Edgar Filing: EARTHSHELL CORP

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

FORM 10-Q

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

For the Quarterly Period Ended
March 31, 2006

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

For the Transition Period From ______to_________

Commission File Number 0-23567

EARTHSHELL CORPORATION

(Exact name of registrant as specified in its charter)

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

1301 YORK ROAD, SUITE 200
LUTHERVILLE, MD 21093
(Address of principal executive office) (Zip Code)

(410) 847-9420
(Registrant's telephone number, including area code)

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

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

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [x]

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).

The number of shares outstanding of the Registrant's Common Stock as of May 15,
2006 is 19,340,188

EARTHSHELL CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2006

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements Page

a) Condensed Consolidated Balance Sheets as of March 31,
2006 (unaudited) and December 31, 2005.................. 1

b) Condensed Consolidated Statements of Operations for
the three month periods ended March 31, 2006 and
March 31, 2005 (unaudited).............................. 2

c) Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 2006 and March 31, 2005
(unaudited) ............................................ 3

d) Notes to Condensed Consolidated Financial Statements
(unaudited) ............................................ 5

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................ 8

Item 3. Quantitative and Qualitative Disclosures About Market Risk. 12

Item 4. Controls and Procedures .................................. 12

PART II. OTHER INFORMATION

Item 1. Legal Proceedings......................................... 12

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities...................................... 12

Item 3. Defaults Upon Senior Securities........................... 13

Item 4. Submission of Matters to a Vote of Security Holders....... 13

Item 5. Other Information......................................... 13

Item 6 Exhibits ................................................. 13

SIGNATURE.............................................................. 15

EARTHSHELL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31 DECEMBER 31
2006 2005
------------- -------------
(UNAUDITED)

ASSETS
CURRENT ASSETS
Cash and cash equivalents ................ $ 623,727 $ 347,812
Prepaid expenses and other current assets 54,529 83,473
------------- -------------
Total current assets ................ 678,256 431,285

PROPERTY AND EQUIPMENT, NET .................... 12,504 11,991
EQUIPMENT HELD FOR SALE ........................ 1 1

------------- -------------
TOTALS ......................................... $ 690,761 $ 443,277
============= =============

LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses .... $ 5,049,163 $ 5,908,670
Current portion of settlements ........... 234,423 300,786
Current portion of deferred revenues ..... 100,000 100,000
Contingent settlement .................... 1,816,937 2,375,000
Note payable, net of discount of $168,901 -- 2,355,296
Payable to a related party ............... 1,000,000 850,000
------------- -------------
Total current liabilities ..... 8,200,523 11,889,752

DEFERRED REVENUES, LESS CURRENT PORTION......... 762,500 787,500
Note payable, net of discount of $1,927,345 2,572,655 --
OTHER LONG-TERM LIABILITIES .................... 88,794 117,914
------------- -------------
Total liabilities ................... 11,624,472 12,795,166

STOCKHOLDERS' DEFICIT
Preferred Stock, $.01 par value, 10,000,000
shares authorized; 9,170,000 Series A shares
designated: no shares issued and
outstanding as March 31, 2006 and
December 31 2005 ............................. -- --

Common Stock, $.01 par value, 40,000,000 shares
authorized: 19,340,188 and
18,981,167 shares issued and
outstanding as of March 31, 2006 and
December 31 2005, respectively................ 193,402 189,812
Additional paid-in common capital .............. 317,907,809 315,306,825
Accumulated deficit............................. (328,977,790) (327,786,868)
Accumulated other comprehensive loss ........... (57,132) (61,658)
------------- -------------
Total stockholders' deficit .............. (10,933,711) (12,351,889)
------------- -------------

TOTALS ......................................... $ 690,761 $ 443,277
============= =============

See Notes to Condensed Consolidated Financial Statements.

EARTHSHELL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------------------
2006 2005
------------ ------------

Revenues ............................................ $ 25,000 $ 75,000

Operating Expenses
Other research and development expenses ......... 30,643 103,595
Related party general and administrative expenses 20,000 578
Other general and administrative expenses ....... 921,402 1,032,313
Depreciation and amortization ................... 1,103 837
------------ ------------
Total operating expenses .................... 973,148 1,137,323

Operating Loss ...................................... 948,148 1,062,323

Other (Income) Expense
Interest income ................................. (3,360) (478)
Related party interest expense .................. 28,372 556
Other interest expense .......................... 498,882 21,461
Gain on sales of property and equipment ......... (26,096) (7,105)
Gain on settlement of debt....................... (255,024) --
------------ ------------
Loss Before Income Taxes ............................ 1,190,922 1,076,757

Income taxes ........................................ -- 800
------------ ------------
Net Loss ............................................ $ 1,190,922 $ 1,077,557
============ ============

Basic and Diluted Loss Per Common Share ............. $ 0.06 $ 0.06
Weighted Average Number of Common Shares ............ 19,302,932 18,250,260

See Notes to Condensed Consolidated Financial Statements.

