume limitations
applicable to Affiliates, be available for sale in the open market, unless such
shares are subject to vesting restrictions with the Company or the lock-up
agreements described above. At September 29, 1997, options to purchase 971,791
shares of Common Stock were issued and outstanding under the 1996 Option Plan
and 1997 Omnibus Plan. See "Management -- Director Compensation" and "-- Stock
Option Plans."

50
53

UNDERWRITING

The Underwriters named below, acting through Paulson Investment Company,
Inc., the Representative, have agreed, severally and not jointly, subject to the
terms and conditions contained in the Underwriting Agreement, to purchase the
Common Stock offered hereby in the amounts set forth below:

NUMBER OF
UNDERWRITER SHARES
----------- ---------

Paulson Investment Company, Inc.............................

---------
Total............................................. 2,000,000
=========

The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares of the Common Stock offered hereby if any shares are
purchased. The Company has been advised that the Underwriters propose to offer
the Common Stock to the public initially at the offering price shown on the
cover page of this Prospectus and to selected dealers, including Underwriters,
at that price less a concession to be determined by the Representative. After
the initial public offering of the Common Stock, the public offering price and
other offering terms may be changed.

The Company has granted the Underwriters the Over-allotment Option,
exercisable by the Representative during the 45-day period after the date of
this Prospectus, to purchase up to 300,000 additional shares on the same terms
as the Common Stock being purchased by the Underwriters from the Company. The
Representative may exercise this option only to cover over-allotments in the
sale of the Common Stock.

The Underwriters will purchase the Common Stock (including the shares
subject to the Over-allotment Option) offered hereby at a discount equal to
% of the public offering price, or $ per share. The
Representative will also receive at the Closing a non-accountable expense
allowance equal to 1% of the aggregate initial public offering price of the
Common Stock sold in this offering of which $35,000 has already been paid. In
the event the offering is not consummated, any non-accountable portion of the
advanced payment will be returned to the Company.

The Company has agreed to issue the Representative's Warrants to the
Representative. The Representative's Warrants will allow the Representative to
purchase up to 200,000 shares of Common Stock. The Representative's Warrants are
exercisable for a period of four years beginning one year from the date of this
Prospectus, at a price of $ per share (120% of the initial public
offering price of the shares) and are nontransferable for one year after the
date of this Prospectus except (i) to any of the Underwriters or to individuals
who are either an officer or a partner of an Underwriter or (ii) by will or the
laws of descent and distribution. The holders of the Representative's Warrants
will have, in that capacity, no voting, dividend or other shareholder rights.
Any profits realized on the sale of the Common Stock issuable on exercise of the
Representative's Warrants may be deemed to be additional underwriting
compensation.

The sale of the shares issuable upon exercise of the Representative's
Warrants could dilute the interests of the other holders of Common Stock, and
the existence of the Representative's Warrants may make the raising of
additional capital by the Company more difficult. At any time at which exercise
of the Representative's Warrants might be expected, it is likely that the
Company could raise additional capital on terms more favorable than the terms of
the Representative's Warrants.

All officers, directors, director nominees and five percent shareholders of
the Company, who own an aggregate of 1,927,393 shares of Common Stock, have
agreed not to sell any Common Stock of the Company owned by such person,
pursuant to Rule 144 under the Securities Act or otherwise, and the Company has
agreed not to sell any Common Stock (other than shares issuable upon the
exercise of options under the 1996

51
54

Option Plan or the 1997 Omnibus Plan), without the prior written consent of the
Representative, for a period of one year after the date of this Prospectus.

In addition, the Company has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act, and to
contribute in certain events to any liabilities incurred by the Underwriters in
connection with the sale of the Common Stock.

At the request of the Company, the Underwriters have reserved approximately
100,000 of the shares of Common Stock offered by the Company hereby for sale at
the initial public offering price to directors, director nominees, officers,
employees and certain individuals associated with the Company, its directors,
its director nominees, its officers or its employees. The number of shares of
Common Stock available to the public will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares that are not so purchased
will be offered by the Underwriters to the general public on the same basis as
the other shares offered hereby.

The Representative has advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of Common Stock on behalf
of the Underwriters to reduce a short position incurred by the Underwriters in
connection with the offering. A "penalty bid" is an arrangement permitting the
Representative to reclaim the selling concession otherwise accruing to an
Underwriter or syndicate member in connection with the offering if the Common
Stock originally sold by such Underwriter or syndicate member is purchased by
the Representative in a syndicate covering transaction and has therefore not
been effectively placed by such Underwriter or syndicate member. The
Representative has advised the Company that such transactions may be effected on
the Nasdaq National Market or otherwise and, if commenced, may be discontinued
at any time.

Prior to the offering, there has been no public market for the Common
Stock. The price to the public for the Common Stock will be determined through
negotiations between the Company and the Representative and will be based on,
among other things, the Company's financial condition, the prospects of the
Company and its industry in general, the management of the Company and the
market prices of securities of companies engaged in business similar to those of
the Company.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Womble Carlyle Sandridge & Rice, PLLC, Research Triangle Park, North
Carolina. One of the members of Womble Carlyle Sandridge & Rice, PLLC holds
10,650 shares of Common Stock, which were purchased from the Company in May 1996
in a private placement transaction. Certain legal matters in connection with
this offering will be passed upon for the Underwriters by Grover T. Wickersham,
P.C., Palo Alto, California.

EXPERTS

The financial statements as of December 31, 1996 and 1995 and for the year
ended December 31, 1996, the seven-month period ended December 31, 1995, and the
period from June 28, 1995 (date of inception) to December 31, 1996 included in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.

