<PAGE>
================================================================================


                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-QSB

(Mark One)

|X|   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934 For the Quarterly Period Ended March 31, 2006
                                       or
|_|   Transition Report Pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934 For the Transition Period From _______________ to
      _______________.

Commission file number 000-25727
                        --------


                               IKONICS CORPORATION
       -----------------------------------------------------------------
       (Exact name of small business issuer as specified in its charter)



              Minnesota                                     41-0730027
    -------------------------------                     -------------------
    (State or other jurisdiction of                       (I.R.S. employer
     incorporation or organization)                      identification no.)


         4832 Grand Avenue
         Duluth, Minnesota                                     55807
----------------------------------------                    ----------
(Address of principal executive offices)                    (Zip code)

                                (218) 628-2217
                           -------------------------
                           Issuer's telephone number

                                 Not Applicable
              ----------------------------------------------------
              (Former name, former address and former fiscal year,
                         if changed since last report)



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

         Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
         Yes  |_|          No  |X|


             State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practical date: Common Stock, $.10
par value -- 1,996,997 shares outstanding as of April 17, 2006.

             Transitional Small Business Disclosure Format (check one):
         Yes  |_|          No  |X|


================================================================================

<PAGE>


                               IKONICS CORPORATION

                         QUARTERLY REPORT ON FORM 10-QSB


<TABLE>
<CAPTION>
PART I.              FINANCIAL INFORMATION                                                             PAGE NO.
                     ---------------------                                                             --------
<S>                  <C>                                                                              <C>
Item 1.                Financial Statements:

                       Balance Sheets as of March 31, 2006 (unaudited) and December 31, 2005               3

                       Statements of Operations for the Three Months Ended March 31, 2006
                       and 2005 (unaudited)                                                                4

                       Statements of Cash Flows for the Three Months Ended March 31, 2006
                       and 2005 (unaudited)                                                                5

                       Condensed Notes to Financial Statements (unaudited)                                 6

Item 2.                Management's Discussion and Analysis of Financial Condition
                       and Results of Operations                                                          10

Item 3.                Controls and Procedures                                                            14

PART II.            OTHER INFORMATION                                                                     15
                    -----------------

                    SIGNATURES                                                                            16
                    ----------
</TABLE>



                                       2

<PAGE>


                         PART I -- FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

IKONICS CORPORATION
BALANCE SHEETS
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                            MARCH 31     DECEMBER 31
                                                                              2006           2005
                                                                          --------------------------
                                                                          (UNAUDITED)
<S>                                                                        <C>           <C>
ASSETS
Current Assets:
   Cash and cash equivalents                                               $3,334,478    $3,412,072
   Marketable securities                                                            -        84,875
   Trade receivables, less allowance for doubtful accounts of
     $50,000                                                                1,705,875     1,702,608
   Inventories (Note 2)                                                     2,155,368     2,364,056
   Prepaid expenses and other assets                                          146,103        65,747
   Deferred income taxes                                                       99,000        99,000
                                                                         ------------   -----------
           Total current assets                                             7,440,824     7,728,358
                                                                         ------------   -----------

PROPERTY, PLANT, AND EQUIPMENT, at cost:
   Land and building                                                        1,479,824     1,479,824
   Machinery and equipment                                                  2,548,974     2,531,734
   Office equipment                                                         1,303,584     1,280,149
   Vehicles                                                                   174,803       174,803
                                                                         ------------   -----------
                                                                            5,507,185     5,466,510
   Less accumulated depreciation                                            4,576,413     4,514,945
                                                                         ------------   -----------
                                                                              930,772       951,565
                                                                         ------------   -----------
INTANGIBLE ASSETS, less accumulated amortization of $140,819 in
   2006 and $134,642 in 2005                                                  283,393       279,086

DEFERRED INCOME TAXES                                                          61,000        61,000

INVESTMENTS IN NON-MARKETABLE EQUITY SECURITIES                               700,788       450,790
                                                                         ------------   -----------

                                                                           $9,416,777    $9,470,799
                                                                         ============   ===========
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable                                                          $362,516      $438,597
   Accrued compensation                                                       130,994       279,042
   Other accrued expenses                                                     208,524       217,912
   Income taxes payable                                                        11,794        56,743
                                                                         ------------   -----------
         Total current liabilities                                            713,828       992,294
                                                                         ------------   -----------


