UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

              |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                For the Quarterly Period Ended September 30, 1999

               |_| TRANSITION REPORT PURSUANT SECTION 13 OR 15 (d)
                       OF SECURITIES EXCHANGE ACT OF 1934

                For the Transition Period From ______to_________

                        Commission File Number 333-13287

                             EARTHSHELL CORPORATION
             (Exact name of registrant as specified in its charter)

                DELAWARE                               77-0322379
     (State or other jurisdiction of                (I.R.S. Employer
      incorporation or organization)               Identification No.)

            111 S. CALVERT ST. SUITE 1950, BALTIMORE, MARYLAND 21202
               (Address of principal executive office) (Zip Code)

       Registrant's telephone number, including area code: (410) 949-1300

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed  by  Section  13 or 15 (d) of the  Securities  Exchange  Act of 1934
during the preceding 12 months (or for such shorter  period that the  registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days.
Yes |X| No |_|

The number of shares outstanding of the registrant's common stock as of November
12, 1999 was 100,045,166.


<PAGE>
<TABLE>
<CAPTION>


                             EARTHSHELL CORPORATION

                                    FORM 10-Q

                    FOR THE QUARTER ENDED SEPTEMBER 30, 1999

                                      INDEX

<S>                                                                                                 <C>
PART I. FINANCIAL INFORMATION

       Item 1.      Financial Statements                                                            Page
                    a)   Balance Sheets
                         as of September 30, 1999 and December 31, 1998 (unaudited) .............    1

                    b)   Statements of Operations
                         for the three and nine months ended September 30, 1999 and 1998
                         (unaudited) and for the period from November 1, 1992 (inception)
                         through September 30, 1999 (unaudited) .................................    2

                    c)   Statements of Stockholders' Equity (Deficit)
                         for the period from November 1, 1992 (inception) to
                         September 30, 1999 (unaudited) .........................................    3

                    d)   Statements of Cash Flows
                         for the nine months ended September 30, 1999 and 1998 (unaudited)
                         and for the period from November 1, 1992 (inception)
                         through September 30, 1999 (unaudited) .................................    4

                    e)   Notes to Financial Statements (unaudited) ..............................    5

       Item 2.      Management's Discussion and Analysis of Financial
                    Condition and Results of Operations .........................................    7

       Item 3.      Quantitative and Qualitative Disclosures About Market Risk ..................    14

PART II. OTHER INFORMATION

       Item 1.      Legal Proceedings ...........................................................    15

       Item 2.      Use of Proceeds .............................................................    15

       Item 3.      Defaults Upon Senior Securities .............................................    15

       Item 4.      Submission of Matters to a Vote for Security Holders ........................    15

       Item 5.      Other Information ...........................................................    16

       Item 6       Exhibits and Reports on Form 8-K ............................................    16

SIGNATURE .......................................................................................    16
</TABLE>


<PAGE>



<TABLE>
<CAPTION>


                             EARTHSHELL CORPORATION

                        (A DEVELOPMENT STAGE ENTERPRISE)

                                 BALANCE SHEETS

                                   (UNAUDITED)

                                                                                 SEPTEMBER 30,    DECEMBER 31,
                                                                                -------------    -------------
                                                                                     1999             1998
                                                                                -------------    -------------
<S>                                                                             <C>              <C>
ASSETS
CURRENT ASSETS:
      Cash and cash equivalents .............................................   $  47,786,663    $  86,590,163
      Restricted cash .......................................................       3,500,000        3,500,000
      Short-term investments ................................................            --          6,530,928
      Other assets ..........................................................         309,500        1,196,373
                                                                                -------------    -------------
          Total current assets ..............................................      51,596,163       97,817,464

PROPERTY AND EQUIPMENT, NET .................................................      47,643,840       37,820,917

INVESTMENT IN JOINT VENTURE .................................................         517,194             --
                                                                                -------------    -------------
TOTAL .......................................................................   $  99,757,197    $ 135,638,381
                                                                                =============    =============


LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
      Accounts payable and accrued expenses .................................   $   6,326,124    $   9,559,437
      Trade payable to majority stockholder .................................         570,593        1,181,300
      Note payable to bank ..................................................            --             22,975
                                                                                -------------    -------------
          Total current liabilities .........................................       6,896,717       10,763,712
                                                                                -------------    -------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
      Common stock, $.01 par value, 200,000,000 shares authorized;100,045,166
        issued and outstanding as of September 30, 1999 and
        December 31,1998 ....................................................       1,000,451        1,000,451
      Additional paid-in common capital .....................................     225,555,255      224,715,255
      Deficit accumulated during the development stage ......................    (133,695,226)    (100,841,037)
                                                                                -------------    -------------
          Total stockholders' equity ........................................      92,860,480      124,874,669
                                                                                -------------    -------------
TOTAL .......................................................................   $  99,757,197    $ 135,638,381
                                                                                =============    =============

                       See notes to financial statements.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>

                             EARTHSHELL CORPORATION

                        (A DEVELOPMENT STAGE ENTERPRISE)

                            STATEMENTS OF OPERATIONS

                                   (UNAUDITED)

                                                       FOR THE THREE MONTHS               FOR THE NINE MONTHS       NOVEMBER 1,1992
                                                        ENDED SEPTEMBER 30,               ENDED SEPTEMBER 30,     (INCEPTION)THROUGH
                                                       ---------------------             ---------------------     SEPTEMBER 30,1999
                                                       1999             1998             1999             1998     -----------------
                                                       ----             ----             ----             ----



<S>                                               <C>              <C>              <C>              <C>              <C>
EXPENSES:
   Related party research and development .....   $   2,683,296    $   2,492,976    $   8,041,331    $   6,297,348    $  54,648,808
   Other research and development .............       6,151,749        2,164,243       13,480,202        6,468,139       29,254,967
   Related party general and administrative
      expenses ................................          56,029           16,800          169,017           50,400        2,037,817
   Other general and administrative expenses ..       2,608,145        4,184,697       10,306,308        6,217,692       35,113,168
   Depreciation and amortization ..............       1,452,276          224,868        3,180,227          612,993        6,320,281
   Related party patent expenses ..............         167,486           33,024          495,506          118,125        8,181,783
                                                  -------------    -------------    -------------    -------------    -------------
      Total expenses ..........................      13,118,981        9,116,608       35,672,591       19,764,697      135,556,824

Interest income ...............................        (729,826)      (1,704,025)      (2,821,873)      (3,597,424)      (8,429,338)
Related party interest expense ................            --               --               --            651,587        4,770,731
Other interest expense ........................            --                692             --            434,530        1,788,738
                                                  -------------    -------------    -------------    -------------    -------------
Loss Before Income Taxes ......................      12,389,155        7,413,275       32,850,718       17,253,390      133,686,955

