##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended June 30, 2008
 or
 o
    
    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 0 00-25727
 IKONICS CORPORATION
 
  Minnesota
    
    41-0730027(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification no.)4832 Grand Avenue 
Duluth, Minnesota
    
    55807(Address of principal executive offices)
    
    (Zip code)
 Issuers telephone number
  
   þ o
  o þ
   Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ




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##### 



IKONICS Corporation
  PAGE NO.PART I.
    

FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Condensed Balance Sheets as of June 30, 2008 (unaudited)
and December 31, 2007
    
    
    3Condensed Statements of Operations for the Three Months and
Six Months Ended June 30, 2008 and 2007 (unaudited)
    
    
    4Condensed Statements of Cash Flows for the Six Months Ended
June 30, 2008 and 2007 (unaudited)
    
    
    5Notes to Condensed Financial Statements (unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    19Item 4.
    
    Controls and Procedures
    
    
    19PART II.
    
    OTHER INFORMATION
    
    
    20SIGNATURES
    
    
    21Certifications of CEOCertifications of CFOSection 1350 Certifications




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##### Table of Contents



FINANCIAL INFORMATION
 
 ITEM 1. Condensed Financial Statements
 IKONICS CORPORATION
 
 CONDENSED BALANCE SHEETS
 June 30
    
    
    December 312008
    
    
    2007(unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    4,787,622
    
    
    $
    1,230,020Short-term investments
    
    
    
    
    
    
    3,550,000Trade receivables, less allowance of $45,000
    
    
    2,174,688
    
    
    
    2,025,257Inventories
    
    
    1,987,791
    
    
    
    2,355,864Deposits, prepaid expenses and other assets
    
    
    326,120
    
    
    
    130,596Deferred income taxes
    
    
    24,000
    
    
    
    24,000Total current assets
    
    
    9,300,221
    
    
    
    9,315,737PROPERTY, PLANT, AND EQUIPMENT, at cost:Land and building
    
    
    1,952,647
    
    
    
    1,631,142Machinery and equipment
    
    
    2,865,478
    
    
    
    2,700,816Office equipment
    
    
    826,498
    
    
    
    812,120Vehicles
    
    
    223,094
    
    
    
    219,964Construction in progress
    
    
    694,528
    
    
    
    6,562,245
    
    
    
    5,364,042Less accumulated depreciation
    
    
    4,170,260
    
    
    
    4,043,4512,391,985
    
    
    
    1,320,591INTANGIBLE ASSETS, less accumulated amortization of $239,916 in
2008 and $213,061 in 2007
    
    
    486,163
    
    
    
    479,888DEFERRED INCOME TAXES
    
    
    11,000
    
    
    
    11,000INVESTMENTS IN NON-MARKETABLE EQUITY SECURITIES
    
    
    855,201
    
    
    
    855,201$
    13,044,570
    
    
    $
    11,982,417LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payableTrade
    
    $
    529,626
    
    
    $
    435,572Construction
    
    
    390,424
    
    
    
    Accrued compensation
    
    
    318,778
    
    
    
    347,691Other accrued expenses
    
    
    135,368
    
    
    
    148,149Income taxes payable
    
    
    2,138
    
    
    
    5,291Total current liabilities
    
    
    1,376,334
    
    
    
    936,703STOCKHOLDERS EQUITY:Preferred stock, par value $.10 per share; authorized 250,000 shares; issued noneCommon stock, par value $.10 per share; authorized 4,750,000 shares;
issued and outstanding 2,081,833 shares in 2008 and 2,045,961 in 2007
    
    
    208,183
    
    
    
    204,596Additional paid-in capital
    
    
    2,279,202
    
    
    
    2,124,342Retained earnings
    
    
    9,180,851
    
    
    
    8,716,776Total stockholders equity
    
    
    11,668,236
    
    
    
    11,045,714$
    13,044,570
    
    
    $
    11,982,417
  3




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IKONICS CORPORATION
 
 CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
 Three Months
    
    
    Six MonthsEnded June 30
    
    
    Ended June 302008
    
    
    2007
    
    
    2008
    
    
    2007NET SALES
    
    $
    4,330,059
    
    
    $
    4,374,677
    
    
    $
    8,110,907
    
    
    $
    7,882,444COSTS AND EXPENSES:Cost of goods sold
    
    
    2,468,468
    
    
    
