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

                                    FORM 10-K

                                   (Mark One)

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

                   For the fiscal year ended December 31, 2005

                                       OR

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

             For the Transition Period From _________ to __________

                         Commission File Number 0-23567

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

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

                            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 [ ] 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 [ ] 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 |_|

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

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 [ ] Accelerated Filer [ ] 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 [ ] No [X]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant as of June 30, 2005 was $31,888,014. The number of shares outstanding
of the Registrant's Common Stock as of March 7, 2006 was 18,981,167.


<PAGE>


                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None
                                      ----

                           ANNUAL REPORT ON FORM 10-K

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

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


                                       i
<PAGE>

                                     PART I


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.


      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:



                                       1
<PAGE>

                                                           Global Market Size
                                                       -------------------------
                                                           $                 %
                                                       -------           -------
                                                           ($ in millions)
                                                       -------------------------
Commercial Products
Plates, Bowls                                          $ 5,700                19
Hinged-Lid Containers                                    1,800                 6

Commercial Prototypes
Wraps                                                    2,000                 7
Hot Cups                                                 3,300                11

Concept Prototypes
Cold Cups                                                5,700                19
Containers, Trays                                        4,200                13
Straws, Cup Lids                                         3,300                11
Pizza Boxes                                              2,000                 7
Cutlery                                                  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
<PAGE>

      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:

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

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

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

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

      o     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.

      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.


                                       3
<PAGE>

      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."

      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.


                                       4
<PAGE>

      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
<PAGE>

      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 Restated 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.

      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.


                                       6
<PAGE>

      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.  The  Company  also  granted a ten year
warrant to EKI to purchase one million  shares of the Company's  common stock at
$3.00 per share in consideration of EKI's continued support of the Company since
its inception,  including providing bridge loans at below market terms from time
to time. This warrant was cancelled and  subsequently a new warrant with similar
terms was reissued in August 2005 to Essam Khashoggi, beneficial owner of EKI.

      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.

      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.


                                       7
<PAGE>

      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.

      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.


                                       8
<PAGE>

      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.

      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


                                       9
<PAGE>

      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.

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

      o     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.

      o     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.



                                       10
<PAGE>

      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 4th 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.

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
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.


                                       11
<PAGE>

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:

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

      o     economic instability;

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

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

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

      o     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


      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.


                                       12
<PAGE>

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.

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


                                       13
<PAGE>

      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.


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
2nd quarter of 2006 and have the judgment  reduced to the correct  amount listed
above.


                                       14
<PAGE>

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

      None.


                                       15
<PAGE>


                                     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.

<TABLE>
<CAPTION>
                                                                            Quarterly Prices
                                                -----------------------------------------------------------------------------
                                                First            Second            Third            Fourth         Total Year
                                                -----            ------            -----            ------         ----------
<S>                                             <C>              <C>              <C>               <C>             <C>
2005
Market price per common share
High ......................                     $2.52             $3.20            $2.96             $2.50           $ 3.20
Low .......................                      1.49              1.65             1.78              1.74             1.49
2004
Market price per common share
High ......................                     $2.52             $2.03            $3.75             $2.97           $ 3.75
Low .......................                      1.49              0.45             1.75              1.95             0.45
</TABLE>

      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
<PAGE>

      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)

<TABLE>
<CAPTION>
                                                    For the Year Ended December 31
                                      -------------------------------------------------------------
                                        2005         2004         2003          2002         2001
                                      ---------    ---------    ---------    ---------    ---------
<S>                                   <C>          <C>          <C>          <C>          <C>
Statement of Operations Data
Revenues ..........................   $     183    $     138    $      --    $      --    $      --
Research and development expenses (1)       201        1,170        9,547       26,890       47,148
General and administrative expenses       5,485        3,749        5,786        9,590        9,634
Depreciation and amortization .....           3           42          380        3,099        5,874
Gain 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       62,302
Average shares outstanding ........      18,503       15,047       13,267       11,277        9,353
Balance Sheet Data
Cash and cash equivalents .........   $     348    $     272    $   1,902    $     111    $     828
Working capital (deficit) .......       (11,485)      (7,289)      (9,438)      (8,315)      (6,941)
Total assets ......................         443          483        2,287       18,024       19,886
Total 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)      11,536
Shares 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
</TABLE>

__________
(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
      4th quarter 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.


