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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-K

                                   (MARK ONE)

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

                                       OR

|_|   TRANSITION REPORT PURSUANT TO 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                            (I.R.S. Employer
of incorporation or organization)                         Identification No.)


  6740 CORTONA DRIVE, SANTA BARBARA, CALIFORNIA                 93117
     (Address of principal executive office)                  (Zip Code)

                                 (805) 571-8232
              (Registrant's telephone number, including area code)

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

      Securities registered pursuant to Section 12 (b) of the Act:

                                      NONE

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

          Securities registered pursuant to Section 12 (g) of the Act:
                           Common Stock $.01 par value
                              (Title of each class)

      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 |_|

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes |X|


<PAGE>


      Indicate by checkmark  whether the registrant is an accelerated  filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No |_|

      The aggregate market value of the voting stock held by  non-affiliates  of
the Registrant as of June 30, 2003 was $42,344,627.

      The number of shares  outstanding of the  Registrant's  Common Stock as of
March 31, 2004 was 14,128,966.

                       DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Proxy  Statement for the  Registrant's  Annual  Meeting of
Stockholders  to be held on June 28, 2004 are  incorporated by reference in Part
III of this Annual Report on Form 10-K.

      As used  herein,  the terms  "EarthShell"  and the  "Company"  shall  mean
EarthShell  Corporation  unless the  context  otherwise  indicates  and the term
"Proxy  Statement"  shall mean the Proxy Statement for the Company's 2004 Annual
Meeting of Stockholders to be held on June 28, 2004.

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<PAGE>

<TABLE>
<CAPTION>
                                                     ANNUAL REPORT ON FORM 10-K
                                             FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003


                                                               PART I

<S>                                                                                                                 <C>
ITEM 1.       BUSINESS...........................................................................................     1

ITEM 2.       PROPERTIES.........................................................................................    10

ITEM 3.       LEGAL PROCEEDINGS..................................................................................    10

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................    10


                                                               PART II

ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..............................    11

ITEM 6.       SELECTED FINANCIAL DATA............................................................................    11

ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............    12

ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........................................    20

ITEM 8.       CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................................    20

ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...............    20

ITEM 9A.      CONTROLS AND PROCEDURES............................................................................    21


                                                              PART III

ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................................................    21

ITEM 11.      EXECUTIVE COMPENSATION.............................................................................    21

ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.....    21

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................................................    21

ITEM 14.      PRINCIPAL ACCOUNTANT FEES AND SERVICES.............................................................    21


                                                               PART IV

ITEM 15.      EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K.....................    22
</TABLE>

<PAGE>


                                     PART I

ITEM 1.  BUSINESS

                                   THE COMPANY

      EarthShell(R) Corporation ("EarthShell" or the "Company") was organized in
November 1992 as a development stage company engaged in the commercialization of
a proprietary  composite material  technology,  designed with the environment in
mind, for the manufacture of disposable packaging for the foodservice  industry.
Current  and future  products  include  hinged-lid  containers,  plates,  bowls,
foodservice wraps, cups, and cutlery ("EarthShell Packaging").

      The  EarthShell  composite  material  is  primarily  made from  abundantly
available  and low cost  natural  raw  materials  such as  limestone  and potato
starch. The Company believes that foodservice  disposables made of this material
and offering certain  environmental  benefits,  will have comparable or superior
performance  characteristics,  such as greater strength and rigidity, and can be
commercially  produced and sold at prices that are  competitive  with comparable
conventional paper and plastic foodservice disposables.

      The Company's  objective is to establish  EarthShell  Packaging(R)  as the
preferred  disposable packaging material for the foodservice industry throughout
the  world  based  on  comparable  performance,  environmental  superiority  and
competitive pricing. EarthShell's approach for achieving this objective has been
to:  (i)  license  the   EarthShell   technology   to   strategically   selected
manufacturing or operating partners to manufacture,  market, distribute and sell
EarthShell Packaging;  (ii) attain customer acceptance and demand for EarthShell
Packaging  through  key  market  leaders  and  environmental  groups;  and (iii)
demonstrate the  manufacturability and improved economics with initial strategic
partners.  The Company  believes that this approach  aligns key market  segments
with select industry partners, minimizes potential direct competition from these
producers,   enables   effective  brand   management,   captures  the  value  of
manufacturing  process  improvements and creates potential for continuing income
streams beyond the life of the patents.

                                INDUSTRY OVERVIEW

      Based on industry  studies,  the Company believes that the annual spending
on foodservice disposable packaging is approximately $12 billion in the U.S. and
over $28 billion  globally.  According to industry  studies of the U.S.  market,
approximately 54% of the total foodservice  disposable packaging is purchased by
quick-service  restaurants  and 46% by  other  institutions  such as  hospitals,
stadiums, airlines, schools, restaurants (other than quick-service restaurants),
and retail  stores.  The Company  believes that of the  foodservice  disposables
purchased  in the U.S.  by  quick-service  restaurants  and other  institutions,
approximately 45% are made of coated or plastic laminated paper and 55% are made
of non-paper materials such as plastic,  polystyrene or foil. A breakdown of the
various  components  of the global  market  for  foodservice  disposables  is as
follows:


          POTENTIAL GLOBAL MARKET FOR FOODSERVICE DISPOSABLE PACKAGING

($ IN MILLIONS)                                              MARKET SIZE
                                                   -----------------------------
                                                      $                     %
                                                   -----------------------------
COMMERCIAL PRODUCTS

Plates, Bowls .......................              $ 4,500                   16%
Hinged-Lid Containers ...............                1,750                    6

COMMERCIAL PROTOTYPES

Wraps ...............................                2,000                    7
Hot Cups ............................                3,000                   11

CONCEPT PROTOTYPES

Cold Cups ...........................                5,500                   20
Containers, Trays ...................                4,000                   14
Straws, Cup Lids ....................                3,000                   11
Pizza Boxes .........................                2,250                    8
Cutlery .............................                2,000                    7
                                                   -------              -------

TOTAL ...............................              $28,000                  100%
                                                   =======              =======

                                       1
<PAGE>

      In addition to the U.S., the market  opportunity for EarthShell  Packaging
is  particularly   strong  in  Europe  and  parts  of  Asia  due  to  heightened
environmental  concerns and  government  regulations.  In Europe,  environmental
legislation,  such as the so-called "Green Dot" laws have created an opportunity
for  environmentally  preferable  products.  Meanwhile,  new regulations in many
Asian countries have mandated a reduction in polystyrene  production stimulating
an increased  demand for  foodservice  packaging  manufactured  from  acceptable
alternative  materials.  Furthermore,  improvements  in the Asian  and  European
composting  and recycling  infrastructure  are expected to facilitate the use of
environmentally preferable products.

                                    PRODUCTS

      EarthShell  Packaging is based on a patented composite material technology
licensed on an exclusive  worldwide basis from E. Khashoggi  Industries LLC, the
largest  stockholder  of the  Company,  and, on a limited  exclusive,  worldwide
basis, from its wholly owned  subsidiaries  (collectively  "EKI"). The Company's
licensed field of use of the technology is for the development,  manufacture and
sale of disposable packaging for use in the foodservice industry and for certain
specific food packaging applications.

      Traditional foodservice  disposables,  wraps, and paperboard are currently
manufactured  from a variety of  materials,  including  paper and  plastic.  The
Company  believes  that none of these  materials  fully  addresses  three of the
principal challenges facing the foodservice industry; namely performance,  cost,
and  environmental  impact.  The  Company  believes  that  EarthShell  Packaging
addresses  the  combination  of  these   challenges   better  than   traditional
alternatives  and therefore  will be able to achieve a significant  share of the
foodservice disposable packaging market.

      EarthShell  Packaging can be categorized  into four types:  foam laminate,
flexible wraps,  injection-molded  articles and paperboard substitutes.  Through
2003, the  EarthShell  technology has been used to produce  plates,  bowls,  and
hinged-lid  containers  intended  for  use by all  segments  of the  foodservice
disposable  packaging  market,  including  quick-service  restaurants,  food and
facilities management companies, the U.S. government, universities/colleges, and
retail  operations.  These products were developed using detailed  environmental
assessments  and carefully  selected raw materials and processes to minimize the
harmful  impact on the  environment  without  sacrificing  competitive  price or
performance.

Environment

      EarthShell's  foodservice  disposable  products were  developed  over many
years  based on  environmental  models to reduce the  environmental  concerns of
foodservice disposable packaging through the careful selection of raw materials,
manufacturing processes and suppliers. For example, EarthShell Packaging reduces
risk to wildlife  compared to polystyrene foam packaging  because it biodegrades
when exposed to moisture in nature and can be composted in a commercial facility
(where available) or even in consumers' backyards.

Performance

        The Company believes that it has demonstrated  that its foam laminate
products, including hinged-lid containers,  plates and bowls meet the critical
performance requirements  of the  marketplace,  including  strength,  graphic
capabilities, insulation,   shipping,   handling  and  packaging.  The  Company
believes  its foodservice   wraps  also  meet  critical   performance
requirements   of  the marketplace,    including   flexibility,   folding
characteristics,    graphic capabilities, insulation, shipping, handling and
packaging. Finally, the Company believes  that its  paperboard  substitute
product,  which is  currently  under development,  may be manufactured using the
same basic raw materials as the foam laminate  disposables and wraps and will be
readily  accepted by the market when available.



                                       2
<PAGE>


      Some  examples  of  where  EarthShell   Packaging(R)  plates,  bowls,  and
hinged-lid containers have been used include:


Quick-Service Restaurants              McDonald's Corporation ("McDonalds")

Facilities Management                  Sodexho
                                       Bon Appetit
                                       Aramark

Government                             U.S. Department of the Interior
                                       U.S. Department of Defense
                                       Environmental Protection Agency
                                       General Services Administration

Universities                           University of California, Davis
                                       Hampshire College
                                       Allegheny College

Retail                                 Wal-Mart Stores
                                       Green Earth Office Supply

      In addition to rigid packaging  products,  the Company will be introducing
second  generation  foodservice  wraps  through  its  licensee,  Hood  Packaging
Corporation, and is preparing to sell these products on an introductory basis to
key customers in test markets.

Cost

      Since  EarthShell   Packaging(R)  is  uniquely  engineered  from  commonly
available,  low cost natural raw  materials  such as limestone  and starch,  the
Company believes  EarthShell  products can be manufactured  cost-effectively  at
commercial levels.

Product Recognition

           To date,  the Company  has won the  following  awards for  EarthShell
Packaging:

<TABLE>
<CAPTION>
                     AWARD/RECOGNITION                         DATE                         ORGANIZATIONS
------------------------------------------------------------ --------- ---------------------------------------------------------
<S>                                                          <C>       <C>
Closing the Circle Award--Won by EarthShell's demonstration     2002    White House Task Force on Waste Prevention and Recycling
            partner, the U.S. Dept. of the Interior

      Best of the Best Award--1st Place--foam packaging         2002              Foodservice and Packaging Institute

    DuPont Award for Innovation in Food Processing and          2002       DuPont, National Food Processors Association, and
                           Packaging                                       Campden & Chorleywood Food Research Association

                    Green Seal Certification                    2000                           Green Seal
                    (hinged-lid container)

            Innovation in Real Materials Award                  1998               Innovation in Materials Conference
</TABLE>



                                       3
<PAGE>



                                BUSINESS STRATEGY

      The  Company's  objective  is to  establish  EarthShell  Packaging  as the
preferred  foodservice  disposable  packaging in the foodservice  industry.  The
Company's strategies to achieve this objective are to:

      o     Develop products that deliver comparable or greater  performance and
            cost-competitiveness  with  environmental  advantages as compared to
            traditional packaging alternatives

      o     Demonstrate  customer  demand  as well as  product  performance  and
            positioning

      o     Prove manufacturability and economics of EarthShell Packaging

      o     License the EarthShell technology to leading manufacturing  partners
            to manufacture, market, distribute and sell EarthShell Packaging

      o     Expand the  business by  replicating  the  EarthShell  model  across
            multiple operating partners to increase capacity

      o     Educate the market and build awareness for the EarthShell brand

      o     Defend a portfolio of patents relating to the EarthShell technology

      Creating  Consumer Demand for EarthShell  Packaging:  The Company believes
that  the  use  of  EarthShell  Packaging  by  key  foodservice  operators  will
accelerate  the  acceptance  of the  products by other  users.  To this end, the
Company has worked  with major  purchasers  of  foodservice  disposables  in the
development  and testing of production  order to  demonstrate  superior  product
performance,  highlight  cost-benefit and build demand for EarthShell Packaging.
The Company also expects that the EarthShell Packaging brand name will appear on
EarthShell products.

      Licensing Existing Manufacturers of Foodservice Disposables: The Company's
strategy  includes  licensing the EarthShell  technology to, or joint  venturing
with,  strategically  selected  manufacturing  or  operating  partners  for  the
manufacture, marketing, distribution and sale of EarthShell Packaging. The
Company expects that licensing the  technology  to companies such as  Sweetheart
Cup Company  ("Sweetheart"), recently acquired by The Solo Cup Company ("Solo"),
will enable the Company to take  advantage  of  their  manufacturing   expertise
and  existing  sales  and distribution  networks.  This approach should also
minimize the need to hire sales and marketing  personnel.  The  Company is
actively  seeking  additional  qualified licensees  and will provide each of its
licensees  with  technical  and ongoing support to facilitate  the  application
of the  EarthShell  technology,  further refine  manufacturing  processes and
reduce  production  costs. The Company will monitor product quality at licensee
operations.

      Developing  International Markets: The Company's international strategy is
to license the technology to strategic partners in major international  markets.
Initial markets with strong interest in the environmental  advantages offered by
EarthShell include Europe and the Far East.

                            LICENSING BUSINESS MODEL

      The licensing  model enables the Company to  concentrate on the continuing
development  of quality food service  packaging  products with reduced impact on
the  environment.  This approach  contemplates  that  manufacturing,  marketing,
distribution and sale of EarthShell  Packaging will be the responsibility of the
Company's  manufacturing  licensees.  EarthShell  believes  that  its  licensing
business model will enable it to generate a sustainable royalty revenue stream.

      Beyond the revenue opportunities, the Company believes the licensing model
has positive  implications for the Company's cost structure.  As the Company has
moved to the product  commercialization  phase and has reduced its investment in
demonstration manufacturing operations, it has been able to significantly reduce
monthly  operating  costs and position itself to take advantage of the operating
leverage provided by the licensing model.

      EarthShell  Packaging  will  be  manufactured  by the  Company's  licensed
manufacturing partners.  Given the low cost of the raw materials required, these
strategic  manufacturing  partners should have a financial  incentive to produce
EarthShell Packaging rather than comparable  traditional  paperboard/polystyrene
products even after a royalty payment to EarthShell.


                                       4
<PAGE>



      While the  Company  believes  it will be  successful  in  developing  cost
competitive products with its partners, delays in developing such products could
adversely impact the introduction and market acceptance of EarthShell  Packaging
and could have an adverse effect on the Company's business,  financial condition
and results of operations.

                             STRATEGIC RELATIONSHIPS

      The Company  believes that it has  demonstrated  that  EarthShell  plates,
bowls  and  hinged-lid  containers  are  commercially  competitive  in  terms of
performance  and that  there is a customer  base that is willing to buy them.  A
critical  task  for  2004  is  the   installation  and  start-up  of  commercial
manufacturing  capacity to supply  EarthShell  products to the marketplace.  The
Company's  licensees  are  committing  capital to purchase  equipment to provide
EarthShell  Packaging  products or otherwise develop the EarthShell  products or
production  capacity.  For example,  Sweetheart has ordered  initial  commercial
turnkey  manufacturing  equipment from Detroit Tool & Engineering  ("DTE").  The
Company intends to proliferate  the use of EarthShell  Packaging in the U.S. and
international  markets through  agreements with  additional  licensed  partners.
Current strategic partners include Solo/Sweetheart and Hood Packaging.

      In February 2004, the Company entered into a definitive  license agreement
with  Hood   Packaging   ("Hood")   under  which  Hood   became  the   exclusive
manufacturer/distributor of EarthShell food wraps for the North American market,
subject to maintaining certain monthly and annual performance  targets.  Hood is
producing initial  quantities of the  second-generation  EarthShell food service
wrap and is preparing to introduce these wraps into selected markets.

      The Company  entered into an  agreement  with  Sweetheart  in late 1997 to
develop and operate  manufacturing  lines at Sweetheart's  Owings Mills facility
for  the   production  of  hinged-lid   containers  for  McDonald's  Big  Mac(R)
sandwiches.  For several years,  the Company worked closely with  Sweetheart and
McDonald's to create an acceptable product design and meet required  performance
standards.  During that period, over 20 million EarthShell  Packaging hinged-lid
containers  for Big Mac  sandwiches  were used on a trial basis.  As a result of
these efforts,  the EarthShell  hinged-lid  container became an approved product
for use in the McDonald's system. At this time,  EarthShell Packaging hinged-lid
containers  are no longer being produced for  McDonald's  while  Solo/Sweetheart
determines its plans for future production capacity (see Manufacturing).

      In  October  2002,  as  a  result  of  the   demonstration   of  a  viable
manufacturing  process  for  plates,  bowls and  hinged-lid  containers  and the
commitment to supply turnkey manufacturing equipment with performance guarantees
from qualified  equipment  suppliers,  Sweetheart and the Company entered into a
new Sublicense & Operating Agreement. This agreement was further amended in July
of 2003. The agreement gives Solo/Sweetheart a priority right to the U.S. retail
market  segment,  provided  they build and operate  manufacturing  capacity at a
prescribed  level. In December of 2002,  Sweetheart  issued its initial purchase
orders for new equipment to  manufacture  plates and bowls but revised its order
late in 2003.  The first of this new  equipment is  currently  planned to become
available  by  mid-to-late  2004.  DTE  has  built  four  plate  and  four  bowl
manufacturing  modules and has  demonstrated to EarthShell's  satisfaction  that
this  equipment is fully capable of  continuous  commercial  service.  Delivery,
installation  and start-up of this  equipment is expected to occur in the second
half of 2004.

      In July 2002, the Company and DuPont signed a strategic Alliance Agreement
to develop  environmentally  preferred packaging and systems. The Company worked
with DuPont to explore and develop potential applications for DuPont's Biomax(R)
biopolymer  resins as a component  of  EarthShell  Packaging.  DuPont  worked on
commercializing  EarthShell  foodservice wraps using their proprietary composite
biopolymer blends to initial select customers,  but discontinued the manufacture
and sale of this product in 2003.

      In October 2001, the Company entered into license  agreements with GEP and
GP.  These  two  entities,   formed  specifically  to  commercialize  EarthShell
Packaging in the U.S. and Asia, are  subsidiaries of Dominance,  Inc., part of a
Malaysian group of companies with over 50 years of manufacturing experience. GEP
planned  to  produce  plates  and bowls for U.S.  markets,  while GP  planned to
produce noodle bowls for Asian markets. In mid-2003,  the Company and GEP and GP
ended these licensing agreements.

      In May 1999,  the Company  signed an  agreement  with  Huhtamaki  creating
Polarcup Earthshell ApS, a joint venture to commercialize  EarthShell  Packaging
throughout  western Europe,  Australia and New Zealand.  In cooperation with the
joint  venture,  EarthShell  designed and  commissioned  the  construction  of a
commercial  line for the  manufacture  of hinged-lid  containers  in Europe.  In
mid-2002,  the joint venture assumed  responsibility  for the  installation  and
start-up of the manufacturing line at Huhtamaki's Goettingen,  Germany facility.
In December of 2003,  the Company and  Huhtamaki  concluded  their joint venture
structure.  Huhtamaki  has  expressed  an interest  in becoming a  non-exclusive
licensee on more standard terms and conditions.


                                       5
<PAGE>



      The Company has garnered  support and achieved  commercial  validation for
EarthShell Packaging from key environmental  groups and foodservice  purchasers.
The Company has also devoted resources to the optimization of product design and
the development of cost-effective  manufacturing  processes. In cooperation with
existing  manufacturing   partners,  the  Company  financed  and  built  initial
commercial  demonstration  production  capacity and sold limited  quantities  of
plates,   bowls,   and   hinged-lid   containers.    Having   demonstrated   the
manufacturability  of  EarthShell  foam  products,  the  Company  has now ceased
commercial  demonstration  production activities and is relying on its equipment
manufacturing    partners   to   demonstrate   and   guarantee   the   long-term
manufacturability of EarthShell Packaging(R).

      EarthShell  believes it has a high quality and cost-effective  product and
the  profitable  business  model  necessary to take  advantage of a  significant
market opportunity.  With the introduction of commercial production capacity and
expected  sales of its  products in 2004,  EarthShell  expects  its  products to
continue to gain  acceptance  in the  marketplace  and  believes it is poised to
support capacity  expansion and market  penetration by its licensees  leading to
commencement and growth of its own royalty revenue.

                                  MANUFACTURING

      The EarthShell  manufacturing  process for foam laminate products consists
of blending the component  ingredients of a proprietary  composite material in a
mixer,  depositing  the mixture  into heated  cavity  molds,  heating the molded
mixture for  approximately  one minute,  removing the product,  trimming  excess
material,  and applying  functional  coatings with desired graphics.  EarthShell
Packaging  uses commonly  available  natural raw  materials,  such as limestone,
potato or corn starch,  as well as natural fiber and  functional  coatings.  The
Company believes that these raw materials are currently  available from multiple
existing suppliers in quantities sufficient to satisfy projected demand.

      Over the past several  years,  the Company has been working to demonstrate
the commercial viability of its manufacturing  processes to enable its operating
partners  to  compete  effectively  with  conventional   disposable  foodservice
packaging and to transfer the  operational and financial  responsibility  of its
production  lines to its  operating  partners.  To date the Company has produced
limited  amounts of  EarthShell  Packaging  at  production  volumes that are low
relative to the intended and  necessary  capacities of the  manufacturing  lines
that are required to achieve efficiencies and cost effectiveness.

      The Company  entered into an Operating  Agreement with  Sweetheart in late
1997 whereby the Company financed and built production  capacity at Sweetheart's
Owings Mills, Maryland manufacturing facility to demonstrate that its hinged-lid
containers could be produced commercially for McDonald's.  For several years the
Company worked closely with McDonald's and created an acceptable  product design
which met required performance standards.  After a lengthy commercial validation
process,  during which McDonald's  purchased and used over 20 million EarthShell
Packaging hinged-lid  containers in select restaurants,  McDonald's approved the
product  design for  national  use in March  2001.  After an attempt to make the
initial  equipment  at  Owings  Mills  work  at  a  commercially  viable  level,
Sweetheart  and EarthShell  decided to invite  qualified  equipment  builders to
implement the EarthShell technology on a guaranteed turnkey basis and production
at the Owings  Mills  facility  ceased in 2002.  As of December  31,  2002,  the
Company's Owings Mills  manufacturing lines were carried on its balance sheet at
a net book value of zero.

      In May 2002,  the Company  announced  that it had licensed  and  certified
various  equipment  builders  to  supply  turnkey  manufacturing   equipment  to
EarthShell licensees. These equipment builders offer performance guarantees. The
Company  believes  that  this  development  will  facilitate  the  expansion  of
production capacity for foam laminate plates,  bowls,  hinged-lid containers and
cups. Detroit Tool and Engineering ("DTE") was the first certified  manufacturer
to provide  performance  guarantees  for  turnkey  manufacturing  modules and is
building the first  commercial  machinery  for  Solo/Sweetheart  for delivery in
mid-to-late  2004.  The  Company  believes  that the  combined  capacity  of its
licensed  equipment  vendors will be  sufficient  to meet the expected  licensee
demand for foam  laminate  production  manufacturing  lines for the  foreseeable
future.

      Although the manufacturing  processes  currently being used to manufacture
EarthShell Packaging are based on generally available methods and equipment,  it
has taken much longer and has cost much more than  anticipated  to integrate the
machinery in an automated fashion and to refine the manufacturing  processes and
equipment to operate at commercially viable levels.


                                       6
<PAGE>



      The Company also manufactured  EarthShell  Packaging plates and bowls at a
pilot facility in Goleta,  California  initially  developed in cooperation  with
GEP.  Plates  and bowls  from  this  facility  were  used to  supply  EarthShell
customers such as the U.S. government and Wal-Mart until early to mid-2003, when
the demand from these  customers  was  temporarily  met with output from the DTE
equipment.

