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 June 30, 2000

|_| TRANSITION REPORT PURSUANT SECTION 13 OR 15 (d)

OF SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ______to_________

Commission File Number 333-13287

EARTHSHELL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware           77-0322379

(State or other jurisdiction of      (I.R.S. Employer

incorporation or organization)      Identification No.)

9020 Junction Drive Suite D, Annapolis Junction, Maryland 20701

(Address of principal executive office) (Zip Code)

Registrant's telephone number, including area code: (301) 957-1300

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirements forthe past 90 days.

Yes |X|   No |_|

The number of shares outstanding of the registrant's common stock as of August 15, 2000 was 101,342,827.

```

                                                      FORM 10-Q

                                         For the Quarter Ended June 30, 2000

                                                        INDEX

Part I. Financial Information
   Item 1.  Financial Statements                                                                    Page
            a)   Balance Sheets
                 as of June 30, 2000 and December 31, 1999 (unaudited).......................         1

            b)   Statements of Operations
                 for the three and six months ended June 30, 2000 and June 30, 1999 (unaudited)
                 and for the period from November 1, 1992 (inception) through June 30, 2000
                 (unaudited).................................................................         2

            c)   Statements of Stockholders' Equity (Deficit)
                 for the period from November 1, 1992 (inception) to June 30, 2000 (unaudited)        3

            d)   Statements of Cash Flows
                 for the six months ended June 30, 2000 and June 30, 1999 (unaudited) and for
                 the period from November 1, 1992 (inception) through June 30, 2000 (unaudited)       4

            e)   Notes to Financial Statements
                 (unaudited) ................................................................         5

   Item 2.  Management's Discussion and Analysis of Financial
            Condition and Results of Operations..............................................         6

   Item 3.  Quantitative and Qualitative Disclosures About Market Risk.......................        10

Part II. Other Information

   Item 1.  Legal Proceedings................................................................        10
   Item 2.  Use of Proceeds..................................................................        10
   Item 3.  Defaults Upon Senior Securities..................................................        11
   Item 4.  Submission of Matters to a Vote for Security Holders.............................        11
   Item 5.  Other Information................................................................        11
   Item 6   Exhibits and Reports on Form 8-K.................................................        11
   Signature ................................................................................        11
```

```

                                                EARTHSHELL CORPORATION
                                           (A Development Stage Enterprise)
                                                    BALANCE SHEETS
                                                     (Unaudited)

                                                                          June 30,             December 31,
                                                                       -------------          -------------
                                                                            2000                   1999
                                                                       -------------          -------------
ASSETS
CURRENT ASSETS:
    Cash and cash equivalents.................................           $16,332,920            $26,412,553
    Restricted cash...........................................             3,500,000              3,500,000
    Short-term investments....................................                     -              8,970,638
    Other assets..............................................               673,250                514,662
                                                                       -------------          -------------
       Total current assets...................................            20,506,170             39,397,853

PROPERTY AND EQUIPMENT, NET...................................            48,056,763             47,355,382

INVESTMENT IN JOINT VENTURE...................................               323,452                445,318

                                                                       -------------          -------------
TOTAL                                                                    $68,886,385            $87,198,553
                                                                       =============          =============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
    Accounts payable and accrued expenses.....................            $4,187,884             $5,165,900
    Trade payable to majority stockholder.....................               509,855              1,385,737
                                                                       -------------          -------------
       Total current liabilities..............................             4,697,739              6,551,637
                                                                       -------------          -------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
    Common stock, $.01 par value, 200,000,000 shares
        authorized; 101,099,997 issued and outstanding
        as of June 30, 2000 and 100,045,166 as of
        December 31,1999......................................             1,011,000              1,000,451
    Additional paid-in common capital                                    228,320,635            224,715,255
    Deficit accumulated during the development stage..........         (165,085,411)          (145,029,480)
                                                                       -------------          -------------
    Accumulated other comprehensive income (loss).............              (57,578)               (39,310)
    Total stockholders' equity................................            64,188,646             80,646,916
                                                                       -------------          -------------
TOTAL                                                                    $68,886,385            $87,198,553
                                                                       =============          =============

                                          See notes to financial statements.
```

```

                                                EARTHSHELL CORPORATION
                                           (A Development Stage Enterprise)
                                               STATEMENTS OF OPERATIONS
                                                     (Unaudited)

                                                                For the                           For the                 November 1,
                                                              Three Months                       Six Months                  1992
                                                             Ended June 30,                    Ended June 30,             (inception)