EARTHSHELL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

THREE MONTHS ENDED
MARCH 31,
--------------------------
2006 2005
----------- -----------

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ................................................................. $(1,190,922) $(1,077,557)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization .......................................... 1,103 838
Amortization of debt discount......... ......................... ....... 344,114 5,922
(Gain) Loss on sale, disposal, or impairment of property and equipment . (26,096) (7,105)
(Gain) on settlements of debt........................................... (255,024) --
Other non-cash expense items ........................................... 39,367 (89,354)
Changes in operating assets and liabilities
Prepaid expenses and other current assets .............................. 28,944 58,382
Deferred revenues ...................................................... (25,000) 175,000
Accounts payable and accrued expenses .................................. (480,528) 90,869
Other long-term liabilities ............................................ 2,828 485
----------- -----------
Net cash used in operating activities ............................... (1,561,214) (842,520)
----------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ....................................... (1,615) --
Proceeds from sales of property and equipment ............................ 26,096 7,105
----------- -----------
Net cash provided by investing activities ........................... 24,481 7,105
----------- -----------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock ................................... -- 25,000
Proceeds from issuance of warrants (net of costs of $39,366).............. 60,634
Proceeds from issuance of notes payable to related party ................. 150,000 251,000
Repayment of notes payable to related party .............................. -- (250,000)

Principal payments on settlements ........................................ (98,311) (93,412)
Proceeds from issuance of note payable ................................... 1,975,803 1,150,000
Note payable issuance costs .............................................. (280,000) (187,000)
----------- -----------
Net cash provided by financing activities ........................... 1,808,126 895,588
----------- -----------

Effect of exchange rate changes on cash and cash equivalents ............. 4,522 (4,686)
----------- -----------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................... 275,915 55,487

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................... 347,812 272,371
----------- -----------

CASH AND CASH EQUIVALENTS, END OF PERIOD ................................. $ 623,727 $ 327,858
=========== ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for
Income taxes ............................... $ -- $ 800
Interest ................................... $ 105,924 $ 3,657

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

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

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

In August 2005, the Company issued a warrant to CCP to purchase 50,000 shares of
common stock of the Company in consideration for consolidating the two CCP
promissory notes and extending the date upon which amortization and repayment of
the notes is to begin. The warrant expires on the later of: (a) August 26, 2007
or (b) the date sixty days after the date the $2,500,000 in promissory notes
issued to Cornell Capital are fully repaid. The warrant has an exercise price of
$4.00 per share of common stock. Using the Black-Scholes pricing model, the
warrant was valued at $3,788.

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

In connection with a Securities Purchase Agreement dated December 30, 2005, the
Company issued to Cornell Capital Partners a warrant to purchase up to 350,000
shares of common stock (the "Cornell Capital Warrant"). This Cornell Capital
Warrant has an exercise price of $4.00 per share, which may be adjusted under
certain conditions to as low as $3.00 per share and expires two years from the
date it was issued. Furthermore, in connection with the Company's sale of
Cornell Capital Debentures, in January 2006 the Company issued to Mr. Benton
Wilcoxon, in consideration of his pledge of shares of common stock of Composite
Technology Corporation pursuant to the terms of the IPEA, a warrant to purchase
up to 125,000 shares of common stock. This warrant has an exercise price of
$4.00 per share and expires three years from the date it was issued. Using the
Black-Scholes pricing model, the warrants were valued at $241,155.

On February 9, 2006, the Company issued 123,000 shares of stock in settlement of
certain outstanding payables and settlement of litigation with Van Dam Machine
Corporation. A gain on the settlements amounting to $41,100 was recorded in the
quarter ended March 31, 2006.

On February 10, 2006, in connection with the issuance of a license and stock
purchase agreement, the Company issued a warrant to EarthShell Asia to purchase
1,033,033 shares of the Company's common stock at $3.90 per share, which, under
certain circumstances, may be adjusted to an exercise price of not less than
$3.00 per share. The warrant expires December 27, 2010. The Company received the
remaining $100,000 (less fees of $39,366) due under the license and stock
purchase agreement and subsequently issued the warrant.

On March 6, 2006, the Company issued a total of 50,000 shares of common stock to
current and past Directors pursuant to restricted stock grants given to the
directors in June 2005 as a bonus in recognition for their willingness to defer
their cash compensation since 2004. An accrual to compensation expense was
recorded in 2005.