    2,533,475
    
    
    
    4,620,261
    
    
    
    4,607,545Selling, general, and administrative
    
    
    1,154,850
    
    
    
    1,211,305
    
    
    
    2,521,930
    
    
    
    2,442,397Research and development
    
    
    167,855
    
    
    
    189,936
    
    
    
    382,710
    
    
    
    396,2083,791,173
    
    
    
    3,934,716
    
    
    
    7,524,901
    
    
    
    7,446,150INCOME FROM OPERATIONS
    
    
    538,886
    
    
    
    439,961
    
    
    
    586,006
    
    
    
    436,294GAIN ON SALE OF NON-MARKETABLE
EQUITY SECURITIES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,159INTEREST INCOME
    
    
    23,697
    
    
    
    36,724
    
    
    
    67,372
    
    
    
    69,631INCOME BEFORE INCOME TAXES
    
    
    562,583
    
    
    
    476,685
    
    
    
    653,378
    
    
    
    561,084INCOME TAX EXPENSE
    
    
    204,146
    
    
    
    145,283
    
    
    
    189,303
    
    
    
    90,585NET INCOME
    
    $
    358,437
    
    
    $
    331,402
    
    
    $
    464,075
    
    
    $
    470,499EARNINGS PER COMMON SHARE:Basic
    
    $
    0.17
    
    
    $
    0.16
    
    
    $
    0.22
    
    
    $
    0.23Diluted
    
    $
    0.17
    
    
    $
    0.16
    
    
    $
    0.22
    
    
    $
    0.23WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING :Basic
    
    
    2,076,828
    
    
    
    2,029,355
    
    
    
    2,064,216
    
    
    
    2,022,501Diluted
    
    
    2,080,617
    
    
    
    2,064,698
    
    
    
    2,068,292
    
    
    
    2,056,762
  4




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IKONICS CORPORATION
 
 CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
 Six MonthsEnded June 302008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    464,075
    
    
    $
    470,499Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    142,205
    
    
    
    134,437Amortization
    
    
    26,855
    
    
    
    26,855Excess tax benefit from share-based payment arrangement
    
    
    (39,319
    )
    
    
    (31,997
    )Tax benefit from stock option exercise
    
    
    4,388
    
    
    
    12,508Stock based compensation
    
    
    8,028
    
    
    
    9,456Gain on sale of vehicles
    
    
    (1,725
    )
    
    
    (7,341
    )Gain on sale of non-marketable equity securities
    
    
    
    
    
    
    (55,159
    )Deferred income taxes
    
    
    
    
    
    
    9,000Changes in working capital components:Trade receivables
    
    
    (149,431
    )
    
    
    (238,043
    )Inventories
    
    
    368,073
    
    
    
    608,620Prepaid expenses and other assets
    
    
    (195,524
    )
    
    
    (17,342
    )Income taxes receivable
    
    
    
    
    
    
    (75,329
    )Accounts payable
    
    
    94,054
    
    
    
    180,619Accrued liabilities
    
    
    (41,694
    )
    
    
    (107,050
    )Income taxes payable
    
    
    36,166
    
    
    
    (62,453
    )Net cash provided by operating activities
    
    
    716,151
    
    
    
    857,280CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (829,950
    )
    
    
    (436,244
    )Proceeds from sale of vehicles
    
    
    8,500
    
    
    
    11,500Purchase of intangibles
    
    
    (33,130
    )
    
    
    (27,578
    )Purchase of short-term investments
    
    
    
    
    
    
    (375,000
    )Proceeds on sale of short-term investments
    
    
    3,550,000
    
    
    
    Purchase of non-marketable equity securities
    
    
    
    
    
    
    (63,750
    )Proceeds from sale of non-marketable equity securities
    
    
    
    
    
    
    252,618Net cash provided (used in) investing activities
    
    
    2,695,420
    
    
    