52
55

ADDITIONAL INFORMATION

The Company has filed with the Commission a registration statement on Form
S-1 (the "Registration Statement") (which term shall encompass all amendments,
exhibits and schedules thereto) under the Securities Act with respect to the
shares of Common Stock offered hereby. This Prospectus, which constitutes part
of the Registration Statement, does not contain all the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission, and to which reference is
hereby made. For further information with respect to the Company and the Common
Stock, reference is hereby made to the Registration Statement. Statements made
in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. The Registration Statement can be inspected and
copied at the Public Reference Section of the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at Seven World Trade Center, 13th Floor, New York, New York 10048, and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of the Registration Statement can be obtained from the Public Reference
Section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, the Commission maintains a World Wide
Web site on the Internet at http://www.sec.gov that contains reports, proxy and
information statements and other documents filed electronically with the
Commission, including the Registration Statement.

The Company intends to furnish its shareholders with annual reports
containing financial statements audited by its independent public accountants
and quarterly reports containing unaudited financial information for the first
three quarters of each fiscal year.

53
56

C3, INC.

INDEX TO FINANCIAL STATEMENTS

Independent Auditors' Report................................ F-2
Balance Sheets as of December 31, 1995 and 1996, and June
30, 1997.................................................. F-3
Statements of Operations for the seven-month period ended
December 31, 1995, the year ended December 31, 1996, the
period from June 28, 1995 (date of inception) to December
31, 1996, and for the six months ended June 30, 1996 and
1997...................................................... F-4
Statements of Shareholders' Equity for the seven-month
period ended December 31, 1995, the year ended December
31, 1996, and for the six months ended June 30, 1997...... F-5
Statements of Cash Flows for the seven-month period ended
December 31, 1995, the year ended December 31, 1996, the
period from June 28, 1995 (date of inception) to December
31, 1996, and for the six months ended June 30, 1996 and
1997...................................................... F-6
Notes to Financial Statements............................... F-7

F-1
57

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
C3, Inc.
Research Triangle Park, North Carolina

We have audited the accompanying balance sheets of C3, Inc. (a development stage
company) as of December 31, 1995 and 1996, and the related statements of
operations, shareholders' equity, and cash flows for the seven-month period
ended December 31, 1995, the year ended December 31, 1996, and the period from
June 28, 1995 (date of inception) to December 31, 1996.

We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1995 and 1996
and the results of its operations, and cash flows for the seven-month period
ended December 31, 1995, the year ended December 31, 1996, and the period from
June 28, 1995 (date of inception) to December 31, 1996 in conformity with
generally accepted accounting principles.

Deloitte & Touche LLP

Raleigh, North Carolina
March 11, 1997, except for Note 9, as to which the date is September 25, 1997

F-2
58

C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

BALANCE SHEETS

PROFORMA
JUNE 30, JUNE 30,
1995 1996 1997 1997
-------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)

ASSETS
CURRENT ASSETS:
Cash and equivalents...................... $ 9,109 $1,167,458 $ 5,538,099 $ 5,538,099
Prepaid and other assets.................. 9,346 7,000
-------- ---------- ----------- -----------
Total current assets.............. 18,455 1,174,458 5,538,099 5,538,099
EQUIPMENT, net of accumulated depreciation
of $542 and $2,352 at December 31, 1995
and 1996, respectively.................... 5,560 14,081 53,955 53,955
PATENT AND LICENSE RIGHTS, net of
accumulated amortization of $256 and
$2,064 at December 31, 1995 and 1996,
respectively.............................. 8,898 37,595 69,866 69,866
-------- ---------- ----------- -----------
TOTAL ASSETS...................... $ 32,913 $1,226,134 $ 5,661,920 $ 5,661,920
======== ========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 8).................... $ 10,100 $ $ $
Accounts payable.......................... 12,855 109,874 109,874
-------- ---------- ----------- -----------
Total current liabilities......... 10,100 12,855 109,874 109,874
-------- ---------- ----------- -----------
COMMITMENTS (Note 7)
SHAREHOLDERS' EQUITY
(Notes 3, 4, 5 and 9):
1996 Series A preferred stock, no par
value; 105,000 shares authorized,
issued and outstanding at December 31,
1996 and June 30, 1997 (unaudited);
none authorized or issued and
outstanding on a pro forma basis at
June 30, 1997 (unaudited).............. 593,271 593,271
1997 Series B preferred stock, no par
value; 682,500 shares authorized,
issued and outstanding at June 30, 1997
(unaudited); none authorized or issued
and outstanding on a pro forma basis at
June 30, 1997 (unaudited).............. 4,981,376
Common stock, no par value; 10 million
shares authorized; 1,704,000 shares,
2,236,500 shares, 2,261,101 shares and
3,938,476 shares issued and outstanding
at December 31, 1995 and 1996, June 30,
1997 (unaudited) and June 30, 1997 on a
pro forma basis (unaudited),
respectively........................... 50,000 1,029,803 1,095,803 6,670,450
Deficit accumulated during the development
stage.................................. (27,187) (409,795) (1,118,404) (1,118,404)
-------- ---------- ----------- -----------
Total shareholders' equity........ 22,813 1,213,279 5,552,046 5,552,046
-------- ---------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY.................................... $ 32,913 $1,226,134 $ 5,661,920 $ 5,661,920
======== ========== =========== ===========

See notes to financial statements.

