**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K/A**


**Amendment
      No. 1**





**(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, 2005**





**OR**





**o
      TRANSITION REPORT
      PURSUANT TO SECTION 13 OR 15 (d) OF SECURITIES**


**EXCHANGE
      ACT OF 1934**





**For
      the Transition Period From _________ to __________**





**Commission
      File Number 0-23567**





**EARTHSHELL
      CORPORATION**


**(Exact
      name of Registrant as specified in its charter)**





**Delaware**
            
            **77-0322379**(State
                or other jurisdiction of
            
            (I.R.S.
                Employerincorporation
                or organization)
            
            Identification
                No.)


**1301
      York Road, Suite 200**


**Lutherville,
      Maryland 21093**


(Address
      of principal executive office) (Zip Code)





**(410) 847-9420**


(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 if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes
o
      No x.







Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


Yes
o
      No x.




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 o




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/A or any amendment
      to
      this Form 10-K/A. Yes o




Indicate
      by checkmark whether the registrant is a large accelerated filer, an accelerated
      filer, or a non-accelerated filer. See definition of “accelerated filer and
      large accelerated filer” in Rule 12b-2 of the Exchange Act.




Larger
      Accelerated Filer o   Accelerated
      Filer o    Non-accelerated
      Filer x




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act). Yes o No x




The
      aggregate market value of the voting stock held by non-affiliates of the
      Registrant as of June 30, 2005 was $13,523,355.




The
      number of shares outstanding of the Registrant’s Common Stock as of March 7,
      2006 was 18,981,167




**DOCUMENTS
      INCORPORATED BY REFERENCE**




**None**












**ANNUAL
      REPORT ON FORM 10-K/A**





**FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2005**





PART
                I
            
            
            1ITEM
                1. BUSINESS
            
            
            1ITEM
                1A. RISK FACTORS
            
            
            9ITEM
                1B. UNRESOLVED STAFF COMMENTS
            
            
            14ITEM
                2. PROPERTIES
            
            
            14ITEM
                3. LEGAL PROCEEDINGS
            
            
            15ITEM
                4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
            
            
            15PART
                II
            
            
            16ITEM
                5. MARKET FOR THE REGISTRANT’S COMMON EQUITY RELATED STOCKHOLDER MATTERS
                AND ISSUER PURCHASES OF EQUITY SECURITIES
            
            
            16ITEM
                6. SELECTED FINANCIAL DATA
            
            
            17ITEM
                7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                OF OPERATIONS
            
            
            18ITEM
                7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK
            
            
            28ITEM
                9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                FINANCIAL DISCLOSURE
            
            
            28ITEM
                9A. CONTROLS AND PROCEDURES
            
            
            28ITEM
                9B. OTHER INFORMATION
            
            
            29PART
                III
            
            
            30ITEM
                10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
            
            
            30ITEM
                11. EXECUTIVE COMPENSATION
            
            
            30ITEM
                12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                AND
                RELATED STOCKHOLDER MATTERS
            
            
            30ITEM
                13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
            
            
            30ITEM
                14. PRINCIPAL ACCOUNTING FEES AND SERVICES
            
            
            30PART
                IV
            
            
            31ITEM
                15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
            
            
            31




i




**EXPLANATORY
      NOTE**




EarthShell
      Corporation (the “Company”) is filing this Amendment No. 1 on Form 10-K/A (this
“Amendment”) to the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2005 to make certain corrections to the Company’s Form 10-K filed
      with the Securities and Exchange Commission on March 31, 2006 as
      follows:




·
            Subsequent
                to the filing of the Form 10K for the year ended December 31, 2005,
                the
                Company identified that it had not included warrants granted to Mr.
                Khashoggi, its former Chairman, in its****footnote
                disclosure of pro forma net loss and loss per share resulting from
                applying SFAS No. 123 for 2005. Accordingly, the Company has restated
                the
                footnote disclosure for this information for the year ended December
                2005
                which resulted in an increase in its pro forma net loss and loss
                per share
                from $6,924,527 and $0.37 to $9,258,471 and $0.49,
                respectively.


·
            The
                Company has revised and enhanced the disclosure under Item 9A Controls
                and
                Procedures.




**PART
      I**


This
        amendment is not intended to update other information presented in this annual
        report as originally filed, except where specifically noted.




**ITEM
      1. BUSINESS**




**The
      Company**




EarthShell
      Corporation (“EarthShell” or the “Company”) was organized in November 1992 to
      engage in the commercialization of proprietary composite material technology,
      designed with the environment in mind, for the manufacture of disposable
      packaging to be used in the foodservice industry. Current and future products
      include hinged-lid containers, plates, bowls, foodservice wraps, cups and
      cutlery (collectively, “EarthShell Packaging”). EarthShell composite material is
      primarily made from abundantly available and low cost natural raw materials
      such
      as limestone and starch from annually renewable crops, such as corn and
      potatoes. The Company has determined that foodservice disposables made of this
      material should offer certain environmental benefits, will have performance
      characteristics, such as strength and rigidity, and it believes that it should
      be able to commercially produce and sell these products at prices that are
      competitive with comparable conventional paper and plastic foodservice
      disposables.




The
      Company’s objective is to establish EarthShell Packaging 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) demonstrate 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.




To
      date,
      the Company has licensed the technology to certain carefully selected partners
      who are working to commercialize the technology. The Company currently has
      three
      active licensees: one in the United States, one in Mexico and one in Asia.
      In
      cooperation with its licensing partners, more than 50,000,000 units of
      EarthShell Packaging , including plates, bowls and sandwich containers have
      been
      manufactured and sold to key customers within a variety of market segments
      in
      order to demonstrate commercial product quality, customer acceptance and demand.
      The Company has received support for its environmemtal claims from a number
      of
      governmental and non-environmental organizations. In addition, the Company
      has
      worked with a machinery manufacturer who has developed turn-key manufacturing
      machinery for EarthShell plates and bowls. The Company’s primary focus is now on
      supporting its licensee in the United States, Renewable Products Inc. (“RPI”),
      who has put in place a commercial production facility and is commencing
      manufacturing and distribution operations. In addition, the Company is
      supporting its Mexican licensee in acquiring and putting into service
      manufacturing capacity to serve the Mexican market. Finally, the Company has
      entered into various license agreements with EarthShell Asia, an Asian licensee,
      to demonstrate and to exploit a new aspect of the EarthShell
      technology.




1




**Industry
      Overview**




Based
      on
      industry studies, the Company believes that the annual spending on foodservice
      disposable packaging is approximately $13 billion in the United States and
      over
      $30 billion globally. According to industry studies of the 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 United
      States 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:




**Global
                Market Size****$**
            ****
            **%****($
                in millions)****Commercial
                Products**Plates,
                Bowls
            
            $
            5,700
            
            
            19Hinged-Lid
                Containers
            
            
            1,800
            
            
            6**Commercial
                Prototypes**Wraps
            
            
            2,000
            
            
            7Hot
                Cups
            
            
            3,300
            
            
            11**Concept
                Prototypes**Cold
                Cups
            
            
            5,700
            
            
            19Containers,
                Trays
            
            
            4,200
            
            
            13Straws,
                Cup Lids
            
            
            3,300
            
            
            11Pizza
                Boxes
            
            
            2,000
            
            
            7Cutlery
            
            
            2,000
            
            
            7**Total**
            
            $
            30,000
            
            
            100





In
      addition to the United States, the Company believes 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 (“EKI”), the largest **** stockholder
      of the Company. 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, price, 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: (i) laminated
      foamed products, (ii) pellet
      technology products, (iii) paperboard
      substitutes and (iv) flexible
      wraps. To date, the EarthShell technology has been used to produce limited
      commercial quantities of laminated foam 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 United States 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.




2




**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. EarthShell Packaging and the
      designs approach for its manufacture and disposal has received support from
      many
      governmental and non-governmental organizations.




**Performance**




The
      Company believes that it has demonstrated that its laminated foam products,
      including plates, bowls, and hinged lid containers, meet the critical
      performance requirements of the marketplace, including strength, graphic
      capabilities, insulation, shipping, handling and packaging. Additionally, the
      Company believes that its other product families, which are currently under
      development, may be manufactured using the same basic raw materials as the
      foam
      laminate disposables and should be readily accepted by the market when
      available.




**Cost**




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




**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:




·
            Develop
                products which deliver comparable or greater performance, are
                competitively priced and offer environmental advantages as compared
                to
                traditional packaging alternatives;




·
            Commercialize
                the plate and bowl project operated at Renewable Products, Inc. (“RPI”)
                and build initial brand awareness and share of
                market;




·
            Accelerate
                market penetration/sales by current licensees with shallow draw foam
                analog, e.g. dinnerware line extensions and other related
                items;




·
            Establish
                and grow international business opportunities, as well as development
                of
                pellet technology;




·
            Promote
                and support additional products with the greatest potential for near
                term
                success: a.) deep draw foam analog products, hot cups and lids, and
                b.)
                injection molded products.




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 has entered into new
      license agreements with RPI in the U.S.
      market and EarthShell
      Hidalgo (“ESH”) for the Mexican market. In addition, the Company has entered
      into an agreement with a new licensee, EarthShell Asia, granting certain
      licenses to use a new embodiment of the EarthShell Technology for various
      applications in certain Asian territories (the “EA License”). Under the license
      agreements, the Company may receive a total of up to $1.7 million from
      technology fees, plus an ongoing royalty. Prior to receiving the prepaid
      technology fees, the Company must successfully demonstrate the commercial
      viability of this new technology for certain applications.




3


The
      Company is 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 the manufacturing processes and reduce
      production costs. The Company will monitor product quality at licensee
      operations .




Over
      the
      past several years, 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.




Throughout
      the course of developing the manufacturing processes for EarthShell Products,
      the Company worked with an equipment manufacturer, Detroit Tool and Engineering
      (“DTE”), which has developed turn-key manufacturing lines for EarthShell plates
      and bowls. One of the Company’s more recent licensees, Renewable Products, Inc.
      (RPI), has acquired 16 manufacturing modules and is in the process of obtaining
      orders and ramping up its manufacturing and distribution operations. The
      Company’s primary focus is now on supporting its licensees. EarthShell believes it has a high quality and cost-effective product and a
      profitable business model necessary to take advantage of a significant market
      opportunity. With the introduction of commercial production capacity by its
      licensees and commercial sales of its products in 2006, EarthShell expects
      its
      products to continue to gain acceptance in the marketplace and believes it
      is
      well positioned to support capacity expansion and market penetration by its
      licensees, leading to growth of the Company’s royalty revenue.




**Licensing
      Business Model**




The
      licensing business 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,
      sale
      and distribution 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 business
      model has positive implications for the Company’s cost structure. As the Company
      has moved from product and process development to the product commercialization
      phase, it has been able to significantly reduce monthly operating costs and
      reposition itself to take advantage of the operating leverage provided by the
      licensing model.




EarthShell
      Packaging will be exclusively manufactured by 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
      making the required royalty payments to EarthShell. With the first turnkey
      commercial manufacturing equipment successfully in service by its
      first  licensee,
      the Company expects that other licensees will then move quickly to invest to
      build additional new manufacturing capacity.




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
      Manufacturing and Distribution Relationships**




The
      Company believes that it has demonstrated that the performance of EarthShell
      plates, bowls and hinged-lid containers is commercially competitive and that
      there is a customer base that is willing to buy them. The Company intends to
      promote the use of EarthShell Packaging in the U.S. and international markets
      through agreements with additional licensed partners. The following is a summary
      of the Company’s current sublicensing relationships.




***ReNewable
      Products, Inc. (RPI)*** The Company entered into the RPI Sublicense coupled with the RPI Merger
      Agreement on June 17, 2005.  Under these agreements, EarthShell has granted
      to RPI the exclusive rights in the U.S. to produce EarthShell plates, bowls,
      and
      other shallow-draw products for certain distribution channels, including the
      retail and government market segments.  In return, RPI agreed to invest in
      excess of $12.0 million and purchase and install the initial eight commercial
      modules that had been built by DTE and to order an additional eight
      modules.  The merger agreement gives RPI the right, ultimately, to merge
      with EarthShell at such time as it has invested substantial capital in building
      new EarthShell manufacturing capacity and the equipment is operational. 
RPI currently has eight manufacturing modules in production and has recently
      completed the installation of the additional eight modules. RPI has commenced
      manufacturing and distribution operations and is actively selling EarthShell
      plates and bowls. The RPI Sublicense requires RPI to pay to the Company a
      royalty fee equal to 20% of RPI’s net sales, not to exceed 50% of RPI’s gross
      margin. See “Management’s Discussion and Analysis of Financial Condition and
      Results of Operations - Liquidity and Capital Resources.”





4


***EarthShell
      Hidalgo S.A. de C.V. (ESH)*** In
      November 2004, the Company entered into a ten year license agreement with ESH
      as
      the Company’s exclusive licensee for the country of Mexico. To date, ESH has
      paid to the Company a $1.0 million technology fee that will be credited against
      future royalty obligations. Under the terms of the ESH License, in order to
      retain its priority in its market segments, ESH must acquire manufacturing
      capacity to supply its market segments and meet other minimum performance
      criteria.




***EarthShell
      Asia, Limited (EA).*** On
      August
      22, 2005, the Company entered into an agreement with EA in connection with
      the
      granting of certain licenses to use a new embodiment of the EarthShell
      Technology for various applications in certain Asian territories (the “EA
      License”). Shortly after executing a letter agreement, both the Company and EA
      decided to restructure the transaction. As part of such restructuring, the
      Company has received a total of $800,000 from the sale of 266,667 shares of
      its
      common stock and may receive an additional $1.8 million from a combination
      of
      (i) prepaid technology fees (up to $1.7 million) and (ii) $0.1 million from
      the issuance of 1,033,333 warrants to purchase shares of the Company’s common
      stock at $3.90 per share. The realization of the $1.7 million in technology
      fees
      is dependent on the Company successfully demonstrating the commercial viability
      of its technology in certain new applications.




***Meridian
      Business Solutions, Ltd. (MBS)*** On
      May
      13, 2004, the Company entered into a 10 year license agreement with MBS and
      granted to MBS a priority license to supply certain retail and government market
      segments in the United States (the “MBS Sublicense”) and initially paid
      EarthShell $0.5 million in technology fees. On June 8, 2005, the Company entered
      into a letter agreement with MBS terminating the MBS Sublicense. At the time
      the
      letter agreement was executed, MBS had not yet implemented the sublicense
      granted to it under the MBS Sublicense. The parties separately agreed that
      the
      effectiveness of the termination would be conditioned upon the effectiveness
      of
      certain agreements with RPI. The Company entered into additional sublicense
      agreements with MBS covering non-competing technologies in other markets and
      territories than those covered by the past MBS Sublicense and the present RPI
      Sublicense. However, the effectiveness of such sublicense agreements was
      expressly conditioned upon the satisfaction of certain conditions before July
      31, 2005, including the receipt by the Company of $2.6 million in technology
      fees and other payments. These agreements expired under their own terms on
      July
      31, 2005 ***.***




**Manufacturing**




The
      current EarthShell manufacturing process for laminated foamed 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. EarthShell Packaging uses readily
      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.




In
      prior
      years, the Company has devoted resources to develop manufacturing machinery
      and
      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. In cooperation
      with former manufacturing partners, the Company financed and built initial
      commercial production capacity. To date, the Company has produced limited
      amounts of EarthShell Packaging bowls, plates and hinged-lid containers 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. Having demonstrated the manufacturability of EarthShell
      foam products, the Company has now concluded its commercial demonstration
      production activities and is relying on its equipment manufacturing partners
      to
      demonstrate and guarantee the long-term manufacturability of EarthShell
      Packaging.




***Detroit
      Tool & Engineering*** ***(DTE)*** ***.*** DTE
      was
      one of the initial equipment manufacturers to work with EarthShell in developing
      its first generation commercial manufacturing equipment. In 2002, EarthShell
      granted a license to DTE to become an approved EarthShell equipment supplier.
      In
      early 2005, the Company extended the license through 2007 with exclusivity
      to
      manufacture equipment for production of shallow draw products. Building on
      previous experience with EarthShell manufacturing, DTE designed and built a
      modular and integrated, turn-key manufacturing line for the production of
      EarthShell plates and bowls, comprising four plate and four bowl manufacturing
      modules and has demonstrated to EarthShell’s satisfaction that this equipment is
      fully capable of continuous commercial service. This equipment was planned
      for
      delivery, installation and start-up in early 2004 with one of EarthShell’s
      licensees. However, due to a change in EarthShell licensees, as well as a
      reorganization of DTE that was completed in late 2004, the placement of this
      equipment was delayed. As of early 2005, these first eight commercial modules
      were sold to RPI and were moved from DTE’s fabrication floor and installed in an
      adjacent manufacturing facility leased to RPI that is in close proximity to
      the
      fabrication facility. The Company granted a license agreement to RPI as
      described above. Subsequently, RPI ordered an additional 8 modules which have
      been installed in RPI’s facility and are being readied for
      operation.




5




**Patents,
      Proprietary Rights And Trademarks**




The
      technology that the Company licenses from EKI is the subject of numerous issued
      and pending patents in the United States 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. Currently, EKI has 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 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 are
      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 associated trademarks,
      and has been licensed by EKI to use the trademark ALI-ITE for the composite
      material.




**Relationship
      With EKI**




The
      Company has an exclusive, worldwide, royalty-free license in perpetuity to
      use
      and license 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 twenty-four hours). Mr. Essam
      Khashoggi, Chairman of EKI, served as our Company’s Chairman of the Board of
      Directors since its organization in November 1992 through July 2005 when he
      retired and resigned from the Board of Directors. Mr. Khashoggi, personally
      and
      through affiliated entities, currently beneficially owns 7,933,603 shares of
      the
      Company’s common stock, which represents approximately 31.79% of the shares
      outstanding as of December 31, 2005. On
      July
      29, 2002, the Company entered into an amendment to its previously Amended
      and Restate d
      License
      Agreement with EKI
      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 nominal 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.




***Summary
      of EKI Agreements.*** During
      2002 and January 2003, EKI made a series of working capital loans (the “EKI
      Simple Interest Loans”) to the Company totaling approximately $5.8 million. The
      Simple Interest Loans were interest bearing at a rate of seven percent or
      ten percent per annum, and were payable on demand. In connection with the
      issuance and sale in March 2003 of the Company’s 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 the Biotec
      Group agreed to subordinate certain payments discussed below to which they
      were
      otherwise entitled under the EKI License Agreement and the Biotec License
      Agreement 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 EKI License Agreement or the Biotec License
      Agreement until such time as the Company’s obligations under the 2006 Debentures
      were satisfied in full. EKI and the Biotec Group
      also agreed to allow the Company to pledge its interest in the EKI License
      Agreement to secure its obligations under the 2006 Debentures, and certain
      additional concessions were made by EKI and the Biotec Group to
      permit the Company greater flexibility in selling its rights under the EKI
      License Agreement and the Biotec License Agreement to third parties in an
      insolvency context. These rights terminated upon the satisfaction in full of
      the
      obligations under the 2006 Debentures in October of 2004. In consideration
      for
      its willingness to subordinate the payments and advances that were 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.




6


As
      part
      of the 2006 Debenture Settlements that EKI helped negotiate and settle, EKI
      purchased the debentures for $1.0 million. On September 30, 2004, EKI entered
      into an agreement with EarthShell to sell back to the Company the 2006
      Debentures it had purchased for $1 .0 million
      in cash, the cash price originally paid by EKI. The Company retired the 2006
      Debentures shortly thereafter.




In
      October 2004, in connection with the settlement of the 2006 Debentures, EKI
      converted all of its then outstanding loans to EarthShell ($2,755,000) into
      unregistered common stock at $3.00 per share and $0.53 million of accumulated
      interest at $4.00 per share for a total of 1,051,494 shares received by EKI.
      These shares are not subject to registration rights. As of December 31,
      2004, the loans from EKI to EarthShell had all been retired.


Pursuant
        to the Board’s approval in February 2005, the Company granted to its chairman of
        the Board of Directors (and majority beneficial stockholder) a warrant to
        purchase one million shares of the Company’s common stock at $3 per share in
        consideration of the stockholder’s continued support of the Company since its
        inception and providing bridge loans from time to time. The warrant was issued
        in August 2005 and expires in May of 2015.