    (638,454
    )CASH FLOWS FROM FINANCING ACTIVITIES:Excess tax benefit from share-based payment arrangement
    
    
    39,319
    
    
    
    31,997Proceeds from exercise of stock options
    
    
    106,712
    
    
    
    63,722Net cash provided by financing activities
    
    
    146,031
    
    
    
    95,719NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    3,557,602
    
    
    
    314,545CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    1,230,020
    
    
    
    253,186CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    4,787,622
    
    
    $
    567,731SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid for income taxes
    
    $
    191,644
    
    
    $
    251,353SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIESConstruction payables incurred for building expansion
    
    $
    390,424
    
    
    $
    
  5




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IKONICS CORPORATION
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  1.
    
    Basis of PresentationThe balance sheet of IKONICS Corporation (the Company) as of June 30, 2008, and the
related statements of operations for the three and six months ended June 30, 2008 and 2007,
and cash flows for the six months ended June 30, 2008 and 2007, 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, 2008, 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, 2007.The results of operations for interim periods are not necessarily indicative of results that
will be realized for the full fiscal year.2.
    
    InventoryThe major components of inventory are as follows:
 June 30, 2008
    
    
    Dec 31, 2007Raw materials
    
    $
    1,314,587
    
    
    $
    1,373,835Work-in-progress
    
    
    323,907
    
    
    
    296,998Finished goods
    
    
    1,026,178
    
    
    
    1,308,917Reduction to LIFO cost
    
    
    (676,881
    )
    
    
    (623,886
    )Total Inventory
    
    $
    1,987,791
    
    
    $
    2,355,864
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IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  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 those
            shares subject to options, had been issued.Shares used in the calculation of diluted EPS are summarized below:
 Three Months EndedJune 30, 2008
    
    June 30, 2007Weighted average common shares outstanding
    
    
    2,076,828
    
    
    
    2,029,355Dilutive effect of stock options
    
    
    3,789
    
    
    
    35,343Weighted average common and common equivalent shares outstanding
    
    
    2,080,617
    
    
    
    2,064,698
 Six Months EndedJune 30, 2008
    
    June 30, 2007Weighted average common shares outstanding
    
    
    2,064,216
    
    
    
    2,022,501Dilutive effect of stock options
    
    
    4,076
    
    
    
    34,261Weighted average common and common equivalent shares outstanding
    
    
    2,068,292
    
    
    
    2,056,762
 4.
    
    Stock-based CompensationThe Company has a stock incentive plan for the issuance of up to 342,750 shares of common
stock. 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
51,173 shares of common stock are reserved for additional grants of options under the plan
at June 30, 2008.The Company charged compensation cost of $4,700 against income for the three months ended
June 30, 2008 and 2007. For the first six months of 2008, the Company charged compensation
cost of approximately $8,000 against income compared to $9,400 for the same period in 2007.
As of June 30, 2008 there was approximately $27,000 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 market price at the time
the stock options are exercised over the exercise price of the options, which increased the
APIC pool, which is the amount that represents the pool of excess tax benefits available to
absorb tax shortages. For the six months ended June 30, 2008, $39,319 of excess tax
benefits were reported as operating and financing cash flows compared to $31,997 for the six
months ended June 30, 2007. The Companys APIC pool totaled $111,029 and $71,709 at June
30, 2008 and December 31, 2007, respectively.Proceeds from the exercise of stock options were $106,712 and $63,722 for the six months
ended June 30, 2008 and 2007, respectively.
 7




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IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  The fair value of options granted during the six months ended June 30, 2008 was estimated
using the Black-Scholes option pricing model with the following assumptions:
 Dividend yield
    
    
    0%Expected volatility
    
    
    55.0%Expected life of option
    
    
    Five YearsRisk-free interest rate
    
    
    3.0%Fair value of each option on grant date
    
    
    $4.05
 There were no options granted during the six months ended June 30, 2007.Stock option activity during the six months ended June 30, 2008 was as follows:
 WeightedAverageExerciseShares
    
    PriceOutstanding at beginning of period
    
    
    52,622
    
    
    $
    4.03Granted
    
    
    5,000
    
    
    
    8.08Exercised
    
    
    (35,872
    )
    
    
    2.97Expired and forfeited
    
    
    
    
    
    
    Outstanding at 6/30/08
    
    
    21,750
    
    
    
    6.70
 The aggregate intrinsic value of all options outstanding and for those exercisable at June
30, 2008 was $47,110 and $41,162, respectively.5.
    
