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                                  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, 2004

               |_| 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.)

               6740 CORTONA DRIVE, SANTA BARBARA, CALIFORNIA 93117
           (Address of principal executive office)          (Zip Code)

                                 (805) 571-8232
              (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 an  accelerated  filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No |_|

The number of shares  outstanding of the Registrant's  Common Stock as of August
5, 2004 is 14,187,177.

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<PAGE>
<TABLE>
<CAPTION>


                             EARTHSHELL CORPORATION

                                    FORM 10-Q

                       FOR THE QUARTER ENDED JUNE 30, 2004

            INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<S>                                                                                                        <C>
PART I. FINANCIAL INFORMATION

      Item 1.      Consolidated Financial Statements                                                        Page

                   a)   Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December
                        31, 2003........................................................................     1

                   b)   Consolidated Statements of Operations for the three months and six months
                        ended June 30, 2004 and June 30, 2003 (unaudited)...............................     2

                   c)   Consolidated Statements of Cash Flows for the six months ended June 30,
                        2004 and June 30, 2003 (unaudited) .............................................     3

                   d)   Notes to 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...........................     15

      Item 4.      Controls and Procedures .............................................................     15

PART II. OTHER INFORMATION

      Item 1.      Legal Proceedings....................................................................     15

      Item 2.      Changes in Securities and Use of Proceeds and Issuer Repurchases of Equity
                   Securities...........................................................................     15

      Item 3.      Defaults Upon Senior Securities......................................................     15

      Item 4.      Submission of Matters to a Vote of Security Holders..................................     15

      Item 5.      Other Information....................................................................     16

      Item 6       Exhibits and Reports on Form 8-K.....................................................     16

SIGNATURE.................................................................................................   17
</TABLE>



<PAGE>
<TABLE>
<CAPTION>

                             EARTHSHELL CORPORATION

                           CONSOLIDATED BALANCE SHEETS

                                                                                 JUNE 30,     DECEMBER 31,
                                                                                  2004           2003
                                                                             -------------  --------------
                                                                               (UNAUDITED)
<S>                                                                           <C>         <C>
ASSETS
CURRENT ASSETS
      Cash and cash equivalents ...........................................   $   408,733   $ 1,901,639
      Prepaid expenses and other current assets ...........................       173,703       323,680
                                                                              -----------   -----------
           Total current assets ...........................................       582,436     2,225,319

PROPERTY AND EQUIPMENT, NET ...............................................         3,973        61,794
EQUIPMENT HELD FOR SALE ...................................................             1             1
                                                                              -----------   -----------
TOTALS ....................................................................   $   586,410   $ 2,287,114
                                                                              ===========   ===========

LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
      Accounts payable and accrued expenses ...............................   $ 4,892,235   $ 4,853,413
      Current portion of deferred revenues ................................       200,000            --
      Convertible debentures, net of discount of $1,158,273 and $1,505,755
          as of June 30, 2004 and December 31, 2003, respectively               6,305,330     5,294,245
                                                                              -----------   -----------
           Total current liabilities ......................................    11,397,565    10,147,658

PAYABLES TO RELATED PARTY .................................................     2,664,386     1,839,108
NOTES PAYABLE TO RELATED PARTY, NET OF DISCOUNT OF $168,623 AND $219,210 AS
     OF JUNE 30, 2004 AND DECEMBER 31, 2003, RESPECTIVELY .................     2,586,377     2,535,790
DEFERRED REVENUES, LESS CURRENT PORTION ...................................       275,000            --
OTHER LONG-TERM LIABILITIES ...............................................       227,341        33,333
                                                                              -----------   -----------
           Total liabilities ..............................................    17,150,669    14,555,889

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIT
Preferred stock, $.01 par value, 10,000,000 shares authorized;  9,170,000 Series
     A shares designated; no shares issued and outstanding as of
     June 30, 2004 and December 31, 2003..................................             --            --
Common stock, $.01 par value, 25,000,000 shares authorized; 14,128,966
     shares issued and outstanding as of June 30, 2004 and December 31, 2003      141,290       141,290
Additional paid-in common capital.........................................    302,033,746   302,033,746
Accumulated deficit ......................................................   (318,681,921) (314,350,681)
Accumulated other comprehensive loss......................................        (57,374)      (93,130)
                                                                              -----------   -----------
      Total stockholders' deficit.........................................    (16,564,259)  (12,268,775)
                                                                              -----------   -----------

TOTALS....................................................................     $  586,410     2,287,114
                                                                              ===========   ===========
</TABLE>


                 See Notes to Consolidated Financial Statements.

<PAGE>
<TABLE>
<CAPTION>

                             EARTHSHELL CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                   (UNAUDITED)

                                                             FOR THE                             FOR THE
                                                           THREE MONTHS                         SIX MONTHS
                                                          ENDED JUNE 30,                      ENDED JUNE 30,

                                                 ---------------------------------  -----------------------------------
                                                      2004             2003              2004               2003
                                                 ---------------  ----------------  ----------------  -----------------
<S>                                                <C>                  <C>              <C>                 <C>
Revenues.........................................  $   25,000        $        --       $    25,000        $        --

Operating Expenses
    Related party license fee and research and
         development expenses...................       300,000           304,667           600,000            658,467
    Other research and development expenses.....        42,913         1,707,507           265,451          3,604,493
    Related party general and administrative
         reimbursements.........................            --                --                --             (4,074)
    Other general and administrative expenses...     1,071,116         1,193,342         2,244,971          3,047,044
    Depreciation and amortization...............        11,230           103,636            38,571            216,276
                                                 ---------------  ----------------  ----------------  -----------------
        Total operating expenses................     1,425,259         3,309,152         3,148,993          7,522,206

Operating Loss..................................     1,400,259         3,309,152         3,123,993          7,522,206

Other (Income) Expenses
    Interest income.............................        (1,537)          (24,299)           (2,771)           (64,251)
    Related party interest expense..............       141,683            94,932           275,865            170,234
    Other interest expense......................       213,910           344,970           423,285            922,737
    Gain on sales of property and equipment.....      (153,535)           (7,000)         (153,535)           (63,000)
    Premium due to debenture default............       663,603                --           663,603                 --
    Other expenses (income).....................            --          (109,571)               --             86,958
    Loss on extinguishment of debentures........            --                --                --          1,697,380
    Debenture conversion costs..................            --                --                --            105,847
                                                 ---------------  ----------------  ----------------  -----------------
Loss Before Income Taxes........................     2,264,383         3,608,184         4,330,440         10,378,111

Income taxes....................................            --                --               800                800
                                                 ---------------  ----------------  ----------------  -----------------
Net Loss........................................   $ 2,264,383       $ 3,608,184       $ 4,331,240        $10,378,911
                                                 ===============  ================  ================  =================

Basic and Diluted Loss Per Common Share.........   $      0.16       $      0.28       $      0.31        $      0.82
Weighted Average Number of Common Shares
     Outstanding................................    14,128,966        13,013,462        14,128,966         12,688,023
</TABLE>


                 See Notes to Consolidated Financial Statements.