STOCKHOLDERS' EQUITY:
   Preferred stock, par value $.10 per share; authorized 250,000 shares; issued
   none Common stock, par value $.10 per share; authorized 4,750,000 shares;
     issued and outstanding 1,989,505 in 2006 and 1,962,537 in 2005           198,950       196,254
   Additional paid-in capital                                               1,845,461     1,721,119
   Retained earnings                                                        6,658,538     6,560,236
   Accumulated other comprehensive income                                           -           896
                                                                         ------------   -----------
         Total stockholders' equity                                         8,702,949     8,478,505
                                                                         ------------   -----------
                                                                           $9,416,777    $9,470,799
                                                                         ============   ===========
</TABLE>

See condensed notes to financial statements.



                                       3
<PAGE>


IKONICS CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                         THREE MONTHS
                                                        ENDED MARCH 31
                                                --------------------------------
                                                   2006               2005
                                                   ----               ----
<S>                                             <C>                <C>
NET SALES                                       $3,371,800         $3,328,527

COSTS AND EXPENSES:
   Cost of goods sold                            1,917,343          1,930,644
   Selling, general and administrative           1,151,986          1,238,154
   Research and development                        180,469            154,903
                                                ----------         ----------
                                                 3,249,798          3,323,701
                                                ----------         ----------

INCOME FROM OPERATIONS                             122,002              4,826

INTEREST INCOME                                     23,788              9,940
                                                ----------         ----------

INCOME BEFORE INCOME TAXES                         145,790             14,766

INCOME TAX EXPENSE (BENEFIT)                        47,488             (8,889)
                                                ----------         ----------

NET INCOME                                      $   98,302         $   23,655
                                                ==========         ==========

EARNINGS PER COMMON SHARE:
   Basic                                             $0.05              $0.01
                                                ==========         ==========

   Diluted                                           $0.05              $0.01
                                                ==========         ==========

WEIGHTED AVERAGE COMMON SHARES
     OUTSTANDING:
   Basic                                         1,971,417          1,930,783
                                                ==========         ==========

   Diluted                                       2,019,238          1,984,051
                                                ==========         ==========
</TABLE>


See notes to financial statements.


                                       4
<PAGE>


IKONICS CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                          THREE MONTHS
                                                         ENDED MARCH 31
                                                  ----------------------------
                                                      2006             2005
<S>                                               <C>              <C>
CASH FLOWS FROM OPERATING
     ACTIVITIES:
   Net income                                     $   98,302       $   23,655
   Adjustments to reconcile net income to net
       cash provided by (used in) operating
         activities:
     Depreciation                                     61,468           74,723
     Amortization                                      6,177            6,381
     Excess tax benefits from share-based payment
       arrangement                                   (12,771)               -
     Tax effect from stock options                         -            2,941
     Stock based compensation                          5,817                -
     Changes in working capital components:
       Trade receivables                              (3,267)         (71,099)
       Inventories                                   208,688           28,315
       Prepaid expenses and other assets             (80,356)         (81,721)
       Income taxes receivable                             -          (22,305)
       Accounts payable                              (76,081)          30,939
       Accrued liabilities                          (157,436)        (104,681)
       Income taxes payable                          (32,178)         (30,169)
                                                  ----------       ----------
         Net cash provided by (used in)
           operating activities                       18,363         (143,021)
                                                  ----------       ----------

CASH FLOWS FROM INVESTING
     ACTIVITIES:
   Purchase of property and equipment                (40,675)         (36,966)
   Purchase of intangibles                           (10,484)          (5,469)
   Purchase on non-marketable equity securities     (249,998)               -
   Proceeds on sales of marketable securities         83,979           42,695
                                                  ----------       ----------
       Net cash provided by (used in)
            investing activities                    (217,178)             260
                                                  ----------       ----------

CASH FLOWS FROM FINANCING
     ACTIVITIES:
   Excess tax benefits from share-based payment
       arrangement                                    12,771                -
   Proceeds from exercise of stock options           108,450           75,363
                                                  ----------       ----------
         Net cash provided by financing
              activities                             121,221           75,363
                                                  ----------       ----------


NET DECREASE IN CASH
   AND CASH EQUIVALENTS                              (77,594)         (67,398)

CASH AND CASH EQUIVALENTS AT
   BEGINNING OF PERIOD                             3,412,072        2,737,460
                                                  ----------       ----------

CASH AND CASH EQUIVALENTS AT
   END OF PERIOD                                  $3,334,478       $2,670,062
                                                  ==========       ==========

SUPPLEMENTAL DISCLOSURES OF
     CASH FLOW INFORMATION:
     Income taxes paid                            $   79,666       $   40,643
                                                  ==========       ==========
</TABLE>


See condensed notes to financial statements.


