**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**


**September
      30, 2006**





**o TRANSITION
      REPORT
      PURSUANT SECTION 13 OR 15 (d)**


**OF
      SECURITIES EXCHANGE ACT OF 1934**





For
      the
      Transition Period From ______to_________





*Commission
      File Number 0-23567*





**EARTHSHELL
      CORPORATION**





(Exact
      name of registrant as specified in its charter)







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





**1301
      YORK ROAD, SUITE 200**


**BALTIMORE,
      MD 21093**


(Address
      of principal executive office) (Zip Code)





(410)
      847-9420


(Registrant's
      telephone number, including area code)





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





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




Large
      accelerated filer o   Accelerated
      filer o   Non-accelerated
      filer x




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


The
      number of shares outstanding of the Registrant's Common Stock as of November
      1,
      2006 is 20,548,749










**EARTHSHELL
      CORPORATION**





**FORM
      10-Q**





**FOR
      THE QUARTER ENDED SEPTEMBER 30, 2006**





**INDEX
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES**





PART
                I. FINANCIAL INFORMATIONItem 1.  Condensed
              Consolidated Financial Statements
            Page


a)
              Condensed Consolidated Balance Sheets
                as of
                September
                30, 2006 (unaudited) and December 31, 2005
              1b)
              Condensed
                Consolidated Statements of Operations for the three month and nine
                month
                periods ended September 30, 2006 and September 30, 2005
                (unaudited)
              2c)
              Condensed
                Consolidated Statements of Cash Flows for the nine months ended September
                30, 2006 and September 30, 2005 (unaudited)
              3d)
              Notes
                to Condensed Consolidated Financial Statements (unaudited)
              6Item
                2.
              Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
              10Item
                3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              15Item
                4.
              Controls
                  and Procedures
              15Part
                  II. Other InformationItem 1.
              Legal
                  Proceedings
              17Item 1A.
              Risk
                  Factors
              17Item 2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              17Item 3.
              Defaults
                  Upon Senior Securities
              18Item 4.
              Submission
                  of Matters to a Vote of Security Holders
              18Item 5.
              Other
                  Information
              18Item 6.
              Exhibits
              19Signature
              20









**EARTHSHELL
      CORPORATION**





**CONDENSED
      CONSOLIDATED BALANCE SHEETS**





SEPTEMBER
                    30
                
                DECEMBER
                    312006
                
                2005(UNAUDITED)ASSETSCURRENT
                    ASSETSCash
                    and cash equivalents
                
                $
                297,935
                
                $
                347,812Prepaid
                    expenses and other current assets
                
                
                56,138
                
                
                83,473Total
                    current assets
                
                
                354,073
                
                
                431,285PROPERTY
                    AND EQUIPMENT, NET
                
                
                10,808
                
                
                11,991EQUIPMENT
                    HELD FOR SALE
                
                
                1
                
                
                1TOTALS
                
                $
                364,882
                
                $
                443,277LIABILITIES
                    AND STOCKHOLDERS’ DEFICITCURRENT
                    LIABILITIESAccounts
                    payable and accrued expenses
                
                $
                3,764,791
                
                $
                5,908,670Current
                    portion of settlements
                
                
                157,329
                
                
                300,786Current
                    portion of deferred revenues
                
                
                100,000
                
                
                100,000Contingent
                    settlement
                
                
                1,236,734
                
                
                2,375,000Note
                    payable, net of discount of $168,901
                
                
                —
                
                
                2,355,296Notes
                    Payable to a related party
                
                
                1,650,000
                
                
                850,000Total
                    current liabilities
                
                
                6,908,854
                
                
                11,889,752DEFERRED
                    REVENUES, LESS CURRENT PORTION
                
                
                712,500
                
                
                787,500NOTE
                    PAYABLE, NET OF DISCOUNT OF $1,775,985
                
                
                2,724,015
                
                
                —OTHER
                    LONG-TERM LIABILITIES
                
                
                29,839
                
                
                117,914Total
                    liabilities
                
                
                10,375,208
                
                
                12,795,166STOCKHOLDERS'
                    DEFICITPreferred
                    Stock, $.01 par value, 10,000,000shares
                    authorized; 400,000 Series Dshares
                    designated - 128,205 and 0 Series Dshares
                    issued and outstanding as of September 30,2006
                    and December 31, 2005, respectively(liquidation
                    preference of approximately $500,000and
                    cumulative dividend of $25,632)
                
                
                1,282
                
                
                —Common
                    Stock, $.01 par value, 40,000,000shares
                    authorized: 20,548,749 and18,981,167
                    shares issued and outstandingas
                    of September 30, 2006 and December 31 2005,respectively
                
                
                205,488
                
                
                189,812Additional
                    paid-in capital
                
                
                321,041,067
                
                
                315,306,825Accumulated
                    deficit
                
                
                (331,212,967
                )
                
                (327,786,868
                )Accumulated
                    other comprehensive loss
                
                
                (45,196
                )
                
                (61,658
                )Total
                    stockholders' deficit
                
                
                (10,010,326
                )
                
                (12,351,889
                )TOTALS
                
                $
                364,882
                
                $
                443,277
  See
        Notes to Condensed Consolidated Financial
        Statements.


1





**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


(UNAUDITED)





**For
                the**
              **Three
                Months**
              **Ended
                September 30,**
            
            **For
                the**
              **Nine
                Months**
              **Ended
                September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Revenues
            
            $
            25,000
            
            $
            25,000
            
            $
            75,000
            
            $
            158,333Operating
                ExpensesResearch
                and development expenses
            
            
            30,928
            
            
            110,628
            
            
            92,245
            
            
            333,406Related
                party general and administrative expenses (reimbursements)
            
            
            —
            
            
            (2,227
            )
            
            30,000
            
            
            (5,867
            )Other
                general and administrative expenses
            
            
            1,850,631
            
            
            1,603,577
            
            
            3,925,553
            
            
            4,213,578Depreciation
                and amortization
            
            
            1,230
            
            
            558
            
            
            3,551
            
            
            2,233Total
                operating expenses
            
            
            1,882,789
            
            
            1,712,536
            
            
            4,051,349
            
            
            4,543,350Operating
                Loss
            
            
            1,857,789
            
            
            1,687,536
            
            
            3,976,349
            
            
            4,385,017Other
                (Income) ExpensesInterest
                income
            
            
            (3,805
            )
            
            (1,112
            )
            
            (11,026
            )
            
            (3,864
            )Related
                party interest expense
            
            
            25,976
            
            
            —
            
            
            74,313
            
            
            101,314Other
                interest expense
            
            
            141,171
            
            
            206,655
            
            
            980,445
            
            
            372,480Gain
                (Loss) on sales or disposals of property and equipment
            
            
            —
            
            
            803
            
            
            (26,096
            )
            
            (22,902
            )Gain
                on settlement of debt
            
            
            (1,263,287
            )
            
            —
            
            
            (1,567,886
            )
            
            —Loss
                Before Income Taxes
            
            
            757,844
            
            
            1,893,882
            
            
            3,426,099
            
            
            4,832,045Income
                taxes
            
            
            —
            
            
            —
            
            
            —
            
            
            800Net
                Loss
            
            $
            757,844
            
            $
            1,893,882
            
            $
            3,426,099
            
            $
            4,832,845Basic
                and Diluted Loss Per Common Share
            
            $
            0.04
            
            $
            0.10
            
            $
            0.17
            
            $
            0.26Weighted
                Average Number of Common Shares Outstanding
            
            
            20,191,430
            
            
            18,507,916
            
            
            19,686,097
            
            
            18,385,325




**See
      Notes to Condensed Consolidated Financial Statements.**




2




**EARTHSHELL
      CORPORATION**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


(UNAUDITED)




NINE
                  MONTHS ENDEDSEPTEMBER
                  30,2006
              
              2005CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  loss
              
              $
              (3,426,099
              )
              $
              (4,832,845
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activitiesDepreciation
                  and amortization
              
              
              3,551
              
              
              2,233Amortization
                  of debt discount
              
              
              495,474
              
              
              234,744(Gain)
                  Loss on sale or disposal of property and equipment
              
              
              (26,096
              )
              