<PAGE>
<TABLE>
<CAPTION>

                             EARTHSHELL CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (UNAUDITED)

                                                                                          SIX MONTHS ENDED
                                                                                              JUNE 30,
                                                                                 ------------------------------------
                                                                                        2004               2003
                                                                                 -----------------  -----------------
<S>                                                                                 <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................................................     $ (4,331,240)    $ (10,378,911)
Adjustments to reconcile net loss to net cash used in operating activities
  Depreciation and amortization.................................................           38,571           216,276
  Amortization and accretion of debenture issue costs...........................          398,069           482,973
  Premium due to debenture default..............................................          663,603                --
  Debenture conversion costs....................................................               --           105,847
  Loss on change in fair value of warrant obligation............................               --            86,958
  Loss on extinguishment of debentures..........................................               --         1,697,380
  Beneficial conversion value due to change in debentures conversion price......               --           360,000
  Gain on sales of property and equipment.......................................         (153,535)          (63,000)
  Deferred revenues.............................................................          475,000                --
  Equity in the losses of joint venture.........................................               --           148,257
  Other non-cash items .........................................................           (9,961)           (2,124)
Changes in operating assets and liabilities
  Prepaid expenses and other current assets.....................................          146,277          (120,135)
  Accounts payable and accrued expenses.........................................           89,851        (2,403,817)
  Payables to related party.....................................................          825,278           344,376
  Other long-term liabilities ..................................................          194,008                --
                                                                                 -----------------  -----------------
     Net cash used in operating activities......................................       (1,664,079)       (9,525,920)
                                                                                 -----------------  -----------------

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from sales of property and equipment...................................          172,785            74,200
Purchases of property and equipment.............................................               --            (1,320)
                                                                                 -----------------  -----------------
     Net cash provided by investing activities..................................          172,785            72,880
                                                                                 -----------------  -----------------

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from  issuance  of common  stock  and  convertible  debentures,  net of
     issuance costs and discounts amounting to approximately $3.4 million.......               --         8,656,982
Proceeds from release of restricted time deposit upon conversion of convertible
     debentures into common stock...............................................               --         1,291,000
Proceeds from release of restricted cash upon exchange of convertible debentures               --         2,000,000
Proceeds from release of restricted cash for repayment of convertible debentures               --         5,200,000
Repayment of convertible debentures.............................................               --        (5,200,000)
Proceeds from issuance of notes payable to related party........................               --         1,010,000
                                                                                 -----------------  -----------------
      Net cash provided by financing activities.................................               --        12,957,982
                                                                                 -----------------  -----------------
Effect of exchange rate changes on cash and cash equivalents....................           (1,612)              922
                                                                                 -----------------  -----------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................       (1,492,906)        3,505,864

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..................................        1,901,639           111,015
                                                                                 -----------------  -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................     $    408,733     $   3,616,879
                                                                                 =================  =================
</TABLE>


<PAGE>
<TABLE>
<CAPTION>

                                                                                            SIX MONTHS ENDED
                                                                                                JUNE 30,

                                                                                   -----------------------------------
                                                                                        2004               2003
                                                                                   ----------------  -----------------
<S>                                                                                      <C>              <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for
     Income taxes...............................................................     $     800         $       --
     Interest...................................................................         1,406             28,203
Transfer of property to EKI.....................................................        78,409                 --
Common stock warrants issued in connection with convertible debentures..........            --            745,562
Conversion of convertible debentures into common stock..........................            --          3,141,000
Interest paid in common stock...................................................            --             74,867
Commission paid in common stock.................................................            --             29,500
Common stock issued to service providers in connection with the March 2003
     financing..................................................................            --            484,500
</TABLE>


     SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

    In March 2003,  warrants  for the  purchase of $1.055  million in  aggregate
    principal amount of convertible debentures and 70,477 shares of common stock
    were issued in connection with the issuance of convertible  debentures.  The
    estimated   fair  value  of  the  warrants  of  $442,040,   based  upon  the
    Black-Scholes  method  of  valuation,  was  recorded  as an  original  issue
    discount, thereby reducing the carrying value of the convertible debentures,
    and as an increase in additional paid-in common capital.

    In March 2003,  warrants for the  purchase of 83,333  shares of common stock
    were  issued  to  EKI,  in  connection  with  the  issuance  of  convertible
    debentures, in consideration for its willingness to subordinate amounts owed
    to it. The estimated fair value of the warrants of $303,522,  based upon the
    Black-Scholes  method  of  valuation,  was  recorded  as an  original  issue
    discount,  thereby  reducing the carrying value of the notes payable to EKI,
    and as an increase in additional paid-in common capital.

                 See Notes to Consolidated Financial Statements.

<PAGE>

                             EARTHSHELL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

                                  JUNE 30, 2004

--------------------------------------------------------------------------------
OVERVIEW OF OPERATIONS

Organized in November 1992 as a Delaware corporation,  EarthShell Corporation is
engaged  in the  commercialization  of  composite  material  technology  for the
manufacture of foodservice disposable packaging designed with the environment in
mind. EarthShell Packaging(R) 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(R),
including hinged-lid sandwich containers,  plates, bowls, foodservice wraps, and
cups, is primarily  made from commonly  available  natural raw materials such as
natural ground limestone and potato starch.  EarthShell believes that EarthShell
Packaging(R) 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 is no longer a development stage enterprise.

PRESENTATION OF FINANCIAL INFORMATION

The foregoing interim  financial  information is unaudited and 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,   EarthShell  GmbH.  All  significant   intercompany   balances  and
transactions  have  been  eliminated  in   consolidation.   In  the  opinion  of
management,  the financial  information reflects all adjustments necessary for a
fair  presentation  of the financial  condition,  results of operations and cash
flows  of  the  Company  in  conformity  with  generally   accepted   accounting
principles.  All such  adjustments were of a normal recurring nature for interim
financial reporting.

The accompanying  unaudited consolidated financial statements and these notes do
not include certain information and footnote  disclosures required by accounting
principles  generally accepted in the United States,  which were included in the
Company's  consolidated  financial  statements  for the year ended  December 31,
2003. The  information  included in this Form 10-Q should be read in conjunction
with Management's  Discussion and Analysis of Financial Condition and Results of
Operations and the Company's consolidated financial statements and notes thereto
for the year ended December 31, 2003 included in the Company's  Annual Report on
Form 10-K, including Form-10K/A - Amendment No. 1.