                                       5

<PAGE>


                               IKONICS CORPORATION

                     CONDENSED NOTES TO FINANCIAL STATEMENTS

                                   (Unaudited)

1.       Notes to Financial Statements

         The balance sheet of IKONICS Corporation (the "Company") as of March
         31, 2006, and the related statements of operations for the three months
         ended March 31, 2006 and 2005, and cash flows for the three months
         ended March 31, 2006 and 2005, have been prepared without being
         audited.

         In the opinion of management, these statements reflect all adjustments
         (consisting of only normal recurring adjustments) necessary to present
         fairly the financial position of IKONICS Corporation as of March 31,
         2006, and the results of its operations and cash flows for all periods
         presented.

         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. Therefore, these statements should be read in conjunction
         with the financial statements and notes thereto included in the
         Company's Annual Report on Form 10-KSB for the year ended December 31,
         2005.

         The results of operations for interim periods are not necessarily
         indicative of results that will be realized for the full fiscal year.


2.       Inventory

         The major components of inventory at March 31, 2006 and December 31,
         2005 are as follows:

<TABLE>
<CAPTION>
                                                             Mar 31, 2006      Dec 31, 2005
                                                             ------------      ------------
<S>                                                          <C>               <C>
                           Raw materials                      $1,320,463        $1,438,881
                           Work-in-progress                      258,066           212,254
                           Finished goods                      1,106,361         1,176,647
                           Reduction to LIFO cost               (529,522)         (508,726)
                                                              ----------        ----------

                           Total Inventory                    $2,155,368        $2,364,056
                                                              ==========        ==========
</TABLE>


3.       Earnings Per Common Share (EPS)

         Basic EPS is calculated using net income divided by the weighted
         average of common shares outstanding during the quarter. Diluted EPS is
         similar to Basic except that the weighted average of common shares
         outstanding is increased to include the number of additional common
         shares that would have been outstanding if the dilutive potential
         common shares, such as those shares subject to stock options, had been
         issued.

         Shares used in the calculation of diluted EPS are summarized below:
<TABLE>
<CAPTION>
                                                                                          Three Months Ended
                                                                                      Mar 31, 2006     Mar 31, 2005
                                                                                      ------------     ------------

<S>                                                                                   <C>              <C>
         Weighted average common shares outstanding                                      1,971,417        1,930,783
         Dilutive effect of stock options                                                   47,821           53,268
                                                                                      ------------     ------------
         Weighted average common and common equivalent shares outstanding                2,019,238        1,984,051
                                                                                      ============     ============

</TABLE>


                                       6

<PAGE>


         Options to purchase 107,567 and 177,692 shares of common stock were
         outstanding at March 31, 2006 and 2005, respectively.

4.       Stock-based Compensation

         Effective January 1, 2006, we adopted Financial Accounting Standards
         Board Statement No. 123 (revised 2004), "Share-Based Payment," (FAS
         123(R)) using the modified-prospective-transition method. Prior to the
         adoption of FAS 123(R), we accounted for stock option grants under APB
         Opinion No. 25, "Accounting for Stock Issued to Employees" (the
         intrinsic value method), and accordingly recognized no compensation
         expense for stock option grants.

         Under the modified-prospective-transition method, FAS 123(R) applies to
         new awards and to awards that were outstanding on January 1, 2006 that
         are subsequently modified, repurchased, or cancelled. Under this method
         compensation cost in 2006 includes cost for options granted prior to
         but not vested as of December 31, 2005, and options granted in 2006.
         Prior periods were not restated to reflect the impact of adopting the
         new standard.

         The adoption of FAS 123(R) lowered net income by approximately $3,700
         for the three months ended March 31, 2006, compared to accounting for
         share-based compensation under APB No. 25. The Company has elected the
         alternative (short-cut) method for calculating the pool of excess tax
         benefits (APIC Pool) available to absorb tax shortages recognized
         subsequent to the adoption of FAS 123(R). The Company's calculation of
         the APIC windfall at January 1, 2006 was $19,496.