F-3
59

C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

STATEMENTS OF OPERATIONS

CUMULATIVE
SEVEN-MONTH FOR THE PERIOD SIX MONTHS ENDED
PERIOD ENDED YEAR ENDED JUNE 28, 1995 TO JUNE 30,
DECEMBER 31, DECEMBER 31, DECEMBER 31, ----------------------
1995 1996 1996 1996 1997
------------ ------------ ---------------- ---------- ---------
(UNAUDITED) (UNAUDITED)

OPERATING EXPENSES:
Marketing and sales............. $ 10,313 $ 47,019 $ 57,332 $ 8,017 $ 46,611
General and administrative...... 10,024 131,097 141,121 48,069 316,154
Research and development........ 6,052 236,047 242,099 68,115 452,571
Depreciation and amortization... 798 3,618 4,416 1,306 6,649
---------- ---------- ---------- ---------- ---------
OPERATING LOSS.................... 27,187 417,781 444,968 125,507 821,985
INTEREST INCOME, net.............. (35,173) (35,173) (1,231) (113,376)
---------- ---------- ---------- ---------- ---------
NET LOSS.......................... $ 27,187 $ 382,608 $ 409,795 $ 124,276 $ 708,609
========== ========== ========== ========== =========
Pro forma net loss per share (Note
2).............................. $ 0.01 $ 0.14 $ 0.14 $ 0.05 $ 0.17
========== ========== ========== ========== =========
Pro forma weighted average common
shares and equivalent common
shares outstanding (Note 2)..... 2,204,062 2,652,250 2,898,212 2,381,562 4,199,978
========== ========== ========== ========== =========

See notes to financial statements.

F-4
60

C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

STATEMENTS OF SHAREHOLDERS' EQUITY

1996 1997
SERIES A SERIES A DEFICIT
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ACCUMULATED
-------------------- ---------------------- ---------------------- DURING THE TOTAL
NUMBER OF NUMBER OF NUMBER OF DEVELOPMENT SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STAGE EQUITY
--------- -------- --------- ---------- --------- ---------- ----------- -------------

BALANCE, JUNE 28, 1995
(date of
inception) --
Issuance of common
stock to founders
for cash and
consideration of
services to be
provided.......... $ $ 1,704,000 $ 50,000 $ $ 50,000
Net loss..... (27,187) (27,187)
------- -------- ------- ---------- --------- ---------- ----------- ----------
BALANCE, DECEMBER 31,
1995................ 1,704,000 50,000 (27,187) 22,813
Issuance of common
stock, net of
offering costs of
$20,197........... 532,500 979,803 979,803
Issuance of 1996
Series A preferred
stock, net of
offering costs of
$10,479........... 105,000 593,271 593,271
Net loss..... (382,608) (382,608)
------- -------- ------- ---------- --------- ---------- ----------- ----------
BALANCE, DECEMBER 31,
1996................ 105,000 593,271 2,236,500 1,029,803 (409,795) 1,213,279
Exercise of stock
option and
recognition of
compensation
expense........... 24,601 66,000 66,000
Issuance of 1997
Series B preferred
stock, net of
offering costs of
$34,999........... 682,500 4,981,376 4,981,376
Net loss..... (708,609) (708,609)
------- -------- ------- ---------- --------- ---------- ----------- ----------
BALANCE, JUNE 30, 1997
(UNAUDITED)......... 105,000 $593,271 682,500 $4,981,376 2,261,101 $1,095,803 $(1,118,404) $5,552,046
======= ======== ======= ========== ========= ========== =========== ==========

See notes to financial statements.

F-5
61

C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

STATEMENTS OF CASH FLOWS

OPERATING ACTIVITIES:
Net loss..................... $(27,187) $ (382,608) $ (409,795) $(124,276) $ (708,609)
Adjustments:
Depreciation and
amortization............ 798 3,618 4,416 1,306 6,648
Compensation expense
related to stock option
exercise................ 66,000
Changes in assets and
liabilities:
Prepaid and other
assets............... (9,346) 2,346 (7,000) 9,446 7,000
Accounts payable........ 12,855 12,855 (100) 97,019
-------- ---------- ---------- --------- ----------
Net cash used in
operating
activities......... (35,735) (363,789) (399,524) (113,624) (531,942)
-------- ---------- ---------- --------- ----------
INVESTING ACTIVITIES:
Purchase of equipment........ (6,102) (10,331) (16,433) (1,286) (44,842)
Patent costs................. (9,154) (30,505) (39,659) (18,365) (33,951)
-------- ---------- ---------- --------- ----------
Net cash used in
investing
activities......... (15,256) (40,836) (56,092) (19,651) (78,793)
-------- ---------- ---------- --------- ----------
FINANCING ACTIVITIES:
Proceeds from notes
payable................... 10,100 53,000 63,100
Repayment of notes payable... (63,100) (63,100) (10,000)
Proceeds from common stock
offerings, net of costs... 50,000 979,803 1,029,803 1,000,002
Proceeds from preferred stock
offerings, net of costs... 593,271 593,271 4,981,376
-------- ---------- ---------- --------- ----------
Net cash provided by
financing
activities......... 60,100 1,562,974 1,623,074 990,002 4,981,376
-------- ---------- ---------- --------- ----------
INCREASE IN CASH AND
EQUIVALENTS.................. 9,109 1,158,349 1,167,458 856,727 4,370,641
CASH AND EQUIVALENTS, BEGINNING
OF PERIOD.................... 9,109 9,109 1,167,458
-------- ---------- ---------- --------- ----------
CASH AND EQUIVALENTS, END OF
PERIOD....................... $ 9,109 $1,167,458 $1,167,458 $ 865,836 $5,538,099
======== ========== ========== ========= ==========

See notes to financial statements.

F-6
62

C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS
SEVEN-MONTH PERIOD ENDED DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
AND PERIOD FROM JUNE 28, 1995 (DATE OF INCEPTION) TO DECEMBER 31, 1996
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

C3, Inc. ("C3" or the "Company"), was incorporated in North Carolina on
June 28, 1995, and is engaged in the development and commercialization of
silicon carbide ("moissanite") as a gemstone material. In addition to the
development of synthetic moissanite gemstones (hereinafter referred to as
"moissanite" or "moissanite gemstones"), the Company is working to develop a
test instrument for manufacture and sale which will be able to distinguish
moissanite gemstones from diamond.