In
      May of
      2005, an additional 44,387 shares were issued to EKI pursuant to a 90 day price
      protection provision, which provided for an adjustment in the effective
      conversion price of the interest portions of the Simple Interest Loans from
      $4.00 per share to $3.00 per share. In February 2005, the Board approved the
      grant of a ten-year option to Essam Khashoggi, its current Chairman, to
      purchase one million  shares of the Company’s common stock at $3.00 per
      share in consideration of his and his company, EKI, continued support of the
      Company since its inception, including providing bridge loans at below market
      terms from time to time. Subsequent to March 31, 2006, the Board became aware
      that the grant of the option exceeded options available under its Stock Option
      Plan and accordingly rescinded the grant. In May 2005, the Board approved the
      grant of a warrant under the same terms as the grant of the option to EKI which
      was subsequently amended to Essam
      Khashoggi. The warrant was issued in August 2005.




On
      October 11, 2005, the Company entered into a loan arrangement (the “2005 EKI
      Loan”) with EKI pursuant to which the Company issued to EKI a promissory note in
      the principal amount of $1.0 million. As of December 31, 2005, EKI had advanced
      $0.85 million with the balance being funded by the second week of January 2006.
      Interest accrues on the principal balance of the 2005 EKI Loan at a variable
      per
      annum rate, as of any date of determination, that is equal to the rate published
      in the “Money Rates” section of *The
      Wall Street Journal* as being
      the “Prime Rate”, compounded monthly. All accrued but unpaid interest and
      outstanding principal is due and payable on the earliest to occur of the
      following: (i) the second anniversary of the date of the EKI Loan;
      (ii) five days following the date the Company has received $3.0 million or
      more in aggregate net cash proceeds from all financing transactions, equity
      contributions, and transactions relating to the sale, licensing, sublicensing
      or
      disposition of assets or the provision of services (including advance
      royalty payments, proceeds from the sale of the Company’s common stock and fees
      for technological services rendered to third parties), measured from the date
      of
      the EKI Loan and not taking into account the proceeds advanced under the EKI
      Loan; or (iii) the occurrence of an Event of Default (as defined in the 2005
      EKI
      Loan).




In
      September of 2004, as part of an overall restructuring of its debt, EarthShell
      entered into an agreement with Biotec to convert $1.475 million of the $2.475
      million of accrued license fees owing to Biotec as of September 1, 2004, plus
      accrued interest into 491,778 shares of EarthShell common stock and to
      eliminate, the $100,000 per month minimum license fee. In December of 2004,
      EarthShell paid to Biotec $125,000, leaving a balance of $875,000 as of
      December 31, 2004. During 2005, the balance was further reduced to $837,145
      and assigned to EKI. Also on October 11, 2005, the Company entered into the
      Debt
      Conversion Agreement with EKI, pursuant to which the Company and EKI agreed
      that
      a payable in an amount equal to $837,146 (previously owed to the Biotec
      Group but subsequently assigned to EKI) be converted into 279,048 shares of
      common stock of the Company. The conversion price equaled $3.00 per share.
      Pursuant to the Debt Conversion Agreement, the Company and EKI released each
      other from any and all claims in connection with the payable.




Under
      the
      terms of the EKI License
      Agreement and an
      amended and restated Patent
      Agreement for the Allocation of Patent Costs by
      and between
      the Company and EKI, EarthShell has the obligation to pay the patent prosecution
      and maintenance costs for those patents which i) “directly relate to” its field
      of use, and which ii) “primarily benefit” EarthShell. 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 EKI License
      Agreement with EKI and continues to pay directly all relevant costs.




See
      Notes
      to Consolidated Financial Statements - Related Party Transactions for a further
      discussion of the relationship with EKI and other related party
      matters.




7


***Biotec
      License Agreement.*** On July
      29, 2002 the Company entered into a license and information transfer
      agreement (the “Biotech License Agreement”) with bio-tec Biologische
      Naturverpackungen GmbH & Co. KG and bio-tec Biologische Naturverpackungen
      Forschungs und Entwicklungs GmbH (the “Biotec Group”) to utilize the Biotec
      Group technology for foodservice disposable packaging applications. EKI had
      previously granted to the Company priority rights to license certain product
      applications on an exclusive basis from the Biotec Group in consideration for
      the Company’s payment of a $100,000 minimum monthly payment to Biotec. In
      addition, in consideration for the monthly payment, the Biotec Group agreed
      to
      render technical services to the Company at the Biotec Group’s cost plus five
      percent . The licensing fee and services arrangements were continued in the
      Biotec License Agreement. Under the terms of the Biotec License Agreement,
      the
      Biotec Group was entitled to receive 25% percent of any royalties or other
      consideration that the Company receives in connection with the sale of products
      utilizing the Biotec Group technology, after applying a credit for all minimum
      monthly payments received. In connection with the issuance of the 2006
      Debentures, the Biotec Group agreed to subordinate the licensee fee payments
      due
      from EarthShell until the debentures were retired. During this period, the
      license fees due to the Biotec Group were accrued.




In
      September of 2004, as part of an overall restructuring of its debt, EarthShell
      and Biotec entered into an agreement to convert $1.475 million of the $2.475
      million of accrued license fees as of September 1, 2004, plus accrued interest
      into 491,778 shares of EarthShell common stock and to eliminate, for two years,
      the $100,000 per month minimum license fee. In December of 2004, the amended
      Biotec License Agreement was further amended and EarthShell paid to Biotech
      $125,000, leaving a balance owing of approximately $875,000, which was
      subsequently reduced to approximately $837,000. On August 31, 2005, in
      connection with the sale of Biotec by EKI, Biotec License Agreement was again
      amended and restated (the “Amended and Restated Biotec License”) and the minimum
      monthly payment to retain exclusivity was completely eliminated and the balance
      of approximately $837,000 owing to EarthShell was assigned by the Biotec Group
      to EKI. Under the Amended and Restated Biotec License, the Company has a fully
      paid up license to use the Biotec technology in the EarthShell fields of use,
      with certain limited exclusions, exclusively through June 2008. The Company
      can
      maintain its exclusivity provided it has been successful in commercializing
      the
      Biotec technology and is making certain minimum royalty payments under the
      license by June 2008. As of October 11, 2005, the Company has paid to the Biotec
      Group **** $125,000
      in cash, has converted approximately $1.475 million into 491,778 shares of
      unregistered stock, and has assigned the balance owing to the Biotec Group
      of
      $837,000 to EKI. **** The
      $837,000 balance was ultimately converted by EKI in October 2005 into shares
      of
      EarthShell common stock at $3.00 per share (see “Relationship with EKI”
above).




**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.




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
      the patents it licenses from EKI uniquely position the Company 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.




**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 are 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.




8


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, 2006, the Company had six 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 100 F Street, NE, 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
      1A. RISK FACTORS**




Our
      business, results of operations and financial condition are subject to a number
      of risks, including the risks set forth below. You should carefully consider
      these risks. Additional risks and uncertainties, including those that are not
      yet identified or that we currently think are insignificant, may also adversely
      affect our business, results of operations and financial condition.





**Our
      obligations under the December Debentures are secured by substantially all
      of
      our Assets which could cause our operations to cease if we
      default.**





Our
      obligations under the $4.5 million of secured convertible debentures (the
“December Debentures”), issued to Cornell Capital Partners on December 30, 2005
      are secured by substantially all of our assets. As a result, if we default
      under
      the terms of the December Debentures, Cornell Capital Partners could foreclose
      its security interest and liquidate substantially all of our assets. This would
      cause us to cease operations.





**We
      have a limited operating history upon which you can evaluate our
      business.**





Although
      the Company earned its first revenues in 2004 and is no longer classified as
      a
“developmental stage company”, it has limited operating history, therefore, it
      remains subject to the inherent challenges and risks of establishing a new
      business enterprise. The Company may not be successful in addressing such risks.
      The limited operating history of the Company makes the prediction of future
      results of operations difficult or impossible. To date, production volumes
      of
      EarthShell Packaging products have been low relative to intended and necessary
      capacity of the manufacturing lines.




The
      initial plates, bowls, and sandwich containers to be sold commercially were
      produced on lab equipment, pilot machinery, or first generation commercial
      equipment.  Although we have produced and sold 40-50 million pieces,
      the commercial equipment envisioned by the Company that will allow for the
      manufacturing to be done profitably needed to be operated at higher speeds
      and
      good part throughput rates than was experienced during the early stages of
      production.  Ultimately the Company discontinued production using the pilot
      and first generation equipment to allow Detroit Tool and Engineering
      Company (“DTE”) to finish the machinery development to achieve the
      commercial levels of quality and throughput.




9


As
      of
      December 31, 2005, the first modules of DTE equipment have been purchased
      by ReNewable Products, Inc. (“RPI”), as EarthShell’s U.S. licensee, and are
      operational at commercial throughput rates. Production and distribution has
      begun and commercial quality product is beginning to be re-introduced into
      the
      market.




The
      success of future operations depends upon the ability of RPI and other licensees
      to manufacture and sell EarthShell Packaging Products in sufficient quantities
      so as to be commercially feasible and then to distribute and sell those products
      at competitive prices. Consistent commercially feasible production volumes
      had
      not been achieved and assured competitive price figures had not yet been fully
      proven as of December 31, 2005. As a result of the foregoing factors, the
      Company expects to incur losses for at least the next 12 months and, depending
      on the success of the Company’s products and services in the marketplace, for
      potentially an even longer period.




**We
      have a working capital deficit, which means that our current assets at December
      31, 2005 were not sufficient to satisfy our current liabilities on that
      date**


For
      the
      year ended December 31, 2004, the Company had reported operating revenues
      of $0.1 million and aggregate net losses of approximately $7.3 million. In
      addition, for the year ended December 31, 2005, the Company had reported
      operating revenues of $0.2 million and an aggregate net loss of approximately
      $6.2 million. Although the Company hopes to achieve break-even cash flow by
      the
      end of 2006, the Company does not expect to operate profitably during the
      current fiscal year. Although the Company is actively seeking equity financing
      to restructure the debt on its balance sheets and to meet its operating and
      capital needs, additional funding may not 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. If the Company is unable to obtain such additional
      capital, the Company may be required to reduce the scope of its anticipated
      expansion, which could adversely affect the Company’s business, financial
      condition and results of operations or cease operations.




**We
      are the subject of a “Going Concern” Opinion from our Independent
      Auditors**





The
      condensed 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. The Company has incurred
      significant losses since inception, has minimal revenues and has a working
      capital deficit of $11,458,467 **** at
      December 31, 2005. These factors, along with others, raise substantial
      doubt as to whether the Company will be able to continue as a going concern
      for
      a period of twelve months or less. The Company will have to raise additional
      funds to meet its current obligations and to cover operating expenses through
      the year ending December 31, 2006. If the Company is not successful in
      raising additional capital, it may not be able to continue as a going concern
      for a period of twelve months or less.




On
      August
      22, 2005, the Company entered into an agreement with EarthShell Asia (EA) in
      connection with the granting of certain licenses to use EarthShell Technology
      for various applications in certain Asian territories (the “EA License”).
      Shortly after executing a letter agreement, both the Company and EA entered
      into
      negotiations to restructure the transaction and ultimately entered into an
      amended and restated letter agreement dated December 9, 2005. As part of such
      restructuring, the Company may receive a total of up to $2.6 million from a
      combination of (i) prepaid
      technology fees (up to $1.7 million), (ii) the
      sale
      of up to 266,667 shares of its common stock and (iii) the
      issuance of 1,033,333 warrants to purchase shares of the Company’s common stock
      at $3.90 per share, which, under certain circumstances, may be adjusted to
      an
      exercise price of not less than $3.00 per share. The realization of the full
      potential of the transaction is dependent on the Company successfully
      demonstrating the commercial viability of its technology in certain new
      applications. The Company received $0.5 million from EA as an initial partial
      payment and agreed to issue 166,667 shares of its common stock in connection
      with this payment. The Company received an additional $0.3 million in December
      2005 and $0.1 million in February 2006 pursuant to the amended and restated
      agreement with EA dated December 9, 2005, but which was not effective until
      February 10, 2006 when the final cash payment was received. Under the amended
      and restated agreement, upon receipt of the final payment, the Company issued
      a
      total of 266,667 shares and the warrants to purchase the 1,033,333
      shares.




On
      October 11, 2005, EKI entered into an agreement with the Company to advance
      to
      it up to $1.0 million under the 2005 EKI Loan. On December 30, 2005, the Company
      entered into a Purchase Agreement with Cornell Capital Partners whereby the
      Company received aggregate proceeds of $4.5 million on January 6, 2006 from
      the
      sale of the convertible debentures. Of the aggregate proceeds, approximately
      $2.6 million were used to payoff the existing $2.5 million promissory note
      to
      Cornell Capital Partners and others. See “Management’s Discussion and Analysis
      of Financial Condition and Results of Operations.” Additional financing may not
      be available to the Company, or, if available, the terms may not be satisfactory
      or if we may not receive any further technology fee payments in 2006 pursuant
      to
      its sublicense agreements. Management also plans to continue in its efforts
      to
      minimize expenses, but it may not be able to reduce expenses below current
      levels. The condensed 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.





10




**Management
      has identified the following material weaknesses in the Company’s internal
      controls over financial reporting:**




·
            The
                Company has inadequate segregation of critical duties within each
                of its
                accounting processes and a lack of sufficient monitoring controls
                over
                these processes to mitigate this risk. The responsibilities assigned
                to
                one employee include maintaining the vendor master file, processing
                payables, creating and voiding checks, reconciling bank accounts,
                making
                bank deposits and processing
                payroll.




·
            There
                are weaknesses in the Company’s information technology controls which
                makes the Company’s financial data vulnerable to error or fraud.
                Specifically, there is a lack of documentation regarding the roles
                and
                responsibilities of the IT function, lack of security management
                and
                monitoring and inadequate segregation of duties involving IT
                functions.




The
      departure of the Company's Controller in November 2004 resulted in the
      accounting and reporting functions being centralized under the Chief Financial
      Officer, with no additional personnel in the Company having an adequate
      knowledge of accounting principles and practices throughout most of 2005. In
      addition, the Company relocated its headquarters and accounting systems from
      Santa Barbara, CA to Lutherville, MD in late 2005. As a result, some
      transactions were not recorded in a timely manner and adjustments to the
      financial statements were recorded that were considered material to the
      financial position at December 31, 2005 and results of operations for the year
      then ended.





The
      Company has begun taking remediation steps to enhance its internal control
      over
      financial reporting and reduce control deficiencies in general, including the
      material weaknesses enumerated above. In the 4 th Quarter
      2005, the Company employed a new Controller, CPA, with 15 years’ experience in
      public and private accounting. The new Controller is in the process of
      developing revised accounting systems and procedures that will strengthen the
      Company’s controls over financial reporting. The Company anticipates hiring an
      additional accounting employee as resources become available.






**We
      need additional capital to finance our operating deficit and to fund capital
      requirements**




For
      the
      year ended December 31, 2005, the Company had reported operating revenues of
      $0.2 million and aggregate net losses of approximately $6.2 million. Although
      the Company hopes to achieve break-even cash flow by the end of 2006, the
      Company does not expect to operate profitably during this fiscal year. Although
      the Company is actively seeking equity financing to restructure the debt on
      its
      balance sheets and to meet its operating and capital needs, additional funding
      may not 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. If the Company
      is
      unable to obtain such additional capital, the Company may be required to reduce
      the scope of its anticipated expansion, which could adversely affect the
      Company’s business, financial condition and results of operations or cease
      operations.




**Our
      Common Stock is deemed to be a “Penny Stock,” which may make it more difficult
      for stockholders to sell their shares**


The
      Company’s common stock is no longer traded on the NASDAQ Small Cap Market. SEC
      regulations 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 Securities
      and Exchange Act of 1934 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.




**We
      are dependent on our licensees, which could have a material adverse effect
      on
      our business**




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, which could have an
      adverse affect on our business.




11




**We
      have not yet fully evaluated all of the EarthShell Packaging products and it
      is
      possible that some of the products may not perform as well as conventional
      packaging products**




Although
      we believe that we can engineer EarthShell Packaging products to meet many
      of
      the critical performance requirements for specific applications, individual
      products may not perform as well as conventional foodservice disposables; for
      example, some consumers may prefer clear cups and clear lids on take-home
      containers which are not available with our foam technology. We are still
      developing many of our EarthShell Packaging products and we have not yet
      evaluated the performance of all of them. If we fail to develop EarthShell
      Packaging products that perform comparably to conventional foodservice
      disposables, this could cause consumers to prefer our competitors’
products.




**Established
      manufacturers in the foodservice disposables industry could improve their
      ability to recycle their existing products or develop new environmentally
      preferable disposable foodservice containers, which could render our technology
      obsolete and could negatively impact our ability to
      compete**




Competition
      among existing food and beverage container manufacturers in the foodservice
      industry is intense. Virtually all of the key participants in the industry
      have
      substantially greater financial and marketing resources at their disposal than
      we do, and many have well-established supply, production and distribution
      relationships and channels. Companies producing competitive products utilizing
      competitive materials 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 products. In addition, some
      of
      the Company’s licensees and joint venture partners manufacture paper, plastic or
      foil packaging that may compete with EarthShell Packaging products. 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. We expect that many
      existing packaging manufacturers may actively seek competitive alternatives
      to
      our products and processes. The development of competitive, environmentally
      attractive, disposable foodservice packaging, whether or not based on our
      products and technology, could render our technology obsolete and could impair
      our ability to compete, which would have an adverse effect on our business,
      financial condition and results of operations.




**Our
      anticipated international revenues are subject to risks inherent in
      international business activities**




We
      expect
      sales of our products and services in foreign countries to account for a
      material portion of our revenues. These sales are subject to risks inherent
      in
      international business activities, including:




any
      adverse change in the political or economic environments in these
      countries;




economic
      instability;




any
      adverse change in tax, tariff and trade or other regulations;




the
      absence or significant lack of legal protection for intellectual property
      rights;




exposure
      to exchange rate risk for revenues which are denominated in currencies other
      than U.S. dollars; and




difficulties
      in managing joint venture businesses spread over various
      jurisdictions.




Our
      revenues could be substantially less than we expect if these risks affect our
      ability to successfully sell our products in the international market.




**Our
      products may be perceived poorly by customers and/or environmental groups,
      which
      could have an adverse affect on our business**





12




Our
      success depends substantially on our ability to design and develop foodservice
      disposables that are not as harmful to the environment as conventional
      disposable foodservice containers made from paper, plastic and polystyrene.
      EarthShell has used a life cycle inventory methodology in its environmental
      assessment of EarthShell Packaging products and in the development of associated
      environmental claims, and we have received support for the EarthShell concept
      from a number of environmental groups. Although we believe that EarthShell
      Packaging products offer several environmental advantages over conventional
      packaging products, our products may also possess characteristics that consumers
      or some environmental groups could perceive as negative for the environment.
      In
      particular, EarthShell Packaging products may result in more solid waste by
      weight and, in a dry environment, by volume, and manufacturing them may release
      greater amounts of some pollutants and lesser amounts of other pollutants than
      occurs with conventional packaging. Whether, on balance, EarthShell Packaging
      products are better for the environment than conventional packaging products
      is
      a somewhat subjective judgment. Environmental groups, regulators, customers
      or
      consumers may not agree that present and future EarthShell Packaging products
      have an environmental advantage over conventional packaging.




**Third
      parties may infringe the patents that we license, new products that we develop
      may not be covered by our licensed patents and we could suffer an adverse
      determination in a patent infringement proceeding, which could allow our
      competitors to duplicate our products without having incurred the research
      and
      development costs we have incurred and therefore allow them to produce and
      market those products more profitably**




Our
      ability to compete effectively with conventional packaging will depend, in
      part,
      on our ability to protect our proprietary rights to the licensed technology.
      Although EKI, the largest stockholder of the Company, and EarthShell endeavor
      to
      protect the licensed technology through, among other things, U.S. and foreign
      patents, the duration of these patents is limited and the patents and patent
      applications licensed to us may not be sufficient to protect our technology.
      The
      patents that EKI obtains and licenses to us may not be validly held and others
      may try to circumvent or infringe those patents. We also rely on trade secrets
      and proprietary know-how that we try to protect in part by confidentiality
      agreements with our licensee manufacturers, proposed joint venture partners,
      employees and consultants. These agreements have limited terms and these
      agreements may be breached, we may not have adequate remedies for any breach
      and
      our competitors may learn our trade secrets or independently develop them.
      It is
      necessary for us to litigate from time to time to enforce patents issued or
      licensed to us, to protect our trade secrets or know-how and to determine the
      enforceability, scope and validity of the proprietary rights of
      others.




We
      believe that we own or have the rights to use all of the technology that we
      expect to incorporate into EarthShell Packaging products, but an adverse
      determination in litigation or infringement proceedings to which we are or
      may
      become a party could subject us to significant liabilities and costs to third
      parties or require us to seek licenses from third parties. Although patent
      and
      intellectual property disputes are often settled through licensing or similar
      arrangements, costs associated with those arrangements could be substantial
      and
      could include ongoing royalties. Furthermore, we may not obtain the necessary
      licenses on satisfactory terms or at all. We could incur substantial costs
      attempting to enforce our licensed patents against third party
      infringement, or the unauthorized use of our trade secrets and proprietary
      know-how or in defending ourselves against claims of infringement by others.
      Accordingly, if we suffered an adverse determination in a judicial or
      administrative proceeding or failed to obtain necessary licenses, it would
      prevent us from manufacturing or licensing others to manufacture some of our
      products.




