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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000911801-01-000008.txt : 20010409
<SEC-HEADER>0000911801-01-000008.hdr.sgml : 20010409
ACCESSION NUMBER:		0000911801-01-000008
CONFORMED SUBMISSION TYPE:	10-K
PUBLIC DOCUMENT COUNT:		4
CONFORMED PERIOD OF REPORT:	20001231
FILED AS OF DATE:		20010402

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			EARTHSHELL CORP
		CENTRAL INDEX KEY:			0000911801
		STANDARD INDUSTRIAL CLASSIFICATION:	PAPERBOARD CONTAINERS & BOXES [2650]
		IRS NUMBER:				770322379
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10-K
		SEC ACT:		
		SEC FILE NUMBER:	000-23567
		FILM NUMBER:		1591577

	BUSINESS ADDRESS:	
		STREET 1:		9020 JUNCTION DRIVE
		STREET 2:		SUITE D
		CITY:			ANNAPOLIS JUNCTION
		STATE:			MD
		ZIP:			20701-1146
		BUSINESS PHONE:		3019571330

	MAIL ADDRESS:	
		STREET 1:		9020 JUNCTION DRIVE
		STREET 2:		SUITE D
		CITY:			ANNAPOLIS JUNCTION
		STATE:			MD
		ZIP:			20701-1146

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	EARTHSHELL CONTAINER CORP
		DATE OF NAME CHANGE:	19960521
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>0001.htm
<DESCRIPTION>FORM 10-K ANNUAL REPORT FOR PERIOD ENDING 12/31/00
<TEXT>


<HTML>
<HEAD>
<TITLE> Annual Report for period ending 12/31/00
</TITLE>
</HEAD>
<BODY>
<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=4><B>UNITED STATES SECURITIES AND EXCHANGE COMMISSION</B></FONT><BR>
                                                        <FONT SIZE=3>WASHINGTON, D.C. 20549</FONT><P>
<HR SIZE=1 NOSHADE WIDTH=15%>
<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=4><B>FORM 10-K</B></FONT><P>
<P><FONT FACE="Times New Roman, Times, Serif" SIZE=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(Mark One)<BR>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;|X|  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE<BR>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;SECURITIES EXCHANGE ACT OF 1934<BR>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT SIZE=2>For the fiscal year ended December 31, 2000</FONT></P>
<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=3>OR</FONT><P>
<P><FONT FACE="Times New Roman, Times, Serif" SIZE=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;|_|  TRANSITION REPORT PURSUANT SECTION 13 OR 15 (d) OF SECURITIES<BR>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;EXCHANGE ACT OF 1934<BR>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT SIZE=2>For the Transition Period From ______to_________</FONT></P>
<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Commission File Number 333-13287</FONT></P>
<HR SIZE=1 NOSHADE WIDTH=15%>
<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=4><B>EARTHSHELL CORPORATION</B></FONT><BR>
                                        <FONT SIZE=2>(Exact name of Registrant as specified in its charter)</FONT></P>

<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2><B>Delaware</B>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>77-0322379</B><BR>
(State or other jurisdiction of&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(I.R.S. Employer<BR>
incorporation or organization)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Identification No.)<BR>
<B>800 Miramonte Drive, Santa Barbara, California 93109</B><BR>
(Address of principal executive office)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(Zip Code)<BR>
<B>(805) 897-2294</B><BR>
(Registrant's telephone number, including area code)<BR></FONT></P>
<HR SIZE=1 NOSHADE WIDTH=15%>
<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Securities registered pursuant to Section 12 (b) of the Act:<BR>
                                                        <B>None</B></FONT></P>
<HR SIZE=1 NOSHADE WIDTH=15%>
<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Securities registered pursuant to Section 12 (g) of the Act:<BR>
                                                      Common Stock $.01 par value<BR>
                                                         (Title of each class)</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>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 |_| </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>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&#146;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. [x] </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The aggregate market value
of the voting stock held by  non-affiliates  of the Registrant as of March 30,
2001 was $113,246,765. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The number of shares
outstanding of the Registrant&#146;s Common Stock as of March 30, 2001 was
108,669,194. </FONT></P>

<H1 ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>DOCUMENTS INCORPORATED BY REFERENCE</FONT></H1>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Portions of the Proxy
Statement for the Registrant&#146;s Annual Meeting of Stockholders to be held on
May 8, 2001 are incorporated by reference in Part III of this Annual Report on
Form 10-K. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>As used herein, the terms
&#147;EarthShell&#148; and the &#147;Company&#148; shall mean EarthShell
Corporation unless the context otherwise indicates and the term &#147;Proxy
Statement&#148; shall mean the Proxy Statement for the Company&#146;s 2001
Annual Meeting of Stockholders to be held on May 8, 2001. </FONT></P>


<HR SIZE=1 NOSHADE>



<H1 ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>ANNUAL REPORT ON FORM 10-K</FONT></H1>
<H1 ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000</FONT></H1>
<PRE>
                                                    PART I

ITEM 1.    BUSINESS......................................................................  1

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

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

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

                                                    PART II

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

ITEM 6.    SELECTED FINANCIAL DATA....................................................... 12

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
           OPERATIONS.................................................................... 13

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................... 16

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................... 18

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
           DISCLOSURE.................................................................... 16

                                                   PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................ 17

ITEM 11.   EXECUTIVE COMPENSATION........................................................ 17

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................ 17

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................ 17

                                                    PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K............. 18
</PRE>




<H1 ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>PART I</FONT></H1>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><B>ITEM 1.     BUSINESS</B></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><B>General</B></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>EarthShell Corporation (the
&#147;Company&#148;)  was organized in November  1992 as a Delaware  corporation
and  is a  development  stage  company  engaged  in the  commercialization  of a
proprietary  composite material,  designed with the environment in mind, for the
manufacture  of  disposable  packaging  for the  foodservice  industry,  such as
hinged-lid containers, plates, bowls, sandwich wraps, and cups. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>E. Khashoggi Industries
LLC, the Company&#146;s principal stockholder, or its predecessors
(&#147;EKI&#148;), has been involved since July 1985, in the development of
various new material technologies including the new EarthShell composite
material. The Company has an exclusive, worldwide, royalty-free license from EKI
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 (&#147;EarthShell Products&#148;). The
Company does not have the right to use the EKI technology for other purposes. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company has and will
license or joint venture with existing manufacturers of foodservice disposables
for the manufacture and distribution of EarthShell Products. The Company expects
to derive revenues primarily from license royalties and profit distributions
from joint ventures that are licensed to manufacture EarthShell Products. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company has experienced
aggregate  net  losses of  approximately  $194  million  from its  inception  on
November 1, 1992 through  December 31, 2000. The Company  expects to continue to
incur  operating  losses  until  its  products  are more  broadly  used and have
achieved greater market acceptance and market  penetration.  The Company has not
recorded any revenues from  operations  since its  inception,  and proceeds from
sales of hinged lid containers to date have been booked as an offset to the cost
of startup  manufacturing  operations.  Successful future operations will depend
upon the ability of the Company,  its licensees  and joint  venture  partners to
commercialize multiple EarthShell Products.
</FONT></P>

<P><FONT   FACE="Times  New  Roman,  Times,  Serif"  SIZE=2>The  new  EarthShell
composite  material  is made  from  commonly  available  raw  materials  such as
limestone,  natural potato,  corn and other starch  binders,  natural fibers and
functional coatings.  The Company believes that foodservice  disposables made of
this material (&#147;EarthShell Products&#148;) will have comparable or superior
performance  characteristics,  such as greater strength and rigidity, and can be
commercially  produced and sold at prices that are  competitive  with comparable
conventional  paper  and  polystyrene  foodservice  disposables,  and  has  been
designed with the environment in mind. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company&#146;s
objective is to establish EarthShell Products as the preferred disposable
packaging material for the foodservice industry throughout the world based on
their performance, price and environmental characteristics. The Company&#146;s
strategy for obtaining this objective is: (i) to demonstrate customer acceptance
through key market leaders; (ii) to demonstrate the manufacturability and
improved economics with initial strategic partners, and (iii) to enter into
licenses or joint ventures with existing manufacturers of disposable packaging
to market, produce and distribute EarthShell Products. The Company believes that
utilizing joint ventures aligns key market segments with select industry
partners, minimizes any potential direct competition from these producer&#146;s,
enables effective brand management, captures the value of manufacturing process
improvements, and creates income streams beyond the life of the patents. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><B>Key Customer</B></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>As the first step in its
strategy,  the  Company  has  continued  to work  closely  with  McDonald&#146;s
Corporation&#174;   (&#147;McDonald&#146;s&#148;)  and  McDonald&#146;s  primary
packaging supplier, Perseco, in developing and testing a prototype container for
the Big  Mac&#174;  sandwich.  The Company and its  licensee,  Sweetheart,  have
constructed a commercial  manufacturing  facility in Owings Mills, Maryland, and
have been  progressing  through an  intesive  product  validation  process  with
Perseco  with  respect  to this  product.  The  debugging  and  start-up  of the
manufacturing  facility  have  taken  much  longer  and  cost  more  money  than
originally  anticipated.  However,  as of March 2001,  the product design of the
EarthShell  hinged-lid container for the Big Mac&reg;  sandwich has been finally
approved by McDonald&#146;s for use by the McDonald&#146;s system in the U.S.
</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>To date, over seven million
EarthShell containers for the Big Mac&reg; sandwich have been purchased and used
on a continuous  validation test basis in select  McDonald&#146;s  stores in the
Chicago  area.  In  March  2001,  following  a  third  party  audit  of  product
performance  of an  improved  product  design to enhance the  functionality  and
performance  of the package  (including  a  &#147;double-tab&#148;  design and a
revised  process for the application of the exterior  coating).  McDonald&#146;s
advised the Company that the EarthShell container for the Big Mac&#174; sandwich
meets the  product  design,  performance,  and quality  criteria  for use in the
McDonald&#146;s  system.  After necessary  adjustments to manufacturing lines to
incorporate   these  recent  design   modifications,   it  is  anticipated  that
distribution  of the container  will be expanded  throughout the Chicago area to
confirm full manufacturing  capability and economics of the sandwich  container.
</FONT></P>

<P><FONT  FACE="Times  New Roman,  Times,  Serif"  SIZE=2>The  Company  has been
advised that McDonald&#146;s intends to use the EarthShell container for the Big
Mac&#174;  sandwich in its U.S.  restaurants,  based on  continuing  performance
against expectations and product availability, and competitive pricing, although
there can be no  assurance  of minimum  purchase  commitments.  With  respect to
specific  commitments  to supply  product  to the  McDonald&#146;s  system,  the
Company continues on a path with input from Perseco, and McDonald&#146;s  toward
a  relationship  that  is  consistent  with  Perseco&#146;s  customary  supplier
relationships.  In  addition,  the Company is free,  at any time,  to seek other
customers   for   the   sandwich    container   produced   at   the   Sweetheart
facility.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><B>First Commercial
 Manufacturing Facility</B></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company&#146;s first
commercial manufacturing plant in Owings Mills, Maryland, consists of three
manufacturing lines to produce the EarthShell Big Mac&#174; sandwich container
for sale to Perseco/McDonald&#146;s. During 2000, the Company operated two of
the three installed EarthShell Big Mac&#174; sandwich container manufacturing
lines to support the validation process, although not at full commercial
throughput capacity. One of these lines was operated in a production mode to
meet the validation requirements, and the second line was used primarily to
improve and optimize the effectiveness of the manufacturing process. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The quantities of product
produced and used in the validation  process to date have been minor relative to
the intended  capacity of the Owings Mills lines.  During  December  2000 it was
determined that the manufacturing  line  configuration  will have to be modified
somewhat and additional  process  improvements  implemented  to accommodate  the
recent product  design changes and to achieve the design  capacity of the plant.
The  reconfiguration  of the lines  will  result in a  simplified  manufacturing
process  and will  entail the  replacement  or  abandonment  of certain  process
equipment. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company believes the
manufacturing capacity already installed at Owings Mills will be of sufficient
size, after appropriate modifications, to meet the initial McDonald&#146;s
system requirements. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>In preparation for ramping
up production at Owings Mills, the Company has moved all further product
development work to its Santa Barbara Product Development Center. It is
contemplated that once the first line has reached its design target capability,
Sweetheart will assume complete operational responsibility for the EarthShell
clamshell production. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Although the Company
believes that the Owings Mills facility will be profitable  once it is optimized
and reaches full design and  production  capacity,  due to the  protracted  time
delays and  additional  costs to initially  commercialize  its first plant,  the
Company may not realize the full economic  potential of the technology with this
first facility.  As the  manufacturing  process has developed and improved,  the
Company has written off $12 million of certain capitalized costs in 2000 related
to, in part,  improvements  that will be completed  in 2001.  Because the Owings
Mills facility is the  Company&#146;s  first  commercial  implementation  of the
EarthShell  technology,  the  Company  believes  that the costs  incurred on the
manufacturing  lines in this  facility have been  significantly  higher than the
expected  cost  of  subsequent   lines  in  future   manufacturing   facilities.
</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><B>Next Generation
 Manufacturing Development</B></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company&#146;s
manufacturing process for foam analog products is comprised of four core
operations: mixing, forming, coating and printing. These operations are
integrated in a continuous process through the use of material handling and
conveyance systems. With the benefit of its experience at Sweetheart&#146;s
Owings Mills facility and the broad manufacturing experience of its partners (as
discussed herein below), the Company is developing a next generation
manufacturing approach that utilizes, as much as possible, commercially
available conventional processing equipment. Next generation commercial products
will include bowls, plates, cups and other hinged-lid containers, in addition to
the Big Mac&#174; container. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Using these concepts, pilot
equipment  has been  built  and used by the  Company  to  manufacture,  and coat
products on a limited basis, such as plates, bowls and cups. These products have
been used in  demonstration  projects to evaluate the performance of products as
well as customer acceptance.  Initial trials with conventional  commercial scale
machinery have been very encouraging. The Company believes it is well positioned
to supply  competitively  priced  products for the middle and higher end markets
for  plates,  bowls and cups which  constitute  approximately  50% of the global
markets. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><B>Other Products; Other Customers</B></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>In keeping with its goals
to provide  environmentally  superior  disposable  packaging for use by the U.S.
Government, EarthShell has provided plates and bowls over the past two years for
demonstration projects with the U.S. Department of the Interior and other users,
demonstrating product performance and customer acceptance of such products.  The
U.S.  Department  of the  Interior  conducted  its own  tests  through  the U.S.
Department  of  Agriculture  to validate the  compostability  of the  EarthShell
containers. In March 2001, the Company signed a commercial supply agreement with
Guest  Services,  Inc.  (&#147;GSI&#148;)  to supply the U.S.  Department of the
Interior with plates and bowls. It addition,  it is anticipated  that EarthShell
plates and bowls will be  introduced  in certain of the  National  Parks  during
2001. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Sysco Corporation, the
leading foodservices distributor in North America, and other potential customers
are engaged in discussions with the Company or its joint venture partners
regarding purchase commitments for a range of EarthShell Products including
plates, bowls, sandwich containers and sandwich wraps. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>In late 2000, the Company
developed a new fully  compostable  sandwich  wrap that has been  designed as an
alternative to the  polyethylene  laminated  paper and foil wraps that currently
dominate  the food  service  industry.  A national  fast food chain is currently
testing this new wrap for possible use in their system. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>While customers other than
McDonalds are showing an increased interest in EarthShell Products, should
McDonald&#146;s withdraw as the initial purchaser of the Company&#146;s products
for any reason, the introduction and market acceptance of one or more other
EarthShell Products could be delayed which could have an adverse effect on the
Company&#146;s business, financial condition and results of operations. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><B>Operating Partners</B></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>In order to support the
anticipated demand from  McDonald&#146;s  since October of 1997, the Company has
been working with  Sweetheart  Cup Company to install and operate  manufacturing
lines at  Sweetheart's  Owings Mills  facility to design and produce  hinged-lid
containers for Big Mac&reg; sandwiches. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>In August 1999, the Company
signed a non-binding letter of intent with Sweetheart to expand and further
develop the manufacturing facility in Owings Mills, Maryland beyond the scope of
the initial commitment for the Big Mac&#174; sandwich container as it begins to
implement its next generation manufacturing technology and expand into new
product lines. This proposal would require joint investment by the Company and
Sweetheart in additional capacity. Sweetheart and the Company may add additional
lines in the future to manufacture plates, cups and hinged-lid containers.
However, there can be no assurance that this letter of intent will result in
definitive agreements with Sweetheart. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>In May 1999, the Company
signed    definitive    agreements   with    Huhtam&#228;ki    Van   Leer   Oyj,
(&#147;Huhtam&#228;ki&#148;)  a leading  international  food and food  packaging
company,  establishing a new joint venture company,  Polarcup EarthShell ApS, to
commercialize  EarthShell  Products throughout Europe,  Australia,  New Zealand,
and,  on a country  by  country  basis,  Asia.  The  Company  believes  that the
opportunity for rapid market acceptance of its products in Europe is exceptional
due to their unique  environmental  profile and the more  demanding  regulations
regarding disposal of conventional  foodservice  disposable  products in Europe.
During  calendar  year 2000,  Polarcup  EarthShell  ApS  announced its intent to
establish  initial  production  capability  at the  Huhtam&#228;ki  facility  at
Goettingen,  Germany.  The  pilot  line  has been  designed  and  major  process
equipment  has been  ordered  for  delivery by late 2001.  The first  product is
expected to be a hinged-lid container for the European markets. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>In November 1999, the
Company signed definitive agreements with Prairie Packaging, Inc.
(&#147;Prairie&#148;) to establish a joint venture to produce an expanded
product set in the U.S. The proposed arrangement with Prairie encompasses the
production of plates, bowls, hinged-lid containers and cups. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Based on the definitive
joint venture agreements with Huhtam&#228;ki and Prairie and the letter of
intent with Sweetheart, planning is underway to establish manufacturing capacity
based on the Company&#146;s next generation manufacturing processes. Under the
terms of existing and contemplated joint venture agreements, EarthShell and its
partners will invest jointly in commercial facilities based on projected
economic returns. Pilot lines for each new product family will be built to
demonstrate that these products can be manufactured at a cost that will produce
returns acceptable to both the Company and its partners. Following successful
startup and demonstration, the Company and its joint venture partners will
commit to the next series of commercial plant investments to meet market demand. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Based on its current
product costing models, the Company believes its products will be able to
compete in the middle and higher end market segments at higher profit margins
when compared to comparable performing foodservice disposables. Additional value
engineering and a lower total cost of coating will be required to be competitive
in lower selling price markets. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>While the Company believes
it will be successful in developing cost competitive products with its joint
venture partners, delays in developing such products for these joint ventures
could adversely impact the introduction and market acceptance of one or more
EarthShell Products and could have an adverse effect on the Company&#146;s
business, financial condition and results of operations. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><B>Products</B></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Foodservice disposables are
currently manufactured from a variety of materials, including paper and
polystyrene. The Company believes that none of these materials fully addresses
all three principal challenges of the foodservice industry - performance, cost
and environmental impact. The Company believes that EarthShell Products will
best address the combination of these challenges and therefore will be able to
achieve significant penetration of the foodservice disposables market. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Performance
Characteristics.</I> The Company believes its hinged-lid containers, plates, bowls,
sandwich wraps, and prototype cups meet the critical performance requirements of
the marketplace, including rigidity, graphic capabilities, insulation, shipping,
handling and stacking performance. In addition, EarthShell Products are designed
to be microwaveable. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Cost Competitive.</I> The
Company believes that EarthShell Products will be able to be manufactured and
sold at prices which are competitive with comparable existing foodservice
disposables based on its experience to date with pilot manufacturing of
EarthShell clamshell containers. Although the Company has built its first
commercial manufacturing capacity at Sweetheart&#146;s facility in Owings Mills,
Maryland to produce the EarthShell Big Mac&#174; sandwich container, it has not
yet produced the hinged-lid container at the commercial volumes reflecting full
utilization of line capacity, and therefore, the actual cost of manufacture has
not been fully demonstrated. Additionally, the Company has produced plates,
bowls and cups, and has successfully demonstrated most of the individual
processing steps for the first of its next generation products using standard
commercial equipment from established suppliers. To date, however, these
prototypes have not been produced on fully integrated, commercial production
lines and, therefore, their actual cost of manufacture is undemonstrated as
well. The Company expects that the cost of producing EarthShell Products will
decrease over time as the technology and initial production processes are
further refined. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Environmental Impact.</I>
EarthShell Products offer a number of attractive environmental features that are
expected to appeal to customers and persons concerned about the environment.
Through the use of an environmental assessment (&#147;life cycle analysis&#148;)
and in consultation with leading environmental experts, EarthShell Products have
been designed to reduce certain environmental burdens of rigid packaging through
the careful selection of raw materials, processes and suppliers. EarthShell
Products are made primarily from limestone, natural starch binders, natural
fibers, biodegradable polymer and wax coatings, and water. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>According to research on
the performance of various formulations of the EarthShell sandwich container
commissioned by the Company and performed by Cal Recovery&#160;Inc., an
international waste management consulting company, when crushed or broken,
EarthShell sandwich containers were shown to be biodegradable in a composting
environment. As a result, the Company believes that EarthShell Products
substantially reduce the risk to wildlife when compared to most conventional
foodservice disposables and may help mitigate potentially adverse environmental
consequences created by their improper disposal. In addition, since EarthShell
Products are compostable, they can offer a disposal alternative not available
with certain conventional foodservice packaging. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><B>Foodservice Disposables
 Markets</B></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>According to industry
studies, about $9.0&#160;billion was spent in the United States during 1997 on
the types of foodservice disposables that the Company believes can be
manufactured using the new composite material. Since then, the Company estimates
an increase of two percent per year in the United States. In addition, according
to an industry study, approximately $4.0&#160;billion was spent in Europe and
Japan on such products in 1997. The Company believes that other unquantified
international markets are large and rapidly developing and therefore present
significant opportunities for EarthShell Products. Overall, the Company believes
the world market for food service disposable packaging exceeds $20 billion. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The key product segments
comprising the foodservice disposable market which can be addressed include:
cold cups, hot cups, straws, plates and bowls, container trays and carriers,
beverage lids, cutlery, hinged-lid containers, and sandwich wraps. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>According to industry
studies on the U.S.&#160;market, approximately 56% of the total foodservice
disposables purchased in 1997 were purchased by quick-serve restaurants, 44% by
other institutions, such as hospitals, stadiums, airlines, schools and
restaurants (other than quick-serve restaurants), as well as retail stores. Of
the foodservice disposables purchased in the United States by quick-serve
restaurants and other institutions, approximately 40% were made of paper and 60%
were made of plastic, polystyrene or foil. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><B>Availability of Raw
 Materials</B></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The new composite material
used to manufacture EarthShell Products is made from commonly available raw
materials such as limestone, natural potato, corn and other starch binders,
natural fibers and functional coatings. While the Company has determined that
sufficient quantities of these raw materials are generally available, the
unavailability of any such raw materials could result in delays in the
commercial introduction and could hinder acceptance of EarthShell Products,
thereby adversely affecting the Company&#146;s business, financial condition and
results of operations. In addition, the Company and its 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 materials prices may increase which in turn may
increase the cost of EarthShell Products. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><B>The Technology</B></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The new composite material
used to make EarthShell Products is the result of more than 11 years of basic
research by EKI in the materials science of natural minerals (such as limestone
and sand) and natural binders (such as starch). EKI has employed materials
science methodologies and state-of-the-art analytical equipment and research
methods to develop this proprietary composite material and related manufacturing
processes. EKI has carefully considered the environmental impact in the
selection of these materials and processes. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>EARTHSHELL Products to date
are made from a moldable foamed material. The EarthShell sandwich container,
plate and bowl, and certain of the Company&#146;s other current prototype
products are made of this formulation. The compostable biopolymer-based sandwich
wrap is made from a biodegradable resin that can be processed using standard
equipment used in the plastics industry. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company has incurred
substantial expense in connection with the commercial application of the
technology for the foodservice packaging market since its formation in 1992. The
Company&#146;s research and development expenses related to the continued
development of EarthShell Products by EKI and the Company were approximately
$37.3 million, $30.5 million and $20.0 million in the years ended
December&#160;31, 2000, 1999 and 1998, respectively. The Company&#146;s research
and development efforts are ongoing, and the Company expects to continue to
incur research and development expenses in the future. During 2001, the Company
expects to incur approximately $15.0 million in research and development costs,
subject to acceptable financing availability. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><B>Patents, Proprietary
 Rights and Trademarks</B></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The technology that the
Company licenses from EKI is the subject of numerous issued and pending patents
in both the United States and foreign countries. The Company believes that these
patent and patent applications provide a strategic web of patent protection
broadly covering the EarthShell Products, their material composition and the
manufacturing processes used to make them. As of March 19, 2001, EKI had
obtained the rights to 59 U.S.&#160;and 75 foreign patents, and had 7
U.S.&#160;and 72 foreign pending patent applications relating to the
compositions, products and manufacturing processes used to produce EarthShell
food and beverage containers. The patents currently issued in the United States
and internationally expire between 2012 and 2018. Pending patents, if granted,
would give the Company additional patent protection through 2019. Sixteen of the
issued U.S. patents and 5 of the pending U.S. applications relate specifically
to molded food and beverage containers manufactured from the new composite
material, the formulation of the new composite material used in the EarthShell
Big Mac&#174; sandwich container and substantially all of the EarthShell
Products currently under development. While the Company and EKI intend to
continue to seek broad patent protection, the Company believes but cannot assure
that the pending patents relating to the Company&#146;s products or other
additional patents will be issued or that the Company or EKI will develop new
technology that is patentable. Moreover, the Company cannot assure that patents
and patent applications licensed to the Company are sufficient to protect the
Company&#146;s technology or that any patent issued to EKI and licensed to the
Company will not be held invalid, circumvented or infringed by others. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Litigation may be necessary
to enforce patents issued or licensed to the Company, to protect trade secrets
or know-how owned by the Company or to determine the enforceability, scope and
validity of the proprietary rights of others. For instance, Novamont S.p.A., an
Italian company specializing in the manufacture of a biodegradable plastic resin
and products, filed a complaint against the Company in the United States
District Court for the Northern District of Illinois in 1999, alleging
infringement of one of its patents. The Company believes it has strong
meritorious defenses and has been to vigorously defending the lawsuit. See
&#147;ITEM 3. Legal Proceedings.&#148; </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company believes that
it owns or has the rights to use all technology incorporated into its products,
but an adverse determination in any such proceedings or in other litigation or
infringement proceedings to which the Company may become a party could subject
the Company to significant liabilities to third parties or require the Company
to seek licenses from third parties. Although patent and intellectual property
disputes have often been settled through licensing or similar arrangements,
costs associated with such arrangements may be substantial and could include
ongoing royalties. Furthermore, the Company cannot assure that necessary
licenses would be available to the Company on satisfactory terms or at all.
Accordingly, an adverse determination in a judicial or administrative proceeding
or failure to obtain necessary licenses would prevent the Company from
manufacturing or licensing others to manufacture certain of its products, which
could have an adverse effect on the Company&#146;s business, financial condition
and results of operations. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company also relies on
proprietary know-how and trade secrets, which are not the subject of patents.
All of this proprietary information is licensed from EKI. To protect its rights
in proprietary know-how and trade secrets, both the Company and EKI sometimes
require licensees, joint venture partners, employees, consultants, advisors and
collaborators to enter into confidentiality agreements. These confidentiality
agreements, however, have limited terms, and the Company cannot assure that
these agreements will provide meaningful protection for the Company and
EKI&#146;s trade secrets, know-how or other proprietary information in the event
of any unauthorized use or disclosure. In addition, the Company&#146;s business
could be adversely affected by competitors who independently develop competing
technologies. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company owns the
trademark EarthShell and certain other trademarks, and has been licensed by EKI
to use the trademark Aliite&#174; for the new composite material. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><B>Relationship with and
 Reliance on EKI</B></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company does not own
the technology necessary for the manufacture of EarthShell Products and,
pursuant to its License Agreement with EKI, the Company is dependent upon its
royalty-free, exclusive license from EKI to use the technology. The
Company&#146;s use of the technology is limited to the development, manufacture
and sale of foodservice disposables for use in the foodservice industry, and the
Company has no right to exploit opportunities for the application of this
technology or improvements outside this field of use. EKI may terminate the
license at any time if the Company is in breach of any material obligations
under the License Agreement and does not cure such breach within a specified
period. If EKI were to file for or be declared bankrupt, the Company would
likely be able to retain its rights under the License Agreement with respect to
U.S.&#160;patents; however, it is possible that steps could be taken to
terminate its rights under the License Agreement with respect to international
patents. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company will continue
to share a key officer with EKI. In addition, since inception, the Company has
relied on EKI to provide extensive management and technical support. The Company
and EKI entered into an Amended and Restated Technical Services and Sublease
Agreement (the &#147;Technical Services Agreement&#148;) which continues through
December 31, 2002. Under the terms of the Technical Services Agreement, the
Company pays EKI for all direct project labor hours incurred by EKI technical
personnel and direct expenses incurred on approved projects. Effective January
1, 2001, EarthShell hired directly those personnel critical to EarthShell&#146;s
development program going forward, and will discontinue its use of EKI technical
services. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Under an Amended and
Restated Agreement for the Allocation of Patent Costs (the &#147;Patent
Agreement&#148;), the Company reimburses EKI for the costs and expenses of
filing, prosecuting, acquiring and maintaining certain patents and patent
applications relating to the technology licensed to the Company under an Amended
and Restated License Agreement (the &#147;License Agreement&#148;). Effective
January 1, 2001, EarthShell assumed direct responsibility to manage the
maintenance of the patent portfolio underlying its license with EKI. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><B>Potential Conflicts with EKI</B></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company and EKI are
both controlled by a common indirect, majority equity owner, Mr. Essam
Khashoggi, and they share certain directors and officers, including
Mr.&#160;Khashoggi, who is also the Chairman of the Board of the Company, and
Mr. Simon Hodson, the Vice Chairman of the Board and Chief Executive Officer of
the Company. Certain conflicts may arise between EKI and the Company,
particularly with respect to corporate opportunities, including the development
of new markets and uses for products based on the EarthShell technology, the
allocation of research and development resources, the devotion of the common
directors&#146; and officers&#146; time to the respective businesses and the
performance by EKI and the Company of their respective obligations under the
License Agreement, the Technical Services Agreement and the Patent Agreement.
Under the Patent Agreement, the Company is obligated to pay or reimburse EKI for
all costs and expenses associated with filing, prosecuting, acquiring and
maintaining certain patents or patent applications. Any patents granted would be
the property of EKI, and EKI may obtain a benefit therefrom other than under the
License Agreement, 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. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><B>Control by Principal Stockholder</B></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Mr. Essam Khashoggi, the
Chairman of the Board of the Company, is the beneficial owner of approximately
59% of the outstanding shares of common stock directly or indirectly through
various entities that he controls, including EKI. Thus, Mr.&#160;Khashoggi has
the ability to elect all of the directors of the Company, to control the
direction and policies of the Company, to determine the outcome of corporate
transactions requiring the approval of the Company&#146;s stockholders,
including mergers, consolidations and the sale of all or substantially all of
the assets of the Company, and to prevent or cause a change in control of the
Company. Mr.&#160;Khashoggi also has the power to control the Company&#146;s
relationship with EKI, which he also controls, and upon which the Company has
been dependent, among other things, for some of its research and development
efforts. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><B>Competition</B></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Competition among existing
food and beverage container manufacturers in the foodservice industry is
intense. Most of these competitors have substantially greater financial and
marketing resources at their disposal than does the Company, and many have
well-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 Products. In addition, all of
the Company&#146;s licensees and joint venture partners manufacture paper,
plastic or foil packaging that may compete with EarthShell Products. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>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 environmental impact, one significant 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&#146;s products and processes. The Company believes its patents uniquely
position it to incorporate a significant proportion of low cost, inorganic
fillers with its material, which, relative to other starch-based or specialty
polymers will allow it to ultimately have a more competitive material cost. The
development of competitive, environmentally attractive, disposable foodservice
containers could render the Company&#146;s technology obsolete and could have an
adverse effect on the business, financial condition and results of operations of
the Company. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><B>Government Regulation</B></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The manufacture, sale and
use of EarthShell Products are subject to regulation by the U.S.&#160;Food and
Drug Administration (the &#147;FDA&#148;). The FDA&#146;s regulations are
concerned with substances used in food packaging materials, not with specific
finished food packaging products. Thus, food or beverage containers will be in
compliance with FDA regulations if the components used in the food and beverage
containers: (i)&#160;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)&#160;are generally recognized as safe (&#147;GRAS&#148;)
for their intended uses and are of suitable purity for those intended uses. Each
of the components of the EarthShell Big Mac&#174; sandwich container and all
other current prototype EarthShell Products is either approved by the FDA as an
indirect food additive for its intended use, codified in the FDA&#146;s
regulations as GRAS for its intended use, or a commonly recognized food
ingredient regarded by the Company and its consultants as GRAS for its intended
use. The Company, however, has not sought the concurrence of the FDA in this
determination. The Company intends to ensure that the raw materials used in the
EarthShell Big Mac&#174; sandwich container are suitable for their intended uses
by specifying standards to be met by suppliers of raw materials and by material
and product testing. There is no requirement that the Company or a manufacturer
of EarthShell Products seek FDA concurrence that certain components are GRAS for
their intended uses or that the raw materials are of suitable purity for their
intended uses. However, the Company believes that the EarthShell Big Mac&#174;
sandwich container and other current prototype products of the Company will be
in compliance with all requirements of the FDA and do not require FDA approval.
The Company cannot assure, however, that the FDA will agree with these
conclusions. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>If the FDA were to disagree
with the Company&#146;s determinations with respect to the EarthShell Big
Mac&#174; sandwich container or future products, the FDA could ask the Company
to voluntarily withdraw the products from the marketplace. They could also
initiate legal action to remove the products from the marketplace and, if
appropriate, pursue additional sanctions against the Company and its management.
Such actions by the FDA could have an adverse effect on the business, financial
condition and results of operations of the Company. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Other EarthShell Products
that may be developed in the future may use components that are not approved by
the FDA as indirect food additives, or that cannot reasonably be considered GRAS
for their intended uses. If such a component is used, it will be necessary for
the manufacturers of the product, or the Company on their behalf, to:
(i)&#160;obtain an FDA indirect food additive approval covering the component
and its intended uses, or (ii)&#160;submit a notification to the FDA regarding a
food contact substance. A food additive petition must be supported by detailed
information concerning the composition and manufacture of the food additive, as
well as by the results of testing to establish the safety of the additive.
Typically, safety testing at exaggerated doses in several species of laboratory
animals is required. The testing required to support a food additive petition
could take a considerable length of time to perform. According to FDA data, from
October&#160;1995 to September 1996, the average time for FDA review and
approval of a food additive petition was 32 months from the date of submission.
The Food and Drug Administration Modernization Act of 1997, which became
effective February&#160;19, 1998, added a new provision to the Federal Food,
Drug, and Cosmetic Act that permits the manufacturer or supplier of a food
contact substance to notify the FDA at least 120 days before beginning
distribution of the substance. The notification would have to set forth the
manufacturer&#146;s or supplier&#146;s rationale for why the substance is safe.
Unless the FDA notifies the submitter within the 120-day period that it
disagrees with the submitter&#146;s conclusion that the food contact substance
is safe, the substance could be lawfully distributed in commerce. The FDA is
required to adopt regulations to implement this provision. At this time, it is
not possible to determine whether the notification procedure, as implemented by
the FDA, will be suitable for any of the Company&#146;s products. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><B>Personnel</B></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>As of January 1, 2001, the
Company had 64 employees. None of the Company&#146;s employees are represented
by a labor union and the Company believes that it has a good relationship with
its employees. </FONT></P>