See Notes to Condensed Consolidated Financial Statements.

EARTHSHELL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2006

OVERVIEW OF OPERATIONS

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

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

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

BASIS OF PRESENTATION OF FINANCIAL INFORMATION

The foregoing financial information has been prepared from the books and records
of EarthShell Corporation. EarthShell Corporation's consolidated financial
statements include the accounts of its wholly-owned subsidiary, PolarCup
EarthShell GmbH. All significant intercompany balances and transactions have
been eliminated in consolidation. In the opinion of management, the financial
information reflects all adjustments, consisting of normal recurring adjustments
which are, in the opinion of management, necessary for a fair presentation of
the financial condition, results of operations and cash flows of the Company in
conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company has incurred
significant losses since inception, has minimal revenues and has a working
capital deficit of $7.5 million at March 31, 2006. These factors, along with
others, indicate substantial doubt that the Company will be able to continue as
a going concern for the next 12 months.

On December 30, 2005 the Company entered into a financing transaction with
Cornell Capital Partners to borrow $4.5 million, of which, the Company received
$1.7 million in net proceeds after repayment of prior loans of $2.5 million and
payment of fees in the amount of $0.3 million (See Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Liquidity and Financial Resources). On January 6, 2006, the Company received
this funding. The Company will have to raise additional funds to meet its
current obligations and to cover operating expenses through the year ending
December 31, 2006. If the Company is not successful in raising additional
capital it may not be able to continue as a going concern. Management plans to
address this need by raising cash through the sale of licenses, the generation
of royalty revenues, short term borrowings, and the issuance of debt or equity
securities. However, the Company cannot assure that additional financing will be
available to it, or, if available, that the terms will be satisfactory, or that
it will be able to sell additional licenses and receive any royalty payments in
2006. Management will also continue in its efforts to reduce expenses, but
cannot assure that it will be able to reduce expenses below current levels. The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis, to obtain additional financing or refinancing
as may be required, and ultimately to attain successful operations.

PROPERTY AND EQUIPMENT AND EQUIPMENT HELD FOR SALE

The cost and accumulated depreciation of property and equipment and equipment
held for sale at March 31, 2006 and December 31, 2005 were as follows:

MARCH 31, DECEMBER 31,
2006 2005
----------- -----------
Total office furniture and equipment ........... 160,469 158,854
Less: Accumulated depreciation and amortization (147,965) (146,863)
--------- ---------
Property and equipment - net ................... $ 12,504 $ 11,991
=========== ===========
Equipment held for sale ........................ $ 1 $ 1
=========== ===========

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

The following is a summary of accounts payable and accrued expenses at March 31,
2006 and December 31, 2005:

2006 2005
---------- ----------
Accounts payable and other accrued expenses $4,180,039 $3,137,261
Legal accruals ............................ 208,442 1,920,575
Deferred officer compensation ............. 456,923 453,544
Accrued property taxes .................... 116,002 116,002
Accrued salaries, wages and benefits ...... 87,757 281,288
---------- ----------
Total accounts payable and accrued expenses $5,049,163 $5,908,670
========== ==========

NOTES PAYABLE

Cornell Capital Debentures. On December 30, 2005, EarthShell entered into a
Securities Purchase Agreement with Cornell Capital Partners (the "Cornell
Capital Debenture Purchase Agreement") pursuant to which the Company issued to
Cornell Capital Partners $4.5 million in principal amount of secured convertible
debentures (the "Cornell Capital Debentures") on the terms described below. This
agreement was consummated on January 6, 2006. The Cornell Capital Debentures are
convertible into shares of the Company's common stock on the terms discussed
below. The Company received the net proceeds of $1.7 million from the issuance
of the Cornell Capital Debentures on January 6, 2006, after repayment of prior
loans to Cornell Capital Partners of $2.5 million and payment of fees in the
amount of $0.3 million.

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

In connection with the Cornell Capital Debenture Purchase Agreement, on December
30, 2005, the Company issued to Cornell Capital Partners a warrant to purchase
up to 350,000 shares of common stock (the "Cornell Capital Warrant"). This
Cornell Capital Warrant has an exercise price of $4.00 per share, which may be
adjusted under certain conditions to as low as $3.00 per share and expires two
years from the date it was issued. Furthermore, in connection with the Company's
issuance of the Cornell Capital Debentures, the Company issued to Mr. Benton
Wilcoxon, in consideration of his pledge of shares of common stock of Composite
Technology Corporation pursuant to the terms of the IPEA, a warrant to purchase
up to 125,000 shares of common stock. This warrant has an exercise price of
$4.00 per share and expires three years from the date it was issued. Using the
Black-Scholes pricing model, the warrants were valued at $241,155.

