<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 June 30, 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)

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

<TABLE>
<S>                                                               <C>
            4832 Grand Avenue
            Duluth, Minnesota                                       55807
(Address of principal executive offices)                          (Zip code)
</TABLE>

                                 (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 -
2,010,861 shares outstanding as of August 7, 2006.

     Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]

<PAGE>

                               IKONICS CORPORATION

                         QUARTERLY REPORT ON FORM 10-QSB

<TABLE>
<CAPTION>
                                                                        PAGE NO.
                                                                        --------
<S>                                                                     <C>
PART I.    FINANCIAL INFORMATION

Item 1.       Financial Statements:

              Balance Sheets as of June 30, 2006 (unaudited) and
              December 31, 2005                                             3

              Statements of Operations for the Three Months and Six
              Months Ended June 30, 2006 and 2005 (unaudited)               4

              Statements of Cash Flows for the Six Months Ended June
              30, 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                                      15

PART II.   OTHER INFORMATION                                               16

           SIGNATURES                                                      18
</TABLE>


                                        2
<PAGE>

                         PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

IKONICS CORPORATION
BALANCE SHEETS

<TABLE>
<CAPTION>
                                                             JUNE 30     DECEMBER 31
                                                               2006          2005
                                                           -----------   -----------
                                                           (UNAUDITED)
<S>                                                        <C>           <C>
ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                $3,782,683   $3,412,072
   Marketable securities                                            --       84,875
   Trade receivables, less allowance for doubtful
      accounts of $50,000                                    1,936,562    1,702,608
   Inventories (Note 2)                                      1,976,743    2,364,056
   Income tax receivable                                         9,604           --
   Prepaid expenses and other assets                           106,194       65,747
   Deferred income taxes                                        99,000       99,000
                                                            ----------   ----------
         Total current assets                                7,910,786    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                                          1,316,388    1,280,149
   Vehicles                                                    174,803      174,803
                                                            ----------   ----------
                                                             5,519,989    5,466,510
   Less accumulated depreciation                             4,637,599    4,514,945
                                                            ----------   ----------
                                                               882,390      951,565
                                                            ----------   ----------
INVESTMENTS IN NON-MARKETABLE EQUITY SECURITIES                775,788      450,790
INTANGIBLE ASSETS, less accumulated amortization of
   $146,996 in 2006 and $134,642 in 2005                       297,638      279,086
DEFERRED INCOME TAXES                                           61,000       61,000
                                                            ----------   ----------
                                                            $9,927,602   $9,470,799
                                                            ==========   ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
   Accounts payable                                         $  319,214   $  438,597
   Accrued compensation                                        255,641      279,042
   Other accrued expenses                                      179,846      217,912
   Income taxes payable                                             --       56,743
                                                            ----------   ----------
         Total current liabilities                             754,701      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 2,010,861
      shares in 2006 and 1,962,537 in 2005                     201,086      196,254
   Additional paid-in capital                                1,965,808    1,721,119
   Retained earnings                                         7,006,007    6,560,236
   Accumulated other comprehensive income                           --          896
                                                            ----------   ----------
         Total stockholders' equity                          9,172,901    8,478,505
                                                            ----------   ----------
                                                            $9,927,602   $9,470,799
                                                            ==========   ==========
</TABLE>

See condensed notes to financial statements.


                                        3

<PAGE>

IKONICS CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                   THREE                      SIX
                                            MONTHS ENDED JUNE 30      MONTHS ENDED JUNE 30
                                          -----------------------   -----------------------
                                             2006         2005         2006         2005
                                          ----------   ----------   ----------   ----------
<S>                                       <C>          <C>          <C>          <C>
NET SALES                                 $4,099,674   $3,741,995   $7,471,474   $7,070,522
COSTS AND EXPENSES:
   Cost of goods sold                      2,304,388    2,104,290    4,221,731    4,034,934
   Selling, general, and administrative    1,136,189    1,093,224    2,288,175    2,331,378
   Research and development                  184,534      160,810      365,003      315,713
                                          ----------   ----------   ----------   ----------
                                           3,625,112    3,358,324    6,874,909    6,682,025
                                          ----------   ----------   ----------   ----------
INCOME FROM OPERATIONS                       474,563      383,671      596,565      388,497
INTEREST INCOME                               26,359       15,259       50,147       25,199
                                          ----------   ----------   ----------   ----------
INCOME BEFORE INCOME TAXES                   500,922      398,930      646,712      413,696
INCOME TAX EXPENSE                           153,453      123,668      200,941      114,779
                                          ----------   ----------   ----------   ----------
NET INCOME                                $  347,469   $  275,262   $  445,771   $  298,917
                                          ==========   ==========   ==========   ==========
EARNINGS PER COMMON SHARE:
   Basic                                  $     0.17   $     0.14   $     0.22   $     0.15
                                          ==========   ==========   ==========   ==========
   Diluted                                $     0.17   $     0.14   $     0.22   $     0.15
                                          ==========   ==========   ==========   ==========
WEIGHTED AVERAGE COMMON SHARES
   OUTSTANDING:
   Basic                                   2,006,379    1,941,696    1,988,994    1,939,450
                                          ==========   ==========   ==========   ==========
   Diluted                                 2,048,958    1,964,166    2,030,068    1,964,218
                                          ==========   ==========   ==========   ==========
</TABLE>