C3 is a development stage company which has devoted substantially all of
its efforts to research and product development and has not yet generated any
revenues, nor is there any assurance of future revenues. The ability of the
Company to successfully develop, manufacture and market its proprietary products
is dependent upon many factors. Further, during the period required to develop
these products, the Company may require additional funds which may not be
available to it. Accordingly, there can be no assurance of the Company's future
success.

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. At December 31, 1996
and June 30, 1997, cash equivalents consisted of money market accounts and U.S.
Treasury bills.

Equipment -- Equipment consists primarily of computer hardware and research
and development equipment. Equipment is recorded at cost and depreciated on the
straight-line method based on estimated useful lives of five to six years.

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 gemstones and moissanite gemstone test
instruments. Such costs are amortized over seventeen years.

Income Taxes -- From the date of inception (June 28, 1995) to December 31,
1995, the Company was treated as a C Corporation for federal and state income
tax purposes. Effective January 1, 1996, the Company elected to change its tax
status from a C Corporation to an S Corporation. On September 4, 1996, in
connection with the closing of the 1996 Series A preferred stock offering, the
Company's number of shareholders exceeded the maximum 35 shareholder limitation
for S Corporations and, as a result, the Company's S Corporation status was
automatically terminated. Losses of the Company for the period January 1, 1996
through September 4, 1996 (totaling $259,533) are included in the personal
income tax returns of the common shareholders as of that date. The tax effect of
losses for the period September 5, 1996 to December 31, 1996 (totaling $123,075)
and the seven-month period ending December 31, 1995 are recorded under the
provisions of Statement of Financial Accounting Standards No. 109 ("FAS 109"),
Accounting for Income Taxes.

Research and Development -- All research and development costs are expensed
when incurred.

Stock Compensation -- The Company's stock option plan is accounted for in
accordance with Accounting Principles Board Opinion No. 25 ("APB 25"),
Accounting for Stock Issued to Employees. In January 1996, the Company adopted
the disclosure requirements of Statement of Financial Accounting Standards No.
123 ("FAS 123"), Accounting for Stock Based Compensation.

F-7
63

C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)

Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles 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.

Pro Forma Net Loss Per Share -- Pro forma net loss per share applicable to
common shareholders is computed using the weighted average number of shares of
common stock outstanding which gives effect to a 2.13-for-1 stock split effected
in September 1997 (see Note 9 of Notes to Financial Statements) and the
conversion of all outstanding shares of the Company's 1996 Series A and 1997
Series B preferred stock into common stock. Common and common equivalent shares
from stock options issued by the Company at prices below the initial public
offering price during the twelve-month period prior to the initial public
offering have been included in the calculation as if they were outstanding for
all periods presented (using the treasury stock method) even if anti-dilutive.

Interim Financial Information -- Interim financial information as of June
30, 1997 and for the six months ended June 30, 1997 and 1996 is unaudited. In
the opinion of management, this interim financial data includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of such data. The operating results for any interim period are not
necessarily indicative of the results that may be expected for any future
periods.

Unaudited Pro Forma Balance Sheet at June 30, 1997 -- The Company's pro
forma balance sheet as of June 30, 1997 gives effect to a 2.13-for-1 stock split
effected in September 1997 and the automatic conversion of all outstanding 1996
Series A preferred stock and 1997 Series B preferred stock into an aggregate of
1,677,375 shares of common stock upon consummation of the Company's initial
public offering.

Newly Issued Accounting Pronouncement -- In February 1997, Statement of
Financial Accounting Standards No. 128, Earnings Per Share, was issued. This
Statement establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. This Statement simplifies the current standards for computing EPS,
and makes them comparable to international EPS standards. This Statement is
effective for financial statements issued for periods ending after December 15,
1997; earlier application is not permitted. This Statement requires restatement
of all prior period EPS data presented. The implementation of this Statement
will not have a material impact on the Company's financial statements.

3. COMMON STOCK

On June 28, 1995, the Company issued 1,465,440 shares of common stock, no
par value, to a founder for an initial capital contribution of $50,000 and
issued 238,560 shares to other founders for consideration of future services to
be provided to the Company. On April 2, 1996 the Company declared an
eight-for-one common stock split. The effect of this stock split is reflected as
if it had occurred at the beginning of the earliest period presented.

In May 1996, the Company issued 532,500 shares of common stock with net
proceeds of approximately $979,800 (net of offering costs of $20,197).

4. PREFERRED STOCK

The Company has authorized 5 million shares of preferred stock, no par
value. The preferred stock may be issued from time to time in one or more
series.

F-8
64

C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)

1996 Series A Preferred Stock -- The Board has designated 105,000 shares of
its preferred stock as 1996 Series A preferred stock. In September 1996, the
Company issued 105,000 shares of Series A preferred stock with net proceeds of
approximately $593,000 (net of offering costs of $10,479).

1997 Series B Preferred Stock -- The Company has authorized 682,500 shares
of its preferred stock as 1997 Series B preferred stock. On January 3, 1997, the
Company offered a maximum of 195 units ("Units"), each consisting of 3,500
shares of its 1997 Series B preferred stock, no par value per share ("Preferred
Stock"), at a price of $25,725 per Unit or $7.35 per share. The preferred stock
may be purchased only by investors meeting the suitability standards prescribed
by the Company. Effective March 7, 1997, the Company completed the offering of
682,500 shares of its 1997 Series B preferred stock with net proceeds of
approximately $5 million.

Liquidation -- After payment of the Company's debts and obligations, any
remaining assets are distributed to shareholders as follow: (i) $4.00 per share
together with any accrued and unpaid dividends to holders of 1997 Series B
preferred stock, (ii) $3.00 per share together with any accrued dividends to
holders of 1996 Series A preferred stock, and (iii) any remaining assets are
then distributed to all shareholders equally based on their relative percentage
of total shares outstanding.