                   PATENTS, PROPRIETARY RIGHTS AND TRADEMARKS

      The  technology  that the  Company  licenses  from EKI is the  subject  of
numerous issued and pending patents in the U.S. and internationally. The Company
believes the patents and pending patent  applications  provide broad  protection
covering  foam  laminate  EarthShell  Packaging,  material  composition  and the
manufacturing  processes.  As of December  31,  2003,  EKI had over 130 U.S. and
international  patents  and has  pending  patent  applications  relating  to the
compositions,  products and manufacturing  processes used to produce  EarthShell
Packaging(R) food and beverage containers. Patents currently issued do not begin
to expire until 2012 and provide some protection until 2020. Pending patents, if
granted,  would  extend  protection  through  2022.  Sixteen of the issued  U.S.
patents and five of the pending U.S. patents relate  specifically to molded food
and  beverage  containers  manufactured  from the new  composite  material,  the
formulation  of  the  new  composite  material  used  in  virtually  all  of the
EarthShell  Packaging  currently  under  development.  The  Company and EKI will
continue  to seek  domestic  and  international  patent  protection  for further
developments  in the technology and will  vigorously  enforce rights against any
person infringing on the technology.

      The Company owns the  EarthShell  trademark and certain other  trademarks,
and has been  licensed by EKI to use the  trademark  ALI-ITE  for the  composite
material.

                      RELATIONSHIP WITH AND RELIANCE ON EKI

      The Company has an exclusive,  worldwide,  royalty-free license to use and
license  the EKI  technology  to  manufacture  and sell  disposable,  single-use
containers for packaging or serving food or beverages  intended for  consumption
within a short period of time (less than 24 hours).

      On July 29, 2002, the Company entered into an amendment to its Amended and
Restated  License  Agreement  with EKI (the "License  Agreement")  expanding the
field of use for the  EarthShell  technology  to include  noodle  bowls used for
packaging  instant noodles,  a worldwide market that the Company estimates to be
approximately  $1 billion.  Because the noodle bowl  development  was made at no
cost to EarthShell and is an incremental  field of use,  EarthShell  will pay to
EKI 50% of any royalty or other consideration it receives in connection with the
sale of products within this particular field of use.

      In  addition,  on July 29,  2002 the  Company  entered  into a  License  &
Information Transfer Agreement with bio-tec Biologische Naturverpackungen GmbH &
Co. KG and bio-tec  Biologische  Naturverpackungen  Forschungs und  Entwicklungs
GmbH,  together known as "Biotec",  a wholly owned subsidiary of EKI, to utilize
the Biotec technology for foodservice applications, including the food wraps and
cutlery  used in  foodservice  applications  (the "Biotec  Agreement").  EKI had
previously  granted to the Company  priority  rights to license  certain product
applications  on an  exclusive  basis  from  Biotec  in  consideration  for  the
Company's payment of a $100,000 monthly licensing fee to Biotec. In addition, in
consideration of the monthly payment, Biotec agreed to render technical services
to the  Company  at  Biotec's  cost  plus 5%.  The  licensing  fee and  services
arrangements  were  continued  in the Biotec  Agreement.  Under the terms of the
Biotec  Agreement,  Biotec is entitled to receive 25% of any  royalties or other
consideration  that the Company receives in connection with the sale of products
utilizing the Biotec technology.

      During 2002,  and January 2003,  EKI made a series of loans to the Company
totaling  approximately  $5.8  million.  These loans were used to pay  operating
costs and  accrued  interest  at 7% or 10% per  annum.  In  connection  with the
issuance  and  sale  in  March  2003 of the  Company's  2%  secured  convertible
debentures  due in 2006  (the  "2006  Debentures")  to a group of  institutional
investors, EKI agreed to subordinate the repayment of these loans to the payment
in full of the Company's obligations under the 2006 Debentures. In addition, EKI
and Biotec agreed to subordinate certain payments referenced above to which they
were  otherwise  entitled under the License  Agreement and the Biotec  Agreement
(other  than their  respective  percentages  of any  royalties  received  by the
Company) to the satisfaction in full of the Company's obligations under the 2006
Debentures. They further agreed not to assert any claims against the Company for
breaches  of the  License  Agreement  or the Biotec  Agreement  (other  than the
assertion of certain equitable remedies to enjoin the Company from, for example,
selling  products  outside  its field of use) until  such time as the  Company's
obligations under the 2006 Debentures are satisfied in full. EKI and Biotec also
agreed to allow the Company to pledge its  interest in the License  Agreement to
secure  its  obligations  under  the 2006  Debentures,  and  certain  additional
concessions  were  made  by  EKI  and  Biotec  to  permit  the  Company  greater
flexibility  in selling its rights  under the License  Agreement  and the Biotec
Agreement to third parties in an insolvency context. These rights terminate upon
the  satisfaction  in full of the  obligations  under  the 2006  Debentures.  In
consideration  for its willingness to subordinate the payments and advances that
are owed to it,  the  Company  issued to EKI in March  2003 a warrant to acquire
83,333 shares of the Company's common stock at a price of $6.00 per share with a
ten year term.


                                       7
<PAGE>



      Under the terms of the License  Agreement  and the  Amended  and  Restated
Patent Agreement for the Allocation of Patent Costs between the Company and EKI,
any  patents  granted  in  connection  with the  EarthShell  technology  are the
property  of  EKI,  and  EKI may  obtain  a  benefit  therefrom,  including  the
utilization  and/or licensing of the patents and related  technology in a manner
or for uses unrelated to the license  granted to the Company in the  foodservice
disposables field of use.  Effective January 1, 2001,  EarthShell assumed direct
responsibility  to manage and  maintain  the  patent  portfolio  underlying  the
License Agreement with EKI and to pay directly all related costs.

      In connection with the issuance and sale of the 2006 Debentures, Mr. Essam
Khashoggi,  who controls EKI and is the beneficial owner of approximately 35% of
the Company's common stock, agreed for himself and on behalf of EKI, not to sell
any of the  Company's  shares for an 18 month period  concluding  in August 2004
(excluding  shares issuable to former EKI employees under existing option grants
and shares  pledged  under an  existing  security  agreement  with a third party
lender).

                                   COMPETITION

      Competition  among  food  and  beverage  container  manufacturers  in  the
foodservice industry is intense. Virtually all of these competitors have greater
financial and marketing  resources at their disposal than does the Company,  and
many have  established  supply,  production and distribution  relationships  and
channels.  Companies producing  competitive  products may reduce their prices or
engage  in  advertising  or  marketing   campaigns  designed  to  protect  their
respective market shares and impede market  acceptance of EarthShell  Packaging.
In  addition,  some  of the  Company's  licensees  and  joint  venture  partners
manufacture  paper,  plastic or foil packaging that may compete with  EarthShell
Packaging.

      Several  paper  and  plastic   disposable   packaging   manufacturers  and
converters  and others have made  efforts to  increase  the  recycling  of these
products.  Increased  recycling of paper and plastic products could lessen their
harmful  environmental impact, one major basis upon which the Company intends to
compete.  A number of companies  have  introduced  or are  attempting to develop
biodegradable  starch-based materials,  plastics, or other materials that may be
positioned as potential  environmentally superior packaging alternatives.  It is
expected that many existing packaging manufacturers may actively seek to develop
competitive  alternatives  to the Company's  products and  processes.  While the
Company believes its patents uniquely position it to incorporate a proportion of
low  cost,  inorganic  fillers  with  its  material,  which,  relative  to other
starch-based or specialty  polymers,  will result in lower material  costs,  the
development of competitive,  environmentally attractive,  disposable foodservice
packaging  could  render the  Company's  technology  obsolete  and could have an
adverse effect on the business, financial condition and results of operations of
the Company.

                              CERTAIN RISK FACTORS

      On March 8, 2004, the Company's  common stock was delisted from the Nasdaq
Smallcap Market because the Company's market  capitalization  failed to meet the
minimum  required  standard.  In  addition,  the Company  did not make  interest
payments  related to the 2006 Debentures as required on January 31, 2004.  These
actions  put the Company in  non-compliance  with its  covenants  under the 2006
Debentures.  Management is currently  negotiating with the debenture holders for
appropriate  relief or waiver of these covenants.  One of the debenture  holders
has notified  the Company in writing that they are in default and has  requested
that the Company  repurchase the entire  principal amount of the 2006 Debentures
that they hold at the price  specified in the debenture,  along with any accrued
and unpaid interest.  Because the Company can not assure that it will be able to
negotiate appropriate relief or a waiver of the applicable covenants, the entire
outstanding  principal  amount of the 2006  Debentures  has been  classified  as
a current liability as of December 31, 2003.


                                       8
<PAGE>



      The SEC adopted  regulations  which generally define a "penny stock" to be
any  non-Nasdaq  equity  security that has a market price of less than $5.00 per
share, subject to certain exceptions.  Based upon the price of EarthShell common
stock as  currently  traded,  EarthShell  common  stock is subject to Rule 15g-9
under the Exchange Act which imposes  additional sales practice  requirements on
broker-dealers which sell securities to persons other than established customers
and  "accredited   investors."  For   transactions   covered  by  this  rule,  a
broker-dealer  must make a special  suitability  determination for the purchaser
and have  received a purchaser's  written  consent to the  transaction  prior to
sale.  Consequently,  this rule may have a  negative  effect on the  ability  of
stockholders to sell common shares of the Company in the secondary market.

      Because  the Company is still in its  developmental  stage and has limited
operating  history,  it remains subject to the inherent  challenges and risks of
establishing  a  new  business  enterprise.   To  date,  production  volumes  of
EarthShell  Packaging  products have been low relative to intended and necessary
capacity of the manufacturing  lines. The success of future  operations  depends
upon the ability of our licensees to manufacture  products made with  EarthShell
Packaging in sufficient quantities so as to be commercially feasible and then to
distribute and sell those products at competitive costs. Consistent commercially
feasible  production volumes had not been achieved and assured  competitive cost
figures had not yet been proven as of December 31, 2003.

      As of December  31, 2003,  the Company had not yet reported any  operating
revenues  and had  experienced  aggregate  net  losses of  approximately  $314.4
million from inception. The Company does not expect to operate profitably during
fiscal year 2004. Although the Company is actively seeking third party financing
to meet its operating and capital needs,  there is no assurance that  additional
funding will be available to the Company,  and,  even if it is  available,  such
financing may be (i) extremely  costly,  (ii) dilutive to existing  stockholders
and/or (iii) restrictive to the Company's ongoing operations.

      The Company's  current business model is to license the  manufacturing and
distribution  of  EarthShell  Packaging  foodservice  disposables  to licensees.
Agreements  with  the  licensees  permit  them to  manufacture  and  sell  other
foodservice  disposable  packaging  products  that are not  based on  EarthShell
Packaging.  The licensees may also  manufacture  paper or polystyrene  packaging
which could compete with EarthShell products, and they may not devote sufficient
resources or otherwise be able successfully to manufacture, distribute or market
EarthShell Packaging. Their failure to do so would be grounds for termination of
exclusivity  provisions  in their  license  agreement,  but might also delay the
rollout of EarthShell Packaging into the marketplace.

      The success of the Company depends substantially on its ability to design,
develop and manufacture  foodservice  disposables that are not as harmful to the
environment as conventional  disposable  foodservice containers made from paper,
plastic  and  polystyrene.  Although  EarthShell  Packaging  offers a number  of
environmental  advantages  over  conventional  packaging  products,  it may also
possess characteristics that consumers or environmental groups could perceive as
negative for the environment. In particular,  EarthShell Packaging may result in
more solid waste by weight,  and manufacturing  them may release greater amounts
of some pollutants than the manufacture of some other packaging would release.

      The  Company  does  not  own  the  technology   necessary  to  manufacture
EarthShell  Packaging  and is dependent  upon the License  Agreement to use that
technology.  The licensed technology is limited to the development,  manufacture
and  sale  of  specified  foodservice  disposables  for  use in the  foodservice
industry,  and  there  is no  right  to  exploit  opportunities  to  apply  this
technology  or improve it outside  this field of use. If EKI were to file for or
be  declared  bankrupt,  the Company  would  likely be able to retain its rights
under the  License  Agreement  with  respect  to U.S.  patents;  however,  it is
possible  that steps could be taken to  terminate  its rights  under the License
Agreement  with  respect  to  international  patents.  EKI  is  the  controlling
stockholder of the Company, and conflicts could arise with regard to performance
under the license  agreement,  corporate  opportunities  or time  devoted to the
business of the Company by officers and directors who are common to both EKI and
the Company.

                              GOVERNMENT REGULATION

The manufacture,  sale and use of EarthShell Packaging are subject to regulation
by the U.S. Food and Drug  Administration (the "FDA"). The FDA's regulations are
concerned with  substances used in food packaging  materials,  not with specific
finished food packaging products.  Thus, food and beverage containers will be in
compliance  with FDA regulations if the components used in the food and beverage
containers:  (i) are approved by the FDA as indirect  food  additives  for their
intended  uses and  comply  with  the  applicable  FDA  indirect  food  additive
regulations;  or (ii) are generally  recognized as safe for their  intended uses
and are of suitable purity for those intended uses.


                                       9
<PAGE>



      The  Company  believes  that  EarthShell   Packaging  plates,   bowls  and
hinged-lid  containers and all other current and prototype  EarthShell Packaging
products of the Company are in compliance  with all  requirements of the FDA and
do not require additional FDA approval. The Company cannot be certain,  however,
that the FDA will agree with these conclusions.

                                    EMPLOYEES

      As of  January  1, 2004,  the  Company  had 13  employees.  The  Company's
employees are not represented by a labor union,  and the Company believes it has
a good relationship with its employees.

                              AVAILABLE INFORMATION

        The  Company's  internet  website  is www.earthshell.com.  The  Company
makes available  free of  charge  on its  website  its  annual  report  on Form
10-K, quarterly  reports on Form 10-Q,  current  reports  on Form 8-K,  reports
filed pursuant to Section 16 of the  Securities  Exchange Act of 1934, as
amended (the "Exchange   Act")  and  amendments  to  those  reports as  soon as
reasonably practicable  after such materials are  electronically  filed or
furnished to the SEC.  Materials  the  Company  files  with the SEC may be read
and copied at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington,  DC 20549. This information  may  also be  obtained  by  calling the
Securities  and  Exchange Commission  at  1-800-SEC-0330.  The  Securities  and
Exchange  Commission  also maintains  an internet website that contains reports,
proxy and  information statements,  and other information  regarding  issuers
that file  electronically with the SEC at  www.sec.gov. The Company will provide
a copy of any of the foregoing documents to shareholders upon request.

ITEM 2. PROPERTIES

      In  September  2003,  the Company  leased  4,000 square feet of office and
research and development space in Santa Barbara,  California, under a lease that
expired on December 31, 2003.  In January 2004,  the lease was extended  through
April 2004.  The  Company's  monthly lease payment with respect to this space is
$5,000.  In  addition,  the Company  leases 3,353 square feet of office space in
Lutherville,  Maryland,  on a month to month basis. The Company's  monthly lease
payment with respect to this space is $5,780.

      The  Company  believes  it will be able to  lease  comparable  space  at a
comparable price when these leases expire.

ITEM 3. LEGAL PROCEEDINGS

      In September  2003,  two lawsuits  were filed against the Company by Green
Packaging  ("GP") and Green Earth  Packaging  ("GEP"),  both of which had signed
license   agreements  with  the  Company  permitting  their  use  of  EarthShell
proprietary,  biodegradable-packaging  technology.  The  first  lawsuit  alleged
breach of an oral contract  involving  manufacturing  equipment  that GP and GEP
purchased  to  make   biodegradable   packaging  using  EarthShell   proprietary
technology.  The second lawsuit alleged violations of California's antitrust law
and  Unfair   Practices   Act  involving   the   commercial   viability  of  the
biodegradable-packaging technology that the Company licensed to GP and GEP.

      The  Company  filed  petitions  seeking  to compel  the court to send both
lawsuits to  arbitration.  While those motions were pending,  the Company held a
mediation  with GP and GEP and resolved  both actions  conclusively  in February
2004 to the  satisfaction  of both  parties on terms in which no party  admitted
liability. The parties are in the process of documenting the settlement.

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

      None.


                                       10
<PAGE>



                                     PART II

ITEM 5.  MARKET  FOR THE  REGISTRANT'S  COMMON  EQUITY AND  RELATED  STOCKHOLDER
MATTERS

The Company's common stock is currently listed through the Pink Sheets published
by the National Quotation Bureau, Inc., and prior to March 8, 2004 traded on the
Nasdaq  SmallCap  Market.  The  Company's  common  stock trades under the symbol
"ERTH.PK." For the periods indicated,  the following table presents the range of
high and low closing sale prices for the Company's common stock.

<TABLE>
<CAPTION>
                                     FIRST       SECOND        THIRD       FOURTH      TOTAL YEAR
                                  -----------  -----------  -----------  -----------  -----------
2003
Market price per common share
<S>                               <C>          <C>          <C>          <C>          <C>
    High ....................     $      7.80  $      7.08  $      5.64  $      4.56  $      7.80
    Low .....................            4.20         4.32         3.72         1.33         1.33

2002
Market price per common share
    High ....................     $     24.60  $     16.80  $     12.96  $      9.60  $     24.60
    Low .....................           13.80         4.32         6.00         6.96         4.32
</TABLE>


The closing sale prices for the Company's common stock reflect, where
applicable, the one-for-twelve reverse stock split of the Company's common stock
effective October 31, 2003.

      The number of  stockholders  of record of the  Company's  common  stock at
March 31, 2004 was 1,182.  At March 31, 2004, Mr. Essam  Khashoggi,  directly or
indirectly,  owned  approximately  35% of the  outstanding  common  stock of the
Company.

      The  Company  is a  developmental  stage  company  and does not  intend to
declare or pay cash dividends on its common stock in the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

      The selected  financial data set forth below should be read in conjunction
with the Company's  Financial  Statements  and Notes  thereto and  "Management's
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operations"
included elsewhere in this Annual Report on Form 10-K.


<TABLE>
<CAPTION>
                                                                   SELECTED FINANCIAL DATA
                                                            (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                                                                                                  NOVEMBER 1,
                                                                                                                     1992
                                                                                                                  (INCEPTION)
                                                              FOR THE YEAR ENDED DECEMBER 31                        THROUGH
                                         --------------------------------------------------------------------     DECEMBER 31,
                                          2003           2002           2001           2000           1999           2003
                                        ---------      ---------      ---------      ---------      ---------      ---------
STATEMENT OF OPERATIONS DATA
<S>                                     <C>            <C>            <C>            <C>            <C>            <C>
Research and development expenses .     $   9,547      $  26,890      $  47,148      $  37,265      $  30,471      $ 213,703
General and administrative expenses         5,786          9,590          9,634          6,843         11,872         70,401
Depreciation and amortization .....           380          3,099          5,874          5,704          4,644         22,841
Gain on sale of property and
    equipment .....................          (452)          (441)            --             --             --           (893)
Interest expense (income), net ....         1,791            132           (356)        (1,264)        (3,448)        (2,193)
Related party patent expenses .....            --             --             --            362            645          8,693
Debenture conversion cost .........           166            321             --             --             --            487
Net loss ..........................        18,517         39,591         62,302         48,912         44,188        314,351
Preferred dividends ...............            --             --             --             --             --          9,927
Net loss available to common
    stockholders ..................        18,517         39,591         62,302         48,912         44,188        324,277
Average shares outstanding ........        13,267         11,277          9,353          8,452          8,337          8,436
BALANCE SHEET DATA
Cash and cash equivalents .........     $   1,902      $     111      $     828      $   7,792      $  26,413
Short-term investments ............            --             --             --             --          8,971
Working capital (deficit) .........        (7,922)        (8,315)        (6,941)         2,107         32,886
Total assets ......................         2,287         18,024         19,886         48,474         87,199
Convertible debentures, accounts
    payable to related party,
    accrued interest and accrued
    dividends .....................            --         10,190             --            266          1,386
Deficit accumulated during
    development stage .............      (314,351)      (295,834)      (256,243)      (193,941)      (145,029)
Stockholders' equity (deficit) ....       (12,269)        (3,473)        11,536         42,296         80,686
Shares outstanding ................        14,129         12,055          9,860          8,709          8,337
PER COMMON SHARE
Basic and diluted loss per share ..     $    1.40      $    3.51      $    6.66      $    5.79      $    5.30      $   38.44
</TABLE>


                                       11
<PAGE>



ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

      The following  discussion  should be read in conjunction with the Selected
Financial  Data and the Company's  Consolidated  Financial  Statements and Notes
thereto included elsewhere in this Annual Report on Form 10-K. Such consolidated
financial   statements  and  information  have  been  prepared  to  reflect  the
historical  operations,  assets and  liabilities of the Company from the date of
the Company's organization on November 1, 1992 through December 31, 2003.

                           FORWARD-LOOKING STATEMENTS

Information in this Annual Report on Form 10-K including but not limited to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contains 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 including but not
limited to "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 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 which may be discussed elsewhere
in this Annual Report on Form 10-K.

                         CRITICAL ACCOUNTING ASSUMPTIONS

      Going Concern  Basis.  The  consolidated  financial  statements  have been
prepared on a going concern basis,  which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. During the
period from November 1, 1992  (inception)  to December 31, 2003, the Company has
incurred a cumulative net loss of $314,350,681 and has a working capital deficit
of  $7,922,339  at December  31, 2003.  These  factors,  along with others,  may
indicate  that the Company  will be unable to continue as a going  concern for a
reasonable  period of time. The Company will have to raise  additional  funds to
meet its current  obligations and to cover operating  expenses  through the year
ending December 31, 2004. If the Company is not successful in raising additional
capital  it may not be able to  continue  as a going  concern  for a  reasonable
period of time.  Management  plans to address  this need by raising cash through
either the  issuance  of debt or equity  securities.  In  addition,  the Company
expects cash to be generated in 2004 through  royalty  payments from  licensees.
Another  possible  source  of funds is the sale or  transfer  of the  commercial
production line in Goettingen,  Germany to an operating  partner.  However,  the
Company can not assure that additional financing will be available to it, or, if
available, that the terms will be satisfactory, that it will receive any royalty
payments in 2004, or that it will be able to negotiate  mutually agreeable terms
for the transfer of its  commercial  production  line to an  operating  partner.
Management  will also  continue in its efforts to reduce  expenses,  but can not
assure  that it  will be able to  reduce  expenses  below  current  levels.  The
consolidated financial statements do not include any adjustments relating to the
recoverability  and  classification of recorded asset amounts or the amounts and
classification  of  liabilities  that might be  necessary  should the Company be
unable to continue as a going concern.


                                       12
<PAGE>



      Estimated Net Realizable Value of Property and Equipment.  The Company has
been  engaged  in  the  development  of  manufacturing   equipment  to  validate
acceptance of EarthShell  products and their  pricing.  To this end, the Company
has previously developed manufacturing lines in Owings Mills, Maryland,  Goleta,
California and in Goettingen,  Germany. The Company evaluates the recoverability
of property and equipment  whenever events or changes in circumstances  indicate
that  the  carrying  value of an asset  may not be  recoverable.  If there is an
indication  that the carrying value of an asset may not be  recoverable  and the
estimated future cash flows (undiscounted and without interest charges) from the
use of the asset are less than the carrying  value,  a write-down is recorded to
reduce the related asset to its estimated fair value.

      The Company entered into a strategic  relationship with Sweetheart in late
1997 whereby the Company  financed and built  production  lines at  Sweetheart's
Owings Mills, Maryland manufacturing facility to demonstrate that its hinged-lid
containers  could be produced  commercially  for McDonald's.  The Company worked
closely with  Sweetheart and McDonald's to create an acceptable  product design,
develop a commercially viable operation and meet required performance standards.
In the  fourth  quarter of 2001,  the  company  wrote down $12.3  million of the
Owings Mills property and equipment to reflect the net  realizable  value of the
equipment  and  machinery  based on a quotation  from a third party.  During the
first half of 2002, production at the Owings Mills facility ceased as Sweetheart
contemplated   acquisition  of  new,  updated   production  lines.  The  Company
negotiated with Sweetheart and certain  equipment  manufacturers to assess their
interest in utilizing  portions of the Company's  existing  production lines and
infrastructure in Owings Mills; however,  definitive agreements were not reached
and the Company is unable to determine the amount,  if any, of  compensation  it
might receive in disposing of its production lines in Owings Mills. As a result,
the Company  wrote down the  remaining  $7.5 million of the  equipment at Owings
Mills during the year ended 2002. As of December 31, 2002, the Company's  Owings
Mills  production  lines was carried on its balance sheet at a net book value of
zero,  and as of December  31, 2003 all of the Owings Mills  equipment  has been
sold or scrapped.