         The following table illustrates the effect on net income and earnings
         per share if we had applied the fair value recognition provisions of
         FAS 123R during the period presented. For the purposes of this pro
         forma disclosure, the value of the options is estimated using a
         Black-Scholes option-pricing model and amortized to expense over the
         options vesting periods.


<TABLE>
<CAPTION>
                                                                 Three Months Ended
                                                                    Mar 31, 2005
                                                                 ------------------
<S>                                                              <C>
       Net income:
          As reported                                               $     23,655
          Deduct total stock-based employee compensation
             expense determined under fair value based method
             for all awards                                                3,914
                                                                       ---------
          Pro forma                                                 $     19,741
                                                                       =========

       Basic earnings per share:
          As reported                                               $       0.01
          Pro forma                                                 $       0.01

       Diluted earnings per share:
          As reported                                               $       0.01
          Pro forma                                                 $       0.01
</TABLE>

         As of March 31, 2006 there was approximately $45,000 of unrecognized
         compensation cost related to unvested share-based compensation awards
         granted. That cost is expected to be recognized over the next three
         years.

         The Company receives a tax deduction for certain stock option exercises
         during the period in which the options are exercised, generally for the
         excess of the prices at which the options are sold over the exercise
         price of the options. Prior to the adoption of FAS 123(R), we reported
         all tax benefits relating to the


                                       7

<PAGE>


         exercise of stock options as operating cash flows in our statement of
         cash flows. In accordance with FAS 123(R), for the three months ended
         March 31, 2006, we changed our statements of cash flows presentation
         to report the excess tax benefits from the exercise of stock options
         as operating and financing cash flows. For the three months ended
         March 31, 2006, $12,771 of excess tax benefits was reported as
         operating and financing cash flows.

         Proceeds from the exercise of stock options were $108,450 for the three
         months ended March 31, 2006. The actual income tax benefit realized
         from the exercise of stock options was $12,771 for the same period.

         During 1995, the Company, with the approval of its shareholders,
         adopted a stock incentive plan for the issuance of up to 57,750 shares
         of common stock. In 1999, the Company, with the approval of its
         shareholders, increased the number of shares reserved for issuance
         under this plan to 305,250 shares and, in 2004, increased the number of
         shares reserved for issuance under this plan to 342,750 shares. The
         plan provides for granting eligible participants stock options or other
         stock awards, as described by the plan, at option prices ranging from
         85% to 110% of fair market value at date of grant. Options granted
         expire up to seven years after the date of grant. Such options
         generally become exercisable over a one to three year period. A total
         of 57,684 shares of common stock are reserved for additional grants of
         options under the plan at March 31, 2006.

         The fair value of options granted during the three months ending March
         31, 2006 was estimated using the Black-Scholes option pricing model
         with the following assumptions:


<TABLE>
<S>                                                                                <C>
         Dividend yield                                                                0.0%
         Expected volatility                                                          63.0%
         Expected life of option                                                   five years
         Risk-free interest rate                                                       4.8%
         Fair value of each option on grant date                                      $4.48
</TABLE>

         Stock option activity during the three months ending March 31, 2006 us
         as follows:


<TABLE>
<CAPTION>
                                                                           Weighted
                                                                            Average
                                                                           Exercise
                                                            Shares           Price

<S>                                                       <C>             <C>
         Outstanding at beginning of year                   130,285         $3.27
         Granted                                              5,000          7.80
         Exercised                                          (26,968)         4.02
         Expired and forfeited                                 (750)         4.32
                                                          ---------
         Outstanding at 3/31/06                             107,567          3.28
                                                          =========
</TABLE>



         The aggregate intrinsic value of all options outstanding and for those
         exercisable at March 31, 2006 was $435,798 and $368,655, respectively.