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. During the period from November
1, 1992  (inception) to June 30, 2004, the Company has incurred a cumulative net
loss of $318.7 million and has a stockholders'  deficit of $16.6 million at June
30, 2004.  These  factors  among  others may  indicate  that the Company will be
unable to  continue  as a going  concern  for a  reasonable  period of time (see
"Critical Accounting Policies - Going Concern Basis").

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.

<PAGE>

Basic loss per common share is computed by dividing net loss available to common
stockholders by the weighted-average  number of common shares outstanding during
the period.  Diluted  loss per common  share is  computed  by dividing  net loss
available to common stockholders by the weighted-average number of common shares
outstanding  plus  an  assumed   increase  in  common  shares   outstanding  for
potentially  dilutive  securities,  which  consist of options  and  warrants  to
acquire common stock and convertible debentures. Potentially dilutive shares are
excluded  from  the  computation  in loss  periods,  as  their  effect  would be
anti-dilutive.  The dilutive  effect of options and  warrants to acquire  common
stock is measured  using the  treasury  stock  method.  The  dilutive  effect of
convertible  debentures is measured  using the  if-converted  method.  Basic and
diluted loss per common share is the same for all periods  presented because the
impact of potentially dilutive securities is anti-dilutive.

Since June 21, 2004, the Company's  common stock has been listed through the OTC
Bulletin Board. The Company's common stock trades under the symbol "ERTH.OB."

RELATED PARTY TRANSACTIONS

E.  Khashoggi  Industries  LLC and its wholly  owned  subsidiaries  ("EKI")  own
approximately 35% of the Company's outstanding shares, and may be deemed to be a
controlling  stockholder.  In connection with the formation of the Company,  the
Company  entered  into a Master  License  Agreement  with EKI (the "EKI  License
Agreement"),  pursuant  to  which  the  Company  has  an  exclusive,  worldwide,
royalty-free  license to use and license the EKI technology to  manufacture  and
sell  disposable,  single-use  containers  for  packaging  or  serving  food  or
beverages  intended for consumption  within a short period of time (less than 24
hours). Effective January 1, 2001, EKI granted to the Company priority rights to
license certain product applications on an exclusive basis from Biotec, a wholly
owned subsidiary of EKI, in  consideration  for payment by the Company of a $0.1
million minimum monthly licensing fee to Biotec.  In addition,  Biotec agreed to
render technical services to the Company, as required, at Biotec's cost plus 5%.
Effective  July 29, 2002, the Company  restated its agreements  with Biotec in a
definitive  License & Information  Transfer Agreement with Biotec to utilize the
Biotec  technology for  foodservice  applications,  including food wraps used in
foodservice  applications (the "Biotec License  Agreement").  Under the terms of
the Biotec  License  Agreement,  the Company paid or accrued $0.3 million during
the three  months ended June 30, 2004 and 2003 and $0.6 million and $0.7 million
during the six months ended June 30, 2004 and 2003, respectively. As part of the
new convertible debenture financing ("2006 Debentures")  completed in March 2003
(see "Convertible  Debentures"),  payment of this licensing fee was subordinated
to the new debentures with strict covenants  governing payment. No cash payments
have been made to Biotec from May 2003 through  June 2004,  and the total amount
of accrued and unpaid  licensing  fees  payable to Biotec as of June 30, 2004 is
approximately  $2.2 million,  including  accrued  interest payable on the unpaid
licensing fees. Subsequent to June 30, 2004, as part of an overall restructuring
of the 2006  Debentures and other long-term  liabilities of the Company,  Biotec
has agreed,  in principal,  to restructure the unpaid licensing fees and accrued
interest payable (see "Subsequent Events").

In September  2002,  the Company  entered into a Loan Agreement with EKI whereby
EKI agreed to extend certain loans to the Company at EKI's sole  discretion,  at
interest  rates of 7% to 10%.  As of  December  31,  2003 and June 30,  2004 the
outstanding principal amount of outstanding loans was $2.755 million. As part of
the 2006 Debentures financing (see "Convertible Debentures"), repayment of these
loans and related  interest was  subordinated  to the new debentures with strict
covenants  governing  their  repayment.  Therefore,  at June 30, 2004, the loans
totaling $2.755 million and related interest of  approximately  $0.5 million are
classified as noncurrent liabilities. Subsequent to June 30, 2004, as part of an
overall  restructuring of the 2006 Debentures and other long-term liabilities of
the Company,  agreement  was reached with EKI to convert the entire  outstanding
loan balance and all accrued but unpaid interest into unregistered shares of the
Company's common stock (see "Subsequent Events").

<PAGE>

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

CONVERTIBLE DEBENTURES

On March 5, 2003, the Company issued secured convertible  debentures due in 2006
(the "2006 Debentures"). The 2006 Debentures bear interest at a rate of 2.0% per
annum,  payable  quarterly  in arrears on each January 31, April 30, July 31 and
October 31. At June 30,  2004,  the  outstanding  principal  balance of the 2006
Debentures  was $6.8  million,  which is reflected on the  accompanying  balance
sheet net of an unamortized discount of approximately $1.2 million

The  Company  did not  make  required  interest  payments  related  to the  2006
Debentures  on January 31, 2004,  April 30, 2004 and July 31, 2004. In addition,
on March 8,  2004,  the  Company's  common  stock was  delisted  from the Nasdaq
Smallcap  Market.  These  actions  put the  Company in  non-compliance  with its
covenants under the 2006 Debentures. Two of the debenture holders, including the
debenture holder with the largest  ownership  position,  notified the Company in
writing  that  the  Company  was in  default  and  requested  that  the  Company
repurchase the entire  principal amount of the 2006 Debentures held at the price
specified  in the  debenture,  along  with  any  accrued  and  unpaid  interest.
Therefore,  the entire  outstanding  principal amount of the 2006 Debentures was
classified as a current  liability as of June 30, 2004 and December 31, 2003. In
addition,  the Company accrued in the second quarter of 2004  approximately $0.7
million of the repurchase premium specified in the debenture.

Subsequent to June 30, 2004, with the assistance of its largest shareholder, the
Company  signed  agreements  with the  holders of all $6.8  million  outstanding
principal  amount of its 2006  Debentures to convert,  retire or restructure the
debentures and all accrued but unpaid interest (see "Subsequent Events").