The Company has valued the convertible note payable, related warrants and the
beneficial conversion feature to convert the principal balance into shares,
using the "Relative Fair Value" approach. Accordingly, the Company recognized a
discount of $2.1 million (which includes $0.3 million of issue costs) on the
$4.5 million principal value of the convertible note payable and is amortizing
the debt discount over the 36 month life of the note.

STOCK OPTIONS

Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123(R), "Share-Based Payment: An Amendment of FASB
Statements No. 123 and 95" using the modified prospective method. Under this
method, compensation cost is recognized on or after the effective date for the
portion of outstanding awards, for which the requisite service has not yet been
rendered, based on the grant date fair value of those awards. Prior to January
1, 2006, the Company accounted for employee stock options using the intrinsic
value method in accordance with Accounting Principles Board ("APB") Opinion No.
25 ("APB No. 25"), "Accounting for Stock Issued to Employees," and adopted the
disclosure only alternative of SFAS No. 123. For stock-based awards issued on or
after January 1, 2006, the Company recognizes the compensation cost on a
straight-line basis over the requisite service period for the entire award.
Measurement and attribution of compensation cost for awards existing on December
31, 2005 that are unvested as of the effective date of SFAS No. 123(R) are based
on the same estimate of the grant-date or modification-date fair value and the
same attribution method used previously under SFAS No. 123.

In accordance SFAS 123(R), the required pro forma disclosure for the three month
period ended March 31, 2005 is shown below:

Net Loss as reported .......................... $ 1,077,557
Deduct: Stock-based employee compensation
expense included in reported net loss, net
of tax ..................................... --
Add: Total stock-based employee compensation
determined under fair value based method
for all awards, net of tax
$ 5,275
-----------

Pro forma net loss ............................ $ 1,082,832
===========
Basic diluted loss per common share
As reported ................................ $ 0.06
Pro forma .................................. $ 0.06

STOCK TRANSACTIONS

On January 11, 2006, the Company issued 186,021 shares of the Company's common
stock to SF Capital Partners pursuant to a conversion right related to the
Contingent Settlement of $2.375 million reached under the September 30, 2004
Amended and Restated Debenture Purchase Agreement. Pursuant to the Contingent
Settlement, EarthShell must pay $2.375 million to SF Capital Partners from 33%
of any equity funding received by the Company (excluding the first $2.7 million
funded by MBS) or 50% of the royalties received by EarthShell in excess of
$250,000 per month (as determined on a cumulative basis commencing July 1,
2004). The Company has the right to convert the unpaid portion of the $2.375
million into shares of the Company's common stock at a price equal to the lesser
of $3.00 per share, or the price per share that EarthShell shall subsequently
receive upon the issuance of its common stock (or other convertible security)
during the three year period commencing September 30, 2004. SF Capital Partners
delivered a conversion notice to the Company on January 11, 2006 requesting
conversion of $558,063 of the Contingent Settlement into shares of the Company's
common stock. Following the conversion, the remaining balance of the Contingent
Settlement was approximately $1.8 million. The Company recorded that difference
between the conversion value and the fair value of the common stock at the time
of the conversion as a settlement gain in the amount of $213,924.

On February 9, 2006, the Company issued 123,000 shares of stock in settlement of
certain outstanding payables and settlement of litigation with Van Dam Machine
Corporation. As a result, the Company recorded settlement gains of $41,100
during the quarter ended March 31, 2006.

On February 10, 2006, in connection with the issuance of a license and stock
purchase agreement, the Company issued a warrant to EarthShell Asia to purchase
1,033,033 shares of the Company's common stock at $3.90 per share, which, under
certain circumstances, may be adjusted to an exercise price of not less than
$3.00 per share. The warrant expires on December 27, 2010. The Company received
the remaining $100,000 (less legal fees of $39,366) due under the license and
stock purchase agreement and subsequently issued the warrant.