      The  commercial  production  line in  Goettingen,  Germany was  originally
financed and  constructed  by the Company for the  Company's  joint venture with
Huhtamaki.  During 2001,  $1.2 million of the Goettingen line was written off to
reflect  equipment that had no further  application  in the product  development
cycle.  During the third quarter of 2002 the Company concluded,  after obtaining
quotations  from various  machinery  suppliers for an identical  line, that $1.7
million  of the cost of the line  would not be  recoverable  and  therefore  the
carrying  value of the line  was  written  down by this  amount,  of which  $1.6
million was recorded in the third quarter of 2002 and the remaining $0.1 million
was recorded in the fourth  quarter of 2002.  With the  conclusion  of the joint
venture  with  Huhtamaki,  the Company is seeking  other  operating  partners to
purchase  the  production  line.  However,  because  the  Company  is  unable to
determine  with  certainty  the proceeds  that will be realized upon sale of the
equipment,  the Company  wrote the line down to $1 as of  December  31, 2003 and
reclassified it to the long-term asset account "Equipment held for sale."

                              RESULTS OF OPERATIONS

Year Ended December 31, 2003 Compared with the Year Ended December 31, 2002

      The Company's net loss decreased $21.1 million to $18.5 million from $39.6
million for the year ended December 31, 2003 compared to the year ended December
31, 2002, respectively.

      Research and Development Expenses. Total research and development expenses
are comprised of Related party license fee and research and development expenses
and Other research and  development  expenses.  Total  research and  development
expenditures  for the  development of EarthShell  Packaging(R)  decreased  $17.4
million to $9.5 million from $26.9 million for the year ended  December 31, 2003
compared to the year ended December 31, 2002, respectively.

      o     Related party license fee and research and development  expenses are
            comprised of the $100,000 minimum monthly  licensing fee for the use
            of the  EarthShell  technology and for technical  services,  both of
            which were payable to EKI, a stockholder of the Company,  or Biotec,
            a wholly owned subsidiary of EKI. It should be noted that payment of
            these  related  party   expenses  has  been  deferred   pursuant  to
            subordination  agreements  entered  into  by  the  EKI  entities  in
            connection with the  convertible  debenture  financing  concluded in
            March  of  2003.   Related   party  license  fee  and  research  and
            development  expenses  decreased  $0.2  million to $1.3 million from
            $1.5 million for the year ended  December  31, 2003  compared to the
            year  ended  December  31,  2002,  respectively.  The  decrease  was
            entirely  due to a decrease in  technical  services  provided to the
            Company by Biotec.


                                       13
<PAGE>



      o     Other research and  development  expenses are comprised of personnel
            costs,  travel and direct overhead for development and demonstration
            production,  as well as impairment charges on manufacturing property
            and equipment  constructed for  demonstration  production  purposes.
            Other research and development  expenses  decreased $17.2 million to
            $8.2 million from $25.4 million for the year ended December 31, 2003
            compared to the year ended  December  31,  2002,  respectively.  The
            decrease in other  research and  development  expenses was primarily
            due to  concluding  the  demonstration  manufacturing  of hinged-lid
            containers  in  Owings  Mills,  Maryland  at the  end of the  second
            quarter of 2002. While the majority of the expenses incurred in 2002
            related to the Owings  Mills  demonstration  manufacturing,  it also
            included  expenses  related  to the  commencement  of  demonstration
            manufacturing  of bowls and  plates  in  Goleta,  California.  Other
            research and development expenses incurred in 2003 primarily related
            to  the  ongoing  demonstration   manufacturing  in  Goleta  through
            mid-April and to the start-up in mid-May of a new manufacturing line
            for  plates  and  bowls  built  and  financed  by  Detroit  Tool and
            Engineering  Company (DTE) at their Lebanon,  Missouri facility.  In
            early August 2003, the company  discontinued its day-to-day  support
            of  manufacturing  activities  at DTE. In keeping  with its business
            model,  the Company will hereafter  focus primarily on the licensing
            of its foam analog material and other  technologies,  and all future
            manufacturing  and production will be the  responsibility of current
            or new  licensees  as they  install  and run  equipment  to  produce
            EarthShell  Packaging(R)in  their own  facilities.  The  decrease in
            other  research  and  development  expenses  was  also due to a $5.8
            million reduction in property and equipment  impairment  charges, to
            $4.0 million in 2003 from $9.8 million in 2002.

      Other   General   and   Administrative   Expenses.   Other   general   and
administrative  expenses are  comprised of  personnel  costs,  travel and direct
overhead  for  marketing,   finance  and   administration.   Total  general  and
administrative expenses decreased $3.8 million to $5.8 million from $9.6 million
for the year ended  December  31, 2003  compared to the year ended  December 31,
2002,  respectively.  This was primarily the result of efforts to  significantly
reduce general and administrative expenses in 2003, which resulted in reductions
in the following expense  categories:  legal fees,  including patent prosecution
and  maintenance  fees,  by $0.9  million,  personnel  costs  by  $0.7  million,
professional  fees and services by $0.4  million,  travel costs by $0.3 million,
facility costs by $0.3 million and business insurance costs by $0.2 million.  In
addition,  in the second  quarter of 2003 the Company began a program to satisfy
vendors for outstanding  invoices and recognized gains from settling various old
trade accounts payable at a discount.  As a result of negotiations,  in 2003 the
Company settled and paid  outstanding  accounts  payable of  approximately  $1.5
million at a discount of approximately $0.8 million.

      Depreciation  and  Amortization  Expense.  Depreciation  and  amortization
expense  decreased  $2.7  million to $0.4 million from $3.1 million for the year
ended  December  31,  2003  compared  to  the  year  ended  December  31,  2002,
respectively.  The decrease in depreciation expense is primarily attributable to
the  decrease  in  property  and  equipment  as a result  of the  impairment  of
demonstration manufacturing property and equipment in 2002.

      Interest  Income.  Interest  income  totaled  $0.1 million for each of the
years ended December 31, 2003 and December 31, 2002.

      Interest Expense.  Interest expense is comprised of Related party interest
expense and Other interest expense.

      o     Related  party  interest  expense  increased  $0.3  million  to $0.4
            million  from $0.1  million  for the year ended  December  31,  2003
            compared to the year ended  December  31,  2002,  respectively.  The
            increase  was due to an  increase  in  accrued  interest  payable on
            outstanding  loans made to the  Company by EKI from  September  2002
            through January 2003 that were  outstanding  throughout all of 2003,
            accretion in 2003 of the discount  related to the warrants issued in
            conjunction with the March 2003 financing transactions, plus accrued
            interest  payable on amounts owed to EKI for monthly  licensing fees
            that were not paid in accordance with the terms of the subordination
            agreements  entered into in connection with the 2006 Debentures (see
            Related Party Transactions).


                                       14
<PAGE>

            Although  the  outstanding  loans and  monthly  licensing  fees will
            accrue  approximately  $0.4  million  in  annual  interest  expense,
            payment of the  interest  is  subordinated  to the 2006  Debentures.
            Therefore,  the related  party  interest  expense  will  continue to
            accrue but will not be paid in cash until the 2006  Debentures  have
            been converted or the obligation satisfied in full.

      o     Other interest  expense  increased $1.2 million to $1.4 million from
            $0.2 million for the year ended  December  31, 2003  compared to the
            year ended December 31, 2002,  respectively.  Other interest expense
            for 2003 is primarily  comprised of accretion of the discount on the
            2006 Debentures and a beneficial  conversion charge in the amount of
            $0.4  million  due to a  change  in the 2007  Debentures  conversion
            price.  In addition,  Other interest  expense for 2003 also included
            accretion  of  the  discount  on the  2007  Debentures  and  accrued
            interest  payable on the 2006 and 2007  Debentures.  Other  interest
            expense for 2002 was  comprised  of  accretion  of the  discount and
            accrued interest  payable on the 2007  Debentures.  Interest expense
            from accretion of the discount and accrued  interest payable for the
            2006  Debentures will be  approximately  $0.8 million per year until
            they are repaid or are converted into common stock.

      Other  Income.  Other income was $0.4 million for the year ended  December
31, 2003.  This  represents  the net gain  realized in the third quarter of 2003
from reducing the balance of the warrant  obligation to its estimated fair value
of zero. Management believes the estimated fair value of the warrant at December
31, 2003 is zero. The warrant  obligation  was initially  recorded in connection
with the March 2003 financing transactions (see Convertible Debentures).

      Loss on Extinguishment of Debentures. Loss on extinguishment of debentures
was $1.7 million for the year ended  December 31, 2003. In  connection  with the
March 2003 financing  transactions,  the Company prepaid $5.2 million  aggregate
principal  amount of the 2007 Debentures,  resulting in a prepayment  penalty of
approximately  $0.2  million.  The  Company  also  issued to the  holders of the
prepaid 2007 Debentures  52,083 shares of common stock,  valued at approximately
$0.2 million based upon the closing price of the Company's common stock of $4.56
per  share  on  March 5,  2003.  In  addition,  one of the  holders  of the 2007
Debentures  exchanged $2.0 million aggregate principal amount of 2007 Debentures
for $2.0 million  aggregate  principal amount of 2006 Debentures.  In connection
with the  prepayment  and  exchange  transactions,  the  Company  incurred  cash
transaction  costs of  approximately  $0.3  million,  excluding  the  prepayment
penalty.  In  addition,  the  Company  incurred a charge of  approximately  $0.9
million for the prorated portion of the original discount attributed to the $7.2
million of the 2007  Debentures  repaid and  exchanged.  Therefore,  the Company
recognized  a $1.7  million  loss  upon  extinguishment  of the 2007  debentures
through the prepayment and exchange.

      Gain on Sale of Property and  Equipment.  Gain on the sale of property and
equipment  increased $0.1 million to $0.5 million from $0.4 million for the year
ended  December  31,  2003  compared  to  the  year  ended  December  31,  2002,
respectively.  The gain in both 2003 and 2002  represents the excess of proceeds
received from the sale of non-essential machine shop equipment and excess office
furniture  and  equipment  over their net book  value.  In  addition,  2003 also
includes  proceeds  received from the sale of production line equipment that was
previously impaired and therefore had a net book value of zero.

      Debenture  Conversion  Cost.  Debenture  Conversion  Cost  decreased  $0.1
million to $0.2 million  from $0.3 million for the year ended  December 31, 2003
compared  to the  year  ended  December  31,  2002,  respectively.  The  expense
represents the prorated portion of the original discount  attributed to the 2007
Debentures whose conversion was forced by the Company in the respective periods.

Year Ended December 31, 2002 Compared with the Year Ended December 31, 2001

      The Company's net loss decreased $22.7 million to $39.6 million from $62.3
million for the year ended December 31, 2002 compared to the year ended December
31, 2001, respectively.

      Research and Development Expenses. Total research and development expenses
are comprised of Related party license fee and research and development expenses
and Other research and  development  expenses.  Total  research and  development
expenditures  for the  development of EarthShell  Packaging(R)  decreased  $20.2
million to $26.9 million from $47.1 million for the year ended December 31, 2002
compared to the year ended December 31, 2001, respectively.

      o     Related party license fee and research and development  expenses are
            comprised of the $100,000 minimum monthly  licensing fee for the use
            of the  EarthShell  technology and for technical  services,  both of
            which were payable to EKI, a stockholder of the Company,  or Biotec,
            a  wholly  owned  subsidiary  of EKI.  Related  party  research  and
            development  expenses  totaled  $1.5  million  for each of the years
            ended December 31, 2002 and December 31, 2001.


                                       15
<PAGE>



      o     Other research and  development  expenses are comprised of personnel
            costs,  travel and direct overhead for development and demonstration
            production,  as well as impairment charges on manufacturing property
            and equipment  constructed for  demonstration  production  purposes.
            Other research and development  expenses  decreased $20.3 million to
            $25.4  million  from $45.7  million for the year ended  December 31,
            2002 compared to the year ended December 31, 2001, respectively. The
            decrease in other  research and  development  was  primarily  due to
            concluding the demonstration  manufacturing of hinged-lid containers
            in Owings Mills,  Maryland at the end of the second quarter of 2002.
            This  decrease  was  partially   offset  by  the   commencement   of
            demonstration   manufacturing   of  bowls  and   plates  in  Goleta,
            California.  The decrease in other research and development expenses
            was also due to a reduction  in  impairment  charges on property and
            equipment;  impairment  charges were $9.8 million for the year ended
            December 31, 2002 versus $19.4  million for the year ended  December
            31, 2001.

            The Company  entered into a strategic  relationship  agreement  with
            Sweetheart  in late 1997  whereby  the  Company  financed  and built
            production   lines   at   Sweetheart's   Owings   Mills,    Maryland
            manufacturing  facility to demonstrate that its hinged-lid container
            products could be produced commercially for McDonald's.  The Company
            worked   closely  with   Sweetheart  and  McDonald's  to  create  an
            acceptable product design,  develop a commercially  viable operation
            and meet  required  performance  standards.  Originally  the Company
            intended  to  transfer  the  production  lines  at  Owings  Mills to
            Sweetheart.

            In the fourth  quarter of 2001, the Company wrote down $12.3 million
            of the Owings  Mills  property  and  equipment  to  reflect  the net
            realizable value of the equipment and machinery based on a quotation
            from a third party.  During the first half of 2002 production at the
            Owings Mills facility ceased as Sweetheart contemplated  acquisition
            of new,  updated  production  lines.  The  Company  negotiated  with
            Sweetheart  and  certain  equipment  manufacturers  to assess  their
            interest in utilizing portions of the Company's existing  production
            lines  and  infrastructure  in  Owings  Mills;  however,  definitive
            agreements  were not reached and the Company was unable to determine
            the amount, if any, of compensation it might receive in disposing of
            its production lines in Owings Mills. As a result, the Company wrote
            down the  remaining  $7.5  million of the  equipment at Owings Mills
            during the year ended 2002.  As of December  31, 2002 the  Company's
            Owings  Mills  production  lines were being  carried on its  balance
            sheet at a net book value of zero.

            The commercial production line in Goettingen, Germany was originally
            financed  and  constructed  by the Company for the  Company's  joint
            venture with Huhtamaki.  During 2001, $1.2 million of the Goettingen
            line was  written  off to  reflect  equipment  that  had no  further
            application  in the  product  development  cycle.  During  the third
            quarter of 2002 the Company  concluded,  after obtaining  quotations
            from various  machinery  suppliers for an identical  line, that $1.7
            million  of the  cost  of the  line  will  not  be  recoverable  and
            therefore  the  carrying  value of the line was written down by this
            amount,  of which $1.6 million was recorded in the third  quarter of
            2002 and the  remaining  $0.1  million  was  recorded  in the fourth
            quarter of 2002.

            During  the fourth  quarter of 2001 and the fourth  quarter of 2002,
            $5.9  million and $0.5  million,  respectively,  of equipment at the
            Company's product  development center was written off because it had
            no further application in the product development activities at that
            time.

      Other   General   and   Administrative   Expenses.   Other   General   and
Administrative  Expenses are  comprised of  personnel  costs,  travel and direct
overhead  for  marketing,   finance  and   administration.   Other  general  and
administrative  expenses were $9.6 million for both the year ended  December 31,
2002 and the year ended December 31, 2001.  Patent  prosecution  and maintenance
fees  remained flat year over year.  Reductions in headcount and legal  expenses
were offset by an increase in insurance and Nasdaq fees, as well as increases in
investor and public relations programs.

      Depreciation  and  Amortization  Expense.  Depreciation  and  amortization
expense  decreased  $2.8  million to $3.1 million from $5.9 million for the year
ended  December  31,  2002  compared  to  the  year  ended  December  31,  2001,
respectively.  The decrease in depreciation expense is primarily attributable to
the  decrease in fixed  assets as a result of the  impairment  of  property  and
equipment to net realizable value during both 2002 and 2001.


                                       16
<PAGE>



      Interest  Income.  Interest income  decreased $0.3 million to $0.1 million
from $0.4  million for the year ended  December  31,  2002  compared to the year
ended December 31, 2001, respectively. The decrease was the result of lower cash
balances available for investment for the comparative years.

      Interest Expense.  Interest expense is comprised of Related party interest
expense and Other interest expense.

      o     Related party  interest  expense was $0.1 million for the year ended
            December 31,  2002.  This  represents  accrued  interest  payable on
            short-term  working  capital  loans  made  to  the  Company  by  EKI
            beginning in September 2002.

      o     Other interest  expense was $0.2 million for the year ended December
            31,  2002.  This  represents  accretion  of the discount and accrued
            interest  payable  on the 2007  Debentures  issued in  August  2002.

      Gain on Sale of Property and  Equipment.  Gain on the sale of property and
equipment  was $0.4 million for the year ended  December 31, 2002.  The gain was
primarily  due to the  Company  selling  equipment  no longer  required  to meet
objectives, most of which was fully depreciated.

      Debenture  Conversion Cost. Debenture Conversion Cost was $0.3 million for
the year ended December 31, 2002. This expense  represents the prorated  portion
of the original discount attributed to the $1.0 million of 2007 Debentures whose
conversion was forced by the Company in the third quarter of 2002.

                         LIQUIDITY AND CAPITAL RESOURCES

      Cash  Flow.  The  Company's  principal  uses of cash  for the  year  ended
December 31, 2003 were to fund  operations and pay accounts  payable and accrued
expenses.  Net cash used in  operations  was $15.7 million and $23.0 million for
the years ended December 31, 2003 and 2002,  respectively.  Net cash provided by
(used in) investing activities was $4.0 million and ($2.3) million for the years
ended December 31, 2003 and 2002,  respectively.  Net cash provided by financing
activities  was $13.5 million and $24.6 million for the years ended December 31,
2003 and 2002,  respectively.  As of December 31, 2003, the Company had cash and
related cash equivalents totaling $1.9 million.

      Capital  Requirements.  Due to the fact that  construction  of the initial
commercial  production  lines  was  largely  completed  in 2002 and the  Company
decided to discontinue all demonstration  manufacturing  activities in 2003, the
Company only made one minor capital  expenditure for the year ended December 31,
2003. The Company does not expect to make  significant  capital  expenditures in
the year 2004.

      Contractual  Obligations.  The following  table  summarizes  the Company's
known  obligations to make future payments  pursuant to certain  contracts as of
December  31,  2003,  as  well as an  estimate  of the  timing  in  which  these
obligations are expected to be satisfied:


<TABLE>
<CAPTION>
                                                                   PAYMENTS DUE BY PERIOD
                                                       -----------------------------------------------
           CONTRACTUAL OBLIGATIONS                                        LESS THAN          1 - 3
                                                          TOTAL            1 YEAR            YEARS
                                                       ------------     ------------     ------------
<S>                                                    <C>              <C>              <C>
          Long-term debt - principal payments only     $ 11,394,108     $  6,800,000     $  4,594,108
          Capital leases                                         --               --               --
          Operating leases                                       --               --               --
          Other long-term liability                          83,333           50,000           33,333
                                                       ------------     ------------     ------------

          Totals                                       $ 11,477,441     $116,850,000     $  4,627,441
                                                       ============     ============     ============
</TABLE>


      Sources of Capital.  As part of the Company's  initial public  offering on
March 27, 1998, the Company issued 877,193 shares of common stock,  for which it
received  net proceeds of $206  million.  On April 18, 2000 and January 4, 2001,
the  Company  filed shelf  registrations  statements  for 416,667 and  1,250,000
shares,  respectively,  of the Company's  common  stock.  During the years ended
December 31, 2002, 2001 and 2000 the Company sold approximately 0.1 million, 1.1
million and 0.4 million  shares of common  stock in private  transactions  under
such  registration  statements  and  received  net  proceeds  from such sales of
approximately  $2.3 million $30.6 million and $10.5 million,  respectively.  All
shares available under such registration statements had been sold as of December
2002.


                                       17
<PAGE>



      In December of 2001 the Company  filed an  additional  shelf  registration
statement  providing for the sale of up to $50 million of securities,  including
secured or  unsecured  debt  securities,  preferred  stock,  common  stock,  and
warrants. These securities could be offered, separately or together, in distinct
series,  and amounts,  at prices and on terms to be set forth in the  prospectus
contained in the registration  statement,  and in subsequent  supplements to the
prospectus.  During the year ended  December  31,  2002,  the  Company  sold 1.9
million  shares of common stock under such  registration  statement and received
net proceeds from such sales of $19.6 million.

      On August 12, 2002, the Company issued $10 million in aggregate  principal
amount of convertible  debentures,  due August 2007, (the "2007 Debentures") and
warrants  to  purchase  0.2  million  shares  of common  stock to  institutional
investors for proceeds of $10.0 million.  The terms of the  debentures  required
the proceeds be held in restricted cash accounts  linked to irrevocable  letters
of credit in favor of each debenture holder such that unrestricted access to the
proceeds from the sale of the debentures generally occurred only upon conversion
of the debentures into shares of the Company's  common stock.  These  debentures
bore interest at a rate of 1.5% per annum.  The holders of these  debentures had
the right to  convert  the  debentures  into the  Company's  common  stock at an
initial  conversion  price of $15.60 per share,  which has been reduced to $6.00
per  share as a result  of  anti-dilution  adjustments.  The  proceeds  from the
debentures  were held in restricted  accounts  linked to irrevocable  letters of
credit in favor of the debenture  holders such that  unrestricted  access to the
proceeds from the sale of the debentures generally occurred only upon conversion
of the debentures into shares of the Company's  common stock. In addition to the
holders'  conversion  option,  under certain  circumstances  the Company had the
right to force  conversion of up to $500,000 of the debentures per week at a 15%
discount  to the  market  price  of the  Company's  stock.  Subject  to  certain
conditions set forth in the  debentures,  the  debentures  could be prepaid upon
twenty business days notice for 104% of the outstanding principal balance of the
debentures.  During the third quarter of 2002, the Company forced  conversion of
$1.0 million  principal  amount of the  debentures  for 168,696 shares of common
stock,  resulting  in the release to the Company of $1.0  million of  restricted
cash.  Subsequent  to December 31, 2002,  the Company  forced  conversion  of an
additional $1.3 million principal amount of the debentures and debenture holders
voluntarily  converted $0.5 million  principal  amount of the debentures,  for a
total of 353,985 shares of common stock, resulting in the release to the Company
of $1.8 million of restricted  cash. In March 2003, as part of a new convertible
debenture  financing,  the Company prepaid $5.2 million  principal amount of the
debentures.  In addition,  one of the holders of the  debentures  exchanged $2.0
million  aggregate  principal  amount  of  these  debentures  for  $2.0  million
aggregate principal amount of 2006 Debentures and 78,989 shares of common stock.
The  exchange  resulted  in the  release  to the  Company  of  $2.0  million  of
restricted  cash, as the 2006  Debentures are not secured by cash.  There are no
outstanding 2007 Debentures as of December 31, 2003.