<H1><FONT FACE="Times New Roman, Times, Serif" SIZE=2>ITEM 2.     PROPERTIES</FONT></H1>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>As of December 31, 2000,
the Company leases 3,353 square feet of office space in Lutherville, Maryland.
The Company&#146;s monthly lease payment with respect to this space is $5,449.
The lease expires on September 30, 2003. The Company leases 16,955 square feet
of office and research and development space in Santa Barbara, California. This
lease is month-to-month and expires with a 180-day notice period by the
landlord. The Company&#146;s monthly lease payment with respect to this space is
$36,000. The Company leases 54,800 square feet of space for its product
development center in Goleta, California. This lease expires on June 30, 2003.
The Company&#146;s monthly lease payment with respect to this space is $41,905. </FONT></P>

<H1><FONT FACE="Times New Roman, Times, Serif" SIZE=2>ITEM 3.     LEGAL PROCEEDINGS</FONT></H1>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>On August 2, 1999, Novamont
S.p.A., an Italian company specializing in the manufacture of a biodegradable
plastic resin and products, filed a complaint in the United States District
Court for the Northern District of Illinois alleging four counts of infringement
of three patents. The Company has analyzed all three patents and believes it has
strong meritorious defenses and has been vigorously defending the lawsuit.
During calendar 2000, Novamont agreed to dismiss three of the four claims
without prejudice. The Company has filed a motion for summary judgement and will
continue to defend the remaining infringement claim. The Company believes this
legal proceeding will not have a material adverse effect on the Company&#146;s
financial condition or results of operations. However, the ultimate resolution
of this claim is subject to many uncertainties. It is possible that the Company
could suffer an adverse determination in this proceeding which could have a
material adverse effect on the Company&#146;s financial position, operating
results or cash flows when resolved in a future reporting period. </FONT></P>

<H1><FONT FACE="Times New Roman, Times, Serif" SIZE=2>ITEM 4.     SUBMISSION OF
 MATTERS TO A VOTE OF SECURITY HOLDERS</FONT></H1>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>None.</FONT></P>

<H1 ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>PART II</FONT></H1>

<H1><FONT FACE="Times New Roman, Times, Serif" SIZE=2>ITEM 5.      MARKET FOR
THE REGISTRANT'S COMMON EQUITY AND RELATED<BR>
                     STOCKHOLDER MATTERS</FONT></H1>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company&#146;s common
stock is traded on the NASDAQ National Market under the symbol: ERTH. For the
periods indicated, the following table presents the range of closing, high and
low sale prices for the Company&#146;s common stock as reported by the NASDAQ
National Market: </FONT></P>

<PRE>
                                       <U>First</U>      <U>Second</U>      <U>Third</U>     <U>Fourth</U>     <U>Total Year</U>
<B>2000:</B>
Market price per common share
    High.............................  $6&nbsp; 7/16   $4&nbsp; 41/64    $3&nbsp; 1/32    $3&nbsp; 3/4       $6&nbsp; 7/16
    Low..............................   $3&nbsp; 3/4         $3    $1&nbsp; 3/16   $ 27/32       $ 27/32

<B>1999:</B>
Market price per common share
    High.............................  $17&nbsp; 3/8  $10&nbsp; 11/16         $8    $5&nbsp; 1/2       $17&nbsp; 3/8
    Low.............................. $8&nbsp; 35/64         $6     $3&nbsp; 7/8  $1&nbsp; 13/32      $1&nbsp; 13/32

</PRE>
<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The number of stockholders
of record of the Company&#146;s common stock at March 20, 2001 was 680. At March
20, 2001, Mr. Essam Khashoggi, directly or indirectly, owned approximately 59%
of the outstanding common stock of the Company. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company is a
developmental stage company and does not intend to declare or pay cash dividends
on its common stock in the foreseeable future. </FONT></P>


<H1><FONT FACE="Times New Roman, Times, Serif" SIZE=2>ITEM 6.      SELECTED FINANCIAL DATA</FONT></H1>


<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The selected financial data
set forth below should be read in conjunction with the Company&#146;s  Financial
Statements and Notes thereto and &#147;Management&#146;s Discussion and Analysis
of Financial  Condition and Results of  Operations&#148;  included  elsewhere in
this Annual Report on Form 10-K.</FONT></P>


<P  ALIGN=CENTER><FONT  FACE="Times New Roman, Times, Serif"  SIZE=2><B>Selected
Financial Data</B><BR><B>(in thousands, except per share data)</B></FONT></P>
<PRE>
                                                                                                                   November 1,
                                                                                                                       1992
                                                                                                                   (inception)
                                                                                                                     through
<U>                                                                                                                December 31,</U>
<B>For the Year Ended December 31</B>                             <B><U>2000</U></B>        <B><U>1999</U></B>        <B><U>1998</U></B>         <B><U>1997</U></B>        <B><U>1996</U></B>         <B><U>2000</U></B>

<B>Statement of Operations Data</B>
Research and development expenses..............         $37,265     $30,471     $19,982       $8,901     $10,159     $130,119
General and administrative expenses............           6,843      11,872       9,296        5,685       3,405       45,391
Interest (income) expense, net.................          (1,264)     (3,448)     (4,026)       3,246       1,692      (3,760)
Patent expenses................................             362         645         486          653       1,382        8,693
Net loss.......................................          48,912      44,188      26,620       18,992      16,950      193,941
Preferred dividends............................               -           -         777        2,134       2,134        9,927
Net loss available to common stockholders......          48,912      44,188      27,397       21,126      19,084      203,867
Average shares outstanding.....................         101,419     100,045      95,707       82,530      82,530       88,603


<B>Balance Sheet Data</B>
Cash and cash equivalents......................          $7,792     $26,413     $86,590           $8         $21
Short-term investments.........................               -       8,971       6,531            -           -
Working capital (deficit)......................           2,107      32,886      87,054      (48,308)    (31,489)
Total assets...................................          48,474      87,199     135,638        3,778       2,817
Notes payable, payables to majority stockholder,
accrued interest and accrued dividends.........             266       1,386       1,181       45,163      29,873
Deficit accumulated during development stage            193,941     145,029     100,841       74,221      55,229
Stockholders' equity (deficit).................          42,296      80,686     124,875      (44,567)    (28,732)
Shares outstanding.............................         104,502     100,045     100,045       82,530      82,530

<B>Per Common Share</B>
Basic and diluted loss per share...............           $0.48       $0.44       $0.29        $0.26       $0.23
Closing market price
          High.................................          $67/16      $173/8      $237/8            -           -
          Low..................................         $ 27/32     $113/32      $55/16            -           -
          Close................................          $19/32       $41/4    $1115/16            -           -
</PRE>


<H1><FONT FACE="Times New Roman, Times, Serif" SIZE=2>ITEM 7.     MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION<BR>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;AND    RESULTS    OF
OPERATIONS</FONT></H1>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The following discussion
should be read in conjunction with the Selected Financial Data and the
Company&#146;s Financial Statements and Notes thereto included elsewhere in this
Annual Report on Form 10-K. Such financial statements and information have been
prepared to reflect the historical operations, assets and liabilities of the
Company from the date of the Company&#146;s organization on November 1, 1992
through December 31, 2000. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Information in this Annual
Report on Form 10-K including &#147;Management&#146;s Discussion and Analysis of
Financial Condition and Results of Operations&#148; 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 &#147;may,&#148; &#147;will,&#148;
&#147;expect,&#148; &#147;anticipate,&#148; &#147;estimate,&#148; or
&#147;continue,&#148; or the negative thereof or other comparable terminology.
Any one factor or combination of factors could cause the Company&#146;s actual
operating performance or financial results to differ substantially from those
anticipated by management that are described herein. Factors influencing the
Company&#146;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&#146;s
business which may be discussed elsewhere in this Annual Report on Form 10-K. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><B>Results of Operations</B></FONT></P>

<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Year Ended
 December 31, 2000 Compared with the Year Ended December 31, 1999</I></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company&#146;s net loss
increased  $4.7 million to $48.9  million from $44.2  million for the year ended
December 31, 2000  compared to the year ended  December 31, 1999.  Excluding the
effects of an $11.0  million one time charge,  the net  operating  loss actually
decreased $6.3 million over 1999. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Research and Development
Expenses.</I> Total research and development expenditures for the development of
EarthShell  Products  increased $6.8 million to $37.3 million from $30.5 million
for the year ended  December  31, 2000  compared to the year ended  December 31,
1999.  The Company wrote off property and equipment of $12.0 million in 2000 and
$2.3 million in 1999,  respectively.  The write off is for  abandonment  charges
related to commercializing  the technology for its first  manufacturing plant at
the Owings Mills facility in Maryland.  The Company abandoned $11 million in the
fourth  quarter  of  2000.  In  December  2000,  it  was  determined   that  the
manufacturing  configuration  will have to be modified  somewhat and  additional
process  improvements  implemented  to  accommodate  the recent  product  design
changes and to achieve the design capacity of the plant. The  reconfiguration of
the lines will eliminate  certain process steps  simplifying  the  manufacturing
process.  In  anticipation  of  these  improvements  and  modifications  to  the
manufacturing  lines, the Company  recognized the abandonment  charge described.
Removing the effect of abandonment,  research and development expenses decreased
$2.9  million  from 1999 to 2000,  primarily  due to a reduction  in startup and
debugging costs of the Owings mills facility. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Total General and
Administrative Expenses.</I> Total general and administrative expenses decreased
$5.1 million to $6.8 million from $11.9 million for the year ended  December 31,
2000 compared to the year ended  December 31, 1999.  Cost reduction has resulted
primarily from a decrease in employee cost, a reduction in costs associated with
operating a publicly traded company, and reductions in costs associated with the
Baltimore executive offices. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Depreciation and
Amortization Expense.</I> Depreciation and amortization expense increased $1.1
million to $5.7 million from $4.6 million for the year ended December 31, 2000
compared to the year ended December 31, 1999. The increase in depreciation
expense was primarily the result of the Company&#146;s commercial manufacturing
equipment at Sweetheart&#146;s Maryland facility being depreciated for a full
calendar year for 2000 versus nine months of depreciation expense for calendar
year 1999. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Related Party Patent
Expenses.</I> Legal fees reimbursed to EKI under the Patent Agreement with EKI,
decreased $0.2 million to $0.4 million from $0.6 million for the year ended
December 31, 2000 compared to the year ended December 31, 1999. This cost varies
with the number of patents filed, researched and/or abandoned during the year. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Interest Income.</I> Interest
income decreased $2.1 million to $1.3 million from $3.4 million for the year
ended December 31, 2000 compared to the year ended December 31, 1999. The
decrease was a result of less cash invested during the year as cash was used for
the Company&#146;s Sweetheart facility and to fund operations. </FONT></P>

<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Year Ended
 December 31, 1999 Compared with the Year Ended December 31, 1998</I></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company&#146;s net loss
increased $17.6 million from $26.6 million for the year ended December 31, 1998
to $44.2 million for the year ended December 31, 1999. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Research and Development
Expenses.</I> Total research and development expenditures for the development of
EarthShell Products increased $10.5 million from $20.0 million for the year
ended December 31, 1998 to $30.5 million for the year ended December 31, 1999.
The increase was more than expected as the Company continued to experience
persistent problems with the debugging and start-up of its first
commercialization activities at Sweetheart&#146;s Maryland facility. Cost
reimbursement to Sweetheart increased by $4.5 million for the year ended
December 31, 1999 compared with the year ended December 31, 1998. The 1999 cost
reimbursement period represented twelve months of activity while the 1998 cost
reimbursement period represented three months of activity. The Company also
incurred an additional $1.2 million in start-up supplies at Sweetheart when
comparing the year ended December 31, 1999 with the year ended December 31,
1998. Expenses for next generation product development increased $3.0 million
from December 31, 1998 compared to the year ended December 31, 1999. This
increase included personnel and facility costs as well as research supplies. The
Company was billed by EKI for research and development services totaling $11.7
million for the year ended December 31, 1999 and $8.9 million for the year ended
December 31, 1998. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Total General and
Administrative Expenses.</I> Total general and administrative expenses increased
$2.6 million from $9.3 million for the year ended December 31, 1998 to $11.9
million for the year ended December 31, 1999. Personnel and facility costs in
Maryland increased $0.5 million when comparing the year ended December 31, 1999
with the year ended December 31, 1998 because the 1999 period included twelve
months of activity while the 1998 period included less than twelve months of
activity. Legal costs increased $1.1 million for deal structuring and general
corporate matters when comparing the year ended December 31, 1999 with the year
ended December 31, 1998. Cost associated with managing a publicly traded
company, such as transfer agent and registrar costs and investor relations costs
increased $0.9 million when comparing the year ended December 31, 1999 with the
year ended December 31, 1998. Net consulting costs for the year ended December
31, 1999 decreased $1.3 million primarily due to the completion of a strategic
planning effort by the Boston Consulting Group during the year ended December
31, 1998. Additionally, the Company wrote-off $0.7 million, primarily in
leasehold improvements related to consolidating office space in Maryland. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Depreciation and
Amortization Expense.</I> Depreciation and amortization expense increased $3.7
million from $0.9 million for the year ended December 31, 1998 to $4.6 million
for the year ended December 31, 1999. The increase in depreciation expense was
primarily the result of the Company&#146;s commercial manufacturing equipment at
Sweetheart&#146;s Maryland facility being placed in service during the year
ended December 31, 1999. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Related Party Patent
Expenses.</I> Legal fees reimbursed to EKI under the Patent Agreement with EKI,
increased $0.1 million from $0.5 million for the year ended December 31, 1998 to
$0.6 million for the year ended December 31, 1999. This cost varies with the
number of patents filed, researched and/or abandoned during the year. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Interest Income.</I> Interest
income decreased $1.7 million from $5.1 million for the year ended December 31,
1998 to $3.4 million for the year ended December 31, 1999. The decrease was a
result of less cash invested during the year as cash was used for the
Company&#146;s Sweetheart facility and to fund operations. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Interest Expense.</I> Interest
expense decreased by $1.1 million from $1.1 million for the year ended December
31, 1998 to zero for the year ended December 31, 1999. The decrease was due to
the repayment of outstanding debt from the proceeds of the Company&#146;s
initial public offering in March 1998. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><B>Liquidity and Capital
 Resources at December 31, 2000</B></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Cash Flow</I>. The
Company&#146;s principal uses of cash for the year ended December 31, 2000 were
to fund operations and purchase equipment to facilitate the development of
manufacturing capacity for EarthShell Products. Net cash used in operations was
$31.5 million for the year ended December 31, 2000 and $40.0 million for the
year ended December 31, 1999. Net cash provided by and (used in) investing
activities was $2.4 million and ($20.1) million for the years ended December 31,
2000 and 1999, respectively. As of December 31, 2000 the Company had cash and
related cash equivalents totaling $7.8 million. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Capital Requirements.</I> The
Company  expects  to  spend  approximately  $10.0 to $15.0  million  in  capital
expenditures   in  the  year  2001  related  to  designing  and  developing  the
manufacturing  facilities and  prototypes  for the line of EarthShell Products,  subject to
available financing. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Sources of Capital.</I> As part
of the Company&#146;s initial public offering on March 27, 1998, the Company
issued 10,526,316 shares of its common stock, $.01 par value, for which the
Company received net proceeds of $206 million. On March 31, 2000, the Company
filed a Registration Statement on Form S-3 to register 5,000,000 shares of its
common stock, which became effective April 19, 2000. On May 3, 2000, the Company
signed an agreement with Acqua Wellington North American Equities Fund, LTD
(&#147;Acqua Wellington&#148;), pursuant to which the Company may, from time to
time and in its sole discretion during the 12 months following the date of the
agreement, present Acqua Wellington with draw-down notices requiring Acqua
Wellington to purchase up to $2,500,000 of the Company&#146;s common stock in
respect of each draw-down notice. The Company will issue and sell the shares to
Acqua Wellington at a per share price equal to the average price of the
Company&#146;s common stock over a period of time after the draw-down notice
less a discount of 5%. The Company may present Acqua Wellington with up to 12
drawdown notices during the term of the agreement. In addition, the agreement
gives Acqua Wellington the option to purchase an additional $2.5 million of the
Company&#146;s common stock per month for the same twelve months, subject to
certain conditions. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Although the common stock
purchase agreement with Acqua Wellington provides that the Company generally may
not draw down  unless the  Company&#146;s  common  stock is trading at $3.00 per
share or more, Acqua Wellington has continued to purchase shares from EarthShell
from time-to-time at negotiated prices,  when the market price for EarthShell is
less than $3.00 per share.  In addition,  for the drawdown  period ended October
26, 2000, as partial  consideration for Acqua Wellington  agreeing to accept the
drawdown  with minimum  trading  prices  below $3.00 per share,  the Company has
issued to Acqua  Wellington  warrants to purchase 830,234 shares of common stock
at an exercise  price per share of 115% of the  purchase  price per share of the
common stock issued and sold in respect of such drawdown period. </FONT></P>