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

FORWARD LOOKING STATEMENTS

Information contained in this Quarterly Report on Form 10-Q, including but not
limited to "Management's Discussion and Analysis of Financial Condition and
Results of Operations," contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, as amended. These
statements may be identified by the use of forward-looking terminology such as
"may," "expect," "anticipate," "believe," "estimate," or "continue," or the
negative thereof or other comparable terminology. Any one factor or combination
of factors could cause the Company's actual operating performance or financial
results to differ substantially from those anticipated by management that are
described herein. Investors should carefully review the risk factors set forth
in other Company reports or documents filed with the Securities and Exchange
Commission, including Forms 10-Q, 10-K, and 8-K. Factors influencing the
Company's operating performance and financial results include, but are not
limited to, the performance of licensees, changes in the general economy, the
availability of financing, governmental regulations concerning, but not limited
to, environmental issues, and other risks and unforeseen circumstances affecting
the Company's business. This Quarterly Report on Form 10-Q should be read in
conjunction with the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2005.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make judgments, assumptions and estimates that affect the amounts
reported in the Company's financial statements and the accompanying notes. The
amounts of assets and liabilities reported in the Company's balance sheet and
the amounts of revenues and expenses reported for each fiscal period are
affected by estimates and assumptions which are used for, but not limited to,
the accounting for asset impairments and transactions involving the Company's
equity securities. Actual results could differ from these estimates. The
following critical accounting policies are significantly affected by judgments,
assumptions and estimates used in the preparation of the consolidated financial
statements.

Going Concern Basis. The condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
Company has incurred significant losses since inception, has minimal revenues
and has a working capital deficit of $7.5 million at March 31, 2006. These
factors, along with others, may indicate that the Company will be unable to
continue as a going concern for the next 12 months. The Company will have to
raise additional funds to meet its current obligations and to cover operating
expenses through the year ending December 31, 2006. If the Company is not
successful in raising additional capital it may not be able to continue as a
going concern. Management plans to address this need by raising cash through
short term borrowings and/or the issuance of debt or equity securities. The
condensed consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.

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

THREE MONTHS ENDED MARCH 31, 2006 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2005.

The Company's net loss increased by approximately $0.1 million to approximately
$1.2 million from approximately $1.1 million for the three months ended March
31, 2006 compared to the three months ended March 31, 2005, respectively.

REVENUES. The Company recorded revenues of approximately $0.03 million for the
three months ended March 31, 2006 as compared to $0.08 for the three months
ended March 31, 2005. These revenues reflect realization of technology fees
receivable under the sublicense agreements. The decrease is due to the
termination of the MBS Sublicense Agreement in June, 2005 and the consummate
elimination of the prepaid technology fee being amortized.

RESEARCH AND DEVELOPMENT EXPENSES. Total research and development expenses are
comprised of related party license fee and research and development expenses and
other research and development expenses. Total research and development expenses
for the development of EarthShell Packaging(R) decreased $0.07 million to $0.03
million for the three months ended March 31, 2006 from approximately $0.1
million for the three months ended March 31, 2005.

The related party license fee agreement was discontinued in 2005.Therefore, the
related party research and development expenses decreased to zero for 2006.

Other research and development expenses are comprised of fees paid to the USDA
under a Cooperative Research and Development Agreement, personnel costs, travel
and direct overhead for development and demonstration production. Other research
and development expenses decreased $0.07 million to $0.03 million for the three
months ended March 31, 2006 from $0.1 million for the three months ended March
31, 2005. The reduction is due to the Company focusing its efforts on the
licensing business model whereby licensees and future licensees will install and
run the equipment to produce EarthShell Packaging in their facilities.

OTHER GENERAL AND ADMINISTRATIVE EXPENSES. Other general and administrative
expenses are comprised of personnel costs, travel and direct overhead for
marketing, finance and administration. Total general and administrative expenses
decreased by approximately $0.09 million to approximately $0.94 million from
approximately $1.03 million for the three months ended March 31, 2006, compared
to the three months ended March 31, 2006, respectively. The largest reductions
were in personnel costs, legal and professional fees as the Company works to
control expenses given the limited cash availability.

INTEREST EXPENSE. Interest expense is comprised of related party interest
expense and other interest expense.

o Related party interest expense increased by approximately $0.03
million to $0.03 for the three months ended March 31, 2006 from
approximately $0.001 million for the three months ended March 31,
2005. The related party interest expense is comprised of interest
accrued on the $1.0 million note payable to E. Khashoggi Industries,
LLC.
o Other interest expense increased by approximately $0.48 million to
approximately $0.5 million for the three months ended March 31, 2006
from approximately $0.02 million for the three months ended March
31, 2005.Other interest expense in the first three months of 2006
was primarily composed of amortization of the debt discount and
interest accrued on Cornell Capital Debentures.