    Building Expansion ProjectIn April 2008, the Company acquired an 11 acre property for $366,000 and began construction
on a new 35,000 square foot manufacturing and warehouse facility. The new facility is
necessary to accommodate the Companys new business initiatives and growth plans and is
expected to be completed by the end of 2008. The entire project, including the purchase of
the land, is expected to cost $4,500,000. Through June 30, 2008 the Company had incurred
costs of $1,100,000 of which $390,424 was included in construction accounts payable.
 8




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##### Table of Contents



IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  6.
    
    Segment InformationThe Companys reportable segments are strategic business units that offer different products
and have varied customer bases. There are three reportable segments: Domestic, Export,
and IKONICS Imaging.
Domestic sells screen printing film, emulsions, and inkjet receptive film to distributors
located in the United States and Canada. IKONICS Imaging sells photo resistant film, art
supplies, glass, metal medium and related abrasive etching equipment to end user customers
located in the United States and Canada. It is also entering the market for etched
ceramics, glass and silicon wafers; and is developing and selling proprietary inkjet
technology. Export sells primarily the same products as Domestic and IKONICS Imaging to
foreign customers. The accounting policies applied to determine the segment information are
the same as those described in the summary of significant accounting policies included in
the Companys Annual Report on Form 10-KSB for the year ended December 31, 2007.Management evaluates the performance of each segment based on the components of divisional
income, and with the exception of accounts receivable, does not allocate assets and
liabilities to segments. Financial information with respect to the reportable segments
follows:For the three months ended June 30, 2008:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet Sales
    
    $
    1,799,163
    
    
    $
    1,350,783
    
    
    $
    1,180,113
    
    
    $
    
    
    
    $
    4,330,059Cost of goods sold
    
    
    963,903
    
    
    
    908,520
    
    
    
    596,045
    
    
    
    
    
    
    
    2,468,468Selling, general and
administrative*
    
    
    295,068
    
    
    
    89,605
    
    
    
    326,841
    
    
    
    443,336
    
    
    
    1,154,850Research and
Development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    167,855
    
    
    
    167,8551,258,971
    
    
    
    998,125
    
    
    
    922,886
    
    
    
    611,191
    
    
    
    3,791,173Income from operations
    
    $
    540,192
    
    
    $
    352,658
    
    
    $
    257,227
    
    
    $
    (611,191
    )
    
    $
    538,886
 For the three months ended June 30, 2007:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet Sales
    
    $
    1,811,968
    
    
    $
    1,382,514
    
    
    $
    1,180,195
    
    
    $
    
    
    
    $
    4,374,677Cost of goods sold
    
    
    1,017,503
    
    
    
    965,229
    
    
    
    550,743
    
    
    
    
    
    
    
    2,533,475Selling, general and
administrative*
    
    
    276,803
    
    
    
    117,386
    
    
    
    338,981
    
    
    
    478,135
    
    
    
    1,211,305Research and
Development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    189,936
    
    
    
    189,9361,294,306
    
    
    
    1,082,615
    
    
    
    889,724
    
    
    
    668,071
    
    
    
    3,934,716Income from operations
    
    $
    517,662
    
    
    $
    299,899
    
    
    $
    290,471
    
    
    $
    (668,071
    )
    
    $
    439,961
 9




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IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  For the six months ended June 30, 2008:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet Sales
    
    $
    3,191,389
    
    
    $
    2,579,728
    
    
    $
    2,339,790
    
    
    $
    
    
    
    $
    8,110,907Cost of goods sold
    
    
    1,747,858
    
    
    
    1,715,346
    
    
    
    1,157,057
    
    
    
    
    
    
    
    4,620,261Selling, general and
administrative*
    
    
    586,752
    
    
    
    201,503
    
    
    
    676,039
    
    
    
    1,057,636
    
    
    