      On March 5, 2003, the Company issued to a group of institutional investors
416,667 shares of common stock and $10.55 million in aggregate  principal amount
of secured convertible debentures due in March 2006 (the "2006 Debentures"), for
which the  Company  received  proceeds of  approximately  $9.0  million,  net of
financing costs of approximately $1.5 million. The 2006 Debentures bear interest
at a rate of 2.0% per annum,  payable  quarterly  in arrears on each January 31,
April 30, July 31 and October 31. The  debentures  are secured by the  Company's
rights,  title and interest to the technology and trademarks  covered by the EKI
License  Agreement,  including  all  process  and  product  improvements  of the
Company,  the Company's right to use and to sublicense the  technology,  and all
license fees,  royalties  and/or other forms of compensation  due to the Company
from sublicenses under existing or future  sublicenses.  The holders of the 2006
Debentures have the right to convert such  debentures into the Company's  common
stock at a conversion  price of $6.00 per share.  While the 2006  Debentures are
outstanding, the conversion price is subject to adjustment in certain instances,
such as a result of stock  dividends  and splits,  distributions  of property to
common stockholders,  the sale of substantially all of the Company's assets, the
consummation of a merger,  or sales of common stock or common stock  equivalents
for per share prices lower than the conversion  price in effect.  In addition to
the holders'  conversion option,  after the first anniversary of the issuance of
the 2006  Debentures  the Company has the right to force  conversion of all or a
portion of the  outstanding  principal  amount of the 2006 Debentures if certain
conditions are met, including a requirement that the closing price of the common
stock has been  equal to or  greater  than 300% of the  conversion  price for at
least  the  10  consecutive  days  immediately  preceding  the  conversion.  The
principal  amount of the 2006  Debentures  is due and  payable on March 5, 2006;
however,  earlier  repayment may occur if the Company  receives cash proceeds in
excess of $2.65  million (the "Excess  Amount")  from the sale of debt or equity
securities,  equipment sales to unrelated third parties,  operating revenues, or
any cash that  becomes  available to the Company as a result of a reduction in a
$3.5 million  letter of credit the Company  issued to a third party in 1998.  If
the Excess Amount arises, the Company can elect to distribute  one-third of such
Excess  Amount  to EKI in  payment  of  amounts  due to EKI  under  the  License
Agreement  or the  Biotec  Agreement  that  have been  subordinated  to the 2006
Debentures,  and  one-third  of such  Excess  Amount , with the  consent of each
applicable  debenture  holder, as a 102% prepayment of principal and interest of
the 2006 Debentures.


                                       18
<PAGE>



      In  connection  with the March 2003  financing  transactions,  the Company
issued  54,167  shares  of  common  stock  to the  lead  purchaser  of the  2006
Debentures  and two  warrants to a placement  agent,  both of whom  received the
instruments as compensation  for their services  rendered in connection with the
transaction.  The first of the two warrants is  immediately  exercisable  by the
placement  agent to purchase  28,810  shares of the  Company's  common stock for
$10.08 per share and  expires in March 2006.  The second of the two  warrants is
immediately  exercisable  by the placement  agent to purchase  $1.055 million in
aggregate  principal  amount of the 2006  Debentures  and 416,667  shares of the
Company's common stock, except if, prior to exercise of the warrant,  all of the
2006 Debentures have been redeemed,  repurchased or converted, in which case the
portion of the warrant  exercisable into the 2006 Debentures becomes exercisable
into  common  stock as if the 2006  Debentures  included in the warrant had been
converted to common  stock.  The  exercise  price of the  convertible  debenture
portion of the warrant is $1,200 for each $1,000 of principal  and is subject to
adjustment  consistent with the provisions of the 2006 Debentures.  The exercise
price of the  common  stock  portion of the  warrant  is $7.20 per  share.  This
warrant also expires in March 2006.

      In  2003,  $5.75  million  principal  amount  of the 2006  Debentures  was
converted into 958,334 shares of common stock.

      At December 31, 2003, the outstanding principal balance of 2006 Debentures
was  $6.8  million.   The  remaining   shares  under  the  December  2001  shelf
registration  described  above  have  been  used to  secure  shares  potentially
issuable upon conversion of the 2006 Debentures.

      At December 31, 2003, the Company was in compliance  with all covenants of
the 2006 Debentures.  However,  on March 8, 2004, the Company's common stock was
delisted  from  the  Nasdaq  Smallcap   Market  because  the  Company's   market
capitalization  failed to meet the minimum required standard.  In addition,  the
Company  did not  make  interest  payments  related  to the 2006  Debentures  as
required on January 31, 2004.  These  actions put the Company in  non-compliance
with  its  covenants  under  the  2006   Debentures.   Management  is  currently
negotiating with the debenture holders for appropriate relief or waiver of these
covenants. One of the debenture holders has notified the Company in writing that
they are in default and has  requested  that the Company  repurchase  the entire
principal amount of the 2006 Debentures that they hold at the price specified in
the debenture,  along with any accrued and unpaid interest.  Because the Company
can not assure that it will be able to negotiate  appropriate relief or a waiver
of the applicable covenants, the entire outstanding principal amount of the 2006
Debentures have been classified as current  liabilities as of December 31, 2003.
(See Subsequent Events).

      During 2002 and 2003, the Company's largest shareholder, EKI, made various
simple interest working capital loans to the Company.  These loans bear interest
at a rate of 7% or 10% per annum, and are payable on demand.  As of December 31,
2003,  the  outstanding  principal  balance of these  loans was  $2,755,000.  In
connection with the March 2003 convertible  debenture  financing,  the remaining
outstanding balance of these loans was subordinated to the 2006 Debentures, with
strict covenants governing their repayment.  In addition,  EKI and Biotec agreed
to subordinate  certain payments to which they were otherwise entitled under the
Biotec  License  Agreement  (other  than  their  respective  percentages  of any
royalties  received by the Company) to the satisfaction of the Company's payment
obligations  under the 2006  Debentures.  They further  agreed not to assert any
claims against the Company for breaches of the Biotec License  Agreement  (other
than the assertion of certain equitable remedies to enjoin the Company from, for
example,  selling  products  outside  its field of use)  until  such time as the
Company's  obligations  under the 2006 Debentures are satisfied in full. EKI and
Biotec also agreed to allow the Company to pledge their respective  interests in
the EKI and Biotec License Agreements to secure the Company's  obligations under
the 2006  Debentures,  and certain  additional  concessions were made by EKI and
Biotec to permit the Company greater flexibility in selling its rights under the
EKI and Biotec  License  Agreements to third  parties in an insolvency  context.
These rights  terminate upon the  satisfaction in full of the obligations  under
the 2006  Debentures.  In  consideration  for its willingness to subordinate the
payments and advances  that are owed to it, in March 2003 the Company  issued to
EKI a warrant,  expiring in ten years, to acquire 83,333 shares of the Company's
common stock for $6.00 per share.

      The  Company  will  have to raise  additional  funds  to meet its  current
obligations and to cover operating expenses through the year ending December 31,
2004. If the Company is not successful in raising  additional capital it may not
be  able to  continue  as a going  concern  for a  reasonable  period  of  time.
Management  plans to  address  this need by  raising  cash  through  either  the
issuance of debt or equity securities.  In addition, the Company expects cash to
be generated in 2004 through royalty  payments from licensees.  Another possible
source of funds is the sale or transfer  of the  commercial  production  line in
Goettingen, Germany to an operating partner. However, the Company can not assure
that  additional  financing will be available to it, or, if available,  that the
terms will be  satisfactory,  that it will receive any royalty payments in 2004,
or that it will be able to negotiate  mutually  agreeable terms for the transfer
of its commercial production line to an operating partner.  Management will also
continue in its efforts to reduce  expenses,  but can not assure that it will be
able to reduce expenses below current levels.


                                       19
<PAGE>



      Off-Balance Sheet Arrangements.  The Company does not have any off-balance
sheet  arrangements  as of  December  31,  2003  and has not  entered  into  any
transactions involving unconsolidated, limited purpose entities.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The Company's  treasury  function  controls all decisions and  commitments
regarding cash management and financing  arrangements.  Treasury  operations are
conducted within a framework that has been authorized by the board of directors.

      The Company is exposed to interest  rate risk on its fixed rate  long-term
working capital loans to EKI and its fixed rate long-term  convertible debenture
obligations.   As  of  December  31,  2003,  these  long-term  fixed  rate  debt
obligations totaled approximately $9.555 million. The working capital loans bear
interest  at a fixed  rate of 10% per annum.  The  convertible  debentures  bear
interest  at a fixed rate of 2.0% per annum.  While  generally  an  increase  in
market  interest  rates will  decrease the value of this debt,  and decreases in
rates will have the opposite  effect,  we are unable to estimate the impact that
interest rate changes will have on the value of the substantial majority of this
debt as there is no active public market for this debt.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      See Index to Consolidated Financial Statements and Schedules.

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

      As  reported  in a Form 8-K dated June 26,  2003,  on June 26,  2003,  the
Company  received a letter  from  Deloitte  and Touche LLP  ("D&T") in which D&T
resigned as the Company's independent public accountants.

      D&T's audit reports on the Company's  financial  statements for the fiscal
years  ended  December  31,  2002 and 2001 (the  "Reports")  did not contain any
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty,  audit scope, or accounting principles, except that such reports
contained an explanatory  paragraph concerning the Company's ability to continue
as a going concern.

      During the years ended  December  31,  2002 and 2001 and through  June 26,
2003, there were no  disagreements  between the Company and D&T on any matter of
accounting principles or practices,  financial statement disclosure, or auditing
scope or procedure, which disagreements,  if not resolved to the satisfaction of
D&T  would  have  caused  it to make  reference  to the  subject  matter of such
disagreements  in  connection  with its  Reports;  and there were no  reportable
events, as defined in Item 304(a)(1)(v) of Regulation S-K except with respect to
the year ended December 31, 2002, as to which D&T sent a letter to the Company's
Audit  Committee   during  the  last  week  in  June  in  conjunction  with  its
resignation,  which letter was  backdated to April 29, 2003,  advising the Audit
Committee of four reportable conditions in the Company's internal controls noted
during the course of the audit for the year ended December 31, 2002, as follows:
(1) a formal  process to close  accounting  periods  prior to the  production of
financial  information  did  not  exist,  (2)  some  of the  accounting  records
maintained by the Company did not  adequately  support  amounts  recorded in the
financial statements,  (3) purchase cutoff prodcedures were inadequate,  and (4)
the Company's accounting  personnel did not have the appropriate  qualifications
and training to fulfill their  assigned  functions.  While the Company  believes
that certain of the matters reported to the Audit Committee by D&T regarding the
year ended  December  31, 2002 were  untimely,  overstated,  or  inaccurate,  it
believes  that each of the  issues  raised has  already  been  addressed  to the
satisfaction of the Audit Committee.

      The Company engaged Farber & Hass, LLP as its new independent  accountants
as of July 31, 2003.


                                       20
<PAGE>



ITEM 9A. CONTROLS AND PROCEDURES

      (a) Evaluation of Disclosure Controls and Procedures.  The Company's Chief
Executive  Officer and Chief Financial  Officer have evaluated the effectiveness
of the Company's  disclosure controls and procedures (as such term is defined in
Rules  13a-15(e)  and  15d-15(e)  under the  Exchange  Act) as of the end of the
period covered by this Report (the "Evaluation Date"). Based on such evaluation,
such officers have  concluded  that, as of the  Evaluation  Date,  the Company's
disclosure  controls and  procedures  are effective in alerting them on a timely
basis to material information relating to the Company required to be included in
the Company's periodic filings under the Exchange Act.

      (b) Changes in Internal  Control Over Financial  Reporting.  No changes in
the  Company's   internal   control  over  financial   reporting  have  come  to
management's  attention  during the  Company's  last  fiscal  quarter  that have
materially  affected,  or  are  reasonably  likely  to  materially  affect,  the
Company's internal control over financial reporting.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The  information  required by this item will be contained in the Company's
Proxy Statement for its 2004 annual meeting of stockholders, which will be filed
on or before April 29, 2004 and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

      The  information  required by this item will be contained in the Company's
Proxy Statement for its 2004 annual meeting of stockholders, which will be filed
on or before April 29, 2004 and is incorporated herein by reference.

ITEM 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

      The  information  required by this item will be contained in the Company's
Proxy Statement for its 2004 annual meeting of stockholders, which will be filed
on or before April 29, 2004 and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The  information  required by this item will be contained in the Company's
Proxy Statement for its 2004 annual meeting of stockholders, which will be filed
on or before April 29, 2004 and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

      The  information  required by this item will be contained in the Company's
Proxy Statement for its 2004 annual meeting of stockholders, which will be filed
on or before April 29, 2004 and is incorporated herein by reference.


                                       21
<PAGE>

                                     PART IV


ITEM 15. EXHIBITS,  CONSOLIDATED  FINANCIAL STATEMENT SCHEDULES,  AND REPORTS ON
FORM 8-K

(A)  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

      1.    CONSOLIDATED FINANCIAL STATEMENTS:

<TABLE>
<CAPTION>
<S>           <C>                                                                                                  <C>
              Independent Auditors' Reports ....................................................................   F-2

              Consolidated Balance Sheets as of December 31, 2003, and 2002.....................................   F-3

              Consolidated Statements of Operations for the years ended December 31, 2003, 2002, 2001, and
              for the period from November 1, 1992 (inception) through December 31, 2003........................   F-4

              Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2003,
              2002, 2001, 2000, 1999, 1998, 1997, 1996, 1995, 1994 and 1993.....................................   F-5

              Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002, 2001, and
              the period from November 1, 1992 (inception) through December 31, 2003............................   F-6

              Notes to the Consolidated Financial Statements....................................................   F-9
</TABLE>

      2.    CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:

              All schedules have been omitted because they are not required, not
              applicable, or the information required to be set forth therein is
              included in the Company's Consolidated Financial Statements or the
              Notes therein.

(B)   REPORTS ON FORM 8-K

      The  Company  filed two  reports  on Form 8-K  during  the  quarter  ended
December 31, 2003. Information regarding the items reported on is as follows:


     DATE                                       ITEM REPORTED ON
--------------------------------------------------------------------------------

October 17, 2003                 Press  release of the Company dated October 20,
                                 2003, regarding a reverse stock split.

December 1, 2003                 Press release of the Company dated  December 3,
                                 2003,   regarding  filing  of  a  Form  S-3  to
                                 register shares of its common stock and that it
                                 was not in compliance  with one of the Nasdaq's
                                 minimum listing requirements.

(C)   EXHIBITS

            3.1   Certificate of Incorporation of the Company.(1)

            3.2   Bylaws of the Company.(1)

            3.3   Certificate    of    Designation,     Preferences    Relative,
                  Participating,  Optional  and  Other  Special  Rights  of  the
                  Company's  Series A Cumulative  Senior  Convertible  Preferred
                  Stock.(1)

            3.4   Amended  and  Restated  Certificate  of  Incorporation  of the
                  Company.(1)

            3.5   Amended and Restated Bylaws of the Company.(1)

            4.1   Specimen certificate of Common Stock.(1)

            4.3   Form of Warrant to  purchase  Common  Stock  dated  August 12,
                  2002.(9)

            4.4   Form of Note under Loan  Agreement  dated as of  September  9,
                  2002 between the Company and E. Khashoggi Industries, LLC.(11)

            4.5   Form of Secured Convertible Debenture due March 5, 2006.(13)

            4.6   Intellectual  Property Security Agreement dated as of March 5,
                  2003 among the Company, E. Khashoggi  Industries,  LLC and the
                  investors signatory thereto.(13)

            4.7   Waiver and  Amendment to Debentures  and Warrants  dated as of
                  March 5, 2003 among the Company and the purchasers  identified
                  on the signature pages thereto.(13)

            4.8   Exchange  Agreement  dated  as of March 5,  2003  between  the
                  Company and the institutional investor signatory thereto.(13)

            10.1  Amended and Restated License Agreement dated February 28, 1995
                  by   and    between    the    Company    and   E.    Khashoggi
                  Industries("EKI").(2)

            10.2  Registration Rights Agreement dated as of February 28, 1995 by
                  and between the Company and EKI, as amended.(1)

            10.3  EarthShell Container Corporation 1994 Stock Option Plan.(1)

                                       22
<PAGE>

            10.4  EarthShell Container Corporation 1995 Stock Incentive Plan.(1)

            10.5  Form of Stock Option Agreement under the EarthShell  Container
                  Corporation 1994 Stock Option Plan.(1)

            10.6  Form of Stock Option Agreement under the EarthShell  Container
                  Corporation 1995 Stock Incentive Plan.(1)

            10.7  Warrant to Purchase  Stock  issued July 2, 1996 by the Company
                  to Imperial Bank.(1)

            10.8  Amended and Restated Technical Services and Sublease Agreement
                  dated October 1, 1997 by and between the Company and EKI.(1)

            10.9  Amended and Restated  Agreement for Allocation of Patent Costs
                  dated October 1, 1997 by and between the Company and EKI.(1)

            10.10 Warrant  to  Purchase  Stock  issued  October  6,  1997 by the
                  Company to Imperial Bank.(1)

            10.11 Warrant to  Purchase  Stock  dated  December  31,  1997 by the
                  Company to Imperial Bank.(1)

            10.12 Letter Agreement re Haas/BIOPAC  Technology dated February 17,
                  1998 by and between the Company and EKI.(1)

            10.13 Second   Amendment  to  1995  Stock   Incentive  Plan  of  the
                  Company.(1)

            10.14 Amendment No. 2 to Registration  Rights  Agreement dated as of
                  September 16, 1993.(1)

            10.15 Amendment  No.  2  to  Registration   Rights  Agreement  dated
                  February 28, 1995.(1)

            10.16 Employment  Agreement  dated April 15, 1998 by and between the
                  Company and Vincent J. Truant.(3)

            10.17 First Amendment dated June 2, 1998 to the Amended and Restated
                  License  Agreement by and between the Company and E. Khashoggi
                  Industries("EKI").(4)

            10.18 First   Amendment  to  1995  Stock  Incentive   Plan   of  the
                  Company.(5)

            10.19 Third   Amendment  to  1995  Stock   Incentive   Plan  of  the
                  Company.(6)

            10.20 Fourth   Amendment  to  1995  Stock   Incentive  Plan  of  the
                  Company.(6)

            10.21 Lease  Agreement  dated  August 23,  2000 by and  between  the
                  Company and Heaver Properties, LLC.(7)

            10.22 Settlement Agreement with Novamont dated August 3, 2001.(8)

            10.23 Amendment to Common Stock Purchase  Agreement  dated March 28,
                  2001.(8)

            10.24 Securities  Purchase  Agreement  dated as of August  12,  2002
                  between the Company and the investors signatory thereto.(9)

            10.25 Amendment #1 to Employment  Agreement dated as of May 15, 2002
                  by and between the Company and Vince Truant.(10)

            10.26 Loan  Agreement  dated as of  September  9, 2002  between  the
                  Company and E. Khashoggi Industries, LLC.(11)

            10.27 Second  Amendment  dated 29 July, 2002 to Amended and Restated
                  License Agreement between E. Khashoggi Industries, LLC and the
                  Company.(12)

            10.28 License and Information Transfer Agreement dated 29 July, 2002
                  between the Biotec Group and the Company.(12)

            10.29 Loan and Securities  Purchase  Agreement  dated as of March 5,
                  2003   between  the  Company  and  the   investors   signatory
                  thereto.(13)

            10.30 Sublicense  Agreement  dated  February 20, 2004 by and between
                  the Company and Hood Packaging Corporation.

            10.31 Operating and  Sublicense  Agreement  dated October 3, 2002 by
                  and between the Company and Sweetheart Cup Company, Inc.


                                       23
<PAGE>



            10.32 First  Amendment to Operating and Sublicense  Agreement  dated
                  July  2003 by and  between  the  Company  and  Sweetheart  Cup
                  Company, Inc.

            10.33 Lease  Agreement  dated  July 2003  between  the  Company  and
                  Sweetheart Cup Company, Inc.

            10.34 First  Amendment to Lease  Agreement  dated  December 16, 2003
                  between the Company and Sweetheart Cup Company, Inc.

            14.4  EarthShell Corporation Code of Ethics for Directors,  Officers
                  and Employees

            16.1  Letter  from  Deloitte  &  Touche  LLP to the  Securities  and
                  Exchange  Commission  dated July 9, 2003,  regarding change in
                  certifying accountant. (18)

            23.1  Independent Auditor's consent

            23.2  Independent Auditor's consent

            31.1  Certification  of the CEO  pursuant to Rules 13a-14 and 15d-14
                  under the Exchange Act, as adopted  pursuant to Section 302 of
                  the Sarbanes-Oxley Act of 2002.

            31.2  Certification  of the CFO  pursuant to Rules 13a-14 and 15d-14
                  under the Exchange Act, as adopted  pursuant to Section 302 of
                  the Sarbanes-Oxley Act of 2002.

            32.1  Certification  pursuant to 18 U.S.C.  Section 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

(1)   Previously filed, as an exhibit to the Company's Registration Statement on
      Form S-1 and amendments  thereto,  File no.  333-13287,  and  incorporated
      herein by reference.

(2)   Previously  filed as an exhibit to the Company's  quarterly report on Form
      10-Q,  for the quarter ended March 31, 1998,  and  incorporated  herein by
      reference.

(3)   Previously  filed as an exhibit to the Company's  quarterly report on Form
      10-Q,  for the quarter  ended June 30, 1998,  and  incorporated  herein by
      reference.

(4)   Previously  filed as an exhibit to the Company's  quarterly report on Form
      10-Q, for the quarter ended September 30, 1998, and incorporated herein by
      reference.

(5)   Previously  filed as an exhibit  to the  Company's  annual  report on Form
      10-K, for the fiscal year ended December 31, 1998, and incorporated herein
      by reference.

(6)   Previously  filed as part of the Company's  definitive  proxy statement on
      Schedule  14A,  file  no.  000-23567,  for  its  1999  annual  meeting  of
      stockholders, and incorporated herein by reference.

(7)   Previously  filed as an exhibit  to the  Company's  annual  report on Form
      10-K, for the fiscal year ended December 31, 2000, and incorporated herein
      by reference.

(8)   Previously  filed as an exhibit to the Company's  quarterly report on Form
      10-Q, for the quarter ended June 30, 2001, and incorporated herein.


                                       24
<PAGE>



 (9) Previously filed as an exhibit to the Company's current report on Form 8-K
      dated August 12, 2002, and incorporated herein by reference.

(10)  Previously  filed as an exhibit to the Company's  quarterly report on Form
      10-Q for the  quarter  ended June 30,  2002,  and  incorporated  herein by
      reference.

(11)  Previously filed as an exhibit to the Company's current report on Form 8-K
      dated September 17, 2002, and incorporated herein by reference.

(12)  Previously  filed as an exhibit to the Company's  quarterly report on Form
      10-Q for the quarter ended September 30, 2002, and incorporated  herein by
      reference.

(13)  Previously filed as an exhibit to the Company's current report on Form 8-K
      dated March 5, 2003, and incorporated herein by reference.



                                       25
<PAGE>


                                   SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) 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, on April 13, 2004.

                                        EARTHSHELL CORPORATION

                                        By:  /s/ Simon K. Hodson
                                            ------------------------------------
                                            Simon K. Hodson
                                            Vice Chairman of the Board and
                                            Chief Executive Officer


      Pursuant to the requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities indicated.


<TABLE>
<CAPTION>
       SIGNATURE                                   TITLE                               DATE
       ---------                                   -----                               ----
<S>                              <C>                                             <C>
 /s/ Essam Khashoggi                      Chairman of the Board                  April 13, 2004
------------------------------
    Essam Khashoggi

                                     Vice Chairman of the Board and Chief
                                    Executive Officer (Principal Executive        April 13, 2004
  /s/ Simon K. Hodson                           Officer)
------------------------------
    Simon K. Hodson


                                   Chief Financial Officer and Secretary          April 13, 2004
  /s/ D. Scott Houston                (Principal Financial Officer)
------------------------------
   D. Scott Houston


                                                 Controller                       April 13, 2004
  /s/ Michael P. Hawks               (Principal Accounting Officer)
------------------------------
   Michael P. Hawks


  /s/ John Daoud                                  Director                        April 13, 2004
------------------------------
      John Daoud


  /s/ Layla Khashoggi                             Director                        April 13, 2004
------------------------------
    Layla Khashoggi


  /s/ Hamlin Jennings                             Director                        April 13, 2004
------------------------------
    Hamlin Jennings


  /s/ Walker Rast                                 Director                        April 13, 2004
------------------------------
      Walker Rast


  /s/ George Roland                               Director                        April 13, 2004
------------------------------
     George Roland

</TABLE>


                                       26
<PAGE>



            INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

<TABLE>
<CAPTION>
<S>                                                                                                      <C>
Index to Consolidated Financial Statements and Schedules...............................................  F-1

Independent Auditors' Reports .........................................................................  F-2

Consolidated Balance Sheets as of December 31, 2003 and 2002...........................................  F-3

Consolidated Statements of Operations for the years ended December 31, 2003, 2002, and 2001, and
for the period from November 1, 1992 (inception) through December 31, 2003.............................  F-4

Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2003, 2002,
2001, 2000, 1999, 1998, 1997, 1996, 1995, 1994, and 1993...............................................  F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002, and 2001, and
for the period from November 1, 1992 (inception) through December 31, 2003.............................  F-6

Notes to Consolidated Financial Statements.............................................................  F-9
</TABLE>


Consolidated Financial Statement Schedules:

      None.