See condensed notes to financial statements.


                                        4
<PAGE>

IKONICS CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
                                                        SIX MONTHS ENDED
                                                            JUNE 30
                                                    -----------------------
                                                       2006         2005
                                                    ----------   ----------
<S>                                                 <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                       $  445,771   $  298,917
   Adjustments to reconcile net income to net
      cash provided by operating activities:
      Depreciation                                     122,654      148,353
      Amortization                                      12,355       21,831
      Excess tax benefit from share-based payment
         arrangement                                   (36,712)          --
      Tax effect from stock options                     14,055       11,451
      Stock based compensation                          12,419           --
      Changes in working capital components:
         Trade receivables                            (233,954)    (263,934)
         Inventories                                   387,313      455,159
         Prepaid expenses and other assets             (40,447)     (36,646)
         Income taxes receivable                        (9,604)     (15,423)
         Accounts payable                             (119,383)    (397,689)
         Accrued liabilities                           (61,467)     (72,489)
         Income taxes payable                          (20,031)     (24,293)
                                                    ----------   ----------
            Net cash provided by
               operating activities                    472,969      125,237
                                                    ----------   ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment                  (53,479)     (43,959)
   Purchase of intangibles                             (30,907)     (17,768)
   Purchase of non-marketable equity securities       (324,998)    (253,330)
   Proceeds from sales of marketable securities         83,979       42,695
                                                    ----------   ----------
            Net cash used in investing
               activities                             (325,405)    (272,362)
                                                    ----------   ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Excess tax benefits from share-based
      payment arrangement                               36,712           --
   Proceeds from exercise of stock options             186,335      128,878
   Redemption of common stock                               --     (115,664)
                                                    ----------   ----------
            Net cash provided by financing
               activities                              223,047       13,214
                                                    ----------   ----------
NET INCREASE (DECREASE) IN CASH
   AND CASH EQUIVALENTS                                370,611     (133,911)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
   PERIOD                                            3,412,072    2,737,460
                                                    ----------   ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD          $3,782,683   $2,603,549
                                                    ==========   ==========
SUPPLEMENTAL DISCLOSURES OF
      CASH FLOW INFORMATION:
      Income taxes paid                             $  216,036   $  143,043
                                                    ==========   ==========
</TABLE>

See condensed notes to financial statements.


                                        5

<PAGE>

                               IKONICS CORPORATION

                     CONDENSED NOTES TO FINANCIAL STATEMENTS

                                   (Unaudited)

1.   Basis of Presentation

     The balance sheet of IKONICS Corporation (the "Company") as of June 30,
     2006, and the related statements of operations for the three and six months
     ended June 30, 2006 and 2005, and cash flows for the six months ended June
     30, 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 June 30, 2006,
     and the results of 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 are as follows:

<TABLE>
<CAPTION>
                          June 30,      Dec 31,
                            2006         2005
                         ----------   ----------
<S>                      <C>          <C>
Raw materials            $1,317,132   $1,483,881
Work-in-progress            231,756      212,254
Finished goods              975,099    1,176,647
Reduction to LIFO cost     (547,244)    (508,726)
                         ----------   ----------
Total Inventory          $1,976,743   $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. Diluted EPS is similar to Basic EPS except that
     the weighted average number 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 options, had
     been issued.