Income Taxes ..................................           2,671             --              3,471              800            8,271
                                                  -------------    -------------    -------------    -------------    -------------
Net Loss ......................................      12,391,826        7,413,275       32,854,189       17,254,190      133,695,226
Preferred Dividends ...........................            --               --               --            776,813        9,926,703
                                                  -------------    -------------    -------------    -------------    -------------
Net Loss Available To Common Stockholders .....   $  12,391,826    $   7,413,275    $  32,854,189    $  18,031,003    $ 143,621,929
                                                  =============    =============    =============    =============    =============

Basic And Diluted Loss Per Common Share .......   $        0.12    $        0.07    $        0.33    $        0.19    $        1.66

Weighted Average Number Of Common Shares ......     100,045,166       99,883,320      100,045,166       94,178,427       86,333,069


                       See notes to financial statements.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>

                             EARTHSHELL CORPORATION

                        (A DEVELOPMENT STAGE ENTERPRISE)

                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                                   (UNAUDITED)

                                                       CUMULATIVE
                                                       CONVERTIBLE
                                                     PREFERRED STOCK              ADDITIONAL             COMMON STOCK
                                                        SERIES A                   PAID-IN               ------------
                                                        --------                  PREFERRED
                                                 SHARES           AMOUNT           CAPITAL          SHARES          AMOUNT
                                                 -----------------------           -------          ----------------------
<S>                                             <C>           <C>              <C>                <C>           <C>
     ISSUANCE OF COMMON STOCK
     AT INCEPTION ........................            --               --               --         82,530,000   $       3,150
     Sale of preferred stock, net ........       6,988,850    $         267    $  24,472,734             --              --
     Net loss ............................            --               --               --               --     $        --

                                                -----------   --------------   --------------     -----------   -------------
     BALANCE, DECEMBER 31, 1993 ..........       6,988,850              267       24,472,734       82,530,000           3,150
     Net loss ............................            --               --               --               --              --

                                                -----------   --------------   --------------     -----------   -------------
     BALANCE, DECEMBER 31, 1994 ..........       6,988,850              267       24,472,734       82,530,000           3,150
     Contribution to equity ..............            --               --               --               --              --
     Net loss ............................            --               --               --               --              --

                                                -----------   --------------   --------------     -----------   -------------
     BALANCE, DECEMBER 31, 1995 ..........       6,988,850              267       24,472,734       82,530,000           3,150
     Contribution to equity ..............            --               --               --               --              --
     Issuance of stock warrants ..........            --               --               --               --              --
     Net loss ............................            --               --               --               --              --

                                                -----------   --------------   --------------     -----------   -------------
     BALANCE, DECEMBER 31, 1996 ..........       6,988,850              267       24,472,734       82,530,000           3,150
     Compensation related to stock options
     and warrants ........................            --               --               --               --              --
     Net loss ............................            --               --               --               --              --

                                                -----------   --------------   --------------     -----------   -------------
     BALANCE, DECEMBER 31, 1997 ..........       6,988,850              267       24,472,734       82,530,000           3,150
     262 to 1 stock split ................            --             69,621          (69,621)            --           822,150
     Conversion of preferred stock to
     Common stock ........................      (6,988,850)         (69,888)     (24,403,113)       6,988,850          69,888
     Issuance of common stock ............            --               --               --         10,526,316         105,263
     Preferred stock dividends ...........            --               --               --               --              --
     Net loss ............................            --               --               --               --              --

                                                -----------   --------------   --------------     -----------   -------------
     BALANCE, DECEMBER 31, 1998 ..........            --               --               --        100,045,166       1,000,451
     Compensation related to stock options            --               --               --               --              --
     Net loss ............................            --               --               --               --              --
                                                -----------   --------------   --------------     -----------   -------------
     BALANCE, SEPTEMBER 30,1999 ..........      $     --      $        --      $        --        100,045,166   $   1,000,451
                                                ===========   ==============   ==============     ===========   =============

                       See notes to financial statements.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>

                             EARTHSHELL CORPORATION

                        (A DEVELOPMENT STAGE ENTERPRISE)

                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                                   (UNAUDITED)

                                   (CONTINUED)

                                                                  DEFICIT
                                                                ACCUMULATED
                                               ADDITIONAL         DURING
                                                 PAID-IN        DEVELOPMENT
                                             COMMON CAPITAL        STAGE            TOTAL
                                             --------------        -----            -----
<S>                                          <C>              <C>              <C>
     ISSUANCE OF COMMON STOCK
     AT INCEPTION ........................   $       6,850             --      $      10,000
     Sale of preferred stock, net ........            --               --         24,473,001
     Net loss ............................            --         (7,782,551)      (7,782,551)

                                             -------------    -------------    -------------
     BALANCE, DECEMBER 31, 1993 ..........           6,850       (7,782,551)      16,700,450
     Net loss ............................            --        (16,582,080)     (16,582,080)

                                             -------------    -------------    -------------
     BALANCE, DECEMBER 31, 1994 ..........           6,850      (24,364,631)         118,370
     Contribution to equity ..............       1,117,723             --          1,117,723
     Net loss ............................            --        (13,914,194)     (13,914,194)

                                             -------------    -------------    -------------
     BALANCE, DECEMBER 31, 1995 ..........       1,124,573      (38,278,825)     (12,678,101)
     Contribution to equity ..............         650,000             --            650,000
     Issuance of stock warrants ..........         246,270             --            246,270
     Net loss ............................            --        (16,950,137)     (16,950,137)

                                             -------------    -------------    -------------
     BALANCE, DECEMBER 31, 1996 ..........       2,020,843      (55,228,962)     (28,731,968)
     Compensation related to stock options
     and warrants ........................       3,156,659             --          3,156,659
     Net loss ............................            --        (18,992,023)     (18,992,023)

                                             -------------    -------------    -------------
     BALANCE, DECEMBER 31, 1997 ..........       5,177,502      (74,220,985)     (44,567,332)
     262 to 1 stock split ................        (822,150)            --               --
     Conversion of preferred stock to
     Common stock ........................      24,403,113             --               --
     Issuance of common stock ............     205,883,493             --        205,988,756
     Preferred stock dividends ...........      (9,926,703)            --         (9,926,703)
     Net loss ............................            --        (26,620,052)     (26,620,052)