COMMITMENTS

During 1998, EKI entered into certain agreements with an equipment  manufacturer
providing  for  the  purchase  by  EKI  of  certain  technology   applicable  to
starch-based  disposable packaging.  EKI licenses such technology to the Company
on a  royalty-free  basis pursuant to the EKI License  Agreement.  In connection
with the purchase,  the Company would be required to pay the seller $3.0 million
over the  five-year  period  commencing  January 1, 2004 if EKI,  the Company or
their  respective  licensees make active use of the  technology.  As of June 30,
2004,  the Company  and its  respective  licensees  have not  actively  used the
technology.  The  Company  does not plan to make  active  use of the  technology
during the year  ending  December  31,  2004.  EKI has agreed to  indemnify  the
Company to the extent the  Company is  required  to pay any portion of this $3.0
million  obligation  solely as a result of EKI's or its licensees' active use of
such  patents  and  related  technology  (other  than use by the  Company or its
sublicenses).  The $3.0 million  obligation  to the seller of the  technology is
subject  to  reduction  in an amount  equal to 5% of the  purchase  price of any
equipment  purchased  from the seller by EKI,  the Company or their  sublicenses
during the five-year period commencing January 1, 2004.

PROPERTY AND EQUIPMENT AND EQUIPMENT HELD FOR SALE

The cost and  accumulated  depreciation  of property and equipment and equipment
held for sale at June 30, 2004 and December 31, 2003 were as follows:

                                        JUNE 30,      DECEMBER 31,
                                         2004           2003
                                     -------------  --------------

Property and Equipment
     Product development center ...   $   893,657    $ 1,175,394
     Office furniture and equipment       236,545        356,339
                                      -----------    -----------
Total cost ........................     1,130,202      1,531,733
Less:  Accumulated depreciation ...    (1,126,229)    (1,469,939)
                                      -----------    -----------
Property and equipment - net ......   $     3,973    $    61,794
                                      ===========    ===========
Equipment held for sale ...........   $         1    $         1
                                      ===========    ===========
<PAGE>

A commercial production line in Goettingen, Germany was financed and constructed
by the Company.  Because the Company is unable to determine  with  certainty the
proceeds that will be realized upon sale of the equipment, the Company wrote the
line down to $1 as of December  31, 2003 and  reclassified  it to the  long-term
asset account  "Equipment  held for sale." If the equipment is sold, the Company
will recognize a gain equal to the proceeds received for the equipment.

STOCK OPTIONS

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

<TABLE>
<CAPTION>

                                                           THREE MONTHS                           SIX MONTHS
                                                          ENDED JUNE 30,                        ENDED JUNE 30,

                                                 ---------------------------------    -----------------------------------
                                                     2004               2003               2004                2003
                                                 --------------    ---------------    ----------------    ---------------
<S>                                                 <C>                <C>                 <C>               <C>
Net Loss as reported...........................     $2,264,383         $3,608,184          $4,331,240        $10,378,911
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..................
                                                        94,422            102,772             107,437            182,162
                                                 --------------    ---------------    ----------------    ---------------

Pro forma net loss.............................     $2,358,805         $3,710,956          $4,438,677        $10,561,073

Net loss per common share
   As reported.................................     $     0.16         $     0.28          $     0.31        $      0.82
   Pro forma...................................           0.17               0.29                0.31               0.83
</TABLE>


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,"  "will,"  "expect,"  "anticipate,"  "estimate,"  or  "continue,"  or  the
negative thereof or other comparable terminology.  Any one factor or combination
of factors could cause the Company's actual  operating  performance or financial
results to differ  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, 10-K/A 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, including Form 10-K/A
- Amendment No. 1, for the fiscal year ended December 31, 2003.

<PAGE>

CRITICAL ACCOUNTING POLICIES

The  preparation of financial  statements and related  disclosures in conformity
with  generally  accepted  accounting  principles  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
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.  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 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.  During the period
from November 1, 1992  (inception)  to June 30, 2004, the Company has incurred a
cumulative net loss of $318.7 million and has a working capital deficit of $10.8
million at June 30, 2004.  These factors,  along with others,  may indicate that
the  Company  will be unable to continue  as a going  concern  for a  reasonable
period of time.  Even after the  restructuring  of the 2006 Debentures and other
long-term  liabilities of the Company and the sale of common stock subsequent to
June  30,  2004  (see  "Subsequent  Events"),  the  Company  may  have to  raise
additional funds to meet its current obligations and to cover operating expenses
through the year ending  December 31, 2004. If the Company is not  successful in
raising additional capital it may not be able to continue as a going concern for
a reasonable  period of time.  Management  plans to address this need by raising
cash through either the issuance of debt or equity securities.  In addition, the
Company expects to receive additional technology fee payments towards the end of
2004 in connection  with a sublicense  agreement  (the  "Sublicense  Agreement")
entered into between the Company and Meridian  Business  Solutions in the second
quarter  of 2004.  Upon  execution  of the  Sublicense  Agreement,  the  Company
received a payment of $500,000 towards the $2.0 million  technology fee provided
for in the  agreement.  Pursuant to the terms of the Sublicense  Agreement,  the
balance  of the  technology  fee is to be paid  over the next  twelve  months as
certain milestones are achieved. Another possible source of funds is the sale or
transfer  of  the  commercial  production  line  in  Goettingen,  Germany  to an
operating partner. However, the Company can not assure that additional financing
will be available to it, or, if available,  that the terms will be satisfactory,
that it will receive any further technology fee payments in 2004 pursuant to the
Sublicense  Agreement,  or that it will be able to negotiate  mutually agreeable
terms  for the  transfer  of its  commercial  production  line  to an  operating
partner.  Management  also plans to continue in its efforts to reduce  expenses,
but can not assure that it will be able to reduce expenses below current levels.
The consolidated financial statements do not include any adjustments relating to
the  recoverability  and classification of recorded asset amounts or the amounts
and  classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.

Estimated Net Realizable  Value of Property and Equipment.  The Company has been
engaged in the development of manufacturing  equipment to validate acceptance of
EarthShell  products  and their  pricing.  To this end the Company  financed and
constructed  a  commercial  production  line  in  Goettingen,  Germany  for  the
Company's  joint  venture  with  Huhtamaki.  During  2001,  $1.2  million of the
Goettingen  line was  written  off to  reflect  equipment  that  had no  further
application in the product  development cycle.  During the third quarter of 2002
the  Company  concluded,  after  obtaining  quotations  from  various  machinery
suppliers for an identical line, that $1.7 million of the cost of the line would
not be recoverable and therefore the carrying value of the line was written down
by this  amount in the second  half of 2002.  With the  conclusion  of the joint
venture with Huhtamaki in 2003, the Company is seeking other operating  partners
to  purchase  the  production  line.  However,  because the Company is unable to
determine  with  certainty  the proceeds  that will be realized upon sale of the
equipment,  the Company  wrote the line down to $1 as of  December  31, 2003 and
reclassified it to the long-term asset account "Equipment held for sale."

<PAGE>

The key accounting  estimates and policies are reviewed with the Audit Committee
of the Board of Directors.

THREE MONTHS ENDED JUNE 30, 2004  COMPARED  WITH THE THREE MONTHS ENDED JUNE 30,
2003.