                                        6

<PAGE>

     Shares used in the calculation of diluted EPS are summarized below:

<TABLE>
<CAPTION>
                                                                     Three Months Ended
                                                                   ---------------------
                                                                    June 30,    June 30,
                                                                      2006        2005
                                                                   ---------   ---------
<S>                                                                <C>         <C>
Weighted average common shares outstanding                         2,006,379   1,941,696
Dilutive effect of stock options                                      42,579      22,470
                                                                   ---------   ---------
Weighted average common and common equivalent shares outstanding   2,048,958   1,964,166
                                                                   =========   =========
</TABLE>

<TABLE>
<CAPTION>
                                                                      Six Months Ended
                                                                   ---------------------
                                                                    June 30,    June 30,
                                                                      2006        2005
                                                                   ---------   ---------
<S>                                                                <C>         <C>
Weighted average common shares outstanding                         1,988,994   1,939,450
Dilutive effect of stock options                                      41,074      24,768
                                                                   ---------   ---------
Weighted average common and common equivalent shares outstanding   2,030,068   1,964,218
                                                                   =========   =========
</TABLE>

     Options to purchase 88,222 and 174,975 shares of common stock were
     outstanding as of June 30, 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 $4,600 for
     the three months ended June 30, 2006, and $8,700 for the six months ended
     June 30, 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 $3,000.

     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 periods 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.


                                        7
<PAGE>

<TABLE>
<CAPTION>
                                                     Three Months     Six Months
                                                        Ended           Ended
                                                    June 30, 2005   June 30, 2005
                                                    -------------   -------------
<S>                                                 <C>             <C>
Net income:
   As reported                                         $275,262        $298,917
   Deduct total stock-based employee compensation
      expense determined under fair value  based
      method for all awards                            $  6,693        $ 10,607
                                                       --------        --------
   Pro forma                                           $268,569        $288,310
                                                       ========        ========
Basic earnings per share:
   As reported                                         $   0.14        $   0.15
   Pro forma                                           $   0.14        $   0.15

Diluted earnings per share:
   As reported                                         $   0.14        $   0.15
   Pro forma                                           $   0.14        $   0.15
</TABLE>

     As of June 30, 2006 there was approximately $46,000 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 option shares 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 exercise of stock options as operating cash
     flows in our statement of cash flows. In accordance with FAS 123(R), for
     the six months ended June, 2006, we began reporting the excess tax benefits
     from the exercise of stock options as a reduction of operating and an
     increase in financing cash flows. For the six months ended June 30, 2006,
     $36,712 of excess tax benefits were reported in the statement of cash
     flows.

     Proceeds from the exercise of stock options were $186,335 for the six
     months ended June 30, 2006. The actual income tax benefit realized from the
     exercise of stock options was $36,712 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 55,673 shares of common stock are reserved for
     additional grants of options under the plan at June 30, 2006.

     The fair value of options granted during the three months ended June 30,
     2006 was estimated using the Black-Scholes option pricing model with the
     following assumptions:

<TABLE>
<S>                                       <C>
Dividend yield                                   0.0%
Expected volatility                             60.6%
Expected life of option                   five years
Risk-free interest rate                          5.0%
Fair value of each option on grant date        $4.80
</TABLE>


                                        8

<PAGE>

Stock option activity during the six months ended June 30, 2006 was as follows:

<TABLE>
<CAPTION>
                                             Weighted
                                              Average
                                             Exercise
                                    Shares     Price
                                   -------   --------
<S>                                <C>       <C>
Outstanding at beginning of year   130,285     $3.27
Granted                              7,250      8.03
Exercised                          (48,324)     3.86
Expired and forfeited                 (989)     4.59
                                   -------
Outstanding at June 30, 2006        88,222      3.33
                                   =======
</TABLE>

The aggregate intrinsic value of all options outstanding and for those
exercisable at June 30, 2006 was $390,258 and $351,729, respectively.

The following table summarizes information about stock options outstanding at
June 30, 2006:

<TABLE>
<CAPTION>
                          Options Outstanding                  Options Exercisable
               -----------------------------------------   --------------------------
                                  Weighted-
                   Number          Average     Weighted-       Number       Weighted-
  Range of     Outstanding at     Remaining     Average    Exercisable at    Average
  Exercise        June 30,       Contractual    Exercise      June 30,       Exercise
    Price           2006        Life (years)     Price          2006          Price
  --------     --------------   ------------   ---------   --------------   ---------
<S>            <C>              <C>            <C>         <C>              <C>
$2.00 - 2.99       58,222           1.40         $2.44         58,222         $2.44
 3.00 - 3.99       11,250           2.10          3.36          7,500          3.36
 4.00 - 4.99        9,250           3.83          4.32          2,916          4.32
 7.00 - 8.99        9,500           4.29          7.79          1,500          7.01
                   ------                                      ------
                   88,222           2.05          3.33         70,138          2.72
                   ======                                      ======
</TABLE>