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.


                                       17
<PAGE>

      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.

      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.


                                       18
<PAGE>

      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.

      o     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.

      o     Other research and  development  expenses are comprised of personnel
            costs,  travel and direct overhead for development and demonstration
            production,  as well as impairment charges on manufacturing property
            and equipment  constructed for  demonstration  production  purposes.
            Other research and  development  expenses  decreased $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.

      o     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").

      o     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.


                                       19
<PAGE>

      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.

      o     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.

      o     Other research and  development  expenses are comprised of personnel
            costs,  travel and direct overhead for development and demonstration
            production,  as well as impairment charges on manufacturing property
            and equipment  constructed for  demonstration  production  purposes.
            Other research and  development  expenses  decreased $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
<PAGE>

      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.

      o     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").

      o     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.

      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.


                                       21
<PAGE>

      (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 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 $1.7 million from the issuance of common
stock,  $2.5 million from the issuance of notes,  (net of issuance costs of $0.4
million),  and $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:

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


      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.


                                       22
<PAGE>

      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.

      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.


                                       23
<PAGE>

      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
<PAGE>

      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.  The Company also granted a ten year warrant
to EKI to purchase one million shares of the Company's common stock at $3.00 per
share in  consideration  of EKI's  continued  support of the  Company  since its
inception,  including  providing bridge loans at below market terms from time to
time.  This warrant was  cancelled and  subsequently  a new warrant with similar
terms was reissued in August 2005 to Essam Khashoggi, beneficial owner of EKI.

      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 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.

      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.


                                       25
<PAGE>

      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
<PAGE>

      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
<PAGE>

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.

      (b) Changes in Internal Control Over Financial Reporting.  The Company has
begun taking  remediation  steps to enhance its internal  control over financial
reporting and reduce control deficiencies.  In the 4th Quarter 2005, the Company
employed  a new  Controller,  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.   The  Company  anticipates  hiring  an  additional
accounting employee as resources become available.


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).


                                       28
<PAGE>

      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
<PAGE>

                                    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
<PAGE>

                                     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-2

      Consolidated Balance Sheets as of December 31, 2005, and 2004..........F-3

      Consolidated Statements of Operations for the years ended
      December 31, 2005, 2004 and 2003.......................................F-4

      Consolidated Statements of Stockholders' Equity (Deficit) for the
      years ended December 31, 2005, 2004 and 2003...........................F-5

      Consolidated Statements of Cash Flows for the years ended
      December 31, 2005, 2004 and 2003.......................................F-6

      Notes 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 3.3 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 4.3 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 (4.5) 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  4.6  purchasers  identified  on the
         signature pages thereto.(13)


                                       31
<PAGE>

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 10.8 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 10.12 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  (10.17)   Company  and  E.  Khashoggi
         Industries("EKI").(4)

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

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

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

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

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

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


                                       32
<PAGE>

10.24    Securities  Purchase  Agreement dated as of August 12, 2002 between the
         Company and the investors 10.24 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)

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)


                                       33
<PAGE>

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,

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)

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)

10.67    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)

10.68    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.


                                       34
<PAGE>

(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.


(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


                                       35
<PAGE>

                                   SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 31, 2006.

                                            EARTHSHELL CORPORATION

                                            By:      /s/ VINCENT J. TRUANT
                                                     --------------------------
                                                     Vincent J. Truant
                                                     Chairman of the Board and
                                                     Chief Executive Officer



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

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Signature                                   Title                                    Date
---------------------------------------------------------------------------------------------------
<S>                                         <C>                                      <C>
/s/ VINCENT J. TRUANT                       Chairman of the Board and                March 31, 2006
------------------------------------
Vincent J. Truant                           Chief Executive Officer


/s/ D. SCOTT HOUSTON                        Chief Financial Officer and Secretary    March 31, 2006
------------------------------------
D. Scott Houston                            (Principal Financial Officer)

/s/ HAMLIN JENNINGS                         Director                                 March 31, 2006
------------------------------------
Hamlin Jennings

/s/ WALKER RAST                             Director                                 March 31, 2006
---------------------------
Walker Rast

/s/ MICHAEL GORDON                          Director                                 March 31, 2006
------------------------------------
Michael Gordon
</TABLE>


