<PAGE>

                                                                   EXHIBIT 10.3

DRAFT SEPTEMBER 10, 2001


                        SETTLEMENT AGREEMENT AND RELEASE

     Challis International Limited ("Challis"),Allgemeine
Repraesentationsanstalt Postfach 539Am Schragen Weg 2 FL 9490 Vaduz Principality
of Liechtenstein, Roderic Alexander Innes Hamilton ("Hamilton"), Allgemeine
Repraesentationsanstalt Postfach 539Am Schragen Weg 2 FL 9490 Vaduz Principality
of Liechtenstein, Constellation 3D Technology Limited ("C3D Tech"), a British
Virgin Islands company with offices at 805 Third Avenue, New York, New York, and
Constellation 3D Inc. ("C3D Inc.") located at 805 Third Avenue - 14/th/ Floor
New York, New York, hereby state:

     WHEREAS, Challis commenced an action against C3D Tech and C3D Inc. in the
Supreme Court of the State of New York, County of New York, under Index Number
602463/00 (the "Litigation") seeking to recover common shares of C3D Inc.; and

     WHEREAS, C3D Tech and C3D Inc. have interposed various counterclaims in the
Litigation seeking compensation from Challis and Hamilton; and

     WHEREAS, C3D Tech and C3D Inc. on the one hand, and Challis and Hamilton on
the other, each deny any wrongdoing, further deny any obligation to compensate
the other, but nevertheless desire to resolve the litigation at this time solely
to avoid the expense and distraction of protracted litigation;

     NOW, THEREFORE, in consideration of the mutual promises contained herein
and other good and valuable consideration Challis, Hamilton, C3D Tech and C3D
Inc. (collectively, the "Parties") hereby agree as follows:

<PAGE>

                              ARTICLE 1: Settlement
                              ---------------------

     1. The Parties fully and forever settle and resolve all past, present and
future disputes relating to the Litigation without admission of any issue of
fact or law, pursuant to the terms and conditions set forth below.

       ARTICLE 2: Transfer of Shares to Williams de Broe
       -------------------------------------------------

     2.1. In consideration of the releases in Article 4 hereof, the dismissal of
the Litigation in Article 5 hereof, and the indemnification in Article 6 hereof,
C3D Tech agrees to tender, subject to the terms of this Settlement Agreement and
the WDB Agreement (as defined below), directly to Williams de Broe, PLC, P.O.
Box 515, 6 Broadgate, London EC2M 2RP, 1,000,000 shares of C3D Inc. common
stock (the "WDB Shares") within ten (10) business days after Williams de Broe
executes a separate agreement in the form attached as Exhibit A (the "WDB
Agreement"), and further provided that Williams de Broe agrees to a restriction
against shorting the WDB Shares, selling derivatives linked to the WDB Shares or
any other perceived hedging activity until such time as the restrictions on the
WDB Shares are removed and/or expire.

     C3D Tech hereby warrants and represents that it has the requisite shares
and authority to transfer said shares to Williams de Broe in satisfaction of the
terms of this Settlement Agreement.

     2.2. As set forth in the WDB Agreement, the WDB Shares shall be "restricted
shares," within the meaning of the securities laws of the United States, and
shall bear a legend designating them as such. The WDB Shares will not have been
registered under the Securities Act of 1933, as amended (the "Act"), and
therefore,

                                       -2-

<PAGE>

cannot be resold unless they are registered under the Act or unless an exemption
from registration is available. Once the restriction expires, neither C3D Inc.
nor C3D Tech shall hinder in any way the registration of the WDB Shares, and C3D
Inc. shall reasonably cooperate with the registration of those shares. In
addition, C3D, Inc., shall if lawful and practicable, include the WBD shares on
its next filed registration statement.