              (22,902
              )(Gain)
                  on settlements of debt
              
              
              (1,567,886
              )
              
              —Stock
                  option and restricted stock compensation expense
              
              
              370,212
              
              
              251,692Other
                  non-cash expense items
              
              
              39,367
              
              
              (198,110
              )Changes
                  in operating assets and liabilitiesPrepaid
                  expenses and other current assets
              
              
              27,335
              
              
              98,860Deferred
                  revenues
              
              
              (75,000
              )
              
              (158,333
              )Accounts
                  payable and accrued expenses
              
              
              1,244,174
              
              
              1,990,416Payable
                  to a related party
              
              
              —
              
              
              (37,854
              )Other
                  long-term liabilities
              
              
              6,401
              
              
              —Net
                  cash used in operating activities
              
              
              (2,908,567
              )
              
              (2,672,099
              )CASH
                  FLOWS FROM INVESTING ACTIVITIESPurchase
                  of property and equipment
              
              
              (2,368
              )
              
              —Proceeds
                  from sales of property and equipment
              
              
              26,096
              
              
              29,706Net
                  cash provided by investing activities
              
              
              23,728
              
              
              29,706CASH
                  FLOWS FROM FINANCING ACTIVITIESProceeds
                  from issuance of preferred stock
              
              
              500,000
              
              
              —Proceeds
                  from issuance of common stock
              
              
              —
              
              
              528,788Proceeds
                  from issuance of warrants (net of costs of $39,366)
              
              
              60,634
              
              
              —Proceeds
                  from issuance of notes payable to related party
              
              
              800,000
              
              
              322,000Repayment
                  of notes payable to related party
              
              
              —
              
              
              (322,000
              )Principal
                  payments on settlements
              
              
              (237,933
              )
              
              (207,724
              )Proceeds
                  from issuance of note payable
              
              
              1,975,803
              
              
              2,500,000Note
                  payable issuance costs
              
              
              (280,000
              )
              
              (402,500
              )Net
                  cash provided by financing activities
              
              
              2,818,504
              
              
              2,418,564Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              16,458
              
              
              (8,039
              )DECREASE
                  IN CASH AND CASH EQUIVALENTS
              
              
              (49,877
              )
              
              (231,868
              )CASH
                  AND CASH EQUIVALENTS, BEGINNING OF PERIOD
              
              
              347,812
              
              
              272,371CASH
                  AND CASH EQUIVALENTS, END OF PERIOD
              
              $
              297,935
              
              $
              40,503SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATIONCash
                  paid forIncome
                  taxes
              
              $
              —
              
              $
              800Interest
              
              $
              144,239
              
              $
              12,619


**See
      Notes to Condensed Consolidated Financial Statements.**




3




**SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES**





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




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




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




Pursuant
      to the Board’s approval in February 2005, the Company granted to its
      then-chairman of the Board of Directors (and majority beneficial stockholder)
      a
      warrant to purchase one million shares of the Company’s common stock at $3.00
      per share in consideration of the stockholder’s continued support of the Company
      since its inception and providing bridge loans from time to time. The warrant
      was issued in August 2005 and expires in May 2015.




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




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




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





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





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


**See
      Notes to Condensed Consolidated Financial Statements.**




4





On
      March
      6, 2006, the Company issued a total of 50,000 shares of common stock to current
      and past Directors pursuant to restricted stock grants given to the directors
      in
      June 2005 as a bonus in recognition for their willingness to defer their cash
      compensation since 2004.  An accrual to compensation expense of
      $150,934 was recorded in 2005.





On
      March 7, 2005, the Company entered into an agreement with Capital Group
      Communications (“CGC”) in which CGC would perform investor relations functions
      on behalf of the Company in return for up to 600,000 shares of the Company’s
      common stock. Pursuant to a letter agreement dated February 27, 2006,
      EarthShell and CGC reached an agreement in which CGC agreed to accept a total
      of
      320,000 unregistered shares of EarthShell’s Common Stock under this agreement as
      payment in full for its services. EarthShell agreed to include 300,000 of such
      shares in the next registration statement it files with the Securities and
      Exchange Commission. The 320,000 shares were issued to CGC on May 2, 2006.
      The shares were valued at $592,000 on the date of issuance and the Company
      recorded a gain of $8,000 related to this settlement.





In
      May
      2006, the Company issued to Midsummer Capital 25,000 shares of its unregistered
      common stock in settlement of claims for liquidated damages. The Company
      recorded the difference between the carrying value of the damages and the fair
      value of the stock as a settlement gain in the amount of $121,975.





During
      June, 2006, the Company issued a total of 160,000 shares of restricted common
      stock to two individuals in connection with the termination of a license
      agreement, mutual release, and settlement of claims between the parties. The
      shares were valued at $330,400 on the date of issuance and the Company recorded
      a loss of $80,400 related to this settlement.




On
      June 21, 2006, the Company entered into a Securities Purchase Agreement
      (the “SPA”) by and among the Company and certain investors named therein (the
“Investors”) pursuant to which the Company sold an aggregate of 128,205 shares
      of Series D convertible preferred stock (the “Series D Preferred Stock”) for a
      total purchase price of $500,000. The Series D Preferred Stock, which was sold
      to the Investors in a private offering, pays a cumulative 20% annual dividend,
      which shall be paid on conversion or liquidation of the Company. The Series
      D
      Preferred Stock is callable in certain circumstances by the Company. In the
      event of any voluntary or involuntary liquidation, dissolution or winding up
      of
      the Company, the holders of the Series D Preferred Stock will be entitled to
      receive, prior and in preference to any distribution of the assets or surplus
      funds of the Company to the holders of any shares of common stock by reason
      of
      the ownership thereof, an amount equal to the Liquidation Value of $3.90 per
      share and any accrued dividends. Each share of Series D Preferred Stock is
      convertible into one share of the Company’s common stock, par value $0.01 per
      share, subject to adjustment. In order to (i) effect an amendment of the
      Company’s Certificate of Incorporation or By-Laws (except to increase the number
      of directors), (ii) issue, or permit any Subsidiaries to issue, any additional
      shares of capital stock or other equity interests at less than Fair Market
      Value, or (iii) change the Company’s business or business model, the affirmative
      vote of the holders of at least seventy-five percent (75%) of the then
      outstanding shares of Series D Preferred Stock must first be obtained. In
      connection with the issuance and sale of the Series D Preferred Stock, the
      Company granted the Investors immediately exercisable warrants to purchase
      an
      aggregate of 555,555 shares of the Company’s common stock at an exercise price
      of $3.90 per share, subject to adjustment (the “Warrants”). The Investors also
      have been granted certain registration rights with respect to the shares of
      common stock underlying the Series D Preferred Stock and the Warrants as set
      forth in Section 3 of the SPA.




On
      July
      12, 2006, the Company entered into a Letter Agreement with CCP, pursuant to
      which CCP has agreed to forbear from exercising certain rights and remedies
      under the Cornell Capital Debentures and that certain Registration Rights
      Agreement until September 30, 2006 in exchange for the issuance by the Company
      to CCP of 250,000 shares of the Company's common stock. On the date of the
      agreement, the stock had a value of $490,000, which was charged to other
      expense.




On
      August
      2, 2006 the Company issued 193,401 shares of the Company’s common stock to SF
      Capital Partners pursuant to an additional conversion request of $580,203.
      The
      Company recorded the difference between the conversion value and the fair value
      of the common stock at the time of the conversion as a settlement gain in the
      amount of $206,939. Following the conversions, the remaining balance of the
      Contingent Settlement was approximately $1.2 million.





On
      September 29, 2006, the Company entered into a Letter Agreement with CCP
      pursuant to which Cornell has agreed to forbear from exercising certain rights
      and remedies under that certain Cornell Capital Debentures and that certain
      Registration Rights Agreement until December 31, 2006 in exchange for the
      issuance by the Company to CCP of 187,500 shares of the Company’s common stock.
      On the date of the agreement, the stock had a value of $318,750, which was
      charged to other expense.




See
      Notes to Condensed Consolidated Financial
      Statements.