      All  schedules  have  been  omitted  because  they are not  required,  not
applicable,  or the information  required to be set forth therein is included in
the Company's Consolidated Financial Statements or the Notes therein.


                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of
EarthShell Corporation:

         We  have  audited  the  accompanying   consolidated  balance  sheet  of
EarthShell  Corporation (a development  stage  enterprise) (the "Company") as of
December  31,  2003,  and the related  consolidated  statements  of  operations,
stockholders'  (deficit) equity, and cash flows for the year then ended, and for
the period from November 1, 1992  (inception)  through  December 31, 2003. These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our  audit.  The  Company's  financial  statements  as of and for the year ended
December 31, 2002, and for the period from November 1, 1992 (inception)  through
December 31, 2002 were audited by other auditors  whose report,  dated April 29,
2003,  expressed  an  unqualified  opinion on those  statements  and included an
explanatory  paragraph  relating to the Company's ability to continue as a going
concern.  The  financial  statements  for  the  period  from  November  1,  1992
(inception)  through  December  31, 2002 total a net loss of  $295,833,940.  The
other auditor's report has been furnished to us, and our opinion,  insofar as it
relates to the amounts  included for such prior  period,  is based solely on the
report of such other auditors.

         We conducted our audit in accordance with auditing standards  generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

         In our  opinion,  based on our audit and the report of other  auditors,
such consolidated financial statements present fairly, in all material respects,
the financial  position of the Company as of December 31, 2003,  and the results
of its operations and its cash flows for the year then ended, and for the period
from November 1, 1992 (inception)  through December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America.

         The accompanying  consolidated  financial statements have been prepared
assuming  that the Company will  continue as a going  concern.  The Company is a
development  stage enterprise  engaged in the  commercialization  of foodservice
disposable  packaging with the environment in mind. As discussed in the notes to
the consolidated  financial statements,  during the period from November 1, 1992
(inception) to December 31, 2003, the Company has incurred a cumulative net loss
of approximately $314,000,000 and has a working capital deficit of $7,900,000 at
December 31, 2003. In addition,  in March 2004 the Company was delisted from the
NASDQ Smallcap Market and did not make the January 2004 interest payments on its
2006  Debentures,  which has  caused  the  Company  to be in default on the 2006
Debentures. These matters raise substantial doubt about the Company's ability to
continue as a going concern.  Management's  plans  concerning  these matters are
also  described  in the  notes to the  consolidated  financial  statements.  The
consolidated  financial  statements  do not include any  adjustments  that might
result from the outcome of this uncertainty.


/s/ Farber & Hass LLP

Camarillo, California
March 23, 2004


<PAGE>


                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of
EarthShell Corporation:

      We have audited the accompanying  consolidated balance sheet of EarthShell
Corporation (a development  stage enterprise) (the "Company") as of December 31,
2002,  and the related  consolidated  statements  of  operations,  stockholders'
(deficit)  equity,  and cash flows for each of the two years in the period ended
December 31, 2002 and for the period from November 1, 1992  (inception)  through
December 31, 2002 (not separately presented herein).  These financial statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance  with auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

      In our opinion, such consolidated  financial statements present fairly, in
all material respects,  the financial position of the Company as of December 31,
2002,  and the results of its  operations and its cash flows for each of the two
years in the period ended  December 31, 2002 and for the period from November 1,
1992  (inception)  through  December 31, 2002,  in  conformity  with  accounting
principles generally accepted in the United States of America.

      The  accompanying  consolidated  financial  statements  have been prepared
assuming  that the Company will  continue as a going  concern.  The Company is a
development  stage enterprise  engaged in the  commercialization  of foodservice
disposable  packaging with the environment in mind. As discussed in the notes to
the consolidated  financial statements,  during the period from November 1, 1992
(inception) to December 31, 2002, the Company has incurred a cumulative net loss
of $295,833,940  and has a working  capital deficit at December 31, 2002.  These
matters raise  substantial  doubt about the  Company's  ability to continue as a
going concern. Management's plans concerning these matters are also described in
the notes to the consolidated  financial statements.  The consolidated financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.


/s/ Deloitte & Touche LLP

Deloitte & Touche LLP
Los Angeles, California
April 29, 2003 (April 13, 2004 as to the  one-for-twelve reverse  stock split of
the Company's common stock)

                                      F-2
<PAGE>

                             EARTHSHELL CORPORATION
                        (A DEVELOPMENT STAGE ENTERPRISE)
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                 DECEMBER 31,
                                                                      --------------------------------
                                                                           2003             2002
                                                                      --------------------------------
ASSETS

CURRENT ASSETS
<S>                                                                   <C>                <C>
   Cash and cash equivalents ....................................     $   1,901,639      $     111,015
   Restricted cash ..............................................                --         12,500,000
   Prepaid expenses and other current assets ....................           323,680            570,802
                                                                      --------------------------------
      Total current assets ......................................         2,225,319         13,181,817

PROPERTY AND EQUIPMENT, NET .....................................            61,794          4,476,174
EQUIPMENT HELD FOR SALE .........................................                 1                 --
INVESTMENT IN JOINT VENTURE .....................................                --            366,012
                                                                      --------------------------------

TOTALS ..........................................................     $   2,287,114      $  18,024,003
                                                                      ================================


LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES
   Accounts payable and accrued expenses ........................     $   4,853,413      $   7,904,957
   Payable to related party .....................................                --            578,779
   Accrued purchase commitment ..................................                --          3,500,000
   Notes payable to related party ...............................                --          1,745,000
   Convertible debentures, net of discount of $1,505,755 and
      $1,232,047 as of December 31, 2003 and 2002, respectively .         5,294,245          7,767,953
                                                                      --------------------------------

      Total current liabilities .................................        10,147,658         21,496,689

PAYABLES TO RELATED PARTY .......................................         1,839,108                 --
NOTES PAYABLE TO RELATED PARTY, NET OF DISCOUNT OF $219,210 .....         2,535,790                 --
OTHER LONG-TERM LIABILITY .......................................            33,333                 --
                                                                      --------------------------------

      Total liabilities .........................................        14,555,889         21,496,689
                                                                      --------------------------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICT
   Preferred Stock, $.01 par value, 10,000,000 shares authorized;
      9,170,000 Series A shares designated;  no shares
      issued and outstanding as of December 31, 2003 and 2002 ...                --                 --
   Common stock, $.01 par value, 25,000,000 shares authorized;
      14,128,966 and 12,054,637 shares issued and outstanding as
      of December 31, 2003 and 2002, respectively ...............           141,290            120,546
   Additional paid-in common capital ............................       302,033,746        292,257,340
   Deficit accumulated during the development stage .............      (314,350,681)      (295,833,940)
   Accumulated other comprehensive loss .........................           (93,130)           (16,632)
                                                                      --------------------------------

      Total stockholders' deficit ...............................       (12,268,775)        (3,472,686)
                                                                      --------------------------------

TOTALS ..........................................................     $   2,287,114      $  18,024,003
                                                                      ================================

</TABLE>

                 See Notes to Consolidated Financial Statements.


                                      F-3
<PAGE>

                             EARTHSHELL CORPORATION
                        (A DEVELOPMENT STAGE ENTERPRISE)
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                                                NOVEMBER 1, 1992
                                                                           YEAR ENDED DECEMBER 31,                 (INCEPTION)
                                                        ----------------------------------------------------  THROUGH DECEMBER 31,
                                                                 2003             2002              2001              2003
                                                        ------------------------------------------------------------------------
<S>                                                         <C>               <C>               <C>               <C>
Operating Expenses
   Related party license fee and research and
     development expenses............................       $ 1,312,374       $ 1,488,070       $ 1,465,250       $ 71,191,282
   Other research and development expenses...........         8,234,416        25,401,869        45,683,165        142,512,071
   Related party general and administrative expenses
     (reimbursements)................................            (4,074)          (24,444)          (24,444)         2,187,540
   Other general and administrative expenses.........         5,790,473         9,614,037         9,658,116         68,213,158
   Depreciation and amortization.....................           379,949         3,099,367         5,874,144         22,841,379
   Related party patent expenses.....................                --                --                --          8,693,105
   Gain on sales of property and equipment...........          (451,940)         (441,413)               --           (893,353)
                                                        ------------------------------------------------------------------------
      Total operating expenses.......................        15,261,198        39,137,486        62,656,231        314,745,182

Other (Income) Expenses
   Interest income...................................           (95,176)         (134,391)         (355,520)       (10,904,809)
   Related party interest expense....................           445,628            66,599                --          5,282,958
   Other interest expense............................         1,440,118           199,880                --          3,428,736
   Other income......................................          (399,701)               --                --           (399,701)
   Loss on extinguishment of debentures..............         1,697,380                --                --          1,697,380
   Debenture conversion cost.........................           166,494           320,970                --            487,464
                                                        ------------------------------------------------------------------------

Loss Before Income Taxes.............................        18,515,941        39,590,544        62,300,711        314,337,210
Income Taxes.........................................               800               800               800             13,471
                                                        ------------------------------------------------------------------------

Net Loss.............................................        18,516,741        39,591,344        62,301,511        314,350,681
Preferred Dividends..................................                --                --                --          9,926,703
                                                        ------------------------------------------------------------------------
Net Loss Available to Common Stockholders............       $18,516,741       $39,591,344       $62,301,511       $324,277,384
                                                        ========================================================================

Basic and Diluted Loss Per Common Share..............       $      1.40       $      3.51       $      6.66       $       38.44
Weighted Average Number of Common Shares Outstanding.        13,266,668        11,277,170         9,352,641           8,435,523
</TABLE>

                 See Notes to Consolidated Financial Statements.


                                      F-4
<PAGE>

                             EARTHSHELL CORPORATION
                        (A DEVELOPMENT STAGE ENTERPRISE)
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY


<TABLE>
<CAPTION>
                                         CUMULATIVE CONVERTIBLE
                                            PREFERRED STOCK                     ADDITIONAL
                                                SERIES A                          PAID-IN                COMMON STOCK
                                   -----------------------------------           PREFERRED         --------------------------
                                         SHARES             AMOUNT                CAPITAL            SHARES         AMOUNT
                                   --------------------------------------------------------------------------------------------
<S>                                <C>                <C>                     <C>                <C>            <C>
ISSUANCE OF COMMON STOCK
   AT INCEPTION .................              --               --                         --       6,877,500   $       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       6,877,500           3,150
Net loss ........................              --               --                         --              --              --
                                   --------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31,
   1994 .........................       6,988,850              267                 24,472,734       6,877,500           3,150
Contribution to equity ..........              --               --                         --              --              --
Net loss ........................              --               --                         --              --              --
                                   --------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31,
   1995 .........................       6,988,850              267                 24,472,734       6,877,500           3,150
Contribution to equity ..........              --               --                         --              --              --
Issuance of stock
   warrants .....................              --               --                         --              --              --
Net loss ........................              --               --                         --              --              --
                                   --------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31,
   1996 .........................       6,988,850              267                 24,472,734       6,877,500           3,150
Compensation related to
   stock options,
   warrants and stock
   grants .......................              --               --                         --              --              --
Net loss ........................              --               --                         --              --              --
                                   --------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31,
   1997 .........................       6,988,850              267                 24,472,734       6,877,500           3,150
262 to 1 stock split.............           5,557           (5,557)                        --          65,625         (65,625)
Conversion of preferred
   stock into common
   stock ........................      (6,988,850)          (5,824)                   582,404           5,824      24,467,177
Issuance of common stock ........              --               --                         --         877,193           8,772
Preferred stock dividends .......              --               --                         --              --              --
Net loss ........................              --               --                         --              --              --
                                   --------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31,
   1998 .........................              --               --                         --       8,337,097          83,371
Net loss ........................              --               --                         --              --              --
                                   --------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31,
   1999 .........................              --               --                         --       8,337,097          83,371
Issuance of common stock ........              --               --                         --         371,431           3,714
Net loss ........................              --               --                         --              --              --
                                   --------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31,
   2000 .........................              --               --                         --       8,708,528          87,085
Issuance of common stock ........              --               --                         --       1,126,727          11,267
Compensation related to
   stock options,
   warrants and stock
   grants .......................              --               --                         --          25,000             250
Net loss ........................              --               --                         --              --              --
                                   --------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31,
   2001 .........................              --               --                         --       9,860,255          98,602
Issuance of common stock ........              --               --                         --       2,025,686          20,257
Common stock warrants
   issued in connection
   with convertible
   debentures ...................              --               --                         --              --              --
Conversion of
   convertible
   debentures to common
   stock ........................              --               --                         --         168,696           1,687
Debenture conversion
   costs ........................              --               --                         --              --              --
Net loss ........................
Foreign currency
   translation adjustment .......              --               --                         --              --              --

Comprehensive loss ..............              --               --                         --              --              --
                                   --------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31,
   2002 .........................              --               --                         --      12,054,637         120,546

Issuance of common stock ........              --               --                         --         137,264           1,373
Common stock and common
   stock warrants issued
   in connection with
   issuance of
   convertible debentures .......              --               --                         --         624,747           6,248
Conversion of
   convertible
   debentures to common
   stock ........................              --               --                         --       1,312,318          13,123
Debenture conversion
   costs ........................              --               --                         --              --              --
Net loss ........................              --               --                         --              --              --
Foreign currency
   translation
   adjustment ...................              --               --                         --              --              --

Comprehensive loss ..............              --               --                         --              --              --
                                   --------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31,
   2003 .........................              --         $     --              $          --      14,128,966   $     141,290
                                   ============================================================================================
</TABLE>

<TABLE>
<CAPTION>

                                                           DEFICIT
                                          ADDITIONAL     ACCUMULATED           ACCUMULATED
                                           PAID-IN         DURING                OTHER
                                            COMMON         DEVELOP-           COMPREHENSIVE
                                           CAPITAL        MENT STAGE              LOSS                   TOTALS
                                      -------------------------------------------------------------------------------------
<S>                                      <C>              <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,
   warrants and stock
   grants ..........................         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................                --               --               --                          --
Conversion of preferred
   stock into common
   stock ...........................                --               --               --
Issuance of common stock ...........       205,979,984               --               --                 205,988,756
Preferred stock dividends ..........        (9,926,703)              --               --                  (9,926,703)
Net loss ...........................                --      (26,620,052)              --                 (26,620,052)
                                      -------------------------------------------------------------------------------------

BALANCE, DECEMBER 31,
   1998 ............................       225,632,335     (100,841,037)              --                 124,874,669
Net loss ...........................                --      (44,188,443)              --                 (44,188,443)
                                      -------------------------------------------------------------------------------------

BALANCE, DECEMBER 31,
   1999 ............................       225,632,335     (145,029,480)              --                  80,686,226
Issuance of common stock ...........        10,518,074               --               --                  10,521,788
Net loss ...........................                --      (48,911,605)              --                 (48,911,605)
                                      -------------------------------------------------------------------------------------

BALANCE, DECEMBER 31,
   2000 ............................       236,150,409     (193,941,085)              --                  42,296,409
Issuance of common stock ...........        30,542,773               --               --                  30,554,040
Compensation related to
   stock options,
   warrants and stock
   grants ..........................           986,869               --               --                     987,119
Net loss ...........................                --      (62,301,511)              --                 (62,301,511)
                                      -------------------------------------------------------------------------------------

BALANCE, DECEMBER 31,
   2001 ............................       267,680,051     (256,242,596)              --                  11,536,057
Issuance of common stock ...........        21,881,459               --               --                  21,901,716
Common stock warrants
   issued in connection
   with convertible
   debentures ......................         1,521,046               --               --                   1,521,046
Conversion of
   convertible
   debentures to common
   stock ...........................           998,313               --               --                   1,000,000
Debenture conversion
   costs ...........................           176,471               --               --                     176,471
Net loss ...........................                        (39,591,344)                                 (39,591,344)
Foreign currency
   translation adjustment ..........                --               --    $     (16,632)                    (16,632)
                                                                                                      ---------------------

Comprehensive loss .................                --               --               --                 (39,607,976)
                                      -------------------------------------------------------------------------------------

BALANCE, DECEMBER 31,
   2002 ............................       292,257,340     (295,833,940)         (16,632)                 (3,472,686)

Issuance of common stock ...........           811,267               --               --                     812,640
Common stock and common
   stock warrants issued
   in connection with
   issuance of
   convertible debentures ..........         2,921,594               --               --                   2,927,842
Conversion of
   convertible
   debentures to common
   stock ...........................         7,536,877               --               --                   7,550,000
Debenture conversion
   costs ...........................        (1,493,332)              --               --                  (1,493,332)
Net loss ...........................                --      (18,516,741)              --                 (18,516,741)
Foreign currency
   translation
   adjustment ......................                --               --          (76,498)                    (76,498)
                                                                                                      ---------------------

Comprehensive loss .................                --               --               --                 (18,593,239)
                                      -------------------------------------------------------------------------------------

BALANCE, DECEMBER 31,
   2003 ............................     $ 302,033,746    $(314,350,681)   $     (93,130)              $ (12,268,775)
                                      ====================================================================================
</TABLE>

                 See Notes to Consolidated Financial Statements.


                                      F-5
<PAGE>

                             EARTHSHELL CORPORATION
                        (A DEVELOPMENT STAGE ENTERPRISE)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                                   NOVEMBER 1,
                                                                                                                      1992
                                                                                                                  (INCEPTION)
                                                                    YEAR ENDED DECEMBER 31,                         THROUGH
                                                  ---------------------------------------------------------       DECEMBER 31,
                                                             2003                2002                2001             2003
                                                  ----------------------------------------------------------------------------------
<S>                                                  <C>                <C>                <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES

Net loss .......................................     $ (18,516,741)     $ (39,591,344)     $ (62,301,511)     $(314,350,681)
Adjustments to reconcile net loss to net cash
      used in operating activities
   Depreciation and amortization ...............           379,949          3,099,367          5,874,144         22,841,379
   Amortization and accretion of debenture issue
      costs ....................................           955,574            144,500                 --          1,371,351
   Debenture conversion costs ..................           166,494            320,970                 --            487,464
   Gain on change in fair value of warrant
      obligation ...............................          (399,701)                --                 --           (399,701)
   Loss on extinguishment of debentures ........         1,697,380                 --                 --          1,697,380
   Beneficial conversion value due to change in
      debentures conversion price ..............           360,000                 --                 --            360,000
   Loss on sale, disposal or impairment
      of property and equipment ................         3,548,059          9,340,375         19,386,412         50,761,599
   Equity in the losses of joint venture .......           392,116             20,263             37,153            541,542
   Accrued purchase commitment .................        (1,855,000)         3,500,000                 --          1,645,000
   Compensation related to issuance of stock,
      stock options and warrants to directors,
      consultants and officers .................                --                 --            987,119          4,848,641
   Net loss on sale of investments .............                --                 --                 --             32,496
   Accretion of discounts on investments .......                --                 --                 --           (410,084)
   Other non-cash items ........................            50,198                 --                 --             50,198
Changes in operating assets and liabilities
   Prepaid expenses and other current assets ...           264,153              9,670            (87,583)          (306,649)
   Accounts payable and accrued expenses .......        (2,339,720)          (444,851)         2,438,911          4,706,951
   Payable to related party ....................         1,214,683            578,779           (266,312)         1,839,108
   Accrued purchase commitment .................        (1,645,000)                --                 --         (1,645,000)
   Other long-term liability ...................            33,333                 --                 --             33,333
                                                  ----------------------------------------------------------------------------------

      Net cash used in operating activities ....       (15,694,223)       (23,022,271)       (33,931,667)      (225,895,673)
                                                  ==================================================================================
</TABLE>


                                      F-6
<PAGE>

<TABLE>
<CAPTION>
                                                                                                                   NOVEMBER 1,
                                                                                                                      1992
                                                                                                                  (INCEPTION)
                                                                    YEAR ENDED DECEMBER 31,                         THROUGH
                                                  ---------------------------------------------------------       DECEMBER 31,
                                                             2003                2002                2001             2003
                                                  ----------------------------------------------------------------------------------
<S>                                                  <C>                <C>                <C>                <C>

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of restricted time deposit in
   connection with purchase commitment .........                --                 --                 --         (3,500,000)
Proceeds from release of restricted time deposit
   upon settlement of purchase commitment ......         3,500,000                 --                 --          3,500,000
Purchase of investments U.S. government
   securities ..................................                --                 --                 --        (52,419,820)
Proceeds from sales and redemptions of
   investments .................................                --                 --                 --         52,797,408
Proceeds from sales of property and equipment ..           487,691            477,566                 --          1,262,927
Investment in joint venture ....................           (26,104)                --                 --           (541,542)
Purchases of property and equipment ............            (1,320)        (2,802,371)        (3,586,020)       (75,799,435)
                                                  ----------------------------------------------------------------------------------

      Net cash provided by (used in) investing
        activities .............................         3,960,267         (2,324,805)        (3,586,020)       (74,700,462)
                                                  ==================================================================================

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from issuance of common stock .........                --         21,901,716         30,554,040        284,852,820
Common stock issuance costs ....................                --                 --                 --        (15,178,641)
Proceeds from issuance of common stock and
   convertible debentures, net of issuance costs
   and discounts amounting to approximately $3.4
   million .....................................         8,711,844                 --                 --          8,711,844
Proceeds from issuance of convertible debentures                --         10,000,000                 --         10,000,000
Purchase of restricted time deposit in
   connection with issuance of convertible
   debentures ..................................                --        (10,000,000)                --        (10,000,000)
Proceeds from release of restricted time deposit
   upon conversion of convertible debentures
   into common stock ...........................         1,800,000          1,000,000                 --          2,800,000
Proceeds from release of restricted time deposit
   upon exchange of convertible debentures .....         2,000,000                 --                 --          2,000,000
Proceeds from release of restricted time deposit
   for repayment of convertible debentures .....         5,200,000                 --                 --          5,200,000
Repayment of convertible debentures ............        (5,200,000)                --                 --         (5,200,000)
Proceeds from issuance of notes payable to
   related party ...............................         1,010,000          4,825,000                 --         20,105,000
Repayment of notes payable to related
    party ......................................                --         (3,080,000)                --        (15,325,651)
Proceeds from drawings on line of credit with
   bank ........................................                --                 --                 --         14,000,000
Repayment of line of credit with bank ..........                --                 --                 --        (14,000,000)
Preferred dividends paid .......................                --                 --                 --         (9,926,703)
Proceeds from issuance of preferred stock ......                --                 --                 --         25,675,000
Preferred stock issuance costs .................                --                 --                 --         (1,201,999)
                                                  ----------------------------------------------------------------------------------

      Net cash provided by financing activities         13,521,844         24,646,716         30,554,040        302,511,670

Effect of exchange rate changes on cash and cash
   equivalents .................................             2,736            (16,632)                --            (13,896)
                                                  ----------------------------------------------------------------------------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS         1,790,624           (716,992)        (6,963,647)         1,901,639
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .           111,015            828,007          7,791,654                 --
                                                  ----------------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS, END OF PERIOD .......     $   1,901,639      $     111,015      $     828,007      $   1,901,639
                                                  ==================================================================================
</TABLE>



                                      F-7
<PAGE>


<TABLE>
<CAPTION>
                                                                                                                   NOVEMBER 1,
                                                                                                                      1992
                                                                                                                  (INCEPTION)
                                                                    YEAR ENDED DECEMBER 31,                         THROUGH
                                                  ---------------------------------------------------------       DECEMBER 31,
                                                             2003                2002                2001             2003
                                                  ----------------------------------------------------------------------------------
<S>                                                  <C>                <C>                <C>                <C>

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid for
   Income taxes ................................     $         800      $         800      $         800      $      12,671
   Interest ....................................           111,353             21,058                 --          3,160,651
Common stock warrants issued in connection with
   convertible debentures ......................           745,562          1,521,046                 --          2,572,776
Conversion of convertible debentures into common
   stock .......................................         7,550,000          1,000,000                 --          8,550,000
Transfer of property from EKI ..................                --                 --                 --             28,745
Conversion of preferred stock into common stock                 --                 --                 --             69,888
Interest paid in common stock ..................            95,339                 --                 --             95,339
Commission paid in common stock ................            29,500                 --                 --             29,500
Common stock issued to service providers in
   connection with the March 2003 financing ....           484,500                 --                 --            484,500
</TABLE>


SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

      In  2003,  warrants  for the  purchase  of  $1.055  million  in  aggregate
principal  amount of  convertible  debentures  and 70,477 shares of common stock
were issued in  connection  with the  issuance of  convertible  debentures.  The
estimated fair value of the warrants of $442,040,  based upon the  Black-Scholes
method of valuation, was recorded as an original issue discount thereby reducing
the  carrying  value  of  the  convertible  debentures  and  as an  increase  in
additional paid-in common capital.