5.   Intangible Assets

     Intangible assets consist primarily of patents, licenses and covenants not
     to compete. 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
     $347,469 and $275,461 for the three months ended June 30, 2006 and 2005,
     respectively. Total comprehensive income was $446,667 and $301,648 for the
     six months ended June 30, 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 second quarter of 2006, the six months ended June 30, 2006 and the
same periods 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.

     -    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.

     -    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.

     -    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.

     -    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.

     -    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.

     -    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.

     -    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 June 30, 2006, the Company had approximately
$160,000 of net deferred tax assets. The net deferred tax assets result
primarily from 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 JUNE 30, 2006 COMPARED TO QUARTER ENDED JUNE 30, 2005

     Sales. The Company realized 10% sales growth during the second quarter of
2006 with sales of $4.1 million, compared to $3.7 million in sales during the
same period in 2005. International sales for the second quarter of 2006
increased by $205,000 compared to the same period in 2005 due to stronger Asian
sales. Domestic sales also increased by $153,000 due to an increase in film and
glass shipments.


                                       11

<PAGE>

     Cost of Goods Sold. Cost of goods sold during the second quarter of 2006
was $2.3 million, or 56.2% of sales, compared to $2.1 million, or 56.2% of
sales, during the same period in 2005. Rising raw material and transportation
costs have been offset by a more favorable product mix.

     Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $1.1 million, or 27.7% of sales, in the second
quarter of 2006, and $1.1 million, or 29.2% of sales, for the same period in
2005.

     Research and Development Expenses. Research and development expenses during
the second quarter of 2006 were $185,000, or 4.5% of sales, versus $161,000, or
4.3% of sales, for the same period in 2005. The increase is due to an increase
in production trials and additional research and development staff.

     Interest Income. Interest income for the second quarter of 2006 was $26,000
compared to $15,000 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
second quarter of 2006, income tax expense was $153,000, or an effective rate of
30.6% versus $124,000, or an effective rate of 31.0% for second quarter of 2005.

SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2005

     Sales. Compared to the same period in 2005, the Company's sales increased
6% during the first six months of 2006. Sales during the first half of 2006 were
$7.5 million versus sales of $7.1 million during the first six months of 2005.
Sales growth was realized in both the domestic and international markets. The
$233,000 domestic sales increase was due to stronger film and glass sales while
the $167,000 international sales increase was mainly related to Asian sales
growth.

     Cost of Goods Sold. Cost of goods sold during the first half of 2006 was
$4.2 million, or 56.5% of sales, compared to $4.0 million, or 57.1% of sales,
during the same period in 2005. The decrease in the cost of sales during the
first six months of 2006 as a percentage of sales reflects a more favorable
product mix partially offset by rising raw material and transportation costs.

     Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $2,288,000, or 30.6% of sales, in the first
six months of 2006, from $2,331,000, or 33.0% of sales, for the same period in
2005. For the most part, the decrease in selling, general and administrative
expenses in 2006 is due to $50,000 of Sarbanes Oxley compliance related expenses
incurred during the first six months of 2005.

     Research and Development Expenses. Research and development expenses during
the first half of 2006 were $365,000, or 4.9% of sales, versus $316,000, or 4.5%
of sales, for the same period in 2005. The increase is due to an increase in
production trials and additional research and development staff.

     Interest Income. Interest income for the first six months of 2006 was
$50,000 compared to $25,000 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
six months of 2006, income tax expense was $201,000, or an effective rate of
31.1%. Income tax expense for the first six months of 2005 was $115,000, or an
effective rate of 27.7%. The lower effective rate for the first half of 2005 was
partially due to a study performed by the Company during the first quarter of
2005, related to 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.


                                       12

<PAGE>

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 $3.8 million and $2.6 million at June 30,
2006 and June 30, 2005, respectively. The Company generated $473,000 in cash
from operating activities during the six months ended June 30, 2006, compared to
generating $125,000 of cash from 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, tax effect of stock
options, and certain changes in working capital components.