                                             -------------    -------------    -------------
     BALANCE, DECEMBER 31, 1998 ..........     224,715,255     (100,841,037)     124,874,669
     Compensation related to stock options         840,000             --            840,000
     Net loss ............................            --        (32,854,189)     (32,854,189)
                                             -------------    -------------    -------------
     BALANCE, SEPTEMBER 30,1999 ..........   $ 225,555,255    $(133,695,226)   $  92,860,480
                                             =============    =============    =============


                       See notes to financial statements.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>

                             EARTHSHELL CORPORATION

                        (A DEVELOPMENT STAGE ENTERPRISE)

                            STATEMENTS OF CASH FLOWS

                                   (UNAUDITED)




                                                                                 FOR THE NINE MONTHS ENDED     NOVEMBER 1, 1992
                                                                                        SEPTEMBER 30,        (INCEPTION) THROUGH
                                                                                   1999             1998      SEPTEMBER 30, 1999
                                                                                ---------------------------   ------------------

<S>                                                                           <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss ..................................................................   $ (32,854,189)   $ (17,254,190)   $(133,695,226)
Adjustments to reconcile net loss to net cash used in operating activities:
   Depreciation and amortization ..........................................       3,180,227          612,993        6,320,281
   Issuance of stock options to directors, consultant and officer .........         840,000             --          4,701,522
   Amortization of debt issue costs .......................................            --               --            271,277
   Loss on sale or disposal of property and equipment .....................       1,835,519          265,840        5,337,995
   Net loss on sale of investments ........................................            --               --             32,496
   Loss from investment in joint venture ..................................          37,555             --             37,555
   Accretion of discounts on investments ..................................            --               --           (410,084)
Changes in operating assets and liabilities: ..............................                             --
   Other assets ...........................................................         886,873         (243,174)        (309,500)
   Accounts payable and accrued expenses ..................................      (3,233,313)       5,978,148        6,326,122
   Payable to majority stockholder ........................................        (610,707)     (25,476,182)      27,453,806
   Accrued interest on notes payable to majority  stockholder .............            --           (636,068)            --

                                                                              -------------    -------------    -------------
       Net cash used in operating activities ..............................     (29,918,035)     (36,752,633)     (83,933,756)
                                                                              -------------    -------------    -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments ...................................................            --         (4,999,091)     (43,449,182)
Purchase of restricted time deposit .......................................            --               --         (3,500,000)
Proceeds from sales and redemptions of investments ........................       6,530,928             --         43,826,770
Proceeds from sale of property and equipment ..............................            --               --            297,670
Investment in joint venture ...............................................        (554,748)            --           (554,748)
Purchase of property and equipment ........................................     (14,838,670)     (26,846,832)     (60,471,522)

                                                                              -------------    -------------    -------------
       Net cash used in investing activities ..............................      (8,862,490)     (31,845,923)     (63,851,012)
                                                                              -------------    -------------    -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable to stockholders ...................            --          1,450,000       14,270,000
Proceeds from drawings on line of credit with bank ........................            --          2,150,000       14,000,000
Proceeds from issuance of common stock ....................................            --        221,052,636      221,062,636
Common stock issuance costs ...............................................            --        (15,180,580)     (15,178,641)
Preferred dividends paid ..................................................            --         (9,926,703)      (9,926,703)
Proceeds from issuance of preferred stock .................................            --               --         25,675,000
Preferred stock issuance costs ............................................            --               --         (1,201,999)
Repayment of line of credit with bank .....................................            --               --        (14,000,000)
Repayment of notes payable ................................................         (22,975)     (21,783,495)     (39,128,862)

                                                                              -------------    -------------    -------------
       Net cash (used) provided by financing activities ...................         (22,975)     177,761,858      195,571,431
                                                                              -------------    -------------    -------------

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ..........................     (38,803,500)     109,163,303       47,786,663
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................      86,590,163            8,437             --
                                                                              -------------    -------------    -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..................................   $  47,786,663    $ 109,171,740    $  47,786,663
                                                                              =============    =============    =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
     Income taxes .........................................................   $       3,471    $         800    $       8,271
     Interest .............................................................            --      $   1,722,201    $   3,026,633
Warrants issued with debt .................................................            --               --      $     306,168
Transfer of property from EKI .............................................            --               --      $      28,745
Conversion of preferred stock to common stock .............................            --      $      69,888    $      69,888

                       See notes to financial statements.
</TABLE>


<PAGE>
EARTHSHELL CORPORATION

NOTES TO FINANCIAL STATEMENTS  (Unaudited)
SEPTEMBER 30, 1999
--------------------------------------------------------------------------------

PRESENTATION OF FINANCIAL INFORMATION

The foregoing interim  financial  information is unaudited and has been prepared
from the books and records of EarthShell  Corporation  (the  "Company").  In the
opinion of  management,  the  financial  information  reflects  all  adjustments
necessary  for a  fair  presentation  of the  financial  condition,  results  of
operations and cash flows of the Company in conformity  with generally  accepted
accounting  principles.  All such  adjustments were of a normal recurring nature
for interim financial reporting.

The accompanying  unaudited financial  statements and these notes do not include
certain  information  and footnote  disclosures  required by generally  accepted
accounting principles, which were included in the Company's financial statements
for the year ended December 31, 1998. The information included in this Form 10-Q
should be read in  conjunction  with  Management's  Discussion  and  Analysis of
Financial Condition and Results of Operations and financial statements and notes
thereto for the year ended  December 31, 1998 included in the  Company's  Annual
Report on Form 10-K.

Basic and diluted  loss per common  share is  calculated  based on the  weighted
average shares  outstanding of 100,045,166  for the three months and nine months
ended  September 30, 1999,  and 99,883,320 and 94,178,427 for the three and nine
months ended September 30, 1998, respectively. Basic and diluted loss per common
share  are  the  same  because   common   stock   equivalents   are   considered
anti-dilutive.

RELATED PARTY TRANSACTIONS

During the three months ended  September 30, 1999 and 1998,  the Company paid or
accrued $2,683,296 and $2,492,976,  respectively,  and for the nine months ended
September  30,  1999 and 1998,  $8,041,331  and  $6,297,348,  respectively,  for
services  performed  by E.  Khashoggi  Industries,  LLC ("EKI"),  the  Company's
majority  stockholder,  under the Amended and  Restated  Technical  Services and
Sublease  Agreement  effective  October 1, 1997,  between  the  Company and EKI.
Additionally,  the  Company  paid EKI  $16,800  and  $50,400,  respectively,  in
sublease  payments  during  each of the  respective  three  month and nine month
periods ended September 30, 1999 and 1998.