                        ARTICLE 3: Remedies Upon Default
                        --------------------------------

     3.1. In the event that C3D Tech fails to transfer the WDB Shares to
Williams de Broe for any reason (except pursuant to Court order), Williams de
Broe shall be entitled to a judgment against C3D Tech (the "Judgment") for the
market value of the WDB shares as of the date application for the Judgment is
made. Application for such judgment may be made by Williams de Broe or by
Challis on behalf of Williams de Broe, it being expressly agreed that Williams
de Broe is a third party beneficiary of the agreement of C3D Tech to transfer
the WDB Shares to Williams de Broe, and all other matters set forth in Article
2, above.

     3.2. C3D Tech's sole defense to the judgment shall be that the WDB Shares
have been tendered as provided in Article 2 of this Agreement and/or a Court
Order has been rendered preventing the tender of said shares.

     3.3 In the event C3D Tech fails to deliver the shares to Williams de Broe
in accordance with the terms of this Settlement Agreement, Challis at its option
after notice and a reasonable time to cure may terminate this Settlement
Agreement with respect to C3D

                                       -3-

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Tech and declare it null and void, however this Settlement Agreement shall
remain binding with respect to C3D, Inc.

                               ARTICLE 4: Releases
                               -------------------

     4.1. Challis, its parents, subsidiaries, affiliated companies and
predecessor companies, and each of their past and present officers, directors,
employees, stockholders and representatives, and Hamilton, and all of their
successors and assigns (the "Challis Releasors") irrevocably waive, relinquish
and fully and forever release and discharge C3D Inc. and C3D Tech, their
parents, subsidiaries, affiliated companies and predecessor companies, and each
of their past and present officers, directors, employees, stockholders and
representatives, their successors, attorneys-in-fact and attorneys (the "C3D
Releasees"), from any and all claims, duties, causes of action, demands,
obligations, liabilities, rights, and damages of any kind, whether now known or
unknown, contingent or noncontingent, asserted or unasserted, whether at law, in
equity or pursuant to statute, which the Challis Releasors ever had, now have or
hereafter can, shall or may have against any of the C3D Releasees for, upon or
by reason of any matter, cause or thing whatsoever from the beginning of the
world to the date hereof, except as to obligations specifically provided in this
Settlement Agreement and Release.

     4.2. C3D Inc. and C3D Tech, their parents, subsidiaries, affiliated
companies and predecessor companies, and each of their past and each of their
present officers, directors, employees, stockholders and representatives,
successors and assigns (the "C3D

                                       -4-

<PAGE>

Releasors") irrevocably waive, relinquish and fully and forever release and
discharge Challis, its parents, subsidiaries, affiliated companies and
predecessor companies, and each of their past and present officers, directors,
employees, stockholders and representatives (including but not limited to
Hamilton), and all of their successors, attorneys-in-fact and attorneys (the
"Challis Releasees"), from any and all claims, duties, causes of action,
demands, obligations, liabilities, rights, and damages of any kind, whether now
known or unknown, contingent or noncontingent, asserted or unasserted, whether
at law, in equity or pursuant to statute, which the C3D Releasors ever had, now
have or hereafter can, shall or may have against any of the Challis Releasees
for, upon or by reason of any matter, cause or thing whatsoever from the
beginning of the world to the date hereof, except as to obligations specifically
provided in this Settlement Agreement and Release.

                        ARTICLE 5: The Pending Litigation
                        ---------------------------------

     5. The Parties shall dismiss the Litigation with prejudice within 10 days
after exchanging executed copies of this Settlement Agreement and Release. Each
Party shall bear its own attorneys fees and costs in connection with effecting
such dismissal, provided, however, that if any Party fails for any reason to
cooperate with the same the other Party shall seek an order granting dismissal
and shall be entitled to recover from the recalcitrant Party reasonable
attorneys fees and costs in effecting the same.