                                       36
<PAGE>

            INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

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

Report of Independent Registered Public Accounting Firm..................................................F-1

Consolidated Balance Sheets as of December 31, 2005 and 2004.............................................F-2

Consolidated Statements of Operations for the years ended December 31, 2005, 2004, and 2003 .............F-3

Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2005, 2004
         and 2003 .......................................................................................F-4

Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004, and 2003 .............F-5

Notes to Consolidated Financial Statements...............................................................F-8
</TABLE>



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

<PAGE>

             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


                                      F-1
<PAGE>

                             EARTHSHELL CORPORATION
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                              December 31,
                                                                                                    ------------------------------
                                                                                                         2005             2004
                                                                                                    -------------    -------------
ASSETS
<S>                                                                                                 <C>              <C>
CURRENT ASSETS
   Cash and cash equivalents ....................................................................   $     347,812    $     272,371
   Prepaid expenses and other current assets ....................................................          83,473          201,467
                                                                                                    -------------    -------------
     Total current assets .......................................................................         431,285          473,838

PROPERTY AND EQUIPMENT, NET .....................................................................          11,991            9,037

EQUIPMENT HELD FOR SALE .........................................................................               1                1
                                                                                                    -------------    -------------

TOTAL ASSETS ....................................................................................   $     443,277    $     482,876
                                                                                                    =============    =============

LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES
   Accounts payable and accrued expenses ........................................................   $   5,908,670    $   3,899,526
   Current portion of settlements ...............................................................         300,786          313,743
   Current portion of deferred revenues .........................................................         100,000          300,000
   Payable to related party, current ............................................................         850,000          875,000
   Debenture settlement .........................................................................       2,375,000        2,375,000
   Note payable, net of discount of $168,901 ..........................................       2,355,296               --
                                                                                                    -------------    -------------
     Total current liabilities ..................................................................      11,889,752        7,763,269

DEFERRED REVENUES, LESS CURRENT PORTION .........................................................         787,500        1,062,500
OTHER LONG-TERM LIABILITIES .....................................................................         117,914          412,192
                                                                                                    -------------    -------------
   Total liabilities ............................................................................      12,795,166        9,237,961
                                                                                                    -------------    -------------
COMMITMENTS AND CONTINGENCIES
   STOCKHOLDERS' DEFICIT
     Preferred Stock, $.01 par value, 10,000,000 shares authorized; 9,170,000 Series A shares
       designated; no shares issued and outstanding as of December 31, 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          182,346
     Additional paid-in common capital ..........................................................     315,306,825      313,196,905
     Accumulated 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
                                                                                                    =============    =============
</TABLE>

                 See Notes to Consolidated Financial Statements.


                                      F-2
<PAGE>

                                                  EARTHSHELL CORPORATION
                                           CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                                  --------------------------------------------
                                                                      2005            2004             2003
                                                                  ------------    ------------    ------------
<S>                                                               <C>             <C>             <C>
Revenues ......................................................   $    183,333    $    137,500    $         --

Operating Expenses
Related party license fee and research and development expenses             --         800,000       1,312,374
Other research and development expenses .......................        200,817         370,163       8,234,416
General and administrative expenses ...........................      5,485,358       3,753,902       5,790,473
Related party general and administrative (reimbursements) .....             --          (4,875)         (4,074)
Depreciation and amortization .................................          2,939          42,236         379,949
Gain on sales of property and equipment .......................        (23,477)       (168,458)       (451,940)
                                                                  ------------    ------------    ------------
Total operating expenses ......................................      5,665,637       4,792,968      15,261,198

Operating Loss ................................................      5,482,304       4,655,468      15,261,198

Other (Income) Expenses
Interest income ...............................................         (5,022)         (4,606)        (95,176)
Related party interest expense ................................        101,314         410,965         445,628
Other interest expense ........................................        599,690         661,721       1,440,118
Premium due to debenture default ..............................             --       1,672,426              --
Other income ..................................................             --              --        (399,701)
(Gain) Loss on extinguishment of debentures ...................             --        (139,673)      1,697,380
Debenture conversion costs ....................................             --              --         166,494
                                                                  ------------    ------------    ------------

Loss Before Income Taxes ......................................      6,178,286       7,256,301      18,515,941

Income Taxes ..................................................            800             800             800
                                                                  ------------    ------------    ------------

Net Loss ......................................................   $  6,179,086    $  7,257,101    $ 18,516,741
                                                                  ============    ============    ============

Basic and Diluted Loss Per Common Share .......................   $       0.33    $       0.48    $       1.40
Weighted Average Number of Common Shares Outstanding ..........     18,503,207      15,046,726      13,266,668
</TABLE>


                 See Notes to Consolidated Financial Statements.