5




**EARTHSHELL
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


(UNAUDITED)


September
      30, 2006


**OVERVIEW
      OF OPERATIONS**




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




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




**BASIS
      OF PRESENTATION OF FINANCIAL INFORMATION**




The
      foregoing condensed financial information has been prepared from the books
      and
      records of EarthShell Corporation. Certain information and footnote disclosures
      normally included in financial statements prepared in accordance with accounting
      principles generally accepted in the United States of America have been
      condensed or omitted pursuant to applicable SEC rules and regulations.
      Operating results for the period ended September 30, 2006 are not
      necessarily indicative of the results that may be expected for the year ending
      December 31, 2006.




The
      balance sheet at December 31, 2005 has been derived from the audited
      financial statements at that date but does not include all of the information
      and footnotes required by accounting principles generally accepted in the United
      States of America for complete financial statements. The accompanying interim
      financial statements should be read in conjunction with the consolidated
      financial statements and notes thereto included in the Company’s
      Form 10-K/A for the year ended December 31, 2005.




EarthShell
      Corporation’s condensed consolidated financial statements include the accounts
      of its wholly-owned inactive subsidiary, PolarCup EarthShell GmbH. All
      significant intercompany balances and transactions have been eliminated in
      consolidation. In the opinion of management, the financial information reflects
      all adjustments, consisting of normal recurring adjustments which are, in the
      opinion of management, necessary for a fair presentation of the financial
      condition, results of operations and cash flows of the Company in conformity
      with accounting principles generally accepted in the United States. The
      accompanying condensed consolidated financial statements have been prepared
      on a
      going concern basis, which contemplates the realization of assets and the
      satisfaction of liabilities in the normal course of business. The Company has
      incurred significant losses since inception, has minimal revenues and has a
      working capital deficit of $6.6 million at September 30, 2006. These factors,
      along with others, indicate substantial doubt that the Company will be able
      to
      continue as a going concern for the next 12 months. The condensed consolidated
      financial statements do not include any adjustments relating to the
      recoverability and classification of recorded asset amounts or the amounts
      and
      classification of liabilities that might be necessary should the Company be
      unable to continue as a going concern. 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.




On
      December 30, 2005 the Company entered into a financing transaction with
      Cornell Capital Partners to borrow $4.5 million, of which, the Company received
      $1.7 million in net proceeds after repayment of prior loans of $2.5 million
      and
      payment of fees in the amount of $0.3 million. On January 6, 2006, the Company
      received this funding. On January 3, 2006, the Company received $150,000 as
      the
      final installment under a $1.0 million promissory note executed with EKI on
      October 11, 2005. On June 21, 2006, EarthShell Corporation entered into a
      Securities Purchase Agreement (the “SPA”) by and among the Company and certain
      investors named therein pursuant to which the Company sold an aggregate of
      128,205 shares of Series D convertible preferred stock for a total purchase
      price of $500,000. On July 28, 2006, the Company entered into a Loan and Mutual
      Release Agreement with EKI pursuant to which the Company received $350,000
      in
      net proceeds. On September 29, 2006, the Company executed a promissory note
      with
      EKI in the amount of $250,000 which was funded in two installments on September
      29, 2006 ($150,000) and November 1, 2006 ($100,000). Subsequent to September
      30,
      2006, the Company entered into a loan agreement with ReNewable Products, Inc.
      in
      the amount of $150,000 which was funded on October 2, 2006. (See Item 2.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations - Liquidity and Financial Resources. Also see Subsequent Events).
      The
      Company will have to raise additional funds to meet its current obligations
      and
      to cover operating expenses through the year ending December 31, 2006. If
      the Company is not successful in raising additional capital it may not be able
      to continue as a going concern. Management plans to address this need by raising
      cash through short term borrowings and the issuance of debt or equity
      securities. However, the Company cannot assure that additional financing will
      be
      available to it, or, if available, that the terms will be satisfactory, or
      that
      it will be able to sell additional licenses and receive any royalty payments
      in
      2006. Management will also continue in its efforts to reduce expenses, but
      cannot assure that it will be able to reduce expenses below current levels.
      If
      the Company is not successful in securing additional funding in a timely manner,
      the Company may have to further reduce or curtail its operations.




**RECENT
        ACCOUNTING PRONOUNCEMENTS**
 
 On
        July
        13, 2006, FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in
        Income
        Taxes — an Interpretation of FASB Statement No. 109 (“FIN 48”) was issued. 
The provisions of FIN 48 are effective for fiscal years beginning after December
        15, 2006.  FIN 48 clarifies the accounting for uncertainty in income taxes
        recognized in an enterprise’s financial statements in accordance with FASB
        Statement No. 109, Accounting for Income Taxes.  It also prescribes a
        recognition threshold and measurement attribute for the financial statement
        recognition and measurement of a tax position taken or expected to be taken
        in a
        tax return.  The Company is currently evaluating the impact of FIN 48 on
        its results of operations, financial condition or cash flows.
  In
        September 2006, the Securities and Exchange Commission issued Staff Accounting
        Bulletin No. 108, Considering the Effects of Prior Year Misstatements when
        Quantifying Misstatements in Current Year Financial Statements (“SAB No. 108”),
        which provides interpretive guidance on the consideration of the effects
        of
        prior year misstatements in quantifying current year misstatements for the
        purpose of a materiality assessment. SAB No. 108 requires registrants to
        quantify misstatements using both the balance sheet and income statement
        approaches and to evaluate whether either approach results in quantifying
        an
        error that is material based on relevant quantitative and qualitative factors.
        The guidance is effective for the first fiscal period ending after November
        15,
        2006. Upon adoption the Company does not expect SAB No. 108 to have a
        material effect on its results of operations, financial condition or cash
        flows.




6




**PROPERTY
      AND EQUIPMENT AND EQUIPMENT HELD FOR SALE**





The
      cost
      and accumulated depreciation of property and equipment and equipment held for
      sale at September 30, 2006 and December 31, 2005 were as follows:




SEPTEMBER
                  30,
              
              DECEMBER
                  31,2006
              
              2005Total
                  office furniture and equipment
              
              
              96,737
              
              
              158,854Less:
                  Accumulated depreciation and amortization
              
              
              (85,929
              )
              
              (146,863
              )Property
                  and equipment - net
              
              $
              10,808
              
              $
              11,991Equipment
                  held for sale
              
              $
              1
              
              $
              1





**ACCOUNTS
      PAYABLE AND ACCRUED EXPENSES**





The
      following is a summary of accounts payable and accrued expenses at September
      30,
      2006 and December 31, 2005:




SEPTEMBER
                    30,
                
                DECEMBER
                    31,2006
                
                2005Accounts
                    payable and other accrued expenses
                
                $
                2,821,048
                
                $
                3,137,261Legal
                    accruals
                
                
                238,904
                
                
                1,920,575Deferred
                    officer compensation
                
                
                522,976
                
                
                453,544Accrued
                    property taxes
                
                
                108,502
                
                
                116,002Accrued
                    salaries, wages and benefits
                
                
                73,361
                
                
                281,288Total
                    accounts payable and accrued expenses
                
                $
                3,764,791
                
                $
                5,908,670





**NOTES
      PAYABLE**





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




The
      Cornell Capital Debentures are secured by (i) a Pledge and Escrow Agreement,
      by
      and among the Company, Cornell Capital Partners, and David Gonzalez, Esq.,
      (ii) an Insider Pledge Agreement and Escrow Agreement (the “IPEA”), by and
      among the Company, Cornell Capital Partners, David Gonzalez, Esq. and Mr. Benton
      Wilcoxon and (iii) an Amended and Restated Security Agreement, by and between
      the Company and Cornell Capital Partners. The Cornell Capital Debentures are
      secured by substantially all of the Company’s assets, have a three year term and
      accrue interest at 12% per annum. **** The
      Cornell Capital Debenture Purchase Agreement required the Company to register
      the shares of the Company’s common stock into which the Cornell Capital
      Debentures are convertible under the Securities Act of 1933. On February 14,
      2006, the Company filed a registration statement on Form S-1 with the Securities
      and Exchange Commission (“SEC”) which was subsequently amended on August 2, 2006
      and again on November 1, 2006 in order to register 6,700,000 shares of common
      stock that may be issuable to the holders of the Cornell Capital Debentures
      upon
      conversion. **** Beginning
      60 days after the SEC declares the registration statement effective, **** Cornell
      Capital Partners is entitled, at its option, to convert and sell up to $250,000
      of the principal amount of the Cornell Capital Debentures, plus accrued
      interest, into shares of the Company’s common stock, within any 30 day period at
      the lesser of (i) a price equal to $3.00 or (ii) 88% of the average of the
      two lowest volume weighted average prices of the common stock during the
      ten trading days immediately preceding the conversion date, as quoted by
      Bloomberg, LP.