<P><FONT  FACE="Times  New Roman,  Times,  Serif"  SIZE=2>During  the year ended
December 31, 2000 and consistent with the stock purchase  agreements between the
Company and Acqua Wellington  described above, the Company issued  approximately
4.5 million  shares of common stock and received net proceeds from such issuance
of approximately  $10.5 million.  In late December,  the Company filed a new S-3
registration  statement  covering  the  issuance of up to 15 million  additional
shares of common stock. In addition, the Company has obtained an extension of it
commitment from Acqua  Wellington for an additional 12 months. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company has reduced its
overall burn rate and is focusing its  resources  on those  activities  that are
critical to  demonstrate  the commercial  viability of the  EarthShell  business
model:  These  activities  include,  modifying and  optimizing  the Owings Mills
manufacturing  equipment,  ramping up commercial  production of the Big Mac&reg;
sandwich  container,  and  continuing  to develop next  generation  products and
manufacturing  processes. As part of its cost reduction efforts, the Company has
consolidated   its  Maryland   operations   and  is  scaling  down   development
expenditures,  moving all of its  development  activities  to its Santa  Barbara
center. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company believes that
its existing cash and the financing provided through the Acqua Wellington equity
drawdown facility will enable it to continue funding its operations, including
the Owings Mills facility, as well as continue with its next generation
development during 2001. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Nevertheless, the Company
continues  discussion with certain  financing  institutions to secure additional
long term funding.  While the Company has no current  commitments for additional
funding,   apart  from  Acqua  Wellington,   based  on  discussions  with  these
institutions,  the Company believes that efforts to obtain additional  financing
will be successful,  particularly  with the final approval of the EarthShell Big
Mac sandwich  container now in hand. The Company cannot  assure,  however,  that
commitments can be obtained on favorable terms, if at all. </FONT></P>

<H1><FONT FACE="Times New Roman, Times, Serif" SIZE=2>ITEM 7A.     QUANTITATIVE
 AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK</FONT></H1>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Not applicable.</FONT></P>

<H1><FONT   FACE="Times  New  Roman,  Times,  Serif"  SIZE=2>ITEM  8.  FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA</FONT></H1>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>See Index to Financial
Statements and Schedules.</FONT></P>

<H1><FONT FACE="Times New Roman, Times, Serif" SIZE=2>ITEM 9.     CHANGES IN AND
 DISAGREEMENTS WITH ACCOUNTANTS ON<BR>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;ACCOUNTING AND
 FINANCIAL DISCLOSURE</FONT></H1>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>None.</FONT></P>

<H1 ALIGN=CENTER><FONT  FACE="Times New Roman,  Times,  Serif"  SIZE=2>PART III</FONT></H1>

<H1><FONT  FACE="Times New Roman,  Times,  Serif"  SIZE=2>ITEM 10. DIRECTORS AND
EXECUTIVE OFFICERS OF THE REGISTRANT</FONT></H1>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The information required by
this item is contained in the Company&#146;s Proxy Statement for its 2001 annual
meeting of stockholders, which will be filed on or before April 30, 2001 and is
incorporated herein by reference. </FONT></P>

<H1><FONT  FACE="Times New Roman,  Times,  Serif"  SIZE=2>ITEM 11.      EXECUTIVE COMPENSATION</FONT></H1>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The information required by
this item is contained in the Company&#146;s Proxy Statement for its 2001 annual
meeting of stockholders, which will be filed on or before April 30, 2001 and is
incorporated herein by reference. </FONT></P>

<H1><FONT   FACE="Times  New  Roman,  Times,  Serif"  SIZE=2>ITEM  12.  SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT</FONT></H1>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The information required by
this item is contained in the Company&#146;s Proxy Statement for its 2001 annual
meeting of stockholders, which will be filed on or before April 30, 2001 and is
incorporated herein by reference. </FONT></P>

<H1><FONT   FACE="Times  New  Roman,   Times,  Serif"  SIZE=2>ITEM  13.  CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS</FONT></H1>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The information required by
this item is contained in the Company&#146;s Proxy Statement for its 2001 annual
meeting of stockholders, which will be filed on or before April 30, 2001 and is
incorporated herein by reference. </FONT></P>


<H1 ALIGN=CENTER><FONT  FACE="Times New Roman,  Times,  Serif"  SIZE=2>PART IV</FONT></H1>

<H1><FONT  FACE="Times  New  Roman,  Times,  Serif"  SIZE=2>ITEM  14.  EXHIBITS,
FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K</FONT></H1>
<PRE>
<B>(a)  Index to Financial Statements</B>

     1.    <B>Financial Statements:</B>

          Independent Auditors' Report................................................................  F-2
          Balance Sheets as of December 31, 2000, and 1999............................................  F-3
          Statements of Operations for the years ended December 31, 2000, 1999, 1998, and for the
              period from November 1, 1992 (inception) through December 31, 2000......................  F-4

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

          Statements of Cash Flows for the years ended December 31, 2000, 1999, 1998, and the period
              from November 1, 1992 (inception) through December 31, 2000.............................  F-6

          Notes to the Financial Statements...........................................................  F-8

     2.   <B>Financial Statement Schedules:</B>
          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  Financial
          Statements or the Notes therein.

<B>(b)  Reports on Form 8-K</B>

     None.

<B>(c)  Exhibits</B>
      3.1 Certificate of Incorporation of the Company. (1)
      3.2 Bylaws of EarthShell the Company Corporation. (1)
      3.3 Certificate of Designation, Preferences Relative, Participating,
          Optional and Other Special Rights of the Company's Series A Cumulative
          Senior Convertible Preferred Stock. (1)
      3.4 Amended and Restated Certificate of Incorporation of the Company. (1)
      3.5 Amended and Restated Bylaws of the Company. (1)
      4.1 Specimen certificate of Common Stock. (1)
     10.1 Amended and  Restated  License  Agreement  dated  February  28, 1995
          by and between the Company and E. Khashoggi Industries ("EKI"). (2)
     10.2 Registration  Rights  Agreement  dated as of February  28, 1995 by and
          between the Company and EKI, as amended. (1)
     10.3 Employment  Agreement  dated  October  19, 1993 by and  between  the
          Company  and Scott  Houston,  as amended.(1)
     10.4 Stock  Purchase  Agreement  dated as of September  16, 1993 by and
          between the Company and the persons named therein.(1)
     10.5 Registration  Rights  Agreement  dated as of  September  16,  1993 by
          and  between the Company and the persons named therein, as amended.(1)
     10.6 Sublicense Agreement dated June 19, 1995 by and between the Company
          and Dopaco, Inc, as amended. (1)
     10.7 Sublicense  Agreement  dated  November 9, 1994 by and between the
          Company and Genpak  Corporation,  as amended. (1)
     10.8 EarthShell Container Corporation 1994 Stock Option Plan. (1)
     10.9 EarthShell Container Corporation 1995 Stock Incentive Plan. (1)
    10.10 Form of Stock Option Agreement under the EarthShell Container
          Corporation 1994 Stock Option Plan. (1)
    10.11 Form of Stock Option Agreement under the EarthShell  Container
          Corporation 1995 Stock Incentive Plan.(1)
    10.12 Warrant to Purchase Stock issued July 2, 1996 by the Company to
          Imperial Bank. (1)
    10.13 Warrant to Purchase Stock issued June 7, 1996 by the Company to
          Imperial Bank. (1)
    10.14 Employment Agreement dated October 1, 1997 by and between the Company
          and Simon K. Hodson. (1)
    10.15 Amended and Restated Technical  Services and Sublease  Agreement dated
          October 1,  1997 by and between the Company and EKI. (1)
    10.16 Amended and Restated  Agreement for  Allocation of Patent Costs dated
          October 1,  1997 by and between the Company and EKI. (1)
    10.17 Warrant to Purchase Stock issued November 15, 1996 by the Company to
          Imperial Bank. (1)
    10.18 Letters  dated  August 22,  1997 from Shelby  Yastrow to Simon K.
          Hodson and Simon K. Hodson to Shelby Yastrow. (1)
    10.19 Warrant to Purchase Stock issued October 6, 1997 by the Company to
          Imperial Bank. (1)
    10.20 Sublicense  Agreement  dated  October 16, 1997 by and between the
          Company and  Sweetheart  Cup Company Inc. (1)
    10.21 Operating  Agreement for the  Production of Hinged  Sandwich
          Containers  for  McDonald's  Corporation between Sweetheart Cup
          Company Inc. and the Company dated as of October 16, 1997. (1)
    10.22 Warrant to Purchase Stock dated December 31, 1997 by the Company to
          Imperial Bank. (1)
    10.23 Letter  Agreement re Haas/BIOPAC  Technology  dated  February 17,
          1998 by and between the Company and EKI. (1)
    10.24 Second Amendment to 1995 Stock Incentive Plan of the Company. (1)
    10.25 Amendment No. 2 to Registration Rights Agreement dated as of
          September 16, 1993. (1)
    10.26 Amendment No. 2 to Registration Rights Agreement dated
          February 28, 1995. (1)
    10.27 Employment Agreement dated March 23, 1998 by and between the Company
          and William F. Spengler. (3)
    10.28 Employment Agreement dated April 15, 1998 by and between the Company
          and Vincent J. Truant. (3)
    10.29 Employment Agreement dated July 22, 1998 by and between the Company
          and Michael M. Hagerty. (3)
    10.30 Lease Agreement dated June 4, 1998 by and between the Company and
          Baltimore Center Associates  Limited Partnership. (3)
    10.31 Lease Agreement  dated May 1, 1998 by and between the Company and ORIX
          SBAP Goleta Venture,  a general partnership. (3)
    10.32 Design,  Procurement and Construction  Management  Services  Agreement
          dated May 13, 1998 by and among the  Company,  Sweetheart  Cup Company
          Inc.,  CH2M  Hill  Industrial  Design  Corporation,  and  IDC
          Construction Management, Inc. (3)
    10.33 First  Amendment dated June 2, 1998 to the Amended and Restated
          License  Agreement by and between the Company and E. Khashoggi
          Industries ("EKI"). (4)
    10.34 First Amendment to 1995 Stock Incentive Plan of the Company. (5)
    10.35 Third Amendment to 1995 Stock Incentive Plan of the Company. (6)
    10.36 Fourth Amendment to 1995 Stock Incentive Plan of the Company. (6)
    10.37 Lease Agreement dated July 2, 1999 by and between the Company and
          Chippewa limited partnership.
    10.38 Employment Agreement dated April 15, 2000 by and between the Company
          and Richard DiPasquale
    10.39 Lease Agreement dated August 23, 2000 by and between the Company and
          Heaver Properties, LLC. 10.40 Termination of Lease Agreement dated
          October 13, 2000 by and between the Company and Chippewa limited
          partnership.

(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,  file no.  333-13287,  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,  file no.  333-13287,  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,  file no.  000-23567,  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,  file no.  000-23567,  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.

</PRE>


<H1 ALIGN=CENTER><FONT  FACE="Times New Roman,  Times,  Serif"  SIZE=2>SIGNATURES</FONT></H1>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>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 30, 2001. </FONT></P>

<PRE>
                                       EARTHSHELL CORPORATION

                       By:
                              /s/         Simon K. Hodson
                              --------------------------------------
                                          Simon K. Hodson
                                   Vice Chairman of the Board and
                                      Chief Executive Officer
</PRE>
<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>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. </FONT></P>

<PRE>
               Signature                                  Title                                  Date

<U>/s/         Essam Khashoggi</U>
          Essam Khashoggi                         Chairman of the Board                    March 30, 2001


<U>/s/         Simon K. Hodson</U>
          Simon K. Hodson              Vice Chairman of the Board, Chief Executive         March 30, 2001
                                                  Officer and President
                                               (Principal Executive Officer)

<U>/s/        D. Scott Houston</U>
         D. Scott Houston                 Chief Financial Officer and Secretary            March 30, 2001
                                                 (Principal Financial and
                                                   Accounting Officer)

<U>/s/           John Daoud</U>
            John Daoud                                   Director                          March 30, 2001

<U>/s/         Layla Khashoggi</U>
          Layla Khashoggi                                Director                          March 30, 2001

<U>/s/         Howard J. Marsh</U>
             Howard Marsh                                Director                          March 30, 2001

<U>/s/          Lynn Scarlett</U>
           Lynn Scarlett                                 Director                          March 30, 2001

<U>/s/        Michael S. Noling</U>
         Michael S. Noling                               Director                          March 30, 2001
</PRE>
<H1 ALIGN=CENTER><FONT  FACE="Times New Roman,  Times,  Serif"  SIZE=2>F-5</FONT></H1>

<H1  ALIGN=CENTER><FONT  FACE="Times New Roman,  Times,  Serif"  SIZE=2>INDEX TO
FINANCIAL STATEMENTS AND SCHEDULES</FONT></H1>
<PRE>
Financial Statements:

Index to Financial Statements and Schedules..................................F-1

Independent Auditors' Report.................................................F-2

Balance Sheets as of December 31, 2000 and 1999..............................F-3

Statements of Operations for the years ended December 31, 2000, 1999,
and 1998 and for the period from November 1, 1992 (inception) through
December 31, 2000............................................................F-4

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

Statements of Cash Flows for the years ended December 31, 2000,
1999, and 1998, and for the period from November 1, 1992 (inception)
through December 31, 2000....................................................F-6

Notes to Financial Statements................................................F-8

Financial Statement Schedules:

None.
</PRE>
<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>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&#146;s Financial
Statements or the Notes therein. </FONT></P>






<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>INDEPENDENT AUDITORS' REPORT</FONT></P>



<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>To the Board of Directors and Stockholders of<BR>
EarthShell Corporation:</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>We have audited the
accompanying balance sheets of EarthShell Corporation (a development stage
enterprise) (the &#147;Company&#148;) as of December&#160;31, 2000 and 1999, and
the related statements of operations, stockholders&#146; equity, and cash flows
for each of the three years in the period ended December&#160;31, 2000 and for
the period from November&#160;1, 1992 (inception) through December&#160;31,
2000. These financial statements are the responsibility of the Company&#146;s
management. Our responsibility is to express an opinion on these financial
statements based on our audits. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>We conducted our audits in
accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>In our opinion, such
financial statements present fairly, in all material respects, the financial
position of the Company as of December&#160;31, 2000 and 1999, and the results
of its operations and its cash flows for each of the three years in the period
ended December&#160;31, 2000 and for the period from November 1, 1992
(inception) through December&#160;31, 2000 in conformity with accounting
principles generally accepted in the United States of America. </FONT></P>

<P><FONT  FACE="Times New Roman, Times,  Serif"  SIZE=2><U>/s/Deloitte &amp;
Touche LLP</U> <BR>
Deloitte &amp;Touche LLP</FONT></P>

<P><FONT  FACE="Times New Roman, Times, Serif" SIZE=2>Los Angeles,
California<BR> March 30, 2001</FONT></P>




<PRE>

                                                        <B>EARTHSHELL CORPORATION
                                                   (A Development Stage Enterprise)
                                                            BALANCE SHEETS</B>

                                                                                   <B>December 31,</B>
                                                                            <B>2000</B>                 <B>1999</B>
<B>ASSETS</B>
<B>CURRENT ASSETS:</B>
      Cash and cash equivalents....................................      $7,791,654           $26,412,553
      Short-term investments.......................................            -                8,970,638
      Prepaid expenses and other current assets....................    <U>     492,889</U>          <U>     514,662</U>
           Total current assets....................................       8,284,543            35,897,853

RESTRICTED CASH....................................................       3,500,000             3,500,000

PROPERTY AND EQUIPMENT, NET........................................      36,265,647            47,355,382

INVESTMENT IN JOINT VENTURE                                                 423,428               445,318
                                                                       <U>            </U>          <U>            </U>
<B>TOTAL</B>..............................................................     $48,473,618           $87,198,553
                                                                       ============          ============
<B>LIABILITIES AND STOCKHOLDERS' EQUITY</B>
CURRENT LIABILITIES:
     Accounts payable and accrued expenses.........................      $5,910,897            $5,126,590
     Trade payable to majority stockholder.........................    <U>     266,312</U>          <U>   1,385,737</U>
         Total current liabilities.................................    <U>   6,177,209</U>          <U>   6,512,327</U>

<B>COMMITMENTS AND CONTINGENCIES</B>

<B>STOCKHOLDERS' EQUITY:</B>
     Preferred Stock, $.01 par value, 10,000,000 shares
         authorized; 9,170,000 Series&#160;A shares designated; no
         shares issued and outstanding as of December 31, 2000
         and 1999, ................................................             -                     -
     Common stock, $.01 par value, 200,000,000 shares authorized;
         104,502,335 and 100,045,166 shares issued and outstanding as
         of December 31, 2000 and 1999, respectively...............
                                                                          1,045,023             1,000,451
     Additional paid-in common capital.............................     235,192,471           224,715,255
     Deficit accumulated during the development stage..............    <U>(193,941,085)</U>         <U>(145,029,480)</U>

Total stockholders' equity.........................................    <U>  42,296,409</U>          <U>  80,686,226</U>

<B>TOTAL</B>..............................................................     $48,473,618           $87,198,553
                                                                       ============          ============
                                                 See notes to financial statements.
</PRE>
<PRE>
                                                        <B>EARTHSHELL CORPORATION
                                                   (A Development Stage Enterprise)
                                                       STATEMENTS OF OPERATIONS</B>
                                                                                                         November 1,
                                                                                                                1992
                                                                                                         (inception)
                                                       <U>          Year Ended December 31,         </U>            through
                                                                                                      <U>   December 31,</U>
                                                       <U>    2000  </U>    <U>       1999 </U>      <U>     1998 </U>     <U>           2000</U>
Expenses:
   Related party research and development.........     $8,654,612     $11,663,499      $8,883,365        $66,925,588
   Other research and development.................     28,610,758      18,807,098      11,098,769         63,192,621
   Related party general and administrative
      expenses....................................        157,593         214,109          67,200          2,240,502
   Other general and administrative expenses......      6,685,777      11,657,896       9,229,267         43,150,533
   Depreciation and amortization..................      5,703,630       4,644,234         880,677         13,487,918
   Related party patent expenses..................    <U>    362,244</U>     <U>    644,584</U>     <U>    485,670</U>       <U>   8,693,105</U>
      Total expenses..............................     50,174,614      47,631,420      30,644,948        197,690,267

Interest income...................................     (1,263,809)     (3,448,448)     (5,112,126)       (10,319,722)
Related party interest expense....................          -               -             651,586          4,770,731
Other interest expense............................    <U>      -    </U>     <U>      -    </U>     <U>    434,844</U>       <U>   1,788,738</U>
Loss Before Income Taxes..........................     48,910,805      44,182,972      26,619,252        193,930,014

Income Taxes......................................    <U>        800</U>     <U>      5,471</U>     <U>        800</U>       <U>      11,071</U>
Net Loss..........................................     48,911,605      44,188,443      26,620,052        193,941,085
Preferred Dividends...............................    <U>       -   </U>     <U>       -   </U>     <U>    776,813</U>       <U>   9,926,703</U>
Net Loss Available To Common Stockholders.........    $48,911,605     $44,188,443     $27,396,865       $203,867,788
                                                      ===========     ===========     ===========       ============
Basic And Diluted Loss Per Common Share...........          $0.48           $0.44           $0.29              $2.30

 Weighted Average Number Of Common Shares.........    101,419,330     100,045,166      95,706,942         88,603,147

                                                 See notes to financial statements.

</PRE>
<PRE>
                                                        <B>EARTHSHELL CORPORATION
                                                   (A Development Stage Enterprise)
                                             STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)</B>

                                         Cumulative            Additional                                   Additional        Deficit
                                    Convertible Preferred       Paid-In                                      Paid-In        Accumulated
                                    <U>    Stock Series A   </U>      Preferred      <U>      Common Stock      </U>        Common      during Develop-
                                    <U> Shares  </U>     <U> Amount</U>     <U>   Capital </U>     <U>  Shares  </U>      <U>  Amount </U>    <U>   Capital </U>    <U>   ment Stage  </U>   <U>    Total </U>

<B>ISSUANCE OF COMMON STOCK AT
   INCEPTION</B>....................            -           -               -     82,530,000        $3,150         $6,850                  -       $10,000
Sale of preferred stock, net....    6,988,850        $267     $24,472,734              -             -              -                  -    24,473,001
Net loss........................   <U>         -</U>    <U>       -</U>    <U>           -</U>    <U>          -</U>    <U>         -</U>   <U>           -</U>       <U>$(7,782,551)</U>   <U>(7,782,551)</U>
<B>BALANCE, DECEMBER 31, 1993</B>          6,988,850         267      24,472,734     82,530,000         3,150          6,850        (7,782,551)    16,700,450
Net loss........................   <U>         -</U>    <U>       -</U>    <U>           -</U>    <U>          -</U>    <U>         -</U>   <U>           -</U>       <U>(16,582,080)</U>   <U>(16,582,080)</U>
<B>BALANCE, DECEMBER 31, 1994</B>          6,988,850         267      24,472,734     82,530,000         3,150          6,850       (24,364,631)       118,370
Contribution to equity..........            -           -               -              -             -      1,117,723                  -     1,117,723
Net loss........................   <U>         -</U>    <U>       -</U>    <U>           -</U>    <U>          -</U>    <U>         -</U>   <U>           -</U>       <U>(13,914,194)</U>   <U>(13,914,194)</U>
<B>BALANCE, DECEMBER 31, 1995</B>          6,988,850         267      24,472,734     82,530,000         3,150      1,124,573       (38,278,825)   (12,678,101)
Contribution to equity..........            -           -               -              -             -        650,000                  -       650,000
Issuance of stock warrants......            -           -               -              -             -        246,270                  -       246,270
Net loss........................   <U>         -</U>    <U>       -</U>    <U>           -</U>    <U>          -</U>    <U>         -</U>   <U>           -</U>       <U>(16,950,137)</U>   <U>(16,950,137)</U>
<B>BALANCE, DECEMBER 31, 1996</B>          6,988,850         267      24,472,734     82,530,000         3,150      2,020,843       (55,228,962)   (28,731,968)
Compensation related to stock
   options and warrants.........            -           -               -              -             -      3,156,659                  -     3,156,659
Net loss........................   <U>         -</U>    <U>       -</U>    <U>           -</U>    <U>          -</U>    <U>         -</U>   <U>           -</U>       <U>(18,992,023)</U>   <U>(18,992,023)</U>
<B>BALANCE, DECEMBER 31, 1997</B>          6,988,850         267      24,472,734     82,530,000         3,150      5,177,502       (74,220,985)   (44,567,332)
262 to 1 stock split............            -      69,621        (69,621)              -       822,150      (822,150)                  -             -
Conversion of preferred stock to
   common stock.................   (6,988,850)   (69,888)    (24,403,113)      6,988,850        69,888     24,403,113                  -             -
Issuance of common stock........            -           -               -     10,526,316       105,263    205,883,493                  -   205,988,756
Preferred stock dividends.......            -           -               -              -             -    (9,926,703)                  -   (9,926,703)
Net loss........................   <U>         -</U>    <U>       -</U>    <U>           -</U>    <U>          -</U>    <U>         -</U>   <U>           -</U>       <U>(26,620,052)</U>   <U>(26,620,052)</U>
<B>BALANCE, DECEMBER 31, 1998</B>                  -           -               -    100,045,166     1,000,451    224,715,255      (100,841,037)   124,874,669
Net loss........................   <U>         -</U>    <U>       -</U>    <U>           -</U>    <U>          -</U>    <U>         -</U>   <U>           -</U>       <U>(44,188,443)</U>   <U>(44,188,443)</U>
<B>BALANCE, DECEMBER 31, 1999</B>                  -           -               -    100,045,166     1,000,451    224,715,255      (145,029,480)    80,686,226
Net Loss.....................               -           -               -              -             -              -       (48,911,605)   (48,911,605)
Issuance of common stock........   <U>         -</U>    <U>       -</U>    <U>           -</U>    <U>  4,457,169</U>    <U>    44,572</U>   <U>  10,477,216</U>       <U>           </U>    <U> 10,521,788</U>
<B>BALANCE, DECEMBER 31, 2000</B>                  -           -               -    104,502,335    $1,045,023   $235,192,471     $(193,941,085)   $42,296,409
                                   ==========    ========    ============    ===========    ==========   ============     ==============   ===========
                                                   See notes to financial statements
</PRE>




<PRE>

                                                        <B>EARTHSHELL CORPORATION
                                                   (A Development Stage Enterprise)
                                                       STATEMENTS OF CASH FLOWS</B>
                                                                                                              November 1, 1992
                                                              <U>           Year Ended December 31,         </U>       (inception)
                                                                                                                  through
                                                              <U>    2000     </U>  <U>    1999     </U>   <U>    1998     </U>   <U>December 31, 2000</U>
<B>CASH FLOWS FROM OPERATING ACTIVITIES:</B>
Net loss..............................................        $(48,911,605)  $(44,188,443)   $(26,620,052)       (193,941,085)
Adjustments to reconcile net loss to net cash used in
operating activities:
      Depreciation and amortization.......................       5,703,631      4,644,234         880,677           13,487,919
      Issuance of stock options to director, consultant and              -              -         114,761            3,861,522
      officer.............................................
      Amortization of debt issue costs....................               -              -               -              271,277
      Loss on sale or disposal of property and equipment..      11,968,967      3,015,310       3,436,837           18,486,753
      Equity in the losses from joint venture.............          21,890         70,120               -               92,010
      Net loss on sale of investments.....................               -              -               -               32,496
      Accretion of discounts on investments...............               -              -               -            (410,084)
Changes in operating assets and liabilities:
      Prepaid expenses and other assets...................          21,773        681,711     (1,167,837)            (492,889)
      Accounts payable and accrued expenses...............         784,307    (4,432,847)       6,376,902            5,910,897
      Payable to majority stockholder.....................     (1,119,425)        204,437       2,588,331              266,312
      Accrued interest on notes payable to majority           <U>           -</U>   <U>           -</U>    <U>   (636,068)</U>        <U>            -</U>
      stockholder.........................................
           Net cash used in operating activities..........    (31,530,462)   (40,005,478)    (15,026,449)        (152,434,872)
                                                              ============   ============    ============        =============