The Company's net loss  decreased $1.3 million to $2.3 million from $3.6 million
for the three months ended June 30, 2004 compared to the three months ended June
30, 2003, respectively.

REVENUES.  The Company  recorded  revenues of $0.03 million for the three months
ended June 30, 2004.  These revenues  reflect  amortization  of the $2.0 million
technology fee payable under the  Sublicense  Agreement that was entered into in
the second quarter of 2004 over the ten years of the agreement. The amortization
of the technology fee will result in the recognition of $0.2 million in revenues
per year during the life of the agreement.

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 $1.7 million to $0.3
million from $2.0  million for the three months ended June 30, 2004  compared to
the three months ended June 30, 2003, respectively.

     o    Related  party license fee and research and  development  expenses are
          comprised of the  $100,000  monthly  licensing  fee for the use of the
          EarthShell  Technology  and  technical  services,  both of  which  are
          payable to EKI, a  stockholder  of the  Company,  or Biotec,  a wholly
          owned  subsidiary  of EKI.  It should be noted  that  payment of these
          related  party  expenses has been deferred  pursuant to  subordination
          agreements  entered  into by the EKI entities in  connection  with the
          convertible debenture financing concluded in March 2003. Related party
          license fee and research and  development  expenses  were $0.3 million
          for both the three  months  ended June 30,  2004 and the three  months
          ended June 30, 2003.

          Subsequent to June 30, 2004,  agreement was reached, in principal,  to
          amend the Biotec  License  Agreement  to  eliminate,  for the next two
          years,  the $0.1 million per month minimum  license fee payable by the
          Company to Biotec (see "Subsequent Events").

     o    Other  research and  development  expenses are  comprised of personnel
          costs,  travel and direct overhead for  development and  demonstration
          production.  Other research and  development  expenses  decreased $1.7
          million to $0.04  million from $1.7 million for the three months ended
          June 30,  2004  compared  to the three  months  ended  June 30,  2003,
          respectively.  The  reduction  was  due to the  non-recurrence  of the
          following  2003  activities:  the  start-up  in mid-May  2003 of a new
          manufacturing  line for plates and bowls built and financed by Detroit
          Tool  and  Engineering  Company  (DTE)  at  their  Lebanon,   Missouri
          facility,  as  well as  expenses  incurred  to  vacate  the  Company's
          demonstration  manufacturing  facility  in Goleta,  California  at the
          expiration  of the lease on May 31, 2003.  In addition,  the Company's
          expense reduction efforts resulted in significantly  reduced personnel
          and other costs in 2004.

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  $0.1  million to $1.1  million from $1.2 million for the three months
ended  June  30,  2004  compared  to the  three  months  ended  June  30,  2003,
respectively.  As a result  of the  Company's  efforts  to  reduce  general  and
administrative expenses,  actual expenses incurred in the second quarter of 2004
were  approximately $0.4 million lower than the second quarter of 2003 expenses.
The largest reductions were in personnel costs  (approximately $0.2 million; due
to a reduction in  headcount  from 14 employees at March 31, 2003 to 8 employees
at March 31. 2004), with additional reductions in travel expenses,  professional
fees and  services,  business  insurance  and  franchise  taxes.  These  expense
reductions were largely offset by approximately $0.4 million of accounts payable
settlement  gains that reduced the second quarter 2003 expenses.  The settlement
gains were the result of a program began by the Company in the second quarter of
2003  to  satisfy  vendors  for  outstanding  aged  invoices.  As  a  result  of
negotiations,  the company  settled  and paid  outstanding  accounts  payable of
approximately $0.7 million at a discount of approximately $0.4 million.

<PAGE>

INTEREST  EXPENSE.  Interest  expense is  comprised  of Related  party  interest
expense and Other interest expense.

     o    Related  party  interest  expense  was $0.1  million in both the three
          months  ended June 30, 2004 and the three  months ended June 30, 2003.
          Related  party  interest   expense   includes   interest   accrued  on
          outstanding  loans made to the Company by EKI under the Loan Agreement
          (see "Related Party Transactions"),  accretion of the discount related
          to the warrants  issued in  conjunction  with the March 2003 financing
          transactions, plus accrued interest payable on amounts owed to EKI for
          monthly licensing fees that were not paid in accordance with the terms
          of the  subordination  agreements  entered into in connection with the
          2006 Debentures ("see Related Party Transactions").

          Subsequent to June 30, 2004, agreement was reached with EKI to convert
          all  outstanding  loans and  accrued but unpaid  interest  into common
          stock of the Company and  agreement  was  reached,  in  principal,  to
          restructure  the  unpaid  licensing  fees  under  the  Biotec  License
          Agreement  (see  "Subsequent  Events").  Therefore,  there  will be no
          Related  party  interest  expense  for these items  subsequent  to the
          closing of the agreements.

     o    Other  interest  expense  decreased  $0.1 million to $0.2 million from
          $0.3 million for the three months ended June 30, 2004  compared to the
          three months ended June 30, 2003, respectively. Other interest expense
          in both years is  primarily  composed of accretion of the discount and
          interest accrued on the 2006 Debentures.  However,  the 2004 accretion
          of the  discount  is lower  than the 2003  accretion  of the  discount
          because of the conversion of almost $5.0 million  principal  amount of
          the 2006  Debentures  into  common  stock of the Company in the second
          half  of  2003,  which  resulted  in a  corresponding  portion  of the
          un-accreted  discount being charged against  additional paid-in common
          capital.  Interest  expense from accretion of the discount and accrued
          interest  payable for the 2006 Debentures will be  approximately  $0.8
          million per year until the 2006  Debentures have been converted or the
          obligation satisfied in full.

<PAGE>

         Subsequent to June 30, 2004,  the Company  signed  agreements  with the
         holders of all $6.8 million  outstanding  principal  amount of its 2006
         Debentures to convert,  retire or  restructure  the  debentures and all
         accrued but unpaid interest (see "Subsequent Events"). Therefore, there
         will be no Other interest expense for the 2006 Debentures subsequent to
         the closing of the agreements.

GAIN ON  SALES  OF  PROPERTY  AND  EQUIPMENT.  The  Company  realized  a gain of
approximately $0.2 million in the three months ended June 30, 2004 upon the sale
of  non-essential  machine  shop  equipment  and  excess  office  furniture  and
equipment over their net book value, most of which was fully depreciated.