Voting -- Holders of 1996 Series A preferred stock and 1997 Series B
preferred stock are not entitled to vote, except as otherwise required by the
North Carolina Business Corporation Act (the "NCBCA"). The NCBCA generally
provides voting rights to any shares of stock, otherwise nonvoting, in
connection with amendments to the articles of incorporation affecting certain
rights of the shares.

Conversion/Redemption -- Holders of 1996 Series A preferred stock and 1997
Series B preferred stock have the right, at their option at any time after the
earlier of (i) July 31, 1998 (Series A) or January 1, 1997 (Series B) or (ii)
the closing of the sale of common stock in an offering registered under the
Securities Act of 1933 with net proceeds to the Company and/or any selling
shareholders of $8 million or more, to convert any or all of their shares of
preferred stock into shares of common stock at the conversion ratio of one share
of common stock for each share of preferred stock. The conversion ratio is
subject to adjustment upon the occurrence of certain events to protect against
dilution. Each share of 1996 Series A preferred stock and 1997 Series B
preferred stock will be automatically converted into common stock upon and at
the effective time of any merger of the Company with any other entity, any share
exchange of the common stock effected with any other entity or any sale of all
or substantially all the assets of the Company.

The Company is not bound by any mandatory redemption, sinking fund or other
similar provisions with respect to the 1996 Series A preferred stock or the 1997
Series B preferred stock. At any time at which the 1996 Series A preferred stock
or the 1997 Series B preferred stock is convertible into common stock, the
Company may redeem the 1996 Series A preferred stock or the 1997 Series B
preferred stock, at the Company's sole discretion, in whole but not in part,
upon not less than 30 days prior written notice at the cash price of $5.75 per
share (Series A) or $7.35 per share (Series B) plus any accrued and unpaid
dividends. After notice of redemption has been given but before the date stated
for redemption, holders of 1996 Series A preferred stock or the 1997 Series B
preferred stock would be able to convert the shares into common stock.

Dividends -- The Company does not anticipate the payment of dividends on
its common or preferred stock in the near future and intends to retain any
earnings indefinitely. If dividends are declared and paid on the common stock,
the Company's bylaws require that dividends are to be declared and paid to
holders of 1996 Series A and 1997 Series B preferred stock. Each share of 1996
Series A and 1997 Series B preferred stock shall be entitled to receive the same
dividends that would have been payable upon such share if that share of
preferred stock had been converted into common stock immediately prior to the
declaration of such dividend on the common stock.

F-9
65

C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)

5. STOCK OPTION PLAN

The Company has adopted the 1996 Incentive Stock Option Plan ("Stock Plan")
under which options to acquire 255,600 common shares, reduced by the number of
options granted outside the Stock Plan, may be granted to key employees,
directors and independent consultants. Under the Stock Plan, both incentive and
nonqualified options may be granted under terms and conditions established by
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 Stock Plan generally vest equally over a three-year
period and have terms of 10 years.

During 1996 options to acquire 200,220 shares of common stock were granted
under the Stock Plan with exercise prices ranging from $1.88-$2.70 per share
(weighted average exercise price of $2.37 per share). At December 31, 1996 all
of these options were outstanding and none were exercisable. Additionally,
during 1996 the Company granted options to acquire 37,275 shares of common stock
to certain consultants. These options are immediately exercisable, have a term
of 5 years and an exercise price of $1.88 per share.

During 1995, the Company issued Cree Research, Inc. ("Cree"), a related
company (see Note 7), an option to acquire 1% of the outstanding shares of
common stock on the date of exercise at an exercise price of $500 at any time
through July 1, 1997. However, the Company retained the right to waive the $500
option fee and issue the stock at any time during the option period. The Company
issued 24,601 shares of common stock to Cree pursuant to this right on January
2, 1997. The Company has recorded compensation expense of approximately $66,000
in 1997 related to this transaction.

All stock options are granted at fair market value of the common stock at
the grant date. Had compensation cost for the Stock Plan been determined
consistent with FAS 123, the Company's pro forma net loss for 1996 would have
been $404,375. The fair value of each option grant is estimated on the date of
grant using the minimum value method with the following assumptions: dividend
yield of 0.0%; risk-free interest rate of 6.0%; and a weighted average expected
option term of 1.8 years.

During the six months ended June 30, 1997, options to acquire 140,154
shares of common stock were granted under the Stock Plan with exercise prices
ranging from $3.45-$4.81 per share (weighted average exercise price of $3.82).

6. INCOME TAXES

At December 31, 1995 and 1996, the Company had deferred tax assets of
$10,700 and $57,600, respectively, relating to federal net operating and state
economic loss carryforwards. In accordance with FAS 109, a valuation allowance
has been provided against these assets.

A reconciliation between anticipated income taxes, computed at the
statutory federal income tax rate applied to pretax accounting income, and the
income taxes included in the statements of operations for the seven-month period
ended December 31, 1995 and the year ended December 31, 1996 follows:

DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------

Anticipated income tax benefit at the statutory federal
rate...................................................... $(9,250) $(40,600)
State income tax benefit, net of federal tax effect......... (1,450) (6,300)
Increase in valuation allowance............................. 10,700 46,900
------- --------
Income tax (benefit) expense................................ $ -- $ --
======= ========

F-10
66

C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)

At December 31, 1996, the Company has operating and economic loss
carryforwards of approximately $147,000, expiring through 2011, which can be
offset against future federal and state taxable income.

7. COMMITMENTS

Operating Lease -- On February 4, 1997, the Company entered into a lease
agreement for office space with Real Color Displays, Inc. ("RCD"), a related
party. The agreement specifies rent of $2,000 per month and a one-time payment
of $6,000 for leasehold improvements. The lease expires January 31, 1998 and may
be renewed at the Company's option for two additional one-year terms, with
annual rent increases of $750 per annum. Future minimum lease payments under
this agreement for 1997 and 1998 are $24,000 and $2,000, respectively.