7




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




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





The
      Company has acknowledged that an event of default under the Debenture had
      occurred as of June 30, 2006 as a result of the Registration Statement filed
      to
      register the common stock underlying the Debenture not yet being declared
      effective by the U.S. Securities and Exchange Commission. The Company also
      acknowledged that Cornell Capital was entitled to liquidated damages equal
      to
      one percent (1%) of the liquidated value of the Cornell Capital Debenture for
      each thirty (30) day period after May 31, 2006. As described below, Cornell
      Capital has agreed to waive the default, including all liquidated damages that
      may have accrued through June 30, 2006 and during the Forbearance Period, in
      exchange for shares of the Company’s common stock and the Company obtaining the
      effectiveness of a Registration Statement by December 31, 2006 which includes
      shares of common stock underlying the Cornell Capital Debentures.




On
      July
      12, 2006, the Company entered into a Letter Agreement with Cornell Capital
      Partners, pursuant to which Cornell Capital Partners has agreed to forbear
      from
      exercising certain rights and remedies under the Cornell Capital Debentures
      and
      that certain Registration Rights Agreement until September 30, 2006 in exchange
      for the issuance by the Company to Cornell Capital Partners of 250,000 shares
      of
      the Company's common stock. On the date of the agreement, the stock had a value
      of $490,000.




On
      September 29, 2006, the Company entered into a Letter Agreement with Cornell
      Capital Partners pursuant to which Cornell has agreed to forbear from exercising
      certain rights and remedies under the Cornell Capital Debentures and that
      certain Registration Rights Agreement until December 31, 2006 in exchange for
      the issuance by the Company to Cornell Capital Partners of 187,500 shares of
      the
      Company’s common stock. On the date of the agreement, the stock had a value of
      $318,750.





**STOCK
      OPTIONS**




In
      1995
      the Company established the EarthShell Corporation 1995 Stock Incentive
      Plan (the “Plan”). The Plan provides that the Company may grant an
      aggregate number of options for up to 1,250,000 shares of common stock to
      employees, directors and other eligible persons as defined by the Plan. Options
      issued to date under the Plan generally vest over varying periods from 0 to
      5
      years and generally expire 5 to 10 years from the date of grant. Some of the
      options granted are subject to approval by the shareholders of an increase
      in
      the number of shares reserved for issuance under the Plan.




Effective
      January 1, 2006, the Company adopted Statement of Financial Accounting
      Standards (“SFAS”) No. 123(R), “Share-Based Payment: An Amendment of SFAS
      No. 123” using the modified prospective method. Under this method,
      compensation cost is recognized on or after the effective date for the portion
      of outstanding awards, for which the requisite service has not yet been
      rendered, based on the grant date fair value of those awards. Prior to
      January 1, 2006, the Company accounted for employee stock options using the
      intrinsic value method in accordance with Accounting Principles Board (“APB”)
      Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to
      Employees,” and adopted the disclosure only alternative of SFAS No. 123.
 For stock-based awards issued on or after January 1, 2006, the
      Company recognizes the compensation cost on a straight-line basis over the
      requisite service period for the entire award. Measurement and attribution
      of
      compensation cost for awards existing on December 31, 2005 that are unvested
      as
      of the effective date of SFAS No. 123(R) are based on the same
      estimate of the grant-date or modification-date fair value and the same
      attribution method used previously under SFAS No. 123. As of January
      1, 2006, the Company had 379,167 shares for which the requisite service period
      has not yet been met. The compensation expense recorded for the portion of
      these
      whose requisite service period had been rendered for the nine months ended
      September 30, 2006 was $0.4 million.




8




Information
      with respect to stock options is as follows for the nine months ended September
      30, 2006:




Shares
            
            Weighted-Average
                Exercise Price
            
            Weighted-Average
                Remaining Contractual Term (in years)
            
            Aggregate
                Intrinsic ValueOutstanding
                as of January 1, 2006
            
            
            1,629,425
            
            $
            6.68
            
            
            —
            
            
            —Granted
            
            
            —
            
            
            —
            
            
            —
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            —
            
            
            —Forfeited
                / Cancelled
            
            
            139,122
            
            $
            56.74
            
            
            —
            
            
            —Outstanding
                as of September 30, 2006
            
            
            1,490,303
            
            $
            2.00
            
            
            6.72
            
            $
            324,000Options
                exercisable as of September 30, 2006
            
            
            1,118,637
            
            $
            1.99
            
            
            6.98
            
            $
            —





For
      2005,
      prior to adoption of SFAS 123(R) the company did not record compensation expense
      related to the options granted. If the Company had applied the fair value based
      method to recognize compensation cost for the options granted, the net loss
      and
      net loss per share would have been changed to the following pro forma amounts
      for the nine months ended September 30, 2005:




2005Net
                  Loss as reported
              
              $
              4,832,845Add:
                  Stock-based employee compensationdetermined
                  under fair value based methodfor
                  all awards, net of taxRelates
                  to options issued to executiveOfficers
              
              $
              1,046,039Add:
                  Stock-based employee compensationdetermined
                  under fair value based methodfor
                  all awards, net of taxRelates
                  to warrants issued to executiveOfficers
              
              $
              1,281,328Pro
                  forma net loss
              
              $
              7,160,212Basic
                  diluted loss per common shareAs
                  reported
              
              $
              0.26Pro
                  forma
              
              $
              0.39





Pursuant
      to the Board’s approval in February 2005, the Company granted to its chairman of
      the Board of Directors (and majority beneficial stockholder) a warrant to
      purchase one million shares of the Company’s common stock at $3.00 per share in
      consideration of the stockholder’s continued support of the Company since its
      inception and providing bridge loans from time to time. The warrant was issued
      in August 2005 and expires in May of 2015.




9





**STOCK
      TRANSACTIONS**





On
      July
      12, 2006, the Company entered into a Letter Agreement with CCP, pursuant to
      which CCP has agreed to forbear from exercising certain rights and remedies
      under the Cornell Capital Debentures and that certain Registration Rights
      Agreement until September 30, 2006 in exchange for the issuance by the Company
      to CCP of 250,000 shares of the Company's common stock. On the date of the
      agreement, the stock had a value of $490,000.




On
      August
      2, 2006 the Company issued 193,401 shares of the Company’s common stock to SF
      Capital Partners pursuant to an additional conversion request of $580,203.
      The
      Company recorded the difference between the conversion value and the fair value
      of the common stock at the time of the conversion as a settlement gain in the
      amount of $206,939. Following the conversions, the remaining balance of the
      Contingent Settlement was approximately $1.2 million.





On
      September 29, 2006, the Company entered into a Letter Agreement with CCP
      pursuant to which Cornell has agreed to forbear from exercising certain rights
      and remedies under that certain Cornell Capital Debentures and that certain
      Registration Rights Agreement until December 31, 2006 in exchange for the
      issuance by the Company to CCP of 187,500 shares of the Company’s common stock.
      On the date of the agreement, the stock had a value of $318,750.




**SUBSEQUENT
      EVENTS**





On
      October 2, 2006, the Company executed a Promissory Note (the “RPI Note”) in the
      amount of $150,000 with ReNewable Products, Inc., a licensee of EarthShell,
      or
      affiliates. Interest accrues on the principal balance of the RPI Note at a
      5.13%
      per annum rate, compounded annually. All accrued but unpaid interest and
      outstanding principal under the note is due and payable on the earliest to
      occur
      of the following: (i) the second anniversary of the date of this note; (ii)
      five
      days following the date the Company has received has received significant net
      cash proceeds from any financing transactions, equity contributions, and
      transactions relating to the sale, licensing, sublicensing or disposition of
      assets or the provision of services (including advance royalty payments,
      proceeds from the sale of the Company’s common stock and fees for technological
      services rendered to third parties), occurring subsequent to the date of the
      note.