Pursuant to  resolutions  adopted by the Board of Directors on February 4, 1999,
the Company  reimbursed  $39,229 and  $118,617 to EKI for  salaries and benefits
paid by EKI for  administrative  support  personnel  during the three months and
nine months ended September 30, 1999, respectively.

Under the  Amended  and  Restated  Agreement  for  Allocation  of  Patent  Costs
effective October 1, 1997, legal fees related to patents of $167,486 and $33,024
were paid to or on behalf of EKI for the three months ended  September  30, 1999
and 1998,  respectively,  and  $495,506  and  $118,125 for the nine months ended
September 30, 1999 and 1998, respectively.


<PAGE>


EARTHSHELL CORPORATION

NOTES TO FINANCIAL STATEMENTS  (Unaudited) - continued
SEPTEMBER 30, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

PROPERTY AND EQUIPMENT

At September 30, 1999, property and equipment consisted of the following:

<S>                                                                <C>
Commercial Manufacturing Equipment: .....................          $ 43,754,757

Product Development Center:
     Equipment ..........................................             4,294,685
     Construction in progress ...........................             2,016,318
     Leasehold improvements .............................               521,253
                                                                   ------------
                                                                      6,832,256

Office equipment and furniture ..........................               442,365

Office leasehold improvements ...........................               769,754

Less: accumulated depreciation ..........................            (4,155,292)
                                                                   ------------

Property and equipment - net ............................          $ 47,643,840
                                                                   ============

</TABLE>

COMMITMENTS

The Company has committed to capital equipment and  infrastructure  expenditures
of $6.1  million for the  Sweetheart  Cup Company Inc.  manufacturing  equipment
installation and $2.3 million for the next generation manufacturing equipment as
of September 30, 1999.

On July 2, 1999, the Company  entered into a lease,  effective  October 1, 1999,
for 34,956 square feet of research and development space in Annapolis  Junction,
Maryland.  This lease expires on September  30, 2004.  The monthly lease payment
with respect to this space is $18,876.

INVESTMENT IN JOINT VENTURE

On May 24,  1999,  the  Company  entered  into a joint  venture  agreement  with
Huhtamaki Oyj to commercialize EARTHSHELL Products throughout Europe, Australia,
New Zealand,  and, on a country by country basis,  Asia. The agreement  provides
for the formation of a Danish  holding  company for the purpose of  establishing
operating  companies to  manufacture,  market,  sell and  distribute  EARTHSHELL
Products.

The Company has  contributed  63,000  Danish krone as nominal  share capital and
500,000  Euros for  start-up  capital.  The  Company is  required to pay for the
development  of the  initial  prototypes  of the next  generation  manufacturing
systems. After both joint venture partners agree that acceptable next generation
manufacturing  economics can be achieved,  the joint venture partners will share
in the commercialization costs on an equal basis.


<PAGE>



ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Information   contained  in  this  Quarterly   Report  on  Form  10-Q  including
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" contain forward-looking statements within the meaning of the Private
Securities  Litigation  Reform Act of 1995, as amended.  These statements may be
identified  by the use of  forward-looking  terminology  such as "may,"  "will,"
"expect,"  "anticipate,"  "estimate," or "continue," or the negative  thereof or
other  comparable  terminology.  Any one factor or  combination of factors could
cause the Company's actual operating  performance or financial results to differ
substantially  from those  anticipated by management that are described  herein.
Factors  influencing the Company's  operating  performance and financial results
include,   but  are  not  limited  to,  changes  in  the  general  economy,  the
availability of financing,  governmental regulations concerning, but not limited
to, environmental issues, and other risks and unforeseen circumstances affecting
the  Company's  business and should be read in  conjunction  with other  factors
discussed in the Company's 1998 Annual Report on Form 10-K.

BACKGROUND

The  Company  was  organized  in  November  1992 as a Delaware  corporation  and
continues  to be a  development  stage  enterprise  at September  30,  1999.  E.
Khashoggi   Industries  LLC,  the  Company's  principal   stockholder,   or  its
predecessors  ("EKI"),  has been involved since July 1985 in the  development of
various new material  technologies.  The Company was formed to develop,  license
and commercialize  foodservice disposables made of EarthShell composite material
("EARTHSHELL Products"). The Company has an exclusive,  worldwide,  royalty-free
license from EKI to use certain technology for this purpose. The Company intends
to  continue  to  license  or  joint  venture  with  existing  manufacturers  of
foodservice  disposables  for the  manufacture  and  distribution  of EARTHSHELL
Products.  The  Company  expects  to  derive  revenues  primarily  from  license
royalties and distributions from joint ventures that are licensed to manufacture
EARTHSHELL Products.  Since inception,  the Company has relied on EKI to provide
extensive  management and technical support.  The Company and EKI are parties to
an  Amended  and  Restated   Technical  Services  and  Sublease  Agreement  (the
"Technical Services Agreement") which continues through December 31, 2002, under
the terms of which,  the  Company  pays EKI for all direct  project  labor hours
incurred by EKI  technical  personnel and direct  expenses  incurred on approved
projects.  In  addition,  under  an  Amended  and  Restated  Agreement  for  the
Allocation of Patent Costs (the "Patent Agreement"),  the Company reimburses EKI
for the costs and expenses of filing,  prosecuting,  acquiring  and  maintaining
certain patents and patent  applications  relating to the technology licensed to
the Company  under an Amended  and  Restated  License  Agreement  (the  "License
Agreement").

The Company has experienced  aggregate net losses of approximately  $134 million
from its inception on November 1, 1992 through  September 30, 1999.  The Company
has been  unprofitable to date and expects to continue to incur operating losses
until  its  products  are  commercially  introduced  and  achieve  broad  market
acceptance and market penetration. Successful future operations will depend upon
the  ability  of the  Company,  its  licensees  and joint  venture  partners  to
commercialize various types of EARTHSHELL Products at a competitive cost.

DEVELOPMENT OF FIRST COMMERCIAL MANUFACTURING FACILITY

The development and installation of the Company's first commercial manufacturing
lines at Sweetheart Cup Company  Inc's.  ("Sweetheart")  Owings Mills,  Maryland
facility has been the Company's major focus since Sweetheart secured the Perseco
(the primary  packaging  purchasing  agent for  McDonald's  Corporation)  supply
agreement for EARTHSHELL containers for the Big Mac(R) sandwich in October 1997.
Following the Company's initial public offering in early 1998 and in cooperation
with  Sweetheart,  the Company  contracted  for the design and  construction  of
commercial scale EarthShell  manufacturing  lines to meet projected demand under
the  Perseco/McDonald's  supply  contract.  In late 1998,  the Company began the
process of debugging and startup of the first of these manufacturing lines.