Purchase Commitment -- In connection with an Exclusive Supply Agreement,
the Company has committed to purchase a minimum of 50% (by dollar volume) of its
requirements for SiC crystals from Cree, a related company. If the Company's
orders require Cree to expand beyond specified production levels, the Company
must commit to purchase certain minimum quantities. 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
adversely affected.

During 1995 and 1996, the Company made purchases from Cree of approximately
$13,500 and $189,600, respectively, for SiC materials and research and
development costs.

8. RELATED PARTIES

During 1995 and 1996, a significant shareholder of the Company loaned an
aggregate of $60,000 to the Company for working capital needs. In addition,
during 1996 an officer and director loaned the Company $3,000. Amounts
outstanding on these loans at December 31, 1995 totaled $10,100 and were paid in
full during 1996.

9. COMMON STOCK SPLIT

On September 25, 1997, the Company effected a 2.13-for-1 stock split of its
common stock. All shares of common stock, common stock options and per share
amounts included in the accompanying financial statements have been
retroactively adjusted to reflect the stock split.

10. SUBSEQUENT EVENTS (UNAUDITED)

On June 6, 1997, the Company entered into an Amended and Restated Exclusive
Supply Agreement ("Amended Agreement") and a Development Agreement with Cree.
The Amended 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 expects to meet this order threshold and to extend the term of the
Amended Agreement. The Development Agreement provides for a five-year
development effort by Cree to produce a fully repeatable process for producing
SiC crystals meeting certain target specifications. If Cree is successful in
meeting the development milestones set forth in the Development Agreement, the
Company will be obligated to pay Cree approximately $12 million over the
five-year term of the Development Agreement. In addition, if Cree meets certain
development milestones by January 1, 1998, the Company will pay Cree a $200,000
bonus.

Subsequent to June 30, 1997, the Company recorded deferred compensation
expense of approximately $2.9 million related to stock options granted in July
and August 1997. Upon consummation of the Company's initial public offering, the
stock options granted to certain officers and directors will vest on December
31,

F-11
67

C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)

1997, in which event approximately $2.1 million of this deferred compensation
expense will be recognized in the quarter ending December 31, 1997. The
remaining deferred compensation expense will be recognized over the three-year
vesting period of the remaining options.

The Company has entered into agreements with certain directors pursuant to
which such directors provide consulting services to the Company. Consideration
paid for services provided to the Company through June 30, 1997 was
insignificant.

Subsequent to December 31, 1996, the Board of Directors authorized, subject
to shareholder approval, an increase in the number of shares for issuance under
the Stock Plan to 777,450. During the period July 1, 1997 through August 20,
1997, options to acquire 321,417 shares of Common Stock were granted under the
Stock Plan with exercise prices ranging from $4.81-$7.63 per share
(weighted-average exercise price of $5.00). The Company currently has no plans
to award additional options under the Stock 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. Initially, a maximum of 477,979
shares of common stock may be delivered pursuant to awards granted under the
1997 Omnibus Plan, and the Board of Directors has reserved that number of shares
for this purpose. 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 Stock 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.

F-12
68

DESCRIPTION OF INSIDE BACK COVER

This graphic has a white background, and in the upper one-half has a
photograph of one of the Company's loose lab-created moissanite gemstones held
by jeweler's tweezers. In the middle of the graphic appears the Company's
trademark stylized moissanite gemstones logo. The logo consists of a black box
in which the word "MOISSANITE" appears in large silver capital letters,
traversed by an orange arc ending with a burst of light rays at the bottom
right corner of the box. The logo also includes the word "GEMSTONES" appearing
underneath the box in capital letters approximately one-third of the size of
the letters used in "MOISSANITE." At the bottom of the page appear the words
"CREATED BY" in capital letters approximately two-thirds of the size of the
letters used in"GEMSTONES" and the Company's stylized name logo. The name logo
consists of a large capital C, similarly sized 3, with a geometric shape of a
diamond to the right of, and intersecting, the numeral "3". In the logo, the
word "Inc." appears to the right of the geometric diamond shape.

======================================================

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF, OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY SINCE SUCH DATE.

---------------------

TABLE OF CONTENTS

PAGE
----

Prospectus Summary.................... 3
Risk Factors.......................... 5
Use of Proceeds....................... 12
Dividend Policy....................... 12
Dilution.............................. 13
Capitalization........................ 14
Selected Financial Data............... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 19
Management............................ 32
Principal Shareholders................ 41
Certain Transactions.................. 42
Description of Capital Stock.......... 46
Shares Eligible for Future Sale....... 49
Underwriting.......................... 51
Legal Matters......................... 52
Experts............................... 52
Additional Information................ 53
Index to Financial Statements......... F-1

---------------------
Until , 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock offered hereby, whether or
not participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.

======================================================
======================================================

2,000,000 SHARES
[LOGO]

C3, INC.

COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
PAULSON INVESTMENT
COMPANY, INC.
, 1997

======================================================
70

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

Other expenses of issuance and distribution payable by the Registrant are
estimated as follows:

Securities and Exchange Commission registration fee......... $ 11,546
National Association of Securities Dealers, Inc. filing
fee....................................................... 4,311
Nasdaq National Market Quotation Fee........................ 50,000
Accounting fees and expenses................................ 30,000
Legal fees and expenses..................................... 250,000
Printing and engraving...................................... 100,000
Fees of Transfer Agent and Registrar........................ 5,000
State Blue Sky registration fees and expenses (including
counsel fees)............................................. 10,000
Representative's Non-Accountable Expense Allowance.......... 270,000
Directors and Officers Insurance Premium.................... 150,000
Miscellaneous expenses...................................... 19,143
--------
Total............................................. $900,000
========

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Sections 55-8-50 through 55-8-58 of the North Carolina Business Corporation
Act contains specific provisions relating to indemnification of directors and
officers of North Carolina corporations. In general, such sections provide that
(i) a corporation must indemnify a director or officer who is wholly successful
in his defense of a proceeding to which he is a party because of his status as
such, unless limited by the articles of incorporation, and (ii) a corporation
may indemnify a director or officer if he is not wholly successful in such
defense and it is determined as provided by statute that the director or officer
meets a certain standard of conduct, but the corporation may not indemnify a
director or officer if he is liable to the corporation or is adjudged liable on
the basis that personal benefit was improperly received by him. A director or
officer of a corporation who is a party to a proceeding may also apply to the
courts for indemnification, and the court may order indemnification under
certain circumstances set forth in the statute. A corporation may, in its
articles of incorporation or bylaws or by contract or resolution, provide
indemnification in addition to that provided by statute, subject to certain
conditions.