PREMIUM  DUE TO  DEBENTURE  DEFAULT.  At  June  30,  2004,  the  Company  was in
non-compliance  with  certain  covenants  of  the  2006  Debentures.  Two of the
debenture  holders,  including the debenture  holder with the largest  ownership
position,  notified  the Company in writing  that the Company was in default and
requested that the Company  repurchase the entire  principal  amount of the 2006
Debentures held at the price specified in the debenture,  along with any accrued
and unpaid  interest.  The debenture  contains a provision for repurchase of the
debenture  at a  premium  if  the  repurchase  is due to an  event  of  default.
Therefore,  the Company  accrued  approximately  $0.7 million of the  repurchase
premium specified in the debentuure. This amount is also included in the current
liabilities account "Convertible debentures" of the June 30, 2004 balance sheet.

SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2003.

The Company's net loss decreased $6.1 million to $4.3 million from $10.4 million
for the six months ended June 30, 2004 compared to the six months ended June 30,
2003, respectively.

REVENUES.  The Company  recorded  revenues  of $0.03  million for the six months
ended June 30, 2004.  These revenues  reflect  amortization  of the $2.0 million
technology fee payable under the  Sublicense  Agreement that was entered into in
the second quarter of 2004 over the ten years of the agreement. The amortization
of the technology fee will result in the recognition of $0.2 million in revenues
per year during the life of the agreement.

<PAGE>

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 $3.4 million to $0.9
million from $4.3 million for the six months ended June 30, 2004 compared to the
six months ended June 30, 2003, respectively.

     o    Related  party license fee and research and  development  expenses are
          comprised of the  $100,000  monthly  licensing  fee for the use of the
          EarthShell  Technology  and  technical  services,  both of  which  are
          payable to EKI, a  stockholder  of the  Company,  or Biotec,  a wholly
          owned  subsidiary  of EKI.  It should be noted  that  payment of these
          related  party  expenses has been deferred  pursuant to  subordination
          agreements  entered  into by the EKI entities in  connection  with the
          convertible debenture financing concluded in March 2003. Related party
          license fee and  research  and  development  expenses  decreased  $0.1
          million to $0.6  million  from $0.7  million for the six months  ended
          June  30,  2004  compared  to the six  months  ended  June  30,  2003,
          respectively.  This  decrease  was  entirely  due  to  a  decrease  in
          technical services provided to the Company by Biotec.

          Subsequent to June 30, 2004,  agreement was reached, in principal,  to
          amend the Biotec  License  Agreement  to  eliminate,  for the next two
          years,  the $0.1 million per month minimum  license fee payable by the
          Company to Biotec (see "Subsequent Events").

     o    Other  research and  development  expenses are  comprised of personnel
          costs,  travel and direct overhead for  development and  demonstration
          production.  Other research and  development  expenses  decreased $3.3
          million to $0.3  million  from $3.6  million for the six months  ended
          June  30,  2004  compared  to the six  months  ended  June  30,  2003,
          respectively.  The  reduction  was  due to the  non-recurrence  of the
          following 2003 activities:the  winding down of on-going  demonstration
          manufacturing  in Goleta,  California in the first quarter of 2003 and
          the  start-up in mid-May 2003 of a new  manufacturing  line for plates
          and bowls built and financed by Detroit Tool and  Engineering  Company
          (DTE)  at  their  Lebanon,  Missouri  facility,  as well  as  expenses
          incurred to vacate the Company's demonstration  manufacturing facility
          in Goleta at the expiration of the lease on May 31, 2003. In addition,
          as previously  noted, the Company's expense reduction efforts resulted
          in significantly reduced personnel and other costs in 2004.

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  $0.8  million to $2.2  million  from $3.0  million for the six months
ended  June  30,  2004   compared  to  the  six  months  ended  June  30,  2003,
respectively.  This was primarily the result of efforts to significantly  reduce
general and administrative  expenses throughout 2003 and 2004, which resulted in
reductions in the following expenses: personnel costs by $0.5 million (due to to
a reduction in  headcount  from 17 employees at December 31, 2002 to 9 employees
at December 31. 2003), facility and support costs by $0.2 million,  professional
fees and services by $0.1  million,  travel and  entertainment  expenses by $0.1
million,  business  insurance  costs by $0.1 million and franchise taxes by $0.1
million. These expense reductions were offset by approximately $0.3 million more
of accounts payable  settlement gains in 2003 than in 2004. The settlement gains
were the result of a program began by the Company in the second  quarter of 2003
to satisfy vendors for outstanding aged invoices.

INTEREST  EXPENSE.  Interest  expense is  comprised  of Related  party  interest
expense and Other interest expense.

     o    Related party interest expense  increased $0.1 million to $0.3 million
          from $0.2 million for the six months  ended June 30, 2004  compared to
          the six  months  ended  June 30,  2003,  respectively.  Related  party
          interest expense includes  interest accrued on outstanding  loans made
          to the Company by EKI under the Loan  Agreement  (see  "Related  Party
          Transactions"),  accretion  of the  discount  related to the  warrants
          issued in conjunction with the March 2003 financing transactions, plus
          accrued interest payable on amounts owed to EKI for monthly  licensing
          fees  that  were  not  paid  in  accordance  with  the  terms  of  the
          subordination  agreements  entered  into in  connection  with the 2006
          Debentures  (see  "Related  Party  Transactions").   The  increase  is
          primarily  due to accrued  interest  payable  on amounts  owed for the
          monthly  licensing  fees.  As the  amount  of  unpaid  licensing  fees
          increases each month due to the subordination agreements,  the monthly
          charge for interest expense also increases.

          Subsequent to June 30, 2004, agreement was reached with EKI to convert
          all  outstanding  loans and  accrued but unpaid  interest  into common
          stock of the Company and  agreement  was  reached,  in  principal,  to
          restructure  the  unpaid  licensing  fees  under  the  Biotec  License
          Agreement  (see  "Subsequent  Events").  Therefore,  there  will be no
          Related  party  interest  expense  for these items  subsequent  to the
          closing of the agreements.

     o    Other  interest  expense  decreased  $0.5 million to $0.4 million from
          $0.9  million for the six months  ended June 30, 2004  compared to the
          six months ended June 30, 2003,  respectively.  Other interest expense
          for the six  months  ended  June 30,  2004 is  primarily  composed  of
          accretion of the discount and interest accrued on the 2006 Debentures.
          Other  interest  expense  for the six months  ended June 30,  2003 was
          primarily composed of accretion of the discount on the 2006 Debentures
          and a beneficial  conversion  charge in the amount of $.04 million due
          to a change in the conversion price of the convertible  debentures due
          in August 2007 (the "2007  Debentures").  In addition,  Other interest
          expense for 2003 also  included  accretion of the discount on the 2007
          debentures  and  accrued   interest  payable  on  the  2006  and  2007
          Debentures.  Interest  expense  from  accretion  of the  discount  and
          accrued interest payable for the 2006 Debentures will be approximately
          $0.8 million per year until the 2006 Debentures have been converted or
          the obligations satisfied in full.