    2,521,930Research and
Development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    382,710
    
    
    
    382,7102,334,610
    
    
    
    1,916,849
    
    
    
    1,833,096
    
    
    
    1,440,346
    
    
    
    7,524,901Income (loss) from
operations
    
    $
    856,779
    
    
    $
    662,879
    
    
    $
    506,694
    
    
    $
    (1,440,346
    )
    
    $
    586,006
 For the six months ended June 30, 2007:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet Sales
    
    $
    3,191,315
    
    
    $
    2,369,464
    
    
    $
    2,321,665
    
    
    $
    
    
    
    $
    7,882,444Cost of goods sold
    
    
    1,818,107
    
    
    
    1,688,312
    
    
    
    1,101,126
    
    
    
    
    
    
    
    4,607,545Selling, general and
administrative*
    
    
    562,370
    
    
    
    240,800
    
    
    
    733,185
    
    
    
    906,042
    
    
    
    2,442,397Research and
Development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    396,208
    
    
    
    396,2082,380,477
    
    
    
    1,929,112
    
    
    
    1,834,311
    
    
    
    1,302,250
    
    
    
    7,446,150Income (loss) from
Operations
    
    $
    810,838
    
    
    $
    440,352
    
    
    $
    487,354
    
    
    $
    (1,302,250
    )
    
    $
    436,294
 Accounts receivable by segment as of June 30, 2008 and December 31, 2007 were as follows:
 June 30, 2008
    
    
    Dec 31, 2007Domestic
    
    $
    998,686
    
    
    $
    980,906Export
    
    
    819,546
    
    
    
    712,936IKONICS Imaging
    
    
    351,748
    
    
    
    356,272Other
    
    
    4,708
    
    
    
    (24,857
    )Total
    
    $
    2,174,688
    
    
    $
    2,025,257
 
 *
    
    The Company does not allocate all general and administrative expenses or any research and
development
expenses to its operating segments for internal reporting. 7.
    
    Income TaxesOn January 1, 2007, the Company adopted the provisions of Financial Standards Accounting Board
Interpretation No. 48, Accounting for Uncertainty in Income Taxes(FIN 48). As a result of the
implementation of FIN 48, the
Company recorded a liability for unrecognized tax benefits of $137,000, which was accounted for as
a reduction in retained earnings as of January 1, 2007 for the cumulative effect
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IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  of a change in
accounting principle as provided for by FIN 48. The balance of the unrecognized tax benefits at
adoption, exclusive of interest, was $122,000. During the first quarter of 2007 and 2008, the
statute of limitations for the relevant taxing authority to examine and challenge the tax position
for an open
year expired, resulting in decreases in income tax expense of $45,000 for the first six
months of 2007 and $44,000 for the six months of 2008. As of June 30, 2008, the liability
for unrecognized tax benefits totaled $54,000 compared to a liability of $92,000 as of June
30, 2007. The liability for unrecognized tax benefits is included in other accrued
expenses.The Company is subject to taxation in the United States and various states. The material
jurisdictions that are subject to examination by tax authorities primarily include Minnesota
and the United States, for tax years 2005, 2006, and 2007.It has been the Companys policy since 2007 to recognize interest and penalties related to
uncertain tax positions in income tax expense. The Company also accrued potential interest
of $2,000 related to these unrecognized tax benefits during 2008 bringing the total accrued
interest to $7,500 as of June 30, 2008. The unrecognized tax benefits at June 30, 2008
relate to taxation of foreign export sales.A reconciliation of the beginning and ending amounts of unrecognized tax benefit for the
first six months of 2008 is as follows:
 Balance at January 1, 2008
    
    $
    98,000Expiration of the statute of limitations for the
assessment of taxes
    
    
    (44,000
    )Balance at June 30, 2008
    
    $
    54,000
 The balance of unrecognized tax benefits totaling $54,000 at June 30, 2008, if reversed,
would decrease the provision for income taxes and increase net income by the same amount and
reduce the Companys effective tax rate.
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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
  Factors that May Affect Future Results
 
    
    The Companys belief that additional proceeds will be received from the sale of
Apprise common and preferred stock that occurred in 2007Actual additional proceeds
received may be impacted by unanticipated expenses related to indemnification clauses
as part of the agreement between Apprise and its purchaser.
    