      In 2003,  warrants for the purchase of 83,333  shares of common stock were
issued to EKI, in connection  with the issuance of  convertible  debentures,  in
consideration  for its  willingness  to  subordinate  amounts  owed  to it.  The
estimated fair value of the warrants of $303,522,  based upon the  Black-Scholes
method of valuation, was recorded as an original issue discount thereby reducing
the carrying  value of the notes payable to EKI and as an increase in additional
paid-in common capital.

      In 2003,  137,264  shares of common stock were issued to satisfy  accounts
payable and accrued interest payable of $812,640.

      In 2002,  warrants for the purchase of 208,333 shares of common stock were
issued in connection with the issuance of convertible debentures.  The estimated
fair value of the warrants of $1,521,046, based upon the Black-Scholes method of
valuation,  was  recorded as an original  issue  discount  thereby  reducing the
carrying  value of the  convertible  debentures and as an increase in additional
paid-in common capital.

      In 2001,  25,000  shares of common stock were granted to  consultants  and
officers with a fair market value on the date of grant of $792,353.

      In 2001,  10,833 stock  options were granted to  consultants.  The Company
recorded $194,766 of expense in conjunction with these transactions.

                 See Notes to Consolidated Financial Statements.


                                      F-8
<PAGE>



                             EARTHSHELL CORPORATION
                        (A DEVELOPMENT STAGE ENTERPRISE)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                 BASIS OF PRESENTATION AND NATURE OF OPERATIONS

      EarthShell Corporation was incorporated in Delaware on November 1, 1992 as
a subsidiary of E.  Khashoggi  Industries,  LLC (together  with its  predecessor
entities,   "EKI").  Beginning  in  January  2002,  the  consolidated  financial
statements of EarthShell  Corporation  include the accounts of its  wholly-owned
subsidiary,  PolarCup EarthShell GmbH. All significant intercompany balances and
transactions have been eliminated in consolidation.  Both EarthShell Corporation
and its subsidiary (collectively  "EarthShell" or the "Company") are development
stage enterprises.  In connection with the formation of the Company, the Company
entered into an Amended and Restated License Agreement (the "License Agreement")
for certain technology  developed by EKI, exclusively for use in connection with
the manufacture and sale of selected disposable food and beverage containers for
use in the foodservice industry.  Investments in affiliated companies with a 20%
to 50% ownership  interest  where control does not exist are accounted for using
the equity method. The accompanying  consolidated  financial  statements reflect
only the costs and expenses  related to the application of the technology  under
development since the Company's formation on November 1, 1992.

      The accompanying consolidated financial statements have been prepared on a
going  concern  basis,  which  contemplates  the  realization  of assets and the
satisfaction of liabilities in the normal course of business.  During the period
from November 1, 1992 (inception) to December 31, 2003, the Company has incurred
a  cumulative  net loss of  $314,350,681  and has a working  capital  deficit of
$7,922,339 at December 31, 2003. These factors,  along with others, may indicate
that the Company will be unable to continue as a going  concern for a reasonable
period of time.

      The  Company  will  have to raise  additional  funds  to meet its  current
obligations and to cover operating expenses through the year ending December 31,
2004. If the Company is not successful in raising  additional capital it may not
be  able to  continue  as a going  concern  for a  reasonable  period  of  time.
Management  plans to  address  this need by  raising  cash  through  either  the
issuance of debt or equity securities.  In addition, the Company expects cash to
be generated in 2004 through royalty  payments from licensees.  Another possible
source of funds is the sale or transfer  of the  commercial  production  line in
Goettingen, Germany to an operating partner. However, the Company can not assure
that  additional  financing will be available to it, or, if available,  that the
terms will be  satisfactory,  that it will receive any royalty payments in 2004,
or that it will be able to negotiate  mutually  agreeable terms for the transfer
of its commercial production line to an operating partner.  Management will also
continue in its efforts to reduce  expenses,  but can not assure that it will be
able to reduce expenses below current levels.

      The  consolidated  financial  statements  do not include  any  adjustments
relating to the  recoverability  and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.

      Management has made estimates and  assumptions in the preparation of these
consolidated financial statements that affect the reported amounts of assets and
liabilities and disclosures of contingent  assets and liabilities at the date of
the  consolidated  financial  statements  and the  reported  amounts of expenses
during the reporting period. Actual results could differ from those estimates.

      In January 2004, the Company  announced that it was not in compliance with
a Nasdaq  SmallCap  Market minimum  requirement.  On March 8, 2004 the Company's
common stock was delisted by the Nasdaq SmallCap Market and trading was moved to
the  over-the-counter  (OTC) Pink Sheets Electronic Quotation Service. The stock
trades under the symbol "ERTH.PK."


                                      F-9
<PAGE>



                              LOSS PER COMMON SHARE

      Basic loss per common share is computed by dividing net loss  available to
common stockholders by the weighted-average  number of common shares outstanding
during the period.  Diluted  loss per common  share is computed by dividing  net
loss available to common stockholders by the  weighted-average  number of common
shares  outstanding  plus an assumed  increase in common shares  outstanding for
potentially  dilutive  securities,  which  consist of options  and  warrants  to
acquire  common  stock  and  convertible  debentures.  Net loss as  reported  is
adjusted for preferred dividends.  Potentially dilutive shares are excluded from
the  computation  in loss periods,  as their effect would be  antidilutive.  The
dilutive  effect of options  and  warrants to acquire  common  stock is measured
using the treasury stock method.  The dilutive effect of convertible  debentures
is measured  using the if  converted  method.  Basic and diluted loss per common
share is the same for all periods  presented  because the impact of  potentially
dilutive  securities  is  anti-dilutive.  The  dilutive  effect  of  potentially
dilutive  securities  was 54 shares,  38,596  shares,  and 38,884 shares for the
years ended at December 31, 2003, 2002 and 2001, respectively.

                            OPERATIONS AND FINANCING

      The Company was engaged in initial concept  development from 1993 to 1998.
During this  period,  the Company  focused on  enhancing  the  material  science
technology  licensed  from  EKI,  initial  development  of  the  Company's  foam
packaging products  (primarily,  its hinged-lid sandwich  containers,  which are
referred to as "hinged-lid  containers"),  and the development of  relationships
with key licensees and end-users.

      Since  1998,  the  Company  has  been  primarily   engaged  in  commercial
validation of EarthShell Packaging for plates, bowls, hinged-lid containers, and
sandwich wraps, and other market development activities.  During this stage, the
Company has worked to demonstrate the commercial viability of its business model
by  optimizing  product  design,  garnering  support  from  key  members  of the
environmental  community,  expanding  validation  of the  environmental  profile
through third party evaluations,  developing  commercially viable  manufacturing
processes,  establishing and refining licensing  arrangements with the Company's
licensees,  and validating  product  performance  and price  acceptance  through
commercial  contracts  with  influential  purchasers  in  key  segments  of  the
foodservice  market.  In cooperation  with its operating  partners,  the Company
financed and built initial commercial  demonstration production capacity and has
sold limited quantities of plates,  bowls, and hinged-lid  containers.  In 2003,
the Company ceased commercial  demonstration  production activity and is relying
on its equipment and manufacturing  partners to demonstrate and to guarantee the
long-term manufacturability of EarthShell Packaging(R).

      As   demonstration   of  the   business   fundamentals   to  licensees  is
accomplished,  the  Company  expects  that its  operating  partners  will  build
production  capacity.  The  Company  intends  to  expand  the use of  EarthShell
Packaging in the U.S.  and in  international  markets  through  agreements  with
additional  licensees.  By leveraging the  infrastructure of its licensees,  the
Company   believes  the   go-to-market   strategy  will  accelerate  the  market
penetration of EarthShell Packaging.

      Currently,  the Company's strategic relationships include Detroit Tool and
Equipment  ("DTE"),  Sweetheart  Cup  Company  Inc.  ("Sweetheart"),   and  Hood
Packaging Corporation, all in the U.S. The Company has not recorded any revenues
from operations  since its inception,  and proceeds from sales of plates,  bowls
and hinged-lid containers to date have been insignificant and have been recorded
as an offset to the costs of its demonstration manufacturing operations.

      As part of the Company's  initial  public  offering on March 27, 1998, the
Company  issued  877,193  shares of common  stock,  for  which it  received  net
proceeds of $206  million.  On April 18,  2000 and January 4, 2001,  the Company
filed S-3 shelf  registration  statements  for  416,667  and  1,250,000  shares,
respectively, of the Company's common stock. During the years ended December 31,
2002, 2001, and 2000 the Company sold approximately 0.1 million, 1.1 million and
0.4  million  shares of common  stock  under such  registration  statements  and
received net  proceeds  from such sales of  approximately  $2.3  million,  $30.6
million  and $10.5  million,  respectively.  All  shares  available  under  such
registration statements had been sold as of December 2002.

      In December of 2001,  the Company filed an additional  shelf  registration
statement  providing for the sale of up to $50 million of securities,  including
secured or  unsecured  debt  securities,  preferred  stock,  common  stock,  and
warrants. These securities could be offered, separately or together, in distinct
series,  and  amounts,  at prices  and  terms to be set forth in the  prospectus
contained in the registration  statement,  and in subsequent  supplements to the
prospectus.  During the year ended  December  31,  2002,  the  Company  sold 1.9
million  shares of common stock under such  registration  statement and received
net proceeds from such sales of $19.6 million.


                                      F-10
<PAGE>



      On August  12,  2002,  the  Company  issued  $10.0  million  in  aggregate
principal  amount  of  convertible  debentures,  due  August  2007,  (the  "2007
Debentures")  and  warrants to purchase  0.2 million  shares of common  stock to
institutional   investors  for  proceeds  of  $10.0  million  (see   Convertible
Debenture).  The  terms  of the  debentures  required  the  proceeds  be held in
restricted  cash accounts  linked to  irrevocable  letters of credit in favor of
each  debenture  holder such that  unrestricted  access to the proceeds from the
sale of the debentures generally occurred only upon conversion of the debentures
into shares of the Company's  common stock (see  Restricted  Cash).  In 2002 and
2003,  $2.8 million of the debentures  were converted to common stock.  In March
2003,  the  Company  issued  $10.55  million in  aggregate  principal  amount of
convertible debentures, due March 2006 (the "2006 Debentures"),  and 0.5 million
shares of common stock to a group of institutional investors for net proceeds of
approximately  $9.0 million.  In connection with this  transaction,  the Company
repaid  $5.2  million  of the  remaining  balance  of the 2007  Debentures,  and
exchanged  $2.0 million of the 2007  Debentures  for the 2006  Debentures.  This
transaction  provided  the  Company  with net  proceeds of  approximately  $11.0
million.  The  Company's  use of these  proceeds  was  subject  to a  number  of
restrictions.  In 2003,  $5.75 million of the 2006  Debentures were converted to
common stock.  The remaining  shares under the December 2001 shelf  registration
described  above  have been  used to secure  shares  potentially  issuable  upon
conversion of the remainder of the 2006 Debentures.

      During 2002 and 2003, the Company's largest shareholder, EKI, made various
simple interest working capital loans to the Company.  These loans bear interest
at a rate of 7% or 10% per annum, and are payable on demand.  As of December 31,
2003,  the  outstanding  principal  balance of these  loans was  $2,755,000.  In
connection  with the March 2003  convertible  debenture  financing the remaining
outstanding balance of these loans was subordinated to the 2006 Debentures, with
strict covenants governing their repayment. (See Related Party Transactions).

                        RECENT ACCOUNTING PRONOUNCEMENTS

      The FASB recently issued the following statements:

      In April 2002, the FASB issued 145  "Rescission of FASB  Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This
Statement  rescinds SFAS 4, Reporting  Gains and Losses from  Extinguishment  of
Debt and an amendment of that statement,  SFAS 64,  Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements.  The rescission of these Statements alters
the financial  reporting  requirements  from gains and losses resulting from the
extinguishments  of debt.  These gains or losses  should now be reported  before
extraordinary  items,  unless the two requirements for  extraordinary  items are
met. This statement also rescinds SFAS 44,  Accounting for Intangible  Assets of
Motor  Carriers  and amends SFAS 13,  Accounting  for Leases,  to  eliminate  an
inconsistency  between the required  accounting for sale-leaseback  transactions
and the required  accounting for certain lease  modifications that have economic
effects that are similar to  sale-leaseback  transactions.  This  statement also
amends other existing  authoritative  pronouncements  to make various  technical
corrections,  clarify meanings,  or describe their  applicability  under changed
conditions.  The  provisions  of this  statement  related to the  rescission  of
Statement 4 shall be applied in fiscal years  beginning  after May 15, 2002. Any
gain or loss on  extinguishments of debt that was classified as an extraordinary
item in prior  periods  presented  that does not meet the criteria in Opinion 30
for classification as an extraordinary  shall be reclassified.  The provision of
this  Statement  related to  Statement 13 shall be  effective  for  transactions
occurring after May 15, 2002.

      In June  of  2002,  the  FASB  issued  SFAS  146,  "Accounting  for  Costs
Associated with Exit or Disposal  Activities,"  which nullifies EITF Issue 94-3.
SFAS 146 is effective for exit and disposal  activities that are initiated after
December 31, 2002 and requires  that a liability for a cost  associated  with an
exit or disposal  activity be  recognized  when the  liability is  incurred,  in
contrast to the date of an entity's  commitment  to an exit plan, as required by
EITF Issue  94-3.  The  Company  adopted the  provisions  of SFAS 146  effective
January 1, 2003.

      In  December  2002,  the  FASB  issued  SFAS  No.  148,   "Accounting  for
Stock-Based  Compensation - Transition and  Disclosure."  This Statement  amends
SFAS No. 123,  "Stock-Based  Compensation,"  to provide  alternative  methods of
transition  for a voluntary  change to the fair value based method of accounting
for stock-based employee  compensation.  In addition,  this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and  interim  financial  statements  about the method of  accounting  for
stock-based employee  compensation and the effect of the method used on reported
results.  The  alternative  methods of  transition of SFAS 148 are effective for
fiscal  years ending after  December  15,  2002.  The Company  follows APB 25 in
accounting for its employee stock options.  The disclosure provision of SFAS 148
is effective for years ending after December 15, 2002 and has been  incorporated
into these consolidated financial statements and accompanying footnotes.


                                      F-11
<PAGE>



      In January 2003 the Financial  Accounting  Standards Board ("FASB") issued
Interpretation   46   "Consolidation   of   Variable   Interest   Entities,   an
interpretation  of ARB No.  51".  This  Interpretation  requires  a  Company  to
consolidate the financial  statements of a "Variable  Interest  Entity" ("VIE"),
sometimes also known as a "special purpose entity",  even if the entity does not
hold a majority equity interest in the VIE. The Interpretation  requires that if
a business  enterprise  has a  "controlling  financial  interest"  in a VIE, the
assets, liabilities, and results of the activities of the VIE should be included
in consolidated financial statements with those of the business enterprise, even
if it holds a  minority  equity  position.  This  Interpretation  was  effective
immediately  for all VIE's created after January 31, 2003;  for the first fiscal
year or  interim  period  beginning  after  June 15,  2003 for  VIE's in which a
Company holds a variable  interest that it acquired  before February 1, 2003. In
December  2003,  the FASB issued a revision to FIN 46 ("FIN46R") to clarify some
of the  provisions of FIN 46. The Company  currently has no entities  which have
the  characteristics of a variable interest entity.  Furthermore,  the Company's
adoption of the remaining  provisions of FIN 46R in the quarter ending March 31,
2004 did not have an impact on the Company's financial statements.

      In May  2003,  the FASB  issued  SFAS No.  150,  "Accounting  for  Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statement  establishes  standards  for  how an  issuer  of debt  classifies  and
measures certain financial  instruments with characteristics of both liabilities
and equity. It requires that an issuer classify certain financial instruments as
a liability (or an asset in some circumstances) instead of equity. The Statement
is effective for financial  instruments  entered into or modified  after May 31,
2003,  and otherwise is effective at the  beginning of the first interim  period
beginning  after June 15, 2003.  The Company  adopted this  Statement on July 1,
2003.

      The  Company  does  not  believe  that  any  of  these  recent  accounting
pronouncements  have had or will  have a  material  impact  on  their  financial
position or results of operations.

                           OTHER COMPREHENSIVE INCOME

      The Company  has  reflected  the  provisions  of SFAS No. 130,  "Reporting
Comprehensive Income", in the accompanying consolidated financial statements for
all  periods   presented.   The   accumulated   comprehensive   loss  and  other
comprehensive  loss as  reflected  in the  accompanying  consolidated  financial
statements, respectively, consists of foreign currency translation adjustments.

                          FOREIGN CURRENCY TRANSLATION

      Assets and  liabilities  of the  Company's  foreign  subsidiary,  PolarCup
EarthShell  GmbH, are translated into United States dollars at the exchange rate
in effect at the close of the period,  and revenues and expenses are  translated
at the weighted average exchange rate during the period. The aggregate effect of
translating the financial  statements of PolarCup EarthShell GmbH is included as
a separate component of stockholders' equity. Foreign exchange gains/losses have
been insignificant.

                               REVERSE STOCK SPLIT

      Effective  as of  October  31,  2003,  the  Company's  Board of  Directors
("Board") approved an amendment to the Company's Certificate of Incorporation to
effect a reverse split of the Company's  common stock.  This action by the Board
followed  approval by 88% of the  stockholders  of a proposal at the 2003 Annual
Meeting  of the  Company  that  authorized  the Board to take such  action.  The
decision  by the Board was  prompted  by the need to  maintain  compliance  with
certain  covenants of the Company's 2006  debentures that require the Company to
retain its listing on a national market.

      After careful  analysis,  the Board approved the final ratio for the split
at one-for-twelve (1:12), whereby each twelve shares of the company's issued and
outstanding  common  stock  was  automatically  converted  into one share of new
common stock.  The percentage of the Company's  stock owned by each  shareholder
remained the same. No fractional shares were issued, and instead,  the Company's
transfer agent aggregated and sold any fractional  shares on the open market and
distributed the pro rata share of the cash proceeds to the holders of fractional
share interests.

      The reverse  split has been  retroactively  reflected  in these  financial
statements.

      In  conjunction  with the reverse split,  the authorized  shares of common
stock were reduced from 200 million to 25 million as of October 31, 2003.


                                      F-12
<PAGE>



              DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

      The Company has financial instruments,  none of which are held for trading
purposes. The Company estimates that the fair value of all financial instruments
at  December  31,  2003 and  2002,  as  defined  in FASB  107,  does not  differ
materially  from the  aggregate  carrying  values of its  financial  instruments
recorded in the  accompanying  balance  sheet.  The estimated fair value amounts
have been  determined  by the Company using  available  market  information  and
appropriate  valuation  methodologies.  However,  the fair value of  payables to
related  parties and notes payable to related party cannot be determined  due to
their related party nature.  In addition,  it is impractical  for the Company to
estimate the fair value of the convertible  debentures because a market for such
debentures  does  not  readily  exist.  Considerable  judgment  is  required  in
interpreting   market  data  to  develop  the  estimates  of  fair  value,   and
accordingly,  the estimates are not  necessarily  indicative of the amounts that
the Company could realize in a current market exchange.

                  CONCENTRATION OF RISK - FINANCIAL INSTRUMENTS

      Financial   instruments   which   potentially   subject   the  Company  to
concentrations of credit risk consist  principally of Cash and Cash Equivalents.
The  Company  places  its  excess  cash  in  reputable  financial   institutions
($1,861,538)  and in high quality  money market fund  deposits  ($39,801).  Cash
deposits in excess of those federally insured amounted to $1,753,523 at December
31, 2003.  Money market fund  deposits  are subject to market  fluctuations  and
there is no guarantee as to their ultimate value.

                                RECLASSIFICATIONS

      Certain  items  in the  2002  and  2001  financial  statements  have  been
reclassified to conform to the 2003 presentation.

                            CASH AND CASH EQUIVALENTS

      Cash and cash  equivalents  include cash,  funds  invested in money market
funds and cash invested  temporarily in various  instruments  with maturities of
three  months or less at the time of purchase.  The money  market fund  deposits
have an  investment  objective  to  provide  high  current  income to the extent
consistent  with the  preservation  of capital and the  maintenance of liquidity
and, therefore, are subject to minimal risk.

                                 RESTRICTED CASH

      At March 30, 1998, a certificate of deposit for $3.5 million was opened as
collateral for the letter of credit related to the Company's  obligation under a
letter  agreement  between the  Company's  majority  stockholder,  EKI,  and the
Company relating to a patent purchase  agreement  between EKI and a third party,
as discussed in the  Commitments  note, and was classified as restricted cash on
the December 31, 2002 balance sheet. The $3.5 million certificate of deposit was
reflected as a current  asset in the  December 31, 2002 balance  sheet since the
obligation  would  become  payable  on or  about  December  31,  2003.  With the
negotiation and payment of the reduced  obligation  amount in the fourth quarter
of 2003,  both the letter of credit and  certificate  of deposit were  released.
Therefore,  no cash remains  restricted  for this  obligation as of December 31,
2003. (See Commitments).

      In August 2002,  proceeds  from the issuance of $10.0  million of the 2007
Debentures (see Convertible  Debentures  note) were used to purchase  restricted
cash deposits to secure irrevocable  letters of credit in favor of the debenture
holders.  Unrestricted  access  to  the  proceeds  of  the  debentures  occurred
generally only upon  conversion of the  debentures  into shares of the Company's
common stock,  accompanied by pro rata  reductions in the letters of credit.  At
December  31,  2002,  $9.0  million  of the  proceeds  were used to  secure  the
irrevocable  letters of credit.  In 2003,  the Company  prepaid $5.2 million and
restructured  $2.0 million of these secured  convertible  debentures,  while the
remaining  $1.8 million were  converted to common  stock.  At December 31, 2003,
there were no 2007 Debentures outstanding.

                    PREPAID EXPENSES AND OTHER CURRENT ASSETS

      The following is a summary of prepaid expenses and other current assets at
December 31:

                                                      2003         2002
                                                    --------     --------
Recoverable foreign taxes-VAT..................     $158,491     $  7,408
Prepaid expenses and other current assets .....      165,189      563,394
                                                    --------     --------

Total Prepaid Expenses and Other Current Assets     $323,680     $570,802
                                                    ========     ========



                                      F-13
<PAGE>



                         EVALUATION OF LONG-LIVED ASSETS

      The Company  evaluates the  recoverability  of long-lived  assets whenever
events or changes in circumstances  indicate that the carrying value of an asset
may not be  recoverable.  If there is an indication that the carrying value of a
long-lived  asset may not be  recoverable  and the  estimated  future cash flows
(undiscounted  and without interest  charges) from the use of the asset are less
than the carrying value, a write-down is recorded to reduce the related asset to
its estimated fair value (see Property and Equipment).

               PROPERTY AND EQUIPMENT AND EQUIPMENT HELD FOR SALE

      Property and equipment are carried at cost.  Depreciation and amortization
is provided for using the straight-line  method for financial reporting purposes
based upon the  estimated  useful  lives of the assets which range from three to
seven  years.  The cost of assets  sold or retired  and the  related  amounts of
accumulated depreciation are eliminated from the accounts and the resulting gain
or loss is included in income.  As described  further  below,  the Company wrote
down  property and  equipment  related to  commercialization  of the  EarthShell
Packaging products technology by $4.0 million in 2003, $9.8 million in 2002, and
$19.4 million in 2001. The impairment  charges were expensed to "Other  research
and development" in the accompanying Statements of Operations.