          Subsequent to June 30, 2004,  the Company signed  agreements  with the
          holders of all $6.8 million  outstanding  principal amount of its 2006
          Debentures to convert,  retire or  restructure  the debentures and all
          accrued but unpaid  interest  (see  "Subsequent  Events").  Therefore,
          there  will be no  Other  interest  expense  for the  2006  Debentures
          subsequent to the closing of the agreements.

GAIN ON  SALES  OF  PROPERTY  AND  EQUIPMENT.  The  Company  realized  a gain of
approximately  $0.2  million in the six months ended June 30, 2004 upon the sale
of  non-essential  machine  shop  equipment  and  excess  office  furniture  and
equipment over their net book value, most of which was fully depreciated.

PREMIUM  DUE TO  DEBENTURE  DEFAULT.  At  June  30,  2004,  the  Company  was in
non-compliance  with  certain  covenants  of  the  2006  Debentures.  Two of the
debenture  holders,  including the debenture  holder with the largest  ownership
position,  notified  the Company in writing  that the Company was in default and
requested that the Company  repurchase the entire  principal  amount of the 2006
Debentures held at the price specified in the debenture,  along with any accrued
and unpaid  interest.  The debenture  contains a provision for repurchase of the
debenture  at a  premium  if  the  repurchase  is due to an  event  of  default.
Therefore,  the Company  accrued  approximately  $0.7 million of the  repurchase
premium specified in the debenture.  This amount is also included in the current
liabilities account "Convertible debentures" of the June 30, 2004 balance sheet.

LOSS ON  EXTINGUISHMENT  OF  DEBENTURES.  In  connection  with  the  March  2003
financing  transactions,  the Company prepaid $5.2 million  aggregate  principal
amount  of  the  2007   Debentures,   resulting  in  a  prepayment   penalty  of
approximately  $0.2  million.  The  Company  also  issued to the  holders of the
prepaid 2007 Debentures  52,083 shares of common stock,  valued at approximately
$0.2 million based upon the closing price of the Company's common stock of $4.56
per  share  on  March 5,  2003.  In  addition,  one of the  holders  of the 2007
Debentures  exchanged $2.0 million aggregate principal amount of 2007 Debentures
for $2.0 million  aggregate  principal amount of 2006 Debentures.  In connection
with the  prepayment  and  exchange  transactions,  the  Company  incurred  cash
transaction  costs of  approximately  $0.3  million,  excluding  the  prepayment
penalty.  In  addition,  the  Company  incurred a charge of  approximately  $0.9
million for the prorated portion of the original discount attributed to the $7.2
million of the 2007  Debentures  repaid and  exchanged.  Therefore,  the Company
recognized  a $1.7  million  loss  upon  extinguishment  of the 2007  debentures
through the prepayment and exchange in 2003.

DEBENTURE  CONVERSION COSTS.  Debenture conversion costs of $0.1 million for the
six months ended March 31, 2003  represent the prorated  portion of the original
discount  attributed  to the 2007  Debentures  whose  conversion  was  forced by
Company in the first six months of 2003.

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES AT JUNE 30, 2004

Cash Flow. The Company's principal use of cash for the six months ended June 30,
2004 was to fund  operations.  Net cash used in operations  was $1.7 million for
the six months ended June 30, 2004,  compared to $9.5 million for the six months
ended  June  30,  2003.  As of June  30,  2004  the  Company  had  cash and cash
equivalents  totaling  $0.4  million  and a  working  capital  deficit  of $10.8
million. These factors, along with others, may indicate that the Company will be
unable to continue as a going concern for a reasonable period of time.

Capital  Requirements.  The Company made no capital  expenditures during the six
months  ended June 30,  2004,  nor does the Company  expect to make  significant
capital expenditures in the year 2004.

Sources of Capital.  The Company did not make required interest payments related
to the 2006 Debentures on January 31, 2004, April 30, 2004 and July 31, 2004. In
addition,  on March 8, 2004,  the  Company's  common stock was delisted from the
Nasdaq Smallcap Market. These actions put the Company in non-compliance with its
covenants under the 2006 Debentures. Two of the debenture holders, including the
debenture holder with the largest  ownership  position,  notified the Company in
writing  that  the  Company  was in  default  and  requested  that  the  Company
repurchase the entire  principal amount of the 2006 Debentures held at the price
specified  in the  debenture,  along  with  any  accrued  and  unpaid  interest.
Therefore,  the  entire  outstanding  principal  amount  of the 2006  Debentures
totaling $6.8 million was classified as a current  liability as of June 30, 2004
and  December  31,  2003.  Subsequent  to June  30,  2004,  the  Company  signed
agreements with the holders of all $6.8 million outstanding  principal amount of
its 2006  Debentures to convert,  retire or  restructure  the debentures and all
accrued but unpaid interest (see "Subsequent Events").

Even  after  the  restructuring  of the  2006  Debentures  and  other  long-term
liabilities  of the Company and the sale of common stock  subsequent to June 30,
2004,  the  Company  may have to  raise  additional  funds  to meet its  current
obligations and to cover operating expenses through the year ending December 31,
2004. If the Company is not successful in raising  additional capital it may not
be  able to  continue  as a going  concern  for a  reasonable  period  of  time.
Management  plans to  address  this need by  raising  cash  through  either  the
issuance of debt or equity  securities.  In  addition,  the  Company  expects to
receive additional technology fee payments towards the end of 2004 in connection
with the  Sublicense  Agreement  that was entered into in the second  quarter of
2004. Upon execution of the Sublicense Agreement, the Company received a payment
of  $500,000  towards  the  $2.0  million  technology  fee  provided  for in the
agreement. Pursuant to the terms of the Sublicense Agreement, the balance of the
technology  fee is to be paid over the next twelve months as certain  milestones
are achieved.  Another  possible  source of funds is the sale or transfer of the
commercial  production  line in  Goettingen,  Germany to an  operating  partner.
However,  the Company can not assure that additional financing will be available
to it,  or, if  available,  that the terms  will be  satisfactory,  that it will
receive any further  technology  fee payments in 2004 pursuant to the Sublicense
Agreement, or that it will be able to negotiate mutually agreeable terms for the
transfer of its commercial  production line to an operating partner.  Management
also plans to  continue in its  efforts to reduce  expenses,  but can not assure
that it will be able to reduce expenses below current levels.

Off-Balance Sheet Arrangements.  The Company does not have any off-balance sheet
arrangements  as of June 30,  2004  and has not  entered  into any  transactions
involving unconsolidated, limited purpose entities.