                                                      ---------------------------      ---------------------------      --------------                                                                through June 30,
                                                          2000            1999             2000            1999               2000
                                                      -----------     -----------      -----------     -----------        ------------
Expenses:
Related party research and development......           $2,486,429      $2,957,725       $4,470,852      $5,358,035         $62,741,828
Other research and development..............            4,908,675       4,026,548        8,978,396       7,328,453          43,560,259
Related party general and administrative ...
   expenses ................................               36,134          96,188           80,435         112,988           2,163,344
Other general and administrative expenses...            2,238,128       4,696,307        4,226,038       7,698,163          40,690,794
Depreciation and amortization...............            1,427,842       1,464,293        2,850,096       1,727,951          10,634,384
Related party patent expenses...............              126,383          26,273          269,773         328,021           8,600,634
                                                      -----------     -----------      -----------     -----------        ------------
Total expenses..............................           11,223,591      13,267,334       20,875,590      22,553,611         168,391,243

Interest income.............................            (333,228)     (1,065,004)        (819,659)     (2,092,047)         (9,875,572)
Related party interest expense..............                    -               -                -               -           4,770,731
Other interest expense......................                    -               -                -               -           1,788,738
                                                      -----------     -----------      -----------     -----------        ------------
Loss Before Income Taxes....................           10,890,363      12,202,330       20,055,931      20,461,564         165,075,140

Income Taxes................................                    -               -                -             800              10,271
                                                      -----------     -----------      -----------     -----------        ------------
Net Loss....................................           10,890,363      12,202,330       20,055,931      20,462,364         165,085,411
Preferred Dividends ........................                    -               -                -               -           9,926,703
                                                      -----------     -----------      -----------     -----------        ------------
Net Loss Available To Common
   Stockholders.............................          $10,890,363     $12,202,330      $20,055,931     $20,462,364        $175,012,114
                                                      ===========     ===========      ===========     ===========        ============
Basic And Diluted Loss Per Common
   Share....................................                $0.11           $0.12            $0.20           $0.20               $2.00
Weighted Average Number Of Common
    Shares..................................          100,381,321     100,045,166      100,213,243     100,045,166          87,681,887

                                          See notes to financial statements.
```

```

                                                EARTHSHELL CORPORATION
                                           (A Development Stage Enterprise)
                                     STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                                     (Unaudited)

                                         Cumulative
                                   Convertible Preferred      Additional                                   Additional     Accumulated         Deficit
                                       Stock Series A           Paid-In             Common Stock            Paid-In          Other          Accumulated
                                   ----------------------      Preferred     -------------------------      Common      Com-prehensive    during Develop-
                                     Shares       Amount        Capital         Shares        Amount        Capital      Income (Loss)      ment Stage         Total
                                   ----------    --------    ------------    -----------    ----------   ------------    -------------    --------------   -----------

ISSUANCE OF COMMON STOCK AT
   INCEPTION.................               -           -               -     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.....................               -           -               -              -             -              -               -       $(7,782,551)   (7,782,551)
                                   ----------    --------    ------------    -----------    ----------   ------------       ----------    --------------   -----------
BALANCE, DECEMBER 31, 1993          6,988,850         267      24,472,734     82,530,000         3,150          6,850               -        (7,782,551)    16,700,450
Net loss.....................               -           -               -              -             -              -               -       (16,582,080)   (16,582,080)
                                   ----------    --------    ------------    -----------    ----------   ------------       ----------    --------------   -----------
BALANCE, DECEMBER 31, 1994          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.....................               -           -               -              -             -              -               -       (13,914,194)   (13,914,194)
                                   ----------    --------    ------------    -----------    ----------   ------------       ----------    --------------   -----------
BALANCE, DECEMBER 31, 1995          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.....................               -           -               -              -             -              -               -       (16,950,137)   (16,950,137)
                                   ----------    --------    ------------    -----------    ----------   ------------       ----------    --------------   -----------
BALANCE, DECEMBER 31, 1996          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.....................               -           -               -              -             -              -               -       (18,992,023)   (18,992,023)
                                   ----------    --------    ------------    -----------    ----------   ------------       ----------    --------------   -----------
BALANCE, DECEMBER 31, 1997          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.....................               -           -               -              -             -              -               -       (26,620,052)   (26,620,052)
                                   ----------    --------    ------------    -----------    ----------   ------------       ----------    --------------   -----------
BALANCE, DECEMBER 31, 1998                  -           -               -    100,045,166     1,000,451    224,715,255               -      (100,841,037)   124,874,669
Net loss.....................               -           -               -              -             -              -               -       (44,188,443)   (44,188,443)