                                       8
<PAGE>



        The following table summarizes information about stock options
outstanding at March 31, 2006:

<TABLE>
<CAPTION>
                                               Options Outstanding                      Options Exercisable
                                ----------------------------------------------    ------------------------------
                                    Weighted-
                                     Number           Average        Weighted-        Number           Weighted-
           Range of              Outstanding at      Remaining        Average     Exercisable at        Average
           Exercise                 March 31,       Contractual      Exercise        March 31,         Exercise
             Price                    2006         Life (years)        Price           2006              Price

<S>     <C>                      <C>              <C>               <C>           <C>                 <C>
        $2.00 - 2.99                 60,325             1.64          $2.44             54,910          $2.42
         3.00 - 3.99                 24,552             1.11           3.20             20,802           3.17
         4.00 - 4.99                  9,500             4.08           4.32                  -              -
         5.00 - 5.99                  5,940             0.07           5.45              5,940           5.45
         7.00 - 7.99                  7,250             4.38           7.56                750           7.01
                                    -------                                          ---------
                                    107,567             1.83           3.29             82,402           2.87
                                    =======                                          =========
</TABLE>


5.       Intangible Assets

         Intangible assets consist primarily of patents, licenses and covenants
         not to compete arising from business combinations. Intangible assets
         are amortized on a straight-line basis over their estimated useful
         lives or terms of their agreements. Estimated amortization expense for
         each of the next five years is $25,000 annually. In connection with
         license agreements, the Company has agreed to pay royalties ranging
         from 3% to 5% on the future sales of products subject to the
         agreements.


6.       Comprehensive income

         Comprehensive income includes unrealized gains and losses on the
         Company's available for sale marketable securities. Total comprehensive
         income was $99,198 and $26,187 for the three months ended March 2006
         and 2005, respectively.

                                       9

<PAGE>



                               IKONICS CORPORATION

         The information presented below in Management's Discussion and Analysis
of Financial Condition and Results of Operations contains forward-looking
statements within the meaning of the safe harbor provisions of Section 21E of
the Securities Exchange Act of 1934, as amended. Such statements are subject to
risks and uncertainties, including those discussed under "Factors that May
Affect Future Results" below, that could cause actual results to differ
materially from those projected. Because actual results may differ, readers are
cautioned not to place undue reliance on these forward-looking statements.
Certain forward-looking statements are indicated by italics.

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

         The following management's discussion and analysis focuses on those
factors that had a material effect on the Company's financial results of
operations during the first quarter of 2006 and the same period of 2005. It
should be read in connection with the Company's unaudited financial statements
and notes thereto included in this Form 10-QSB.

FACTORS THAT MAY AFFECT FUTURE RESULTS

         Certain statements made in this Quarterly Report on Form 10-QSB,
including those summarized below, are forward-looking statements within the
meaning of the safe harbor provisions of Section 21E of the Securities Exchange
Act of 1934, as amended, that involve risks and uncertainties, and actual
results may differ. Factors that could cause actual results to differ include
those identified below.


          o    The Company's belief that the quality of its receivables is high
               and that strong internal controls are in place to maintain proper
               collections--This belief may be impacted by domestic economic
               conditions, by economic, political, regulatory or social
               conditions in foreign markets, or by the failure of the Company
               to properly implement or maintain strong internal controls.

          o    The belief that the Company's current financial resources, its
               line of credit, cash generated from operations and the Company's
               capacity for debt and/or equity financing will be sufficient to
               fund current and anticipated business operations. The belief that
               the Company's low debt levels and available line of credit make
               it unlikely that a decrease in product demand would impair the
               Company's ability to fund operations--Changes in anticipated
               operating results, credit availability, equity market conditions
               or the Company's debt levels may further enhance or inhibit the
               Company's ability to maintain or raise appropriate levels of
               cash.

          o    The Company's expectations as to the level and use of planned
               capital expenditures and that capital expenditures will be funded
               with cash generated from operating activities--This expectation
               may be affected by changes in the Company's anticipated capital
               expenditure requirements resulting from unforeseen required
               maintenance or repairs. The funding of planned or unforeseen
               expenditures may also be affected by changes in anticipated
               operating results resulting from decreased sales or increased
               operating expenses or by other unexpected events affecting the
               Company's financial position.

          o    The Company's belief that its vulnerability to foreign currency
               fluctuations and general economic conditions in foreign countries
               is not significant--This belief may be impacted by economic,
               political and social conditions in foreign markets, changes in
               regulatory and competitive conditions, a change in the amount or
               geographic focus of the Company's international sales, or changes
               in purchase or sales terms.

          o    The Company's plans to continue to invest in research and
               development efforts, expedite internal product development and
               invest in technological alliances, as well as the expected focus
               and results of