SUBSEQUENT EVENTS

Subsequent to June 30, 2004, the Company  entered into agreements to restructure
its long-term debt, including the 2006 Debentures, the notes payable to EKI, the
unpaid  licensing  fees under the Biotec  Licensing  Agreement  and all  related
accrued  but unpaid  interest.  In total the Company  has signed  agreements  to
settle an aggregate of  approximately  $14.0 million in long-term  debt for $3.5
million in cash payments,  the issuance of  approximately  2.3 million shares of
common stock of the Company (subject to possible anti-dilution  adjustments) and
future  cash  payments  (or  conversions  to  common  stock of the  Company)  of
approximately $2.1 million. In addition,  on August 5, 2004, the Company entered
into an agreement to sell  approximately  1.7 million shares of its unregistered
common stock to a single  purchaser at a price of $3.00 per share.  Although the
agreement  required  funding on August 5, 2004, the Company has not yet received
the $5.0  million in  consideration.  However,  the  Company has  received  oral
assurances  from the purchaser  that the funds will be  forthcoming  in the near
future.


<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's treasury function controls all decisions and commitments regarding
cash management and financing  arrangements.  Treasury  operations are conducted
within a framework that has been authorized by the board of directors.

The Company is exposed to interest rate risk on its fixed rate long-term working
capital loans to EKI and its fixed rate long-term convertible debentures.  As of
June  30,  2004,  the  principal  amount  of these  long-term  fixed  rate  debt
obligations totaled approximately $9.555 million. The working capital loans bear
interest  at a fixed  rate of 10% per annum.  The  convertible  debentures  bear
interest at a fixed rate of 2% per annum.  While generally an increase in market
interest rates will decrease the value of this debt, and decreases in rates will
have the opposite  effect,  we are unable to estimate  the impact that  interest
rate changes will have on the value of the substantial  majority of this debt as
there is no active public market for this debt.

ITEM 4. CONTROLS AND PROCEDURES

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  Securities  Exchange Act of 1934, as amended
(the  "Exchange  Act")) as of the end of the period  covered  by this  quarterly
report on Form 10-Q (the  "Evaluation  Date").  Based on such  evaluation,  such
officers  have  concluded  that,  as  of  the  Evaluation  Date,  the  Company's
disclosure  controls and  procedures  are effective in alerting them on a timely
basis to material information relating to the Company required to be included in
the Company's periodic filings under the Exchange Act.

Changes  in  internal  control  over  financial  reporting.  No  changes  in the
Company's  internal  control over financial  reporting have come to management's
attention  during  the  Company's  last  fiscal  quarter  that  have  materially
affected,  or are reasonably likely to materially affect, the Company's internal
control over financial reporting.

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not applicable

ITEM 2.  CHANGES IN  SECURITIES  AND USE OF PROCEEDS AND ISSUER  REPURCHASES  OF
EQUITY SECURITIES

Not applicable

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

The  Company  did not  make  required  interest  payments  related  to the  2006
Debentures  on January 31, 2004,  April 30, 2004 and July 31, 2004. In addition,
on March 8,  2004,  the  Company's  common  stock was  delisted  from the Nasdaq
Smallcap  Market.  These  actions  put the  Company in  non-compliance  with its
covenants under the 2006 Debentures. Two of the debenture holders, including the
debenture holder with the largest  ownership  position,  notified the Company in
writing  that  the  Company  was in  default  and  requested  that  the  Company
repurchase the entire  principal amount of the 2006 Debentures held at the price
specified  in the  debenture,  along  with  any  accrued  and  unpaid  interest.
Subsequent to June 30, 2004, with the assistance of its largest shareholder, the
Company  signed  agreements  with the  holders of all $6.8  million  outstanding
principal  amount of its 2006  Debentures to convert,  retire or restructure the
debentures and all accrued but unpaid interest (see "Subsequent Events").

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

The Annual Meeting of Stockholders of the Company was held on July 26, 2004. The
meeting,  originally  convened on June 28, 2004,  was adjourned to July 26, 2004
because a quorum was not  present at that time.  At the  reconvened  meeting the
following actions were taken:

<PAGE>

     1)   Re-elected the entire membership of the Board of Directors,  as listed
          in the Company's Proxy  Statement  dated June 8, 2004,  until the next
          Annual Meeting of Stockholders. Voting for the individual nominees was
          as follows:

                                                                Votes Withheld
          Nominee                             Votes For           or Against
          -------                             ---------           ----------
          Mr. Essam Khashoggi                 7,529,763            540,894
          Mr. Simon K. Hodson                 7,529,908            540,749
          Mr. John Daoud                      7,529,846            540,811
          Dr. Hamlin M. Jennings              7,529,906            540,751
          Ms. Layla Khashoggi                 7,529,672            540,985
          Mr. Walker Rast                     7,529,823            540,834
          Dr. George W. Roland                7,529,906            540,751

     2)   Approved an amendment to the Company's Certificate of Incorporation to
          increase,  upon  filing,  the  number of Common  Stock the  Company is
          authorized  to issue  from  25,000,000  to  40,000,000  shares  and in
          connection  therewith  to increase  the total  number of shares of all
          classes of stock the Company is authorized to issue from 35,000,000 to
          50,000,000. The votes were cast as follows:

          Votes for                           7,249,071
          Votes withheld or against             757,924
          Abstentions                            63,662
          Broker non-votes                            0

ITEM 5. OTHER INFORMATION

Not applicable

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

<TABLE>
<CAPTION>

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

      <S>                 <C>
       10.1                Meridian Business Solutions Sublicense Agreement dated May 13, 2004.
       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.
</TABLE>

<PAGE>

(b)  Reports on Form 8-K

The Company filed one report on Form 8-K during the quarter ended June 30, 2004.
Information regarding the item reported on is as follows:

<TABLE>
<CAPTION>

         DATE                                       ITEM REPORTED ON
----------------------------        ------------------------------------------------------------
<S>                                 <C>
      June 29, 2004                 Press release of the Company dated June 28, 2004 announcing,
                                    that (i) it had adjourned its Annual Meeting of Stockholders
                                    to July 26,  2004  because a quorum was not present by proxy
                                    or in person and (ii) it reported during a discussion period
                                    following  adjournment of the business portion of the Annual
                                    qeeting of  Stockholders  that its largest  shareholder,  E.
                                    Khashoggi Industries (EKI), has agreed to convert its $2.755
                                    million  note to  common  stock at a price of $3 per  share,
                                    provided  that the  Registrant  can resolve the default that
                                    currently exists under its 2006 debentures.
</TABLE>


                                    SIGNATURE

Pursuant  to the  requirements  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.

                                            EarthShell Corporation

Date: August 16, 2004                       By:  /s/ D. Scott Houston
                                                 ____________________
                                                 D. Scott Houston
                                                 Chief Financial Officer

                                                (PRINCIPAL FINANCIAL OFFICER AND
                                                 DULY AUTHORIZED OFFICER)