Foreign currency translation loss           -           -               -              -             -              -       ($39,310)                         (39,310)
                                                                                                                                                              --------
Total comprehensive income...               -           -               -              -             -              -               -                      (44,227,753)
                                   ----------    --------    ------------    -----------    ----------   ------------       ----------    --------------   -----------
BALANCE, DECEMBER 31, 1999                  -           -               -    100,045,166     1,000,451    224,715,255        (39,310)      (145,029,480)    80,646,916
Net Loss.....................               -           -               -              -             -              -               -       (20,055,931)   (20,055,931)
Foreign currency translation loss           -           -               -              -             -              -        (18,268)                         (18,268)
                                                                                                                                                              --------
Total comprehensive income...               -           -               -              -             -              -               -                      (20,074,199)
Issuance of common stock.....               -           -               -      1,054,831        10,549      3,605,380               -                        3,615,929
                                   ----------    --------    ------------    -----------    ----------   ------------       ----------    --------------   -----------
BALANCE, JUNE 30, 2000                      -           -               -    101,099,997    $1,011,000   $228,320,635         $57,578     $(165,085,411)   $64,188,646
                                   ==========    ========    ============    ===========    ==========   ============       ==========    ==============   ===========

                                          See notes to financial statements
```

```

                                                EARTHSHELL CORPORATION
                                           (A Development Stage Enterprise)
                                               STATEMENTS OF CASH FLOWS
                                                     (Unaudited)

                                                                             For the                 November 1,
                                                                        Six Months Ended           1992(inception)
                                                                            June 30,               through June 30,
                                                                  ----------------------------     ---------------
                                                                      2000            1999              2000
                                                                  ------------    -------------    --------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................      (20,055,931)    $(20,462,364)    $(154,195,048)
Adjustments to reconcile net loss to net cash used in operating
activities:
   Depreciation and amortization............................         2,850,096        1,727,951         9,206,542
   Issuance of stock options to director, consultant and officer             -          840,000         3,861,522
   Loss on sale or disposal of property and equipment.......           194,937          289,821         6,712,723
   Loss from investment in joint venture....................           103,598                -           101,718
   Other....................................................                 -                -         (106,311)
Changes in operating assets and liabilities:
   Other assets.............................................         (158,588)          798,188         (759,633)
   Accounts payable and accrued expenses....................         (978,015)      (2,329,270)         4,249,023
   Trade payable to majority stockholder....................         (875,882)        (191,800)        27,418,009
                                                                  ------------    -------------    --------------
    Net cash used in operating activities...................      (18,919,785)     (19,327,474)     (103,511,455)
                                                                  ------------    -------------    --------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds (purchase) from short-term investments.............         8,970,638                -      (54,521,106)
Purchase of restricted time deposit.........................                 -                -       (3,500,000)
Proceeds from sales and redemptions of investments..........                 -        6,530,928        43,826,770
Proceeds from sale of property and equipment................                 -                -           297,670
Investment in joint venture.................................                                  -         (515,438)
Purchase of property and equipment..........................       (3,746,414)     (12,265,164)      (64,326,266)
                                                                  ------------    -------------    --------------
    Net cash provided by (used in) investing activities.....         5,224,224      (5,734,236)      (78,738,370)
                                                                  ------------    -------------    --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable to stockholders.....                 -                -        14,270,000
Proceeds from drawings on line of credit with bank..........                 -                -        14,000,000
Proceeds from issuance of common stock......................         3,615,929                -       221,062,636
Common stock issuance costs.................................                 -                -      (15,178,641)
Preferred dividends paid....................................                 -                -       (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)
Repayment of note payable...................................                 -                -      (39,128,862)

                                                                  ------------    -------------    --------------
    Net cash provided by financing activities...............         3,615,929                -       195,571,431
                                                                  ------------    -------------    --------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............      (10,079,633)     (25,061,710)        13,321,606

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..............        26,412,553       86,590,163                 -
                                                                  ------------    -------------    --------------

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..............       $16,332,920      $61,528,453       $13,321,606
                                                                  ============    =============    ==============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
     Income taxes...........................................                 -             $800           $10,271
     Interest...............................................                 -                -        $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

                                          See notes to financial statements.
```