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





**FORWARD
      LOOKING STATEMENTS**





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





**OVERVIEW
      OF OPERATIONS**




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




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




10




**CRITICAL
      ACCOUNTING POLICIES**





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





Going
      Concern Basis. The condensed consolidated financial statements have been
      prepared on a going concern basis, which contemplates the realization of assets
      and the satisfaction of liabilities in the normal course of business. The
      Company has incurred significant losses since inception, has minimal revenues
      and has a working capital deficit of $7.6 million at September 30, 2006. These
      factors, along with others, may indicate that the Company will be unable to
      continue as a going concern for the next 12 months. The Company will have to
      raise additional funds to meet its current obligations and to cover operating
      expenses through the year ending December 31, 2006. If the Company is not
      successful in raising additional capital it may not be able to continue as
      a
      going concern. Management plans to address this need by raising cash through
      short term borrowings and/or the issuance of debt or equity securities. The
      condensed consolidated financial statements do not include any adjustments
      relating to the recoverability and classification of recorded asset amounts
      or
      the amounts and classification of liabilities that might be necessary should
      the
      Company be unable to continue as a going concern.




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





**THREE
      MONTHS ENDED SEPTEMBER 30, 2006 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER
      30, 2005.**





The
      Company's net loss decreased by approximately $1.1 million to approximately
      $0.8
      million from approximately $1.9 million for the three months ended September
      30,
      2006 compared to the three months ended September 30, 2005, respectively.





**REVENUES** .
      The
      Company’s revenues were consistent at $0.03 million for the three months ended
      September 30, 2006 and 2005. The revenues are comprised of the amortization
      of
      technology fees received pursuant to the sublicense agreements.





**RESEARCH
      AND DEVELOPMENT EXPENSES.** Research
      and development expenses are comprised of fees paid to the USDA under a
      Cooperative Research and Development Agreement, personnel costs, travel and
      direct overhead for development and demonstration production. The predominant
      focus of the research and developments efforts are on the development of hot
      cups and the further expansion of the Company’s product line. Research and
      development expenses decreased $0.08 million to $0.03 million for the three
      months ended September 30, 2006 from $0.11 million for the three months ended
      September 30, 2005. The reduction is due to the Company’s focus on a streamlined
      research and development process as well as its continued cost cutting
      measures.




**OTHER
      GENERAL AND ADMINISTRATIVE EXPENSES** .
      Other
      general and administrative expenses are comprised of personnel costs, travel
      and
      direct overhead for marketing, finance and administration. Total general and
      administrative expenses increased by approximately $0.3 million to approximately
      $1.9 million from approximately $1.6 million for the three months ended
      September 30, 2006, compared to the three months ended September 30, 2006,
      respectively. The Company has been actively cutting costs and effectively
      redefining its operations. However, the Company incurred $0.8 million in costs
      associated with the forbearance agreements entered into during July and
      September 2006. This charge was offset by reductions in occupancy costs, legal
      fees and other professional fees totaling $0.5 million.




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





·  Related
      party interest expense increased by $0.03 million to $0.03 for the three months
      ended September 30, 2006 from $0.0 million for the three months ended September
      30, 2005. The increase is due to the loans issued to the Company by E. Khashoggi
      Industries, LLC (“EKI”) during 2005 and 2006. The Company did not have any loans
      outstanding to EKI during the quarter ended September 30, 2005. The related
      party interest expense in 2006 is comprised of interest accrued on the $1.65
      million note payable to EKI.


·  Other
      interest expense decreased by approximately $0.1 million to approximately $0.1
      million for the three months ended September 30, 2006 from approximately $0.2
      million for the three months ended September 30, 2005.Other interest expense
      for
      the third quarter of 2006 was primarily composed of amortization of the debt
      discount and interest accrued on Cornell Capital Debentures discussed below.





**OTHER
      INCOME** .
      Other
      income increased by approximately $1.3 million to $1.3 million for the three
      months ended September 30, 2006 from $0.0 million for the three months ended
      September 30, 2005. This other income was the result of recognition of gains
      on
      settlement of debt in 2006. The gain was primarily the result of the settlement
      of litigation with two equipment suppliers related to the purchase of
      manufacturing equipment for the Company’s former Goettingen, Germany
      manufacturing line that is no longer in service. The entire amount claimed
      in
      the litigation had already been accrued as part of the Company’s accounts
      payable. During the quarter ended September 30, 2006, the Company reached
      settlements with both of these equipment suppliers and the litigation matters
      were dismissed. The Company recorded a gain on the settlement of this litigation
      amounting to approximately $1.0 million in the quarter ended September 30,
      2006.





11




**NINE
      MONTHS ENDED SEPTEMBER 30, 2006 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER
      30, 2005.**





The
      Company's net loss decreased by approximately $1.4 million to approximately
      $3.4
      million from approximately $4.8 million for the nine months ended September
      30,
      2006 compared to the nine months ended September 30, 2005, respectively.





**REVENUES** .
      The
      Company recorded revenues of approximately $0.08 million for the nine months
      ended September 30, 2006 as compared to $0.2 million for the nine months ended
      September 30, 2005. The revenues are comprised of the amortization of technology
      fees received pursuant to the sublicense agreements. The decrease is due to
      the
      termination of the MBS Sublicense Agreement in June, 2005 and the related
      elimination of the prepaid technology fee being amortized.





**RESEARCH
      AND DEVELOPMENT EXPENSES.** Research
      and development expenses are comprised of fees paid to the USDA under a
      Cooperative Research and Development Agreement, personnel costs, travel and
      direct overhead for development and demonstration production. The predominant
      focus of the research and developments efforts are on the development of hot
      cups and the further expansion of the Company’s product line. Research and
      development expenses decreased $0.2 million to $0.09 million for the nine months
      ended September 30, 2006 from $0.3 million for the nine months ended September
      30, 2005. The reduction is due to the Company’s focus on a streamlined research
      and development process as well as its continued cost cutting measures.





**OTHER
      GENERAL AND ADMINISTRATIVE EXPENSES** .
      Other
      general and administrative expenses are comprised of personnel costs, travel
      and
      direct overhead for marketing, finance and administration. Total general and
      administrative expenses decreased by approximately $0.3 million to approximately
      $3.9 million from approximately $4.2 million for the nine months ended September
      30, 2006, compared to the nine months ended September 30, 2005, respectively.
      The Company has been actively cutting costs and effectively redefining its
      operations. However, the Company incurred $0.8 million in costs associated
      with
      the forbearance agreements entered into during July and September 2006. This
      charge was offset by reductions in occupancy costs, legal fees and other
      professional fees totaling $0.5 million.





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





·  Related
      party interest expense decreased by approximately $0.02 million to $0.08 million
      for the nine months ended September 30, 2006 from approximately $0.1 million
      for
      the nine months ended September 30, 2005. The decrease is due to interest
      expense being recorded on the EKI stock issuance and debt conversion during
      the
      first quarter of 2005. The related party interest expense for 2006 is comprised
      of interest accrued on the $1.7 million note payable to EKI.




·  Other
      interest expense increased by approximately $0.6 million to approximately $1.0
      million for the nine months ended September 30, 2006 from approximately $0.4
      million for the nine months ended September 30, 2005. Other interest expense
      in
      the first nine months of 2006 was primarily composed of amortization of the
      debt
      discount and interest accrued on the Cornell Capital Debentures discussed below.





**OTHER
      INCOME** .
      Other
      income increased by approximately $1.6 million to $1.6 million for the nine
      months ended September 30, 2006 from $0.0 million for the nine months ended
      September 30, 2005. This other income was primarily the result of recognition
      of
      gains on settlement of debt in 2006 as well as a gain on the sale of certain
      minor pieces of equipment.




**L** **IQUIDITY
      AND CAPITAL RESOURCES**




***Cash
      Flow.*** The
      Company’s principal uses of cash for the nine months ended September 30, 2006
      were to fund operations and repay notes and settlements.




Net
      cash
      used in operating activities in 2006 amounted to $2.9 million which was
      primarily due to the net loss from operations before non-cash items amounting
      to
      $4.1 million, offset by an increase of $1.2 million in accounts payable and
      accrued expenses. Net cash used in operating activities in 2005 amounted to
      $2.7
      million which was primarily due to the net loss from operations before non-cash
      items amounting to $4.6 million, offset by an increase of $2.0 million in
      accounts payable and accrued expenses.