                                      F-3
<PAGE>

                             EARTHSHELL CORPORATION
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY

<TABLE>
<CAPTION>
                                Common Stock
                        ----------------------------
                                                        Additional                                     Accumulated
                                                         Paid-In                          Stock           Other
                                                         Common        Accumulated       Purchase     Comprehensive
                            Shares         Amount        Capital         Deficit        Receivable         Loss          Totals
                        -------------  -------------  -------------   -------------   -------------   -------------   -------------
<S>                     <C>            <C>            <C>              <C>            <C>             <C>             <C>
BALANCE,
  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              --              --              --         812,640
Common stock and
  common stock
  warrants issued in
  connection with
  issuance of
  convertible
  debentures                  624,747          6,248      2,921,594              --              --              --       2,927,842
Conversion of
  convertible
  debentures to common
  stock                     1,312,318         13,123      7,536,877              --              --              --       7,550,000
Debenture conversion
  costs                            --             --     (1,493,332)             --              --              --      (1,493,332)
Net loss                           --             --             --     (18,516,741)             --              --     (18,516,741)
Foreign currency
  translation
  adjustment                       --             --             --              --              --         (76,498)        (76,498)
                                                                                                                      -------------
Comprehensive loss                 --             --             --              --              --              --     (18,593,239)
                        -------------  -------------  -------------   -------------   -------------   -------------   -------------
BALANCE,
  DECEMBER 31, 2003        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)             --       6,706,402
Conversion of
  convertible
  debentures to common
  stock                     1,662,377         16,624      4,970,508              --              --              --       4,987,132
Debenture conversion
  costs                            --             --       (989,319)             --              --              --        (989,319)
Net loss                           --             --             --      (7,257,101)             --              --      (7,257,101)
Foreign currency
  translation
  adjustment                       --             --             --              --              --          66,576          66,576
                                                                                                                      -------------
Comprehensive 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              --       1,300,000
Conversion of  related
  party note to common
  stock                       323,435          3,234        934,670              --              --              --         937,904
Common stock and
  common stock
  warrants issued in
  connection with
  issuance of
  convertible
  debentures                  156,450          1,565        377,917              --              --              --         379,482
Net 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)
                        =============  =============  =============   =============   =============   =============   =============
</TABLE>



                See Notes to Consolidated Financial Statements.


                                      F-4
<PAGE>

                             EARTHSHELL CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                      Year Ended December 31,
                                                                         --------------------------------------------
                                                                            2005            2004             2003
                                                                         ------------    ------------    ------------
<S>                                                                      <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss ...........................................................   $ (6,179,086)   $ (7,257,101)   $(18,516,741)
  Adjustments to reconcile net loss to net cash used in operating
    activities
     Bad debt expense ................................................        183,333              --              --
    Depreciation and amortization ....................................          2,939          42,236         379,949
    Amortization and accretion of debenture issue costs
        ..............................................................        633,490         592,316         955,574
    Compensation 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 ..........................             --              --         166,494
    Gain on change in fair value of warrant obligation ...............             --              --        (399,701)
    (Gain) Loss on extinguishment of debentures ......................             --        (139,673)      1,697,380
    Beneficial 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)      3,548,059
    Equity in the losses of joint venture ............................             --              --         392,116
    Accrued purchase commitment ......................................             --              --      (1,855,000)
    Other non-cash expense items .....................................       (223,962)        180,171          50,198
  Changes in operating assets and liabilities
    Prepaid expenses and other current assets ........................        117,994         120,549         264,153
    Accounts payable and accrued expenses ............................      2,054,721        (553,710)     (2,339,720)
    Payable to related party .........................................        (34,070)      1,043,869       1,214,683
    Deferred revenues ................................................       (183,333)      1,362,500              --
    Accrued purchase commitment ......................................             --              --      (1,645,000)
    Other long-term liabilities ......................................         28,914         378,859          33,333
                                                                         ------------    ------------    ------------
      Net cash used in operating activities ..........................     (3,370,844)     (2,726,016)    (15,694,223)
                                                                         ============    ============    ============