EARTHSHELL CORPORATION

NOTES TO FINANCIAL STATEMENTS  *(Unaudited)*

JUNE 30,2000

Presentation of Financial Information

The foregoing interim financial information is unaudited and hasbeen prepared from the books and records of EarthShell Corporation (the“Company”). In the opinion of management, the financial informationreflects all adjustments necessary for a fair presentation of the financialcondition, results of operations and cash flows of the Company in conformitywith generally accepted accounting principles. All such adjustments were of anormal recurring nature for interim financial reporting. Certainreclassifications have been made to prior year’s financial statements toconform to the 2000 presentation. 

The accompanying unaudited financial statements and these notesdo not include certain information and footnote disclosures required bygenerally accepted accounting principles, which were included in theCompany’s financial statements for the year ended December 31, 1999. Theinformation included in this Form 10-Q should be read in conjunction withManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and financial statements and notes thereto for the year endedDecember 31, 1999 included in the Company’s Annual Report on Form 10-K. 

Basic and diluted loss per common share is calculated based onthe weighted average shares outstanding of 100,381,321 and 100,213,243 for thethree and six months ended June 30, 2000 and 100,045,166 for the three and sixmonths ended June 30, 1999, respectively. Basic and diluted are the same becausecommon stock equivalents are considered anti-dilutive. 

Related Party Transactions

For the three months ended June 30, 2000 and 1999, the Companypaid or accrued $2,486,429 and $2,957,725 respectively, and for the six monthsended June 30, 2000 and 1999, $4,470,852 and $5,358,035, respectively, forservices performed by EKI under the Amended and Restated Technical Services andSublease Agreement effective October 1, 1997, between the Company and EKI, and$16,800 and $33,600 in sublease payments during each of the respective threemonth and six month periods ended June 30, 2000 and 1999. 

Pursuant to resolutions adopted by the Board of Directors onFebruary 4, 1999, the Company reimbursed $55,757 to EKI for salaries andbenefits paid by EKI for administrative support personnel dedicated toEarthShell activities during the six months ended June 30, 2000. 

Under the Amended and Restated Agreement for Allocation ofPatent Costs effective October 1, 1997, legal fees related to patents of$126,383 and $26,273 were paid to or on behalf of EKI for the three months endedJune 30, 2000 and 1999, respectively, and $269,773 and $328,021 for the sixmonths ended June 30, 2000 and 1999, respectively. 

EARTHSHELL CORPORATION

NOTES TO FINANCIAL STATEMENTS  *(Unaudited)* - continued

JUNE 30,2000

Property and Equipment

```

At June 30, 2000, property and equipment consisted of the following:

Commercial Manufacturing Equipment:  Construction in progress.....   $45,495,575

Product Development Center:
     Equipment....................................................     2,746,723
     Construction in progress.....................................     7,170,037
     Leasehold improvements.......................................       521,253
                                                                     -----------
                                                                      10,438,013

Office equipment and furniture....................................       401,913
Office leasehold improvements.....................................        50,108

Less: accumulated depreciation....................................   (8,328,846)
                                                                     -----------

Property and equipment - net......................................   $48,056,763
                                                                     ===========
```

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

Information contained in this Quarterly Report on Form 10-Qincluding “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” contain forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995, as amended.These statements may be identified by the use of forward-looking terminologysuch as “may,” “will,” “expect,”“anticipate,” “estimate,” or “continue,” or thenegative thereof or other comparable terminology. Any one factor or combinationof factors could cause the Company’s actual operating performance orfinancial results to differ substantially from those anticipated by managementthat are described herein. Factors influencing the Company’s operatingperformance and financial results include, but are not limited to, changes inthe general economy, the availability of financing, governmental regulationsconcerning, but not limited to, environmental issues, and other risks andunforeseen circumstances affecting the Company’s business and should beread in conjunction with other factors discussed in the Company’s AnnualReport on Form 10-K for the fiscal year ended December 31, 1999. 