<PAGE>

The  debugging  and startup of the first line has taken  longer than  originally
anticipated.  The  production  output from the first line is  currently at lower
than  acceptable  commercial  yields and at a low volume  level  relative to the
intended  capacity  requirements.  The Company has not run the entire line, on a
fully  integrated  basis, at a commercially  acceptable  level of  manufacturing
efficiency.  One of the  primary  causes of the delay has been the  failure of a
high-speed conveyor segment to meet its original performance  specifications.  A
new conveyor segment was designed,  installed,  and placed in operation in early
November 1999. The new conveyor section appears to be functioning as required.

Although the Company has operated a number of the presses in the first line,  to
date  the  Company  has not yet run the line  with  mold  tooling  in all of the
presses  at the same time.  Now that the new  conveyor  system is in place,  the
Company  expects  to have the first line fully  tooled  and  operational  during
December 1999. The complete  validation of the  performance of the line with the
new conveyor is expected to be complete in December 1999. Once the first line is
operating  satisfactorily,  the Company will proceed to enable the second system
mixer and to startup the remaining lines. Building on the first line experience,
the startup process for these lines is expected to proceed more quickly.

To  assure  that  it  will  have  adequate  capacity  to  meet  the  anticipated
Perseco/McDonald's  rollout schedule,  the Company has made contingent plans for
installing  additional forming and coating capacity and has obtained commitments
from vendors to supply the required equipment.  Implementation of the additional
forming  and  coating  capacity  will  depend upon the degree to which the first
manufacturing line has achieved targeted manufacturing efficiencies by year-end.

Concurrent  with the work to debug and  optimize  the  performance  of the first
line, a portion of each week is reserved for regular  production  to support the
Perseco/McDonald's  validation  process and to build inventory.  Currently,  the
line is  available  for  production  three days a week in two shifts  working 24
hours a day. Initially,  this production was staffed by a combination of Company
engineering  professionals and Sweetheart manufacturing personnel.  Beginning in
late September 1999, Sweetheart's manufacturing personnel assumed responsibility
for the regular production shifts.

Because  the  Owings  Mills   facility  is  the   Company's   first   commercial
implementation of the EarthShell technology,  the Company believes that the cost
incurred  on the  manufacturing  lines in this  facility  will be  significantly
higher  than  the cost of  manufacturing  lines in  subsequent  facilities.  The
Company believes the estimated  capitalized cost of the Sweetheart lines will be
approximately  $58.3  million  upon  completion.  The  Company  expects  to have
expensed  approximately  $10.2  million  of  process  development,   design  and
engineering  costs and  approximately  $10.9  million in start-up and  debugging
expense  associated  with  preparing  the  Sweetheart  facility  for  full-scale
production. If the addition of forming and coating capacity is not required, the
total  project cost was estimated to be  approximately  $72 million at September
30, 1999. The total project cost for this facility with the  additional  forming
and coating capacity is estimated to be approximately $79 million.

<PAGE>

KEY CUSTOMER AND PRODUCT VALIDATION

To support the contract with Perseco to supply McDonald's U.S.  restaurants with
EARTHSHELL containers for the Big Mac(R) sandwich, the Company agreed to provide
EarthShell-owned  manufacturing equipment to be used at Sweetheart with adequate
capacity to fulfill the  Perseco/McDonald's  supply contract.  The manufacturing
facility has been built and the first of these lines is currently being operated
on a limited  basis to produce  and  supply  EARTHSHELL  containers  for the Big
Mac(R) sandwich to Perseco/McDonald's to validate that they meet the performance
specifications agreed to in the supply contract.

The  validation  process began in June 1999,  and is being  conducted by Perseco
using a protocol  that is typical  for all new  product  introductions  into the
McDonald's  system.  It includes  kitchen testing and a number of other tests as
well as evaluating various aspects of product  performance and consumer reaction
in actual restaurants. Following initial kitchen and core testing, in July 1999,
EARTHSHELL  containers  for  the  Big  Mac(R)  sandwich  were  shipped  to  four
McDonald's  stores in the Las Vegas area for testing.  In  addition,  containers
were supplied to two stores in the Baltimore  area and two stores in the Chicago
area. Product performance in Las Vegas was monitored during July and August 1999
and feedback was provided to the Company to fine-tune  the product.  The results
from this testing were encouraging,  and in September 1999, Perseco notified the
Company  that  it  was  expanding  the  Las  Vegas  test  from  four  stores  to
approximately 30 stores.

In  mid-October  1999, as use of the product was being  expanded  within the Las
Vegas area, a higher than expected level of breakage was noted. With concurrence
of  Perseco,  the Company  removed  the  product  from all of the Las Vegas area
stores until the problem could be thoroughly  assessed and  rectified.  Analysis
indicated that the breakage  problem  resulted  primarily from the failure of an
automatic  bagging machine to consistently seal the product in airtight shipping
bags.  As a  consequence,  certain  sleeves of product fell below the  specified
moisture  content during  warehousing and shipping to the stores and became more
susceptible  to damage during  shipping and handling.  The defective  bagger has
been repaired and overall  quality control  procedures  have been improved.  The
Company and Sweetheart are running extensive internal  verification tests before
notifying Perseco that Sweetheart is ready to resume product shipments.

The Company expects to achieve  production  capacity to meet U.S. demand for the
EARTHSHELL containers for the Big Mac(R) sandwich during the year 2000.

OTHER CUSTOMERS AND LICENSEES

In May 1999,  the Company  signed  definitive  agreements  with Huhtamaki Oyj, a
leading  international  food and food packaging  firm,  establishing a new joint
venture  company,  Polarcup  EarthShell,  to commercialize  EARTHSHELL  Products
throughout Europe,  Australia,  New Zealand, and, on a country by country basis,
Asia. The Company  believes that the opportunity for rapid market  acceptance of
its products in Europe is exceptional due to their unique environmental  profile
and the more demanding regulations regarding disposal of foodservice  disposable
products in Europe. In November 1998, the Company signed a non-binding letter of
intent with Prairie Packaging,  Inc. ("Prairie)" to establish a joint venture to
produce  an  array  of  "next  generation"  EarthShell  products.  The  proposed
arrangement with Prairie encompasses the production of plates, bowls, hinged-lid
containers  and cups,  initially  to be sold to Sysco  Corporation,  the leading
foodservice  distributor in North  America.  To date,  discussions  leading to a
definitive agreement with Prairie are still in progress, and no assurance can be
given  that the  non-binding  letter  of  intent  will  result  in a  definitive
agreement with Prairie.