**Failure
      of our licensees to produce EarthShell Packaging products profitably on a
      commercial scale would adversely affect our ability to compete with conventional
      disposable foodservice packagers**




Production
      volumes of EarthShell Packaging products to date have been low relative to
      the
      intended capacity of the various manufacturing lines, and, until production
      volumes approach design capacity levels, actual costs and profitability will
      not
      be certain. Since the actual cost of manufacturing EarthShell Packaging products
      on a commercial scale has not been fully demonstrated, they may not be
      manufactured at a competitive cost. As our licensees and joint venture partners
      begin to commercially produce EarthShell Packaging products, they may encounter
      unexpected difficulties that cause production costs to exceed current estimates.
      The failure to manufacture EarthShell Packaging products at commercially
      competitive costs would make it difficult to compete with other foodservice
      disposable manufacturers.




**Unavailability
      of raw materials used to manufacture our products, increases in the price of
      the
      raw materials, or the necessity of finding alternative raw materials to use
      in
      our products could delay the introduction and market acceptance of our
      products**




Although
      we believe that sufficient quantities of all raw materials used in EarthShell
      Packaging products are generally available, if any raw materials become
      unavailable, it could delay the commercial introduction and hinder market
      acceptance of EarthShell Packaging products. In addition, our licensees and
      joint venture partners may become significant consumers of certain key raw
      materials such as starch, and if such consumption is substantial in relation
      to
      the available resources, raw material prices may increase which in turn may
      increase the cost of EarthShell Packaging products and impair our profitability.
      In addition, we may need to seek alternative sources of raw materials or modify
      our product formulations if the cost or availability of the raw materials that
      we currently use become prohibitive.




13




**If
      initial purchasers of the EarthShell Packaging products do not purchase
      significant quantities, it could delay the introduction and market acceptance
      of
      the products**




It
      will
      be important for our licensees and joint venture partners to identify and obtain
      contractual commitments from major customers for substantial quantities of
      product. If initial purchasers of our products do not ultimately purchase
      significant quantities or continue to purchase on a repeat basis, it will delay
      our ability to realize meaningful royalty revenues from sales of those
      products.




**We
      do not own the technology necessary to manufacture EarthShell
      Packaging**




EarthShell
      Packaging is based primarily on patented composite material technology licensed
      on an exclusive worldwide basis from EKI, the largest stockholder of the Company, and to a lesser extent, on a limited exclusive,
      worldwide basis from the Biotec Group .
      The
      Company does not own the technology necessary to manufacture EarthShell
      Packaging and is dependent upon a license agreement with EKI (the “EKI Licensing
      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 EKI License Agreement with respect to U.S. patents; however,
      it
      is possible that steps could be taken to terminate its rights under the EKI
      License Agreement with respect to international patents. EKI is the largest
      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 employees of EKI.




**Our
      operations are subject to regulation by the U.S. Food and Drug
      Administration**




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 are 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. 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. However, the FDA may not agree with these conclusions, which could
      have a material adverse affect on our business operations.




**ITEM
      1B. UNRESOLVED STAFF COMMENTS**




Not
      Applicable




**ITEM
      2. PROPERTIES**




In
      November 2005, the Company consolidated its offices to its current location
      at
      1301 York Road, Suite 200, Lutherville, Maryland 21093. The Company leases
      3,353
      square feet of office space on a month to month basis at a rate of $5,780 per
      month.




14




**ITEM
      3. LEGAL PROCEEDINGS**




The
      Company is engaged in litigation with two equipment suppliers seeking to collect
      a total of approximately $600,000 for manufacturing equipment in connection
      with
      the Company’s former Goettingen, Germany manufacturing line that is no longer in
      service. The entire amount claimed in the litigation has already been accrued
      as
      part of the Company’s accounts payable. The Company believes that it has good
      defenses and counterclaims inasmuch as the equipment did not reach the
      performance requirements specified in the purchase contracts, and expects to
      settle the respective matters soon.




The
      Company is engaged in settlement discussions with Baltimore County, Maryland
      (the “County”) related to personal property taxes that are owed to the County.
      The County holds a judgment against the Company in the amount of $963,648 for
      personal property taxes for the years 1999 through 2005. However, the amount
      of
      the taxes owed was calculated in error by the County. As a result, the County
      has offered to reduce to judgment to $92,287 plus accrued interest pending
      the
      Company entering into a satisfactory payment plan with the County. The Company
      believes that it will execute a payment plan with the County by the
      2 nd quarter
      of 2006 and have the judgment reduced to the correct amount listed above.




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




None.




15




**PART
      II**




**ITEM
      5. MARKET** **FOR THE REGISTRANT’S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES**




The
      Company’s common stock is currently listed on the Bulletin Board 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.OB.” For the periods indicated, the following table presents the range of
      high and low closing sale prices for the Company’s common stock.




**Quarterly
                Prices****First**
            
            **Second**
            
            **Third**
            
            **Fourth**
            
            **Total
                Year****2005**Market
                price per common shareHigh
            
            $
            2.52
            
            $
            3.20
            
            $
            2.96
            
            $
            2.50
            
            $
            3.20Low
            
            
            1.49
            
            
            1.65
            
            
            1.78
            
            
            1.74
            
            
            1.49**2004**Market
                price per common shareHigh
            
            $
            2.52
            
            $
            2.03
            
            $
            3.75
            
            $
            2.97
            
            $
            3.75Low
            
            
            1.49
            
            
            0.45
            
            
            1.75
            
            
            1.95
            
            
            0.45


The
      Company’s common stock sales prices have been restated, where applicable, to
      reflect the one-for-twelve reverse split of the Company’s common stock effective
      as of October 31, 2003. Quotations since the Company’s stock began trading on
      the OTC Bulletin Board may reflect inter-dealer prices, without retail mark-up,
      mark-down or commission and may not necessarily represent actual
      transactions.




The
      number of stockholders of record of the Company’s common stock at February 9,
      2006 was 1,195. At March 24, 2006, Mr. Essam Khashoggi, directly or indirectly,
      owned approximately 31.79% of the outstanding common stock of the
      Company.




The
      Company does not intend to declare or pay cash dividends on its common stock
      in
      the foreseeable future nor has it paid dividends in the past two years. The
      Company’s ability to pay cash dividends is restricted under certain debt
      obligations to which the Company is a party.




**Recent
      Sales of Unregistered Securities**




(1) In
      March 2005, EarthShell issued 143,550 shares of its common stock to Cornell
      Capital Partners in connection with a financing transaction.




(2) In
      March 2005, EarthShell issued 6,450 shares of its common stock to Sloan
      Securities Corporation in connection with services provided pursuant a financing
      transaction with Cornell Capital Partners.




(3) In
      March 2005, EarthShell issued 6,450 shares of its common stock to Crown
      Investment Banking, Inc. in consideration of the services rendered by Crown
      in
      connection the Company obtaining financing.




(4) In
      May 2005, EarthShell issued 44,387 shares of its common stock to EKI in
      conversion of interest due on a prior note payable to EKI.




(5)
      In
      October 2005, the Company issued 279,048 shares of its common stock to EKI
      pursuant to a Debt Conversion and Mutual Release Agreement.




(6) In
      December 2005, in connection with a stock purchase agreement with EarthShell
      Asia dated August 22, 2005, which was subsequently amended and restated, the
      Company issued 266,667 shares of its common stock. The shares were issued to
      and
      are held by various principals of EarthShell Asia as follows: Mr. Ying Wang
      received 83,333 shares; Mr. Monty Waltz received 33,333 shares; Mr. Greg C.
      Hoffman received 66,668 shares; and The Steven L. Galvanoni Trust received
      83,333 shares.




16


With
      respect to the sale of unregistered securities referenced above, all
      transactions were exempt from registration pursuant to Section 4(2) of the
      Securities Act of 1933, as amended (the “1933 Act”), and Regulation D
      promulgated under the 1933 Act. In each instance, the purchaser had access
      to
      sufficient information regarding the Company so as to make an informed
      investment decision. More specifically, we had a reasonable basis to believe
      that each purchaser was an “accredited investor” as defined in Regulation D of
      the 1933 Act and otherwise had the requisite sophistication to make an
      investment in our securities.




**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.




**Selected
      Financial Data**





**(in
      thousands, except per share data)**





**For
                the Year Ended December 31****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001****Statement
                of Operations Data**Revenues
            
            $
            183
            
            $
            138
            
            $
            --
            
            $
            --
            
            $
            --Research
                and development expenses (1)
            
            
            201
            
            
            1,170
            
            
            9,547
            
            
            26,890
            
            
            47,148General
                and administrative expenses
            
            
            5,485
            
            
            3,749
            
            
            5,786
            
            
            9,590
            
            
            9,634Depreciation
                and amortization
            
            
            3
            
            
            42
            
            
            380
            
            
            3,099
            
            
            5,874Gain
                on sale of property and equipment
            
            
            (23
            )
            
            (168
            )
            
            (452
            )
            
            (441
            )
            
            --Interest
                expense (income), net
            
            
            696
            
            
            1,068
            
            
            1,791
            
            
            132
            
            
            (356
            )Debenture
                conversion cost
            
            
            --
            
            
            --
            
            
            166
            
            
            321
            
            
            --Net
                loss
            
            
            6,179
            
            
            7,257
            
            
            18,517
            
            
            39,591
            
            
            62,302Average
                shares outstanding
            
            
            18,503
            
            
            15,047
            
            
            13,267
            
            
            11,277
            
            
            9,353**Balance
                Sheet Data**Cash
                and cash equivalents
            
            $
            348
            
            $
            272
            
            $
            1,902
            
            $
            111
            
            $
            828Working
                capital (deficit)
            
            
            (11,485
            )
            
            (7,289
            )
            
            (9,438
            )
            
            (8,315
            )
            
            (6,941
            )Total
                assets
            
            
            443
            
            
            483
            
            
            2,287
            
            
            18,024
            
            
            19,886Total
                long-term obligations
            
            
            905
            
            
            1,475
            
            
            4,408
            
            
            --
            
            
            --Deficit
                accumulated during development stage
            
            
            (321,669
            )
            
            (321,607
            )
            
            (314,351
            )
            
            (295,834
            )
            
            (256,243
            )Stockholders’
                equity (deficit)
            
            
            (12,352
            )
            
            (8,755
            )
            
            (12,269
            )
            
            (3,473
            )
            
            11,536Shares
                outstanding
            
            
            18,981
            
            
            18,235
            
            
            14,129
            
            
            12,055
            
            
            9,860**Per
                Common Share**Basic
                and diluted loss per share
            
            $
            0.33
            
            $
            0.48
            
            $
            1.40
            
            $
            3.51
            
            $
            6.66


(1)
            During
                1998, the Company entered into a 5 year purchase commitment with
                a
                supplier whereby the supplier would be entitled to a minimum fee
                of $3.5
                million. The fee would be waived if supplier received an aggregate
                of $70
                million in orders over the 5 year period from 1998 through 2003.
                As of
                December 31, 2002, it was apparent that the purchase commitment would
                not
                be met and the Company recorded the liability for the $3.5 million
                fee and
                as a charge to Other Research and Development Expense. However, during
                the
                4thquarter of 2003, the Company was able to negotiate a reduction of
                the $3.5
                million fee to approximately $1.7 million. Accordingly, the difference
                of
                $1.8 million was recorded as a credit to Other Research and Development
                Expense in 2003. See “Commitments” in the Notes to Consolidated Financial
                Statements.





17




**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 Company’s
      operations for the three years ended December 31, 2005 and the assets and
      liabilities of the Company as of December 31, 2005 and 2004.




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 such as “may,” “will,” “expect,”
“anticipate,” “estimate,” or “continue,” or the negative thereof or other
      comparable terminology. Any one factor or combination of factors could cause
      the
      Company’s actual operating performance or financial results to differ 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.




**Overview**




Organized
      in November 1992 as a Delaware corporation, EarthShell Corporation (the
“Company”) is engaged in the commercialization of composite material
      technology for the manufacture of foodservice disposable packaging designed
      with
      the environment in mind. EarthShell Packaging is based on patented
      composite material technology (collectively, the “EarthShell Technology”),
      licensed on an exclusive, worldwide basis from E. Khashoggi Industries LLC
      and
      its wholly owned subsidiaries.




The
      EarthShell Technology has been developed over many years in consultation with
      leading material scientists and environmental experts to reduce the
      environmental burdens of foodservice disposable packaging through the careful
      selection of raw materials, processes, and suppliers. EarthShell Packaging,
      including hinged-lid sandwich containers, plates, bowls, foodservice wraps,
      and
      cups, is primarily made from commonly available natural raw materials such
      as
      natural ground limestone and potato starch. EarthShell believes that EarthShell
      Packaging has comparable or superior performance characteristics and can be
      commercially produced and sold at prices that are competitive with comparable
      paper and plastic foodservice disposables.




EarthShell
      was a development stage enterprise through the first quarter of 2004. With
      the
      recognition of the Company’s first revenues resulting from the receipt of $0.5
      million in technology fees in connection with granting a license to a strategic
      partner in the second quarter of 2004, the Company was no longer a development
      stage enterprise.




**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. The Company has incurred significant losses
      since inception, has minimal revenues and has a working capital deficit of
      $11,458,467 at December 31, 2005. These factors, along with others, raise
      substantial doubt as to whether the Company will be able 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, 2006. If the Company is not successful
      in raising additional capital it may not be able to continue as a going concern.
      Management plans to address this need by raising cash through either the sale
      of
      licenses, the generation of royalty revenues or the issuance of debt or equity
      securities. In addition, the Company expects cash to be generated in 2006
      through royalty payments from licensees. However, the Company cannot assure
      that
      additional financing will be available to it, or, if available, that the terms
      will be satisfactory, or that it will receive any royalty payments in 2006.
      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.




18


***Revenue
      Recognition.*** The
      Company recognizes revenue when persuasive evidence of an arrangement exists,
      the price is fixed or readily determinable and collectibility is probable.
      The
      Company recognizes revenue in accordance with Staff Accounting Bulletin No.
      101,
“Revenue Recognition in Financial Statements,” (SAB 101), as amended by SAB
      104. EarthShell’s revenues consist of technology fees that are recognized
      ratably over the life of the related agreements and royalties based on product
      sales by licensees that are recognized in the quarter that the licensee reports
      the sales.




**Results
      of Operations**




***Year
      Ended December 31, 2005 Compared with the Year Ended December 31,
      2004***




The
      Company’s net loss decreased $1.1 million to $6.2 million from $7.3 million for
      the year ended December 31, 2005 compared to the year ended
      December 31, 2004, respectively.




***Revenues.*** The
      Company recorded revenues of $0.2 million for the year ended December 31,
      2005. These revenues reflect amortization of the technology fees receivable
      under the sublicense agreements.




***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 decreased $1.0 million to $0.2 million from $1.2 million for the
      year ended December 31, 2005 compared to the year ended December 31,
      2004, respectively.




·
            Related
                party license fee and research and development expenses decreased
                $0.8
                million to $0 from $.8 million for the year ended December 31, 2005
                compared to the year ended December 31, 2004, respectively. Prior to
                2005, related party license fee and research and development expenses
                were
                comprised a $0.1 million minimum monthly licensing fee for the use
                of the
                EarthShell technology and for technical services, both of which were
                payable to EKI, a principal stockholder of the Company, or Biotec,
                a
                wholly-owned subsidiary of EKI. The minimum monthly licensing fee
                to
                Biotec was terminated in 2004.




·
            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 $0.2 million to $0.2 million from $0.4 million
                for the
                year ended December 31, 2005 compared to the year ended
                December 31, 2004, respectively. The reduction is due to the Company
                focusing its efforts on the licensing business model whereby licensees
                and
                future licensees will install and run the equipment to produce EarthShell
                Packaging in their facilities.




***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 increased $1.7 million to $5.5 million from $3.8 million
      for the year ended December 31, 2005 compared to the year ended
      December 31, 2004, respectively. This was due to increases in legal fees of
      $0.2 million, investor relations fees of $0.6 million, financing costs of $0.2
      million, property taxes of $0.5 million (property taxes had a negative balance
      in 2004 due to a settlement of back taxes of $0.5 million), and bad debt expense
      of $0.2 million.




***Depreciation
      and Amortization Expense.*** Depreciation and amortization expense decreased $0.039 million to $0.003 million
      from $0.04 million for the year ended December 31, 2005 compared to the
      year ended December 31, 2004, respectively. The decrease in depreciation
      expense is attributable to the continued write-off of discontinued manufacturing
      and development assets.




***Interest
      Expense.*** Interest
      expense is comprised of related party interest expense and other interest
      expense.




·
            Related
                party interest expense decreased $0.3 million to $0.1 million from
                $0.4
                million for the years ended December 31, 2005 and 2004, respectively.
                Related party interest expense includes interest accrued on outstanding
                loans made to the Company by EKI under the Loan Agreement (see
                “Business - Relationship with EKI”), accretion of the discount related to
                the warrants issued to EKI in conjunction with the March 2003 financing
                transactions, plus accrued interest payable on amounts owed to EKI
                for
                monthly licensing fees that were accrued rather than being paid in
                accordance with the terms of the subordination agreements entered
                into in
                connection with the 2006 Debentures (see “Business - Relationship
                with EKI”). During the third quarter of 2004, agreements were negotiated
                with EKI to convert the EKI Simple Interest Loans, and accrued but
                unpaid
                interest, into common stock of the Company and to restructure the
                unpaid
                licensing fees under the Biotec License Agreement (see “Item 1 - Business
                Relationship with EKI”).




19




·
            Other
                interest expense decreased $0.1 million to $0.6 million from $0.7
                million
                for the year ended December 31, 2005 compared to the year ended
                December 31, 2004, respectively. Other interest expense for 2005 is
                primarily comprised of accretion of the discount and interest accrued
                on
                the CCP Notes. Other interest expense for 2004 was primarily comprised
                of
                accretion of discount on the 2006
                Debentures.




***Gain
      on Sale of Property and Equipment.*** Gain on
      the sale of property and equipment decreased $0.18 million to $.02 million
      from
      $0.2 million for the year ended December 31, 2005 compared to the year
      ended December 31, 2004, respectively. The gains in both 2005 and 2004 were
      realized due to the sale of non-essential machine shop equipment and excess
      office furniture and equipment over their net book value, most of which was
      fully depreciated.




***Premium
      due to Debenture Default.*** During
      the year ended December 31, 2004, the Company accrued $1.7 million in premium
      due to a default under the 2006 Debentures. See the discussion
      below.




***(Gain) Loss
      on Extinguishment of Debentures.*** There
      was no gain or loss on extinguishment of debentures for the year ended
      December 31, 2005 compared to a gain on extinguishment of debentures of
      $0.1 million for the year ended December 31, 2004. The $0.1 million gain
      for the year ended December 31, 2004 relates to interest payable on the
      2006 Debentures that was not paid by the Company upon conversion of the
      Debentures.




***Year
      Ended December 31, 2004 Compared with the Year Ended December 31,
      2003***




The
      Company’s net loss decreased $11.2 million to $7.3 million from $18.5 million
      for the year ended December 31, 2004 compared to the year ended
      December 31, 2003, respectively.




***Revenues.*** The
      Company recorded revenues of $0.1 million for the year ended December 31,
      2004. These revenues reflect amortization of the $3.0 million of technology
      fees
      payable under the sublicense agreements that were entered into with MBS and
      with
      ESH in the second and fourth quarters of 2004 over the ten years of the
      agreements. Prior to this, the Company had no recognized revenue as it was
      a
      development stage company.




***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 decreased $8.3 million to $1.2 million from $9.5 million for the
      year ended December 31, 2004 compared to the year ended December 31,
      2003, respectively.




·
            Related
                party license fee and research and development expenses are comprised
                of
                the $.1 million 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 license fee and research and development
                expenses decreased $0.5 million to $0.8 million from $1.3 million
                for the
                year ended December 31, 2004 compared to the year ended
                December 31, 2003, respectively. The decrease was primarily due to a
                decrease in the license fee as a result of an agreement with Biotec
                to
                eliminate the $0.1 million per month minimum licensing
                fee.