Net
      cash
      provided by investing activities was $0.02 million and $0.03 million for the
      nine months ended September 30, 2006 and 2005, respectively, which were
      primarily the proceeds from the sale of property and equipment.




Net
      cash
      provided by financing activities was $2.8 million and $2.4 million for the
      nine
      months ended September 30, 2006 and 2005, respectively. For 2006, the cash
      provided by financing activities was comprised of $2.0 million from the issuance
      of notes, $0.5 million from the issuance of preferred stock and $0.8 million
      from the proceeds of a note payable to a related party, and net of $0.3 million
      in notes payable issuance costs and $0.2 million in principal payments on
      settlement arrangements. For 2005, the cash provided by financing activities
      was
      comprised of $2.5 million from the issuance of notes, $0.5 million from the
      issuance of common stock and net of $0.4 million in notes payable issuance
      costs
      and $0.2 million in principal payments on settlement arrangements. As of
      September 30, 2006, the Company had cash and related cash equivalents totaling
      $0.3 million.




12




***Capital
      Requirements.*** The
      Company only made minor capital expenditures during the nine months ended
      September 30, 2006 and does not anticipate additional significant capital
      expenditures in 2006.




***Working
      Capital Requirements.*** See
“Financial Outlook” later in this section.




***Financing
      and Restructuring Transactions.***




***SF
      Capital Settlement.*** On
      January 11, 2006, the Company issued 186,021 shares of the Company’s common
      stock to SF Capital Partners pursuant to a conversion right related to the
      Contingent Settlement of $2.375 million reached under the September 30, 2004
      Amended and Restated Debenture Purchase Agreement. Pursuant to the
      Contingent Settlement, EarthShell must pay $2.375 million to SF Capital Partners
      from 33% of any equity funding received by the Company (excluding certain
      funding) or 50% of the royalties received by EarthShell in excess of $250,000
      per month (as determined on a cumulative basis commencing July 1, 2004). The
      Company has the right to convert the unpaid portion of the $2.375 million into
      shares of the Company's common stock at a price equal to the lesser of $3.00
      per
      share, or the price per share that EarthShell shall subsequently receive upon
      the issuance of its common stock (or other convertible security) during the
      three year period commencing September 30, 2004. Following the conversion of
      $558,063 into 186,021 shares of common stock, the remaining balance of the
      Contingent Settlement was approximately $1.8 million. The Company recorded
      that
      difference between the conversion value and the fair value of the common stock
      at the time of the conversion as a settlement gain in the amount of $213,924.
      On
      August 2, 2006 the Company issued 193,401 shares of the Company’s common stock
      to SF Capital Partners pursuant to an additional conversion request of $580,203.
      The Company recorded that difference between the conversion value and the fair
      value of the common stock at the time of the conversion as a settlement gain
      in
      the amount of $206,939. Following the conversions, the remaining balance of
      the
      Contingent Settlement was approximately $1.2 million.





In
      connection with the settlement of the 2006 Debentures and the related
      restructuring of the Company’s debt, the Company provided registration rights
      with respect to newly issued unregistered shares of its common stock. Such
      registration rights required the Company to, among other things, file a
      registration statement with the SEC in December 2004 registering the resale
      of such shares of common stock. Under certain of the agreements, the Company’s
      registration statement not being declared effective within the required
      timeframe provides the holders of the registerable securities with a right
      to
      liquidated damages which, in the aggregate, may amount to approximately $32,000
      per month until the registration statement is filed. If the Company fails to
      pay
      such liquidated damages, the Company must also pay interest on such amount
      at a
      rate of 10% per year (or such lesser amount as is permitted by law).
      Because this registration statement has not been declared effective, in
      December 2004 the Company began accruing the liquidated damages described
      above. In light of the Company’s current liquidity and financial position any
      such claim could have a negative effect on the Company.




***EarthShell
      Asia License.*** The
      Company is party to an amended licensing agreement with EarthShell Asia (“EA”)
      pursuant to which the Company has received a total of $0.5 million from a
      combination of ( i )
      prepaid
      technology fees (up to $1.7 million), ( ii )
      the
      sale of up to 266,667 shares of its common stock for $0.5 million and
      ( iii )
      the
      issuance of a warrant to purchase 1,033,333 shares of the Company’s common stock
      at $3.90 per share, which, under certain circumstances, may be adjusted to
      an
      exercise price of not less than $3.00 per share. The realization of further
      licensing fees under the agreement is dependent on the Company successfully
      demonstrating the commercial viability of its technology in certain new
      applications.





***Financing
      Transactions and Arrangements with EKI.*** On
      October 11, 2005, the Company borrowed $1.0 million from EKI under a promissory
      note (the “2005 EKI Loan”). As of December 31, 2005, $850,000 had been received
      under this note. The balance of $150,000 was received in January 2006. Interest
      accrues on the principal balance of the 2005 EKI Loan at a variable per annum
      rate, as of any date of determination, that is equal to the rate published
      in
      the “Money Rates” section of *The
      Wall Street Journal* as
      being
      the “Prime Rate”, compounded monthly. All accrued but unpaid interest and
      outstanding principal is due and payable on the earliest to occur of the
      following: (i) the second anniversary of the date of the 2005 EKI Loan; (ii)
      five days following the date the Company has received $3.0 million or more
      in
      aggregate net cash proceeds from all financing transactions, equity
      contributions, and transactions relating to the sale, licensing, sublicensing
      or
      disposition of assets or the provision of services (including advance
      royalty payments, proceeds from the sale of the Company’s common stock and fees
      for technological services rendered to third parties), measured from the date
      of
      the 2005 EKI Loan and not taking into account the proceeds advanced under the
      2005 EKI Loan; or (iii) the occurrence of an Event of Default (as defined in
      the
      2005 EKI Loan).





On
      July
      28, 2006, the Company entered into a Loan and Mutual Release Agreement (the
      “LMRA”) pursuant to which EKI advanced $350,000 directly to the Company and an
      additional $150,000 to a law firm on behalf of the Company to cover legal fees
      related to patent renewals (together, the “2006 EKI Loans”. The Company executed
      two separate promissory notes to EKI on July 28, 2006; one in the amount of
      $350,000 and the other in the amount of $150,000. Interest accrues on the
      principal balance of the $350,000 note at a variable per annum rate, as of
      any
      date of determination, that is equal to the rate published in the “Money Rates”
section of *The
      Wall Street Journal* as
      being
      the “Prime Rate”, compounded monthly. The $150,000 note is non-interest bearing.
      All accrued but unpaid interest and outstanding principal under the 2006 EKI
      Loans is due and payable on the earliest to occur of the following: (i) the
      second anniversary of the date of the 2006 EKI Loans; (ii) five days following
      the date the Company has received $3.0 million or more in aggregate net cash
      proceeds from all financing transactions, equity contributions, and transactions
      relating to the sale, licensing, sublicensing or disposition of assets or the
      provision of services (including advance royalty payments, proceeds from
      the sale of the Company’s common stock and fees for technological services
      rendered to third parties), measured from the date of the 2006 EKI Loans and
      not
      taking into account the proceeds advanced under the 2005 EKI Loan or the 2006
      EKI Loans; or (iii) the occurrence of an Event of Default (as defined in the
      2006 EKI Loan).




13




On
      September 29, 2006, the Company executed a Promissory Note (the “EKI Note”) in
      the amount of $250,000 with EKI. Pursuant to the EKI Note, EKI made an initial
      advance of $150,000 on September 29, 2006. The remaining $100,000 was funded
      to
      the Company on November 1, 2006. Interest accrues on the principal balance
      of
      the EKI Note at a 5.13% per annum rate, compounded monthly. All accrued but
      unpaid interest and outstanding principal under the note is due and payable
      on
      the earliest to occur of the following(i) five days following the date the
      Company has received significant net cash proceeds from new financing
      transactions, equity contributions, and transactions relating to the sale,
      licensing, sublicensing or disposition of assets or the provision of
      services (including advance royalty payments, proceeds from the sale of the
      Company’s common stock and fees for technological services rendered to third
      parties), occurring subsequent to the date of the note or, (ii) the date the
      existing notes from EKI to EarthShell become due and payable.