<PAGE>

In  August  1999,  the  Company  signed a  non-binding  letter  of  intent  with
Sweetheart to expand and further  develop the  manufacturing  facility in Owings
Mills, Maryland beyond the scope of the initial EARTHSHELL container for the Big
Mac(R) sandwich commitment. This proposal would require investment in additional
capacity of which  Sweetheart would pay 50%. This capacity will first be applied
to  incremental  McDonald's  business,  on a priority  basis,  and then to other
customers.  The Company also believes that there will be a significant reduction
in the  capital  cost of this new  capacity  as well as the level of first time,
non-recurring expenses as compared to its initial manufacturing lines. There can
be no  assurances  that  this  non-binding  letter  of  intent  will  result  in
definitive agreements with Sweetheart.

Based on the definitive joint venture agreements with Huhtamaki, the non-binding
letter of intent with Sweetheart and progress made on definitive agreements with
Prairie,  planning is underway to establish  manufacturing capacity based on the
Company's  next  generation  manufacturing  processes.  Under  the  terms of the
definitive agreements, Huhtamaki Oyj is actively participating in this effort.

SECOND GENERATION MANUFACTURING DEVELOPMENT

Due  to  the  extensive   technical  effort  and  costs  required  to  initially
commercialize  the  EarthShell  technology,  the  Company  does  not  expect  to
demonstrate the full economic potential of EarthShell  products at the Company's
first commercial  manufacturing facility at Sweetheart.  With the benefit of its
experience at Sweetheart and the broad manufacturing experience of its partners,
the  Company  is  developing  a  next  generation  manufacturing  approach  that
utilizes, as much as possible,  commercially available  conventional  industrial
processing equipment.  In addition,  the Company is developing a next generation
commercial  product  set that  will  include  bowls,  plates,  other  hinged-lid
containers, and cups.

The  Company's  manufacturing  process  is  comprised  of four core  operations;
mixing, forming,  coating and printing. These operations must be integrated in a
continuous process through the use of material handling and conveyance  systems.
The  Company  has  identified   conventional,   commercially  available  process
equipment  for mixing,  forming and printing  that it believes can meet its next
generation  manufacturing  goals and is working with suppliers of this equipment
to validate suitability.  Additionally, the Company is working with conventional
film thermoforming equipment to develop a process to apply biodegradable film as
a coating for EarthShell  products.  Pilot  equipment has been built and used to
manufacture and coat products such as plates,  bowls and trays on a small scale.
These products have been used in demonstration projects with the U.S. Department
of the Interior and other users to validate the  performance of products as well
as customer  acceptance.  Initial  trials  with  conventional  commercial  scale
machinery have also been encouraging. The Company believes it is well positioned
to source  competitively  priced  biodegradable  films for the middle and higher
selling price markets for plates and bowls,  but more development is required to
arrive at films which satisfy the Company's economic and technical requirements.

Under  the  terms  of  existing  and  contemplated  joint  venture   agreements,
EarthShell  and its partners will invest  jointly in the  commercial  facilities
based on projected  economic  returns.  The Company does not intend to commit to
its next series of commercial plant investments until it has demonstrated, using
commercial scale equipment in integrated  pilot lines,  that its next generation
products can be manufactured  at a cost that will produce returns  acceptable to
both EarthShell and its partners.

<PAGE>

The Company  believes  it will take up to nine  months to prove next  generation
manufacturing  economics  for plates and bowls during 2000.  The Company has not
yet developed a commercial  manufacturing  process for hot and cold cups,  which
represent a significant portion of the Company's targeted market, and therefore,
development of next  generation  manufacturing  systems for cups are expected to
take longer.  Based on its current product costing models,  the Company believes
its  products  will be able to compete in the  middle and higher  selling  price
markets.  Additional value engineering and a lower total cost of coating will be
required to be competitive in lower priced markets.

COMPARISON OF THE THREE MONTHS AND NINE MONTHS ENDED  SEPTEMBER 30, 1999, TO THE
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998

TOTAL  RESEARCH  AND   DEVELOPMENT   EXPENSES  Total  research  and  development
expenditures for the development of EARTHSHELL  Products  increased $8.7 million
from $12.8 million for the nine months ended September 30, 1998 to $21.5 million
for the nine months ended September 30, 1999. The increase was primarily related
to the cost of start-up,  debugging and supporting the Sweetheart  manufacturing
lines.  This included a $3.9 million increase in reimbursement to Sweetheart for
costs  incurred  during the  startup  and  debugging  phase of the  project,  an
increase of $2.3 million  related to  additional  staffing  costs to support the
Sweetheart project and next generation product development,  an increase of $1.7
million  related  to  reimbursement  to EKI for its  support  of the  Sweetheart
operation,  for EKI work performed on several demonstration projects and for EKI
efforts in support of next generation manufacturing systems, an increase of $1.0
million for expensed equipment and supplies related to supporting the Sweetheart
project,  and an increase of $0.5  million for  EarthShell-led  next  generation
manufacturing  activity.  These  costs were  offset by a net  reduction  of $1.2
million in construction  management and design services at Sweetheart as various
vendors completed their work at Sweetheart.

Total research and  development  expenditures  for the development of EARTHSHELL
Products  increased  $4.2  million  from $4.6 million for the three months ended
September  30, 1998 to $8.8  million for the three months  ended  September  30,
1999. The increase was primarily related to the cost of start-up,  debugging and
supporting  the  Sweetheart  manufacturing  lines.  This included a $1.6 million
increase in  reimbursement  to Sweetheart for costs incurred during the start-up
and  debugging  phase of the  project,  an increase of $0.8  million  related to
additional  staffing costs to support the Sweetheart project and next generation
product development,  and an increase of $0.5 million for expensed equipment and
supplies related to supporting the Sweetheart project.

TOTAL  GENERAL AND  ADMINISTRATIVE  EXPENSES  Total  general and  administrative
expenses  increased  $4.2  million  from $6.3  million for the nine months ended
September  30, 1998 to $10.5  million for the nine months  ended  September  30,
1999.  This is primarily due to increased  compensation  and benefit costs for a
higher  number of  employees in the 1999 period of $1.6 million and $1.0 million
in  compensation  to directors,  related  primarily to the grant of compensatory
stock options.  Approximately  $1.6 million of the increase was due to the costs
of being a public  company,  such as costs of  preparing  and  issuing an annual
report,  developing and  implementing  an investor  relations  program and legal
costs  primarily  related  to  structuring   joint  ventures.   An  increase  of
approximately  $0.7  million  was a result of  marketing  and  public  relations
expenses in preparation of the national rollout of the EARTHSHELL  container for
the Big Mac(R)  sandwich.  Rent and utility costs also increased $0.2 million in
the nine  months  ended  September  30, 1999  compared to the nine months  ended
September 30, 1998 due to the Baltimore,  Maryland office being in operation for
the  entire  period  in 1999.  Professional  services  performed  by The  Boston
Consulting  Group  decreased $1.0 million in the nine months ended September 30,
1999 due to the completion of the project in the 1998 period.