<B>CASH FLOWS FROM INVESTING ACTIVITIES:</B>
Purchase of investments U.S. government securities........               -    (8,970,638)     (6,530,928)         (52,419,820)
Purchase of  restricted time deposit......................               -              -     (3,500,000)          (3,500,000)
Proceeds from sales and redemptions of investments........       8,970,638      6,530,928               -           52,797,408
Proceeds from sale of property and equipment..............               -              -               -              297,670
Investment in joint venture                                              -      (515,438)                            (515,438)
Purchase of property and equipment........................    <U> (6,582,863)</U>   <U>(17,194,009)</U>    <U>(38,397,302)</U>        <U> (69,409,724)</U>
      Net cash provided by (used in) investing activities.       2,387,775   (20,149,157)    (48,428,230)         (72,749,904)
                                                              ============   ============    ============        =============

<B>CASH FLOWS FROM FINANCING ACTIVITIES:</B>
Proceeds from issuance of notes payable to stockholders...               -              -       1,450,000           14,270,000
Proceeds from drawings on line of credit with bank........               -              -       2,150,000           14,000,000
Proceeds from issuance of common stock....................      10,521,788              -     221,052,636          231,584,424
Common stock issuance costs...............................               -              -    (15,178,641)         (15,178,641)
Preferred dividends paid..................................               -              -     (9,926,703)          (9,926,703)
Proceeds from issuance of preferred stock.................               -              -               -           25,675,000
Preferred stock issuance costs............................               -              -               -          (1,201,999)
Repayment of line of credit with bank.....................               -              -    (14,000,000)         (14,000,000)
Repayment of note payable.................................    <U>           -</U>   <U>    (22,975)</U>    <U>(35,510,887)</U>        <U> (12,245,651)</U>
      Net cash provided by (used in) financing activities.    <U>  10,521,788</U>   <U>    (22,975)</U>    <U> 150,036,405</U>        <U>  232,976,430</U>

<B>(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS</B>
 .........................................................    (18,620,899)   (60,177,610)      86,581,726           $7,791,654
<B>CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD</B>                <U>  26,412,553</U>   <U>  86,590,163</U>    <U>       8,437</U>        <U>            -</U>
<B>CASH AND CASH EQUIVALENTS, END OF PERIOD</B>                        $7,791,654    $26,412,553     $86,590,163           $7,791,654
                                                              ============   ============    ============        =============
<B>SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION</B>
Cash paid for:
     Income taxes.........................................            $800         $5,471            $800              $11,071
     Interest.............................................               -              -      $1,722,551           $3,028,240
Warrants issued with debt.................................               -              -               -             $306,168
Transfer of property from EKI.............................               -              -               -              $28,745
Conversion of preferred stock to common stock.............               -              -         $69,888              $69,888

</PRE>
<P><FONT  FACE="Times New Roman, Times,  Serif"  SIZE=2><B>SUPPLEMENTAL DISCLOSURE
 OF NON-CASH INVESTING AND FINANCING ACTIVITIES:</B></FONT></P>

<P><FONT  FACE="Times New Roman, Times,  Serif"  SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In 1998, all  outstanding  preferred  stock was converted to common stock resulting in an increase of $69,888 in the par value
         of common stock.</FONT></P>

<P><FONT  FACE="Times New Roman, Times,  Serif"  SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Non-cash  compensation of $114,761 was recorded in 1998,  representing  the difference  between fair market value and exercise
         price of options on the date of grant.</FONT></P>

<P ALIGN=CENTER><FONT  FACE="Times New Roman, Times,  Serif"  SIZE=2>See notes to financial statements.</FONT></P>



<H1 ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>EARTHSHELL CORPORATION<BR>
                                                   (A Development Stage Enterprise)<BR>
                                                     NOTES TO FINANCIAL STATEMENTS</FONT></H1>


<P><FONT  FACE="Times New Roman, Times,  Serif"  SIZE=2><I>Basis of Presentation
and Nature of Operations</I></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>EarthShell Corporation (
"EarthShell or the Company") was incorporated in Delaware on November 1, 1992 and is
a majority-owned  subsidiary of E. Khashoggi Industries,  LLC (together with its
predecessor  entities,  "EKI").  Both the Company and EKI are development  stage
enterprises.  In  connection  with the  formation  of the  Company,  the Company
entered into an Amended and Restated License Agreement (the "License Agreement")
for certain technology  developed by EKI, exclusively for use in connection with
the manufacture and sale of selected disposable food and beverage containers for
use in the foodservice industry.  Investments in affiliated companies with a 20%
to 50% ownership  interest where control does not exist are accounted for on the
equity method. The accompanying  financial statements reflect only the costs and
expenses  related to the application of the technology under  development  since
the Company's formation on November 1, 1992.</FONT></P>

<P><FONT  FACE="Times  New  Roman,  Times,  Serif"  SIZE=2>Management  has  made
estimates and assumptions in the preparation of these financial  statements that
affect the  reported  amounts  of assets  and  liabilities  and  disclosures  of
contingent  assets and  liabilities at the date of the financial  statements and
the reported  amounts of expenses  during the reporting  period.  Actual results
could differ.</FONT></P>

<P><FONT   FACE="Times  New  Roman,  Times,  Serif"   SIZE=2><I>Operations   and
Financing</I></FONT></P>

<P><FONT  FACE="Times New Roman,  Times,  Serif"  SIZE=2>Since  its inception on
November  1,  1992,  the  Company  has  been in the  development  stage  and has
experienced aggregate net losses through December 31, 2000 of approximately $194
million.  The Company has not recorded any revenues  from  operations  since its
inception,  and proceeds  from sales of hinged lid  containers to date have been
booked as an offset to the cost of startup manufacturing operations. The Company
has implemented a number of procedures to reduce costs not necessary to complete
the commercialization of the products using its initial  manufacturing  facility
or next generation manufacturing development. The Company expects to continue to
incur operating losses until its products are commercially  produced and achieve
broader market acceptance and market  penetration.  Successful future operations
and recovery of the Company's  investment in its property and equipment  depends
upon the Company  commercializing  its products using its initial  manufacturing
facility and ultimately, commercializing multiple products and achieving broader
market acceptance and penetration.</FONT></P>

<P><FONT  FACE="Times New Roman,  Times,  Serif" SIZE=2>As the first step in its
strategy,  the  Company  has  continued  to work  closely  with  McDonald&#146;s
Corporation&reg;   ("McDonald&#146;s")  and  McDonald&#146;s  primary  packaging
supplier,  Perseco,  in developing and testing a prototype container for the Big
Mac&reg; sandwich. The Company and its licensee,  Sweetheart, have constructed a
commercial  manufacturing  facility  in Owings  Mills,  Maryland,  and have been
progressing  through an intensive product  validation  process with Perseco with
respect  to this  product.  The  debugging  and  start-up  of the  manufacturing
facility have taken much longer and cost more money than originally anticipated.
However,  as of March 2001,  the  product  design of the  EarthShell  hinged-lid
container  for  the  Big  Mac&reg;   sandwich  has  been  finally   approved  by
McDonald&#146;s system in the U.S.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>To date, over seven million
EarthShell containers for the Big Mac&reg; sandwich have been purchased and used
on a continuous  validation test basis in select  McDonald&#146;s  stores in the
Chicago  area.  In  March  2001,  following  a  thrid  party  audit  of  product
performance  of an  improved  product  design to enhance the  functionality  and
performance  of the  package  (including  a  "double-tab"  design  and a revised
process for the application of the exterior  coating).  McDonald&#146;s  advised
the Company that the  EarthShell  container for the Big Mac&reg;  sandwich meets
the  product  design,   performance,   and  quality  criteria  for  use  in  the
McDonald&#146;s  system.  After necessary  adjustments to manufacturing lines to
incorporate   these  recent  design   modifications,   it  is  anticipated  that
distribution  of the container  will be expanded  throughout the Chicago area to
confirm full manufacturing capability and economics of the sandwich container.</FONT></P>

<P><FONT  FACE="Times  New Roman,  Times,  Serif"  SIZE=2>The  Company  has been
advised that McDonald&#146;s intends to use the EarthShell container for the Big
Mac&reg;  sandwich  in its U.S.  restaurants,  based on  continuing  performance
against expectations and product availability, and competive pricing.</FONT></P>


<P><FONT  FACE="Times New Roman, Times, Serif" SIZE=2>To ensure that the Company
will have the capital in 2001 to continue  funding the  facility at  Sweetheart,
and to proceed with its next generation development,  and to fund the design and
development  of its  next  commercial  facility,  the  Company  is in  financing
discussions  with certain  financial  institutions.  On May 3, 2000, the Company
signed an agreement  with Acqua  Wellington  North  American  Equities Fund, LTD
("Acqua  Wellington"),  pursuant to which the Company may, from time to time and
in its sole discretion during the 12 months following the date of the agreement,
present Acqua  Wellington with draw-down  notices  requiring Acqua Wellington to
purchase  up to  $2,500,000  of the  Company's  common  stock in respect of each
draw-down notice. The Company will issue and sell the shares to Acqua Wellington
at a per-share  price equal to the average price of the  Company's  common stock
over a period of time after the  draw-down  notice  less a  discount  of 5%. The
Company may present Acqua  Wellington with up to 12 drawdown  notices during the
term of the agreement.  In addition,  the agreement  gives Acqua  Wellington the
option to purchase an additional $2.5 million of the Company's  common stock per
month for the same twelve months, subject to certain conditions.</FONT></P>

<P><FONT  FACE="Times New Roman, Times, Serif"  SIZE=2>Although the common stock
purchase agreement with Acqua Wellington provides that the Company generally may
not draw down unless the Company's common stock is trading at $3.00 per share or
more,  Acqua  Wellington has continued to purchase  shares from  EarthShell from
time-to-time at negotiated prices,  when the market price for EarthShell is less
than $3.00 per share.  In addition,  for the drawdown  period ended  October 26,
2000,  as partial  consideration  for Acqua  Wellington  agreeing  to accept the
drawdown  with minimum  trading  prices  below $3.00 per share,  the Company has
issued to Acqua  Wellington  warrants to purchase 830,234 shares of common stock
at an exercise  price per share of 115% of the  purchase  price per share of the
common stock issued and sold in respect of such drawdown period.</FONT></P>

<P><FONT  FACE="Times  New Roman,  Times,  Serif"  SIZE=2>During  the year ended
December 31, 2000 and consistent with the stock purchase  agreements between the
Company and Acqua Wellington  described above, the Company issued  approximately
4.5 million  shares of common stock and received net proceeds from such issuance
of approximately  $10.5 million.  In late December,  the Company filed a new S-3
registration  statement  covering  the  issuance of up to 15 million  additional
shares of common stock. In addition, the Company has obtained an extension of it
commitment from Acqua  Wellington for an additional 12 months.</FONT></P>

<P><FONT  FACE="Times  New  Roman,  Times,  Serif"  SIZE=2>The  Company  is also
pursuing  additional  commitment of financing for 2001. While the Company has no
current commitments for additional  financing beyond the funding described,  the
Company believes that efforts to obtain additional financing will be successful.
However,  the Company  cannot assure it will be able to obtain such financing on
favorable  terms, if at all. If the required  financing can not be obtained on a
timely basis, the Company will scale back its development activities to conserve
resources until financing becomes available.</FONT></P>

<P><FONT   FACE="Times  New  Roman,  Times,   Serif"   SIZE=2><I>Cash  and  Cash
Equivalents</I></FONT></P>

<P><FONT  FACE="Times New Roman,  Times, Serif" SIZE=2>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 carrying value of cash equivalents  approximates  fair value. 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.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Restricted Cash</I></FONT></P>

<P><FONT  FACE="Times  New Roman,  Times,  Serif"  SIZE=2>At  March 30,  1998, a
certificate  of deposit for $3,500,000 was opened as collateral on the letter of
credit related to the Company's  obligation under a letter agreement between the
Company's  majority  stockholder,  EKI,  and the  Company  relating  to a patent
purchase agreement between EKI and a third party as discussed in the Commitments
note and is classified  as restricted  cash on the balance sheet at December 31,
2000 and 1999.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Short-term Investments</I></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif"  SIZE=2>Investments  are accounted
for in accordance with Statement of Financial  Accounting Standards ("SFAS") No.
115 and are  classified  as available  for sale.  This  standard  requires  that
certain debt and equity securities are to be adjusted to market value at the end
of each accounting  period. At December 31, 1999, the market value of short-term
investments  approximated market value. There were no short-term  investments at
December 31, 2000.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Loss Per Common Share</I></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Basic loss per common share
is  computed  by  dividing  net loss  available  to common  shareholders  by the
weighted-average  number of common shares outstanding during the period. Diluted
loss per common  share is  computed  by dividing  net loss  available  to common
shareholders by the weighted-average number of common shares outstanding plus an
assumed increase in common shares outstanding for dilutive securities.  Net loss
as reported is adjusted for preferred  dividends.  Dilutive  securities  consist
entirely of stock  options and warrants to acquire  common stock for a specified
price and their  dilutive  effect are measured  using the treasury stock method.
Basic and  diluted  loss per  common  share is the same  because  the  impact of
dilutive securities is anti-dilutive. Incremental dilutive shares which would be
issuable using the treasury stock method would be 70,906, 209,120, and 517,972
at December 31, 2000, 1999, and 1998, respectively.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Accounting Standard</I></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>In June 1998, the Financial
Accounting  Standards  Board ("FASB") issued  Statement of Financial  Accounting
Standards ("SFAS") No. 133,  "Accounting for Derivative  Instruments and Hedging
Activities."  SFAS No. 133  establishes  accounting and reporting  standards for
derivative  instruments,  including  derivative  instruments  imbedded  in other
contracts,  and for hedging  activities.  It requires  that all  derivatives  be
recognized as either assets or  liabilities  in the balance sheet at fair value.
SFAS No. 133 becomes  effective  for all fiscal years  beginning  after June 15,
2000 as amended by SFAS No.  137,  "Accounting  in  Derivative  Instruments  and
Hedging  Activities - Deferral of the Effective  Date of FASB No. 133," and SFAS
No. 138,  "Accounting  for Certain  Derivative  Instruments  and Certain Hedging
Activities - an amendment of FASB Statement No. 133." The Company will implement
SFAS No. 133 in fiscal 2001. The Company does not expect any significant  impact
of implementing these standards.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Evaluation of Long-Lived
Assets</I></FONT></P>

<P><FONT   FACE="Times  New  Roman,  Times,  Serif"  SIZE=2>In  accordance  with
Statement  of  Financial   Accounting   Standards  No.  121  ("SFAS  No.  121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", the Company  evaluates  the potential  impairment of long-lived
assets based on  replacement  cost or  projections  of  undiscounted  cash flows
whenever  events or changes in  circumstances  indicate that the carrying  value
amount of an asset  may not be fully  recoverable.  Because  of  delays,  design
changes, and cost overruns experienced in the installation and commercialization
of the Company's  initial  manufacturing  facility,  an evaluation for potential
impairment  of property and  equipment was performed as of December 31, 2000 and
December 31, 1999 using  projected  undiscounted  cash flows  expected from this
facility during a 15-year operating cycle. Based on these projections, and after
abandonment of property and equipment, management believes no impairment of this
facility existed at December 31, 2000 and December 31, 1999.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Property and Equipment</I></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif"  SIZE=2>Property and equipment are
carried at cost.  Depreciation and amortization is provided by the straight-line
method for financial reporting purposes based upon the estimated useful lives of
the assets  which range from three to twenty  years.  The cost of assets sold or
retired and the related amounts of accumulated  depreciation are eliminated from
the accounts and the resulting gain or loss is included in income.  Renewals and
betterments are capitalized. Repairs and maintenance are charged to expense when
incurred and were $228,239 in 2000,  $167,919 in 1999,  and $24,146 in 1998. The
Company  abandoned $12.0 million in 2000, $2.3 million in 1999, and $3.4 million
in 1998  of  equipment  related  to  commercializing  technology  for its  first
manufacturing plant. The abandonment charges are expensed to the category, Other
research   and   development,   in  the   Statement   of   Operations   for  the
Company.</FONT></P>

<P><FONT  FACE="Times New Roman,  Times, Serif" SIZE=2>The Company abandoned $11
million in the fourth  quarter of 2000  related to the  property  and  equipment
located at the Owings Mills,  facility.  The quantities of product  produced and
used in the clamshell validation process to date have been minor relative to the
intended  capacity of the Owings Mills  facility.  In December 2000,  management
determined  that  the  manufacturing  configuration  will  have  to be  modified
somewhat and additional  process  improvements  implemented  to accommodate  the
recent product  design changes and to achieve the design  capacity of the plant.
The  reconfiguration  of the lines  will  result in a  simplified  manufacturing
process,  and  as a  result  of  these  improvements  and  modifications  to the
equipment the Company recognized the abandonment charge described.</FONT></P>

<P><FONT  FACE="Times New Roman, Times, Serif" SIZE=2>The Company abandoned $0.7
million in 1999 related primarily to leasehold  improvements at its office space
in  Maryland.   The  Company  has   consolidated   its  space  during  1999  and
2000.</FONT></P>

<P><FONT  FACE="Times New Roman,  Times,  Serif" SIZE=2>The cost and accumulated
depreciation of property and equipment at December 31 were as follows:</FONT></P>
<PRE>
                                                                      <B><U>2000</U></B>             <B><U>1999</U></B>
Commercial Manufacturing Property:  Construction in progress
         Sweetheart Cup Company............................... $35,355,723      $44,473,386

Product Development Center
         Equipment............................................   4,541,344        4,541,344
         Construction in progress.............................   7,066,882        2,919,322
         Leasehold improvements............................... <U>    571,361</U>      <U>    559,787</U>
                                                                12,179,587        8,020,453

Office equipment &amp; furniture..................................     425,893          340,292
                                                               <U>           </U>      <U>           </U>
Total cost....................................................  47,961,203       52,834,131

Less:  accumulated depreciation...............................<U>(11,695,556)</U>      <U>(5,478,749)</U>
Property and equipment - net.................................. $36,265,647      $47,355,382
                                                               ===========      ===========
</PRE>
<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Investment in Joint Venture</I></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>On May 24, 1999, the
Company entered into a joint venture agreement with Huhtam&#228;ki Van Leer to
commercialize EarthShell Products throughout Europe, Australia, New Zealand,
and, on a country by country basis, Asia. Polarcup EarthShell ApS, a Danish
holding company, was formed for the purpose of establishing operating companies
to manufacture, market, sell and distribute EarthShell Products. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company contributed
approximately 10,000 Euros as nominal share capital and 500,000 Euros for
start-up capital. The Company is required to pay for the development of the
initial prototypes of the next generation manufacturing systems. After both
joint venture partners agree that acceptable next generation manufacturing
economics can be achieved, the joint venture partners will share in the
commercialization costs on an equal basis. During 2000 and 1999, the Company
recorded its equity in the losses of $21,890 and $70,120, respectively, on its
investment in Polarcup EarthShell ApS. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Related Party Transactions</I></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>In connection with the
formation of the Company, the Company entered into an Amended and Restated
License Agreement (the &#147;License Agreement&#148;), which was amended in
1998, with EKI to manufacture, use, sell and sublicense certain foodservice
disposable products and to use certain trademarks owned by EKI in connection
with the products covered under the License Agreement. The license continues in
effect during the life of the patents licensed under the License Agreement
covering the technologies. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company&#146;s product
and manufacturing process development offices and some administrative offices
are located in shared facilities with EKI. In addition, the conduct of the
Company&#146;s current operations requires sharing of technical support and
management personnel of EKI, primarily to assist in furthering the
Company&#146;s development of the licensed technology and product applications.
To confirm these arrangements, the Company and EKI entered into a Technical
Services and Sublease Agreement (the &#147;Prior Technical Services
Agreement&#148;), effective July 1, 1994. Under the terms of the Prior Technical
Services Agreement, the Company paid EKI for all direct project labor hours
incurred at specified hourly billing rates and direct expenses incurred on
approved projects. The specified hourly billing rates, which are subject to
revision semiannually, are fully burdened to include all EKI facility, equipment
and overhead costs and vary according to job classification. The intercompany
rates were compared to a market rate study previously prepared by an independent
third party provider of similar services and were within the range of average
market rates for each job classification. Effective January 1, 2001, EarthShell
hired directly from EKI those personnel critical to EarthShell&#146;s
development program going forward, and will discontinue its use of EKI technical
services. The Company will continue to share a key officer with EKI. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company also subleased
office space from EKI for $5,600 per month under this agreement. The Prior
Technical Services Agreement terminated on September&#160;30, 1997. Effective
October&#160;1, 1997, the Company entered into an Amended and Restated Technical
Services and Sublease Agreement (the &#147;Technical Services Agreement&#148;)
that contains substantially the same terms as the Prior Technical Services
Agreement and expires on December 31, 2002. For the years ended
December&#160;31, 2000, 1999, and 1998, the Company paid or accrued $8,654,612,
$11,663,499, and $8,883,365, respectively, for services performed under these
agreements and $67,200 in sublease payments for each of the respective periods. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>For the years ended
December 31, 2000 and December 31, 1999 and pursuant to resolutions adopted by
the Board of Directors during 1999, the Company paid or accrued $117,289 and
$146,909, respectively, to EKI for salaries and benefits paid by EKI for
administrative support personnel. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company and EKI entered
into the Amended and Restated Agreement for Allocation of Patent Costs (the
&#147;Patent Agreement&#148;), effective October&#160;1, 1997. Until
September&#160;30, 1999, the Company paid all costs associated with prosecuting,
filing, maintaining or acquiring patents and patent applications in connection
with patents and patent applications that are directly related to foodservice
disposables. After September&#160;30, 1999, the Company is obligated to pay all
costs associated with prosecuting, filing, maintaining or acquiring patents and
patent applications in connection with technology that primarily benefits the
foodservice disposables applications licensed to the Company (as compared with
applications of such patents and patent applications outside of the foodservice
disposables field of use). EKI will pay for all other patent related costs. EKI
and the Company will review, on a biennial basis, the comparative benefits of
each existing patent and patent application to determine whether EarthShell
Products derive the principal benefits from the patent or patent application in
question and will allocate the associated patent costs for the ensuing two-year
period accordingly. No party will have the right to be reimbursed for any costs
following notification in writing by the other party that it does not desire to
incur such costs. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Any costs incurred by EKI
or the Company in connection with filing, prosecuting, and maintaining patents
or patent applications prior to December 31, 1997 were allocated in accordance
with the terms and provisions of the prior patent agreement between the Company
and EKI (the &#147;Prior Patent Agreement&#148;) which expired September 30,
1997. Under the Prior Patent Agreement, the Company reimbursed EKI for all costs
associated with prosecuting, filing and maintaining patents and patent
applications in connection with technology that was directly related to food and
beverage containers within, or which had significant teachings with respect to,
the field of use licensed to the Company. EKI paid for all other patent related
costs. Under the Prior Patent Agreement, the patents and patent applications are
the property of EKI, and EKI may obtain a benefit therefrom other than under the
License Agreement, including the utilization and/or licensing of the patents and
related technology in a manner or for uses unrelated to the License Agreement.
Under these agreements, legal fees of $362,244 $644,584, and $485,670 were paid
to or on behalf of EKI during 2000, 1999, and 1998, respectively. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The amount payable to the
majority stockholder of $266,312 and $1,385,737 as of December&#160;31, 2000 and
1999, respectively, includes amounts due to EKI under the Technical Services
Agreement and the Prior Technical Services Agreement and the Patent Agreement
and the Prior Patent Agreement. </FONT></P>

<P><FONT  FACE="Times New Roman,  Times, Serif"  SIZE=2><I>Accounts  Payable and
Accrued Expenses</I></FONT></P>

<P><FONT  FACE="Times  New Roman,  Times,  Serif"  SIZE=2>Accounts  payable  and
accrued expenses consists of the following:</FONT></P>
<PRE>
                                             <U>           December 31,          </U>
                                                  <B>2000</B>                <B>1999</B>
Trade payables .........................       $4,755,738          $3,031,768
Accrued expenses .......................          700,186           1,054,684
Salaries, wages and benefits............          454,973             920,524
Deferred payments on purchases..........     <U>           -</U>        <U>     119,614</U>
                                             $  5,910,897        $  5,126,590
                                             ============        ============
</PRE>
<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Commitments</I></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company has committed
to capital equipment expenditures for the Sweetheart installation and the second
generation of manufacturing equipment of $3.0 million as of December 31, 2000. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Effective  October 1, 1999,
the Company entered into a lease,  effective  October 1, 1999, for 34,956 square
feet of research and development space in Maryland that expires in October 2004.
This lease was terminated  effective  October 15th,  2000 and  concurrently  the
Company entered into a three-year lease for 3,353 square feet of office space in
Lutherville,  Maryland.  The Company  leases 54,800 square feet of space for its
product development center in Goleta, California. This lease expires on June 30,
2003.  The  Company&#146;s  monthly  lease payment with respect to this space is
$41,905. All leases provide the Company with options to renew the leases subject
to certain conditions. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Future minimum lease
payments required under these leases as of December 31, 2000 are as follows: </FONT></P>