                           ARTICLE 6: Indemnification
                           --------------------------

                                       -5-

<PAGE>

     6. Challis and Hamilton represent and acknowledge that neither Challis nor
Hamilton have ever been authorized to act on behalf of C3D Inc., whether to sell
shares of stock on behalf of C3D Inc. or otherwise legally bind C3D Inc. in any
other matter whatsoever. Challis and Hamilton further represent that neither
Challis nor Hamilton has any outstanding obligation or promise to sell shares of
stock of C3D Inc. Accordingly, the Challis Releasors, jointly and severally,
agree to defend and indemnify, and hold fully harmless, C3D Inc. and C3D Tech,
their parents, subsidiaries, affiliated companies and predecessor companies,
their past and present officers, directors, employees, stockholders and
representatives, their successors, attorneys-in-fact and attorneys, from and
against any and all claims, duties, causes of action, demands, obligations,
liabilities, rights, and damages of any kind, whether now known or unknown,
contingent or noncontingent, asserted or unasserted, whether at law, in equity
or pursuant to statute asserted by any person or entity (other than any claim
made by Williams de Broe pursuant to this Settlement Agreement) claiming that
they are owed shares of either C3D Inc. or C3D Tech by virtue of any agreement
with any of the Challis Releasors, acting on their own behalf or purportedly on
behalf of C3D Inc. or C3D Tech. The Parties explicitly agree that payment is not
a precondition to the obligation herein to indemnify and defend.

                          ARTICLE 7: General Provisions
                          -----------------------------

     7.1. The Parties each have participated in the drafting of this Settlement
Agreement and Release through their respective counsel. Therefore, the language
of this Settlement Agreement and

                                       -6-

<PAGE>

Release shall not be presumptively construed in favor or against any Party.

     7.2. This Settlement Agreement and Release represents the entire
understanding and agreement among the Parties. The Parties each represent and
warrant that no representation, warranties or promises, whether express or
implied, have been relied on other than as set forth herein, and as set forth in
the separate agreement to be executed with Williams de Broe pursuant to Article
2, above. Any other provisions of this Settlement Agreement and Release to the
contrary notwithstanding, this Settlement Agreement and Release can only be
modified by a writing signed by the Party against whom such modification is
sought to be enforced and this provision cannot be orally waived.

     7.3. This Settlement Agreement and Release shall be governed and construed
in accordance with the laws of the State of New York, without giving effect to
conflict of law rules, any dispute under, regarding or pertaining this
Settlement Agreement and Release shall be resolved in a federal or state court
located in New York County in the State of New York, and the prevailing party in
any such dispute shall be entitled to recover reasonable attorneys fees and
costs. Challis, Hamilton, C3D Inc. and C3D Tech expressly consent to
jurisdiction in such courts for purposes of this Settlement Agreement and
Release.

     7.5. In the event that any additional action must be commenced for purposes
of enforcing any provision of this Settlement Agreement and Release (including
but not limited to for purposes of obtaining the Judgment or enforcing Challis'
indemnification obligations), (1) C3D Inc. and C3D Tech agree that

                                       -7-

<PAGE>

that service by certified mail to the General Counsel of C3D Inc. shall be
effective; and (2) Challis and Hamilton hereby irrevocably appoint as their
agent for service of process the law firm of Shatzkin, Reiss & Eisenpress, 425
Madison Avenue, New York, New York, and that service by certified mail shall be
effective.

     7.6. This Settlement Agreement and Release may be executed in counterparts,
each of which shall be deemed an original and all of which shall together
constitute one agreement. In any case, each Party shall receive an original
executed by each other party. This Settlement Agreement and Release shall be
void, and without effect, until signed by all parties hereto before a notary
public.

CHALLIS INTERNATIONAL LIMITED                 CONSTELLATION 3D INC.


By: Roderic Alexander Hamilton                By: /s/ Eugene Levich
   Name:                                        Name:
   Title: Secretary and  Signator               Title: /s/ Chairman
   Date:  September ___, 2001                   Date:  September ___, 2001


                                              CONSTELLATION 3D TECHNOLOGY
                                                LIMITED

/s/ Roderic Alexander Hamilton
--------------------------------
RODERIC ALEXANDER INNES HAMILTON              By: /s/ Lev Zaidenberg
                                                Name:
                                                Title: Chairman
                                                Date:  September ___, 2001


                                       -8-

<PAGE>

                           A C K N O W L E D G M E N T
COUNTRY OF _____________   )
                           : SS.:
CITY OF ________________   )


     On September ___, 2001, before me personally came Roderic Alexander Innes
Hamilton, to me known, who, be me duly sworn, did depose and say that deponent
is the ______________ of Challis International Limited, the corporation
described in the foregoing Settlement Agreement and Release, and that he
executed the same on his own behalf, and on behalf of Challis International
Limited by order of the board of directors of that corporation, and he
acknowledged to me that he executed the same.