                                       10

<PAGE>


               such investments--These plans and expectations may be impacted by
               general market conditions, unanticipated changes in expenses or
               sales, delays in the development of new products, technological
               advances, the ability to find suitable and willing technology
               partners or other changes in competitive or market conditions.

          o    The Company's efforts to grow its international business--These
               efforts may be impacted by economic, political and social
               conditions in current and anticipated foreign markets, regulatory
               conditions in such markets, unanticipated changes in expenses or
               sales, changes in competitive conditions or other barriers to
               entry or expansion.

          o    The Company's belief as to future activities that may be
               undertaken to expand the Company's business--Actual activities
               undertaken may be impacted by general market conditions,
               competitive conditions in the Company's industry, unanticipated
               changes in the Company's financial position or the inability to
               identify attractive acquisition targets or other business
               opportunities.

CRITICAL ACCOUNTING POLICIES

         The Company prepares its financial statements in conformity with
accounting principles generally accepted in the United States of America.
Therefore, the Company is required to make certain estimates, judgments and
assumptions that the Company believes are reasonable based upon the information
available. These estimates and assumptions affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the periods presented. The accounting policies,
which IKONICS believes are the most critical to aid in fully understanding and
evaluating its reported financial results, include the following:

         Accounts Receivable. The Company performs ongoing credit evaluations of
its customers and adjusts credit limits based upon payment history and the
customer's current credit worthiness, as determined by review of the current
credit information. The Company monitors collections and payments from its
customers and maintains a provision for estimated credit losses based upon
historical experience and any specific customer collection issues that have been
identified. While such credit losses have historically been within expectations
and the provisions established, the Company cannot guarantee that it will
continue to experience the same collection history that has occurred in the
past. The Company's general payment terms are net 30-45 days for domestic
customers and net 60-90 days for foreign customers.

         Inventory. Inventories are valued at the lower of cost or market value
using the last in, first out (LIFO) method. The Company monitors its inventory
for obsolescence and records reductions in cost when required.

         Deferred Tax Assets. At March 31, 2006, the Company had approximately
$160,000 of net deferred tax assets. The net deferred tax assets result
primarily due to timing differences in intangible assets and property and
equipment. The Company has recorded a $27,000 valuation allowance to reserve for
items that will more likely than not be realized. The Company has determined
that it is more likely than not that the remaining net deferred tax assets
reflected on the balance sheet will be realized and that an additional valuation
allowance for such assets is not currently required.

         Revenue Recognition.  The Company recognizes revenue on products when
title passes, which is usually upon shipment. Freight billed to customers is
included in sales. Shipping costs are included in cost of goods sold.

RESULTS OF OPERATIONS

QUARTER ENDED MARCH 31, 2006 COMPARED TO QUARTER ENDED MARCH 31, 2005

         Sales. Compared to the same period in 2005, the Company's sales
increased 1.3% during the first quarter of 2006. Sales during the first quarter
of 2006 were $3,372,000 versus sales of $3,329,000 during the first quarter of
2005. Stronger domestic sales were partially offset by weaker international
sales. The $80,000 domestic sales


                                       11

<PAGE>


increase was due to stronger film sales while the $37,000 decrease in
international sales was related to slower activity in the Indian market.

         Cost of Goods Sold. Cost of goods sold during the first quarter of 2006
was $1,917,000, or 56.9% of sales, compared to $1,931,000, or 58.0% of sales,
during the same period in 2005. The decrease in the cost of sales in the first
quarter of 2006 as a percentage of sales reflects a more favorable product mix
partially offset by rising raw material costs.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $1,152,000, or 34.2% of sales, in the first
quarter of 2006, from $1,238,000, or 37.2% of sales, for the same period in
2005. The first three months of 2005 reflected $35,000 of higher administrative
expenses related to Sarbanes-Oxley compliance efforts. The Company incurred an
additional $20,000 in sales and marketing expenses in 2005 related to the
startup of the IKONSign Etch and IKONImage product lines.

         Research and Development Expenses. Research and development expenses
during the first quarter of 2006 were $180,000, or 5.4% of sales, versus
$155,000, or 4.7% of sales, for the same period in 2005. The increase is due to
additional research and development staff and higher lab supply costs.