      The cost and  accumulated  depreciation  of  property  and  equipment  and
equipment held for sale at December 31 were as follows:


                                                       2003            2002
                                                    -----------    -----------
Commercial Manufacturing Equipment
   Goettingen, Germany ........................     $        --    $ 4,000,000

Other Property and Equipment
   Product Development Center .................       1,175,394      2,077,438
   Office Furniture and Equipment .............         356,339        742,931
   Leasehold improvements .....................              --        521,187
                                                    -----------    -----------

                                                      1,531,733      3,341,556
Total cost ....................................       1,531,733      7,341,556
Less: accumulated depreciation and amortization      (1,469,939)    (2,865,382)
                                                    -----------    -----------

Property and equipment--net ...................     $    61,794    $ 4,476,174
                                                    ===========    ===========

Equipment held for sale .......................     $         1             --
                                                    ===========    ===========


      The commercial  production  line in  Goettingen,  Germany was financed and
constructed  by the Company for the Company's  joint venture (see  Investment in
Joint Venture) with Huhtamaki.  During 2001, $1.2 million of the Goettingen line
was  written off to reflect  equipment  that had no further  application  in the
product  development  cycle.  During  the  third  quarter  of 2002  the  Company
concluded,  after obtaining  quotations from various machinery  suppliers for an
identical  line,  that  $1.7  million  of the  cost  of  the  line  will  not be
recoverable  and  therefore  the carrying  value of the line was written down by
this amount, of which $1.6 million was recorded in the third quarter of 2002 and
the  remaining  $0.1  million  was  recorded in the fourth  quarter of 2002.  At
December 31, 2003,  the Company is  negotiating  to sell the line to a party who
would become a licensee with rights to produce foodservice disposables. However,
because the Company is unable to determine with certainty the proceeds that will
be realized upon sale of the equipment, the Company wrote the line down to $1 as
of  December  31,  2003  and  reclassified  it to the  long-term  asset  account
"Equipment  held for sale." The $4.0 million  impairment  charge was expensed to
"Other research and development" in the  accompanying  Statements of Operations.
If the  equipment  is sold,  the  Company  will  recognize  a gain  equal to the
proceeds received for the equipment.

      The  Company  entered  into  a  strategic   relationship   agreement  with
Sweetheart in late 1997 whereby the Company  financed and built production lines
at Sweetheart's  Owings Mills,  Maryland  manufacturing  facility to demonstrate
that its hinged-lid  containers  could be produced  commercially for McDonald's.
The  Company  worked  closely  with  Sweetheart  and  McDonald's  to  create  an
acceptable product design and meet required  performance  standards.  Since 1997
the Company had  intended to transfer  the  production  lines at Owings Mills to
Sweetheart.  During 1999 and 2000 the Company  consolidated  its space in Owings
Mills.  In  December  2000,   management   determined  that  the   manufacturing
configuration  of the  equipment  at  Owings  Mills  would  have to be  modified
somewhat and additional process improvements  implemented to accommodate product
design  changes  and  to  achieve  the  design   capacity  of  the  plant.   The
reconfiguration   of  the  lines  was   expected  to  result  in  a   simplified
manufacturing  process.  As a result of the planned  modifications,  the Company
impaired  $11.0  million  of assets  located at Owings  Mills  during the fourth
quarter of 2000,  approximately  $0.7 million  during the second quarter of 2000
and  approximately  $0.3 million during the first quarter of 2000. In the fourth
quarter of 2001,  the Company wrote down $12.3 million of property and equipment
at  Owings  Mills to  reflect  the net  realizable  value of the  equipment  and
machinery  based on a  quotation  from a third  party.  During the first half of
2002, production at the Owings Mills facility ceased as Sweetheart  contemplated
construction of new, updated  production  lines. As a result,  the Company wrote
down the remaining $7.5 million of the equipment at Owings Mills during the year
ended 2002;  $0.3  million in the third  quarter and $7.2  million in the fourth
quarter.  As of December 31, 2002, the Company's  Owings Mills  production lines
were carried on its balance sheet at a net book value of zero.  In 2003,  all of
the Owings Mills equipment was either sold or disposed of.


                                      F-14
<PAGE>



      During the fourth  quarter  of 2001 and the fourth  quarter of 2002,  $5.9
million and $0.5 million,  respectively,  of equipment at the Company's  product
development center was written off because it had no further  application in the
product development cycle.

      As the Company sold non-essential machine shop equipment and excess office
furniture and equipment in 2003, the related cost and  accumulated  depreciation
were removed from the  applicable  asset account and  accumulated  depreciation,
respectively. At the expiration of the leases at the Company's Santa Barbara and
Goleta,  California  facilities in 2003, all leasehold  improvements  were fully
amortized.  Due to the  relocation  to new office  space in Santa  Barbara,  the
Company  removed  the  fully  amortized  leasehold  improvements  from  both the
Leasehold improvements and accumulated amortization accounts.

                           INVESTMENT IN JOINT VENTURE

      On May 24, 1999, the Company  entered into a joint venture  agreement with
Huhtamaki to commercialize  EarthShell Packaging  throughout Europe,  Australia,
New Zealand, and, on a country by country basis, Asia. The Company and Huhtamaki
formed Polarcup EarthShell ApS ("PolarCup"),  a Danish holding company,  for the
purpose of establishing  operating  companies to manufacture,  market,  sell and
distribute EarthShell Packaging.

      The  Company  contributed  approximately  10,000  Euros as  nominal  share
capital  and  500,000  Euros for  start-up  capital.  The  Company  paid for the
development  of the  initial  commercial  production  line to be  located at the
Huhtamaki  facility at  Goettingen,  Germany (see  Property and  Equipment).  In
January  2004,  the  Company  announced  the  conclusion  of its  joint  venture
structure with Huhtamaki.  During 2003,  2002, and 2001 the Company recorded its
equity in the losses of the joint  venture of  $392,117,  $20,263,  and $37,153,
respectively, including the write off of its remaining investment as of December
31, 2003.

                           RELATED PARTY TRANSACTIONS

      In connection with the formation of the Company,  the Company entered into
a License  Agreement  (the "License  Agreement")  with EKI, a stockholder of the
Company.  Pursuant to the  license  agreement,  as  amended,  the Company has an
exclusive, worldwide, royalty-free license to use and license the EKI technology
to  manufacture  and sell  disposable,  single-use  containers  for packaging or
serving food or beverages intended for consumption within a short period of time
(less than 24 hours) and to use certain  trademarks  owned by EKI in  connection
with the products covered under the License Agreement.  The license continues to
be in effect during the life of the patents licensed under the License Agreement
covering the technologies. Patents currently issued do not begin to expire until
2012 and provide some  protection  through 2020.  Pending  patents,  if granted,
would extend  protection  through 2022. On July 29, 2002, the License  Agreement
was amended to expand the field of use for the EarthShell  technology to include
noodle bowls used for packaging instant noodles. The Company will pay to EKI 50%
of any royalty or other consideration it receives in connection with the sale of
products within this particular field of use. In addition,  on July 29, 2002 the
Company entered into a License & Information  Transfer  Agreement with Biotec, a
wholly owned subsidiary of EKI, to utilize the Biotec technology for foodservice
applications,  including the food wraps used in  foodservice  applications  (the
"Biotec  Agreement").  Effective January 1, 2001, EKI had previously  granted to
the  Company  priority  rights to license  certain  product  applications  on an
exclusive  basis from Biotec in  consideration  for the  Company's  payment of a
$100,000 monthly licensing fee to Biotec.  In addition,  in consideration of the
monthly payment,  Biotec agreed to render  technical  services to the Company at
Biotec's  cost  plus  5%.  The  licensing  fee and  services  arrangements  were
continued  in the Biotec  Agreement.  Under the terms of the  Biotec  Agreement,
Biotec is entitled to receive 25% of any royalties or other  consideration  that
the Company  receives in  connection  with the sale of  products  utilizing  the
Biotec technology.  As part of the new convertible debenture financing completed
in March 2003 (see Convertible Debentures),  payment of amounts due to EKI under
the License Agreement or the Biotec Agreement have been subordinated to the 2006
Debentures with strict covenants governing their repayment. However, any amounts
deferred pursuant to this subordination requirement shall accrue interest at the
rate of 10% per annum until paid.  For the years ended  December 31, 2003,  2002
and  2001,  the  Company  paid or  accrued  to EKI  $1,355,693,  $1,488,070  and
$1,465,250,  respectively,  under the License  Agreement  and Biotec  Agreement,
consisting  of the  $100,000 per month  licensing  fee,  materials  and services
provided  by EKI,  which vary based on the  Company's  given  requirements,  and
interest payable on outstanding balances.


                                      F-15
<PAGE>



      From July 1, 1994  through  December 31, 2000 the Company and EKI operated
under  various  agreements  pursuant to which the  Company  paid EKI for certain
technical  services and by which the Company subleased office space from EKI for
$5,600 per month.  Technical  services  consisted of direct  project labor hours
incurred by EKI personnel at specified  hourly billing rates and direct expenses
incurred on approved  projects.  Effective  January 1, 2001, the Company and EKI
ceased operating under these agreements, the Company hired directly from EKI the
scientific,   technical  and  administrative   personnel  it  required  for  its
operations and assumed direct  responsibility for the lease obligations  related
to the office and laboratory  space the Company was subleasing from EKI in Santa
Barbara,  California.  The  Company  did not  assume  any  accrued  compensation
obligations in connection  with the transfer of the employees,  and EKI remained
obligated to pay all accrued  vacation and  severance  liabilities.  The Company
entered into a new lease for the Santa Barbara office (cancelable on six-months'
notice)  beginning  April 1, 2001. In each of 2003,  2002 and 2001, EKI paid the
Company $4,074, $24,444, and $24,444,  respectively, for the use of office space
in the Company's  Santa Barbara  office.  Effective March 1, 2003, EKI no longer
sublets any space from the Company.

      On January 1, 2001, the Company also purchased from EKI certain  operating
equipment  and  machinery,  furniture,  supplies  and  tools to  facilitate  the
transfer of the EKI employees to the Company.  The Company paid $900,000 for the
assets, which approximated net book value.

      In the year  ended  December  31,  2000 and  prior  periods,  the  Company
reimbursed  EKI for the costs and  expenses  incurred  in  filing,  prosecuting,
acquiring and maintaining  certain patents and patent  applications  relating to
the  technology  licensed to the Company  under the License  Agreement  under an
Amended and Restated  Agreement for the  Allocation of Patent Costs (the "Patent
Agreement"). Legal fees of $362,244 were paid to or on behalf of EKI during 2000
under the Patent Agreement. Effective January 1, 2001, EarthShell assumed direct
responsibility  to manage and  maintain  the  patent  portfolio  underlying  the
License Agreement with EKI and to pay directly all related costs.

      At  December  31,  2003 and 2002,  the  amounts  payable  to EKI under the
various  agreements,  for materials and services  provided,  and for interest on
outstanding balances were $1.5 million and $0.6 million, respectively.

      On September 9, 2002,  the Company  entered into a Loan Agreement with EKI
whereby  EKI  agreed  to  extend  certain  loans to the  Company  at EKI's  sole
discretion.  Loans made under the Loan Agreement  plus accrued  interest are due
and payable on the first to occur of i) receipt by the Company of proceeds  from
a qualified  financing or ii) 30 days.  During 2002,  the Company  received $4.8
million in loans from EKI, at interest rates of 7% or 10% per annum. At December
31,  2002,  outstanding  loans and related  interest  payable to EKI were $1.745
million and $0.159 million,  respectively. In January 2003, the Company received
an additional  $1.01 million in short-term  loans from EKI, at interest rates of
10% per annum. As part of the new convertible  debenture  financing completed in
March 2003 (see  Convertible  Debentures),  repayment of loans  totaling  $2.755
million  have been  subordinated  to the new  debentures  with strict  covenants
governing their repayment. In March 2003, the Company issued to EKI a warrant to
purchase 83,333 shares at $6.00 per share in connection  with the  subordination
of loans of  $2.755  million  made to the  Company  and the  elimination  of the
conversion feature. At December 31, 2003, outstanding loans and related interest
payable to EKI were $2.755 million and $0.323 million, respectively.


                                      F-16
<PAGE>



                      ACCOUNTS PAYABLE AND ACCRUED EXPENSES

      The  following  is a summary of accounts  payable and accrued  expenses at
December 31:


                                                  2003            2002
                                                ----------     ----------
Accounts payable and other accrued expenses     $3,603,340     $5,767,482
Accrued property taxes ....................        655,000        500,586
Accrued salaries, wages and benefits ......        338,402        538,189
Accrued legal fees ........................        256,671      1,098,700
                                                ----------     ----------

Total Accounts Payable and Accrued Expenses     $4,853,413     $7,904,957
                                                ==========     ==========


                             CONVERTIBLE DEBENTURES

      On August  12,  2002,  the  Company  issued  $10.0  million  in  aggregate
principal  amount  of the 2007  Debentures  to  institutional  investors.  These
debentures  bore  interest  at a rate of 1.5% per annum,  payable  quarterly  in
arrears on each  January  31,  April 30,  July 31 and October 31. The holders of
these  debentures  had the right to convert the  debentures  into the  Company's
common  stock at an initial  conversion  price of $15.60  per  share,  which was
reduced to $8.40 per share in November 2002 and then to $6.00 per share in March
2003 as a result of  anti-dilution  adjustments.  Based on the conversion  price
relative to the fair market value of the common stock at the date of issue,  the
debentures were deemed to have no beneficial  conversion feature. In March 2003,
the conversion price of the 2007 Debentures was adjusted downward,  resulting in
a beneficial  conversion  charge of $360,000 that is included in Other  interest
expense in the Statements of Operations.  The proceeds from the debentures  were
held in restricted  accounts linked to irrevocable letters of credit in favor of
the  debenture  holders such that  unrestricted  access to the proceeds from the
sale of the debentures generally occurred only upon conversion of the debentures
into shares of the Company's common stock (see Restricted  Cash). In addition to
the holders' conversion option, under certain  circumstances the Company had the
right to force  conversion of up to $500,000 of the debentures per week at a 15%
discount  to the  market  price  of the  Company's  stock.  Subject  to  certain
conditions set forth in the  debentures,  the  debentures  could be prepaid upon
twenty business days notice for 104% of the outstanding principal balance of the
debentures.  During the third quarter of 2002, the Company forced  conversion of
$1.0 million  principal  amount of the  debentures  for 168,696 shares of common
stock,  resulting  in the release to the Company of $1.0  million of  restricted
cash.  During 2003, the Company forced  conversion of an additional $1.3 million
principal amount of the debentures and debenture holders  voluntarily  converted
$0.5 million  principal amount of the debentures,  for a total of 353,985 shares
of common  stock,  resulting  in the release to the  Company of $1.8  million of
restricted cash.

      In connection with the issuance of the 2007 Debentures, the Company issued
to the debenture  holders  warrants to purchase  208,333 shares of the Company's
common stock at $14.40 per share (see Stock Warrants). A value of $1,521,046 was
ascribed to the warrants and recorded as an original issue discount based on the
Black-Scholes  method of valuation.  During 2002,  non-cash  interest expense of
$144,500 and  debenture  conversion  costs of $320,970  were  recognized  in the
Statements of Operations to reflect  amortization of the original issue discount
associated with the warrants and to reflect the 15% discount to the market price
of the Company's common stock resulting from the forced  conversions of the 2007
Debentures.  During 2003, non-cash interest expense of $74,927 was recognized in
the  Statements  of  Operations to reflect  amortization  of the original  issue
discount  associated  with the  warrants.  In addition,  $59,747 of the original
issue discount associated with the debentures  voluntarily converted was charged
to additional paid in common capital.

      In March  2003,  as part of a new  convertible  debenture  financing,  the
Company prepaid $5.2 million principal amount of the 2007 Debentures,  resulting
in a prepayment  penalty of $208,000.  The Company also issued to the holders of
the 2007  Debentures,  52,083 shares of common stock,  valued at $237,500  based
upon the closing  price of the  Company's  common  stock on the Nasdaq  SmallCap
Market of $4.56 per share on March 5, 2003.  In addition,  one of the holders of
the 2007 Debentures  exchanged $2.0 million  aggregate  principal amount of 2007
Debentures for $2.0 million  aggregate  principal  amount of 2006 Debentures and
78,989 shares of common stock valued at  approximately  $360,000  based upon the
closing price of the Company's common stock of $4.56 per share on March 5, 2003.
In  connection  with the  prepayment  and  exchange  transactions,  the  Company
incurred  cash  transaction  costs  of  approximately  $296,000,  excluding  the
prepayment   penalty.   The  Company   recognized   a  $1.7  million  loss  upon
extinguishment of the 2007 Debentures  through the prepayment and exchange.  The
exchange of $2.0 million of the 2007 Debentures for 2006 Debentures  resulted in
the  release to the Company of $2.0  million of  restricted  cash.  There are no
outstanding 2007 Debentures as of December 31, 2003.


                                      F-17
<PAGE>



      On March 5, 2003, the Company issued to a group of institutional investors
416,667 shares of common stock and $10.55 million in aggregate  principal amount
of secured convertible debentures due in March 2006 (the "2006 Debentures"), for
which the  Company  received  proceeds of  approximately  $9.0  million,  net of
financing costs of approximately $1.5 million. The 2006 Debentures bear interest
at a rate of 2.0% per annum,  payable  quarterly  in arrears on each January 31,
April 30, July 31 and October 31. The  debentures  are secured by the  Company's
rights,  title and interest to the technology and trademarks  covered by the EKI
License  Agreement,  including  all  process  and  product  improvements  of the
Company,  the Company's right to use and to sublicense the  technology,  and all
license fees,  royalties  and/or other forms of compensation  due to the Company
from sublicenses under existing or future  sublicenses.  The holders of the 2006
Debentures have the right to convert such  debentures into the Company's  common
stock at a conversion  price of $6.00 per share.  While the 2006  Debentures are
outstanding, the conversion price is subject to adjustment in certain instances,
such as a result of stock  dividends  and splits,  distributions  of property to
common stockholders,  the sale of substantially all of the Company's assets, the
consummation of a merger,  or sales of common stock or common stock  equivalents
for per share prices lower than the conversion  price in effect.  In addition to
the holders'  conversion option,  after the first anniversary of the issuance of
the 2006  Debentures  the Company has the right to force  conversion of all or a
portion of the  outstanding  principal  amount of the 2006 Debentures if certain
conditions are met, including a requirement that the closing price of the common
stock has been  equal to or  greater  than 300% of the  conversion  price for at
least  the  10  consecutive  days  immediately  preceding  the  conversion.  The
principal  amount of the 2006  Debentures  is due and  payable on March 5, 2006;
however,  earlier  repayment may occur if the Company  receives cash proceeds in
excess of $2.65  million (the "Excess  Amount")  from the sale of debt or equity
securities,  equipment sales to unrelated third parties,  operating revenues, or
any cash that  becomes  available to the Company as a result of a reduction in a
$3.5 million  letter of credit the Company  issued to a third party in 1998.  If
the Excess Amount arises, the Company can elect to distribute  one-third of such
Excess  Amount  to EKI in  payment  of  amounts  due to EKI  under  the  License
Agreement  or the  Biotec  Agreement  that  have been  subordinated  to the 2006
Debentures,  and  one-third  of such  Excess  Amount , with the  consent of each
applicable  debenture  holder, as a 102% prepayment of principal and interest of
the 2006 Debentures.

      In accordance with Accounting Principles Board Opinion No. 14, "Accounting
for Convertible Debt and Debt Issued with Stock Purchase  Warrants," the Company
allocated the net proceeds of $9.0 million to the 2006 Debentures and the common
stock based upon their relative fair values.  A discount on the 2006  Debentures
of $3.4 million and a discount on the common stock of $604,000 resulted from the
fair value  allocation.  Based on the  conversion  price of the 2006  Debentures
relative to the fair market value for a share of the  Company's  common stock at
the date of  issue,  the  2006  Debentures  were  deemed  to have no  beneficial
conversion  feature.  If subsequent to the issuance date the conversion price of
the 2006 Debentures is adjusted  downward,  the value of the conversion  feature
will be re-measured to determine if any  beneficial  conversion  value should be
recorded as of the date the  conversion  price is  adjusted.  There have been no
adjustments to the conversion price of the 2006 Debentures. The principal amount
of the 2006 Debentures of $10.55 million was recorded as a noncurrent liability,
net of the $3.4 million discount.  The total discount of $3.4 million,  which is
being  amortized  to  interest  expense  over  the  36-month  term  of the  2006
Debentures  using the  effective  interest  method,  may be subject to  downward
adjustments to the extent  partial  conversions  of the 2006  Debentures  occur.
These adjustments,  if required, would reduce the discount and reduce additional
paid-in capital.

      In addition  to the $1.5  million of  financing  costs,  the Company  also
incurred  approximately $646,000 of non-cash costs attributable to 54,167 shares
of common stock  issued to the lead  purchaser  of the 2006  Debentures  and two
warrants issued to a placement  agent,  both of whom received the instruments as
compensation for their services rendered in connection with the transaction. The
fair value of the 54,167 shares of common stock issued to the lead purchaser was
determined to be $247,000,  based on the closing price of $4.56 per share of the
Company's  common stock on the Nasdaq SmallCap Market on March 5, 2003. The fair
value of  approximately  $42,000 of the first of the two warrants  issued to the
placement agent,  which expires in March 2006 and is immediately  exercisable by
the placement agent to purchase 28,810 shares of the Company's  common stock for
$10.08 per share, was estimated using the Black Scholes option-pricing model and
is  reflected  in  the  accompanying  financial  statements  as an  increase  in
additional  paid-in  capital and as a component  of the $4.0  million  aggregate
discount  on the 2006  Debentures  and  common  stock  issued in the March  2003
transaction. The second of the two warrants issued to the placement agent, which
expires in March 2006, is  immediately  exercisable  by the  placement  agent to
purchase $1.055 million in aggregate principal amount of the 2006 Debentures and
41,667 shares of the Company's common stock, except if, prior to exercise of the
warrant,  all  of  the  2006  Debentures  have  been  redeemed,  repurchased  or
converted,  in which case the portion of the warrant  exercisable  into the 2006
Debentures  becomes  exercisable  into  common  stock as if the 2006  Debentures
included in the warrant had been  converted to common stock.  The exercise price
of the convertible debenture portion of the warrant is $1,200 for each $1,000 of
principal and is subject to  adjustment  consistent  with the  provisions of the
2006  Debentures.  The exercise price of the common stock portion of the warrant
is $7.20 per share.  The  estimated  fair value of this warrant was reflected in
the financial  statements as a warrant obligation and as a component of the $4.0
million aggregate discount on the 2006 Debentures and common stock issued in the
March 2003 financing  transaction.  At September 30, 2003, the Company evaluated
the current value of this warrant,  considering the Company's  current cash flow
projections,  continued  operating losses,  the prospects of raising  additional
equity capital,  the significant  excess of the conversion  price to the current
stock price and the  volatility in the Company's  stock price.  Based upon these
factors,  the Company  determined  that the warrant had no value as of September
30, 2003 and December 31, 2003 and therefore  reduced the balance of the warrant
obligation  to zero as of September  30, 2003,  resulting in a $0.5 million gain
that is reflected in "Other (income) expense" in the Statements of Operations.


                                      F-18
<PAGE>



      The issuance of the 2006  Debentures,  prepayment  of the 2007  Debentures
(from  restricted  cash) and the  debenture  exchange  provided the Company with
aggregate net proceeds of approximately $11.0 million.

      In  2003,  $5.75  million  principal  amount  of the 2006  Debentures  was
converted  into 958,334  shares of common stock  resulting in the  approximately
$4.4 million carrying amount of the 2006 Debentures being  transferred to common
stock.

      At December 31, 2003, the outstanding principal balance of 2006 Debentures
was $6.8 million, which is reflected on the accompanying balance sheet net of an
unamortized discount of approximately $1.5 million.