CASH FLOWS FROM INVESTING ACTIVITIES
  Proceeds from release of restricted time deposit upon settlement of
    purchase commitment ..............................................             --              --       3,500,000
  Proceeds from sales of property and equipment ......................         30,280         187,708         487,691
  Investment 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
                                                                         ============    ============    ============
</TABLE>


                                      F-5
<PAGE>

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                        --------------------------------------------
                                                                            2005           2004             2003
                                                                        ------------    ------------    ------------
<S>                                                                          <C>           <C>             <C>
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds 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 ....................................................             --              --       8,711,844
  Proceeds 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.........................             --              --       1,800,000
  Proceeds from release of restricted time deposit upon exchange of
    convertible debentures ..........................................             --              --       2,000,000
  Proceeds from release of restricted time deposit for repayment of
    convertible debentures ..........................................             --              --       5,200,000
  Repayment 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              --       1,010,000
  Note payable issuance costs .......................................       (402,500)             --              --
                                                                        ------------    ------------    ------------
    Net cash provided by financing activities .......................      3,436,351         910,074      13,521,844

  Effect 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)      1,790,624

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ......................        272,371       1,901,639         111,015
                                                                        ------------    ------------    ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD ............................   $    347,812    $    272,371    $  1,901,639
                                                                        ============    ============    ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  Cash paid for
    Income taxes ....................................................   $        800    $        800    $        800
    Interest ........................................................        410,772         111,353          21,058
  Common stock warrants issued in connection with convertible
    debentures ......................................................        129,161              --         745,562
  Conversion of convertible debentures into common stock ............        837,145       6,800,000       7,550,000
  Interest paid in common stock .....................................        100,758         532,644          95,339
  Commission paid in common stock ...................................             --              --          29,500
  Common stock issued to service providers in connection with the
    March 2003 financing ............................................             --              --         484,500
</TABLE>


                                      F-6
<PAGE>

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.

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
<PAGE>

                             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.

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.

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."


                                      F-8
<PAGE>

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).

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.


                                      F-9
<PAGE>

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.

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.


                                      F-10
<PAGE>

Disclosure About Fair Value of Financial Instruments

The  Company  has  financial  instruments,  none of which  are held for  trading
purposes. The Company estimates that the fair value of all financial instruments
at  December  31,  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       2004
                                                  --------   --------
Prepaid expenses and other current assets .....   $ 83,473   $ 83,583
Receivable on sale of  equipment ..............         --     78,009
Related party receivable ......................         --     12,875
Retainer for financing ........................         --     27,000
                                                  --------   --------
Total 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.

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.


                                      F-11
<PAGE>

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    $ 245,274
    Less: accumulated depreciation and amortization    (146,863)    (236,237)
                                                      ---------    ---------

Property and equipment--net .......................   $  11,991    $   9,037
                                                      =========    =========
Equipment 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
<PAGE>

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.

Accounts Payable and Accrued Expenses

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

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



                                      F-13
<PAGE>

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.

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.


                                      F-14
<PAGE>

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.

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).


                                      F-15
<PAGE>

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.


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.


                                      F-16
<PAGE>

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.

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


                                      F-17
<PAGE>

<TABLE>
<CAPTION>
                                          2005                            2004                           2003
                              ------------------------------   ------------------------------   ------------------------------
                                            Weighted-Average                 Weighted-Average                 Weighted-Average
                                Shares       Exercise Price      Shares       Exercise Price      Shares       Exercise Price
                              ----------    ----------------   ----------    ----------------   ----------    ----------------
<S>                            <C>          <C>                   <C>        <C>                   <C>        <C>
Outstanding at beginning of
  year ....................    1,043,245    $          12.58      384,912    $          38.24      320,924    $          50.49
Granted ...................    1,341,520                2.00      762,498                0.78      121,699                4.87
Cancelled .................           --                  --      (92,499)              15.00      (43,748)              34.02
Expired ...................     (755,340)               6.52      (11,666)              68.95      (13,963)              42.14
                              ----------    ----------------   ----------    ----------------   ----------    ----------------
Outstanding at end
  of year .................    1,629,425    $           6.68    1,043,245    $          12.58      384,912    $          38.24
                              ==========    ================   ==========    ================   ==========    ================