<PRE>
2001...............................          $684,242
2002...............................           568,249
2003...............................        <U>   258,567</U>
Total..............................        $1,511,058
                                           ==========
</PRE>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>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 $3,500,000 on or about December 31, 2003, which
obligation is secured by a letter of credit. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company&#146;s
obligation to the seller of the technology will be reduced by 5% of the purchase
price of any equipment purchased by EKI, the Company or its licensees or joint
venture partners from the seller of the technology. In addition, the Company is
required to pay $3,000,000 over the five year period commencing January 1, 2004
if EKI, the Company or the Company&#146;s licensees or joint venture partners
have not purchased, by December 31, 2003, at least $35,000,000 of equipment from
the seller of the technology and EKI, the Company or the Company&#146;s
licensees or joint venture partners make active use of the purchased technology.
EKI has agreed to indemnify the Company to the extent the Company is required to
pay any portion of this $3,000,000 obligation solely as a result of EKI&#146;s
or its licensees&#146; active use of such patents and related technology (other
than use by the Company or its sublicensees). </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Contingencies</I></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>On August 2, 1999, Novamont
S.p.A.,  an Italian  company  specializing in the manufacture of a biodegradable
plastic  resin and  products,  filed a complaint in the United  States  District
Court for the Northern District of Illinois alleging four counts of infringement
of three patents. The Company has analyzed all three patents and believes it has
meritorious defenses and has been vigorously defending the lawsuit. During 2000,
Novamont  agreed to dismiss  three of the four  claims  without  prejudice.  The
Company has filed a motion for summary judgement and will continue to defend the
remaining  infringement  claim.  The Company believes this legal proceeding will
not have a material adverse effect on the Company&#146;s  financial condition or
results of operations. However, the ultimate resolution of this claim is subject
to many  uncertainties.  It is possible that the Company could suffer an adverse
determination  in this proceeding  which could have a material adverse effect on
the  Company&#146;s  financial  position,  operating  results or cash flows when
resolved in a future reporting period. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Retirement Benefits</I></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company established a
qualified 401(k) plan for all of its employees in 1998. The 401(k) plan allows
employees to contribute, on a tax-deferred basis, up to fifteen percent of their
annual base compensation subject to certain regulatory and plan limitations. The
Company uses a discretionary matching formula that matches one half of the
employee&#146;s 401(k) deferral up to a maximum of six percent of annual base
compensation for 2000 and three percent for 1999. The 401(k) employer match was
$61,189 in 2000, $100,492 in 1999, and $9,929 in 1998. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Cumulative Convertible Preferred Stock</I></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>During 1993, the Company
completed a private placement of preferred stock totaling $26,675,000, with net
proceeds to the Company totaling $24,473,001. Under the Series A Cumulative
Senior Convertible Preferred Stock Purchase Agreement, the Company issued
6,988,850 shares of Series&#160;A cumulative senior convertible preferred stock
at $3.82 per share. Dividends, when declared, are payable on a quarterly basis
at 8% per annum. At December 31, 1996, and December 31, 1997 cumulative
undeclared dividends totaled $7,016,000 and $9,149,890, respectively. Each share
of preferred stock was convertible into one share of common stock. Subject to
the right of the holders of the preferred stock to convert their shares into
common stock, the Company had the right to redeem the preferred stock at a price
of $3.87 per share between September&#160;30, 1997 and September&#160;30, 1998
and at a price of $3.82 per share after September&#160;30, 1998. After three
years from the issuance, registration rights enabled the preferred stockholders
to cause the Company to effect two registration statements for the common stock
into which their shares of preferred stock are convertible. Preferred
stockholders had the right to vote with the common stock as if the preferred
stock had converted to common stock of the Company. Preferred stockholders had
the right to elect one member to the Board of Directors. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>To facilitate the sale by
stockholders of Series A preferred stock in the Company&#146;s March 1998
initial public offering of common stock, 3,993,404 shares of the 6,988,850
shares of outstanding Series A preferred stock were converted to 3,993,404
shares of common stock. A portion of the converted shares was sold in the
initial public offering by stockholders. In April 1998, the Board of Directors
declared a cash dividend to preferred stockholders of $1.40 per share based on
the dividend rate of 8% per annum on the liquidation preference of the shares.
The total dividends paid were $9,725,201. By notice dated May 13, 1998, the
Company called for redemption, effective July 14, 1998, of the remaining
2,995,446 shares of Series A preferred stock. In August 1998, the Board of
Directors declared a cash dividend to former preferred stockholders of $.0033
per share based on the dividend rate of 8% per annum of the liquidation
preference pursuant to the Certificate of Designation, Preferences Relative,
Participating, Optional and Other Special Rights for Series A Cumulative Senior
Convertible Preferred Stock, which provided for dividends to accrue until the
time of conversion, together with interest thereon at the rate of 8% per annum
from the date of conversion until the date of payment. Total dividends and
interest paid to the remaining Series A preferred stockholders was $201,502. As
of September 30, 1998, all outstanding shares of Series A preferred stock had
been converted to common stock. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Stock Options</I></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company established the
EarthShell Corporation 1994 Stock Option Plan in 1994 (the &#147;1994
Plan&#148;). The Company subsequently established the EarthShell Corporation
1995 Stock Incentive Plan in 1995 (the &#147;1995 Plan&#148;) which effectively
supersedes the 1994 Plan for options issued on or after the date of the 1995
Plan&#146;s adoption. The 1994 and 1995 Plans as amended (the
&#147;Plans&#148;), provide that the Company may grant an aggregate number of
options for up to 10,000,000 shares of common stock to employees, directors and
other eligible persons as defined by the Plans. Options issued to date under the
1994 Plan and the 1995 Plan generally vest over varying periods from 0 to 5
years and generally expire 10 years from the date of grant. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Stock option activity is as follows:</FONT></P>
<PRE>
                                                                             Weighted
                                                                              Average
                                                             Option Price    Exercise
                                                  <U>Shares</U>      <U>Per Share</U>        <U> Price</U>


   Outstanding at January 1, 1998...........   1,158,040          -             $6.60
   Options granted..........................     670,000        $21.00         $21.00
   Options canceled or expired .............   <U> (91,920)</U>     $7.63-$21.00      $17.67
   Outstanding at December 31, 1998.........   1,736,120          -            $11.57
   Options granted..........................   1,474,000     $5.00-21.00        $6.21
   Options canceled or expired..............   <U>(925,870)</U>     $3.82-$21.00      $11.64
   Outstanding at December 31, 1999.........   2,284,250          -             $8.08
                                               =========
   Options granted..........................     425,000     $1.50-21.00        $6.45
   Options canceled or expired..............   <U>(386,630)</U>     $5.00-$21.00      $11.10
   Outstanding at December 31, 2000.........   2,322,620          -             $7.26
                                               =========
</PRE>
<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The following table
summarizes information about stock options outstanding at December&#160;31,
2000: </FONT></P>

<PRE>
                   <U>               Options Outstanding                  </U>         <U>       Options Exercisable      </U>
                      Number      Weighted-Average                               Number
    Exercise       Outstanding       Remaining         Weighted-Average         Exercisable     Weighted-Average
     <U>Prices</U>       <U> at 12/31/00    Contractual Life      Exercise Price </U>         <U>At 12/31/00      Exercise Price</U>

     $ 1.50             30,000                9.80               $1.50                     -              $1.50
     $ 3.78            160,000                4.68               $3.78                     -              $3.78
     $ 3.82            402,170                3.24               $3.82               402,170              $3.82
     $ 4.00             45,000                9.52               $4.00                     -              $4.00
     $ 5.00            955,000                8.78               $5.00               276,250              $5.00
     $ 7.63            281,650                5.05               $7.63               281,650              $7.63
     $10.69            125,000                3.37              $10.69               125,000             $10.69
     $15.20             78,600                3.26              $15.20                78,600             $15.20
     $16.80             26,200                1.02              $16.80                26,200             $16.80
     $21.00          <U>  219,000</U>                7.83              $21.00            <U>    91,000</U>             $21.00
                     2,322,620                6.46               $7.26             1,280,870              $7.77
                     =========                                                     =========
</PRE>
<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>The Company accounts for
its 1994 and 1995 Plans in accordance with Accounting Principles Board Opinion
No.&#160;25. To measure stock-based compensation in accordance with SFAS No.
123, &#147;Accounting for Stock-Based Compensation&#148;, the fair value of each
option grant was 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. </FONT></P>

<PRE>
                                                    <B>Year Ended,          Year Ended,          Year Ended,
                                                 <U>December 31, 2000</U>   <U>December 31, 1999</U>    <U>December 31, 1998</U></B>

Net loss available to common stockholders:
   As reported..................................    $48,911,605          $44,188,443          $27,396,865
   Pro forma....................................    $49,872,536          $44,709,965          $28,374,937
Net loss per common share:
   As reported..................................          $0.48                $0.44                $0.29
   Pro forma....................................          $0.49                $0.45                $0.30
Risk-free interest rate.........................          5.40%                5.89%                 5.5%
Expected life in years..........................            4.0                  4.0                  4.0
Volatility......................................           139%                  79%                  60%
Weighted average fair value of options
granted during the year.........................          $3.25                $2.43                $3.81
</PRE>
<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Stock Warrants</I></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>On June 7, 1996, in
consideration of a $3,000,000 line of credit financing arrangement, the Company
issued a warrant which entitled the lender to purchase common stock shares equal
to $150,000 divided by the price per share of the Company&#146;s common stock in
the initial public offering. The warrant exercise price was equal to the initial
public offering price and could be exercised at any time following six months
after the initial public offering by the Company and prior to its expiration
date of June 7, 2001. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>On July 2, 1996, the line
of credit was increased to $4,500,000 and an additional warrant was issued which
entitled the lender to purchase another $150,000 in common stock on terms
similar to those in the previously issued warrant of June 7, 1996. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>On November 15, 1996, the
line of credit was increased to $9,000,000 and an additional warrant was issued
which entitled the lender to purchase $450,000 in common stock at a price per
share equal to 110% of the initial public offering price. This warrant expires
on November 15, 2003. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>On October 6, 1997, the
line of credit was increased to $13,000,000 and an additional warrant was issued
which entitled the lender to purchase $250,000 in common stock at a price per
share equal to 110% of the initial public offering price. This warrant expires
on October 6, 2004. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>On December 31, 1997, the
line of credit was increased to $14,000,000 and an additional warrant was issued
which entitled the lender to purchase $50,000 in common stock at a price per
share equal to 110% of the initial public offering price. This warrant expires
on December 31, 2004. The warrants issued in 1997 were valued at $59,898 based
upon the Company&#146;s option pricing model. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>On October 26, 2000, and as
partial consideration for Acqua Wellington agreeing to accept the drawdown with
minimum trading prices below $3.00 per share, the Company has issued to Acqua
Wellington warrants to purchase 830,234 shares of common stock at an exercise
price of 115% of the purchase price per share of the common stock issued and
sold in respect of such drawdown period. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Income Taxes</I></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>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. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Deferred income taxes
result from temporary differences in the recognition of revenues and expenses
for financial and tax reporting purposes. At December&#160;31, 2000 and 1999,
deferred tax assets were comprised primarily of the following: </FONT></P>

<PRE>
                                                        <B><U>2000</U></B>             <B><U>1999</U></B>
Federal:
   Depreciation.................................      ($7,348)         $164,859
   Capitalized operating expenses...............    12,848,166        9,819,959
   Capitalized research and development.........       301,111          322,555
   Deferred compensation........................     1,091,917        1,091,917
   Deferred contributions.......................       359,721          359,721
   Net operating loss carryforward..............   <U> 52,746,419</U>       <U> 36,897,671</U>
                                                    67,339,986       48,656,682
                                                   ===========      ===========
State:
   Depreciation.................................       (2,010)           45,094
   Capitalized operating expenses...............     3,514,351        2,686,047
   Capitalized research and development.........    10,008,188        5,382,581
   Deferred compensation........................       298,672          298,672
   Deferred contributions.......................        98,394           98,394
   Net operating loss carryforward..............    <U>10,127,203</U>       <U> 3,278,952</U>
                                                    <U>24,044,798</U>       <U>11,789,740</U>


Deferred tax asset..............................    91,384,784       60,446,422
Valuation allowance.............................  <U>(91,384,784)</U>     <U>(60,446,422)</U>


   Net deferred tax asset.......................  $          -      $         -
                                                  ============     ============
</PRE>




<P><FONT  FACE="Times New Roman,  Times,  Serif" SIZE=2>The  valuation allowance
increased by $30,938,362,  $16,172,506,  and $12,438,940  during the years ended
December 31, 2000,  1999, and 1998  respectively,  as a result of changes in the
components of the deferred tax items.</FONT></P>

<P><FONT  FACE="Times New Roman,  Times,  Serif"  SIZE=2>For  federal income tax
purposes, the Company has net operating loss carryforwards of $155,136,526 as of
December 31, 2000 that expire through 2020.  For state income tax purposes,  the
Company has  California  net operating  loss  carryforwards  of  $13,213,448  of
December 31, 2000 that expire  through  2005,  and Maryland net  operating  loss
carryforwards  of $127,987,634  that follow the federal  treatment and expire in
2020.</FONT></P>

<P><FONT  FACE="Times New Roman,  Times,  Serif"  SIZE=2>Income  tax expense for
2000, 1999, and 1998 consists primarily of the minimum state franchise tax.</FONT></P>







<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2><I>Quarterly Financial Information (Unaudited)</I></FONT></P>
<PRE>
                                                      <U>First</U>          <U>Second</U>           <U>Third</U>           <U>Fourth</U>         <U>Total Year</U>
<B>2000:</B>
Other Research and development expenses........    $4,069,721      $4,908,675      $4,888,075      $14,744,287     $28,610,758
Related party research and development.........     1,984,423       2,486,429       2,053,602        2,130,158       8,654,612
Related party patent expense...................       143,390         126,383          51,124           41,347         362,244
General and administrative.....................     1,987,910       2,238,128       2,096,661          363,078       6,685,777
Net loss common shareholders...................     9,165,568      10,890,363      10,249,079       18,606,595      48,911,605
Basic and diluted loss per common share........         $0.09           $0.11           $0.10            $0.18           $0.48
Weighted average common shares outstanding.....
                                                  100,045,166     100,381,321     101,352,816      103,871,798     101,419,330
Market price per common share (1)
    High.......................................       $6 7/16        $4 41/64         $3 1/32           $3 3/4         $6 7/16
    Low........................................        $3 3/4              $3         $1 3/16          $ 27/32         $ 27/32
    Close......................................        $4 1/8         $3 1/32          $1 1/4          $1 9/32         $1 9/32


<B>1999:</B>
Research and development expenses..............    $3,301,905      $4,026,548      $6,151,749       $5,326,896     $18,807,098
Related party research and development.........     2,400,310       2,957,725       2,683,296        3,622,168      11,663,499
Related party patent expense...................       301,747          26,273         167,486          149,078         644,584
General and administrative.....................     3,001,856       4,696,307       2,608,145        1,351,588      11,657,896
Net loss common shareholders...................     8,260,033      12,202,330      12,391,826       11,334,254      44,188,443
Basic and diluted loss per common share........         $0.08           $0.12           $0.12            $0.11           $0.44
Weighted average common shares outstanding.....
                                                  100,045,166     100,045,166     100,045,166      100,045,166     100,045,166
Market price per common share (1)
    High.......................................       $17 3/8       $10 11/16              $8           $5 1/2         $17 3/8
    Low........................................      $8 35/64              $6          $3 7/8         $1 13/32        $1 13/32
    Close......................................        $9 3/4              $7          $3 7/8           $4 1/4          $4 1/4
</PRE>
<P><FONT  FACE="Times New Roman,  Times,  Serif" SIZE=2>(1) The Company's common
stock commenced trading on The Nasdaq Stock Market on March 24, 1998.</FONT></P>

</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>2
<FILENAME>0002.htm
<DESCRIPTION>EMPLOYMENT AGREEMENT
<TEXT>

<HTML>
<HEAD>
<TITLE>
EX 10.38 Employment Agreement dated April 15, 2000 by and between the Company and Richard DiPasquale
</TITLE>
</HEAD>
<BODY>
<H1 ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>EMPLOYMENT
AGREEMENT</FONT></H1>

<H1 ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>BETWEEN</FONT></H1>

<H1 ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>EARTHSHELL CORPORATION</FONT></H1>

<H1 ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>AND</FONT></H1>

<H1 ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>RICHARD
DIPASQUALE</FONT></H1>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;This
Employment  Agreement  (the   &#147;Agreement&#148;)   is  entered  into  as  of
April&#160;15,  2000 (the &#147;Effective  Date&#148;) by and between EarthShell
Corporation,  a  Delaware  corporation  with its  principal  office  located  in
Baltimore,  Maryland  (the  &#147;Company&#148;),  and  Richard  DiPasquale,  an
individual (&#147;Employee&#148;). </FONT></P>

<H1 ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>AGREEMENT</FONT></H1>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;1.
&nbsp;&nbsp;&nbsp;<B><U>Services Provided to the Company.</U></B></FONT></P>


<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)
&nbsp;&nbsp;&nbsp;<U>Position  and  Duties.</U>  As of the Effective
Date,  Employee shall be employed as Chief Technology Officer of the Company and
will have the general  responsibility for all  commercialization  and technology
development  activities  of the  Company  and its  joint  venture  partners  and
licensees,  the management of the technical services agreement with E. Khashoggi
Industries,  LLC and its affiliated companies,  and oversight responsibility for
the Company's  technical  resources and operations,  including the  procurement,
development,  improvement  and  installation  of  commercial  equipment  at  the
Company's or its joint  venturers' or licensees'  operating  sites in accordance
with agreements,  specifications,  parameters and efficiencies  demonstrated and
documented by prototype  line  operation.  Within the parameters of the approved
budgets,   Employee   will  maintain  a  qualified   staff  to  complete   these
responsibilities  in order to meet the goals and  timelines  established  by the
Company and under the Chief Executive Officer of the Company.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)
&nbsp;&nbsp;&nbsp;<U>Reporting  Responsibilities.</U>  Employee will
report to the Chief  Executive  Officer of the  Company  and shall  oversee  the
Company's  weekly  technical  staff  meetings.  Employee  shall  keep the  Chief
Executive  Officer  apprised  on a weekly  basis as to  Employee's  progress  in
achieving  the goals and  objectives  set forth in any  budgets,  milestones  or
business plans established by the Company.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)
&nbsp;&nbsp;&nbsp;<U>Time  Commitment</U>.  During  the term of this
Agreement,  Employee shall devote substantially all of his regular working hours
to the business and welfare of the Company and its subsidiaries, and he shall be
required  to  expend  such  additional   time  as  is  reasonably   required  to
successfully  discharge  his  duties  and  responsibilities.  Employee  shall be
considered an exempt employee for employment law purposes.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;2.
&nbsp;&nbsp;&nbsp;<B><U>Compensation to Employee.</U></B></FONT></P>


<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)
&nbsp;&nbsp;&nbsp;<U>Base  Salary.</U>  Employee  shall receive a base salary in
the amount of $250,000 per annum, commencing April 15, 2000.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)
&nbsp;&nbsp;&nbsp;<U>Stock Options.</U> In addition to the foregoing
compensation,  subject to  satisfaction  of the conditions set forth below or as
modified  by mutual  agreement  by the  parties and  provided  that  Employee is
employed by the Company as of the vesting date for each respective option
grant:</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)
&nbsp;&nbsp;&nbsp;Pursuant  to the  Consulting  Agreement  that  was
entered into between  Employee and the Company,  effective  January 1, 2000, the
Company  has  granted to Employee  options to acquire  the  following  number of
shares of the  Company&#146;s  newly  issued  common  stock,  which  options are
exercisable at an exercise  price of $4.00 per share during the one-year  period
commencing  January&#160;1,  2001 and ending  January&#160;5,  2002,  subject to
satisfaction  of  the  modified  conditions  set  forth  below  (which  modified
conditions are subject to the  ratification by the  Company&#146;s  Stock Option
Committee): </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(A)
&nbsp;&nbsp;&nbsp;Employee  has been granted an option to purchase 30,000 shares
of the  Company's  common  stock  that  shall vest if, and only if, as of May 1,
2000, the initial  equipment line installed at the Sweetheart  Facility has been
operating with all  16&#160;presses  for a continuous  72&#160;hour period at an
overall  efficiency  rate of greater  than 50% and  Sweetheart  Cup  Company has
agreed to a defined set of  conditions to assume full  responsibility  for plate
operations and economics. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(B)
&nbsp;&nbsp;&nbsp;Employee  has been granted an option to purchase an additional
40,000  shares of the  Company&#146;s  common stock that shall vest if, and only
if, as of June 30, 2000, the initial  equipment line installed at the Sweetheart
Facility has been  operating for a continuous  14&#160;day  period at an overall
efficiency  rate of  greater  than 80%,  all  three  equipment  lines  have been
operating with all  16&#160;presses  for a continuous  72&#160;hour period at an
overall  efficiency  rate of greater than 10% for each line,  and Sweetheart Cup
Company has assumed full  responsibility  for the  operation and economics of at
least one line as defined above. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii)
&nbsp;&nbsp;&nbsp;Effective  June 30, 2000,  the Company shall grant to Employee
options to purchase up to an 50,000  shares of the  Company&#146;s  newly-issued
common  stock  at an  exercise  price  equal  to the  fair  market  value of the
Company&#146;s  common  stock on June 30,  2000,  as  determined  pursuant  to a
pricing  formula  to be  decided  by the  Stock  Option  Committee  and  applied
generally to option grants by the Company to its employees,  which options shall
be exercisable  over a nine-year  term  commencing  January 1, 2001,  subject to
earlier  termination  upon  termination of  Employee&#146;s  employment with the
Company  in  accordance  with the terms  and  conditions  of the  Company&#146;s
standard option agreement,  and subject further to satisfaction of the following
conditions  (which  conditions are subject to  ratification  by the Stock Option
Committee): </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(A)
&nbsp;&nbsp;&nbsp;Employee  shall be granted an option to purchase 10,000 shares
of the  Company&#146;s  common stock that shall vest if, and only if, as of June
30, 2000, the initial  equipment line installed to produce  EarthShell bowls has
been operated for a continuous 24 hour period at an overall  efficiency  rate of
greater than 80% or economic model efficiencies, raw material costs, quality and
labor  have been  demonstrated  pursuant  to the  standards  attached  hereto or
subsequently  established by the Executive Committee of the Company&#146;s Board
of Directors. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(B)
&nbsp;&nbsp;&nbsp;Employee  shall be granted an option to purchase 10,000 shares
of the Company&#146;s common stock that shall vest if, and only if, as of August
1, 2000, the initial  equipment line installed to produce  EarthShell plates has
been operated for a continuous 24 hour period at an overall  efficiency  rate of
greater than 80% or economic model efficiencies, raw material costs, quality and
labor  have been  demonstrated  pursuant  to the  standards  attached  hereto or
subsequently  established  by the  Executive  Committee.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(C)
&nbsp;&nbsp;&nbsp;Employee  shall be granted an option to purchase  10,000
shares of the Company&#146;s common stock that shall vest if, and only if, as of
August 30, 2000, the initial equipment line installed to produce EarthShell cups
has been operated for a continuous 24 hour period at an overall  efficiency rate
of greater than 80% or economic model efficiencies,  raw material costs, quality
and labor have been  demonstrated  pursuant to the standards  attached hereto or
subsequently established by the Executive Committee.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(D)
&nbsp;&nbsp;&nbsp;Employee  shall be granted an option to purchase  10,000
shares of the Company&#146;s common stock that shall vest if, and only if, as of
September 30, 2000, the initial  equipment line installed to produce  EarthShell
products  in Europe has been  operated  for a  continuous  24 hour  period at an
overall efficiency rate of greater than 80% or economic model efficiencies,  raw
material  costs,  quality  and labor  have  been  demonstrated  pursuant  to the
standards   attached  hereto  or  subsequently   established  by  the  Executive
Committee. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(E)
&nbsp;&nbsp;&nbsp;Employee  shall be granted an option to purchase 10,000 shares
of the  Company&#146;s  common  stock  that  shall  vest if,  and only if, as of
October  1,  2000,  the  initial  EarthShell   paperboard   products  have  been
commercially produced at raw material costs and equipment rates that meet target
economics pursuant to the standards attached hereto or subsequently  established
by the Executive Committee. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)
&nbsp;&nbsp;&nbsp;<U>Additional   Compensation.</U>  During  the  term  of  this
Agreement,  Employee  shall be entitled to receive  such  bonuses and  incentive
compensation  (totaling not more than 100% of his base salary) and stock options
as the Board of Directors (or the appropriate  committees  thereof) shall decide
in its sole and absolute discretion.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;3.
&nbsp;&nbsp;&nbsp;<B><U>Employee  Benefits.</U></B> The Company shall provide to
Employee each of the following benefits:</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)
&nbsp;&nbsp;&nbsp;<U>Business  Expenses.</U>  The Company shall pay or reimburse
Employee for all reasonable  out-of-pocket  expenses incurred by Employee in the
course of providing  his services  hereunder and which are  consistent  with the
Company's expense reimbursement guidelines or policies. Such reimbursement shall
be made by the  Company  within  thirty  (30) days after  receipt of a statement
therefor from Employee setting forth in reasonable detail the expenses for which
reimbursement is requested,  accompanied by reasonable  documentation evidencing
such expenses. The Company agrees to pay up to $4,000 per year of the Employee's
dues  and  fees  attributable  to  his  participation  in the  Young  Presidents
Organization.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)
&nbsp;&nbsp;&nbsp;<U>Insurance  Coverage  and  Benefits.</U>  The Company  shall
provide Employee,  at the Company's  expense,  coverage under the major medical,
hospitalization,  disability  and other  insurance  programs  maintained  by the
Company  for its  operating  officers  generally,  or if  none  is made  for its
operating officers  generally,  its employees  generally,  including any benefit
plans that are provided by the Company subsequent to the date of this Agreement.
In  addition,  Employee  shall  receive  all  other  Company-provided  benefits,
including sick pay benefits and vacation time, that are, from time to time, made
available by the Company to its operating  officers generally or, if not made to
its operating officers generally, its employees generally.  Employee agrees that
the Company  retains the right to establish  compensation,  benefits and working
conditions for all of its officers or employees and to change,  modify or delete
any  aspects  of its  current  or  future  compensation,  benefits  and  working
conditions in its sole discretion. Employee shall initially be entitled to three
weeks of paid vacation per year.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;4.
&nbsp;&nbsp;&nbsp;<B><U>Termination.</U></B></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)
&nbsp;&nbsp;&nbsp;Employee's  employment hereunder may be terminated upon thirty
(30) days  written  notice by  Employee  or the  Company,  provided  that if the
Company  terminates  Employee's  employment  for other  than  cause (as  defined
below), Employee shall be entitled to receive a lump sum severance payment equal
to 100% of his then  annual  base  salary  (less the  portion of the base salary
which is paid for services  rendered  following the notice of termination).  The
severance payment shall constitute  Employee's exclusive and sole remedy for the
Company's  termination  of  this  Agreement  (although  Employee  shall  also be
entitled to receive any unpaid base salary to which he is entitled under Section
2(a) and which has accrued through the effective date of termination, as well as
reimbursement  for all  previously  unreimbursed  expenses  under Section 3(a)).
Payment of such severance  payment shall be conditioned on Employee's  execution
and  delivery  of a  release  and  termination  agreement  containing  terms and
conditions which are standard and customary for an agreement of that type.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)
&nbsp;&nbsp;&nbsp;Notwithstanding  the foregoing, Employee shall not be entitled
to any severance  payment if Employee  terminates  this Agreement for any reason
(other  than  by  reason  of the  Company's  uncured  default  of  its  material
obligations hereunder), or should the Company terminate this Agreement for cause
(in which event this Agreement can be terminated  effective upon the delivery of
written notice to Employee).</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)
&nbsp;&nbsp;&nbsp;Cause means the occurrence of any of the following events: (i)
failure  (including by reason of death or medical  disability  for a consecutive
period of sixty (60) days or more) by the Employee to substantially  perform his
duties with the Company,  including the timely and professional discharge of his
duties and  responsibilities  under Section 1; provided,  however, to the extent
the event  justifying  termination is capable of being cured by the Employee and
does not represent  repetitive  conduct,  Employee  shall be given notice of the
problem and a  reasonable  time  period to cure the  problem  (which time period
shall not exceed ten (10) days);  and provided,  further,  that if Employee does
cure the problem to the Company's reasonable  satisfaction within the designated
time period, this Agreement shall continue and shall not be terminated; (ii) any
act by the  Employee of fraud,  misappropriation,  dishonesty,  embezzlement  or
similar  conduct against the Company;  or (iii)  indictment or conviction of the
Employee for a felony or any other crime involving moral turpitude.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;5.
&nbsp;&nbsp;&nbsp;<B><U>Confidential and Proprietary Information; Inventions.</U></B></FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)
&nbsp;&nbsp;&nbsp;Employee  acknowledges  that he has executed and  delivered to
the Company its standard non-disclosure  agreement with respect to the Company's
confidential and proprietary information (the "Confidentiality Agreement"). Such
agreement shall continue to be effective through the date specified therein.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)
&nbsp;&nbsp;&nbsp;In  addition to the duties and  obligations  of Employee under
the   Confidentiality   Agreement,   Employee  covenants  and  agrees  that  all
inventions, trade secrets, products, processes, material applications,  designs,
formulations and ideas of a proprietary  nature created or developed as a result
of the services rendered by Employee pursuant to this Agreement,  whether or not
subject to patent, trademark or copyright protection, which are made, developed,
created,  conceived or reduced to practice by Employee,  individually or jointly
with the Company or the Company  affiliates,  during the term of this Agreement,
or at any time thereafter if based upon or related to  Confidential  Information
belonging  to  the  Company  or  the  Company  affiliates   (collectively,   the
"Inventions"),  shall be  immediately  reported  to the Company and shall be the
exclusive  property of the Company.  Employee  shall  perform,  at the Company's
request and expense,  any and all acts and render any technical assistance which
the Company shall reasonably request that are necessary to vest the Company with
all right,  title and  interest  in and to any such  Inventions,  including  the
filing,  procurement  and  maintenance  of any patent,  trademark  or  copyright
applications.  When  appropriate  or  necessary,  Employee  shall  also  perform
whatever services or assistance that may be reasonably  requested by the Company
to defend its position  pertaining to any actions  against  infringement  of any
patent,  trademark or copyright  issued in connection  with the Inventions or to
protect and enforce the same. Nothing in this Agreement shall be construed as an
obligation  upon the Company or any Company  affiliate  to develop or market any
Inventions created by Employee pursuant to this Agreement.  Employee agrees that
all Inventions  made,  developed,  created,  conceived or reduced to practice by
Employee  during the course of rendering  Services  pursuant to this  Agreement,
whether  or not  such  Invention  is  developed  on or off the  premises  of the
Company, shall belong exclusively to the Company and shall be deemed to be works
made for hire.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;6.
&nbsp;&nbsp;&nbsp;<B><U>General Provisions.</U></B></FONT></P>