OTHER INCOME. Other income increased by approximately $0.3 million to $0.3
million for the three months ended March 31, 2006 from $0.008 million for the
three months ended March 31, 2005. This other income was the result of a gain on
the sale of certain minor pieces of equipment which had previously been scrapped
and consigned to an equipment dealer and recognition of gains on settlement of
debt.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow. The Company's principal uses of cash for the three months ended March
31, 2006 were to fund operations, repay notes and payment of accounts payable
and accrued expenses. Net cash used in operations was $1.6 million and $0.8
million for the three months ended March 31, 2006 and 2005, respectively. The
use for 2006 was primarily from the loss incurred plus an additional $0.5
million decrease in accounts payable and accrued expenses. In the first three
months of 2005, the use of cash was comprised of the net loss offset by an
increase in deferred revenue of $0.2 million Net cash provided by investing
activities was $0.02 million and $0.007 million for the three months ended March
31, 2006 and 2005, respectively. Net cash provided by financing activities was
$1.8 million and $0.9 million for the three months ended March 31, 2006 and
2005, respectively. For 2006, the cash provided by financing activities was
comprised of $1.6 million from the issuance of notes (net of issue costs of $0.3
million) and $0.2 million from the proceeds of a note payable to a related
party. As of March 31, 2006, the Company had cash and related cash equivalents
totaling $0.6 million.

Capital Requirements. The Company only made minor capital expenditures during
the three months ended March 31, 2006 and does not anticipate additional
significant capital expenditures in 2006.

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

Payments due
by period
(in thousands) Less than 1-3
Contractual Obligations Total 1 year Years
-------------------------------------------------- -------------- --------- -------

Note payable to related party (including interest) $ 1,225 $ 75 $ 1,150
Convertible debenture 4,500 -- 4,500
Other long-term liability
323 234 89
-------------- --------- -------
Totals $ 6,048 $ 309 $ 5.739
-------------- --------- -------

Sources of Capital - Financing and Restructuring Transactions.

The 2006 Debentures. On March 5, 2003, the Company issued to a group of
institutional investors 416,667 shares of common stock and $10.55 million in
aggregate principal amount of secured convertible debentures due in March 5,
2006 (the"2006 Debentures"), for which the Company received proceeds of
approximately $9.0 million, net of financing costs of approximately $1.5
million. In connection with the March 2003 financing transactions, the Company
issued 54,167 shares of common stock to the lead purchaser of these 2006
Debentures and two warrants to a placement agent, both of whom received the
instruments as compensation for their services rendered in connection with the
transaction. In 2003, $5.75 million principal amount of the 2006 Debentures was
converted into 958,334 shares of common stock. At December 31, 2003, the
outstanding principal balance of 2006 Debentures was $6.8 million. The remaining
shares under a December 2001 shelf registration statement were used to reserve
shares potentially issuable upon conversion of the 2006 Debentures. Although the
Company was in compliance with all covenants of the 2006 Debentures at December
31, 2003, on March 8, 2004 the Company's common stock was delisted from the
Nasdaq SmallCap Market because the Company's market capitalization failed to
meet the minimum required standard for continued listing. In addition, the
Company did not make interest payments related to the 2006 Debentures as
required on January 31, 2004. These actions put the Company in non-compliance
with its covenants under the 2006 Debentures. During 2004, the Company sold $2.7
million of its common stock in a private equity transaction, received $1.5
million in prepaid technology fees related to the granting of new licenses, and
worked to negotiate settlements with each of the remaining holders of its 2006
Debentures to retire the 2006 Debentures, to resolve the defaults, and to
restructure its long-term debt. As of December 31, 2004, the 2006 Debentures had
been retired and the Company booked a contingent settlement of $2.375 million
owing to SF Capital Partners, one of the former 2006 Debenture holders.

EarthShell Asia License. On August 22, 2005, the Company entered into an
agreement with Earthshell Asia in connection with the granting of certain
licenses to use a new embodiment of EarthShell Technology for various
applications in certain Asian territories (the "EA License"). Shortly after
executing a letter agreement, both the Company and EA entered into negotiations
to restructure the transaction and ultimately entered into an amended and
restated letter agreement dated December 9, 2005. As part of such restructuring,
the Company may receive a total of up to $2.6 million from a combination of (i)
prepaid technology fees (up to $1.7 million), (ii) the sale of up to 266,667
shares of its common stock for $0.5 million and (iii) the issuance of a warrant
to purchase 1,033,333 shares of the Company's common stock at $3.90 per share,
which, under certain circumstances, may be adjusted to an exercise price of not
less than $3.00 per share. The realization of the full potential of the
transaction is dependent on the Company successfully demonstrating the
commercial viability of its technology in certain new applications. The Company
received $0.5 million in 2005 from EA as an initial partial payment and agreed
to issue 166,667 shares of its common stock in connection with this payment. The
Company received an additional $0.3 million in December 2005 and $0.1 million in
February of 2006 pursuant to the amended and restated agreement with EA, which
was dated December 9, 2005, but which was not effective until February 10, 2006
when the final cash payment was received. On February 10, 2006 the Company
issued a warrant to EarthShell Asia to purchase 1,033,033 shares of the
Company's common stock at $3.90 per share, which, under certain circumstances,
may be adjusted to an exercise price of not less than $3.00 per share. The
Company received the remaining $100,000 (less fees of $39,366) due under the
license and stock purchase agreement and subsequently issued the warrant.