<PAGE>

Total  general and  administrative  expenses  decreased  $1.5  million from $4.2
million for the three  months ended  September  30, 1998 to $2.7 million for the
three  months ended  September  30,  1999.  This is  primarily  due to decreased
compensation  expense  incurred in the three months ended  September 30, 1999 of
$1.1 million and reduced  professional  service  costs of $1.0 related to a 1998
consulting  project by The Boston Consulting Group.  These decreases in expenses
were offset by increased marketing and public relations expenses of $0.1 million
and increased  costs of being a public  company,  including legal costs, of $0.3
million  during the three months ended  September 30, 1999 compared to the three
months ended September 30, 1998.

DEPRECIATION AND  AMORTIZATION  EXPENSE  Depreciation  and amortization  expense
increased $2.6 million from $0.6 million for the nine months ended September 30,
1998 to $3.2 million for the nine months ended September 30, 1999, and increased
$1.3 million from $0.2 million for the three months ended  September 30, 1998 to
$1.5  million for the three  months ended  September  30, 1999.  The increase in
depreciation  is  primarily  due to the  purchase  of  commercial  manufacturing
equipment for the Company's Sweetheart facility.

RELATED PARTY PATENT EXPENSES Legal fees reimbursed to EKI under the Amended and
Restated  Agreement for  Allocation of Patent Costs with EKI increased  $377,381
from  $118,125 for the nine months ended  September 30, 1998 to $495,506 for the
nine months ended  September 30, 1999,  and increased  $134,462 from $33,024 for
the three months ended September 30, 1998 to $167,486 for the three months ended
September  30,  1999.  These  increases  were  primarily  a result of  increased
domestic and international patent activity.

INTEREST INCOME Interest income decreased $0.8 million from $3.6 million for the
nine months ended  September  30, 1998 to $2.8 million for the nine months ended
September 30, 1999,  and decreased  $1.0 million from $1.7 million for the three
months  ended  September  30, 1998 to $0.7  million for the three  months  ended
September 30, 1999. These decreases are primarily due to a declining  balance of
funds available to be invested in interest bearing securities.  These funds were
expended   primarily  for  construction  and  equipment  costs  related  to  the
Sweetheart  facility,   continued  research  and  development  and  general  and
administrative activities.

INTEREST EXPENSE  Interest  expense  decreased from $1.1 million to zero for the
nine months  ended  September  30,  1999  compared  with the nine  months  ended
September 30, 1998. Following the initial public offering,  the interest-bearing
debt was repaid.

LIQUIDITY AND CAPITAL RESOURCES AT SEPTEMBER 30, 1999

In connection with the Company's  initial public offering on March 27, 1998, the
Company issued  10,526,316 shares of its common stock, $.01 par value, for which
it received net proceeds of  approximately  $206  million.  The Company has used
$162.8 million of the net proceeds  through  September 30, 1999. As of September
30, 1999 the Company had cash totaling  approximately  $51.3  million.  Net cash
used in operations was $29.9 million and $36.8 million for the nine months ended
September 30, 1999 and 1998, respectively. Net cash used in investing activities
was $8.9 million and $31.8 million for the nine months ended  September 30, 1999
and 1998,  respectively.  Other uses of the  initial  public  offering  proceeds
include the repayment of indebtedness,  payment of outstanding payables, and the
purchase of equipment to facilitate the  development of  manufacturing  capacity
for EARTHSHELL Products.

<PAGE>

The Company has incurred greater than anticipated  costs on its first commercial
manufacturing  facility at Sweetheart and has incurred costs associated with the
development of its next generation  manufacturing systems.  During the course of
the  development of the Sweetheart  manufacturing  lines,  the Company created a
core in-house  competence in manufacturing  engineering and design.  At the same
time  EarthShell's  related party,  EKI,  expanded its workforce to increase its
capabilities  in basic  material  science and applied  materials  engineering to
support the EarthShell  commercialization  effort.  These  activities  have been
instrumental  in  providing  solutions  to first  time  manufacturing  issues at
Sweetheart  as well as  assisting  in the  process  re-design  and  location  of
suitable  equipment vendors for next generation  manufacturing  systems.  Having
reached  this stage in its  development,  the  Company  believes  it is now in a
position  to better  leverage  relationships  with  vendors  and  joint  venture
partners going forward.

In view of the fact that the commercialization  effort is not yet complete,  the
Company is moving aggressively to reduce its fundamental  operating expense base
by eliminating  those functions and related  expenses not directly  necessary to
complete the  commercialization  at Sweetheart or next generation  manufacturing
development.  Similarly  the Company is reducing  its  reliance on EKI and other
outside  consultants.  Most of the planned cost  reduction  initiatives  will be
completed by year-end, resulting in a reduced cash burn rate entering 2000. With
the planned  reductions in scope of activities and related  operating  expenses,
the  Company  believes  it  will  have  enough  cash  to  complete  the  initial
commercialization  of the manufacturing  lines at Sweetheart and demonstrate the
first of the next generation pilot lines.

The Company intends to seek third party  financing  during the next 12 months to
ensure that it will meet its operating and working capital needs and to initiate
design and development of its next  manufacturing  facilities at the appropriate
time. The Company believes that efforts to obtain  additional  financing will be
successful based on initial discussions with several financial institutions. The
Company has no  commitments  for any additional  financing,  and there can be no
assurance that any such  commitments  can be obtained on favorable  terms, if at
all. If the Company is unable to obtain additional  financing,  the Company will
be unable to fund its operations.

YEAR 2000 COMPLIANCE

The  Company is  reviewing  its  business  operations  to  minimize  the risk of
potential  disruption  from the Year 2000  issue.  This  problem  is a result of
computer  programs  having been written  using two digits,  rather than four, to
define the applicable  year. Any  information  systems that have  time-sensitive
software  may  recognize a date using "00" as the year 1900 rather than the year
2000, which could result in  miscalculations  and system  failures.  The problem
also extends to many non-information  technology systems; that is, operating and
control  systems that rely on embedded  chip  systems.  For the purposes of this
discussion,  "Year 2000 ready " means that the  computer  hardware,  software or
device in question will function in 2000 without  modification  or adjustment or
will function in 2000 with a one-time manual adjustment.  However,  there can be
no assurance  that any such Year 2000  compatible  hardware,  software or device
will  function  properly  when  interacting  with any Year  2000  non-compatible
hardware, software or device.