Options exercisable at
  year-end ................    1,051,925    $           7.41      141,162    $          61.35      155,228    $          61.70
                              ==========    ================   ==========    ================   ==========    ================
</TABLE>


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

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

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

<TABLE>
<CAPTION>
                                                                         Year Ended          Year Ended           Year Ended
                                                                        December 31,        December 31,         December 31,
                                                                            2005                2004                 2003
                                                                     -----------------    -----------------    -----------------
<S>                                                                  <C>                  <C>                  <C>
Net Loss as reported .............................................   $       6,179,086    $       7,257,101    $      18,516,741
Deduct: Stock-based employee compensation expense
included in reported net loss, net of tax ........................                  --                   --                   --
Add: Total stock-based employee compensation determined under fair
  value based method for all awards, net of tax ..................             745,441              472,267              776,018
                                                                     -----------------    -----------------    -----------------
Pro forma net loss ...............................................   $       6,924,527    $       7,729,368    $      19,292,759
Net loss per common share
  As reported ....................................................   $            0.33    $            0.48    $            1.40
  Pro forma ......................................................                0.37                 0.51                 1.45
Average risk-free interest rate ..................................                3.38%                4.05%                4.53%
Average expected life in years ...................................                7.17                  9.5                  9.5
Volatility .......................................................                  71%                  80%                 102%
Average fair value of options granted during the year ............   $            1.37    $            0.64    $            3.99
</TABLE>


                                      F-18
<PAGE>

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.

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.


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.


                                      F-19
<PAGE>

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             2004
                                                ------------     ------------
Federal:
  Depreciation ............................      $ 1,273,296      $ 1,375,770
  Deferred compensation ...................          154,205          101,386
  Deferred contributions ..................          361,117          361,117
  Accrued management fees .................               --          272,000
  Accrued vacation ........................           44,320           87,955
  Other reserves ..........................           62,333           22,258
  Net operating loss carryforward .........      104,184,369       99,808,790
                                                ------------     ------------
        TOTAL                                   $106,079,640     $102,029,276
                                                ============     ============
Valuation allowance                             (106,079,640)    (102,029,276)
                                                ------------     ------------
        BALANCE                                            0                0
                                                ============     ============

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  2.1
million shares,  3.0 million  shares,  and 900,000 shares for the years ended at
December 31, 2005, 2004 and 2003, respectively.

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.


                                      F-20
<PAGE>

      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.

In January  2006,  SF Capital  Partners  converted  a portion of the  settlement
balance into shares of the Company' 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.


                                      F-21
<PAGE>

                   QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                                        First         Second          Third           Fourth       Total Year
                                    ------------   ------------    ------------    ------------    ------------
<S>                                 <C>            <C>             <C>             <C>             <C>
2005
Revenues                            $     75,000   $     58,333    $     25,000    $     25,000    $    183,333
Related party research and
  development                                 --             --              --              --              --
Other research and development           103,595        119,183         110,628        (132,589)        200,817
Related 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       6,161,602
Net loss common shareholders        $  1,077,557   $  1,861,406    $  1,893,882    $  1,346,241    $  6,179,086
Basic and diluted loss per
  common share                      $        .06   $        .10    $        .10    $        .07    $        .33
Weighted average common shares
  outstanding                         18,250,260     18,394,967      18,507,916      18,853,010      18,503,207

2004
Revenues                            $         --   $     25,000    $     50,000    $     62,500    $    137,500
Related party research and
  development                            300,000        300,000         200,000              --         800,000
Other research and development           222,538         42,913          64,121          40,591         370,163
Other general and administrative       1,173,855      1,071,116          99,162       1,409,769       3,753,902
Net loss common shareholders        $  2,066,857   $  2,264,383    $  1,645,931    $  1,279,930    $  7,257,101
Basic and diluted loss per common
  share                             $       0.15   $       0.16    $       0.12    $       0.07    $       0.48
Weighted average common shares
  outstanding                         14,128,966     14,128,966      14,223,402      17,659,043      15,046,726
</TABLE>


                                      F-22