Results of Operations

The Company was organized in November 1992, as a Delawarecorporation and remains a development stage enterprise. E. Khashoggi IndustriesLLC, the Company’s principal stockholder, or its predecessors(“EKI”), has been involved since July 1985, in the development ofvarious new material technologies including the new composite material. TheCompany was formed to develop, license and commercialize foodservice disposablesmade of EarthShell composite material (“EARTHSHELL Products”). TheCompany has an exclusive, worldwide, royalty-free license from EKI to usecertain technology for this purpose. The Company intends to continue to licenseor joint venture with existing manufacturers of foodservice disposables for themanufacture and distribution of EARTHSHELL Products. The Company expects toderive revenues primarily from license royalties and distributions from jointventures that are licensed to manufacture EARTHSHELL Products. 

The Company has experienced aggregate net losses ofapproximately $165 million from its inception on November 1, 1992 through June30, 2000. The Company has been unprofitable to date and expects to continue toincur operating losses until its products have been used commercially morebroadly and have achieved greater market acceptance and marketpenetration.  Since its inception, the Company has notgenerated any revenues from operations. Successful future operations will dependupon the ability of the Company, its licensees and joint venture partners tocommercialize multiple EARTHSHELL Products. Since inception, the Company hasrelied on EKI to provide extensive management and technical support. Therelationship between the Companyand EKI is governed by an Amended and Restated Technical Services and SubleaseAgreement (the “Technical Services Agreement”) which continues throughDecember 31, 2002. Under the terms of the Technical Services Agreement, theCompany pays EKI for all direct project labor hours incurred by EKI technicalpersonnel and direct expenses incurred on approved projects. In addition, underan Amended and Restated Agreement for the Allocation of Patent Costs (the“Patent Agreement”), the Company reimburses EKI for the costs andexpenses of filing, prosecuting, acquiring and maintaining certain patents andpatent applications relating to the technology licensed to the Company under anAmended and Restated License Agreement (the “License Agreement”). 

Key Customer

As the first step in its strategy, the Company worked closelywith McDonald’s Corporation (“McDonald’s”) in developing andtesting prototype sandwich containers. As a result of this work, McDonald’sprimary packaging purchaser, Perseco, entered into a supply agreement in 1997with the Company’s licensee, Sweetheart Cup Company Inc.(“Sweetheart”), pursuant to which Perseco committed to purchase notless than 1.8 billion EarthShell Big Mac® sandwichcontainers over a three-year period, subject to certain conditions. At the timethe supply agreement was signed, there was no existing commercial capacity tomanufacture EARTHSHELL Products. To support the supply agreement betweenSweetheart and Perseco to supply McDonald’s U.S. restaurants withEARTHSHELL containers for the Big Mac® sandwich, the Companyagreed to build commercial manufacturing capacity that would be operated bySweetheart. 

First Commercial Manufacturing Facility

In 1998 and 1999, the Company built its first commercialmanufacturing plant at Sweetheart’s facility in Owings Mills, Maryland toproduce the EarthShell Big Mac® sandwich container for sale toPerseco/McDonald’s. During the second quarter 2000, the Company and itsoperating partner, Sweetheart, have been running two of three EarthShell BigMac® sandwich container manufacturing lines. One of these lines is beingoperated in a production mode to meet the customer’s order requirements,and the second line is being used primarily to improve and optimize theeffectiveness of the manufacturing process. Current production volumes arebeing shipped or inventoried to support Perseco’s immediate demand for product during their validation process. 

The Company and Sweetheart are progressing through a productvalidation process with Perseco with respect to the EarthShell BigMac® sandwich container. EarthShell containers have been indaily use in 128 McDonald’s stores since late April, and approximately onemillion containers have been used with no known reports of store operatorcomplaints. The company continues to believe it will meet all of the validationcriteria for approval for future expansion to supply Big Mac containers withinthe U.S. McDonald’s system. The quantities of product currently being usedin the validation process are small relative to the intended capacity of thelines. Although additional improvements are needed to achieve the designcapacity of the production manufacturing lines, the Company believes these threelines will be sufficient to meet the Perseco/McDonald’s systemrequirements. The third line will be enabled after the first two lines arerunning at near full capacity. 

The Company is in discussions with McDonald’s/Perseco withrespect to its commitment to supply product to the McDonald’s system. Uponsuccessful completion of the validation process, McDonald’s intends to usethe EarthShell Big Mac container in its US system, although there may not bespecific annual volume commitments going forward. In addition, the Company isfree to seek other customers for the sandwich container produced at theSweetheart facility before McDonald’s full system demand is met. 