·
            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 $7.8 million to $0.4 million from $8.2 million
                for the
                year ended December 31, 2004 compared to the year ended
                December 31, 2003, respectively. The reduction was due to the
                non-recurrence of the following 2003 activities: the winding down
                of
                on-going demonstration manufacturing in Goleta, California in the
                first
                quarter of 2003, 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, expenses
                incurred to vacate the Company’s demonstration manufacturing facility in
                Goleta at the expiration of the lease on May 31, 2003, costs incurred
                in
                connection with testing of the Goettingen, Germany manufacturing
                equipment
                during the third quarter, the write down of the Goettingen manufacturing
                equipment to $1 as of December 31, 2003 due to the uncertainty of the
                proceeds to be realized upon sale of the equipment, and the losses
                of the
                Company’s joint venture. In early August 2003, the Company discontinued
                its day-to-day support of manufacturing activities at DTE. In keeping
                with
                its business model, in 2004 the Company primarily focused on the
                licensing
                of its foam analog material and other technologies to new licensees,
                and
                these licensees and future licensees will install and run equipment
                to
                produce EarthShell Packaging in their own
                facilities.




20


***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 $2.0 million to $3.8 million from $5.8 million
      for the year ended December 31, 2004 compared to the year ended
      December 31, 2003, respectively. This was primarily the result of efforts
      to significantly reduce general and administrative expenses throughout 2003
      and
      2004, which resulted in reductions in the following expenses: personnel costs
      by
      $0.7 million (due to a reduction in headcount from 14 employees at
      December 31, 2003 to 9 employees at December 31, 2004), professional
      fees and services by $0.8 million, facility and support costs by $0.3 million,
      business insurance costs by $0.2 million, travel and entertainment expenses
      by
      $0.1 million and franchise taxes by $0.1 million. In addition, the Company
      was
      able to reduce previously provided expense accruals by approximately $0.6
      million due to their favorable resolution in the third quarter of 2004. Most
      of
      the credit to general and administrative expenses related to the favorable
      resolution of property tax disputes within the states of California and
      Maryland. The expense reductions were partially offset by approximately $0.8
      million of accounts payable settlement gains in 2003. The settlement gains
      were
      the result of a program began by the Company in the second quarter of 2003
      to
      satisfy vendors for outstanding aged invoices.




***Depreciation
      and Amortization Expense.*** Depreciation and amortization expense decreased $0.34 million to $0.04 million
      from $0.38 million for the year ended December 31, 2004 compared to the
      year ended December 31, 2003, respectively. The decrease in depreciation
      expense is primarily attributable to taking the remainder of EarthShell’s
      manufacturing and development assets out of service as of the end of
      2003.




***Interest
      Expense.*** Interest
      expense is comprised of related party interest expense and other interest
      expense.




·
            Related
                party interest expense was $0.4 million for both the year ended
                December 31, 2004 and the year ended December 31, 2003. Related
                party interest expense includes interest accrued on outstanding loans
                made
                to the Company by EKI under the Simple Interest Loan Agreement (see
                “Related Party Transactions”), accretion of the discount related to the
                warrants issued to EKI in conjunction with the March 2003 financing
                transactions, plus accrued interest payable on amounts owed to EKI
                for
                monthly licensing fees that were accrued rather than being paid in
                accordance with the terms of the subordination agreements entered
                into in
                connection with the 2006 Debentures (see “Business - Relationship
                with EKI”). During the third quarter of 2004, agreements were negotiated
                with EKI to convert the EKI Simple Interest Loans, and accrued but
                unpaid
                interest, into common stock of the Company and to restructure the
                unpaid
                licensing fees under the Biotec License Agreement (see “Item 1 Business
                Relationship with EKI”).




·
            Other
                interest expense decreased $0.7 million to $0.7 million from $1.4
                million
                for the year ended December 31, 2004 compared to the year ended
                December 31, 2003, respectively. Other interest expense for 2004 is
                primarily comprised of accretion of the discount and interest accrued
                on
                the 2006 Debentures. Other interest expense for 2003 was primarily
                comprised of accretion of 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.




***Gain
      on Sale of Property and Equipment.*** Gain on
      the sale of property and equipment decreased $0.3 million to $0.2 million from
      $0.5 million for the year ended December 31, 2004 compared to the year
      ended December 31, 2003, respectively. The gains in both 2004 and 2003 were
      realized due to the sale of non-essential machine shop equipment and excess
      office furniture and equipment over their net book value, most of which was
      fully depreciated. In addition, 2003 also included proceeds received from the
      sale of production line equipment that was previously impaired and therefore
      had
      a net book value of zero.




***Premium
      due to Debenture Default.*** At
      September 30, 2004, the Company was in non-compliance with certain covenants
      of
      the 2006 Debentures. Two of the debenture holders, including the debenture
      holder with the largest ownership position, notified the Company in writing
      that
      the Company was in default and requested that the Company repurchase the entire
      principal amount of the 2006 Debentures held at the price specified in the
      debenture, along with any accrued and unpaid interest. The debenture contains
      a
      provision for repurchase of the debenture at a premium if the repurchase is
      due
      to an event of default, and the Company accrued the amount of the premium
      specified in the debenture of $1.7 million.




21


***Other
      Income.*** Other
      income for the year ended December 31, 2004 was zero compared to $0.4
      million for the year ended December 31, 2003. The 2003 other income
      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. The
      warrant obligation was initially recorded in connection with the March 2003
      financing transactions.




***(Gain) Loss
      on Extinguishment of Debentures.*** There
      was a gain on extinguishment of debentures of $.1 million for the year ended
      December 31, 2004 compared to a loss on extinguishment of debentures of
      $1.7 million for the year ended December 31, 2003. The $0.1 million gain
      for the year ended December 31, 2004 relates to interest payable on the
      2006 Debentures that was not paid by the Company upon conversion of the
      Debentures. 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.




***Debenture
      Conversion Cost.*** Debenture Conversion Cost was $0.2 million for the year ended December 31,
      2003. 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.




**Liquidity
      and Capital Resources**




***Cash
      Flow.*** The
      Company’s principal uses of cash for the year ended December 31, 2005 were
      to fund operations, repay notes, and pay accounts payable and accrued expenses.
      Net cash used in operations was $3.4 million and $2.7 million for the years
      ended December 31, 2005 and 2004, respectively. The uses for 2005 and 2004
      were mainly from losses incurred offset by $2.1 million increase in accounts
      payable and accrued expenses in 2005, changes in other operating assets and
      liabilities and premium due to debenture default in 2004. Net cash provided
      by
      investing activities was $0.02 million and $0.2 million for the years ended
      December 31, 2005 and 2004, respectively. Net cash provided by financing
      activities was $3.4 million and $0.9 million for the years ended
      December 31, 2005 and 2004, respectively. For 2005, the cash provided by
      financing activities was comprised of $0.8 million from the issuance of common
      stock, $2.5 million from the issuance of notes (net of issue costs of $0.4
      million), $0.9 million from the proceeds of notes payable to a related party
      (net of principal payments on settlements of $0.3 million). As of
      December 31, 2005, the Company had cash and related cash equivalents
      totaling $0.3 million.




***Capital
      Requirements.*** The
      Company only made minor capital expenditures during the years ended
      December 31, 2005 and 2004 and does not anticipate significant capital
      expenditures in 2006.




***Contractual
      Obligations.*** The
      following table summarizes the Company’s known obligations to make future
      payments pursuant to certain contracts as of March 31, 2006, as well as an
      estimate of the timing in which these obligations are expected to be
      satisfied:




**Payments
                due by period**
              **(in
                thousands)**
            
            **Less
                than**
            
            **1-3****Contractual
                Obligations**
            
            **Total**
            
            **1
                year**
            
            **Years**Note
                payable to related party (including interest)
            
            $
            1,225
            
            $
            75
            
            $
            1,150Notes
                payable
            
            
            2,600
            
            
            2,600Convertible
                debenture
            
            
            4,500
            
            
            —
            
            
            4,500Other
                long-term liability
            
            
            427
            
            
            307
            
            
            120Totals
            
            $
            8,507
            
            $
            2,982
            
            $
            5,770




22


***Sources
      of Capital - Financing and Restructuring Transactions.***




To
      date,
      the Company’s operations have been financed through a series of debt and equity
      issuances and to a lesser extent through the receipt of a limited amount of
      technology and licensing fees. Since January 1, 2003, the Company has received:
      (i) an aggregate of $2.9 million through private placements of its capital
      stock
      and warrants; (ii) an aggregate of $16.9 million through the sale of debentures
      other debt securities; and $0.3 million in licensing and technology fees. The
      discussion below summarizes these financings and arrangements and the terms
      of
      various restructuring transactions the Company has undertaken to continue to
      finance its operations.




***The
      2006 Debentures.*** 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 5, 2006 (the“2006 Debentures”), for
      which the Company received proceeds of approximately $9.0 million, net of
      financing costs of approximately $1.5 million. In connection with the March
      2003
      financing transactions, the Company issued 54,167 shares of common stock to
      the
      lead purchaser of these 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. 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 a
      December 2001 shelf registration statement were used to secure shares
      potentially issuable upon conversion of the 2006 Debentures. Although the
      Company was in compliance with all covenants of the 2006 Debentures at
      December 31, 2003, 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 for continued listing. 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. During 2004, the Company sold
      $2.7 million of its common stock in a private equity transaction, received
      $1.5 million in prepaid technology fees related to the granting of new licenses,
      and worked to negotiate settlements with each of the remaining holders of its
      2006 Debentures to retire the 2006 Debentures, to resolve the defaults, and
      to
      restructure its long-term debt.




***2006
      Debenture Settlements.*** As of
      September 30, 2004, the Company entered into agreements with each of the holders
      of the 2006 Debentures to amend and restate the secured debenture purchase
      agreements entered into in July 2004 by and among EarthShell and the Holders
      (as
      amended and restated, the “Debenture Purchase Agreements”) and the transactions
      contemplated therein (collectively, the “Debenture Transactions”). The 2006
      Debentures were in default and their outstanding principal balance totaled
      $6.5
      million prior to their repurchase. Collectively, the Debenture Purchase
      Agreements required (i) EKI to pay $1.0 million in cash (EarthShell was
      obligated to reimburse EKI for this cash payment as discussed below), (ii)
      the
      Holders to convert the 2006 Debentures in accordance with their terms, resulting
      in the issuance by EarthShell of 1,091,666 shares of its common stock, which
      shares were previously registered for resale by the Company in connection with
      the issuance of the 2006 Debentures, (iii) EarthShell to issue to the Holders
      an
      aggregate of 512,500 additional shares of EarthShell common stock and (iv)
      EarthShell to pay $2.3 million to SF Capital Partners from 33% of any
      equity funding received by the Company (excluding the first $2.7 million
      funded by MBS) or 50% of the royalties received by EarthShell in excess of
      $250,000 per month (as determined on a cumulative basis commencing July 1,
      2004). EarthShell has the right to convert the unpaid portion of the $2.3
      million into shares of the Company’s common stock at a price equal to the lesser
      of $3.00 per share, or the price per share that EarthShell shall subsequently
      receive upon the issuance of its common stock (or other convertible security)
      during the three year period commencing September 30, 2004. The 512,500 shares
      of common stock issued to the Holders on October 6, 2004 have been included
      in a
      Form S-1 registration statement filed with the Securities and Exchange
      Commission on February 14, 2006, which has not yet become effective. The
      consideration for the repurchase of the 2006 Debentures has been paid or issued,
      and the 2006 Debentures have been retired by EarthShell.




In
      connection with the settlement of the 2006 Debentures and the related
      restructuring of the Company’s debt, the Company provided registration rights
      with respect to newly issued unregistered shares of its common stock. Such
      registration rights required the Company to, among other things, file a
      registration statement with the SEC in December 2004 registering the resale
      of
      such shares of common stock. Under certain agreements, the Company not filing
      such a registration statement (or the registration statement not being declared
      effective) within a required timeframe provided the holders of the registrable
      securities with a right to liquidated damages which, in the aggregate, may
      amount to approximately $50,000 per month until a registration statement is
      filed. If the Company fails to pay such liquidated damages, the Company must
      also pay interest on such amount at a rate of 10% per year (or such lesser
      amount as is permitted by law). Because this Registration Statement was not
      filed as planned, in December 2004 the Company became obligated on the direct
      financial obligation described above. In light of the Company’s current
      liquidity and financial position any such claim could have a negative effect
      on
      the Company.




23


***Agreements
      with MBS.*** On
      May
      13, 2004, the Company entered into a ten year license agreement with MBS and
      granted to MBS a priority license to supply certain retail and government market
      segments in the United States (the “MBS Sublicense”). MBS has paid EarthShell
      $0.5 million in technology fees to date. On June 8, 2005, the Company terminated
      the MBS Sublicense as set forth herein below.




On
      August
      5, 2004, EarthShell and MBS entered into a stock purchase agreement (the “MBS
      SPA”) pursuant to which MBS agreed to fund $5.0 million to EarthShell in
      exchange for EarthShell’s issuance of 1,666,666 shares of common stock at $3.00
      per share. On August 20, 2004, EarthShell received $0.5 million from MBS, for
      which the Company issued to MBS 166,666 shares of its common stock. On October
      1, 2004, EarthShell received an additional $1.2 million of the $5.0 million
      commitment, and the Company issued to MBS 400,000 shares of its common stock.
      On
      October 11, 2004, MBS purchased an additional 333,333 shares for $1.0 million,
      of which it had paid $0.5 million as of December 31, 2004 and $0.5 million
      was
      still due. During 2005, the unamortized balance of MBS’ deferred technology fee
      of $0.3 million was applied to the stock receivable. The shares of common stock
      issued to MBS were not registered for resale under the 1933 Act. The cash
      received from MBS was used, in part, to fund the repurchase of the 2006
      Debentures and to restructure the Company’s long-term debt.




On
      June
      8, 2005, the Company entered into a letter agreement with MBS terminating its
      sublicense agreement (the “MBS Sublicense”), dated as of May 13, 2004. At the
      time the letter agreement was executed, MBS had not yet implemented the
      sublicense granted to it under the MBS Sublicense. The parties separately agreed
      that the effectiveness of the termination would be conditioned upon the
      effectiveness of the agreements with RPI as described herein below. The Company
      entered into additional sublicense agreements with MBS covering non-competing
      technologies in other markets and territories than those covered by the MBS
      Sublicense and the present RPI Sublicense. The effectiveness of such sublicense
      agreements was expressly conditioned upon the satisfaction of certain conditions
      before July 31, 2005, including the receipt by the Company of $2.6 million
      in
      technology fees and other payments. These agreements expired under their own
      terms.




***RPI
      Agreements.*** On
      June
      17, 2005, EarthShell entered into a sublicense agreement with RPI (the “RPI
      Sublicense”), a newly formed subsidiary of Thompson Street Capital Partners
      (“Thompson Street”), pursuant to which the Company granted to RPI an exclusive
      license to produce plates, bowls, and certain other EarthShell products
      incorporating the Company’s technology and to sell these products in the retail
      and governmental market segments in the United States. The Company has been
      advised that RPI has received the full $12.0 million funding commitment from
      Thompson Street in order to begin production of EarthShell Packaging products.
      The RPI Sublicense requires RPI to pay to the Company a royalty fee equal to
      20%
      of RPI’s net sales, not to exceed 50% of RPI’s gross margin




On
      June
      17, 2005, the Company, RPI and RPI’s sole stockholder, Renewable Products, LLC
      (“RPI LLC”), entered into an agreement and plan of merger (the “RPI Merger”),
      which contemplates the Company’s eventual acquisition of RPI in exchange for 8.0
      million shares of the Company’s Series C Convertible Preferred stock (the
“Series C Preferred”) at such time as the following conditions, among others,
      are achieved: (i) RPI’s procurement, installation and start-up of 16
      manufacturing modules for producing the Company’s product, which equipment is to
      be designed to produce an aggregate of approximately $16.0 million of EarthShell
      products per year, (ii) RPI’s establishment of plant facilities to support the
      full commercial operations of such machines, (iii) RPI’s receipt of funding to
      support additional working capital needs of $1.0 million, (iv) RPI’s
      receipt of at least $12.0 million of capital to purchase the machines described
      above, and (v) the 20% royalty described above having become payable and either
      accrued or paid to the Company pursuant to the RPI Sublicense. At such time
      as
      the conditions to the transactions contemplated by the RPI Merger are met,
      RPI
      has the right, through March 31, 2006, to call for the merger to occur. The
      parties have mutually agreed to extend RPI’s call date to December 31, 2006. At
      the time the merger is triggered, a valuation of RPI will be obtained and the
      Company will acquire RPI pursuant to the terms of the RPI Merger in
      exchange for 8.0 million shares of Series C Preferred, as described above.
      The
      Series C Preferred will be convertible on a share for share basis into
      8.0 million shares of the Company’s common stock which will be subject to
      registration rights.





***EA
      License.*** On
      August
      22, 2005, the Company entered into an agreement with EA in connection with
      the
      granting of certain licenses to use a new embodiment of EarthShell Technology
      for various applications in certain Asian territories (the “EA License”).
      Shortly after executing a letter agreement, both the Company and EA entered
      into
      negotiations to restructure the transaction and ultimately entered into an
      amended and restated letter agreement dated December 9, 2005. As part of such
      restructuring, the Company may receive a total of up to $2.6 million from a
      combination of ( i )
      prepaid
      technology fees (up to $1.7 million), ( ii )
      the
      sale of up to 266,667 shares of its common stock for $0.5 million and
      ( iii )
      the
      issuance of 1,033,333 warrants to purchase shares of the Company’s common stock
      at $3.90 per share, which, under certain circumstances, may be adjusted to
      an
      exercise price of not less than $3.00 per share. The realization of the full
      potential of the transaction is dependent on the Company successfully
      demonstrating the commercial viability of its technology in certain new
      applications. The Company received $0.5 million from EA as an initial partial
      payment and agreed to issue 166,667 shares of its common stock in connection
      with this payment. The
      Company received an additional $0.3 million in December 2005 and $0.1 million
      in
      February of 2006 pursuant to the amended and restated agreement with EA dated
      December 9, 2005, but which was not effective until February 10, 2006 when
      the
      final cash payment was received. Under the amended and restated agreement,
      upon
      receipt of the final payment, the Company issued a total of 266,667 shares
      and
      the warrants to purchase the 1,033,333 shares.




24


***Financing
      Transactions and Arrangements with EKI.*** During
      2002 and 2003, EKI, an affiliated entity, made a series of Simple Interest
      Loans
      to the Company totaling approximately $5.8 million. In addition, EKI purchased
      $1.0 million of the Company’s 2006 Debentures. On September 30, 2004, EKI
      entered into an agreement with EarthShell to sell back to the Company the 2006
      Debentures it had purchased for $1.0 million in cash, the cash price
      originally paid by EKI. The Company retired the 2006 Debentures shortly
      thereafter.




In
      October 2004, in connection with the settlement of the 2006 Debentures, EKI
      converted all of its outstanding loans to EarthShell ($2,755,000) into
      unregistered common stock at $3.00 per share and $532,644 of accumulated
      interest at $4.00 per share for a total of 1,051,494 shares received by EKI.
      As
      of December 31, 2004, the loans from EKI to EarthShell had all been
      retired.




In
      May
      2005, an additional 44,387 shares were issued to EKI pursuant to a ninety day
      price protection in the clause, which provided for an adjustment in the
      effective conversion price of the interest portions of the EKI loans from $4.00
      per share to $3.00 per share. In February 2005, the Board approved the grant
      of a ten
      year warrant to Essam Khasshoggi, beneficial owner of EKI, to purchase one
      million shares of the Company’s common stock at $3.00 per share in
      consideration of his continued support of the Company since its inception,
      including providing bridge loans at below market terms from time to time. The
      warrant was actually issued in August 2005.





On
      October 11, 2005, the Company entered into the 2005 EKI Loan with EKI pursuant
      to which the Company issued to EKI a promissory note in the principal amount
      of
      $1.0 million. As of December 31, 2005, EKI had advanced $0.85 million with
      the
      balance being funded by the second week of January 2006. Interest accrues on
      the
      principal balance of the 2005 EKI Loan at a variable per annum rate, as of
      any
      date of determination, that is equal to the rate published in the “Money Rates”
section of *The
      Wall Street Journal* as
      being
      the “Prime Rate”, compounded monthly. All accrued but unpaid interest and
      outstanding principal is due and payable on the earliest to occur of the
      following: (i) the second anniversary of the date of the 2005 EKI Loan; (ii)
      five days following the date the Company has received $3.0 million or more
      in
      aggregate net cash proceeds from all financing transactions, equity
      contributions, and transactions relating to the sale, licensing, sublicensing
      or
      disposition of assets or the provision of services (including advance
      royalty payments, proceeds from the sale of the Company’s common stock and fees
      for technological services rendered to third parties), measured from the date
      of
      the 2005 EKI Loan and not taking into account the proceeds advanced under the
      2005 EKI Loan; or (iii) the occurrence of an Event of Default (as defined in
      the
      2005 EKI Loan).