***Cornell
      Capital Debentures.*** On
      January 6, 2006, the Company issued and sold to Cornell Capital Partners $4.5
      million in principal amount of secured convertible debentures (the “Cornell
      Capital Debentures”) on the terms described below. The Cornell Capital
      Debentures are convertible into shares of the Company’s common stock on the
      terms discussed below The Company received the aggregate proceeds of
      $4.5
      million from the
      sale of the Cornell Capital Debentures on January 6, 2006, of which
      approximately $2.6 million was used to repay then existing loans from Cornell
      Capital Partners of $2.5 million.




The
      Cornell Capital Debentures are secured by substantially all of the Company’s
      assets, have a three year term and accrue interest at 12% per annum. **** On
      February 14, 2006, the Company filed a registration statement on Form S-1 with
      the Securities and Exchange Commission (“SEC”) which was subsequently amended on
      August 2, 2006 and again on November 1, 2006 in order to register 6,700,000
      shares of common stock that may be issuable to the holders of the Cornell
      Capital Debentures upon conversion. **** Beginning
      60 days after the SEC declares the registration statement effective, **** Cornell
      Capital Partners is entitled, at its option, to convert and sell
      up to $250,000 of the principal amount of the Cornell Capital Debentures, plus
      accrued interest, into shares of the Company’s common stock, within any 30 day
      period at the lesser of (i) a price equal to $3.00 or (ii) 88% of the
      average of the two lowest volume weighted average prices of the common stock
      during the ten trading days immediately preceding the conversion date, as
      quoted by Bloomberg, LP.




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




In
      connection with the Cornell Capital Debenture Purchase Agreement, the Company
      issued to Cornell Capital Partners a
      two
      year warrant to purchase up to 350,000 shares of common stock (the “Cornell
      Capital Warrant”). The warrant has an exercise price of $4.00 per share, which
      may be adjusted under certain conditions to as low as $3.00 per
      share.




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





On
      July
      12, 2006, the Company entered into a Letter Agreement with Cornell Capital
      Partners, pursuant to which Cornell Capital Partners has agreed to forbear
      from
      exercising certain rights and remedies under the Cornell Capital Debentures
      and
      that certain Registration Rights Agreement until September 30, 2006 in exchange
      for the issuance by the Company to Cornell Capital Partners of 250,000 shares
      of
      the Company's common stock. On the date of the agreement, the stock had a value
      of $490,000.




On
      September 29, 2006, the Company entered into a subsequent Letter Agreement
      with
      Cornell Capital Partners pursuant to which Cornell has agreed to forbear from
      exercising certain rights and remedies under that certain Cornell Capital
      Debentures and that certain Registration Rights Agreement until December 31,
      2006 in exchange for the issuance by the Company to Cornell Capital Partners
      of
      187,500 shares of the Company’s common stock. On the date of the agreement, the
      stock had a value of $318,750.




The
      Company has acknowledged in the Letter Agreements that an event of default
      under
      the Debenture had occurred as of June 30, 2006 as a result of the Registration
      Statement filed to register the common stock underlying the Debenture not yet
      being declared effective by the U.S. Securities and Exchange Commission. The
      Company also acknowledged that Cornell Capital was entitled to liquidated
      damages equal to one percent (1%) of the liquidated value of the Cornell Capital
      Debenture for each thirty (30) day period after May 31, 2006. Pursuant to the
      Letter Agreements, Cornell Capital has agreed to waive the default, including
      all liquidated damages that may have accrued through the date of the Letter
      Agreement and during the Forbearance Period, in exchange for the shares and
      the
      Company obtaining the effectiveness of the Registration Statement by December
      31, 2006 which includes shares of common stock underlying the Cornell Capital
      Debentures.




14




***Series
      D Preferred Stock.*** On
      June 21, 2006, the Company entered into a Securities Purchase Agreement by
      and among the Company and certain investors named therein pursuant to which
      the
      Company sold an aggregate of 128,205 shares of Series D convertible preferred
      stock (the “Series D Preferred Stock”) in a private placement for a total
      purchase price of $500,000. The Series D Preferred Stock carries a cumulative
      20% annual dividend, which is payable on conversion or liquidation of the
      Company. The Series D Preferred Stock is callable in certain circumstances
      by
      the Company and is entitled to a preferential liquidation value of $3.90 per
      share plus any accrued and unpaid dividends. Each share of Series D Preferred
      Stock is convertible into one share of the Company’s common stock, par value
      $0.01 per share, subject to adjustment. Holders of Series D Preferred Stock
      also
      have approval rights with respect to certain corporate matters.




In
      connection with the issuance and sale of the Series D Preferred Stock, the
      Company granted the Investors immediately exercisable warrants to purchase
      an
      aggregate of 555,555 shares of the Company’s common stock at an exercise price
      of $3.90 per share, subject to adjustment. The Investors also have been granted
      certain registration rights with respect to the shares of common stock
      underlying the Series D Preferred Stock and the warrants.




***Financial
      Outlook.*** The
      Company has made significant reductions to its operating expenses and cash
      requirements during the past year. During the third quarter of 2006, the total
      cash expenditures were approximately $606,000, an average of $202,000 per month.
      The Company’s current rate of cash expenditures requires approximately $275,000
      per month. The Company is actively seeking additional sources of both
      interim and long term funding. Although we are in discussions with
      potential funding sources for interim financing, there cannot be assurances
      that
      the Company will be able to secure sufficient funding to mainting operations
      through the end of 2006. The Company will require at least $3.0 million in
      additional capital to fund its planned cash expenditures as called for in its
      business plans for the next 12 months. The Company has been actively working
      on
      obtaining permanent funding to restructure its balance sheet and expand its
      operations. The Company has engaged an investment banker with significant
      presence in the industry to assist in obtaining such permanent funding in the
      form of equity or debt on the most favorable terms available to the
      Company. Further, provided that the Company’s licensee, RPI, is successful
      in scaling up its manufacturing operation and becomes profitable, the Company
      may begin to realize revenues from royalties. Alternatively, provided that
      certain conditions are met, RPI may call for a merger between RPI and
      EarthShell, in which case RPI’s positive cashflow from operations may become
      available to EarthShell as a result of the merger. However, there can be no
      assurances that the Company will be successful in securing additional funding
      or
      that funding may be obtained on terms that are acceptable to the Company. If
      the
      Company is not successful in securing additional funding in a timely manner,
      the
      Company may have to further reduce or curtail its operations.




***Off-Balance
      Sheet Arrangements.*** The
      Company does not have any off-balance sheet arrangements as of September 30,
      2006, and has not entered into any transactions involving unconsolidated,
      limited purpose entities.




**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





The
      Company is
      exposed to interest rate risk on its obligations under the 2005 EKI Loan and
      the
      2006 EKI Loans. Currently, the principal amount of the 2005 EKI Loan and the
      2006 EKI Loans total $1.65 million, of which, $1.35 million are interest bearing
      at a variable rate. The loans bear interest on the principal balance of $1.35
      million at a variable rate per annum, as of any date of determination, equal
      to
      the rate published in the “Money Rates” section of *The
      Wall Street Journal* as being
      the “Prime Rate”, compounded monthly.  In
      addition, **** there
      remain a limited number of settlements of accounts payable obligations that
      will
      be paid out over terms from 18 months to 36 months, the long term portion of
      which may be exposed to interest rate risk.




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





**ITEM
      4. CONTROLS AND PROCEDURES**





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




·
            The
                Company has inadequate segregation of critical duties within each
                of its
                accounting processes and a lack of sufficient monitoring controls
                over
                these processes to mitigate this risk. The responsibilities assigned
                to
                one employee include maintaining the vendor master file, processing
                payables, creating and voiding checks, reconciling bank accounts,
                making
                bank deposits and processing
                payroll.




15




·
            There
                are weaknesses in the Company's information technology ("IT") controls
                which makes the Company's financial data vulnerable to error or fraud.
                Specifically, there is a lack of documentation regarding the roles
                and
                responsibilities of the IT function, lack of security management
                and
                monitoring and inadequate segregation of duties involving IT
                functions.