Although the Company believes that the production from the firstthree lines will be profitable once these lines have been optimized and reach fulldesign capacity, due to the protracted time delays and additional costs toinitially commercialize its first plant, the Company may not realize the fulleconomic potential of the technology with this first facility. Because theOwings Mills facility is the Company’s first commercial implementation ofthe EarthShell technology, the Company believes that the cost incurred todevelop and build themanufacturing lines in this facility are significantly higher than the costof manufacturing lines in subsequent facilities. The Company believes theestimated capitalized cost of the Sweetheart lines will be approximately $52.0million upon completion. The Company expects to have expensed approximately$10.8 million of process development, design and engineering costs andapproximately $14.9 million in start-up and debugging expense associated withpreparing the Sweetheart facility for full-scale production. As of June 30,2000, the total project cost for this facility upon completion is estimated tobe approximately $77.7 million. 

Next Generation Manufacturing Development

With the benefit of its experience at Sweetheart’s Marylandfacility and the broad manufacturing experience of its partners, the Company isdeveloping a next generation manufacturing approach that utilizes, as much aspossible, commercially available conventional processing equipment. This nextgeneration commercial product set will include bowls, plates, cups and otherhinged-lid containers in addition to the Big Mac® container. 

The Company’s manufacturing process is comprised of fourcore operations: mixing, forming, coating and printing. These operations must beintegrated in a continuous process through the use of material handling andconveyance systems. The Company is utilizing conventional, commerciallyavailable process equipment for mixing, forming and printing that it believescan meet its next generation manufacturing goals. Additionally, the Company hascontracted with conventional film thermoforming equipment suppliers to develop aprocess to apply biodegradable film as a coating for EARTHSHELL Products. Pilotequipment has been built and used to manufacture and coat products such asplates, bowls and trays on a small scale. These products have been used indemonstration projects with the U.S. Department of the Interior and other usersto evaluate the performance and customer acceptance of products. Initial trialswith conventional commercial scale machinery have also been encouraging. TheCompany believes it is well positioned to source competitively pricedbiodegradable films for the middle and higher selling price markets for plates,bowls and cups. 

Under the terms of existing and contemplated joint ventureagreements, EarthShell and its partners will invest jointly in commercialfacilities based on projected economic returns. 

The Company is currently in the process of expanding itsrelationship with Sweetheart. The Company began construction of a new prototypemanufacturing line at Sweetheart to produce bowls. The forming section iscomplete and in startup phase. The coating and printing equipment for this lineare being tested for acceptance at the factory prior to shipment. Sweetheart andEarthShell may add additional lines in the future to manufacture plates, cupsand hinged-lid containers. 

The Company and its other joint venture partners, HuhtamäkiVan Leer and Prairie Packaging, do not intend to commit to the next series ofcommercial plant investments until they have demonstrated, using commercialscale equipment in integrated demonstration lines, that the next generationproducts can be manufactured at a cost that will produce returns acceptable toboth EarthShell and its partners. 

Based on its current product costing models, the Companybelieves its products will be able to compete in the middle and higher sellingprice market segments at higher profit margins when compared to competitivefoodservice disposables. Additional value engineering and a lower total cost ofcoating will be required to be competitive in lower selling price markets. 

Comparison  of the Three Months and Six Months EndedJune 30, 2000,  to the Three Months and Six Months Ended June 30, 1999

***Total Research and Development Expenses***Totalresearch and development expenditures for the development of EarthShell Productsincreased $0.8 million to $13.5 million from $12.7 million for the six monthsended June 30, 2000 compared with the six months ended June 30, 1999, andincreased $0.4 million to $7.4 million from $7.0 million for the three monthsended June 30, 2000 compared to the three months ended June 30, 1999. TheCompany was billed by EKI for research and development services totaling $4.5million and $5.4 million for the six months ended June 30, 2000 and 1999,respectively and $2.5 million and $2.9 million for the three months ended March31, 2000 and 1999, respectively. 

***Total General and Administrative Expenses*****Total general and administrative expenses decreased $3.5 millionto $4.3 million from $7.8 million for the six months ended June 30, 2000compared to the six months ended June 30, 1999, and decreased $2.5 million to2.2 million from 4.7 million for the three months ended June 30, 2000 comparedto the three months ended June 30, 1999. Approximately $1.5 million and $0.6million of the decrease, for the six month and three month comparison,respectively was due to compensation and benefits related to fewer employees inthe 2000 period, particularly at the senior management level, than in the 1999period. The majority of the remaining decrease, when comparing the six and threemonths ended June 30, 2000 to the six and three months ended June 30, 1999, wasdue to lower expenses in connection with operating a publicly traded-company,such as those related to investor relations and the creation of an annualreport. 