<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)
&nbsp;&nbsp;&nbsp;<U>Notices.</U>  Any  notice  to be  given  pursuant  to  this
Agreement  shall be in writing and, in the absence of receipted  hand  delivery,
shall be deemed duly given when  mailed,  if the same shall be sent by certified
or registered  mail,  return receipt  requested,  or by a nationally  recognized
overnight courier,  and the mailing date shall be deemed the date from which all
time  periods  pertaining  to a date of  notice  shall  run.  Notices  shall  be
addressed to the parties at the following addresses:</FONT></P>

<PRE>
        If to the Company, to:             EarthShell Corporation
                                           800 Miramonte Drive
                                           Santa Barbara, California 93109
                                           Attention:  Simon K. Hodson

        If to Employee, to:                Richard DiPasquale
                                           2874 Redondo Avenue
                                           Camarillo, California 93012
</PRE>
<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)
&nbsp;&nbsp;&nbsp;<U>Successors and Assigns.</U> This Agreement shall be binding
upon and shall inure to the benefit of the Company and any successors whether by
merger,   consolidation,   transfer  of  substantially  all  assets  or  similar
transaction,  and it shall be  binding  upon and shall  inure to the  benefit of
Employee and his heirs and legal representatives.  This Agreement is personal to
Employee and shall not be assignable by Employee.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)
&nbsp;&nbsp;&nbsp;<U>Waiver of Breach.</U> No waiver of any breach of any of the
provisions  of this  Agreement  shall be  deemed a waiver  of any  preceding  or
succeeding  breach of the same or any other  provisions  hereof.  No such waiver
shall be effective  unless in writing and then only to the extent  expressly set
forth in writing.  All  remedies  available  to either  party for breach of this
Agreement are cumulative and may be exercised  concurrently  or separately,  and
the exercise of any one remedy shall not be deemed an election of such remedy to
the exclusion of other remedies.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)
&nbsp;&nbsp;&nbsp;<U>Entire   Agreement/Amendment.</U>   This   Agreement,   the
Confidentiality Agreement and any exhibits attached hereto or thereto constitute
the entire  agreement  between  the parties  hereto with  respect to the subject
matter  hereof,  and shall  supersede  all  previous  oral and  written  and all
contemporaneous  oral negotiations,  commitments,  agreements and understandings
relating  hereto.  Any amendment to this Agreement shall be effective only if it
is in  writing  and  signed by the  parties to this  Agreement.  This  Agreement
supercedes  the  Consulting  Agreement in its entirety  (although  the terms and
provisions of the Consulting  Agreement shall survive and continue to govern the
parties'  consulting  arrangement during any fiscal period ending on or prior to
April 15, 2000). Except as set forth in the immediately preceding sentence,  the
Consulting Agreement is hereby terminated as of April 15, 2000.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e)
&nbsp;&nbsp;&nbsp;<U>Applicable  Law.</U> The validity of this Agreement and the
interpretation  and  performance  of all of its  terms  shall be  construed  and
enforced  in  accordance  with  the  laws of the  State  of  California  without
reference to choice or conflict of law principles.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f)
&nbsp;&nbsp;&nbsp;<U>Severability.</U>  Any provision of this  Agreement that is
deemed invalid,  illegal or unenforceable in any jurisdiction  shall, as to that
jurisdiction and subject to this paragraph, be ineffective to the extent of such
invalidity,  illegality or  unenforceability,  without  affecting in any way the
remaining  provisions hereof in such jurisdiction or rendering that or any other
provision  of this  Agreement  invalid,  illegal or  unenforceable  in any other
jurisdiction. If any covenant should be deemed invalid, illegal or unenforceable
because its scope is considered  excessive,  such covenant  shall be modified so
that the scope of the covenant is reduced only to the minimum  extent  necessary
to render the modified covenant valid, legal and enforceable.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(g)
&nbsp;&nbsp;&nbsp;<U>Arbitration.</U>  Employee agrees that any disputes arising
out of  his  employment,  including  any  claims  against  officers,  directors,
shareholders,  employees or agents of the Company, and including but not limited
to any claims for alleged wrongful termination,  alleged breach of contract, and
alleged  discrimination  of any type, shall be finally resolved by an arbitrator
in the City of Santa  Barbara,  California,  at the time such dispute  arises in
accordance with the American Arbitration  Association's Model Employment Dispute
Resolution Rules then in effect (including any  state-specific  rules applicable
to the place of Employee's  primary place of employment  with the Company at the
time such dispute arises). Employee and the Company agree that judgment upon any
award  rendered  by the  arbitrator  may be  entered  in any court of  competent
jurisdiction  and that the decisions of the  arbitrator  within the scope of the
submission  shall be final and binding on all parties.  Employee agrees that the
only exception to this mandatory arbitration agreement shall be that the Company
may sue in court for  injunctive  relief and ancillary  remedies for any alleged
violation  of  Employee's  obligation  to  respect  and  protect  the  Company's
confidential  information  and  Inventions  as provided  in the  Confidentiality
Agreement and this Agreement.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(h)
&nbsp;&nbsp;&nbsp;<U>Further  Assurances.</U>  The parties  agree to execute and
deliver  to  each  other,  upon  request,  any  and  all  additional  documents,
instruments and advice necessary to be filed,  recorded or delivered in order to
carry out the purposes of this Agreement.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)
&nbsp;&nbsp;&nbsp;<U>Injunctive  Relief.</U> It is hereby  understood and agreed
that damages shall be an inadequate  remedy in the event of a breach by Employee
of the  provisions  of Section 5 of this  Agreement  and that any such breach by
Employee  will cause the Company  irreparable  injury and  damage.  Accordingly,
Employee  agrees  that  the  Company  shall be  entitled,  without  waiving  any
additional  rights or remedies  otherwise  available to the Company at law or in
equity or by  statute,  to  injunctive  relief,  specific  performance  or other
equitable  remedies in the event of a breach or threatened breach by Employee of
such provisions.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(j)
&nbsp;&nbsp;&nbsp;<U>Modifications.</U> No modifications to this Agreement shall
be effective unless in writing and signed by both parties.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(k)
&nbsp;&nbsp;&nbsp;<U>Mutually  Drafted.</U>  This  Agreement  shall be deemed to
have been mutually  drafted and shall be construed fairly and in accordance with
its terms. No party shall be entitled to any presumption or construction in such
party's favor as a result of any party assuming the burden of memorializing  the
parties' agreement hereunder.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(l)
&nbsp;&nbsp;&nbsp;<U>Counterparts.</U>  This Agreement may be executed in one or
more counterparts,  each of which shall be deemed an original,  and all of which
together shall constitute one and the same instrument.  Faxed signatures to this
Agreement shall be binding for all purposes.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(m)
&nbsp;&nbsp;&nbsp;<U>Expenses.</U> Each party shall bear its own legal and other
professional  expenses,  as well as any finder's or similar  fees, in connection
with the preparation, negotiation and execution of this Agreement.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;IN
WITNESS WHEREOF, the undersigned have executed this Agreement as of the date
first above written. </FONT></P>
<PRE>
                               EARTHSHELL CORPORATION,

                               a Delaware corporation

                               By:  /s/ Simon K. Hodson
                                    ------------------------------

                               Title:  CEO
                                       ---------------------------



                               RICHARD DIPASQUALE


                               /s/ Richard M. Dipasquale
                               ------------------------------------

</PRE>
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<DESCRIPTION>EX 10.39 EARTHSHELL LEASE
<TEXT>

<HTML>
<HEAD>
<TITLE> 10.39 EarthShell Lease
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<BODY>
<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>THIS Lease Agreement
(Lease) is made this 23 day of August 2000, between HEAVER PROPERTIES, LLC, 1301
York Road, Lutherville, Maryland 21093, hereinafter called the
&#147;Landlord,&#148; and EarthShell CORPORATION, hereinafter called the
&#147;Tenant&#148;. </FONT></P>

<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>WITNESSETH:</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>1)       <B>PREMISES</B><BR>
That the said Landlord,  for and in  consideration of the payment of the rentals
and performance of the covenants and agreements hereinafter  mentioned,  demises
and leases unto the said  Tenant,  and the latter does let from the former,  the
following described office,  known as Suite 200, in the office building known as
Heaver  Plaza,  hereinafter  referred to as the  Building,  located at 1301 York
Road, Baltimore County,  Maryland,  consisting of 3,353 rentable square feet, as
shown outlined in red on Exhibit &#147;A&#148;, attached hereto, and made a part
hereof.  Said  office  shall be referred  to in this Lease as the  Premises.  In
addition to the Premises,  Tenant shall have the right of non-exclusive  use, in
common  with  others,  of  driveways,   access  roads,   footways,  and  loading
facilities;  all to be subject to the terms and  conditions of this Lease and to
the rules and regulations for use thereof as prescribed by Landlord. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>2)       <B>TERM</B><BR>
The term of this Lease shall commence on September 15, 2000, and shall terminate
on  September  30,  2003,  for a period  of  three  years  and one  half  month.
</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)       <B>RENT</B><BR>
Tenant  covenants  and  agrees  to pay to the  Landlord  a base  rental  for the
Premises,  at the rate of Sixty-five Thousand Three Hundred Eighty-eight Dollars
and  Ninety-six  Cents  ($65,388.96)  per annum,  payable  in twelve  (12) equal
monthly  installments of $5,449.08 each, in advance,  on or before the first day
of each full calendar  month during the term; the first payment shall be due and
payable upon the signing of the Lease. All rentals payable by Tenant to Landlord
under this Lease  shall be paid to  Landlord  at the office of  Landlord  herein
designated  by it for notices  (See Article  27).  Tenant will  promptly pay all
rentals herein prescribed when and, as the same shall become due and payable. If
the term of the Lease does not begin on the first day or end on the first day of
a month,  the Base Rent for that partial month shall be prorated by  multiplying
the monthly  Base Rent by a fraction,  the  numerator  of which is the number of
days of the partial month  included in the term and the  denominator of which is
the total number of days in the full calendar month. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>4)       <B>ESCALATION CLAUSE</B><BR>
At the  commencement of the second year of this term and on the anniversary date
of each year thereafter  that this Lease is in effect,  the base rent to be paid
to Landlord by Tenant shall be derived by adding 3% of the preceding year&#146;s
rent to the preceding year&#146;s rent, the total of which shall then be payable
in the same  manner as the base rent in Article 3 hereof.  Base rent  throughout
the balance of the lease term shall be as follows </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;October
 1, 2001&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;$67,350.63/annual
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;$5,612.55/monthly<BR>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;October
 1, 2002&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;$69,371.15/annual
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;$5,780.93/monthly</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>5)       <B>REAL ESTATE TAXES AND CHARGES</B><BR>
The  Building,  situated  on 5.909  acres of land,  contains  a total of 100,000
square feet of leasable area, of which 2,994 usable square feet  constitutes the
Premises. The real estate taxes and Metropolitan District charges levied against
the Premises  including,  but not limited to, those charged by Baltimore  County
and the State of Maryland or any form of tax which replaces these charges in the
future,  are  based  upon the  assessment  on the  improvements  and land by the
Department  of  Assessments  and  Taxation of  Baltimore  County or the State of
Maryland or any other agency authorized to assess commercial real estate in this
area.  Tenant  shall pay 2.99  percent of any increase in said taxes and charges
over the Base Tax (as defined  below),  whether such increase is due to a change
in the tax rate or a change in the  assessment  of the said any increase in real
estate  tax  assessments  caused by  specific  improvements  made  solely to the
Premises. Tenant agrees to promptly pay said percent of said increased taxes and
charges, but not any penalties,  late interest, or late charges, upon submission
of a true and correct  photocopy  of the tax bill by  Landlord.  For purposes of
this Lease,  base tax means $122,912.77 for the fiscal year July 1, 2000 to June
30,  2001.  Tenant  shall not be  responsible  for any  increase in the taxes or
charges that were caused by any additional building on the site. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>6)       <B>UTILITY SURCHARGE</B><BR>
In the event that charges to the Building for  utilities  (gas,  electric  &amp;
water) shall increase by more than 15%  cumulatively  per year,  Tenant shall be
responsible  for 2.99% of any overage  beyond said 15% which shall be considered
&#147;additional  rent&#148;  and Tenant  hereby agrees to promptly pay any such
surcharge upon being invoiced by Landlord with a reasonably  detailed  statement
therefore. </FONT></P>

<PRE>
 Example:     Utility charges 2000        $145,050
                                           <U> x 15%</U>
                                          $166,813

              Assume charges 2001 =        168,000
              Overage =                   $  1,187

              Tenant surcharge = $1,187 2.99% = $35.49
              Tenant charge for 2001 = $35.49
</PRE>
<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>For purposes of this Lease,
base year shall mean calendar year 2000. If another tenant or tenants in the
Building consume excessive amounts of utilities, Landlord shall charge the
tenants directly for such excessive use and subtract all payments towards
utilities from the calculation contemplated under this article. </FONT></P>


<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>7)      <B>USE AND ENJOYMENT</B><BR>
The  Premises  shall be used for general  office use and for no other  purposes.
Tenant  shall,  at  Tenant&#146;s   expense,   comply  with  all  laws,   rules,
regulations,  requirements  and  ordinances  existing  or  hereafter  enacted or
imposed by any governmental authority having jurisdiction over the Premises, the
Building,  Landlord or Tenant applicable to Tenant and Tenant&#146;s  particular
use of the  Premises.  Landlord  warrants  that so long as Tenant  complies with
every  covenant of this Lease and is not in default of this Lease,  Tenant shall
have the right of quiet enjoyment of the Premises  insofar as from  interference
from the Landlord or  Landlord&#146;s  agents.  Tenant covenants and agrees that
the Premises shall be used for the purposes above  mentioned in a careful,  safe
and proper  manner;  that it shall not deface or overload the  Premises.  Tenant
shall maintain the Premises,  including  shampooing of carpeting and cleaning of
draperies, at its own expense, in an orderly and sanitary condition. Tenant will
not use nor  permit  the use of any  apparatus,  noisy  or  vibration  producing
equipment,  or musical  instruments  for sounds so  reproduced,  transmitted  or
produced  which  shall be audible or felt beyond the  interior of the  Premises.
Tenant shall be responsible  for the costs of repairing or replacing any portion
of the  Premises  or common  areas  which was  damaged by the act or omission of
Tenant or its  agents,  employees  or assigns,  or their use of the  Premises or
common areas, normal wear and tear excepted. </FONT></P>



<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>8)       <B>PARKING SPACES</B><BR>
So long as Tenant  shall pay the rent herein  provided  at the times  designated
herein for the  payment of rent,  Landlord  shall  provide  Tenant  with one (1)
executive  parking  space and 13  unreserved  parking  spaces on the property on
which the Building is located.  (The current executive parking space is shown on
the drawing  attached  hereto as Exhibit C).  Tenant,  represented by its office
manager,  shall  observe  and  use its  best  efforts  to  enforce  the  parking
regulations as equitably established by Landlord and shall require that invitees
shall not, under any circumstances, use parking spaces assigned to other tenants
of the Building.  Parking  spaces will be provided by Landlord for the exclusive
use of visitors to the  Building.  Tenant and its employees or agents shall not,
under  any  circumstances,  use the  parking  spaces  designated  for  visitors.
Persistent  disregard of these  regulations  shall constitute a violation of the
Lease by the  Tenant.  Landlord  shall use its best  efforts  to keep all spaces
clear of any obstructions. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>9)       <B>ALTERATIONS AND RENOVATIONS</B><BR>
Tenant shall not make any alterations or renovations to the Premises without the
prior written  consent of Landlord  first  obtained,  which consent shall not be
unreasonably  withheld or delayed.  Said  consent  shall not be given until full
drawings and  specifications  detailing  proposed changes have been submitted to
and approved by the Landlord.  It is further  agreed that at the  termination of
this Lease or any extension thereof,  Tenant shall have removed said alterations
and  improvements  and the Tenant  shall  restore the  Premises to their  former
condition,  normal wear and tear excepted, or, if allowed by Landlord, leave the
improvements in place, in good condition,  reasonable wear and tear excepted. At
the time of consenting  to such  alterations  or  improvements,  Landlord  shall
indicate in writing whether Tenant will be required to remove such alteration or
improvement  at the end of this Lease.  It is understood  and agreed that Tenant
shall, in making any such alternations and  improvements,  as well as in its use
of the  Premises,  fully  comply  with  all  national  and  state  laws,  county
ordinances and regulations of public  authority,  as well as the requirements of
the Association of Fire Underwriters or similar governing  insurance bodies, all
at Tenant&#146;s  expense.  Tenant  covenants,  at its own expense,  promptly to
comply with and do all things  required by any notice served upon it or upon the
Landlord in relation to said Premises or any part thereof from any department of
the State or County,  including  the Health  Department  and Building  Engineers
Office,  or the United States,  if the same shall be caused by Tenant&#146;s use
of the Premises, or any alteration,  addition, or change thereof made by Tenant.
All  renovations  and  improvements  shall be  performed  by the  Landlord  or a
Landlord approved contractor. (Also see Article 32) </FONT></P>