                                        _______________________________________
                                        Notary Public

                                       -9-

<PAGE>

                           A C K N O W L E D G M E N T
STATE OF ____________      )
                           : SS.:
COUNTY OF ___________      )


     On September ___, 2001, before me personally came ______________________,
to me known, who, be me duly sworn, did depose and say that deponent is the
______________ of Constellation 3D Inc., the corporation described in the
foregoing Settlement Agreement and Release, and that he executed the same by
order of the board of directors of that corporation, and he acknowledged to me
that he executed the same.


                                        _______________________________________
                                        Notary Public

                                      -10-

<PAGE>

                           A C K N O W L E D G M E N T
STATE OF ____________      )
                           : SS.:
COUNTY OF ___________      )


     On September ___, 2001, before me personally came ______________________,
to me known, who, be me duly sworn, did depose and say that deponent is the
______________ of Constellation 3D Technology Limited, the corporation described
in the foregoing Settlement Agreement and Release, and that he executed the same
by order of the board of directors of that corporation, and he acknowledged to
me that he executed the same.


                                       ________________________________________
                                       Notary Public

                                      -11-

<PAGE>

                                    EXHIBIT A
                    AGREEMENT RELATING TO TRANSFER OF SHARES
                    ----------------------------------------

     Whereas, Constellation 3D Technology Limited ("C3D Tech") a British Virgin
Islands Company with offices at 805 Third Avenue, New York, New York,has agreed
in connection with an agreement with Challis International Ltd. to transfer
directly to Williams dde Broe, PLC P.O. Box 515, 6 Broadgate, London EC2M 2RP,
1,000,000 shares of common stock (the "WDB Shares") of Constellation 3D Inc.
("C3D Inc.) within ten (10) business days after the Parties execute this
agreement; accordingly, C3D Tech and Williams de Broe hereby agrees as follows:

     1.  The WDB Shares shall be "restricted shares," within the meaning of the
securities laws of the United States, and shall bear a legend to the following
effect:

         THIS SECURITY (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE
         U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
         ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE
         TRANSFERRED, EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS
         ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER: (1)
         REPRESENTS THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN
         RULE 144A UNDER THE SECURITIES ACT)(A "QIB") OR AN "ACCREDITED
         INVESTOR" WITHIN THE MEANING OF RULE 501 PROMULGATED UNDER THE
         SECURITIES ACT, (2) AGREES THAT IT WILL NOT RESELL OR OTHERWISE
         TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY OR ANY OF ITS
         SUBSIDIARIES OR (B) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS
         A QIB OR ACCREDITED INVESTOR IN A TRANSACTION MEETING THE REQUIREMENTS
         OF RULE 144A AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM
         THIS SECURITY OR AN INTEREST HEREIN IS TRANSFERRED A NOTICE
         SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND.

Accordingly, among other things, Williams de Broe agrees to a restriction
against shorting the WDB Shares, selling derivatives linked to the WDB Shares or
any other perceived hedging activity

                                      -12-

<PAGE>

until such time as the restriction on the WDB Shares are removed and/or expire.
C3D Inc. will not register any transfer of shares in violation of the
restrictions set forth in that legend. Once the restriction expires, neither C3D
Inc. nor C3D Tech shall hinder in any way the registration of transfer of the
WDB Shares, and C3D Inc. shall reasonably cooperate with the registration of
transfer of those shares. In addition, C3D, Inc. shall, if lawful and
practicable, include the WBD shares on its next filed registration statement.