***Depreciation and Amortization Expense***Depreciation and amortization expense increased $1.1 million to $2.9 millionfrom $1.7 million for the six months ended June 30, 2000 compared with the sixmonths ended June 30, 1999. The increase in depreciation expense was primarilythe result of the Company’s commercial manufacturing equipment atSweetheart’s Maryland facility being placed in service after the threemonths ended March 31, 1999. 

***Related Party Patent Expenses***Legal feesreimbursed to EKI under the Amended and Restated Agreement for Allocation ofPatent Costs with EKI decreased $0.06 million to $0.27 million from $0.33million for the six months ended June 30, 2000 compared with the six monthsended June 30, 1999. This cost varies with the number of patents filed,researched and/or abandoned during the period. 

***Interest Income***Interest Income decreased $1.3million to $0.8 million for the six months ended June 30, 2000 from $2.1 millionfor the six months ended June 30, 1999. The decrease was a result of less cashinvested during the period as cash was used for the Company’s Sweetheartfacility and to fund operations. 

Liquidity and Capital Resources at June 30, 2000

*Cash Flow.*The Company’s principal uses of cash forthe six months ended June 30, 2000 were to fund operations and purchaseequipment to facilitate the development of manufacturing capacity for EARTHSHELLProducts. Net cash used in operations was $18.9 million for the six months endedJune 30, 2000 and $19.3 million for the six months ended June 30, 1999. Net cashprovided by and used in investing activities was $5.2 million and $5.7 millionfor the six months ended June 30, 2000 and 1999, respectively. Net cash providedby financing activities was $3.6 million and $0- for the six months ended June30, 2000 and 1999, respectively. As of June 30, 2000 the Company had cash andshort-term investments totaling $16.3 million. 

*Capital Requirements*. The Company has budgetedapproximately $18 million in capital expenditures in the year 2000,approximately $8 million of which will be related to completing development ofSweetheart’s Maryland facility and approximately $10 million of which willbe related to designing and developing the next generation manufacturingfacilities and prototypes for an expanded line of products. 

*Sources of Capital*. As part of the Company’s initialpublic offering on March 27, 1998, the Company issued 10,526,316 shares of itscommon stock, $.01 par value, for which the Company received net proceeds of$206 million. The Company has used $200.3 million of the net proceeds throughJune 30, 2000. A portion of the proceeds was used to repay indebtedness to themajority stockholder of $36.6 million, bank debt of $14.0 million and to payaccrued dividends on the Company’s Series A preferred stock of $9.9million. 

The Company expects to use the remaining proceeds: (i) forgeneral corporate purposes, including the continued design and development ofEARTHSHELL Products and anticipated operating losses; (ii) to complete thedevelopment of its first commercial manufacturing capacity at Sweetheart; (iii)to complete the development and construction of its next generationmanufacturing lines for demonstration to its licensees or joint ventures; and(iv) to launch an initial public relations and advertising campaign at such time as McDonald’s begins to introduce the EarthShell clamshell on a national basis. 

On March 31, 2000, the Company filed a Registration Statement onForm S-3 to register 5,000,000 shares of its common stock, which becameeffective April 19, 2000. On May 3, 2000, the Company signed an agreement withAcqua Wellington North American Equities Fund, LTD (“AcquaWellington”), pursuant to which EarthShell may, from time to time and inits sole discretion during the 12 months following the date of the agreement,present Acqua Wellington with draw-down notices requiring Acqua Wellington topurchase up to $2,500,000 of EarthShell common stock in respect of eachdraw-down notice. EarthShell will issue and sell the shares to Acqua Wellingtonat a per share price equal to the average price of EarthShell common stock overa period of time after the draw-down notice less a discount of 5%. EarthShellmay present Acqua Wellington with up to 12 drawdown notices during the term ofthe agreement. In addition, the agreement gives Acqua Wellington the option topurchase an additional $2.5 million of the Company’s common stock per monthfor the same twelve months, subject to certain conditions. 