Also
      on
      October 11, 2005, the Company entered into a debt conversion and mutual release
      agreement (the “Debt Conversion Agreement”) with EKI. Pursuant to the Debt
      Conversion Agreement, the Company and EKI agreed that a payable in an amount
      equal to $837,145 (previously owed the Biotec Group, but which payable was
      subsequently assigned to EKI) be converted into 279,048 shares of common stock
      of the Company. The conversion price equals $3.00 per share. Pursuant to the
      Debt Conversion Agreement, the Company and EKI released each other from any
      and
      all claims in connection with the payable.




***Cornell
      Capital Partners Financings.*** On
      March
      23, 2005, the Company entered into a financing arrangement with Cornell Capital
      Partners whereby the Company issued promissory notes to, and entered into a
      security agreement with, Cornell Capital Partners. Pursuant to the financing,
      the Company issued promissory notes (collectively, the “CCP Notes”) to Cornell
      Capital Partners with a total principal amount of $2.5 million. Upon
      consummation of the December Debenture Purchase Agreement with Cornell Capital
      Partners on January 6, 2006, described below, the CCP Notes and all accrued
      interest thereon have been paid in full.




On
      March
      23, 2005, the Company entered into a Standby Equity Distribution Agreement
      (the
“SEDA”) with Cornell Capital Partners whereby the Company was entitled to, at
      its sole discretion, periodically sell to Cornell Capital Partners shares of
      its
      common stock for a total aggregate purchase price of up to $10.0 million. On
      June 9, 2005, the Company filed a registration statement on Form S-1 with the
      SEC to register shares of its common stock underlying the SEDA. On
      September 27, 2005, the registration statement was withdrawn and, on
      December 30, 2005, the parties terminated the SEDA.




25


On
      May
      26, 2005, the Company issued a common stock purchase warrant to Cornell Capital
      Partners to purchase 625,000 shares of common stock of the Company. This May
      Warrant expires on May 26, 2006, has an exercise price which was adjusted to
      $3.00 per share of common stock and has “piggy back” and demand registration
      rights. In August 2005 Cornell Capital Partners agreed to consolidate the CCP
      Notes and to defer the commencement of repayment installments. In consideration
      of this modification to CCP Notes, the Company issued a warrant to Cornell
      Capital Partners to purchase 50,000 shares of common stock of the Company.
      This
      Warrant expires on May 26, 2006, has an exercise price, which was adjusted
      to
      $3.00 per share of common stock as of December 30, 2005, and has “piggy back”
and demand registration rights.




***December
      Debentures.*** On
      December 30, 2005, EarthShell entered into a Securities Purchase Agreement
      with
      Cornell Capital Partners (the
“December Debenture Purchase Agreement”) pursuant to which the Company issued
      and sold to Cornell Capital Partners $4.5 million in principal amount of secured
      convertible debentures (the “December Debentures”) on the terms described below.
      This agreement was consummated on January 6, 2006. The December Debentures
      are
      convertible into shares of the Company’s common stock on the terms discussed
      below The Company received the aggregate proceeds of
      $4.5
      million from the
      sale of the December Debentures on January 6, 2006, of which approximately
      $2.6
      million was used to payoff the CCP Notes.




The
      December Debentures are secured by (i) a Pledge and Escrow
      Agreement, by and
      among the Company, Cornell Capital Partners, and David Gonzalez, Esq.,
      (ii) an Insider Pledge Agreement and Escrow Agreement (the “IPEA”), by and
      among the Company, Cornell Capital Partners, David Gonzalez, Esq. and Mr. Benton
      Wilcoxon and (iii) an Amended and Restated Security Agreement, by and between
      the Company and Cornell Capital Partners. The December Debentures are secured
      by
      substantially all of the Company’s assets, have a three year term and accrue
      interest at 12% per annum. **** The
      December Debenture Purchase Agreement required the Company to register the
      shares of the Company’s common stock into which the December Debentures are
      convertible under the Securities Act of 1933. On February 14, 2006, the Company
      filed a registration statement on Form S-1 with the Securities and Exchange
      Commission (“SEC”) in order to register 6,700,000 shares of common stock that
      may be issuable to the holders of the December Debentures upon
      conversion. **** Beginning
      60 days after the SEC declares the registration statement effective, **** Cornell
      Capital Partners is entitled, at its option, to convert and sell
      up to $250,000 of the principal amount of the December Debentures, plus accrued
      interest, into shares of the Company’s common stock, within any 30 day period at
      the lesser of (i) a price equal to $3.00 or (ii) 88% of the average of the
      two lowest volume weighted average prices of the common stock during the
      ten trading days immediately preceding the conversion date, as quoted by
      Bloomberg, LP.




The
      holder of the December Debentures may not convert the December Debentures or
      receive shares of the Company's common stock as payment of interest thereunder
      to the extent such conversion or receipt of such interest payment would result
      in the holder, together with any affiliate thereof, beneficially owning (as
      determined in accordance with Section 13(d) of the Securities Exchange
      Act of 1934,
      as amended, and the
      rules promulgated thereunder) in excess of 4.9% of the then issued and
      outstanding shares of common stock, including shares issuable upon conversion
      of, and payment of interest on, the December Debentures held by such holder
      after application of this 4.9% restriction. This 4.9% restriction may be waived
      by the holder (but only as to itself and not to any other holder) upon not
      less than 65 days prior notice to the Company.




The
      Company may redeem, with three business days advance written notice to Cornell
      Capital Partners, a portion or all amounts outstanding under the December
      Debentures prior to the maturity date provided that the closing bid price of
      the
      of the Company’s common stock, as reported by Bloomberg, LP, is less than $3.00
      at the time of the redemption notice. The Company shall pay an amount equal
      to
      the principal amount being redeemed plus a redemption premium equal to ten
      percent of the principal amount being redeemed, and accrued interest, to be
      delivered to the Cornell Capital Partners on the third business day after the
      redemption notice, provided, however, this redemption premium does not apply
      until the outstanding principal balance of the December Debentures has been
      reduced by $2.5 million. The amount that Cornell may convert in any 30 day
      period will be reduced by the amount that the Company redeems.




In
      connection with the December Debenture Purchase Agreement, on December 30,
      2005,
      the Company issued to Cornell Capital Partners the
      warrant to purchase up to 350,000 shares of common stock (the “December
      Warrant”). This December Warrant has an exercise price of $4.00 per share, which
      may be adjusted under certain conditions to as low as $3.00 per share and
      expires two years from the date it was issued. Furthermore, in connection with
      the Company’s sale of December Debentures, the Company issued to Mr. Benton
      Wilcoxon, in consideration of his pledge of shares of common stock of Composite
      Technology Corporation pursuant to the terms of the IPEA , a
      warrant
      to purchase up to 125,000 shares of common stock. This warrant has an exercise
      price of $4.00 per share and expires three years from the date it was
      issued.




The
      Company believes that as a result of (a) the $900,000 received pursuant to
      the
      EA agreements (b) the $1.0 million received pursuant to the 2005 EKI Loan and
      (c) the $4,500,000 in proceeds received in connection with the issuance and
      sale
      to Cornell Capital Partners of the December Debentures, the Company has
      sufficient capital to fund its operations through the first several months
      of
      2006. The Company expects to receive additional technology fees in connection
      with the granting of additional new licenses during 2006. In addition, the
      Company expects to begin generating royalty revenues later in 2006. If the
      Company is not successful at generating royalty payments and/or technology
      fees
      during 2006, the Company may have to raise additional funds to meet its current
      obligations and to cover operating expenses through December 31, 2006. If
      the Company is not successful in raising additional capital it may not be able
      to continue as a going concern for a reasonable amount of time. Management
      expects to address this potential need in 2006 by generating cash through the
      issuance of debt or equity securities. However, the Company cannot assure that
      additional financing will be available to it, or, if available, that the terms
      will be satisfactory to it. Management will also continue in its efforts to
      reduce expenses, but cannot assure that it will be able to reduce expenses
      below
      current levels. If the Company is not successful in raising additional capital
      it may not be able to continue as a going concern.





26




***Off-Balance
      Sheet Arrangements.*** The
      Company does not have any off-balance sheet arrangements as of December 31,
      2005, and has not entered into any transactions involving unconsolidated,
      limited purpose entities.




27




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




The
      Company is
      exposed to interest rate risk on its obligations under the 2005 EKI Loan.
      Currently, the principal amount of the 2005 EKI Loan totals $1.0 million. The
      loan bears interest on the principal balance of $1.0 million at a variable
      rate
      per annum, as of any date of determination, that is equal to the rate published
      in the “Money Rates” section of *The
      Wall Street Journal* as being
      the “Prime Rate”, compounded monthly.  In
      addition, **** there
      remain a few settlements of accounts payable obligations that will be paid
      out
      over terms from 18 months to 36 months, the long term portion of which may
      be
      exposed to interest rate risk.




Generally
      an increase in market interest rates will increase the Company’s interest
      expense on this debt and decreases in rates will have the opposite
      effect.




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




See
      Item
      15(a)(1) of Part IV of this form 10-K.




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




Not
      Applicable.




**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 were not effective in ensuring
      that (i) information required to be disclosed by the Company in the reports
      that it files or submits under the Exchange Act is recorded, processed,
      summarized and reported, within the time periods specified in the SEC’s rules
      and forms and (ii) information required to be disclosed by the Company in
      the reports that it files or submits under the Exchange Act is accumulated
      and
      communicated to the Company’s management, including its principal executive and
      principal financial officers, or persons performing similar functions, as
      appropriate to allow timely decisions regarding required
      disclosure.




The
      Company's assessment of its internal control over financial reporting identified
      the following material weaknesses for the years ended December 31, 2004 and
      these weaknesses continued through December 31, 2005:




·
            The
                Company has inadequate segregation of critical duties within each
                of its
                accounting processes and a lack of sufficient monitoring controls
                over
                these processes to mitigate this risk. The responsibilities assigned
                to
                one employee include maintaining the vendor master file, processing
                payables, creating and voiding checks, reconciling bank accounts,
                making
                bank deposits and processing
                payroll.




·
            The
                departure of the Company's Controller in November 2004 resulted in
                the
                accounting and reporting functions being centralized under the Chief
                Financial Officer, with no additional personnel in the Company having
                an
                adequate knowledge of accounting principles and practices. As a result,
                certain transactions had not been recorded in a timely manner and
                several
                adjustments to the financial statements that were considered material
                to
                the financial position at December 31, 2005 and 2004 and results
                of
                operations for the years then ended were
                recorded.




·
            There
                are weaknesses in the Company's information technology ("IT") controls
                which makes the Company's financial data vulnerable to error or fraud.
                Specifically, there is a lack of documentation regarding the roles
                and
                responsibilities of the IT function, lack of security management
                and
                monitoring and inadequate segregation of duties involving IT
                functions.




28




Additionally,
      at the conclusion of our independent auditor's examination of the Company's
      internal control over financial reporting, our independent auditor noted several
      other areas of operations which could be improved, but were not listed as
      significant deficiencies. Accordingly, these items are not discussed
      herein.




(b) Changes
      in Internal Control Over Financial Reporting. In consultation with its
      independent auditors, as of December 31, 2005, the Company had begun taking
      the
      following remediation steps, among others, to enhance its internal control
      over
      financial reporting and reduce control deficiencies in general, including the
      material weaknesses enumerated above:




·
            Management
                interviewed multiple qualified candidates to perform the Controller
                responsibilities, and as of October 31, 2005 hired a new controller
                who is
                a CPA, with 15 years experience in public and private accounting.
                The new
                Controller is in the process of developing revised accounting systems
                and
                procedures that will strengthen the Company's controls over financial
                reporting. Subsequent to December 31, 2005, the Company hired an
                additional accounting employee on March 30, 2006 to help segregate
                critical accounting functions to improve internal control over financial
                reporting.




·
            Management
                employs an outside firm, to monitor and maintain the Company's information
                systems. This group was been directed to develop and implement
                Company-wide information management control procedures in response
                to the
                control weaknesses noted by the Company's auditors and in consultation
                with the Company's internal auditors. A first draft was completed
                in July
                2005. In connection with the recent move of its corporate offices
                to
                Maryland, a new group was retained to perform a similar function.
                It is
                expected that a final information technology controls policy and
                procedures document will be finalized and implemented by year-end,
                2007.




Management
      is continuing its efforts to improve its internal control over financial
      reporting.




**ITEM
      9B. OTHER INFORMATION**




Pursuant
      to transactions described more fully in Item 5 under the subheading “Recent
      Sales of Unregistered Securities” and in Management’s Discussion and Analysis,
      in connection with the settlement of the March 2006 Debentures and the related
      restructuring of the Company’s debt, the Company provided registration rights
      with respect to newly issued unregistered shares of its common stock. Such
      registration rights required the Company to, among other things, file a
      registration statement with the SEC in December 2004 registering the resale
      of such shares of common stock. Under certain of the agreements, the Company’s
      not filing such a registration statement (or the registration statement not
      being declared effective) within the required timeframe provides the
      holders of the registrable securities with a right to liquidated damages which,
      in the aggregate, may amount to approximately $50,000 per month until the
      registration statement is filed. If the Company fails to pay such liquidated
      damages, the Company must also pay interest on such amount at a rate of 10%
      per
      year (or such lesser amount as is permitted by law).




Because
      this registration statement was not filed, in December 2005 the Company
      became obligated on the direct financial obligation described above. In light
      of
      the Company’s current liquidity and financial position any such claim could have
      a negative effect on the Company.




29




**PART
      III**




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




Information
      responsive to this item is incorporated herein by reference to EarthShell’s
      definitive proxy statement to be filed with the Securities and Exchange
      Commission within 120 days after the end of the fiscal year covered by this
      Form 10-K with respect to our Annual Meeting of Shareholders.




**ITEM
      11. EXECUTIVE COMPENSATION**




Information
      responsive to this item is incorporated herein by reference to EarthShell’s
      definitive proxy statement to be filed with the Securities and Exchange
      Commission within 120 days after the end of the fiscal year covered by this
      Form 10-K with respect to our Annual Meeting of Shareholders.




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




Information
      responsive to this item is incorporated herein by reference to EarthShell’s
      definitive proxy statement to be filed with the Securities and Exchange
      Commission within 120 days after the end of the fiscal year covered by this
      Form 10-K with respect to our Annual Meeting of Shareholders.




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




Information
      responsive to this item is incorporated herein by reference to EarthShell’s
      definitive proxy statement to be filed with the Securities and Exchange
      Commission within 120 days after the end of the fiscal year covered by this
      Form 10-K with respect to our Annual Meeting of Shareholders.




**ITEM
      14. PRINCIPAL ACCOUNTING FEES AND SERVICES**




Information
      responsive to this item is incorporated herein by reference to EarthShell’s
      definitive proxy statement to be filed with the Securities and Exchange
      Commission within 120 days after the end of the fiscal year covered by this
      Form 10-K with respect to our Annual Meeting of Shareholders.




30




**PART
      IV**




**ITEM
      15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES**




**(a) Index
      to Consolidated Financial Statements**




1.
                Consolidated Financial Statements:Report
                of Independent Registered Public Accounting Firm
            
            
            F-2Consolidated
                Balance Sheets as of December 31, 2005, and 2004
            
            
            F-3Consolidated
                Statements of Operations for the years endedDecember 31,
                2005, 2004 and 2003
            
            
            F-4Consolidated
                Statements of Stockholders’ Equity (Deficit) for
                theyears
                ended December 31, 2005, 2004 and 2003
            
            
            F-5Consolidated
                Statements of Cash Flows for the years endedDecember 31,
                2005, 2004 and 2003
            
            
            F-6Notes
                to the Consolidated Financial Statements
            
            
            F-9





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) Exhibits**




3.1
            
            Amended
                and Restated Certificate of Incorporation of the
                Company.(1)3.2
            
            Amended
                and Restated 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)4.1
            
            Specimen
                certificate of Common Stock.(1)4.2
            
            Form
                of Warrant to purchase Common Stock dated August 12,
                2002.(9)4.3
            
            Form
                of Note under Loan Agreement dated as of September 9, 2002 between
                the
                Company and E. Khashoggi Industries, LLC.(11)4.4
            
            Form
                of Secured Convertible Debenture due March 5, 2006.(13)4.5
            
            Intellectual
                Property Security Agreement dated as of March 5, 2003 among the Company,
                E. Khashoggi Industries, LLC and the investors signatory
                thereto.(13)4.6
            
            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)




31






4.7
            
            Exchange
                Agreement dated as of March 5, 2003 between the Company and the
                institutional investor signatory thereto.(13)4.8
            
            Investor
                Rights Agreement dated as of December 9, 2005, by and among EarthShell
                Corporation and the parties signatory thereto. (19)4.9
            
            Form
                of EarthShell Corporation Common Stock Warrant dated February 10,
                2006
                (19)10.1
            
            Amended
                and Restated License Agreement dated February 28, 1995 by and between
                the
                Company and E. Khashoggi Industries(“EKI”).(1)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)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)




32




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. (15)10.31
            
            Operating
                and Sublicense Agreement dated October 3, 2002 by and between the
                Company
                and Sweetheart Cup Company, Inc. (15)10.32
            
            First
                Amendment to Operating and Sublicense Agreement dated July 2003 by
                and
                between the Company and Sweetheart Cup Company,
                Inc. (15)10.34
            
            Lease
                Agreement dated July 2003 between the Company and Sweetheart Cup
                Company,
                Inc. (15)10.35
            
            First
                Amendment to Lease Agreement dated December 16, 2003 between the
                Company and Sweetheart Cup Company, Inc. (15)10.37
            
            Sublicense
                Agreement dated November 11, 2004 by and between the Company and
                EarthShell Hidalgo S.A. de C.V.. (18)10.38
            
            Standby
                Equity Distribution Agreement dated as of March 23, 2005 between
                the
                Company and Cornell Capital Partners, LP. (16)10.39
            
            Registration
                Rights Agreement dated as of March 23, 2005 between the Company and
                Cornell Capital Partners, LP. (16)10.40
            
            Placement
                Agent Agreement dated as of March 23, 2005 by and among the Company,
                Cornell Capital Partners, LP and Sloan Securities
                Corporation. (16)10.41
            
            Security
                Agreement dated as of March 23, 2005 between the Company and Cornell
                Capital Partners, LP. (16)10.42
            
            Promissory
                Note dated as of March 23, 2005 issued to Cornell Capital Partners,
                LP. (16)10.43
            
            Meridian
                Business Solutions Sublicense Agreement dated May 13,
                2004. (17)




33




10.44
            
            Amended
                and Restated Debenture Purchase Agreement by and among the Company,
                EKI
                and SF Capital Partners, Ltd. dated September 30,
                2004. (17)10.45
            
            Amended
                and Restated Debenture Purchase Agreement by and among the Company,
                EKI
                and Omicron Master Trust dated September 29,
                2004. (17)10.46
            
            Amended
                and Restated Debenture Purchase Agreement by and among the Company,
                EKI
                and Islandia, Ltd. dated September 29, 2004. (17)10.47
            
            Amended
                and Restated Debenture Purchase Agreement by and among the Company,
                EKI
                and Midsummer Investment, Ltd. dated September 29,
                2004. (17)10.48
            
            Conversion
                Agreement by and among the Company, EKI and RHP Master Fund, Ltd.
                dated
                July 20, 2004. (17)10.49
            
            Amended
                and Restated Debenture Purchase Agreement by and among the Company,
                EKI
                and Straus-GEPT L.P. dated September 29,
                2004. (17)10.50
            
            Amended
                and Restated Debenture Purchase Agreement by and among the Company,
                EKI
                and Straus Partners L.P. dated September 29,
                2004. (17)10.51
            
            Amended
                and Restated Debenture Purchase Agreement by and among the Company
                and EKI
                dated September 30, 2004. (17)10.52
            
            Agreement
                with EKI dated July 16, 2004 to convert debt to
                equity. (17)10.53
            
            Agreement
                dated September 1, 2004 for conversion of Biotec indebtedness.
                (17)10.54
            
            Stock
                Purchase Agreement between the Company and Meridian Business Solutions,
                LLC dated August 5, 2004. (17)10.55
            
            Warrant,
                dated May 26, 2005, issued by the Company to Cornell Capital Partners,
                LP
                (20)10.56
            
            Letter
                Agreement dated as of December 9, 2005, by and between EarthShell
                Corporation and EarthShell Asia, Limited. (19)10.57
            
            Securities
                Purchase Agreement dated as of December 30, 2005, by and between
                EarthShell Corporation and Cornell Capital Partners, LP
                (21)10.58
            
            Investor
                Registration Rights Agreement dated as of December 30, 2005 by and
                between
                EarthShell Corporation and Cornell Capital Partners, LP
                (21)10.59
            
            Secured
                Convertible Debenture dated as of December 30, 2005, issued to Cornell
                Capital Partners, LP (21)10.60
            
            Amended
                and Restated Security Agreement dated as of December 30, 2005, by
                and
                between EarthShell Corporation and Cornell Capital Partners, LP
                (21)10.61
            
            Warrant
                dated as of December 30, 2005 issued to Cornell Capital Partners,
                LP
                (21)10.62
            
            Pledge
                and Escrow Agreement dated as of December 30, 2005 among Corporation,
                Cornell Capital Partners, LP and David Gonzalez, Esq.
                (21)10.63
            
            Escrow
                Agreement dated December 30, 2005 among EarthShell Corporation, Cornell
                Capital Partners, LP and David Gonzalez, Esq. (21)




34




10.64
            
            Irrevocable
                Transfer Agent Instructions dated as of December 30, 2005, by and
                between
                EarthShell Corporation and Cornell Capital Partners, LP
                (21)10.65
            
            Insider
                Pledge and Escrow Agreement dated December 30, 2005 by and among
                EarthShell Corporation, Cornell Capital Partners, LP, David Gonzalez,
                Esq.
                and Benton Wilcoxon (21)10.66
            
            Termination
                Agreement dated December 30, 2005 by and between EarthShell Corporation,
                Cornell Capital Partners, LP and Sloan Securities Corporation
                (21)10.77
            
            Irrevocable
                Transfer Agent Instructions dated as of December 30, 2005 by and
                between
                EarthShell Corporation, Cornell Capital Partners, LP and David Gonzalez,
                Esq. regarding the Convertible Debentures (21)10.78
            
            Form
                of Lockup Agreement (21)14.1
            
            EarthShell
                Corporation Code of Ethics for Directors, Officers and Employees
                (15)16.1
            
            Letter
                from Deloitte & Touche LLP to the Securities and Exchange Commission
                dated July 9, 2003, regarding change in certifying
                accountant. (14)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.