     During the first six months of 2006, trade receivables increased by
$234,000. The increase in receivables was driven by higher sales volumes and 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 $387,000 due to lower finished good
levels and the timing of raw material shipments. Prepaid expenses increased
$40,000, reflecting insurance costs prepaid in the first quarter of 2006.
Accounts payable decreased $119,000, primarily as a result of the timing of
payments to and purchases of material from suppliers for inventory. Accrued
expenses decreased $61,000, primarily reflecting the timing of compensation and
other miscellaneous payments. Income taxes payable decreased $20,000 due to
payment of 2005 taxes during the first quarter of 2006.

     For the first six months of 2006, the Company used $325,000 in investing
activities. This included exercising warrants to buy an additional 43,333 shares
of stock in Imaging Technology International. The price per share was $7.50 for
a total cash outlay of $325,000. The Company owns approximately 6% of the
outstanding shares of Imaging Technology International (iTi). Also during the
first half of 2006, the Company received $84,000 from the sale of marketable
securities and purchased $53,000 of plant equipment to improve efficiency, and
reduce operating costs. The Company also incurred $31,000 in patent application
costs that the Company records as an asset and amortizes upon successful
completion of the application process. During the first six months of 2005, the
Company invested $253,000 in iTi, received $43,000 from the sale of marketable
securities, purchased $44,000 in capital equipment, and incurred $18,000 in
patent application costs.

     The Company realized $223,000 in cash from financing activities during the
first six months of 2006 compared to $13,000 received in the same period in
2005. During the first six months of 2006, the Company received $186,000 for the
issuance of 48,324 shares of common stock upon the exercise of stock options
compared to $129,000 received during the first six months of 2005 for 29,401
shares of common stock issued upon the exercise of stock options. The Company
also realized a $37,000 cash benefit during the first half of 2006 related to
the excess tax benefit from the exercise of stock options. During the first six
months of 2005 the Company repurchased 25,499 shares of common stock at a cost
of $116,000.

     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
first six months of 2006 and there were no borrowings outstanding as of June 30,
2006. The line of credit was also not utilized during 2005, and there were no
borrowings outstanding under this line as of June 30, 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.


                                       13

<PAGE>

CAPITAL EXPENDITURES

     Through June 30, 2006, the Company has spent $53,000 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 31% of total sales during the first half 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
June 30, 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.

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

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). 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. FIN 48 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. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 will be
effective for us beginning in fiscal 2007. We are evaluating the interpretation
to determine the effect on our financial statements and related disclosures.

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


                                       14

<PAGE>

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.


                                       15
<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

     The Company's Annual Meeting was held on April 27, 2006. The shareholders
     took the following actions:

     The shareholders elected six directors to hold office until the next annual
     meeting of shareholders. The shareholders present in person or by proxy
     cast the following numbers of votes in connection with the election of
     directors, resulting in the election of all nominees:

<TABLE>
<CAPTION>
                      Votes For   Votes Withheld   Broker Non-Votes
                      ---------   --------------   ----------------
<S>                   <C>         <C>              <C>
Charles H. Andresen   1,718,415       41,535               0
David O. Harris       1,725,390       34,560               0
Gerald W. Simonson    1,725,390       34,560               0
William C. Ulland     1,715,230       44,720               0
Rondi Erickson        1,726,380       33,570               0
H. Leigh Severance    1,725,390       34,560               0
</TABLE>

     The shareholders elected to ratify the selection of McGladrey & Pullen, LLP
     as IKONICS Corporation's independent registered public accounting firm for
     the year ending December 31, 2006. The shareholders present in person or by
     proxy cast the following numbers of votes in connection with the
     ratification of McGladrey & Pullen, LLP:

<TABLE>
<CAPTION>
                                       Broker
Votes For   Votes Against   Abstain   Non-Votes
---------   -------------   -------   ---------
<C>         <C>             <C>       <C>
1,758,850         0          1,100        0
</TABLE>

ITEM 5. OTHER INFORMATION

     None


                                       16

<PAGE>

ITEM 6.  EXHIBITS

     The following exhibits are filed as part of this Quarterly Report on Form
10-QSB for the quarterly period ended June 30, 2006:

<TABLE>
<CAPTION>
Exhibit   Description
-------   -----------
<S>       <C>
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
</TABLE>

     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).


                                       17

<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: August 11, 2006                   By: /s/ Jon Gerlach
                                        ----------------------------------------
                                        Jon Gerlach,
                                        Chief Financial Officer, and
                                        Vice President of Finance


                                       18

<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>