    The Companys expectation that its effective tax rate will return to 35% to 36% of
pretax income for the second six months of 2008 compared to the tax rate of 29%
recorded in the first six months of 2008The effective tax rate for the second six
months of 2008 may be affected by changes in federal and state tax law, unanticipated
changes in the Companys financial position or the Companys actions could increase or
decrease its effective tax rate.
    
    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 internal controls.
    
    The belief that the Companys current financial resources, 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 and capital
expenditures. 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 on hand and 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, repairs, capital asset additions or increases in
construction costs. The funding of planned or unforeseen expenditures may also be
affected by changes in anticipated operating results resulting from decreased sales,
lack of acceptance of new products or increased operating expenses or by other
unexpected events affecting the Companys financial position.
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
    
    The Companys belief that the total cost of its new facility construction project
will be $4.5 millionActual construction costs may be impacted by changes in
construction costs, changes to the building design, or regulatory changes.
    
    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 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, lack of acceptance of new products or the inability
to identify attractive acquisition targets or other business opportunities.
 Critical Accounting Policies
  Accounts Receivable.
 Inventories.
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Income Taxes.
 Investments in Non-Marketable Equity Securities
 Revenue Recognition.
 Results of Operations
 Quarter Ended June 30, 2008 Compared to Quarter Ended June 30, 2007
 Sales.
 Cost of Goods Sold .
 Selling, General and Administrative Expenses
 Research and Development Expenses
 Interest Income.
 Income Taxes.
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Six Months Ended June 30, 2008 Compared to the Six Months Ended June 30, 2007
 Sales.
 Cost of Goods Sold .
 Selling, General and Administrative Expenses
 Research and Development Expenses
 Gain on Sale of Non-Marketable Equity Securities.
 Interest Income.
 Income Taxes
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Liquidity and Capital Resources
       16




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Capital Expenditures
   International Activity
   Future Outlook
  17




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Recent Accounting Pronouncements
     Off Balance Sheet Arrangements
  18




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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
  
 ITEM 4. Controls and Procedures
   19




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OTHER INFORMATION
 ITEM 1. Legal Proceedings
  ITEM 1A. Risk Factors
  ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  ITEM 3. Defaults upon Senior Securities
  ITEM 4. Submission of Matters to a Vote of Security Holders
   Votes For
    
    Votes WithheldCharles H. Andresen
    
    
    1,874,686
    
    
    
    3,669David O. Harris
    
    
    1,874,686
    
    
    
    3,669Gerald W. Simonson
    
    
    1,874,686
    
    
    
    3,669William C. Ulland
    
    
    1,874,686
    
    
    
    3,669Rondi Erickson
    
    
    1,874,186
    
    
    
    4,169H. Leigh Severance
    
    
    1,874,686
    
    
    
    3,669
 ITEM 5. Other Information
  ITEM 6. Exhibits
  Exhibit
    
    Description3.1
    
    Restated Articles of Incorporation of Company, as amended.13.2
    
    By-Laws of the Company, as amended.131.1
    
    Rule 13a-14(a)/15d-14(a) Certifications of CEO31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications of CFO32
    
    Section 1350 Certifications
  
 1
    
    Incorporated by reference to the like numbered Exhibit
to the Companys Registration Statement on Form 10-SB (File No. 000-25727). 20




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SIGNATURES
  IKONICS CORPORATIONDATE: August 14, 2008
    
    By:
    
    /s/ Jon Gerlach

Jon Gerlach,Chief Financial Officer, and Vice President of Finance
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INDEX TO EXHIBITS
 Exhibit
    
    Description
    
    Page3.1
    
    Restated Articles of Incorporation of Company, as amended
    
    Incorporated by reference3.2
    
    By-Laws of the Company, as amended.
    
    Incorporated by reference31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications of CEO.
    
    Filed Electronically31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications of CFO.
    
    Filed Electronically32
    
    Section 1350 Certifications.
    
    Filed Electronically