Financing Transactions and Arrangements with EKI. During 2002 and 2003, EKI, an
affiliated entity, made a series of simple interest loans to the Company
totaling approximately $5.8 million. In addition as part of the settlement
transactions, EKI purchased the Company's 2006 Debentures. On September 30,
2004, EKI entered into an agreement with EarthShell to sell back to the Company
the 2006 Debentures it had purchased on the same terms originally paid by EKI.
The Company retired the 2006 Debentures shortly thereafter.

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

In May 2005, an additional 44,387 shares were issued to EKI pursuant to a ninety
day price protection in the clause, which provided for an adjustment in the
effective conversion price of the interest portions of the EKI loans from $4.00
per share to $3.00 per share. The Company also granted a ten year warrant to EKI
to purchase one million shares of the Company's common stock at $3.00 per share
in consideration of EKI's continued support of the Company since its inception,
including providing bridge loans at below market terms from time to time. This
warrant was cancelled and subsequently a new warrant with similar terms was
reissued in August 2005 to Essam Khashoggi, beneficial owner of EKI and the then
chairman of the board of the Company. On October 11, 2005, the Company entered
into the 2005 EKI Loan with EKI pursuant to which the Company issued to EKI a
promissory note in the principal amount of $1.0 million. As of December 31,
2005, EKI had advanced $0.85 million with the balance being funded by the second
week of January 2006. Interest accrues on the principal balance of the 2005 EKI
Loan at a variable per annum rate, as of any date of determination, that is
equal to the rate published in the "Money Rates" section of The Wall Street
Journal as being the "Prime Rate", compounded monthly. All accrued but unpaid
interest and outstanding principal is due and payable on the earliest to occur
of the following: (i) the second anniversary of the date of the 2005 EKI Loan;
(ii) five days following the date the Company has received $3.0 million or more
in aggregate net cash proceeds from all financing transactions, equity
contributions, and transactions relating to the sale, licensing, sublicensing or
disposition of assets or the provision of services (including advance royalty
payments, proceeds from the sale of the Company's common stock and fees for
technological services rendered to third parties), measured from the date of the
2005 EKI Loan and not taking into account the proceeds advanced under the 2005
EKI Loan; or (iii) the occurrence of an Event of Default (as defined in the 2005
EKI Loan).

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

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

On May 26, 2005, the Company issued a common stock purchase warrant to Cornell
Capital Partners to purchase 625,000 shares of common stock of the Company. This
May Warrant expires on May 26, 2006, has an exercise price which was adjusted to
$3.00 per share of common stock and has "piggy back" and demand registration
rights. In August 2005 Cornell Capital Partners agreed to consolidate the CCP
Notes and to defer the commencement of repayment installments. In consideration
of this modification to CCP Notes, the Company issued a warrant to Cornell
Capital Partners to purchase 50,000 shares of common stock of the Company. This
Warrant expires on August 26, 2007, has an exercise price, which was adjusted to
$3.00 per share of common stock as of December 30, 2005, and has "piggy back"
and demand registration rights.

Cornell Capital Debentures. On December 30, 2005, EarthShell entered into a
Securities Purchase Agreement with Cornell Capital Partners (the "Cornell
Capital Debenture Purchase Agreement") pursuant to which the Company issued and
sold to Cornell Capital Partners $4.5 million in principal amount of secured
convertible debentures (the "Cornell Capital Debentures") on the terms described
below. This agreement was consummated on January 6, 2006. The Cornell Capital
Debentures are convertible into shares of the Company's common stock on the
terms discussed below The Company received the aggregate proceeds of $4.5
million from the sale of the Cornell Capital Debentures on January 6, 2006, of
which approximately $2.6 million was used to repay prior loans to Cornell
Capital Partners of $2.5 million.

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

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

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

The Company has valued the convertible note payable, related warrants and the
beneficial conversion option to convert the principal balance into shares, using
the "Relative Fair Value" approach. Accordingly, the Company recognized a
discount of $2.1 million on the $4.5 million principal value of the convertible
note payable and is amortizing the debt discount over the 36 month life of the
note.