         Interest Income. Interest income for the first quarter of 2006 was
$24,000 compared to $10,000 for the same period in 2005. The interest income
increase is due to an increase in interest rates and a larger balance of
interest earning assets.

         Income Taxes. The income tax provision differs from the expected tax
expense primarily due to the benefits of the foreign sales exclusion, state
income taxes and federal tax credits for research and development. For the first
quarter of 2006, income tax expense was $47,000, or an effective rate of 32.6%.
During the first quarter of 2005, the Company performed a study of its research
and development activities resulting in tax credits totaling $15,000. The tax
credits resulted in a net income tax benefit during the period of $9,000.

LIQUIDITY AND CAPITAL RESOURCES

         The Company has financed its operations principally with funds
generated from operations and employee stock option exercises. These funds have
been sufficient to cover the Company's normal operating expenditures, annual
capital requirements, and research and development expenditures.

         Cash and cash equivalents were $3,334,000 and $2,670,000 at March 31,
2006 and March 31, 2005, respectively. The Company generated $18,000 in cash
from operating activities during the three months ended March 31, 2006, compared
to using $143,000 of cash in operating activities during the same period in
2005. The increase in cash from operating activities is primarily due to the
increase in net income and changes in working capital components as discussed
below. Cash provided by operating activities is primarily the result of net
income adjusted for non-cash depreciation, amortization, and certain changes in
working capital components.

         During the first three months of 2006, trade receivables increased by
$3,000. The increase in receivables was driven by the timing of collections. The
Company believes that the quality of its receivables is high and that strong
internal controls are in place to maintain proper collections. Inventory levels
decreased $209,000 due to lower finished good levels and the timing of raw
material shipments. Prepaid expenses increased $80,000, reflecting insurance
costs prepaid in the first quarter of 2006. Accounts payable decreased $76,000,
primarily as a result of the timing of payments to and purchases of material
from suppliers for inventory. Accrued expenses decreased $157,000, primarily
reflecting the timing of compensation payments. Income taxes payable decreased
$32,000 due to payment of 2005 taxes during the first quarter of 2006.

         For the first three months of 2006, the Company used $217,000 in
investing activities. During the first quarter of 2006, the Company elected for
an early exercise of its warrants to buy an additional 33,333 shares of stock in
Imaging Technology International. The price per share was $7.50 per share and as
consideration for the early exercise, the Company was granted warrants to buy an
additional 8,333 shares at $8.50 per share. The Company owns approximately 6% of
the outstanding shares of Imaging Technology International. Also during the
first quarter


                                       12


<PAGE>



of 2006, the Company received $84,000 from the sale of marketable securities and
purchased $41,000 of plant equipment to improve efficiency, and reduce operating
costs. The Company also incurred $10,000 in patent application costs that the
Company records as an asset and amortizes upon successful completion of the
application process. During the first three months of 2005, the Company received
$43,000 from the sale of marketable securities, purchased $37,000 in capital
equipment, and incurred $5,000 in patent application costs.

         The Company realized $121,000 in cash from financing activities during
the first three months of 2006 compared to $75,000 received in the same period
of 2005. During the first three months of 2006, the Company received $108,000
for the issuance of 26,968 shares of common stock upon the exercise of stock
options compared to $75,000 received during the first three months of 2005 for
16,700 shares of common stock issued upon the exercise of stock options. The
Company also realized a $13,000 cash benefit during the first quarter of 2006
related to the excess tax benefit from the exercise of stock options.

         A bank line of credit exists providing for borrowings of up to
$1,250,000. Outstanding debt under this line of credit is collateralized by
accounts receivable and inventory and bears interest at 2.00 percentage points
over the 30-day LIBOR rate. The Company did not utilize this line of credit
during the quarter ended March 31, 2006 and there was no debt outstanding under
this line as of March 31, 2006. The line of credit was also not utilized during
2005 and there were no borrowings outstanding under this line as of March 31,
2005.

         The Company believes that current financial resources, its line of
credit, cash generated from operations and the Company's capacity for debt
and/or equity financing will be sufficient to fund current and anticipated
business operations. The Company also believes that its low debt levels and
available line of credit make it unlikely that a decrease in demand for the
Company's products would impair the Company's ability to fund operations.

CAPITAL EXPENDITURES

         Through March 31, 2006, the Company has spent $41,000 on capital
expenditures. This spending primarily consists of plant equipment upgrades and
building improvements to improve efficiency and reduce operating costs.