<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>10)      <B>LIABILITY INSURANCE</B><BR>
Tenant will keep in force at its own expense,  so long as this Lease  remains in
effect,  commercial general liability  insurance with respect to the Premises in
companies  and in form  acceptable  to  Landlord  with a combined  single  limit
coverage  for bodily  injury  and/or  death to one or more  persons and property
damage with minimum  limits of $1,000,000  for each  occurrence  and  $1,000,000
aggregate. Tenant shall ensure that the Landlord shall be named as an additional
insured under said policy and Tenant will further deposit the policy or policies
of  such  insurance  or bona  fide  certificates  thereof  with  Landlord.  Said
certificate or policy shall stipulate that the Landlord is to be notified by the
insurance  carrier prior to termination of coverage.  If Tenant shall not comply
with the  covenants  made in this Article,  Landlord  may, at its option,  cause
insurance as aforesaid to be issued, and in such event, Tenant agrees to pay the
premium for such insurance promptly upon Landlord&#146;s  demand, which shall be
considered additional rent. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>11)      <B>SUBORDINATION OF LEASE; ATTORNMENT AGREEMENT</B><BR>
Tenant agrees that this Lease and the interest of the Tenant  created  hereunder
shall be  subject  and  subordinate  to the lien,  operation  and  effect of all
covenants,  restrictions,  easements  and other  encumbrances  now or  hereafter
affecting  the fee title of the  Premises and to all  underlying  leases and any
mortgages  or deeds of trust that may now or at any time  hereafter be placed on
the  Premises by  Landlord to secure  borrowed  funds;  the term Lease,  as used
herein, shall include any renewals, modifications,  consolidations, replacements
and extensions  thereof.  Tenant agrees,  at any time hereafter,  on demand,  to
execute any appropriate instrument,  release certificate or other documents that
may be  requested by Landlord for the purpose of  subjecting  and  subordinating
this Lease to the lien of any  Mortgage  or Deed of Trust,  whether  original or
substituted.  Anything herein to the contrary  notwithstanding,  this Lease will
not be terminated  nor will  Tenant&#146;s  possession or use of the Premises be
disturbed, by reason of any default under or foreclosure of any such Mortgage or
Deed of  Trust,  except an event of  default  that  would  entitle  Landlord  to
terminate the Lease or  Tenant&#146;s  possession.  Tenant hereby agrees to join
with Landlord and Landlord&#146;s mortgagee in executing an Attornment Agreement
in a form satisfactory to Landlord&#146;s  mortgagee, which Tenant hereby agrees
to do if requested by Landlord or Landlord&#146;s  mortgagee.  Tenant is willing
to  subordinate  the lien,  operation,  and  effect  of this  Lease to the lien,
operation,  and effect of a mortgage  in favor of  Landlord so long as Tenant is
assured that its possession of the Premises shall not be disturbed solely on the
basis of said subordination. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>12)      <B>ESTOPPEL CERTIFICATES</B><BR>
Each party agrees at any time,  and from time to time,  upon written  request by
the other  party,  to  execute,  acknowledge  and  deliver to such other party a
statement in writing  certifying that this Lease is unmodified and in full force
and effect (or, if there have been any  modifications,  that the same is in full
force and effect as modified,  and stating the modifications),  and the dates to
which rent and other  charges have been paid,  and whether there is any existing
notice of  default  served by such  other  party,  it being  intended  that such
statement delivered pursuant to this Article may be relied upon by a prospective
purchaser or mortgagee of the reversion or the leasehold. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>13)      <B>INDEMNIFICATION AND EXCULPATION</B><BR>
Tenant shall  indemnify  Landlord and save it harmless  from and against any and
all claims, actions,  damages,  liability and expense in connection with loss of
life,  personal  injury  and/or  damage to property  arising  from or out of the
occupancy and use by Tenant,  subtenants or assignees,  of the Premises,  or any
part thereof or any other part of Landlord&#146;s property, or occasioned wholly
or in part by any act or omission of Tenant, its agents, contractors,  guests or
employees,  except  that said damage or injury was caused by the  negligence  or
willful  misconduct  of the  Landlord  or its agents,  contractors,  invitees or
employees..  Tenant  further  agrees that Landlord  shall not be  responsible or
liable for  damages or  injuries  to the person or property of the Tenant or its
employees, agents, invitees, and contractors,  including damages to the Premises
or to  any  other  person  or  to  Tenant&#146;s  business  caused  directly  or
indirectly  by  water  damage,  theft,  fire or  other  casualty,  or any  cause
whatever,  except  that said  damage or injury was caused by the  negligence  or
willful  misconduct  of the Landlord or its agents,  contractors,  invitees,  or
employees,  and then,  only to the  extent  that the loss is not  covered by the
Tenant&#146;s insurance. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>14)     <B> BANKRUPTCY OF TENANT</B><BR>
If any sale of  Tenant&#146;s  interest  in the  Premises  created by this Lease
shall be made under  execution  or similar  legal  process,  or if Tenant  shall
petition to be adjudicated as bankrupt or insolvent, or if a receiver or trustee
shall  be  appointed   for  its   business  or  property,   or  if  a  corporate
reorganization  of Tenant or an arrangement with its creditors shall be approved
by a court order under the Federal  Bankruptcy  Act, or if Tenant  shall make an
assignment  for  the  benefit  of  creditors,  or if in  any  other  manner  the
Tenant&#146;s  interest  under this Lease shall pass to another by  operation of
law,  then,  in any of said events,  Tenant  shall be deemed to have  breached a
material  covenant of this Lease and Landlord  may, at its option,  re-enter the
Premises and declare this Lease and the tenancy hereby created  terminated,  but
notwithstanding  such  termination,  Tenant shall remain  liable for all rent or
damages which may be due at the time of such termination and, further,  shall be
liable for any damages as set forth under Article 16. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>15)      <B>DEFAULT PROVISIONS</B><BR>
The following events shall be deemed a default of this Lease by Tenant:</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;a)       Failure
of Tenant to pay rent  required to be paid under this Lease for a period of five
(5) days or more from the date when it was due  hereunder.  Failure of Tenant to
pay  additional  rent or any other sum of money  required  to be paid under this
Lease  for a period of  fifteen  (15) days or more from the date when it was due
hereunder</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;b)       Failure
by Tenant to pay any  installment  of base rent within five (5) days of due date
three or more times during  twelve (12)  consecutive  months  during the term of
this Lease.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;c)       Failure
by  Tenant to  comply  with any other  covenant  or  condition,  other  than the
covenants to pay any installment of base rent or additional  rent, of this Lease
within  ten (10) days of notice  from  Landlord,  unless  compliance  requires a
longer  period of time, in which case Tenant shall not be considered in default,
if it has commenced  performance  promptly and is  diligently  and in good faith
pursuing its cure until its timely resolution.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;d)       Deleted</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;e)       Deleted</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;f)       The
filing of a tax lien,  attachment,  execution or other judicial  seizure against
Tenant's  property which is not bonded or discharged  within thirty (30) days of
the date said lien, attachment, execution or seizure if filed.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;g)       Commencement
of action or proceeding  for the  liquidation  or  dissolution  of Tenant or the
appointment  of  a  trustee  or  receiver  of  the  Tenant's  property,  whether
instituted by or against the Tenant,  if not  discharged or bonded within thirty
(30) days of commencement of said action or proceeding.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>16)      <B>REMEDIES</B><BR>
Upon the  occurrence of an event of default,  Landlord  shall have the following
remedies,  as  well  as  any  other  legal  means  of  redress  then  available.
</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;a)       Landlord
shall have the right to  terminate  this  Lease and  immediately  repossess  the
Premises  and further be entitled to recover as damages the total  amount of the
following:</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1)      all
direct and  verifiable  costs to recover the  Premises,  including  all standard
legal fees and costs of suit, and</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2)      any
unpaid rent earned at the time of  termination,  plus interest,  computed at the
greater of: (i) eighteen  percent  (18%) per annum,  or (ii) at 4% over the then
current  prime rate used by Allfirst  Bank,  (i.e.  prime is  8&#137;+4&#137;  =
12&#137; &#139; 18&#137; therefore 18%)</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;b)       Without
terminating this Lease,  Landlord may reenter and attempt to relet the Premises,
by legal  process  without  liability  to  Tenant  (which  liability  is  hereby
expressly waived). In the event of reletting by the Landlord as the agent of the
Tenant,  the  reletting  shall be on such terms,  conditions  and rentals as the
Landlord may deem proper and the proceeds  that may be collected  from the same,
less the  expense of  recovering  the  Premises  and  reletting,  including  any
broker's  commissions,  all  standard  costs and legal  fees,  shall be  applied
against the amounts  due by Tenant,  as outlined  under items a) (1)-(3) of this
Article,  and the Tenant shall remain  liable for any balance not covered by the
proceeds  of said  reletting.  Such  reletting  shall not operate as a waiver or
postponement of any right of the Landlord against the Tenant.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;c)       In
addition to the rights and options  aforementioned,  Landlord shall have any and
all rights  which may be  available  to it at the time of a default,  whether by
statute,  ordinance,  rule of court, common law, at law or in equity. All rights
and remedies shall be  cumulative,  and none shall exclude any other remedies or
rights.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>17)      <B>LANDLORD'S RIGHT TO CURE</B><BR>
On the occurrence of an event of default,  Landlord  without thereby waiving the
event of default, may, at Landlord&#146;s sole option, elect to perform the same
for the  Tenant  at  Tenant&#146;s  expense,  without  prior  notice in cases of
emergency  (but Landlord  shall use its best efforts to notify Tenant as soon as
practicable  under the  circumstances)  and with ten (10) days written notice in
all other  cases.  Landlord  may enter  Premises to perform  under this  Article
without incurring any liability to Tenant or anyone claiming through Tenant, and
any  reasonable  costs  incurred by Landlord in so doing shall be  considered as
Additional Rent. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>18)      <B>INABILITY TO PERFORM</B><BR>
This Lease and the obligations of the Tenant hereunder, including the payment of
rent, shall not be affected by  Landlord&#146;s  inability to fulfill any of its
obligations  under this Lease or to provide  any  service to be  supplied  by it
under the terms of this Lease, if Landlord is prevented or delayed from so doing
by reasons or circumstances beyond Landlord&#146;s  control.  Landlord shall not
be liable for  interference  with any services  provided to Tenant by others for
any reason or circumstance beyond  Landlord&#146;s  control.  This Article shall
not impose any obligations  upon the Landlord that are not  specifically  stated
elsewhere in this Lease. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>19)      <B>ASSIGNMENT AND SUBLETTING</B><BR>
Tenant warrants for itself and permitted successors and assigns that it will not
assign or otherwise  transfer,  mortgage or otherwise  hypothecate this Lease or
their  rights  hereunder,  or will it sublet the Premises or any part thereof or
permit  anyone  other  than the  Tenant to occupy  the  Premises,  or permit the
transfer of this Lease by operation of law, without the prior written consent of
the Landlord first obtained.  Landlord may not unreasonably  withhold,  delay or
condition such consent,  and any consent given shall not  constitute  consent to
subsequent assignments or sublets. Any transfer without  Landlord&#146;s consent
shall be null and void.  Notwithstanding  any contrary  provision in this Lease,
Tenant may assign this Lease or  sublease  part or all of the  Premises  without
Landlord&#146;s  consent to (a) any  corporation,  partnership,  or other entity
that controls,  is controlled by, or is under common  control with,  Tenant;  as
long as nature of use does not change; or (b) any corporation resulting from the
merger or  consolidation  with  Tenant or to any  entity  that  acquires  all of
Tenant&#146;s  assets as a going concern of the business that is being conducted
on the Premises,  as long as the assignee or subtenant is a bona fide entity and
assumes  the  obligations  of  Tenant.  As long as Tenant is a  corporation  the
outstanding voting stock of which is listed with NASDAQ or other  &#147;national
securities  exchange&#148;  (as defined in the Securities Exchange Act of 1934),
the transfer by sale,  assignment,  bequest,  inheritance,  operation of law, or
other disposition of any part or all of the corporate shares of Tenant shall not
constitute an assignment for purposes of this Lease. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If
the Tenant wishes to transfer this Lease in whole or in part, Tenant shall
submit to Landlord in writing the following items; the name and address of the
proposed transferee, a detailed statement of the proposed transferee&#146;s
business including financial references and information concerning the financial
condition of the proposed transferee, and a copy of the proposed assignment or
sublease document. If Landlord grants permission to transfer said Lease, Tenant
shall provide an additional copy of the transfer document, fully executed by
Tenant and transferee, within 30 days of consent by Landlord. Tenant shall
further warrant that the Landlord shall have no liability for any costs to
create said transfer, including but not limited to, realtor&#146;s commissions,
renovation costs, etc. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>20)      <B>LANDLORD'S SERVICES - GROSS</B><BR>
Landlord  agrees,  as long as no event of default  exists,  to furnish to Tenant
adequate heat and air conditioning for the Premises;  toilet  facilities on each
floor for the use of the  employees,  customers  and other  invitees  of tenants
leasing  office  space;  janitorial  service  for the  Premises  each week night
(holidays recognized by federal government  excluded);  electricity for lighting
purposes and convenience outlets in the Premises;  and elevator service;  except
that heat,  air  conditioning  (HVAC  service)  and  elevator  service  shall be
furnished  only  between the hours of 6:00 a.m.  and 7:00 p.m.,  Monday  through
Friday  and  Saturday  from 8:00 a.m.  until  1:00 p.m.  (Sundays  and  holidays
recognized by the federal  government  excluded)  (standard hours), and when, in
the sole non capricious judgment of Landlord, the weather requires HVAC service,
except that at least one (1) elevator shall be available at all times.  Landlord
shall  provide  all such  services  in a  manner  consistent  with the  level of
services  provided by landlords of comparable  office buildings in the Baltimore
metropolitan area. Tenant and its agents,  contractors,  employees, and invitees
shall  have  access  to the  Premises  24 hours  per day,  seven  days per week.
</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If
Tenant requires consistent use of the Premises during hours other than the
standard hours (the &#147;extra hours&#148;), a special arrangement must be made
by Tenant with Landlord in written form, mutually agreed with the parties, prior
to use of the Premises during the &#147;extra hours&#148;. Landlord shall be
paid $23.00 per hour for HVAC service as invoiced, for &#147;extra hours&#148;
only beyond 9:00 p.m. weekdays and 1p.m. Saturday, all day Sundays and holidays
(as defined above). Any special equipment, such as but not limited to, large
duplicating, printing, coffee making, computer or data processing equipment,
electric range, etc., used by the Tenant, thereby causing a greater use of
&#147;normal&#148; electricity, heat or air conditioning, shall require the
prior written permission of the Landlord (which permission shall not be
capriciously withheld or delayed) with specific arrangements for Landlord&#146;s
appropriate compensation for the additional operating costs required to support
such special equipment. (By &#147;normal&#148; for equipment, it is deemed that
a piece of equipment that consumes more than ten (10) amperes at 120 volts
exceeds the normal criteria or the use of more than three (3) watts per square
foot for all of tenant&#146;s equipment). </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Landlord
reserves the right to suspend temporarily any service for the purpose of
inspection, repair or replacement of the facilities for the same. Landlord,
however, shall use its best efforts to minimize disruption or interference to
Tenant&#146;s business operations and use and enjoyment of the Premises. In the
event of any temporary cessation of any service herein provided, Landlord agrees
to use its best efforts to restore the same as promptly as possible; provided,
however, that a failure to furnish any service hereunder shall not be construed
as constructive eviction of Tenant and shall not justify Tenant in failing to
perform any of Tenant&#146;s obligations under this Lease, and shall not give
Tenant any claim against Landlord for damages for failure to furnish such
service unless such interruption is due to the negligence or willful misconduct
of Landlord or its agents, contractors, invitees or employees. Tenant agrees to
promptly advise Landlord of any malfunction in any mechanical system within the
Premises. Landlord shall maintain all public areas (stairways, parking lot) at
its sole expense, except as outlined under Article 7 of this Lease. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>21)      <B>LANDLORD AND LANDLORD'S LIABILITY</B><BR>
The term Landlord, as used in this Lease, means only the owner, or the mortgagee
in  possession,  so that in the event of any transfer of title to said  Premises
and the transfer of the security  deposit to the  successor  landlord,  the said
Landlord shall be and hereby is entirely freed and relieved of all covenants and
obligations of Landlord hereunder  thereafter  accruing,  and it shall be deemed
and  construed as a covenant  running with the land  without  further  agreement
between the parties or their successors interest, or between the parties and the
transferee of title to said Premises, that the transferee has assumed and agreed
to carry out any and all covenants and  obligations  of Landlord  hereunder.  In
consideration of the benefits  accruing  hereunder,  the Tenant for itself,  its
successors and assigns,  agrees that, in the event of a default or breach of any
covenant hereunder by the Landlord,  no member of Heaver Properties LLC shall be
personally  responsible  for any  actual or  alleged  breach of  Landlord&#146;s
obligations. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>22)      <B>HOLDING OVER</B><BR>
In the absence of an executed  extension of this Lease,  Tenant agrees to vacate
the  Premises  by  midnight on the final day of the term stated in Article 2 and
Landlord  shall be entitled to the  benefits of summary  proceedings  to recover
possession  of the Premises at the end of the term, as though  statutory  notice
had been given.  If Tenant  remains in  possession  of the  Premises  beyond the
expiration date of this Lease,  said action shall not be deemed to have extended
the term of the Lease or to renew the Lease for an  additional  term and nothing
contained   in  this  Lease  shall   constitute   Landlord&#146;s   approval  of
Tenant&#146;s   remaining.   If  Tenant  remains  in  the  Premises  beyond  the
termination date of this Lease,  Landlord,  at its option, shall consider Tenant
to be either a) a &#147;Tenant-At-Will&#148; who shall be liable for rent at the
then   current   market   rate  as   determined   by  the   Landlord   or  b)  a
&#147;Tenant-Holding-Over&#148;  who shall be liable  for rent in the  amount of
150% of the last full  month&#146;s  rate during the term of this Lease plus any
additional rent (real estate taxes,  utility surcharge,  etc.) and shall also be
liable  for any and all  direct  verifiable  and  necessary  costs  incurred  by
Landlord as a result of  Tenant&#146;s  holding over,  including but not limited
to, all  typical  legal fees and costs,  damages and  opportunity  costs lost by
Landlord and damages incurred by any future tenant who is consequently unable to
occupy the Premises. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>23)      <B>FIRE RESTORATION</B><BR>
It is  understood  and agreed that in the event said  Premises  or Building  are
damaged by fire, storm,  elements, or other casualty or act of a public enemy or
ordered altered due to  deterioration  or unsafe  condition by duly  constituted
public  authority,  but not to such an extent as to render  any  portion  of the
Premises  or  Building  untenantable,  then  the  Landlord  shall  restore  said
Premises,  excepting Tenant&#146;s  equipment, as speedily as possible and there
shall be no abatement of rent. If said Premises are damaged by or altered due to
any of the  aforesaid  causes,  only to the extent as to render  them  partially
untenantable,  the Landlord shall restore such Premises so injured or damaged as
speedily as possible,  and the rent shall be abated proportionately on such part
of said Premises as may have been rendered materially  untenantable,  until such
time as such part shall be fit for  occupancy,  after  which the full  amount of
rent abated as aforesaid  shall be payable as  hereinbefore  set forth.  If said
Premises are damaged by or altered due to any of the aforesaid causes to such an
extent as to render  the same  materially  untenantable,  then,  Landlord  shall
promptly  restore  said  Premises so injured or  damaged,  and the rent shall be
wholly  abated and forgiven  until such time as said  Premises  shall be fit for
occupancy,  at which time the rent  shall  once  again be due as stated  herein,
however,  if said Premises shall not be fit for occupancy or shall be materially
untenantable  within 180 days of said occurrence,  or if Landlord estimates that
such restoration  cannot be completed within 180 days of such occurrence  (which
estimate  Landlord  shall provide to Tenant within 60 days of such  occurrence),
Tenant shall have the option of terminating this Lease. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Landlord
shall have the option of terminating this Lease if the Premises are a) rendered
materially untenantable, or b) damaged by causes which are not covered under
Landlord&#146;s insurance or if the proceeds from Landlord&#146;s insurance are
insufficient to cover the cost of making the necessary repairs or reconstruction
or if over fifty percent (50%) of the gross leasable area of the Building is
destroyed. Landlord warrants that it will maintain adequate property and
casualty insurance. (It is understood for purposes of this Lease that
&#147;materially untenantable&#148; means the Premises or the Building have been
damaged to such an extent as to prohibit Tenant from conducting its normal
business.) In such event, Landlord shall notify Tenant of its election not to
rebuild within sixty days of said damage and all rights and benefits under the
Lease shall cease as of the date of said notice. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>24)      <B>EMINENT DOMAIN</B><BR>
If the whole of the Premises or the  Building  shall be taken under the power of
eminent  domain,  then  this  Lease  shall  terminate  on the day the  Tenant is
required  to  yield to  possession  thereof  and no  further  rent  shall be due
hereunder  from the date of said yielding of the Premises.  If only a portion of
the Premises is taken, so as not to materially  alter the Premises,  the minimum
rent and pass through  expenses  shall be adjusted and Landlord  shall make such
repairs and  alterations  as may be  necessary  in order to restore the part not
taken to useful condition proportionately as of the date of said taking and this
Lease shall continue in full force.  Such taking shall not be deemed a breach of
the  Landlord&#146;s  covenant  of quiet  enjoyment  as  contained  herein.  All
compensation  awarded for such taking of the fee and the leasehold  shall belong
to and be the property of Landlord,  provided,  however, that Landlord shall not
be entitled to any portion of the award made to Tenant for loss of business  and
for the cost of  removal  of stock  and  fixtures.  Tenant  shall  have no claim
against  Landlord  arising out of the taking or  condemnation,  cancellation  of
lease, for any portion of the award resulting from said taking, for the value of
the  unexpired  term  of  the  Lease,   or  for  any  property  other  than  the
Tenant&#146;s personal property lost through condemnation. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>25)      <B>LANDLORD'S ACCESS</B><BR>
The  Landlord  reserves  the right to enter the  Premises,  with prior notice to
Tenant, where possible,  for the purposes of inspection or to make improvements,
repairs,  or for any other purpose which Landlord considers necessary to operate
the Building,  without  incurring any liability to Tenant,  other than liability
for  personal  injuries or damages  caused by Landlord or its agents,  invitees,
employees  or  assigns,  during  normal  business  hours,  except  in  cases  of
emergency,  when Landlord can enter at anytime (but Landlord  shall use its best
efforts to notify Tenant as soon as practicable under the circumstances). Tenant
hereby  agrees  not to place  any new  locks or to rekey  any locks in or on the
Premises without  Landlord&#146;s prior approval and shall provide Landlord with
all keys to enter upon any portion of the  Premises.  It is further  agreed that
Landlord shall have the right to show the Premises during the period of nine (9)
months  prior  to the  expiration  of  this  Lease  to any  persons  who  may be
interested in leasing the Premises and that the Tenant shall permit the Premises
to be shown to a  mortgagor&#146;s  agent or to  prospective  purchasers  of the
Building. During any such entry, Landlord shall use its best efforts to minimize
disruption or  interference  to  Tenant&#146;s  business  operations and use and
enjoyment of the Premises. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>26)      <B>REMEDIES CUMULATIVE</B><BR>
No mention in this Lease of any specific right or remedy shall preclude Landlord
from  exercising  any  other  right or from  having  any other  remedy,  or from
maintaining any action to which it may otherwise be entitled either at law or in
equity;  and the failure of Landlord to insist in any one or more instances upon
a strict  performance of any covenant of this Lease or to exercise any option or
right herein contained shall not be construed as a waiver or relinquishment  for
the future of such covenant,  right or option, but the same shall remain in full
force and effect  unless the contrary is  expressed in writing by the  Landlord.
Tenant&#146;s  liability hereunder shall not end with Landlord&#146;s  execution
of a new lease for all or any portion of the Premises or the  acceptance of rent
by any subtenant or assignee. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>27)      <B>NOTICES</B><BR>
It is mutually agreed that any notice required or permitted by this Lease, to be
given by either party to the other, may be either  personally  delivered or sent
by certified or registered mail,  properly addressed and prepaid, to the address
of  the  parties  provided  herein,  unless  another  address  shall  have  been
substituted for such address by written notice, the date of so depositing (which
shall be evidenced by the postmark) or date of personal delivery, being the date
of giving such notice: </FONT></P>

<PRE>
         Landlord:         Heaver Properties LLC
                           Suite 707   Heaver Plaza
                           1301 York Road
                           Lutherville, Maryland   21093-6080

         Tenant:           EarthShell Corporation
                           Suite 200 Heaver Plaza
                           1301 York Road
                           Lutherville, Maryland  21093

         Copy to:          Venable, Baetjer and Howard, LLP
                           1800 Mercantile Bank &amp; Trust Building
                           Two Hopkins Plaza
                           Baltimore, Maryland   21201-2978
                           Attn:  Kevin L. Shepherd, Esquire.
</PRE>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>28)      <B>SUCCESSORS AND ASSIGNS</B><BR>
This Lease and the covenants and conditions  herein contained shall inure to the
benefit of and be binding upon the Landlord,  its  successors  and assigns,  and
shall be binding upon the Tenant, its successors and assigns, and shall inure to
the benefit of Tenant and only such assigns of Tenant to whom the  assignment by
Tenant has been consented to by Landlord or assigns of Landlord under provisions
of Article 19 of this Lease. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>29)      <B>APPLICABLE LEGAL ISSUES</B><BR>
This Lease shall be construed  under the laws of Baltimore  County and the State
of Maryland wherein the Premises are situated.  Landlord and Tenant hereby agree
to waive trial by jury in any action, proceeding,  claim or counterclaim between
Landlord  and Tenant on any matter  directly  or  indirectly  arising  from this
Lease,  the relationship  between Landlord and Tenant,  the use and occupancy of
the Premises,  or any damages or claims  regarding this Lease.  It is understood
that if two (2) or  more  parties  shall  execute  this  Lease  as  Tenant,  the
liability of each party under this Lease shall be joint and several. If Landlord
shall pay any monies,  or incur any expenses in connection  with the  violation,
breach or default of any  covenants  herein  set forth,  the  amounts so paid or
incurred shall, at  Landlord&#146;s  option, be considered  additional  rentals;
payable by Tenant promptly upon receipt of said notice of expense,  and shall be
collected  or enforced as provided by law in respect of rentals.  Time is of the
essence  in  the  performance  of  each  and  every  one  of  each  party&#146;s
responsibilities under this Lease. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>30)      <B>RECORDING</B><BR>
It is  understood  and agreed that this Lease may be recorded and that the costs
of  recording  shall  be paid by the  party  requesting  the  recording.  If the
mortgagee  requires  this Lease to be recorded,  Tenant hereby agrees to execute
any appropriate documents to facilitate said recording. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>31)      <B>RULES AND REGULATIONS</B><BR>
Tenant,  its employees,  agents and assigns,  agree to comply with the Rules and
Regulations with respect to the Premises and Building which are set forth at the
end of this Lease as Exhibit B and are  expressly  made a part hereof.  Landlord
shall  have  the  right  to  make  non-  capricious,  unilateral  additions  and
amendments thereto from time to time that do not impose any monetary  obligation
on Tenant, its employees, agents and servants, and Tenant, its employees, agents
and servants  agree to comply with such  additions and  amendments  after notice
from Landlord. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>32)      <B>IMPROVEMENTS</B><BR>
The Premises are being leased to the Tenant on an "AS IS" basis except as to the
following:  </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(A) By no later than September 15, 2000,
Landlord will perform,  at its expense and in a good and workmanlike manner, the
work  itemized   below:</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1)
Create  reception  area;  remove  existing  demising wall between two offices in
southwest  corner  of  suite to  create  one  large  office  with  one  door</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2)
Repair existing  cabinets in kitchen;  furnish and install new building standard
counter top; and furnish and install door at kitchen entrance</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3)
Furnish and install new building standard carpet throughout; furnish and install
new building  standard VCT in kitchen;  remove  existing  wood paneling and wall
covering  and  repaint all painted  surfaces;  furnish and install new  building
standard  miniblinds  on  windows;  and  repair  and/or  replace  ceiling  tiles
throughout,   as  required;   repair  and  or  replace   lighting   fixtures  as
required</FONT></P>


<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(B)
Tenant will be responsible for the cost and  implementation  of the items listed
below and will,  if Landlord  performs  said work,  reimburse  it promptly  upon
substantial completion as invoiced.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1)
All computer and telephone cabling and wiring</FONT></P>