The Registrant's bylaws provide for the indemnification of any director or
officer of the Registrant against liabilities and litigation expenses arising
out of his status as such, excluding (i) any liabilities or litigation expenses
relating to activities which were at the time taken known or believed by such
person to be clearly in conflict with the best interest of the Registrant and
(ii) that portion of any liabilities or litigation expenses with respect to
which such person is entitled to receive payment under any insurance policy.

The Registrant's articles of incorporation provide for the elimination of
the personal liability of each director of the Registrant to the fullest extent
permitted by law.

In connection with this offering, the Registrant intends to obtain
directors' and officers' liability insurance, under which any controlling
person, director or officer of the Registrant will be insured or indemnified
against certain liabilities which he may incur in his capacity as such.

Under the underwriting agreement to be entered into by the Registrant,
certain controlling persons, directors and officers of the Registrant may be
entitled to indemnification by underwriters who participate in the distribution
of securities covered by the Registration Statement against certain liabilities,
including liabilities under the Securities Act.

II-1
71

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

(a) The Registrant was incorporated on June 28, 1995 under the laws of the
State of North Carolina. Except as set forth below, no securities of the
Registrant have been sold by the Registrant without registration under the
Securities Act. Amounts of Common Stock have been adjusted to reflect an 8-for-1
stock split, effected on April 2, 1996, and a 2.13-for-1 stock split effected on
September 25, 1997.

(b) On June 28, 1995, the Registrant issued 170,400 shares of Common Stock
to Jeff N. Hunter, a founder, President and Chairman of the Board of the
Company, and Paula K. Berardinelli, a founder of the Company, as joint tenants
with rights of survivorship, in consideration of services to be performed by
each of them on behalf of the Registrant in reliance on the exemption from
registration provided by Section 4(2) and Rule 701 under the Securities Act of
1933, as amended (the "Securities Act"). On June 28, 1995, the Registrant also
issued 1,465,440 shares of Common Stock to C. Eric Hunter, a founder of the
Company believed to qualify as an "accredited investor" as defined in Rule
501(a) under the Securities Act, for an aggregate consideration of $50,000 in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act. Also on June 28, 1995, the Registrant issued to Cree an option
covering a number of shares equal to one percent of the Common Stock outstanding
on the date of exercise in exchange for certain intellectual property rights.
Cree had the right to exercise the option upon payment of an aggregate exercise
price of $500 and the Registrant retained the right to waive the payment of the
exercise consideration and issue the stock at any time during the option period.
This option was issued in reliance on the exemption from registration provided
by Section 4(2) under the Securities Act.

(c) On June 30, 1995, the Registrant issued 68,160 shares of Common Stock
to two individuals who were consultants to the Registrant in consideration of
services to be performed by them on behalf of the Registrant. Such shares were
issued in reliance on the exemption from registration provided by Section 4(2)
and Rule 701 under the Securities Act.

(d) Between May 2 and May 24, 1996, the Registrant issued an aggregate of
532,500 shares of Common Stock to certain individual investors in exchange for
an aggregate consideration of $1 million in reliance on the exemption from
registration provided by Rule 505 under the Securities Act.

(e) Between May 25, 1996 and June 6, 1996, the Registrant issued options
covering an aggregate of 37,275 shares of Common Stock to four individuals who
were consultants to the Registrant for an aggregate consideration of $3 and in
consideration of services performed or to be performed by them on behalf of the
Registrant. Such options were issued in reliance on the exemption from
registration provided by Section 4(2) and Rule 701 under the Securities Act.

(f) Between June 1, 1996 and August 18, 1997, the Registrant issued options
covering an aggregate of 640,491 shares of Common Stock to certain employees,
directors and consultants of the Registrant pursuant to the 1996 Option Plan and
in consideration of services rendered and to be rendered to the Registrant. The
options have exercise prices between approximately $1.88 per share and
approximately $7.62 per share with a weighted average exercise price of $2.37
per share. The Registrant granted the options in reliance on the exemption from
registration provided by Section 4(2) and Rule 701 under the Securities Act.

(g) Between August 5, 1996 and September 3, 1996, the Registrant issued an
aggregate of 223,650 shares of 1996 Series A Preferred Stock to certain
individual investors in exchange for an aggregate consideration of $603,750 in
reliance on the exemption from registration provided by Rule 506 under the
Securities Act.

(h) On January 2, 1997, the Registrant issued 24,601 shares of Common Stock
to Cree in accordance with the terms of an option previously issued to Cree.
Such shares were issued in reliance on the exemption from registration provided
by Section 4(2) of the Securities Act.

(i) Between January 9, 1997 and March 17, 1997, the Registrant issued an
aggregate of 1,453,725 shares of 1997 Series B Preferred Stock to certain
individual and institutional investors in exchange for an aggregate
consideration of $5,016,375 in reliance on the exemption from registration
provided by Rule 506 under the Securities Act.