      At December 31, 2003, the Company was in compliance  with all covenants of
the 2006 Debentures.  However,  on March 8, 2004, the Company's common stock was
delisted  from  the  Nasdaq  Smallcap   Market  because  the  Company's   market
capitalization  failed to meet the minimum required standard.  In addition,  the
Company  did not  make  interest  payments  related  to the 2006  Debentures  as
required on January 31, 2004.  These  actions put the Company in  non-compliance
with  its  covenants  under  the  2006   Debentures.   Management  is  currently
negotiating with the debenture holders for appropriate relief or waiver of these
covenants. One of the debenture holders has notified the Company in writing that
they are in default and has  requested  that the Company  repurchase  the entire
principal amount of the 2006 Debentures that they hold at the price specified in
the debenture,  along with any accrued and unpaid interest.  Because the Company
can not assure that it will be able to negotiate  appropriate relief or a waiver
of the applicable covenants, the entire outstanding principal amount of the 2006
Debentures has been  classified as a current  liability as of December 31, 2003.
(See Subsequent Events)

      In connection  with the March 2003 financing  transactions,  EKI agreed to
subordinate  the repayment of its  outstanding  loans totaling $2.755 million to
the Company's payment  obligations under the 2006 Debentures.  In addition,  EKI
and Biotec agreed to subordinate  certain  payments to which they were otherwise
entitled  under the  Biotec  License  Agreement  (other  than  their  respective
percentages of any royalties received by the Company) to the satisfaction of the
Company's payment obligations under the 2006 Debentures. They further agreed not
to assert any claims  against  the Company  for  breaches of the Biotec  License
Agreement (other than the assertion of certain equitable  remedies to enjoin the
Company from, for example, selling products outside its field of use) until such
time as the Company's  obligations  under the 2006  Debentures  are satisfied in
full. EKI and Biotec also agreed to allow the Company to pledge their respective
interests  in the EKI and Biotec  License  Agreements  to secure  the  Company's
obligations under the 2006 Debentures,  and certain additional  concessions were
made by EKI and Biotec to permit the Company greater  flexibility in selling its
rights  under the EKI and  Biotec  License  Agreements  to third  parties  in an
insolvency context.  These rights terminate upon the satisfaction in full of the
obligations  under the 2006 Debentures.  In consideration for its willingness to
subordinate  the payments  and  advances  that are owed to it, in March 2003 the
Company issued to EKI a warrant, expiring in ten years, to acquire 83,333 shares
of the Company's common stock for $6.00 per share. The fair value of the warrant
was  estimated  to be  approximately  $303,522  using the  Black-Scholes  option
pricing model and was recorded as a discount on the outstanding loans.

                                   COMMITMENTS

      In  September  2003,  the Company  leased  4,000 square feet of office and
research and development space in Santa Barbara,  California, under a lease that
expired on December 31, 2003.  In January 2004,  the lease was extended  through
April 2004.  The  Company's  monthly lease payment with respect to this space is
$5,000.  In  addition,  the Company  leases 3,353 square feet of office space in
Lutherville,  Maryland,  on a month to month basis. The Company's  monthly lease
payment  with respect to this space is $5,780.  Future  minimum  lease  payments
required under these leases as of December 31, 2003 are $0. Rental  expenses for
the years ended December 31, 2003, 2002 and 2001 amounted to $558,195,  $927,386
and $980,978, respectively.


                                      F-19
<PAGE>



      During  1998,  EKI  entered  into  certain  agreements  with an  equipment
manufacturer  providing for the purchase by EKI of certain technology applicable
to  starch-based  disposable  packaging.  EKI licenses  such  technology  to the
Company on a royalty-free basis pursuant to the License Agreement. In connection
with the purchase, and pursuant to the terms of a letter agreement with EKI, the
Company  agreed to pay the  seller of the  technology  $3.5  million on or about
December  31,  2003,  which  obligation  is secured  by a letter of credit  (see
Restricted  Cash).  In the fourth  quarter of 2002,  the Company  established  a
liability  for the $3.5 million  commitment  as of December  31, 2002  ("Accrued
Purchase  Commitment")  and recorded a corresponding  expense to "Other research
and development" in the Statements of Operations. In the fourth quarter of 2003,
the Company  negotiated  a reduction of the  obligation  to $1.6  million.  Upon
payment of the  reduced  obligation  amount in the fourth  quarter of 2003,  the
seller simultaneously  released the letter of credit.  Therefore, as of December
31, 2003, the Accrued Purchase Commitment has been fulfilled and the excess $1.8
million  recorded  in 2002 was  recorded  as an offset to  "Other  research  and
development" in the 2003 Statements of Operations.

      In  addition,  the Company is required to pay the seller $3.0 million over
the  five-year  period  commencing  January 1, 2004 if EKI, the Company or their
licensees make active use of the technology and have not purchased,  by December
31, 2003,  at least $35.0 million of equipment  from the seller.  As of December
31,  2003,  the  Company  and its  licensees  have  neither  actively  used  the
technology nor purchased equipment from the seller. The Company does not plan to
make active use of the technology  during the year ending December 31, 2004. EKI
has agreed to indemnify the Company to the extent the Company is required to pay
any portion of this $3.0 million  obligation  solely as a result of EKI's or its
licensees' active use of such patents and related  technology (other than use by
the Company or its  sublicensees).  The $3.0 million obligation to the seller of
the  technology is subject to reduction in an amount equal to 5% of the purchase
price of any  equipment  purchased  from the seller by EKI, the Company or their
sublicensees during the five-year period commencing January 1, 2004.

                     CUMULATIVE CONVERTIBLE PREFERRED STOCK

      The cumulative convertible preferred stock was issued in 1993 and remained
outstanding until it was converted into shares of common stock in 1998.

      During 1993, the Company  completed a private placement of preferred stock
totaling  $26,675,000,  with net proceeds to the Company  totaling  $24,473,001.
Under the  Series A  Cumulative  Senior  Convertible  Preferred  Stock  Purchase
Agreement,  the Company issued  6,988,850  shares of Series A cumulative  senior
convertible preferred stock at $3.82 per share.  Dividends,  when declared, were
payable on a quarterly basis at 8% per annum. At December 31, 1996, and December
31, 1997  cumulative  undeclared  dividends  totaled  $7,016,000 and $9,149,890,
respectively.  Each share of preferred stock was  convertible  into one share of
common  stock.  Subject to the right of the  holders of the  preferred  stock to
convert their shares into common stock,  the Company had the right to redeem the
preferred  stock at a price of $3.87 per share  between  September  30, 1997 and
September  30, 1998 and at a price of $3.82 per share after  September 30, 1998.
After three years from the issuance,  registration  rights enabled the preferred
stockholders to cause the Company to effect two registration  statements for the
common  stock  into  which  their  shares of  preferred  stock are  convertible.
Preferred  stockholders  had the right to vote with the  common  stock as if the
preferred  stock  had  converted  to  common  stock  of the  Company.  Preferred
stockholders had the right to elect one member to the Board of Directors.

      To facilitate the sale by  stockholders of Series A preferred stock in the
Company's March 1998 initial public offering of common stock,  3,993,404  shares
of the 6,988,850  shares of outstanding  Series A preferred stock were converted
to 3,993,404  shares of common stock. A portion of the converted shares was sold
in the initial  public  offering by  stockholders.  In April 1998,  the Board of
Directors declared a cash dividend to preferred  stockholders of $1.40 per share
based on the dividend rate of 8% per annum on the liquidation  preference of the
shares. The total dividends paid were $9,725,201.  By notice dated May 13, 1998,
the Company  called for  redemption,  effective  July 14, 1998, of the remaining
2,995,446  shares of Series A  preferred  stock.  In August  1998,  the Board of
Directors  declared a cash dividend to former  preferred  stockholders of $.0033
per  share  based  on the  dividend  rate  of 8% per  annum  of the  liquidation
preference  pursuant to the  Certificate of Designation,  Preferences  Relative,
Participating,  Optional and Other Special Rights for Series A Cumulative Senior
Convertible  Preferred  Stock,  which provided for dividends to accrue until the
time of conversion,  together with interest  thereon at the rate of 8% per annum
from the date of  conversion  until the date of  payment.  Total  dividends  and
interest paid to the remaining Series A preferred  stockholders was $201,502. As
of September 30, 1998, all  outstanding  shares of Series A preferred  stock had
been converted to common stock.


                                      F-20
<PAGE>


                               RETIREMENT BENEFITS

      The Company  established a qualified  401(k) plan for all of its employees
in 1998.  The 401(k) plan allows  employees  to  contribute,  on a  tax-deferred
basis,  up to  fifteen  percent of their  annual  base  compensation  subject to
certain  regulatory  and plan  limitations.  The  Company  uses a  discretionary
matching formula that matches one half of the employee's 401(k) deferral up to a
maximum of six percent of annual base  compensation.  The 401(k)  employer match
was $44,057 in 2003, $74,853 in 2002, and $114,746 in 2001.

                                  STOCK OPTIONS

      In 1994 the Company  established  the  EarthShell  Corporation  1994 Stock
Option Plan (the "1994 Plan"). In 1995 the Company subsequently  established the
EarthShell  Corporation  1995  Stock  Incentive  Plan (the  "1995  Plan")  which
effectively  superseded the 1994 Plan for options issued on or after the date of
the 1995  Plan's  adoption.  The 1994 and 1995  Plans as amended  (the  "Plans")
provide  that the  Company  may grant an  aggregate  number of options for up to
833,333  shares of  common  stock to  employees,  directors  and other  eligible
persons  as  defined  by the  Plans.  Options  issued  to date  under  the Plans
generally  vest over varying  periods from 0 to 5 years and generally  expire 10
years from the date of grant.

      Stock option activity for 2003, 2002 and 2001 is as follows:

<TABLE>
<CAPTION>
                                                  2003                          2002                          2001
                                      ------------------------------------------------------------------------------------------
                                                           WEIGHTED-                     WEIGHTED-                     WEIGHTED-
                                                            AVERAGE                       AVERAGE                       AVERAGE
                                                            EXERCISE                      EXERCISE                      EXERCISE
                                            SHARES           PRICE         SHARES          PRICE         SHARES          PRICE
                                      ------------------------------------------------------------------------------------------
<S>                                        <C>             <C>           <C>             <C>           <C>             <C>
Outstanding at beginning of year....        320,924          $50.49        231,333        $ 73.44        193,552         $87.12
   Granted..........................        121,699            4.87        168,811          34.44         60,000          38.64
   Cancelled........................        (43,748)          34.02        (73,105)         74.52        (22,219)         98.28
   Expired..........................        (13,963)          42.14         (6,115)        189.24             --             --
                                      ------------------------------------------------------------------------------------------

Outstanding at end of year..........         384,912          38.24        320,924          50.49        231,333          73.44
                                      ==========================================================================================

Options exercisable at year-end.....         155,228         $61.70        162,476        $ 63.72        188,208         $73.44
                                      ==========================================================================================
</TABLE>

      The following table summarizes information about stock options outstanding
at December 31, 2003:

<TABLE>
<CAPTION>
                                      OPTIONS OUTSTANDING                                    OPTIONS EXERCISABLE
               -------------------------------------------------------------------------------------------------------------
                          NUMBER        WEIGHTED-AVERAGE
                        OUTSTANDING         REMAINING                                     NUMBER
        EXERCISE            AT             CONTRACTUAL            WEIGHTED-AVERAGE       EXERCISABLE        WEIGHTED-AVERAGE
         PRICES          12/31/03             LIFE                EXERCISE PRICE        AT 12/31/03          EXERCISE PRICE
----------------------------------------------------------------------------------------------------------------------------
<S>                    <C>                  <C>                    <C>                   <C>                 <C>
       $  4.20             4,167                9.84                  $  4.20                2,083              $  4.20
          4.80           104,166                9.73                     4.80                    -                    -
          5.64            11,283                4.43                     5.64                8,683                 5.64
         15.00             8,334                2.19                    15.00                8,334                15.00
         16.68             8,332                3.41                    16.68                8,332                16.68
         36.00           128,334                8.08                    36.00                7,500                36.00
         44.04            27,145                7.17                    44.04               27,145                44.04
         45.36             6,249                1.36                    45.36                6,249                45.36
         45.60             6,249                2.35                    45.60                6,249                45.60
         60.00            43,750                 5.8                    60.00               43,750                60.00
         91.56            23,471                2.05                    91.56               23,471                91.56
        128.28             4,166                 .37                   128.28                4,166               128.28
        182.40             2,183                3.90                   182.40                2,183               182.40
        252.00             7,083                4.42                   252.00                7,083               252.00
               -------------------------------------------------------------------------------------------------------------

                         384,912                7.14                  $ 38.24              155,228              $ 61.70
               =============================================================================================================
</TABLE>


                                      F-21
<PAGE>



      The Company  accounts for the Plans in accordance  with the  provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to  Employees,"  and complies  with the  disclosure  provisions  of Statement of
Financial  Accounting  Standards ("SFAS") No. 123,  "Accounting for Stock- Based
Compensation."  Under APB Opinion No. 25,  compensation  expense is based on the
difference,  if any,  on the  date of  grant,  between  the  fair  value  of the
Company's  common stock and the  exercise  price of the option.  For  disclosure
purposes,  to measure stock-based  compensation in accordance with SFAS No. 123,
"Accounting for Stock-Based  Compensation",  the fair value of each option grant
is estimated on the date of grant using the Black-Scholes  option-pricing model.
The fair value of each option grant will be amortized as pro forma  compensation
expense over the vesting period of the options.  The following  table sets forth
the  assumptions  used and the pro forma  net loss and loss per share  resulting
from applying SFAS No. 123:

<TABLE>
<CAPTION>

                                                                               YEAR ENDED,        YEAR ENDED,        YEAR ENDED,
                                                                               DECEMBER 31,       DECEMBER 31,       DECEMBER 31,
                                                                                   2003               2002               2001
                                                                            --------------------------------------------------------
<S>                                                                           <C>                <C>                <C>
Net Loss as reported .....................................................    $   18,516,741     $   39,591,344     $   62,301,511
Deduct: Stock-based employee compensation expense included in reported net
   loss, net of tax ......................................................                --                 --                 --
Add: Total stock-based employee compensation determined under fair value
   based method for all awards, net of tax ...............................           776,018          2,136,323          2,635,623
                                                                            --------------------------------------------------------

Pro forma net loss .......................................................    $   19,292,759     $   41,727,667     $   64,937,134
Net loss per common share
   As reported ...........................................................    $         1.40     $         3.51     $         6.66
   Pro forma .............................................................              1.45               3.70               6.94
Weighted average risk-free interest rate .................................              4.53%              4.54%              5.06%
Weighted average expected life in years ..................................               9.5                9.6                7.9
Volatility ...............................................................               102%               182%               113%
Weighted average fair value of options granted during the year ...........    $         3.99     $        11.91     $        32.36
</TABLE>


                                 STOCK WARRANTS

      On June 7, 1996, in consideration of a $3,000,000 line of credit financing
arrangement,  the Company issued a warrant which entitled the lender to purchase
common shares equal to $150,000  divided by the price per share of the Company's
common stock in the initial public  offering of $252 per share.  The warrant was
not exercised and expired on June 7, 2001.

      On November 15, 1996,  the line of credit was increased to $9,000,000  and
an  additional  warrant was issued which  entitled the lender to purchase  1,623
shares of common stock for $277.20 per share.  The warrant was not exercised and
expired on November 15, 2003.

      On October 6, 1997, the line of credit was increased to $13,000,000 and an
additional  warrant was issued which entitled the lender to purchase $250,000 in
common stock at a price per share equal to 110% of the initial  public  offering
price. This warrant expires on October 6, 2004.

      On December 31, 1997, the line of credit was increased to $14,000,000  and
an additional  warrant was issued which entitled the lender to purchase  $50,000
in  common  stock  at a price  per  share  equal to 110% of the  initial  public
offering  price.  This warrant expires on December 31, 2004. The warrants issued
in 1997 were valued at $59,898 based upon an option pricing model.

      On October 26, 2000, as partial  consideration  for a financing  agreement
where the minimum trading prices were below $36.00 per share, the Company issued
warrants to purchase  69,186 shares of common stock at an exercise price of 115%
of the  purchase  price per share of the common stock issued and sold in respect
of such drawdown  period.  During 2001, 1,667 warrants were exercised at a price
of $17.33 per common  share in respect to the warrants  described.  On March 20,
2002 the Company  terminated  this  financing  agreement and reduced the warrant
exercise  prices in  consideration.  The exercise price of the remaining  67,519
warrants  were  re-priced  to $3.00 per share  and were  subsequently  exercised
during 2002.


                                      F-22
<PAGE>



      On April 5,  2002,  the  Company  entered  into a  common  stock  purchase
agreement (the "Purchase  Agreement") with certain investors (the  "Purchasers")
for an  aggregate of 291,667  shares of  EarthShell  common stock for  aggregate
consideration of $4,025,000.  Under the Purchase Agreement,  the Purchasers were
issued warrants to purchase up to an additional  145,833 shares of the Company's
common  stock at a price equal to $13.80 per share  during the thirty day period
following the closing of the Purchase Agreement. These warrants have expired.

      In connection  with the issuance of the  convertible  debentures on August
12,  2002 (see  Convertible  Debentures),  the Company  issued to the  debenture
holders  warrants to purchase  208,333  shares of the Company's  common stock at
$14.40 per  share.  A value of  $1,521,046  was  ascribed  to the  warrants  and
recorded as an original  issue  discount  based on the  Black-Scholes  method of
valuation. The exercise price and number of common shares issuable upon exercise
of the warrants are subject to adjustment under certain  circumstances,  such as
the  occurrence  of stock  dividends  and splits,  distributions  of property or
securities  other than common stock,  equity issuances for less than the warrant
exercise  price and a change in control  of the  Company.  Originally,  with any
adjustment to the warrant  exercise price, the number of shares issuable were to
be increased or decreased such that the aggregate  exercise price remained fixed
at  $3,000,000.  As of December  31, 2002,  357,143  shares of common stock were
issuable  upon  exercise of the warrants for $8.40 per share.  In March 2003, in
connection with the issuance of the 2006  Debentures,  the exercise price of the
warrants  was  reduced  to $6.00 per  share,  but the number of shares of common
stock issuable upon exercise  remained  fixed at 357,143.  At the same time, the
warrant agreement was amended such that any subsequent reduction in the exercise
price of the warrants will not result in any increase in the number of shares of
common stock  issuable  under the  warrants.  The warrants  expire on August 12,
2007.

      In  connection  with the issuance of the  convertible  debentures in March
2003 (see  Convertible  Debentures),  the Company issued to the placement  agent
warrants to purchase  $1.055 million in aggregate  principal  amount of the 2006
Debentures  at $1,200  per  $1,000 of  principal  amount,  28,810  shares of the
Company's  common stock at $10.08 per share,  and 41,667 shares of the Company's
common  stock at $7.20  per  share.  A value of  $484,500  was  ascribed  to the
warrants and recorded as an original issue  discount based on the  Black-Scholes
method of valuation.  The exercise  price and number of common  shares  issuable
upon  exercise  of  the  warrants  are  subject  to  adjustment   under  certain
circumstances,   such  as  the   occurrence  of  stock   dividends  and  splits,
distributions  of property or securities other than common stock and a change in
control of the Company. The warrants expire in March 2006.

      On March 5, 2003, the Company  issued to EKI a warrant to purchase  83,333
shares at $6.00  per  share in  connection  with the  subordination  of loans of
$2.755  million  made to the  Company  and  the  elimination  of the  conversion
feature. The warrants expire on March 4, 2010.

                                  INCOME TAXES

      Deferred  income tax assets and  liabilities  are  computed  annually  for
differences  between the financial  statement and income tax bases of assets and
liabilities. Such deferred income tax asset and liability computations are based
on enacted tax laws and rates applicable to periods in which the differences are
expected to reverse.  Valuation allowances are established,  when necessary,  to
reduce deferred income tax assets to the amounts expected to be realized. Income
tax  expense is the tax payable or  refundable  for the period plus or minus the
change during the period in deferred income tax assets and liabilities.


                                      F-23
<PAGE>


      Deferred income taxes result from temporary differences in the recognition
of revenues and expenses for financial and tax reporting  purposes.  At December
31, 2003 and 2002,  deferred  income tax assets were comprised  primarily of the
following:

                                                    2003              2002
                                              ---------------------------------
Federal:
   Depreciation .......................       $   6,510,014       $   5,335,487
   Capitalized operating expenses .....           3,198,684           6,480,950
   Deferred compensation ..............           1,091,917           1,091,917
   Deferred contributions .............             361,117             360,955
   Accrued vacation ...................             110,415             141,408
   Other reserves .....................              20,945              33,442
   Accrued purchase commitment ........                  --           1,190,000
   Net operating loss carryforward ....          92,580,034          82,550,118
                                              ---------------------------------

                                                103,873,126          97,184,277
                                              =================================

State:
   Capitalized research and development           9,813,976           9,633,296
   Depreciation .......................           1,927,489           1,552,355
   Capitalized operating expenses .....                  --             576,499
   Accrued purchase commitment ........                  --             346,229
   Deferred compensation ..............             323,296             317,692
   Deferred contributions .............             106,920             105,020
   Accrued vacation ...................              32,692              41,142
   Other reserves .....................               6,201               9,730
   Net operating loss carryforward ....          12,649,869          10,156,366
                                              ---------------------------------

                                                 24,860,443          22,738,329
                                              ---------------------------------

Deferred tax asset ....................         128,733,569         119,922,606
Valuation allowance ...................        (128,733,569)       (119,922,606)
                                              ---------------------------------

   Net deferred tax asset .............       $          --       $          --
                                              =================================


      The  valuation   allowance   increased  by  $8,810,963,   $20,523,501  and
$8,014,321   during  the  years  ended  December  31,  2003,   2002,  and  2001,
respectively,  as a result of changes in the  components of the deferred  income
tax items.

      For  federal  income tax  purposes,  the Company  has net  operating  loss
carryforwards  of $272,294,219 as of December 31, 2003 that expire through 2023.
For state income tax purposes,  the Company has  California  net operating  loss
carryforwards  of  $46,883,091 as of December 31, 2003 that expire through 2014,
and Maryland net operating loss  carryforwards  of $121,505,765  that follow the
federal treatment and expire through 2023.

      Income tax expense for 2003,  2002, and 2001 consists of the minimum state
franchise tax.

                                SUBSEQUENT EVENTS

      On March 8, 2004, the Company's  common stock was delisted from the Nasdaq
Smallcap Market because the Company's market  capitalization  failed to meet the
minimum  required  standard.  In  addition,  the Company  did not make  interest
payments  related to the 2006 Debentures as required on January 31, 2004.  These
actions  put the Company in  non-compliance  with its  covenants  under the 2006
Debentures.  Management is currently  negotiating with the debenture holders for
appropriate  relief or waiver of these covenants.  One of the debenture  holders
has notified  the Company in writing that they are in default and has  requested
that the Company  repurchase the entire  principal amount of the 2006 Debentures
that they hold at the price  specified in the debenture,  along with any accrued
and unpaid interest.  Because the Company can not assure that it will be able to
negotiate appropriate relief or a waiver of the applicable covenants, the entire
outstanding  principal  amount of the 2006  Debentures has been  classified as a
current liability as of December 31, 2003.


                                      F-24
<PAGE>



<TABLE>
<CAPTION>
                   QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

                                                  FIRST             SECOND           THIRD          FOURTH         TOTAL YEAR
                                             ---------------------------------------------------------------------------------
<S>                                            <C>               <C>              <C>            <C>              <C>
                                                                                                                          2003
Related party research and development         $   353,800      $   304,667      $   353,907      $   300,000      $ 1,312,374
Other research and development                   1,896,986        1,707,507        1,287,516        3,342,407        8,234,416
Other general and administrative                 1,853,702        1,193,342        1,361,900        1,381,529        5,790,473
Net loss common shareholders                   $ 6,770,727      $ 3,608,184      $ 2,920,797      $ 5,217,033      $18,516,741
Basic and diluted loss per common share        $      0.55      $      0.28      $      0.21      $      0.37      $      1.40
Weighted average common shares outstanding      12,358,967       13,013,462       13,595,973       14,013,965       13,266,668

                                                                                                                          2002
Related party research and development         $   300,000      $   468,313      $   300,000      $   419,757      $ 1,488,070
Other Research and development                   6,667,159        3,809,063        2,941,860       11,983,787       25,401,869
Other general and administrative                 2,477,474        2,122,397        2,372,488        2,641,678        9,614,037
Net loss common shareholders                   $10,212,738      $ 7,159,409      $ 6,785,374      $15,433,823      $39,591,344
Basic and diluted loss per common share        $      0.99      $      0.64      $      0.59      $      1.29      $      3.51
Weighted average common shares outstanding      10,364,811       11,147,808       11,541,668       11,941,306       11,277,170
</TABLE>


                                      F-25