On June 2, 2000, the Company issued its first draw-down noticeto Acqua Wellington for $2.5 million of common stock, and as of June 30, AcquaWellington had exercised its call option to purchase an additional $1.8 millionof common stock for a total of $4.3 million draw down and call option exerciseduring the first draw-down period. Of the $4.3 million exercised in the month ofJune 2000, $3.6 million was settled and recognized in the financial statementsof June 30, 2000. The remaining $0.7 million was settled in early July, 2000. 

The Company believes that its existing cash and the financingprovided by Acqua Wellington will enable it to continue funding the facility atSweetheart, proceed with its next generation development and fund its share ofdesign and development of its next commercial facilities over the next twelvemonths. 

Item 3. Quantitative and Qualitative DisclosuresAbout Market Risk

Not applicable

*Part II. Other Information*

Item 1. Legal Proceedings

On August 2, 1999, Novamont S.p.A., an Italian companyspecializing in the manufacture of a biodegradable plastic resin and products,filed a complaint in the United States District Court for the Northern Districtof Illinois alleging four counts of infringement of three patents. The Companyhas analyzed all three patents and believes it has strong meritorious defensesand has been vigorously defending the lawsuit.  The Company believes this legalproceeding willnot have a material adverse effect on the Company’s financial condition orresults of operations. However, the ultimate resolution of this claim is subjectto many uncertainties. It is reasonably possible that the Company could sufferan adverse determination in this proceeding which could have a material adverseeffect on the Company’s financial position, operating results or cash flowswhen resolved in a future reporting period. 

Item 2. Use of Proceeds

In connection with the Company’s initial public offering(the “IPO”), the Company issued 10,526,316 shares of its common stock,$.01 par value (the “IPO Shares”), on March 27, 1998. The IPO Shareswere offered and sold by the underwriters at an initial public offering price of$21.00 per share, resulting in aggregate offering proceeds of $221,052,636. Inaddition, selling stockholders sold 2,673,684 shares of common stock. Netoffering proceeds to the Company were $205,873,995. 

As of June 30, 2000, the Company had applied $200.3 million ofthe $205.9 million in net offering proceeds from the IPO Shares. During thethree months ended June 30, 2000, the Company applied $13 million of such netoffering proceeds. Of this amount, $3.9 million was used for the purchase ofmanufacturing equipment, $3.6 million was used for the demonstration andprototype facility, and $5.5 million was used for other operating expenses. 

The cost of the Company’s first manufacturing lines atSweetheart has exceeded the Company’s initial estimates as discussed in“Management’s Discussion and Analysis of Financial Conditions andResults of Operations.” As a result, although the Company believes that theproduction from these first three lines will be profitable once they reach fullcapacity and have been optimized, due to the protracted time delays andadditional costs to initially commercialize its first plant, the Company may notrealize the full economic potential of the technology with this first facility.The Company intends to demonstrate the performance and manufacturing economiesof its next generation manufacturing systems in advance of the next tier ofcommercial plant investment by building and demonstrating commercial scale pilotmodules. The Company has refined its business strategy to utilize joint venturesin which the joint venture partner generally will share equally the cost andoperating risks of turnkey equipment lines. The Company believes using jointventures in which both venturers generally assume equal responsibility and risk,as well as share equally any upside opportunities, better aligns its interestswith the interests of its partners while maintaining a favorable return oninvestment to the Company. As a result of those and other changed circumstances,the actual use of initial public offering proceeds will vary from theanticipated use of proceeds described in the prospectus dated March 23, 1998 inconnection with the Company’s IPO (the “Company’sProspectus”). For example, the Company plans now to use most of the $7.4million initial public offering proceeds that were shown in the Company’sProspectus as anticipated to be used for patent enforcement and protection forthe development of its next generation manufacturing systems and to fundoperations. 

Item 3. Defaults Upon Senior Securities

Not applicable

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

None

Item 5. Other Information

Not applicable

Item 6. Exhibits and Reports on Form 8-K

(a)      27.1     Financial Data Schedule

(b)      Reports on Form 8-K

No reports on Form 8-K were filed by EarthShell during thequarter ended June 30, 2000. 

*Signature*

Pursuant to the requirements of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned thereunto duly authorized. 

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                                   EarthShell Corporation

Date: August 14, 2000              By:
                                      -------------------------
                                      D. Scott Houston
                                      Chief Financial Officer

                                     (Principal Financial and Accounting Officer
                                      and Duly Authorized Officer)
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