(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.




35




(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.




(14)
            Previously
                filed as an exhibit to the Company’s current report on Form 8-K dated July
                11, 2003, and incorporated herein by
                reference.




(15)
            Previously
                filed as an exhibit to the Company’s annual report on Form 10-K, for the
                fiscal year ended December 31, 2003, and incorporated herein by
                reference.




(16)
            Previously
                filed as an exhibit to the Company’s current report on Form 8-K dated
                March 29, 2005, and incorporated herein by
                reference.




(17)
            Previously
                filed as part of the Company’s quarterly report on Form 10-Q for the
                quarter ended September 30, 2004, and incorporated herein by
                reference.




(18)
            Previously
                filed as an exhibit to the Company’s annual report on Form 10-K for the
                fiscal year ended December 31, 2004, and incorporated herein by
                reference.




(19)
            Previously
                filed as an exhibit to the Company’s current report on Form 8-K dated
                February 10, 2006




(20)
            Previously
                filed as an exhibit to the Company’s current report on Form 8-K dated May
                26, 2005




(21)
            Previously
                filed as an exhibit to the Company’s current report on Form 8-K dated
                December 30, 2005




36




**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 November
      1, 2006.


**EARTHSHELL
                CORPORATION**By:
            */s/
              VINCENT J. TRUANT*Vincent
                J. TruantChairman
              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.




**Signature**
            
            **Title**
            
            **Date***/s/
                VINCENT J. TRUANT*
            
            Chairman
                of the Board and
            
            November
                  1, 2006Vincent
                J. Truant
            
            Chief
                Executive Officer*/s/
                D. SCOTT HOUSTON*
            
            Chief
                Financial Officer and Secretary
            
            November
                  1, 2006D.
                Scott Houston*/s/
                PAUL
                B. SUSIE*
            
            Principal
                Accounting Officer
            
            November
                1, 2006Paul
                B. Susie*/s/
                HAMLIN JENNINGS*
            
            Director
            
            November
                  1, 2006Hamlin
                Jennings*/s/
                WALKER RAST*
            
            Director
            
            November
                  1, 2006Walker
                Rast*/s/
                MICHAEL GORDON*
            
            Director
            
            November
                  1, 2006Michael
                Gordon




37




**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES**





Index
                to Consolidated Financial Statements and Schedules
            
            
            F-iReport
                of Independent Registered Public Accounting Firm
            
            
            F-1Consolidated
                Balance Sheets as of December 31, 2005 and 2004
            
            
            F-2Consolidated
                Statements of Operations for the years ended December 31, 2005, 2004,
                and 2003
            
            
            F-3Consolidated
                Statements of Stockholders’ Equity (Deficit) for the years ended
                December 31, 2005, 2004, and 2003
            
            
            F-4Consolidated
                Statements of Cash Flows for the years ended December 31, 2005, 2004,
                and 2003
            
            
            F-5Notes
                to Consolidated Financial Statements
            
            
            F-8




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-i





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors and Stockholders of EarthShell Corporation:





We
      have
      audited the accompanying consolidated balance sheets of EarthShell
      Corporation (the “Company”) as of December 31, 2005 and 2004, and
      the related consolidated statements of operations,
      stockholders’ (deficit) equity, and cash flows for the years ended
      December 31, 2005, 2004 and 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 audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan and perform the audit to obtain reasonable assurance about whether the
      financial statements are free of material misstatement. The Company is not
      required to, nor were we engaged to perform, an audit of its control over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly we express no such opinion. 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, based on our audits, such consolidated financial statements present
      fairly, in all material respects, the financial position of the Company as
      of
      December 31, 2005 and 2004, and the results of its operations and its cash
      flows for the years ended December 31, 2005, 2004 and 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. As discussed in the notes to
      the
      consolidated financial statements, the Company has incurred significant losses,
      has minimal revenues and has a working capital deficit of $11,458,467 and a
      stockholders’ deficit of $12,351,889 as of December 31, 2005. 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 Hurley & McEwen, LLP*





Camarillo,
      California


March
      10,
      2006 , except
      as
      to the Stock Option footnote for which the date is October 27,
      2006.





F-1




EARTHSHELL
        CORPORATION
 CONSOLIDATED
        BALANCE SHEETS
 
 December 31,2005
              
              2004ASSETSCURRENT
                  ASSETSCash
                  and cash equivalents
              
              $
              347,812
              
              $
              272,371Prepaid
                  expenses and other current assets
              
              
              83,473
              
              
              201,467Total
                  current assets
              
              
              431,285
              
              
              473,838PROPERTY
                  AND EQUIPMENT, NET
              
              
              11,991
              
              
              9,037EQUIPMENT
                  HELD FOR SALE
              
              
              1
              
              
              1TOTAL
                  ASSETS
              
              $
              443,277
              
              $
              482,876LIABILITIES
                  AND STOCKHOLDERS’ DEFICITCURRENT
                  LIABILITIESAccounts
                  payable and accrued expenses
              
              $
              5,908,670
              
              $
              3,899,526Current
                  portion of settlements
              
              
              300,786
              
              
              313,743Current
                  portion of deferred revenues
              
              
              100,000
              
              
              300,000Payable
                  to related party, current
              
              
              850,000
              
              
              875,000Debenture
                  settlement
              
              
              2,375,000
              
              
              2,375,000Note
                  Payable, net of discount of $168,901
              
              
              2,355,296
              
              
              —Total
                  current liabilities
              
              
              11,889,752
              
              
              7,763,269DEFERRED
                  REVENUES, LESS CURRENT PORTION
              
              
              787,500
              
              
              1,062,500OTHER
                  LONG-TERM LIABILITIES
              
              
              117,914
              
              
              412,192Total
                  liabilities
              
              
              12,795,166
              
              
              9,237,961COMMITMENTS
                  AND CONTINGENCIESSTOCKHOLDERS’
                  DEFICITPreferred
                  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,
                  2005 and 2004
              
              
              —
              
              
              —Common
                  stock, $.01 par value, 40,000,000 shares authorized; 18,981,167
                  and
                  18,234,615 shares issued and outstanding as of December 31, 2005 and
                  2004, respectively
              
              
              189,812
              
              
              182,346Additional
                  paid-in common capital
              
              
              315,306,825
              
              
              313,196,905Accumulated
                  deficit
              
              
              (327,786,868
              )
              
              (321,607,782
              )Less
                  note receivable for stock
              
              
              —
              
              
              (500,000
              )Accumulated
                  other comprehensive loss
              
              
              (61,658
              )
              
              (26,554
              )Total
                  stockholders’ deficit
              
              
              (12,351,889
              )
              
              (8,755,085
              )TOTAL
                  LIABILITES AND STOCKHOLDERS’ DEFICIT
              
              $
              443,277
              
              $
              482,876
 
 See
        Notes
        to Consolidated Financial Statements.
  F-2
 
 EARTHSHELL
        CORPORATION
 CONSOLIDATED
        STATEMENTS OF OPERATIONS
 
 Year
                  Ended December 31,2005
              
              2004
              
              2003Revenues
              
              $
              183,333
              
              $
              137,500
              
              $
              —Operating
                  ExpensesRelated
                  party license fee and research and development expenses
              
              
              —
              
              
              800,000
              
              
              1,312,374Other
                  research and development expenses
              
              
              200,817
              
              
              370,163
              
              
              8,234,416General
                  and administrative expenses
              
              
              5,485,358
              
              
              3,753,902
              
              
              5,790,473Related
                  party general and
                  administrative (reimbursements)
              
              
              —
              
              
              (4,875
              )
              
              (4,074
              )Depreciation
                  and amortization
              
              
              2,939
              
              
              42,236
              
              
              379,949Gain
                  on sales of property and equipment
              
              
              (23,477
              )
              
              (168,458
              )
              
              (451,940
              )Total
                  operating expenses
              
              
              5,665,637
              
              
              4,792,968
              
              
              15,261,198Operating
                  Loss
              
              
              5,482,304
              
              
              4,655,468
              
              
              15,261,198Other (Income) ExpensesInterest
                  income
              
              
              (5,022
              )
              
              (4,606
              )
              
              (95,176
              )Related
                  party interest expense
              
              
              101,314
              
              
              410,965
              
              
              445,628Other
                  interest expense
              
              
              599,690
              
              
              661,721
              
              
              1,440,118Premium
                  due to debenture default
              
              
              —
              
              
              1,672,426
              
              
              —Other
                  income
              
              
              —
              
              
              —
              
              
              (399,701
              )(Gain) Loss
                  on extinguishment of debentures
              
              
              —
              
              
              (139,673
              )
              
              1,697,380Debenture
                  conversion costs
              
              
              —
              
              
              —
              
              
              166,494Loss
                  Before Income Taxes
              
              
              6,178,286
              
              
              7,256,301
              
              
              18,515,941Income
                  Taxes
              
              
              800
              
              
              800
              
              
              800Net
                  Loss
              
              $
              6,179,086
              
              $
              7,257,101
              
              $
              18,516,741Basic
                  and Diluted Loss Per Common Share
              
              $
              0.33
              
              $
              0.48
              
              $
              1.40Weighted
                  Average Number of Common Shares Outstanding
              
              
              18,503,207
              
              
              15,046,726
              
              
              13,266,668
 
 See
        Notes
        to Consolidated Financial Statements.
  F-3
 
 EARTHSHELL
        CORPORATION
 CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
 
 Common
                  Stock
              
              Additional
                  Paid-In Common
              
              Accumulated
              
              Stock
                  Purchase
              
              Accumulated
                  Other ComprehensiveShares
              
              Amount
              
              Capital
              
              Deficit
              
              Receivable
              
              Loss
              
              TotalsBALANCE,
                  DECEMBER 31, 2002
              
              
              12,054,637
              
              
              120,546
              
              
              292,257,340
              
              
              (295,833,940
              )
              
              —
              
              
              (16,632
              )
              
              (3,472,686
              )Issuance
                  of common stock
              
              
              137,264
              
              
              1,373
              
              
              811,267
              
              
              —
              
              
              —
              
              
              —
              
              
              812,640Common
                  stock and common stock warrants issued in connection with issuance
                  of
                  convertible debentures
              
              
              624,747
              
              
              6,248
              
              
              2,921,594
              
              
              —
              
              
              —
              
              
              —
              
              
              2,927,842Conversion
                  of convertible debentures to common stock
              
              
              1,312,318
              
              
              13,123
              
              
              7,536,877
              
              
              —
              
              
              —
              
              
              —
              
              
              7,550,000Debenture
                  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
              
              
              14,128,966
              
              
              141,290
              
              
              302,033,746
              
              
              (314,350,681
              )
              
              —
              
              
              (93,130
              )
              
              (12,268,775
              )Issuance
                  of common stock
              
              
              2,443,272
              
              
              24,432
              
              
              7,181,970
              
              
              —
              
              
              (500,000
              )
              
              —
              
              
              6,706,402Conversion
                  of convertible debentures to common stock
              
              
              1,662,377
              
              
              16,624
              
              
              4,970,508
              
              
              —
              
              
              —
              
              
              —
              
              
              4,987,132Debenture
                  conversion costs
              
              
              —
              
              
              —
              
              
              (989,319
              )
              
              —
              
              
              —
              
              
              —
              
              
              (989,319
              )Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              (7,257,101
              )
              
              —
              
              
              —
              
              
              (7,257,101
              )Foreign
                  currency translation adjustment
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              66,576
              
              
              66,576Comprehensive
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (7,190,525
              )BALANCE,
                  DECEMBER 31, 2004
              
              
              18,234,615
              
              $
              182,346
              
              $
              313,196,905
              
              $
              (321,607,782
              )
              $
              (500,000
              )
              $
              (26,554
              )
              $
              (8,755,085
              )Issuance
                  of common stock
              
              
              266,667
              
              
              2,667
              
              
              797,333
              
              
              —
              
              
              500,000
              
              
              —
              
              
              1,300,000Conversion
                  of related party note to common stock
              
              
              323,435
              
              
              3,234
              
              
              934,670
              
              
              —
              
              
              —
              
              
              —
              
              
              937,904Common
                  stock and common stock warrants issued in connection with issuance
                  of
                  convertible debentures
              
              
              156,450
              
              
              1,565
              
              
              377,917
              
              
              —
              
              
              —
              
              
              —
              
              
              379,482Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              (6,179,086
              )
              
              —
              
              
              —
              
              
              (6,179,086
              )Foreign
                  currency translation adjustment
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (35,104
              )
              
              (35,104
              )Comprehensive
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (6,214,190
              )BALANCE,
                  DECEMBER 31, 2005
              
              
              18,981,167
              
              $
              189,812
              
              $
              315,306,825
              
              $
              (327,786,868
              )
              
              —
              
              $
              (61,658
              )
              $
              (12,351,889
              )
 
 See
        Notes
        to Consolidated Financial Statements.
  F-4
  EARTHSHELL
        CORPORATION
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 
 Year
                  Ended December 31,2005
              
              2004
              
              2003CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  loss
              
              $
              (6,179,086
              )
              $
              (7,257,101
              )
              $
              (18,516,741
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activitiesBad
                  debt expense
              
              
              183,333
              
              
              —
              
              
              —Depreciation
                  and amortization
              
              
              2,939
              
              
              42,236
              
              
              379,949Amortization
                  and accretion of debenture issue costs
              
              
              633,490
              
              
              592,316
              
              
              955,574Compensation
                  related to restricted stock issuance to directors
              
              
              150,934
              
              
              —
              
              
              —Interest
                  paid in common stock
              
              
              100,758
              
              
              —
              
              
              —Premium
                  due to debenture default
              
              
              —
              
              
              1,672,426
              
              
              —Debenture
                  issuance and conversion costs
              
              
              —
              
              
              —
              
              
              166,494Gain
                  on change in fair value of warrant obligation
              
              
              —
              
              
              —
              
              
              (399,701
              )(Gain) Loss
                  on extinguishment of debentures
              
              
              —
              
              
              (139,673
              )
              
              1,697,380Beneficial
                  conversion value due to change in debentures conversion
                  price
              
              
              —
              
              
              —
              
              
              360,000(Gain) Loss
                  on sale, disposal or impairment of property and equipment
              
              
              (23,476
              )
              
              (168,458
              )
              
              3,548,059Equity
                  in the losses of joint venture
              
              
              —
              
              
              —
              
              
              392,116Accrued
                  purchase commitment
              
              
              —
              
              
              —
              
              
              (1,855,000
              )Other
                  non-cash expense items
              
              
              (223,962
              )
              
              180,171
              
              
              50,198Changes
                  in operating assets and liabilitiesPrepaid
                  expenses and other current assets
              
              
              117,994
              
              
              120,549
              
              
              264,153Accounts
                  payable and accrued expenses
              
              
              2,054,721
              
              
              (553,710
              )
              
              (2,339,720
              )Payable
                  to related party
              
              
              (34,070
              )
              
              1,043,869
              
              
              1,214,683Deferred
                  revenues
              
              
              (183,333
              )
              
              1,362,500
              
              
              —Accrued
                  purchase commitment
              
              
              —
              
              
              —
              
              
              (1,645,000
              )Other
                  long-term liabilities
              
              
              28,914
              
              
              378,859
              
              
              33,333Net
                  cash used in operating activities
              
              
              (3,370,844
              )
              
              (2,726,016
              )
              
              (15,694,223
              )CASH
                  FLOWS FROM INVESTING ACTIVITIESProceeds
                  from release of restricted time deposit upon settlement of purchase
                  commitment
              
              
              —
              
              
              —
              
              
              3,500,000Proceeds
                  from sales of property and equipment
              
              
              30,280
              
              
              187,708
              
              
              487,691Investment
                  in joint venture
              
              
              —
              
              
              —
              
              
              (26,104
              )Purchases
                  of property and equipment
              
              
              (12,697
              )
              
              (8,729
              )
              
              (1,320
              )Net
                  cash provided by  investing activities
              
              
              17,583
              
              
              178,979
              
              
              3,960,267
  F-5
 
 Year
                  Ended December 31,2005
              
              2004
              
              2003CASH
                  FLOWS FROM FINANCING ACTIVITIESProceeds
                  from issuance of common stock
              
              
              800,000
              
              
              2,086,755
              
              
              —Proceeds
                  from issuance of common stock and convertible debentures, net of
                  issuance
                  costs and discounts amounting to approximately $3.4
                  million
              
              
              —
              
              
              —
              
              
              8,711,844Proceeds
                  from issuance of note payable
              
              
              2,500,000
              
              
              —
              
              
              —Proceeds
                  from payment on stock purchase receivable
              
              
              25,000
              
              
              —
              
              
              —Proceeds
                  from release of restricted time deposit upon conversion of convertible
                  debentures into common stock
              
              
              —
              
              
              —
              
              
              1,800,000Proceeds
                  from release of restricted time deposit upon exchange of convertible
                  debentures
              
              
              —
              
              
              —
              
              
              2,000,000Proceeds
                  from release of restricted time deposit for repayment of convertible
                  debentures
              
              
              —
              
              
              —
              
              
              5,200,000Repayment
                  of convertible debentures
              
              
              —
              
              
              (1,110,294
              )
              
              (5,200,000
              )Principal
                  payments on settlements
              
              
              (336,149
              )
              
              (66,387
              )
              
              —Proceeds
                  from issuance of notes payable to related party
              
              
              850,000
              
              
              —
              
              
              1,010,000Note
                  payable issuance costs
              
              
              (402,500
              )
              
              —
              
              
              —Net
                  cash provided by financing activities
              
              
              3,436,351
              
              
              910,074
              
              
              13,521,844Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              (7,649
              )
              
              7,695
              
              
              2,736(DECREASE) INCREASE
                  IN CASH AND CASH EQUIVALENTS
              
              
              75,441
              
              
              (1,629,268
              )
              
              1,790,624CASH
                  AND CASH EQUIVALENTS, BEGINNING OF PERIOD
              
              
              272,371
              
              
              1,901,639
              
              
              111,015CASH
                  AND CASH EQUIVALENTS, END OF PERIOD
              
              $
              347,812
              
              $
              272,371
              
              $
              1,901,639SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATIONCash
                  paid forIncome
                  taxes
              
              $
              800
              
              $
              800
              
              $
              800Interest
              
              
              410,772
              
              
              111,353
              
              
              21,058Common
                  stock warrants issued in connection with convertible
                  debentures
              
              
              129,161
              
              
              —
              
              
              745,562Conversion
                  of convertible debentures into common stock
              
              
              837,145
              
              
              6,800,000
              
              
              7,550,000Interest
                  paid in common stock
              
              
              100,758
              
              
              532,644
              
              
              95,339Commission
                  paid in common stock
              
              
              —
              
              
              —
              
              
              29,500Common
                  stock issued to service providers in connection with the March
                  2003
                  financing
              
              
              —
              
              
              —
              
              
              484,500
  F-6




**SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES**





In
      March
      of 2005, in consideration for a loan guarantee, the Company issued warrants
      to
      Benton Wilcoxon to purchase 65,000 shares of common stock of the Company at
      an
      exercise price of $ 3.00 per share. The warrants expire on March 23, 2008.
      Using
      the Black-Scholes pricing model, the warrants are valued at $34, 980.  Also
      in March of 2005, in consideration for consulting services rendered in
      connection with the company obtaining financing, the Company issued a warrant
      to
      Douglas Metz for 80,000 shares of common stock of the Company at an exercise
      price of $3.00 per share. The warrant expires on March 23, 2008. Using the
      Black-Scholes pricing model, the warrant was valued at $43,048.