·
            The
                Company has begun taking remediation steps to enhance its internal
                control
                over financial reporting and reduce control deficiencies. In the
                4th
                Quarter 2005, the Company employed a new Controller, a CPA, with
                15 years’
                experience in public and private accounting. The new Controller came
                up to
                speed quickly and was able to successfully assist with the audit
                during
                the first quarter. He is in the process of reviewing the existing
                control
                framework and developing recommendations to enhance accounting systems
                controls and procedures that will strengthen the Company’s controls over
                financial reporting. Additionally, on March 30, 2006, the Company
                hired an
                accounting employee to assist the Controller, thus enhancing our
                segregation of duties.In
                addition, in mid-2006, the Company formed a Disclosure Control Committee
                consisting of the CEO, the CFO, the Controller, and the Chairman
                of the
                Audit Committee who review all financial reports to assure that the
                Company’s disclosures are timely and
                accurate.




(b) Changes
      in Internal Control Over Financial Reporting. There were no changes in our
      internal control over financial reporting identified in connection with our
      evaluation as of September 30, 2006 that occurred during the period covered
      by
      this Report that has materially affected, or is reasonably likely to materially
      affect, our internal control over financial reporting.




Management
      is continuing its efforts to improve its internal control over financial
      reporting.




16





**PART
      II. OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**





The
      Company had been engaged in litigation with two (2) equipment suppliers related
      to the purchase of manufacturing equipment for the Company’s former Goettingen,
      Germany manufacturing line that is no longer in service. The entire amount
      claimed in the litigation had already been accrued as part of the Company’s
      accounts payable. During July 2006, the Company reached settlements with both
      of
      these equipment suppliers and the litigation matters were dismissed. The Company
      recorded a gain on the settlement of this litigation amounting to approximately
      $1.0 million in the quarter ended September 30, 2006.




The
      Company had been engaged in settlement discussions with Baltimore County,
      Maryland (the “County”) related to personal property taxes that are owed to the
      County. The County held a judgment against the Company in the amount of $963,648
      for personal property taxes for the years 1999 through 2005. However, the amount
      of the taxes owed was previously calculated in error by the County. As a result,
      the County offered to reduce to judgment to $92,287 plus accrued interest
      pending the Company entering into a satisfactory payment plan with the County.
      On June 23, 2006, the Company entered into a payment plan with the County
      to satisfy the judgment. As part of the settlement, the County reduced its
      recorded judgment to $92,287 plus accrued interest of $40,643.




The
      Company received notice of a complaint that was filed in the Circuit Court
      for
      Baltimore County on October 16, 2006 which demands payment for professional
      services that were provided to the Company in 2003. The total amount of the
      claim is $31,763. The entire amount of this claim is recorded within the
      Company’s accounts payable balance. The Company is currently engaged in
      settlement discussions with the provider to resolve the issue via a payment
      plan
      or other means.




**ITEM
      1A. RISK FACTORS**




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




**ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS**





On
      January 11, 2006, the Company issued 186,021 shares of the Company’s common
      stock to SF Capital Partners pursuant to a conversion right related to the
      Contingent Settlement of $2.375 million reached under the September 30, 2004
      Amended and Restated Debenture Purchase Agreement. Following the conversion
      of $558,063 into 186,021 shares of common stock, the remaining balance of the
      Contingent Settlement was approximately $1.8 million.





On
      February 9, 2006, the Company issued 123,000 shares of stock in settlement
      of
      certain outstanding payables and settlement of litigation with Van Dam Machine
      Corporation.





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





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





Pursuant
      to a letter agreement dated February 27, 2006, the EarthShell and Capital Group
      Communications (“CGC”) reached an agreement in which CGC agreed to accept a
      total of 320,000 unregistered shares of EarthShell’s Common Stock under this
      agreement as payment in full for its services. EarthShell agreed to include
      300,000 of such shares in the next registration statement it files with the
      Securities and Exchange Commission. The 320,000 shares were issued to CGC on
      May
      2, 2006.





In
      May
      2006, the Company issued to Midsummer Capital 25,000 shares of its unregistered
      common stock in settlement of claims for liquidated damages. The Company
      recorded the difference between the carrying value of the damages and the fair
      value of the stock as a settlement gain in the amount of $121,975.





During
      June, 2006, the Company issued a total of 160,000 shares of restricted common
      stock to two individuals in connection with the termination of a license
      agreement, mutual release, and settlement of claims between the parties.





On
      June 21, 2006, the Company sold an aggregate of 128,205 shares of Series D
      Preferred Stock for a total purchase price of $500,000. In connection with
      the
      issuance and sale of the Series D Preferred Stock, the Company issued
      immediately exercisable warrants to purchase an aggregate of 555,555 shares
      of
      the Company’s common stock at an exercise price of $3.90 per share, subject to
      adjustment. The Company granted certain registration rights with respect to
      the
      shares of common stock underlying the Series D Preferred Stock and the Warrants
      as set forth in Section 3 of the SPA.




17




On
      July 12, 2006, the Company issued 250,000 shares of common stock to Cornell
      Capital Partners in connection with the letter agreement discussed in Item
      3
      below.




On
      August
      2, 2006 the Company issued 193,401 shares of the Company’s common stock to SF
      Capital Partners pursuant to an additional conversion request of $580,203.
      The
      Company recorded the difference between the conversion value and the fair value
      of the common stock at the time of the conversion as a settlement gain in the
      amount of $206,939. Following the conversions, the remaining balance of the
      Contingent Settlement was approximately $1.2 million.





On
      September 29, 2006, the Company agreed to issued 187,500 shares of common stock
      to Cornell Capital Partners in connection with the letter agreement discussed
      in
      Item 3 below.





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





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





On
      July
      12, 2006, the Company entered into a Letter Agreement with Cornell Capital
      Partners, pursuant to which Cornell Capital Partners has agreed to forbear
      from
      exercising certain rights and remedies under the Cornell Capital Debentures
      and
      that certain Registration Rights Agreement until September 30, 2006 in exchange
      for the issuance by the Company to Cornell Capital Partners of 250,000 shares
      of
      the Company's common stock. On the date of the agreement, the stock had a value
      of $490,000.




On
      September 29, 2006, the Company entered into a subsequent Letter Agreement
      with
      Cornell Capital Partners pursuant to which Cornell has agreed to forbear from
      exercising certain rights and remedies under that certain Cornell Capital
      Debenture and that certain Registration Rights Agreement until December 31,
      2006
      in exchange for the issuance by the Company to Cornell Capital Partners of
      187,500 shares of the Company’s common stock. On the date of the agreement, the
      stock had a value of $318,750.




The
      Company has acknowledged in the Letter Agreements that an event of default
      under
      the Debenture had occurred as of June 30, 2006 as a result of the Registration
      Statement filed to register the common stock underlying the Debenture not yet
      being declared effective by the U.S. Securities and Exchange Commission. The
      Company also acknowledged that Cornell Capital was entitled to liquidated
      damages equal to one percent (1%) of the liquidated value of the Cornell Capital
      Debenture for each thirty (30) day period after May 31, 2006. Pursuant to the
      Agreements, Cornell Capital has agreed to waive the default, including all
      liquidated damages that may have accrued through the date of the Letter
      Agreement and during the Forbearance Period (as defined below), in exchange
      for
      the shares and the Company obtaining the effectiveness of the Registration
      Statement by December 31, 2006 which includes shares of common stock underlying
      the Cornell Capital Debentures.




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





Not
      applicable.





**ITEM
      5. OTHER INFORMATION**




Not
      applicable.





18




**ITEM
      6. EXHIBITS**





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




ExhibitNumber
              Description10.1
              Letter
                  Agreement, dated September 29, 2006, by and between EarthShell
                  Corporation
                  and Cornell Capital Partners, LP (incorporated by reference to
                  the
                  Registrant’s Form 8-K filed on October 4, 2006)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
              Certifications
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of
                  2002.





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**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned thereunto duly authorized November 14, 2006.







EARTHSHELL
                CORPORATIONNovember
              14, 2006.
            By:
            /s/ D.
              Scott HoustonD.
              Scott HoustonChief
                Financial Officer




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


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