<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>33)      <B>CAPTIONS AND HEADINGS</B><BR>
The  captions  and  headings  throughout  this  Lease  are for  convenience  and
reference only and the words contained therein shall in no way be held or deemed
to  define,  limit,   describe,   explain,   modify,   amplify  or  add  to  the
interpretation, construction, or meaning of any provision of the scope or intent
of this Lease nor in any way affect this  Lease.  Whenever  herein the  singular
number is used, the same shall include the plural where the context so requires,
and vice versa.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>34)      <B>OPTION TO EXTEND TERM</B><BR>
Tenant  shall have the option to extend  the  original  term of this Lease for a
period of three (3) years, commencing on the day following the expiration of the
original  term,  so long as this Lease is in effect then and no event of default
exists  at the time of notice  required  hereunder  or any other  time from said
notice  through the expiration of the original term. The base rent for the first
year of said  extended  term  shall be  based on  prevailing  market  rates  for
comparable  space in the Building at that time (as  determined  by Landlord) and
shall become the new base rent for the  extension  term.  Landlord  shall advise
Tenant by no later  than  October 1, 2002 of the amount of the base rent for the
extended  term.  Tenant shall have the right to exercise  such option by written
notice to  Landlord  by no later than  December 1, 2002.  Once  exercised,  such
option shall be  irrevocable.  Tenant shall have no further right to extend this
Lease than the one time outlined  hereunder.  All provisions of this Lease shall
remain in effect during said extension except as modified hereunder.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>35)      <B>ENTIRE AGREEMENT</B><BR>
This Lease contains the entire agreement between the parties,  and any executory
agreement  hereafter made shall be ineffective to change,  modify,  discharge or
effect an abandonment of it in whole or in part unless such executory  agreement
is in writing and signed by the party  against whom  enforcement  of the change,
modification, discharge or abandonment is sought.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>36)      <B>SECURITY DEPOSIT</B><BR>
Tenant,  concurrently  with the  execution  of this Lease,  shall  deposit  with
Landlord the sum of Ten Thousand Eight Hundred  Ninety-eight Dollars and Sixteen
Cents  ($10,898.16)  the receipt of which is hereby  acknowledged  by  Landlord,
which  shall serve as a security  deposit.  On prior  written  notice to Tenant,
Landlord shall have the right to apply this deposit towards curing any breach of
this  Lease.  If Landlord so elects to use said  deposit in this  fashion,  said
monies used shall be deemed  Additional Rent and Tenant shall be responsible for
paying  Landlord the amount needed to restore said deposit to its original level
upon demand.  To the extent permitted by law, Landlord shall be entitled to full
use of said  deposit and shall not be required  to  maintain  said  deposit in a
separate account nor to pay Tenant any interest on account thereof.<BR> Landlord
shall return the security  deposit to Tenant  within  thirty (30) days after the
expiration or earlier termination of this Lease. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>37)      <B>BROKER WARRANTY</B><BR>
Tenant  represents  that Tenant has dealt directly with, and only with,  MANEKIN
BROTHERS  ABESHOUSE,  LLC  (&#147;MBA&#148;)  and COLLIERS PINKARD as brokers in
connection  with this Lease  (collectively  the  &#147;brokers&#148;),  and that
insofar as Tenant knows, no other broker negotiated this Lease or is entitled to
any commissions in connection with it. Landlord  represents to Tenant and Tenant
represents  to Landlord  that  Landlord has dealt  directly with the Brokers and
that insofar as either party knows, no other broker  negotiated this Lease or is
entitled to any  commissions  in  connection  with it. Each party shall hold the
other  harmless from and indemnify the other party for any costs incurred by the
other party arising out of any other  broker&#146;s claim that such other broker
has assisted  either  party  hereto with respect to this Lease,  unless claim is
valid in which case the party  responsible  will bear all costs  associated with
said  defense  or  action.  Landlord  covenants  and  agrees  to pay  MBA a full
brokerage  commission in  connection  with this Lease,  and that Landlord  shall
compensate  its broker,  Colliers  Pinkard,  in  accordance  with the  agreement
between Landlord and Colliers Pinkard. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>38)      <B>PREMATURE TERMINATION</B><BR>
Notwithstanding  anything to the contrary contained in this Lease, and if Tenant
is not in  default  at time of  notice to  Landlord  or at any time from date of
notice  until  September  30,  2003,  Tenant  shall  have a  one-time  option to
terminate this Lease  (&#147;termination  option&#148;)  in accordance  with the
following terms and conditions:</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;A)
If Tenant desires to exercise the Termination Option, Tenant shall give Landlord
irrevocable  written notice  (&#147;termination  notice&#148;)  of Tenant&#146;s
exercise  of this  Termination  Option  by no  later  than 90  days  before  the
&#147;Termination  Date&#148;.  The  Termination  Date  may be at the end of any
month between  September 1, 2001 and April 30, 2003. The Termination  Date shall
be the date on which this Lease shall  terminate  and be of no further  force or
effect.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;B)
For such premature Termination Notice to be effective, it must be accompanied by
the  termination  fee in an amount equal to two (2) monthly  installments of the
then current Rent, plus any unamortized  costs born by Landlord under Article 36
or 32 based upon a 6 year amortization schedule,  which shall be payable only in
cash or certified  funds.  If Tenant  exercises the Termination  Option,  Tenant
covenants and agrees to surrender  full and complete  possession of the Premises
to Landlord on or before the Termination  Date in accordance with the provisions
of this Lease.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;C)
If Tenant properly and timely exercises the Termination Option and properly and
timely satisfies all other monetary and non-monetary obligations under this
Lease, this Lease shall cease and expire on the Premature Termination Date with
the same force and effect as if the Termination Date were the date originally
provided in this Lease as the expiration date of the term hereof. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>39)    <B>FACSIMILE SIGNATURES; COUNTERPARTS</B><BR>
Signatures to this Lease transmitted by telecopy shall be valid and effective to
bind the party so signing.  Each party  agrees to promptly  deliver an execution
original to this Lease with its actual  signature  to the other party  within 15
days of said execution,  it being expressly agreed that each party to this Lease
shall be bound by its own  telecopied  signature and shall accept the telecopied
signature  of the other party to this  Lease.  The Lease  bearing  the  original
signatures shall be the final and valid copies,  and it shall exactly  duplicate
the faxed signature versions.</FONT></P>

<H1 ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>RULES &amp; REGULATIONS </FONT></H1>


<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>1. Tenant shall not
obstruct or permit its agents, employees, contractors, etc. to obstruct, in any
way, the sidewalks, entry passages, corridors, halls, or stairways of the
Building, or use the same in any other way than as a means of passage to and
from the Premises; bring in, store, test or use any materials in the Building
which could cause a fire or an explosion or produce any fumes or vapor; make or
permit any improper noises in the Building; throw substances of any kind out of
the windows or doors, or down the passages of the Building, or in the halls or
passageways; sit on or place anything upon the window sills; or clean the
windows. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>2. Water closets, urinals
and lavatories shall not be used for any purpose other than those for which they
were constructed; and no towels, sweepings, rubbish, ashes, newspaper or any
other substances of any kind shall be thrown into them. Waste and excessive or
unusual use of water is prohibited. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>3. Tenant shall not (i)
obstruct the windows, doors, partitions and lights that reflect or admit light
into the halls or other places in the Building, or (ii) inscribe, paint, affix
or otherwise display signs, advertisements or notices in, on, upon or behind any
windows or on any door, partition or other part of the interior or exterior of
the Building without the prior written consent of Landlord (which consent shall
not be delayed). If such consent be given by Landlord, any such sign,
advertisement, or notice shall be inscribed, painted or affixed by Landlord, or
a company approved by Landlord (which approval shall not be delayed), but the
cost of the same shall be charged to and be paid by Tenant and Tenant agrees to
pay the same promptly, within fifteen (15) days after receipt of a reasonably
detailed invoice therefore. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>4. No contract of any kind
with any supplier of towels, water, ice, toilet articles, waxing, rug
shampooing, Venetian blind washing, furniture polishing, lamp servicing,
cleaning of electrical fixtures, removal of waste paper, rubbish or garbage, or
other like service shall be entered into by Tenant, nor shall any vending
machine, including 2 burner or commercial coffee maker, of any kind, be
installed in the Building, without the prior written consent of Landlord (which
consent shall not be delayed). </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>5. Any electrical work must
be approved by Landlord and shall be performed by Landlord or Landlord&#146;s
approved contractor (which approval shall not be delayed). Any exposed wiring
run through the ceiling space must be in either in conduit or greenfield or
utilize Teflon covered wire, as all ceilings are return air plenums. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>6. No additional lock or
locks shall be placed by Tenant on any door in the Building, without prior
written consent of Landlord. Two keys will be furnished to Tenant by Landlord
for their suite entrance door and any interior door. Tenant, its agents and
employees, shall not change any locks without the prior approval of Landlord and
all locks shall be keyed to Landlord&#146;s master system. All keys shall be
returned to Landlord at the termination of the tenancy, and, in the event of
loss of any keys furnished, Tenant shall pay Landlord the cost thereof. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>7. Tenant shall not employ
any person or persons other than Landlord&#146;s janitors for the purpose of
cleaning the premises, without prior written consent of Landlord (which consent
shall not be unreasonably delayed). Except as otherwise provided in the Lease,
Landlord shall not be responsible to Tenant for any loss of property from the
Premises however occurring, or for any damage done to the effects of Tenant by
such janitors or any of its employees, or by any other person or any other
cause. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>8. No bicycles, vehicles or
animals of any kind shall be brought into or kept in or about the Premises. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>9. Tenant shall not
conduct, or permit any other person to conduct, any auction upon the Premises;
manufacture or store goods, wares or merchandise upon the Premises, without the
prior written approval of Landlord, except the storage of usual supplies and
inventory to be used by Tenant in the conduct of its business; permit the
Premises to be used for gambling; make any unusual noises in the Building,
permit to be played any musical instrument in the Premises; permit to be played
any radio, television, recorded or wired music in such a loud manner as to
disturb or annoy other tenants; or permit any unusual odors to be produced upon
the Premises. Tenant shall not occupy or permit any portion of the Premises to
be occupied as an office for a public stenographer or typewriter, or for the
storage, manufacture, or sale of intoxicating beverages, tobacco in any form, or
as a food service, barber or manicure shop. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>10. No awnings or other
projections shall be attached to the outside walls of the Building. No curtains,
blinds, shades, or screens shall be attached to or hung in, or used in
connection with, any window or door of the Premises, without the prior written
consent of Landlord (which consent shall not be delayed). Such curtains, blinds
and shades must be of a quality, type, design, and color and attached in a
manner approved by Landlord (which approval shall not be delayed). </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>11. Canvassing, soliciting,
and  peddling in the  Building are  prohibited,  and Tenant  shall  cooperate to
prevent the same. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>12. Tenant, before closing
and leaving the Premises, shall ensure that all windows are closed and locked
and that all entrance doors are locked, and that all lights and appliances are
turned off. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>13. The Landlord shall in
all cases have and retain the power to prescribe the weight, proper position and
manner of support of all safes and all damage done to the Building by taking or
putting out any safe or other freight, or during the time it is in or upon the
Premises, shall be repaired at the expense of the Tenant but by contractors or
mechanics named by the Landlord. The moving of safes shall occur at such time as
the Landlord shall designate and the persons employed to move safes in and out
of the Building must be acceptable to the Landlord. No freight, furniture or
bulky matter of any description will be received into the building or carried up
or down except during hours designated by the Landlord. There shall not be used
in the Premises or in the Building, either by Tenant or by others in the
delivery or receipt of merchandise, any hand trucks except those equipped with
rubber tires and side guards. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>14. Landlord shall have the
right to prohibit any advertising by Tenant which in Landlord&#146;s opinion
tends to impair the reputation of the Building or its desirability as a building
for offices, and, upon written notice from Landlord, Tenant shall refrain from
or discontinue such advertising. A number of &#147;Visitor Parking&#148; spaces
shall be available for the benefit of Tenant&#146;s invitees or callers to be
used in common with other Tenants of the Building. Under no circumstances are
&#147;Visitor Parking&#148; spaces or other &#147;assigned&#148; spaces to be
used by the Tenant or any of its employees. Persistent disregard of the
Landlord&#146;s regulations on parking by the Tenant or his employees shall
constitute a violation of the Lease. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>15. Except as otherwise
provided in the Lease, Landlord shall not be responsible for interrupted heat,
air conditioning, electrical, plumbing or light supply, nor for any accident in
the operation of these systems, provided that such interruption is not caused by
Landlord or Landlord&#146;s agents, employees, or contractors negligence or
willful misconduct. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>16. Tenant shall list all
equipment permanently affixed to Premises on Tenant&#146;s letterhead, or a
blank which will be furnished by Landlord. Such list shall be presented at the
office of the Building for approval before such articles are taken from the
Building. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>17. Landlord hereby
reserves to itself any and all rights not granted to Tenant hereunder,
including, but not limited to, the following rights which are reserved to
Landlord for its purposes in operating the Building: </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(a) the exclusive  right to
the use of the name of the Building for all purposes, except that Tenant may use
the   name   as  its   business   address   and   for  no   other   purpose;<BR>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) the right to change the name or address of the
Building,   without   incurring  any  liability  to  Tenant  for  doing  so;<BR>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)  the right to install  and  maintain a sign or
signs on the exterior of the Building;<BR> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) the
exclusive  right to use or dispose  of the use of the roof of the  Building;<BR>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e)  the right to limit the space on the directory
of the Building to be allotted to Tenant; (Tenant, however, shall have directory
space as permitted in an equitable fashion to all tenants in the  Building).<BR>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f)  the  right to grant to  anyone  the  right to
conduct  any  particular   business  or   undertaking  in  the  Building;   <BR>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(g)   the  right  to  assign  parking  spaces  and
establish vehicle and personnel traffic flow patterns and regulations.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>18. Tenant shall at no time
attempt to solicit the leasing, or exchanging, of building space with other
tenants or parties, without first obtaining specific written approval from the
Landlord. </FONT></P>

<P><FONT  FACE="Times New Roman, Times,  Serif" SIZE=2>IN WITNESS WHEREOF,  each
party  hereto has executed  this  Agreement by causing it to be signed by a duly
authorized  representative,  on the day and  year  stated  in the  commencement.
</FONT></P>

<PRE>
WITNESS:                  LANDLORD: HEAVER PROPERTIES, LLC
/s/ illegible                      /s/ Allan B. Heaver                   (SEAL)
                                   Allan B. Heaver, Managing Member

WITNESS:                  TENANT:           EarthShell CORPORATION
/s/ illegible                      /s/ Vincent J. Truant                 SEAL)
                                   Sr. Vice President

</PRE>

<P><FONT  FACE="Times New Roman, Times, Serif" SIZE=2>STATE OF MARYLAND,  COUNTY
OF BALTIMORE, TO WIT:</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>I HEREBY CERTIFY that on
this 24 day of August 2000, before me, a Notary Public of the State aforesaid,
personally appeared Allan B. Heaver, known to me (or satisfactorily proven) to
be the person whose name is subscribed to the within instrument, who signed the
same in my presence and acknowledged that he executed the same for the purpose
therein contained. </FONT></P>


<P><FONT  FACE="Times  New  Roman,  Times,  Serif"  SIZE=2>WITNESS  my hand  and
Notarial Seal.<BR> <U>Janice M. Marety</U><BR>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Notary Public<BR> My
commission expires: 10/1/01</FONT></P>


<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>STATE OF MARYLAND COUNTY OF
BALTIMORE TO WIT:</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>I HEREBY CERTIFY that on
this 23 day of August, 2000, before me, the subscriber, a Notary Public of the
State aforesaid, personally appeared Vincent Truant who acknowledged himself to
be the duly authorized representative of EarthShell Corporation, and that as
such, executed by signing in my presence, the foregoing instrument for the
purposes therein contained. </FONT></P>


<P><FONT  FACE="Times  New  Roman,  Times,  Serif"  SIZE=2>WITNESS  my hand  and
Notarial Seal.<BR> <U>Janice M. Marety</U><BR>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Notary Public<BR>
My commission expires: 10/0/01</FONT></P>

<P ALIGN=CENTER><FONT  FACE="Times  New  Roman,  Times,  Serif"  SIZE=2>Exhibit A</FONT></P>

<P><FONT  FACE="Times  New  Roman,  Times,  Serif"  SIZE=2>Drawing:  Outline  of
offices</FONT></P>

<P><FONT  FACE="Times  New Roman,  Times,  Serif"  SIZE=2>Heaver  Plaza - Second
Floor<BR> Suite 200</FONT></P>


<P ALIGN=CENTER><FONT  FACE="Times  New  Roman,  Times,  Serif"  SIZE=2>Exhibit C</FONT></P>

<P><FONT  FACE="Times  New  Roman,  Times,  Serif"  SIZE=2>Drawing:  Outline  of
Executive Parking Spaces</FONT></P>

<P><FONT  FACE="Times  New Roman,  Times,  Serif"  SIZE=2>Heaver  Plaza - Second
Floor<BR> Suite 200</FONT></P>

<P ALIGN=CENTER><FONT  FACE="Times  New  Roman,  Times,  Serif"  SIZE=2>SUMMARY</FONT></P>

<P ALIGN=CENTER><FONT  FACE="Times  New  Roman,  Times,  Serif"  SIZE=2>HEAVER PLAZA LEASE</FONT></P>
<PRE>
LANDLORD:                           HEAVER PROPERTIES, LLC
                                    FEDERAL ID # 52-1437213

TENANT:                             EarthShell CORPORATION

PREMISES:                           SUITE 200, HEAVER PLAZA

BASE RENT:                          $65,388.96/ANNUAL  $5,449.08/MONTHLY
- ----------------------------------------------------------------------

ANNIVERSARY DATE:                   OCTOBER 1

ANNUAL ESCALATION:                  3%

R.E. TAX:                           2.99%

COMMENCEMENT DATE:                  SEPTEMBER 15, 2000

TERMINATION DATE:                   SEPTEMBER 30, 2003

TERM:                               3 YEARS AND ONE HALF MONTH WITH
                                    ONE 3 YEAR OPTION

PARKING SPACES:                     14

CSL INSURANCE LIMIT:                $1,000,000
- ----------------------------------------------------------------------

NOTICE:           HEAVER PROPERTIES, LLC
                  SUITE 707, HEAVER PLAZA
                  1301 YORK ROAD
                  LUTHERVILLE, MD   21093-6080
                  PHONE: (410) 321-7501  FAX:  (410) 321-5679

TENANT:           EarthShell CORPORATION
                  SUITE  200, HEAVER PLAZA
                  1301 YORK ROAD
                  LUTHERVILLE, MD  21093

COPY TO:          VENABLE, BAETHER AND HOWARD, LLP
                  1800 MERCANTILE BANK &amp; TRUST BUILDING
                  TWO HOPKINS PLAZA
                  BALTIMORE, MD   21201-2978
                  ATTN:   KEVIN L. SHEPHERD, ESQUIRE

</PRE>
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<TYPE>EX-10
<SEQUENCE>4
<FILENAME>0004.htm
<DESCRIPTION>EX-10.40 TERMINATION  OF LEASE  AGREEMENT
<TEXT>

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<HEAD>
<TITLE>
EX-10.40 Termination  of Lease  Agreement by and between the Company and
Chippewa limited partnership.
</TITLE>
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<BODY>
<H1 ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=1><U>TERMINATION OF LEASE</U></FONT></H1>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;THIS
TERMINATION OF LEASE (this &#147;Agreement&#148;), made as of the 13th day of
October, 2000 by and between CHIPPEWA LIMITED PARTNERSHIP, a Maryland limited
partnership (the &#147;Landlord&#148;), and EARTHSHELL CORPORATION, a Delaware
corporation (the &#147;Tenant&#148;). </FONT></P>

<H1 ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=1><U>RECITALS</U></FONT></H1>


<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant
to a Lease Agreement dated July 2, 1999 (the  &#147;Lease&#148;)  by and between
the  Landlord  and the  Tenant,  the  Landlord  leased  to the  Tenant a certain
premises  (the  &#147;Premises&#148;)  located  in the  building  known  as 9020
Junction  Drive in Howard  County,  Maryland.  The  Landlord and the Tenant have
agreed to terminate the Lease,  subject to the terms and conditions set forth in
this Agreement. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;NOW
THEREFORE,  in  consideration  of the premises and for further good and valuable
consideration,  the receipt and sufficiency of which is hereby acknowledged, the
parties hereto do hereby agree as follows: </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.
<U>Termination  of the  Lease</U>.  The Lease and the leasehold  estate  created
thereby are hereby terminated, effective 12:00&#160;a.m.,  October 13, 2000 (the
&#147;Termination  Date&#148;).  From and after the  Termination  Date,  (a) the
Tenant shall have no interest  whatsoever in the  Premises,  and (b) neither the
Landlord nor the Tenant shall have further rights, obligations, responsibilities
or duties under the Lease, except as set forth herein. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2.
<U>Conditions  Precedent to Termination.</U>  This Agreement and the termination
of the Lease is, at the Landlord's election, subject to the following conditions
precedent:</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)
<U>New  Lease.</U> On or prior to the Termination  Date, the Landlord and Little
Optics, Inc., a Delaware corporation (the "New Tenant"), shall have entered into
a new lease  agreement  for the lease of the Premises to the New Tenant on terms
and conditions  satisfactory to the Landlord in the Landlord's sole and absolute
discretion  and such lease  shall not be subject  to any  unsatisfied  condition
precedent or conditioned on any approval not obtained by Landlord.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)
<U>Lender's  Approval.</U>  Landlord  shall have obtained from the holder of any
mortgage or deed of trust or similar instrument affecting all or any part of the
Premises (a  "Mortgagee")  the written  approval of the termination of the Lease
and of the new lease to be entered  into by and between the Landlord and the New
Tenant.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)
<U>Estoppel and SNDA.</U> The Landlord shall have obtained from the New Tenant a
Tenant Estoppel  Certificate,  a Subordination,  Non-Disturbance  and Attornment
Agreement and any other  agreement  required by a Mortgagee  with respect to the
New Tenant.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
the event that any of the foregoing conditions precedent are not satisfied as of
the Termination  Date, then the Landlord,  in its sole and absolute  discretion,
shall  have  the  right  (but  shall  not be  obligated  to) to  terminate  this
Agreement.  If the Landlord  elects to terminate this  Agreement,  it shall give
written notice of termination to the Tenant and, upon the giving of such notice,
this Agreement shall become null,  void and of no force or effect,  as if it had
never been  executed,  and the Lease shall  continue in existence in  accordance
with its terms and conditions. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3.
<U>Possession and Condition of Premises</U>. On the Termination Date, the Tenant
shall deliver to the Landlord  possession of the Premises in the condition  that
the Premises are required,  by paragraph 24, and any other applicable provisions
of the Lease,  to be in on the date of expiration or earlier  termination of the
Lease. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4.
<U>Security  Deposit</U>.  If  the  Tenant  shall  have  performed  all  of  its
obligations  under the terms of the Lease and under the terms of this Agreement,
the Landlord shall,  within thirty (30) days after the Termination  Date, return
to the Tenant the security deposit held by the Landlord, pursuant to paragraph 6
of the Lease.  If the Tenant has defaulted in any obligation  under the Lease or
under this Agreement,  the Landlord shall be entitled to apply any or all of the
security  deposit  towards the  Landlord&#146;s  damages,  as  determined by the
Landlord. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5.
<U>Adjustment of Taxes, Insurance and Common Area Charges</U>.  Taxes, insurance
and common area charges  payable by the Tenant under the Lease shall be adjusted
to the  Termination  Date.  The  obligation  of the Tenant to make  payments  on
account  of  taxes,   insurance  and  common  area  charges  shall  survive  the
termination  of the Lease and the  execution  of this  Agreement  and the Tenant
shall make any payment to the  Landlord on account  thereof  within  twenty (20)
days after written notice form the Landlord to the Tenant  specifying the amount
of such payment that is due. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;6.
<U>Indemnification</U>.  Except  to  the  extent  the  claim  results  from  the
negligence or intentional misconduct of Landlord or its agents or employees, the
Tenant will defend and will  indemnify  Landlord  and save it harmless  from and
against  any  and  all  claims,  actions,   damages,   liability,  and  expenses
(including, but not limited to, reasonable  attorneys&#146;  fees) in connection
with or arising  out of the  failure  of the  Tenant to comply  with any term or
provision of this Agreement.  Without  limiting the generality of the foregoing,
if the Tenant holds over after the Termination Date, without the express written
consent  of  Landlord,  the Tenant  shall pay the  Landlord a hold over fee on a
daily  basis at the rate of one and  one-half  (1 1/2) times the  monthly  basic
rental specified to be due under the terms of the Lease, but such obligation for
payment  of the hold over fee shall not give rise to any right of the  Tenant to
maintain  occupancy of the Premises after the Termination Date nor shall it give
rise to any tenancy or new lease. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;7.
<U>Indemnification,  Etc.</U>  The  obligations  of  the  Tenant  set  forth  in
paragraph 20.A (Indemnification and Waiver of Claim) and paragraph 34 (Hazardous
Materials)  of the Lease  shall  survive  the  termination  of the Lease and the
execution of this Agreement.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;8.
<U>Acknowledgment  of  Notice</U>.  Landlord  acknowledges  that it has received
sufficient notice of Tenant&#146;s  intention to vacate the Premises pursuant to
paragraph  21(8) of the Lease so that,  if Tenant  vacates  the  Premises on the
Termination  Date, Tenant shall not have committed an event of default under the
Lease, pursuant to paragraph 21(8) of the Lease. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;9.
<U>Representations and Warranties</U>. The Tenant hereby represents and warrants
to the  Landlord  that  (i)  this  Agreement  has been  duly  authorized  by all
necessary action on the part of Tenant and constitutes the valid and binding act
of Tenant and is enforceable  against Tenant in accordance  with its terms,  and
(ii) Tenant has not assigned,  sublet or otherwise transferred or encumbered its
interest  in the Lease or the  Premises,  in whole or in part.  The  undersigned
individual  represents  and  warrants  to  the  Landlord  that  he is  the  duly
authorized  officer of the Tenant and has the power and authority to execute and
deliver this Agreement on behalf of the Tenant. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;10.
<U>Successors  and Assigns.</U> This Agreement shall inure to the benefit of and
be  binding  upon  Landlord  and  Tenant  and their  respective  successors  and
assigns.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;11.
<U>Applicable  Law.</U>  This  Agreement and the rights and  obligations  of the
parties hereunder shall be construed in accordance with and governed by the laws
of the State of Maryland.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;12.
<U>Remedies  Cumulative</U>.  Any and all remedies available to the Landlord for
the  enforcement  of the  provisions of this  Agreement are  cumulative  and not
exclusive and the Landlord  shall be entitled to pursue  singly or  concurrently
any of the rights and remedies  enumerated in this  Agreement or in the Lease or
authorized  by law or  available in equity.  In the event the  Landlord  retains
legal  counsel to enforce any of its rights or remedies  under or in  connection
with this Agreement, the Tenant shall pay all of the reasonable counsel fees and
court costs of the Landlord&#146;s counsel. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;13.
<U>Time is of the  Essence.</U>  Time is of the essence of all of the provisions
of the Agreement.</FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;14.
<U>Entire Agreement</U>.  This Agreement,  together with the Lease, contains the
entire  agreement  between the parties as to the subject matter hereof,  and all
agreements relating hereto have been integrated herein. This Agreement cannot be
changed or  modified  except by a written  instrument  signed by the party to be
bound thereby. </FONT></P>

<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;IN
WITNESS WHEREOF the parties hereto,  by the properly  authorized  persons,  have
duly  executed  this  Agreement,  under seal, as of the day and year first above
written. </FONT></P>

<PRE>
WITNESS/ATTEST:    CHIPPEWA LIMITED PARTNERSHIP, a Maryland limited partnership,

                                By:    Emory Holdings II Limited
                                Partnership, its general partner



__/s/unlegible__________        By: _/s/R.Clayton Emory_______(SEAL)
                                    R. Clayton Emory, general partner



WITNESS/ATTEST:    EARTHSHELL CORPORATION



_/s/Teasha Blackman_____        By: /s/Scott Houston_____________(SEAL)
Teasha Blackman                 Name:    Scott Houston
                                Title: Chief Financial Officer

</PRE>
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