     2.   In connection with the transfer of WDB Shares contemplated by the
Settlement Agreement, C3D Tech hereby represents, warrants and agrees that:

          a. Neither C3D Tech, nor any person acting on its behalf, has offered
     or sold any of the WDB Shares by any form of general solicitation or
     general advertising.

          b. The transfer of WDB Shares has not and will not be integrated with
     any other offering of shares of stock of C3D Inc.

     3.   In connection with the transfer of WDB Shares contemplated by the
Settlement Agreement, Williams de Broe hereby represents, warrants and agrees
that:

          a. Williams de Broe is acquiring the WDB Shares for its own account,
     and not as nominee or agent for any other person and with no intention of
     distributing or reselling the WDB Shares or any part thereof in any
     transaction which would be in violation of the securities laws of the
     United States of America or of any state thereof.

                                       -13-

<PAGE>

     b. Williams de Broe understands that the WDB Shares have not been
registered under the Securities Act of 1933, as amended (the "Act"), and
therefore, cannot be resold unless they are registered under the Act or unless
an exemption from registration is available, and that the certificates
representing the WDB Shares will bear a legend to that effect.

     c. Williams de Broe is an "accredited investor" (as that term is defined in
Rule 501 of Regulation D under the Act).

     d. Williams de Broe, by reason of its business and financial experience,
has such knowledge, sophistication and experience in business and financial
matters so as to be capable of evaluating the merits and risks of the investment
in the WDB Shares, and Williams de Broe is able to bear the economic risk of
such investment and, at the present time, is able to afford a complete loss of
such investment.

     e. Williams de Broe has been afforded access to officials of C3D Inc. and
information about C3D Inc. and C3D Inc.'s financial condition, results of
operations, business, property, management and prospects sufficient to enable
Williams de Broe to evaluate an investment in the WDB Shares.

     f. In connection with the transfer of WDB Shares contemplated by the
Settlement Agreement, Williams de Broe negotiated directly with C3D Tech in
arranging and effecting the transfer of WDB Shares without the involvement of
any brokers or dealers. The transfer was effected in the State of New York.

                                      -14-

<PAGE>

     3. Williams de Broe, its parents, subsidiaries, affiliated companies and
predecessor companies, and each of their past and present officers, directors,
employees, stockholders and representatives, and all of their successors and
assigns (the "WDB Releasors") irrevocably waive, relinquish and fully and
forever release and discharge C3D Inc. and C3D Tech, their parents,
subsidiaries, affiliated companies and predecessor companies, and each of their
past and present officers, directors, employees, stockholders and
representatives, their successors, attorneys-in-fact and attorneys (the "C3D
Releasees"), from any and all claims, duties, causes of action, demands,
obligations, liabilities, rights, and damages of any kind, whether now known or
unknown, contingent or noncontingent, asserted or unasserted, whether at law, in
equity or pursuant to statute, which the WDB Releasors ever had, now have or
hereafter can, shall or may have against any of the C3D Releasees for, upon or
by reason of any matter, cause or thing whatsoever from the beginning of the
world to the date hereof, except as to the obligations of C3D Inc. and C3D Tech
specifically provided above.

CONSTELLATION 3D TECHNOLOGY                     WILLIAMS dE BROE
  LIMITED

                                                By: /s/ John Gunn

By: /s/ Lev Zaidenberg                          Name:
    ------------------                          Title: Investment Manager
    Name: Chairman                              Date:  September ____, 2001
    Title:
    Date:  September ____, 2001

                                      -15-

<PAGE>

                           A C K N O W L E D G M E N T
STATE OF ____________      )
                           : SS.:
COUNTY OF ___________      )


     On September ___, 2001, before me personally came ______________________,
to me known, who, be me duly sworn, did depose and say that deponent is the
______________ of Williams de Broe, PLC the [corporation] described in the
foregoing Settlement Agreement and Release, and that he executed the same by
order of the board of directors of that corporation, and he acknowledged to me
that he executed the same.



                                       ________________________________________
                                       Notary Public

                                      -16-