II-2
72

(j) In September 1997, the Registrant issued options covering 310,000
shares of Common Stock to certain employees, directors and consultants of the
Registrant pursuant to the 1997 Omnibus Plan and in consideration of services
rendered and to be rendered to the Registrant. The options have an exercise
price equal to the initial public offering price of the shares of Common Stock
being offered in this offering. The Registrant granted the options in reliance
on the exemption from registration provided by Section 4(2) and Rule 701 under
the Securities Act.

(k) At or prior to the consummation of this offering, the Registrant will
issue, in reliance on the exemption from registration provided by Section
3(a)(9) of the Securities Act, 1,677,375 shares of Common Stock upon the
automatic conversion of outstanding shares of 1996 Series A Preferred Stock and
1997 Series B Preferred Stock.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits

The following exhibits listed in accordance with the number assigned to
each in the exhibit table of Item 601 of Regulation S-K are included in Part II
of this Registration Statement.

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

1 -- Form of Underwriting Agreement*
3.1 -- Amended and Restated Articles of Incorporation of C3, Inc.**
3.2 -- Amended and Restated Bylaws of C3, Inc.**
4.1 -- Specimen Certificate of Common Stock**
4.2 -- Form of Representative's Warrant*
5 -- Opinion of Womble Carlyle Sandridge & Rice, PLLC**
10.1 -- Consulting Agreement, dated May 1, 1997, between Kurt Nassau
and C3, Inc.*
10.2 -- Letter Agreement, dated May 17, 1997, between Kurt Nassau
and C3, Inc.*
10.3 -- Letter Agreement, dated February 17, 1997, between Howard
Rubin and C3, Inc.*
10.4 -- Independent Contractor Agreement, dated May 1, 1997, between
Paula K. Berardinelli and C3, Inc.*
10.5 -- Independent Contractor Agreement, dated September 3, 1997,
between C. Eric Hunter and C3, Inc.*
10.6 -- Independent Contractor Agreement dated July 10, 1997 between
Ollin B. Sykes and C3, Inc.*
10.7 -- Employment Agreement, dated June 1, 1997, between Jeff N.
Hunter and C3, Inc.*
10.8 -- Employment Agreement, dated July 30, 1997, between Mark W.
Hahn and C3, Inc.*
10.9 -- Employment Agreement, dated September 15, 1997, between
Martin J. DeRoy and C3, Inc.*
10.10 -- Employment Agreement, dated March 1, 1997, between Thomas G.
Coleman and C3, Inc.*
10.11 -- Amended and Restated Exclusive Supply Agreement, dated June
6, 1997, between Cree Research, Inc. and C3, Inc.*+
10.12 -- Development Agreement, dated as of June 6, 1997, between
Cree Research, Inc. and C3, Inc.*+
10.13 -- Letter Agreement, dated July 14, 1997, between Cree
Research, Inc. and C3, Inc.*+
10.14 -- Letter Agreement, dated January 31, 1996, between Cree
Research, Inc. and C3, Inc.*+
10.15 -- 1996 Stock Option Plan of C3, Inc.*
10.16 -- 1997 Omnibus Stock Plan of C3, Inc.*
10.17 -- Restricted Stock Agreement, dated June 30, 1995, between
Jeff N. Hunter and Paula K. Berardinelli and C3, Inc.*
10.18 -- Shareholders Agreement, dated March 18, 1997, between
General Electric Pension Trust, C. Eric Hunter and C3, Inc.*

II-3
73

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

10.19 -- Registrations Rights Agreement, dated March 18, 1997,
between General Electric Pension Trust and C3, Inc.*
10.20 -- Agreement, dated September 24, 1997, between John M.
Bachman, Inc. and C3, Inc.*+
10.21 -- Agreement, dated September 12, 1997, between QMD, Inc. and
C3, Inc.*+
23.1 -- Consent of Womble Carlyle Sandridge & Rice, PLLC (included
in Exhibit 5)**
23.2 -- Consent of Deloitte & Touche LLP
23.3 -- Consent of Kurt Leutzinger*
23.4 -- Consent of David B. Stewart*
23.5 -- Consent of Ollin B. Sykes*
24 -- Power of Attorney (included on the signature page of this
Registration Statement)*
27 -- Financial Data Schedule*

- ---------------

* Previously filed.

** To be filed by amendment.

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

(b) Financial Statement Schedules

All schedules are omitted because they are not required, they are not
applicable or the information is already included in the financial statements or
notes thereto.

ITEM 17. UNDERTAKINGS.

1. The undersigned registrant hereby undertakes that:

(a) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.

(b) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

2. The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.

3. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

II-4
74

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Morrisville, State of North Carolina, on October 3, 1997.

C3, INC.

By: /s/ JEFF N. HUNTER
------------------------------------
Jeff N. Hunter
President

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the registration statement has been signed by the following persons on
October 3, 1997 in the capacities indicated.

/s/ JEFF N. HUNTER /s/ FREDERICK A. RUSS*
- ----------------------------------------------------- -----------------------------------------------------
Jeff N. Hunter Frederick A. Russ
President and Director Director
(principal executive officer)

/s/ KURT NASSAU* /s/ MARK W. HAHN
- ----------------------------------------------------- -----------------------------------------------------
Kurt Nassau Mark W. Hahn
Director Chief Financial Officer
(principal financial and accounting officer)

/s/ HOWARD RUBIN*
- -----------------------------------------------------
Howard Rubin
Director

*By: /s/ JEFF N. HUNTER
------------------------------------------------
Jeff N. Hunter
Attorney-in-Fact

II-5

   1

                                                                    EXHIBIT 23.2



INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Amendment No. 1 to Registration Statement No.
333-36809 of C3, Inc. of our report dated March 11, 1997, except for Note 9, as
to which the date is September 25, 1997, appearing in the Prospectus, which is
part of this Registration Statement, and to the reference to us under the
headings "Selected Financial Data" and "Experts" in such Prospectus.


/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP

Raleigh, North Carolina
October 3, 1997