In
      May
      2005, the Company issued a warrant to Cornell Capital Partners (CCP) to purchase
      625, 000 shares of common stock of the Company. The warrant expires on the
      later
      of : (a) May 26,2006 or (b) the date sixty days after the date the $2,500,000 in
      promissory notes issued to Cornell Capital are fully repaid. The warrant has
      an
      exercise price of $4.00 per share of common stock. Using the Black-Scholes
      pricing model, the warrant was valued at $47,345.




In
      August
      2005, the Company issued a warrant to CCP to purchase 50,000 shares of common
      stock of the Company in consideration for consolidating the two CCP promissory
      notes and extending the date upon which amortization and repayment of the notes
      is to begin. The warrant expires on the later of: (a) May 26, 2006 or (b) the
      date sixty days after the date the $2,500,000 in promissory notes issued to
      Cornell Capital are fully repaid. The warrant has an exercise price of $4.00
      per
      share of common stock. Using the Black-Scholes pricing model, the warrant was
      valued at $3,788.




Pursuant
      to the Board’s approval in February 2005, the Company granted to its chairman of
      the Board of Directors (and majority beneficial stockholder) a warrant to
      purchase one million shares of the Company’s common stock at $3 per share in
      consideration of the stockholder’s continued support of the Company since its
      inception and providing bridge loans from time to time. The warrant was issued
      in August 2005 and expires in May of 2015.




On
      October 11, 2005, the Company entered into a debt conversion and mutual release
      agreement (the “Debt Conversion Agreement”) with EKI. Pursuant to the Debt
      Conversion Agreement, the Company and EKI agreed that the remaining payable
      of
      $837,145 (previously owed to Bio-Tec Biologische Naturverpackunger GmbH
& Co.KG, but which payable was subsequently assigned to EKI) be converted
      into 279,048 shares of common stock of the Company. The conversion price equals
      $3.00 per share. Pursuant to the Debt Conversion Agreement, the Company and
      EKI
      released each other from any and all claims in connection with the
      receivable.




In
      connection with a Securities Purchase Agreement, on December 30, 2005, the
      Company issued to Cornell Capital Partners a warrant to purchase up to 350,000
      shares of common stock (the “December Warrant). This December Warrant has an
      exercise price of $4.00 per share, which may be adjusted under certain
      conditions to as low as $3.00 per share and expires two years from the date
      it
      was issued. Furthermore, in connection with the Company’s sale of December
      Debentures, the Company issued to Mr. Benton Wilcoxon, in consideration of
      his pledge of shares of common stock of Composite Technology Corporation
      pursuant to the terms of the IPEA, a warrant to purchase up to 125,000 shares
      of
      common stock. This warrant has an exercise price of $4.00 per share and expires
      three years from the date it was issued.




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.




See
      Notes
      to Consolidated Financial Statements.




F-7





**EARTHSHELL
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**Overview
      of Operations**




Organized
      in November 1992 as a Delaware corporation, EarthShell Corporation (the
“Company”) is engaged in the commercialization of composite material
      technology for the manufacture of foodservice disposable packaging designed
      with
      the environment in mind. EarthShell Packaging is based on patented
      composite material technology (collectively, the “EarthShell Technology”),
      licensed on an exclusive, worldwide basis from E. Khashoggi Industries, LLC
      and
      its wholly owned subsidiaries.




The
      EarthShell Technology has been developed over many years in consultation with
      leading material scientists and environmental experts to reduce the
      environmental burdens of foodservice disposable packaging through the careful
      selection of raw materials, processes, and suppliers. EarthShell Packaging,
      including hinged-lid sandwich containers, plates, bowls, foodservice wraps,
      and
      cups, is primarily made from commonly available natural raw materials such
      as
      natural ground limestone and potato starch. EarthShell believes that EarthShell
      Packaging has comparable or superior performance characteristics and can be
      commercially produced and sold at prices that are competitive with comparable
      paper and plastic foodservice disposables.




EarthShell
      was a development stage enterprise through the first quarter of 2004. With
      the
      recognition of the Company’s first revenues in the second quarter of 2004, the
      Company was no longer a development stage enterprise.




**Restatement**




Subsequent
      to the filing of the Form 10K for the year ended December 31, 2005, the Company
      identified that it had not included warrants granted to Mr. Khashoggi, its
      former Chairman, in its **** footnote
      disclosure of pro forma net loss and loss per share resulting from applying
      SFAS
      No. 123 for 2005. Accordingly, the Company has restated the footnote disclosure
      for this information for the year ended December 2005 which resulted in an
      increase in its pro forma net loss and loss per share from $6,924,527 and $0.37
      to $9,258,471 and $0.49, respectively. See Stock Option note
      following.




**BASIS
      OF PRESENTATION OF FINANCIAL INFORMATION**




The
      foregoing financial information has been prepared from the books and records
      of
      EarthShell Corporation. EarthShell Corporation’s consolidated financial
      statements include the accounts of its wholly-owned subsidiary, PolarCup
      EarthShell GmbH. All significant intercompany balances and transactions have
      been eliminated in consolidation. In the opinion of management, the financial
      information reflects all adjustments necessary for a fair presentation of the
      financial condition, results of operations and cash flows of the Company in
      conformity with accounting principles generally accepted in the United States.
      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. The Company has incurred
      significant losses since inception, has minimal revenues and has a working
      capital deficit of $11,458,467 at December 31, 2005. These factors, along
      with others, indicate substantial doubt that the Company will be able to
      continue as a going concern for a reasonable period of time.




Subsequent
      to December 31, 2005 the Company entered into a financing transaction to
      borrow $4.5 million, of which, the Company netted $1.6 million (See Subsequent
      Events). On January 6, 2006, the Company received this funding. The Company
      will
      have to raise additional funds to meet its current obligations and to cover
      operating expenses through the year ending December 31, 2006. If the
      Company is not successful in raising additional capital it may not be able
      to
      continue as a going concern. Management plans to address this need by raising
      cash through either the sale of licenses, the generation of royalty revenues
      or
      the issuance of debt or equity securities. In addition, the Company expects
      cash
      to be generated in 2006 through royalty payments from licensees. However, the
      Company cannot assure that additional financing will be available to it, or,
      if
      available, that the terms will be satisfactory, or that it will receive any
      royalty payments in 2006. 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.




F-8




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. The Company’s continuation as a going
      concern is dependent upon its ability to generate sufficient cash flow to meet
      its obligations on a timely basis, to obtain additional financing or refinancing
      as may be required, and ultimately to attain successful operations.




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 de-listed by the Nasdaq SmallCap Market and trading was moved to the
      over-the-counter (OTC) [Pink Sheets Electronic Quotation Service].
      Since June 21, 2004, the Company’s common stock has been listed through the OTC
      Bulletin Board. The Company’s common stock trades under the symbol
“ERTH.OB.”




**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 concluded 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.




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”) and Renewable Products, Inc. (“RPI”) in the U.S, as well
      as EarthShell Hidalgo (“ESH”) in Mexico and EarthShell Asia. During
      2005, the Company received technology fees from ESH. During prior years,
      proceeds from initial sales of plates, bowls and hinged-lid containers were
      not
      significant and were recorded as an offset to the costs of its demonstration
      manufacturing operations.




During
      2004, as a result of its stock price dropping below $3 per share for an extended
      period of time, the Company was de-listed from NASDAQ. Consequently, it became
      in default on its 2006 Debentures. In the 4th quarter of 2004, the Company
      sold
      $2.7 million of unregistered stock, negotiated a settlement with each of its
      debenture holders, and retired all of the outstanding debentures.




On
      October 11, 2005, the Company entered into the 2005 EKI Loan with EKI pursuant
      to which the Company issued to EKI a promissory note to EKI in the principal
      amount of $1,000,000. As of the second week of January 2006, EKI has advanced
      the full $1,000,000 to the Company. Interest accrues on the principal balance
      of
      the 2005 EKI Loan at a variable per annum rate, as of any date of determination,
      that is equal to the rate published in the “Money Rates” section of *The
      Wall Street Journal* as being
      the “Prime Rate”, compounded monthly. 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 October 2004, these related party loans, including accrued
      interest were converted to unregistered shares of EarthShell common
      stock. (See Related Party Transactions).




F-9




**Recent
      Accounting Pronouncements**




The
      FASB
      recently issued the following statements:




In
      December 2004, the FASB issued SFAS No. 123R, “Share Based Payment”. This
      Statement is a revision of FASB Statement No. 123, Accounting for Stock-Based
      Compensation. This Statement supersedes APB Opinion No. 25, Accounting for
      Stock
      Issued to Employees, and its related implementation guidance. This Statement
      establishes standards for the accounting for transactions in which an entity
      exchanges its equity instruments for goods or services. It also addresses
      transactions in which an entity incurs liabilities in exchange for goods or
      services that are based on the fair value of the entity’s equity instruments or
      that may be settled by the issuance of those equity instruments. This Statement
      focuses primarily on accounting for transactions in which an entity obtains
      employee services in share-based payment transactions. This Statement does
      not
      change the accounting guidance for share-based payment transactions with parties
      other than employees provided in Statement 123 as originally issued and EITF
      Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other
      Than Employees for Acquiring, or in Conjunction with Selling, Goods or
      Services.” This Statement does not address the accounting for employee share
      ownership plans, which are subject to AICPA Statement of Position 93-6,
      Employers’ Accounting for Employee Stock Ownership Plans. This statement will
      require the Company to recognize the fair value of employee services received
      in
      exchange for awards of equity instruments in current earnings. The Company
      will
      adopt this pronouncement January 1, 2006 as required.




In
      May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
      Corrections—a replacement of APB Opinion No. 20 and FASB Statement
      No. 3” (SFAS 154). This Statement replaces APB Opinion No. 20,
“Accounting Changes,” and FASB Statement No. 3, “Reporting Accounting
      Changes in Interim Financial Statements,” and changes the requirements for the
      accounting for and reporting of a change in accounting principle by requiring
      retrospective application to prior periods’ financial statements of changes in
      accounting principle, unless it is impractical to determine either the
      period-specific effects or the cumulative effect of the change. It also applies
      to changes required by an accounting pronouncement in the unusual instance
      that
      the pronouncement does not include specific transition provisions. In addition,
      the Statement also requires that a change in depreciation or amortization for
      long-lived assets be accounted for as a change in accounting estimate effected
      by a change in accounting principle. When a pronouncement includes specific
      transition provisions, those provisions should be followed. SFAS 154 is
      effective for accounting changes and corrections of errors made in fiscal years
      beginning after December 15, 2005. Consequently, the Company will adopt
      provisions of SFAS 154 for the fiscal year beginning January 1, 2006.
      Management currently believes the adoption of the provisions of SFAS 154 will
      not have a material impact on its 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, which historically have
      been insignificant to the Company’s operations.




**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.




F-10




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. The authorized
      shares of common stock were increased in conjunction with the annual meeting
      of
      the shareholders held on June 26, 2004, from 25 million to 40
      million.




**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, 2005 and 2004, 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 federally insured financial institutions and in high
      quality money market fund deposits. Money market fund deposits ($433,514 on
      deposit with one bank at December 31, 2005) are subject to market
      fluctuations and there is no guarantee as to their ultimate value.




**Reclassifications**




Certain
      items in the 2003 and 2004 financial statements have been reclassified to
      conform to the 2005 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.




**Prepaid
      Expenses and Other Current Assets**




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




2005
            
            2004Prepaid
                expenses and other current assets
            
            $
            83,473
            
            $
            83,583Receivable
                on sale of equipment
            
            
            —
            
            
            78,009Related
                party receivable
            
            
            —
            
            
            12,875Retainer
                for financing
            
            
            —
            
            
            27,000Total
                Prepaid Expenses and Other Current Assets
            
            $
            83,473
            
            $
            201,467




**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.




F-11




**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.
      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. 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, 2005 were as follows:




2005
            
            2004**Property
                and Equipment**Office
                furniture and equipment
            
            $
            158,854
            
            $
            245,274Less:
                accumulated depreciation and amortization .
            
            
            (146,863
            )
            
            (236,237
            )Property
                and equipment—net
            
            $
            11,991
            
            $
            9,037Equipment
                held for sale
            
            $
            1
            
            $
            1




The
      Company has fully depreciated equipment (original cost of
      $893,657) and a commercial production line which are being held for sale.
      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
      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.
      At
      December 31, 2003, the Company was negotiating to sell the line to a party
      who would become a licensee with rights to produce foodservice disposables.
      However, because the Company was unable to determine with certainty the proceeds
      that would 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 for
      2003 was expensed to “Other research and development” in the accompanying
      Statements of Operations. If the equipment is sold, the Company will record
      a
      gain equal to the proceeds received for the equipment.




The
      Company sold non-essential machine shop equipment and excess office furniture
      and equipment in 2004 and 2005, realizing gains on the sale.




**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 and 2002 the Company recorded its equity in the losses of the joint
      venture of $392,117 and $20,263 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 convertible
      debenture financing completed in March 2003 (see Convertible Debentures),
      payment of amounts due to EKI under the License Agreement or the Biotec
      Agreement were 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, 2005, 2004, and 2003, the
      Company paid or accrued to EKI $0, $800,000, and $1,312,374 , 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-12




In
      September of 2004, as part of an overall restructuring of its debt, EarthShell
      entered into an agreement with Biotec to convert $1.475 million of the $2.475
      million of accrued license fees owing to Biotec as of September 1, 2004, plus
      accrued interest into 491,778 shares of EarthShell common stock and to
      eliminate, the $100,000 per month minimum license fee. In December of 2004,
      EarthShell paid to Biotec $125,000, leaving a balance of $875,000 as of
      December 31, 2004. During 2005, the balance was further reduced to $837,145
      and assigned to EKI. On October 11, 2005, the Company entered into a debt
      conversion and mutual release agreement (the “Debt Conversion Agreement”) with
      EKI. Pursuant to the Debt Conversion Agreement, the Company and EKI agreed
      that
      the remaining receivable of $837,145 (previously owed to Bio-Tec
      Biologische Naturverpackunger GmbH & Co.KG, but which receivable was
      subsequently assigned to EKI) be converted into 279,048 shares of common stock
      of the Company. The conversion price equals $3.00 per share. Pursuant to the
      Debt Conversion Agreement, the Company and EKI released each other from any
      and
      all claims in connection with the receivable.




In
      connection with the settlement of the March 2006 Debentures in October of 2004,
      EKI converted all of its outstanding loans to
      EarthShell ($2,755,000) into unregistered common stock at $3.00 per
      share and converted $532,644 of accumulated interest into unregistered common
      stock at $4.00 per share for a total of 1,051,494 shares received by
      EKI.




In
      September 2004, the Company hired an executive assistant who supports both
      EKI
      and Company executives. The Company paid the salary and benefits of the
      executive assistant and charged EKI for the portion of her time that was spent
      supporting EKI executives. The Company invoiced EKI $32,608 and $12,875 for
      the
      years ended December 31, 2005 and 2004, respectively, for such support services.
      This arrangement terminated in October 2005.




In
      May
      2004, the Company sold non-essential machine shop equipment and excess office
      furniture and equipment with a net book value of approximately $19,122 to EKI
      for $78,409.




On
      September 22, 2004, Simon K. Hodson, the then Chief Executive Officer of the
      Company, loaned $50,000 to the Company on a short-term basis at an annual
      interest rate of 7%, and on September 29, 2004 Mr. Hodson loaned the Company
      an
      additional $86,000. During the fourth quarter of 2004, the Company repaid both
      short-term loans.




Pursuant
      to the Board’s approval in February 2005, the Company granted to its chairman of
      the Board of Directors (and majority beneficial stockholder) a warrant to
      purchase one million shares of the Company’s common stock at $3 per share in
      consideration of the stockholder’s continued support of the Company since its
      inception and providing bridge loans from time to time. The warrant was issued
      in August 2005 and expires in May of 2015.




F-13




**Accounts
      Payable and Accrued Expenses**




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




2005
            
            2004Accounts
                payable and other accrued expenses
            
            $
            3,137,261
            
            $
            1,333,101Legal
                accruals
            
            
            1,283,842
            
            
            1,497,103Deferred
                officer compensation
            
            
            453,544
            
            
            298,194Accrued
                property taxes
            
            
            116,002
            
            
            112,159Accrued
                salaries, wages and benefits
            
            
            281,288
            
            
            258,691Accrued
                legal fees
            
            
            636,733
            
            
            400,278Total
                accounts payable and accrued Expenses
            
            $
            5,908,670
            
            $
            3,899,526




**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. 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. 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 were 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 bore interest at a
      rate
      of 2.0% per annum, payable quarterly in arrears on each January 31, April 30,
      July 31 and October 31.




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.




F-14




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 would expire in March 2006 and was 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 would expire in March 2006, was 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. 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 31, 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.




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 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. The Company negotiated with the
      various debenture holders to resolve the defaults. From July through October
      2004, the Company reached settlements with each of the remaining debenture
      holders to retire the entire $6.8 million outstanding at the end of 2003. Taken
      together, the debenture holders converted their debenture holdings into
      1,149,877 shares of registered stock, received a total of $1.11 million in
      cash
      payments, and received an additional 512,500 shares of unregistered common
      stock. One of the debenture holders also received a settlement payable of $2.375
      million, which may be converted to common stock at the option of the holder
      at
      $3 per share. This holder also has the right to elect to be paid from up to
      1/3
      of the proceeds of future equity capital transactions or from up to 1/3 of
      future revenues until he has received a total of $2.375 million, less any
      portion that has already been converted. As of December 31, 2004, 100% of
      the outstanding debentures had been retired, the security interest held by
      the
      2006 Debenture Holders had been released, and any and all defaults under these
      debentures had been waived. Because the $2.375 million settlement payable is
      payable only from future proceeds, it is classified on the balance sheet under
      Current Liabilities as a Debenture Settlement.




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 The Biotec
      Group 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. 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 $0.3 million using
      the Black-Scholes option pricing model and was recorded as a discount on the
      outstanding loans.




F-15




On
      October 11, 2005, the Company entered into the 2005 EKI Loan with EKI pursuant
      to which the Company issued to EKI a promissory note to EKI in the principal
      amount of $1.0 million. As of December 31, 2005, EKI had advanced $0.85 million
      with the balance being funded by the second week of January 2006. Interest
      accrues on the principal balance of the EKI Loan at a variable per annum rate,
      as of any date of determination, that is equal to the rate published in the
      “Money Rates” section of *The
      Wall Street Journal* as being
      the “Prime Rate”, compounded monthly. All accrued but unpaid interest and
      outstanding principal is due and payable on the earliest to occur of the
      following: (i) the second anniversary of the date of the 2005 EKI Loan;
      (ii) five days following the date the Company has received $3.0 million or
      more in aggregate net cash proceeds from all financing transactions, equity
      contributions, and transactions relating to the sale, licensing, sublicensing
      or
      disposition of assets or the provision of services (including advance
      royalty payments, proceeds from the sale of the Company’s common stock and fees
      for technological services rendered to third parties), measured from the date
      of
      the EKI Loan and not taking into account the proceeds advanced under the 2005
      EKI Loan; or (iii) the occurrence of an Event of Default (as defined in the
      2005
      EKI Loan).




**Notes
      Payable**





In
      March
      2005, the Company entered into a promissory note and Security Agreement with
      Cornell Capital Partners. Pursuant to the Security Agreement, the Company issued
      promissory notes to Cornell Capital Partners in the original principal amount
      of
      $2.5 million. The $2.5 million was disbursed as follows: $1.15 million was
      disbursed on March 28, 2005 and on May 23, 2005 the remaining $1.35 million
      was
      issued in a second closing. After origination costs, the Company realized
      approximately $2.1 million of net proceeds. The promissory notes are secured
      by
      the assets of the Company and shares of stock of another entity pledged by
      an
      affiliate of that entity. In addition, the Company pledged to the lender 100
      shares of Series B convertible preferred stock which are convertible in the
      event of default into approximately $3.3 million shares of the Company’s common
      stock. The promissory notes have a one-year term and accrue interest at 12%
      per
      year .