         The Company plans for additional capital expenditures during 2006 to
include ongoing manufacturing equipment upgrades, development equipment to
modernize the capabilities and processes of the Company's research and
development laboratory to improve measurement and quality control processes.
Total 2006 planned capital expenditures are expected to be similar to prior
years and are expected to be funded with cash generated from operating
activities.

INTERNATIONAL ACTIVITY

         The Company markets its products to numerous countries in North
America, Europe, Latin America, Asia and other parts of the world. Foreign sales
were approximately 29% of total sales during the first quarter 2006 and 30% of
total sales for the same period in 2005. Fluctuations of certain foreign
currencies have not significantly impacted the Company's operations because the
Company's foreign sales are not concentrated in any one region of the world. The
Company believes its vulnerability to uncertainties due to foreign currency
fluctuations and general economic conditions in foreign countries is not
significant.

         The Company's foreign transactions are primarily negotiated, invoiced
and paid in U.S. dollars while a portion is transacted in Euros. IKONICS has not
implemented a hedging strategy to reduce the risk of foreign currency
translation exposures, which management does not believe to be significant based
on the scope and geographic diversity of the Company's foreign operations as of
March 31, 2006.

FUTURE OUTLOOK

         IKONICS has invested on average over 4% of its sales dollars for the
past few years in research and development. The Company plans to maintain its
efforts in this area and expedite internal product development as well as form
technological alliances with outside experts to ensure commercialization of new
product opportunities.


                                       13


<PAGE>

         In addition to its traditional emphasis on domestic markets, the
Company will continue efforts to grow its business internationally by attempting
to develop new markets and expanding market share where it has already
established a presence.

         Other future activities undertaken to expand the Company's business may
include acquisitions, building expansion and additions, equipment additions, new
product development and marketing opportunities.

ITEM 3.  CONTROLS AND PROCEDURES

         As of the end of the period covered by this report, the Company
conducted an evaluation, under the supervision and with the participation of the
principal executive officer and principal financial officer, of the Company's
disclosure control and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the "Exchange Act")). Based on this
evaluation, the principal executive officer and principal financial officer
concluded that the Company disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in SEC rules and forms.

         There was no change in the Company's internal control over financial
reporting identified in connection with the evaluation required by Rule
13a-15(d) and Rule 15d-15(d) of the Exchange Act that occurred during the period
covered by this report that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.


                                       14

<PAGE>



                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

        None

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

        None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

        Not applicable

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

        None

ITEM 5. OTHER INFORMATION

        None

ITEM 6. EXHIBITS

       The following exhibits are filed as part of this Quarterly Report on
Form 10-QSB for the quarterly period ended March 31, 2006:

Exhibit                             Description
-------                             -----------
  3.1           Restated Articles of Incorporation of Company, as amended.1
  3.2           By-Laws of the Company, as amended.1
 31.1           Rule 13a-14(a)/15d-14(a) Certifications of CEO
 31.2           Rule 13a-14(a)/15d-14(a) Certifications of CFO
 32             Section 1350 Certifications

       Copies of Exhibits will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the Exhibits.


---------------------------------
1    Incorporated by reference to the like numbered Exhibit to the Company's
     Registration  Statement on Form 10-SB (File No. 000-25727).


                                       15
<PAGE>


                               IKONICS CORPORATION

                                   SIGNATURES

        In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


                                           IKONICS CORPORATION


DATE: May 15, 2006                         By: /s/ Jon Gerlach
                                               ---------------------------------
                                               Jon Gerlach,
                                                   Chief Financial Officer, and
                                                   Vice President of Finance




                                       16

<PAGE>



                                INDEX TO EXHIBITS


<TABLE>
<CAPTION>
Exhibit                    Description                                                           Page
-------                    -----------                                                           ----
<S>      <C>                                                                                 <C>
  3.1    Restated Articles of Incorporation of Company, as amended......................     Incorporated by Reference
  3.2    By-Laws of the Company, as amended.............................................     Incorporated by Reference
 31.1    Rule 13a-14(a)/15d-14(a) Certifications of CEO.................................     Filed Electronically
 31.2    Rule 13a-14(a)/15d-14(a) Certifications of CFO.................................     Filed Electronically
 32      Section 1350 Certifications....................................................     Filed Electronically
</TABLE>