The  Company  does  not rely on any  internally  developed  software  to run its
systems. The Company has received documentation from its major vendors asserting
that  equipment and software in use for its Sweetheart  operations,  accounting,
payroll  and  phone  systems  is Year  2000  ready.  Additionally,  the  Company
contractually requires that manufacturing  equipment suppliers deliver equipment
that is Year 2000 ready.

<PAGE>

Based on documented vendor assertions and Company contractual requirements,  the
Company  believes  that  the  cost  of  completing  any  internal  modifications
necessary to become Year 2000 ready will not be material.  The Company has spent
less than  $100,000 to date to become Year 2000 ready since major  purchases for
hardware,  software  and  devices  were  deemed  to be Year  2000  ready  by the
Company's  vendors.  The Company has not formally tested each vendor's assertion
and plans to do this testing for its major systems,  consisting primarily of the
manufacturing control system at Sweetheart, before the end of 1999. There can be
no assurances  that each vendor's claim to be Year 2000 ready will ultimately be
true and the Company is unable to  estimate  the cost to become Year 2000 ready,
if a vendor's assertion proves to be incorrect.

The  failure  to  correct  a  material  Year  2000  problem  could  result in an
interruption in or failure of certain normal  business  activities or operations
of the  Company  including  the  ability to  produce  and  introduce  EARTHSHELL
Products to the market.  Such failures  could have a material  adverse effect on
the Company including  unanticipated  effects on cash flow. The Company believes
that  both  its  major  information   technology  systems  and   non-information
technology systems are Year 2000 ready.

The  Company  believes  that the areas that  present  the  greatest  risk to the
Company  are  (i)  disruption  of  the  Company's  business  due  to  Year  2000
non-compatibility  of  one of  its  critical  business  systems  (primarily  the
manufacturing  control system at Sweetheart) and (ii) disruption of the business
of certain of its significant customers and vendors due to their non-compliance.
Whether  disruption of a customer's or vendor's  business due to  non-compliance
will have a  material  adverse  effect on the  Company  will  depend on  several
factors including the nature and duration of the disruption, the significance of
the  customer  or  vendor  and,  in the case of  vendors,  the  availability  of
alternate sources for the vendor's products.

The Company does not currently have a contingency  plan, but is considering  the
development of such a plan to address Year 2000 non-compliance issues.

Readers are cautioned  that the preceding  discussion  contains  forward-looking
statements and should be read in conjunction with the "Forward-Looking Statement
Notice"  appearing at the beginning of "Management's  Discussion and Analysis of
Financial  Condition and Results of Operations."  Expectations about future Year
2000-related  costs and the  progress  of the  Company's  Year 2000  efforts are
subject to various  uncertainties  that could cause the actual results to differ
materially from the Company's  expectations,  including:  (i) the success of the
Company in  identifying  hardware,  software  and devices that are not Year 2000
ready;  (ii)  the  nature  and  amount  of  remediation  required  to make  them
compatible;  (iii)  the  availability,  rate and  amount  or  related  labor and
consulting costs and (iv) the success of the Company's  significant  vendors and
customers in addressing their Year 2000 issues.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable


<PAGE>



PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

On August 2, 1999,  Novamont  S.p.A.,  an Italian  company  specializing  in the
manufacture of a biodegradable plastic resin and products,  filed a complaint in
the United States District Court for the Northern  District of Illinois alleging
infringement  of three  patents.  The Company has analyzed all three patents and
believes it has strong  meritorious  defenses and plans to vigorously defend the
lawsuit.

ITEM 2.   USE OF PROCEEDS

In connection  with the Company's  initial public  offering,  the Company issued
10,526,316  shares of its common stock,  $.01 par value (the "IPO  Shares"),  on
March 27, 1998. The IPO Shares were offered and sold by the  underwriters  at an
initial  public  offering  price of $21.00 per  share,  resulting  in  aggregate
offering  proceeds of  $221,052,636.  In  addition,  selling  stockholders  sold
2,673,684 shares of common stock. Net offering proceeds were $205,873,995.

At December  31,  1998,  the company  had applied  $114.6  million of the $205.9
million in net offering proceeds.  For the nine months ended September 30, 1999,
the Company applied an additional $48.2 million of the net offering proceeds. Of
this amount, $14.3 million was used for the purchase of manufacturing equipment,
$10.2 million was used for  construction  and  engineering  costs related to the
manufacturing  plant,  $2.1 million was used for the demonstration and prototype
facility, and $21.6 million for other operating expenses.

The  cost  of  designing,   installing   and   debugging  the  Company's   first
manufacturing lines at Sweetheart will exceed the Company's initial estimates as
discussed in "Management's  Discussion and Analysis of Financial  Conditions and
Results  of  Operations."  As a result,  the  Company  intends to prove its next
generation  manufacturing  systems in  advance of a next tier plant  investment.
Based partly on this, the Company has refined its business  strategy and intends
to utilize joint  ventures in which the joint  venture  partner  generally  will
share equally the cost of turnkey  equipment lines and will assume equally risks
associated  with  failures of the equipment  lines to meet  targeted  throughput
efficiencies.  The Company believes using joint ventures in which both venturers
generally  assume equal  responsibility  and risk,  as well as share equally any
upside opportunities,  will enable the Company to share the product introduction
and capital  risk with its  partners  while  maintaining  a favorable  return on
investment to the Company.  As a result of this business  model change and other
changed  circumstances,  the actual use of initial public offering proceeds will
vary from the anticipated use of proceeds described in the Company's Prospectus.
For  example,  the  Company  plans now to use some of the $7.4  million  initial
public  offering  proceeds  that  were  shown  in the  Company's  Prospectus  as
anticipated to be used for patent  enforcement and protection in the development
of its next generation manufacturing systems and to fund operations.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

<PAGE>

ITEM 5.  OTHER INFORMATION

As previously  reported,  D. Scott  Houston,  Senior Vice President of Corporate
Planning,  resumed the position of Chief Financial  Officer effective October 8,
1999.  Mr.  Houston  replaces  William  Spengler  who  resigned to pursue  other
interests.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits
         27.1     Financial Data Schedule

(b)      Reports on Form 8-K

No  reports  on Form 8-K were  filed by  EarthShell  during  the  quarter  ended
September 30, 1999.




Signature


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                            EarthShell Corporation


Date: November 15, 1999                     By:____________________
                                            D. Scott Houston
                                            Chief Financial Officer


                                            (Principal Financial and Accounting
                                            Officer and Duly Authorized Officer)