In addition to (a) the $0.9 million received pursuant to the EA agreements
(b) the $1.0 million received pursuant to the 2005 EKI Loan and (c) the $1.7
million in net proceeds received from the $4.5 million note to Cornell Capital
Partners' Cornell Capital Debentures, the Company believes it will have to raise
additional funds to meet its current obligations and to cover operating expenses
through the year ending December 31, 2006. The Company expects to receive
additional technology fees in connection with the granting of additional new
licenses during 2006. If the Company is not successful in raising additional
capital it may not be able to continue as a going concern. Management plans to
address this need by raising cash through the sale of licenses, the generation
of royalty revenues, short term borrowings, and the issuance of debt or equity
securities. However, the Company cannot assure that additional financing will be
available to it, or, if available, that the terms will be satisfactory, or that
it will be able to sell additional licenses and receive any royalty payments in
2006. Management will also continue in its efforts to reduce expenses, but
cannot assure that it will be able to reduce expenses below current levels. If
the Company is not successful in raising additional capital it may not be able
to continue as a going concern.

Off-Balance Sheet Arrangements. The Company does not have any off-balance sheet
arrangements as of March 31, 2006, and has not entered into any transactions
involving unconsolidated, limited purpose entities.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. The Company's Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
period covered by this Report (the "Evaluation Date"). Based on such evaluation,
such officers have concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures were not effective in ensuring that (i)
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms and
(ii) information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is accumulated and communicated to the
Company's management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. The deficiencies in disclosure
controls and procedures relate to the deficiencies in our internal control over
financial reporting noted below.

(b) Changes in Internal Control Over Financial Reporting. The Company has begun
taking remediation steps to enhance its internal control over financial
reporting and reduce control deficiencies. In the 4th Quarter 2005, the Company
employed a new Controller, a CPA, with 15 years' experience in public and
private accounting. The new Controller is in the process of developing revised
accounting systems and procedures that will strengthen the Company's controls
over financial reporting. Additionally, the Company has hired an accounting
employee to assist the Controller.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not applicable

ITEM 1A. RISK FACTORS

There has been no material change to the risk factors required to be disclosed
by us in our Form 10-K for the year ended December 31, 2005.

ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS

On February 10, 2006, in connection with the issuance of a license and stock
purchase agreement, the Company issued a warrant to EarthShell Asia to purchase
1,033,033 shares of the Company's common stock at $3.90 per share, which, under
certain circumstances, may be adjusted to an exercise price of not less than
$3.00 per share. The warrant expires on December 27, 2010. The Company received
the remaining $100,000 (less fees of $39,366) due under the license and stock
purchase agreement and subsequently issued the warrant.

On March 7, 2005, the Company entered into an agreement with Capital Group
Communications ("CGC") in which CGC would perform investor relations function on
behalf of the Company in return for up to 600,000 shares of the Company's common
stock. During the past year, the Company has accrued for this expense. Pursuant
to a letter agreement dated February 27, 2006, the EarthShell and CGC reached an
agreement in which CGC agreed to accept a total of 320,000 unregistered shares
of EarthShell's Common Stock under this agreement as payment in full for its
services. EarthShell agreed to include 300,000 of such shares in the next
registration statement it files with the Securities and Exchange Commission. The
320,000 shares were issued to CGC on May 2, 2006.

The foregoing transactions were consummated without registration under the
Securities Act of 1933, as amended (the "1933 Act"), in reliance upon the
exemption from registration pursuant to Section 4 (2) of the 1933 Act and Rule
506 of Regulation D promulgated thereunder. All of the purchasers are believed
by the Company to be "accredited investors" within the meaning of the 1933 Act

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

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

Not applicable.

ITEM 5. OTHER INFORMATION

In connection with the settlement of the 2006 Debentures and the related
restructuring of the Company's debt, the Company provided registration rights
with respect to newly issued unregistered shares of its common stock. Such
registration rights required the Company to, among other things, file a
registration statement with the SEC in December 2004 registering the resale of
such shares of common stock. Under certain of the agreements, the Company's not
filing such a registration statement (or the registration statement not being
declared effective) within the required timeframe provides the holders of the
registerable securities with a right to liquidated damages which, in the
aggregate, may amount to approximately $50,000 per month until the registration
statement is filed. If the Company fails to pay such liquidated damages, the
Company must also pay interest on such amount at a rate of 10% per year (or such
lesser amount as is permitted by law).

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

During the first quarter of 2006, the Company issued certain equity securities
for cash and in settlement transactions as disclosed in Item 2 of Part II
hereof.

ITEM 6. EXHIBITS

The following documents are filed as a part of this report:

Exhibit
Number Description
------- -----------

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

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

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

SIGNATURES

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

May 17, 2006 EARTHSHELL CORPORATION

By: /s/ D. Scott Houston
---------------------------
Name: D. Scott Houston,
Title: Chief Financial Officer

(Mr. Houston is the Principal Financial Officer and has been duly authorized to
sign on behalf of the registrant.)