In
      connection with the financing with Cornell Capital Partners, the Company issued
      a
      warrant to Cornell Capital Partners to purchase 625,000 shares of common stock
      of the Company. The
      warrant expires on the later of: (a) May 26, 2006 or (b) the date sixty days
      after the date the $2.5 million in promissory notes issued to Cornell Capital
      Partners are fully repaid. The warrant has an exercise price of $4.00 per share
      of common stock. The first installment payment on the promissory notes was
      due
      on July 25, 2005. In August 2005 Cornell Capital Partners agreed to consolidate
      the two notes and to defer the commencement of repayment installments until
      October 1, 2005. In consideration of this modification to the promissory notes,
      the Company issued a warrant to Cornell Capital Partners to purchase 50,000
      shares of common stock of the Company. The warrant expires on the later of:
      (a)
      May 26, 2005 or (b) the date sixty days after the date the $2.5 million in
      promissory notes issued to Cornell Capital are fully repaid. The warrant has
      an
      exercise price of $4.00 per share of common stock.





Also
      in
      March 2005, the Company entered into a Standby Equity Distribution Agreement
      with Cornell Capital Partners. Pursuant to the Standby Equity Distribution
      Agreement, the Company may, at its discretion, periodically sell to Cornell
      Capital Partners shares of common stock for a total aggregate purchase price
      of
      up to $10.0 million. For each share of common stock purchased under the Standby
      Equity Distribution Agreement, Cornell Capital Partners will pay the Company
      98%
      of the lowest volume weighted average price of the Company's common stock as
      quoted by Bloomberg, LP on the Over-the-Counter Bulletin Board or other
      principal market on which the Company's common stock is traded for the 5 days
      immediately following the notice date. The price paid by Cornell Capital
      Partners for the Company's stock shall be determined as of the date of each
      individual request for an advance under the Standby Equity Distribution
      Agreement. Cornell Capital Partners will also retain 5% of each advance under
      the Standby Equity Distribution Agreement. Cornell Capital Partners' obligation
      to purchase shares of the Company's common stock under the Standby Equity
      Distribution Agreement is subject to certain conditions, including the Company's
      registration statement for shares of common stock sold under the Standby Equity
      Distribution Agreement being declared effective by the Securities and Exchange
      Commission and is limited to $0.5 million per weekly advance. On June 9, 2005
      the Company filed a registration statement on Form S-1 with the Securities
      and
      Exchange Commission to register the shares of EarthShell common stock underlying
      this transaction. On September 27, 2005, the registration statement was
      withdrawn. The Company expects to filed a revised S-1 on February 14,
      2006.





The
      notes
      above were fully repaid and refinanced through the December Debentures. See
      “Subsequent Events” below.





F-16




**Other
      Long Term Liabilities**




The
      Company has negotiated settlements with a number of its trade payable vendors
      comprised of payment plans of up to 36 months. These settlements have been
      reclassified on the balance sheet from trade payables to Current Portion of
      Settlements for payments due within the current reporting year and Other Long
      Term Liabilities for payments due after December 31, 2006. Payments on such
      settlements due in 2007 and 2008 total $0.18million and $0,
      respectively.




**Commitments**




During
      2005,the company relocated its headquarters to its current location where it
      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. Rental expenses for the years ended December 31, 2005,
      2004 and 2003 amounted to $98,885, $165,382, and $558,195 respectively. 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 was secured by a letter of credit. 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
      was
      considered 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.




**Contingencies**




The
      Company is engaged in litigation with two equipment suppliers seeking to collect
      a total of approximately $600,000 for manufacturing equipment in connection
      with
      the Company’s former Goettingen, Germany manufacturing line that is no longer in
      service. The entire amount claimed in the litigation has already been accrued
      as
      part of the Company’s accounts payable. The Company believes that it has good
      defenses and counterclaims inasmuch as the equipment did not reach the
      performance requirements specified in the purchase contracts, and expects to
      settle the respective matters soon.




The
      Company is periodically involved in litigation and administrative proceedings
      primarily arising in the normal course of its business. In the opinion of
      management, the Company’s gross liability, if any, and without any consideration
      given to the availability of indemnification or insurance coverage, under any
      pending or existing litigation or administrative proceedings, other than those
      separately addressed above, would not have a material adverse impact upon the
      Company’s financial statements.




**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 15% 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 $24,842
      in 2005, $24,311 in 2004, and $44,057 in 2003.




**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 1,250,000 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. Some of the options granted
      are subject to approval by the shareholders of an increase in the number of
      shares reserved for issuance under the Plans.




F-17


Stock
      option activity for 2005, 2004 and 2003 is as follows:




2005
            
            2004
            
            2003Shares
            
            Weighted-Average
                Exercise Price
            
            Shares
            
            Weighted-Average
                Exercise Price
            
            Shares
            
            Weighted-Average
                Exercise PriceOutstanding
                at beginning of year
            
            
            1,043,245
            
            $
            12.58
            
            
            384,912
            
            $
            38.24
            
            
            320,924
            
            $
            50.49Granted
            
            
            1,341,520
            
            
            2.00
            
            
            762,498
            
            
            0.78
            
            
            121,699
            
            
            4.87Cancelled
            
            
            —
            
            
            —
            
            
            (92,499
            )
            
            15.00
            
            
            (43,748
            )
            
            34.02Expired
            
            
            (755,340
            )
            
            6.52
            
            
            (11,666
            )
            
            68.95
            
            
            (13,963
            )
            
            42.14Outstanding
                at end of year
            
            
            1,629,425
            
            $
            6.68
            
            
            1,043,245
            
            $
            12.58
            
            
            384,912
            
            $
            38.24Options
                exercisable at year-end
            
            
            1,051,925
            
            $
            7.41
            
            
            141,162
            
            $
            61.35
            
            
            155,228
            
            $
            61.70





The
      following table summarizes information about stock options outstanding at
      December 31, 2005:




Options
                Outstanding
            
            Options
                ExercisableExercise
                Price
            
            Number
                Outstanding At 12/31/05
            
            Weighted-Average
                Remaining Contractual Life
            
            Weighted-Average
                Exercise Price
            
            Number
                Exercisable At 12/31/05
            
            Weighted-Average
                Exercise Price$
                0.75
            
            
            100,000
            
            
            8.49
            
            $
            0.75
            
            
            —
            
            $
            —1.85
            
            
            800,000
            
            
            6.53
            
            
            1.85
            
            
            800,000
            
            
            1.852.10
            
            
            350,000
            
            
            9.67
            
            
            2.10
            
            
            —
            
            
            —2.15
            
            
            115,000
            
            
            9.18
            
            
            2.15
            
            
            85,000
            
            
            2.152.55
            
            
            4,166
            
            
            3.58
            
            
            2.55
            
            
            4,166
            
            
            2.552.85
            
            
            75,000
            
            
            4.56
            
            
            2.85
            
            
            75,000
            
            
            2.854.80
            
            
            41,666
            
            
            7.72
            
            
            4.80
            
            
            —
            
            
            —5.64
            
            
            4,471
            
            
            2.42
            
            
            5.64
            
            
            4,471
            
            
            5.6415.00
            
            
            8,334
            
            
            0.19
            
            
            15.00
            
            
            8,334
            
            
            15.0036.00
            
            
            55,834
            
            
            6.53
            
            
            36.00
            
            
            —
            
            
            —44.04
            
            
            16,666
            
            
            5.36
            
            
            44.04
            
            
            16,666
            
            
            44.0460.00
            
            
            41,667
            
            
            3.79
            
            
            60.00
            
            
            41,667
            
            
            60.0091.56
            
            
            10,371
            
            
            0.08
            
            
            91.56
            
            
            10,371
            
            
            91.56252.00
            
            
            6,250
            
            
            2.38
            
            
            252.00
            
            
            6,250
            
            
            252.001,629,425
            
            
            7.26
            
            $
            6.68
            
            
            1,051,925
            
            $
            7.41





F-18




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 or warrant. 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 or warrant grant is estimated on the date of grant using the
      Black-Scholes option-pricing model. The fair value of each 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:




Year
                Ended December 31, 2005
              (as
                restated)
            
            Year
                Ended December 31, 2004
            
            Year
                Ended December 31, 2003Net
                Loss as reported
            
            $
            6,179,086
            
            $
            7,257,101
            
            $
            18,516,741Deduct:
                Stock-based employee compensation expenseincluded
                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
            
            
            3,079,385
            
            
            472,267
            
            
            776,018Pro
                forma net loss
            
            $
            9,258,471
            
            $
            7,729,368
            
            $
            19,292,759Net
                loss per common shareAs
                reported
            
            $
            0.33
            
            $
            0.48
            
            $
            1.40Pro
                forma
            
            
            0.49
            
            
            0.51
            
            
            1.45Average
                risk-free interest rate
            
            
            3.38
            %
            
            4.05
            %
            
            4.53
            %Average
                expected life in years
            
            
            7.17
            
            
            9.5
            
            
            9.5Volatility
            
            
            71
            %
            
            80
            %
            
            102
            %Average
                fair value of options granted during the year
            
            $
            1.46
            
            $
            0.64
            
            $
            3.99





**Stock
      Warrants**




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. In March 2003, in
      connection with the issuance of the 2006 Debentures, the exercise price of
      the
      warrants was reduced to $3.90 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. When the 2006 Debentures were retired in 2004,
      the warrant to purchase $1,055 million in the aggregate principal amount of
      the
      2006 Debentures converted to a warrant to purchase 175,833 shares of common
      stock at $7.20 per share. Therefore, the total number of warrants now held
      by
      Roth Capital Partners, LLC is 246,310. 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.




Pursuant
      to the Board’s approval in February 2005, the Company granted to its chairman of
      the Board of Directors (and majority beneficial stockholder) a warrant to
      purchase one million shares of the Company’s common stock at $3 per share in
      consideration of the stockholder’s continued support of the Company since its
      inception and providing bridge loans from time to time. The warrant was issued
      in August 2005 and expires in May of 2015.




In
      connection with a Securities Purchase Agreement, on December 30, 2005, the
      Company issued to Cornell Capital Partners a warrant to purchase up to 350,000
      shares of common stock (the “December Warrant). This December Warrant has an
      exercise price of $4.00 per share, which may be adjusted under certain
      conditions to as low as $3.00 per share and expires two years from the date
      it
      was issued. Furthermore, in connection with the Company’s sale of December
      Debentures, the Company issued to Mr. Benton Wilcoxon, in consideration of
      his pledge of shares of common stock of Composite Technology Corporation
      pursuant to the terms of the IPEA, a warrant to purchase up to 125,000 shares
      of
      common stock. This warrant has an exercise price of $4.00 per share and expires
      three years from the date it was issued. The related debt proceeds were received
      in January 2006, accordingly, the fair value of the warrants will be recorded
      as
      a debt discount in the fiscal quarter ended March 31, 2006.




F-19




**Revenue
      Recognition Policy**




The
      Company recognizes revenue when persuasive evidence of an arrangement exists,
      the price is fixed or readily determinable and collectibility is probable.
      The
      Company recognizes revenue in accordance with Staff Accounting Bulletin No.
      101,
“Revenue Recognition in Financial Statements,” (SAB 101), as amended by SAB
      104. EarthShell’s revenues consist of technology fees that are recognized
      ratably over the life of the related agreements and royalties based on product
      sales by licensees that are recognized in the quarter that the licensee reports
      the sales.




**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.




Deferred
      income taxes result from temporary differences in the recognition of revenues
      and expenses for financial and tax reporting purposes. At December 31, 2005
      and 2004, deferred income tax assets, which are fully reserved, were comprised
      primarily of the following:




2005
            
            2004Federal:Depreciation
            
            $
            1,273,296
            
            $
            1,375,770Deferred
                compensation
            
            
            154,205
            
            
            101,386Deferred
                contributions
            
            
            361,117
            
            
            361,117Accrued
                management fees
            
            
            —
            
            
            272,000Accrued
                vacation
            
            
            44,320
            
            
            87,955Other
                reserves
            
            
            62,333
            
            
            22,258Net
                operating loss carryforward
            
            
            104,184,369
            
            
            99,808,790Subtotal
            
            $
            106,079,640
            
            $
            102,029,276Valuation
                Allowance
            
            
            (106,079,640
            )
            
            (102,029,276Balance
            
            $
            —
            
            $
            —





The
      valuation allowance (decreased) increased by $4,050,364, ($1,843,850)
      and $8,810,963 during the years ended December 31, 2005, 2004, and 2003,
      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
      $306,424,613 as of December 31, 2005 that expire through 2024. For state
      income tax purposes, the Company has California net operating loss carryforwards
      of $183,854,768 as of December 31, 2005 that expire through 2009, and
      Maryland net operating loss carryforwards of $122,569,845 that follow the
      federal treatment and expire through 2024. Additionally, the ultimate
      utilization of net operating losses may be limited by change of control
      provision under section 382 of the Internal Revenue Code.




Income
      tax expense for 2005, 2004, and 2003 consists of the minimum state franchise
      tax.




**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, including Common stock to be issued. Diluted loss per common share
      is computed by dividing net loss available to common stockholders by the
      weighted-average number of common shares outstanding including Common stock
      to be issued) 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. Potentially dilutive shares
      are
      excluded from the computation in loss periods, as their effect would be
      anti-dilutive. 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 approximately ___ million
      shares, 3.0 million shares, and 900,000 shares for the years ended at
      December 31, 2005, 2004 and 2003, respectively.




F-20




**Subsequent
      Events**




On
      December 30, 2005, EarthShell entered into a Securities Purchase Agreement
      with
      Cornell Capital Partners (the “December Debenture Purchase Agreement”) pursuant
      to which the Company issued and sold to Cornell Capital Partners $4.5 million
      in
      principal amount of secured convertible debentures (the “December Debentures”)
      on the terms described below. This agreement was consummated on January 6,
      2006.
      The December Debentures are convertible into shares of the Company’s common
      stock on the terms discussed below The Company received the aggregate proceeds
      of $4.5 million from the sale of the December Debentures on January 6, 2006,
      of
      which approximately $2.6 million was used to payoff the CCP Notes.




The
      December Debentures are secured by (i) a Pledge and Escrow Agreement, by and
      among the Company, Cornell Capital Partners, and David Gonzalez, Esq.,
      (ii) an Insider Pledge Agreement and Escrow Agreement (the “IPEA”), by and
      among the Company, Cornell Capital Partners, David Gonzalez, Esq. and Mr. Benton
      Wilcoxon and (iii) an Amended and Restated Security Agreement, by and between
      the Company and Cornell Capital Partners. The December Debentures are secured
      by
      substantially all of the Company’s assets, have a three year term and accrue
      interest at 12% per annum. **** The
      December Debenture Purchase Agreement required the Company to register the
      shares of the Company’s common stock into which the December Debentures are
      convertible under the Securities Act of 1933. On February 14, 2006, the Company
      filed a registration statement on Form S-1 with the Securities and Exchange
      Commission (“SEC”) in order to register 6,700,000 shares of common stock that
      may be issuable to the holders of the December Debentures upon
      conversion. **** Beginning
      60 days after the SEC declares the registration statement effective, **** Cornell
      Capital Partners is entitled, at its option, to convert and sell up to $250,000
      of the principal amount of the December Debentures, plus accrued interest,
      into
      shares of the Company’s common stock, within any 30 day period at the lesser of
      (i) a price equal to $3.00 or (ii) 88% of the average of the two lowest
      volume weighted average prices of the common stock during the ten trading
      days immediately preceding the conversion date, as quoted by Bloomberg, LP.




The
      holder of the December Debentures may not convert the December Debentures or
      receive shares of the Company's common stock as payment of interest thereunder
      to the extent such conversion or receipt of such interest payment would result
      in the holder, together with any affiliate thereof, beneficially owning (as
      determined in accordance with Section 13(d) of the Securities Exchange Act
      of 1934, as amended, and the rules promulgated thereunder) in excess of 4.9%
      of
      the then issued and outstanding shares of common stock, including shares
      issuable upon conversion of, and payment of interest on, the December Debentures
      held by such holder after application of this 4.9% restriction. This 4.9%
      restriction may be waived by the holder (but only as to itself and not to
      any other holder) upon not less than 65 days prior notice to the Company.




The
      Company may redeem, with three business days advance written notice to Cornell
      Capital Partners, a portion or all amounts outstanding under the December
      Debentures prior to the maturity date provided that the closing bid price of
      the
      of the Company’s common stock, as reported by Bloomberg, LP, is less than $3.00
      at the time of the redemption notice. The Company shall pay an amount equal
      to
      the principal amount being redeemed plus a redemption premium equal to ten
      percent of the principal amount being redeemed, and accrued interest, to be
      delivered to the Cornell Capital Partners on the third business day after the
      redemption notice, provided, however, this redemption premium does not apply
      until the outstanding principal balance of the December Debentures has been
      reduced by $2.5 million. The amount that Cornell may convert in any 30 day
      period will be reduced by the amount that the Company redeems.




In
      connection with the settlement of the 2006 Debentures and the related
      restructuring of the Company’s debt, the Company provided registration rights
      with respect to newly issued unregistered shares of its common stock. Such
      registration rights required the Company to, among other things, file a
      registration statement with the SEC in December 2004 registering the resale
      of
      such shares of common stock. Under certain agreements, the Company not filing
      such a registration statement (or the registration statement not being declared
      effective) within a required timeframe provided the holders of the registrable
      securities with a right to liquidated damages which, in the aggregate, may
      amount to approximately $50,000 per month until a registration statement is
      filed. If the Company fails to pay such liquidated damages, the Company must
      also pay interest on such amount at a rate of 10% per year (or such lesser
      amount as is permitted by law). Because this Registration Statement was not
      filed as planned, in December 2004 the Company became obligated on the direct
      financial obligation described above. In light of the Company’s current
      liquidity and financial position any such claim could have a negative effect
      on
      the Company.




In
      February 2006, the Company issued to Midsummer an additional 25, 000 shares
      of
      its common stock in settlement of certain claims relating to the
      settlement.




F-21





In
      January 2006, SF Capital Partners converted a portion of the settlement balance
      into shares of the Company’s common stock. In addition, the Company has agreed
      to register on behalf of SF Capital partners 1,000,000 shares of the Company’s
      common stock to be available for the conversion of the remaining balance owed
      to
      SF Capital and to pay damages stemming the Company’s non-performance under the
      registration rights clause of the settlement agreement.




**QUARTERLY
      FINANCIAL INFORMATION (UNAUDITED)**





First
            
            Second
            
            Third
            
            Fourth
            
            Total
                Year2005Revenues
            
            $
            75,000
            
            $
            58,333
            
            $
            25,000
            
            $
            25,000
            
            $
            183,333Related
                party research and development
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Other
                research and development
            
            
            103,595
            
            
            119,183
            
            
            110,628
            
            
            (132,589
            )
            
            200,817Related
                party general & administrative
            
            
            578
            
            
            (4,218
            )
            
            (2,227
            )
            
            5,867
            
            
            —Other
                general and administrative
            
            
            1,048,384
            
            
            1,804,774
            
            
            1,810,481
            
            
            1,497,963
            
            
            6,161,602Net
                loss common shareholders
            
            $
            1,077,557
            
            $
            1,861,406
            
            $
            1,893,882
            
            $
            1,346,241
            
            $
            6,179,086Basic
                and diluted loss per common share
            
            $
            .06
            
            $
            .10
            
            $
            .10
            
            $
            .07
            
            $
            .33Weighted
                average common shares outstanding
            
            
            18,250,260
            
            
            18,394,967
            
            
            18,507,916
            
            
            18,853,010
            
            
            18,503,2072004Revenues
            
            $
            —
            
            $
            25,000
            
            $
            50,000
            
            $
            62,500
            
            $
            137,500Related
                party research and development
            
            
            300,000
            
            
            300,000
            
            
            200,000
            
            
            --
            
            
            800,000Other
                research and development
            
            
            222,538
            
            
            42,913
            
            
            64,121
            
            
            40,591
            
            
            370,163Other
                general and administrative
            
            
            1,173,855
            
            
            1,071,116
            
            
            99,162
            
            
            1,409,769
            
            
            3,753,902Net
                loss common shareholders
            
            $
            2,066,857
            
            $
            2,264,383
            
            $
            1,645,931
            
            $
            1,279,930
            
            $
            7,257,101Basic
                and diluted loss per common share
            
            $
            0.15
            
            $
            0.16
            
            $
            0.12
            
            $
            0.07
            
            $
            0.48Weighted
                average common shares outstanding
            
            
            14,128,966
            
            
            14,128,966
            
            
            14,223,402
            
            
            17,659,043
            
            
            15,046,726





F-22