<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 September 30, 2004

                                       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 [ ]

      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 -
1,920,134 shares outstanding as of October 18, 2004.

      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 September 30, 2004 (unaudited) and December 31, 2003             3

                       Statements of Operations
                       for the Three Months and Nine Months Ended September 30, 2004
                       and 2003 (unaudited)                                                   4

                       Statements of Cash Flows
                       for the Nine Months Ended September 30, 2004 and 2003 (unaudited)      5

                       Notes to Financial Statements (unaudited)                              6

Item 2.                Management's Discussion and Analysis
                       of Financial Condition and Results of
                       Operations                                                             9

Item 3.                Controls and Procedures                                               13

PART II.             OTHER INFORMATION                                                       14

                     SIGNATURES                                                              15
</TABLE>

                                       2
<PAGE>

                         PART I -- FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

IKONICS CORPORATION
BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                     SEPTEMBER 30
                                                                                         2004       DECEMBER 31
                                                                                      (UNAUDITED)      2003
                                                                                     ------------   -----------
<S>                                                                                  <C>            <C>
ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                                         $  2,617,021   $ 1,507,794
   Marketable securities                                                                  150,043       221,907
   Trade receivables, less allowance for doubtful accounts of
     $100,000                                                                           1,792,026     1,859,480
   Inventories                                                                          2,035,424     1,807,233
   Prepaid expenses and other assets                                                       61,689        73,260
   Deferred taxes                                                                         128,000       128,000
                                                                                     ------------   -----------
           Total current assets                                                         6,784,203     5,597,674

PROPERTY, PLANT, AND EQUIPMENT, at cost:
   Land, building and leasehold improvements                                            1,501,743     1,406,377
   Machinery and equipment                                                              2,399,194     2,337,166
   Office equipment                                                                     1,219,621     1,185,098
   Vehicles                                                                               175,406       191,628
                                                                                     ------------   -----------
                                                                                        5,295,964     5,120,269

   Less accumulated depreciation                                                        4,220,680     4,010,110
                                                                                        1,075,284     1,110,159

INTANGIBLE ASSETS, less accumulated amortization of $106,474 in
    2004 and $85,154 in 2003                                                              291,028       308,017

DEFERRED TAXES                                                                             66,000        66,000

OTHER ASSETS                                                                              112,834       112,834
                                                                                     ------------   -----------

                                                                                     $  8,329,349   $ 7,194,684
                                                                                     ============   ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable                                                                  $    511,579   $   264,744
   Accrued compensation                                                                   308,500       227,318
   Other accrued expenses                                                                 238,989       207,506
   Income taxes payable                                                                    72,208       126,766
                                                                                     ------------   -----------
           Total current liabilities                                                    1,131,276       826,334

CONTINGENCIES

 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 1,919,634 shares in 2004 and 1,872,
   190 shares in 2003 (adjusted for the 3-for-2 stock split described below)              191,963       187,219
   Additional paid-in capital                                                           1,384,711     1,207,083
   Retained earnings                                                                    5,627,617     4,987,311
   Accumulated other comprehensive loss                                                    (6,218)      (13,263)
                                                                                     ------------   -----------
         Total stockholders' equity                                                     7,198,073     6,368,350
                                                                                     ------------   -----------
                                                                                     $  8,329,349   $ 7,194,684
                                                                                     ============   ===========
</TABLE>

See notes to financial statements.

                                       3
<PAGE>

IKONICS CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                         THREE MONTHS                       NINE MONTHS
                                                      ENDED SEPTEMBER 30                  ENDED SEPTEMBER 30
                                                ------------------------------      -------------------------------
                                                   2004               2003              2004              2003
<S>                                             <C>               <C>               <C>              <C>
SALES                                           $3,324,135        $ 3,061,503       $  10,390,348    $    9,053,881
COSTS AND EXPENSES:
   Cost of goods sold                            1,844,447          1,666,991           5,724,791         4,981,928
   Selling, general, and administrative          1,073,879          1,067,735           3,390,204         3,121,686
   Research and development                        136,060            149,239             430,790           492,461
                                                ----------        -----------       -------------    --------------
                                                 3,054,386          2,883,965           9,545,785         8,596,075
                                                ----------        -----------       -------------    --------------

INCOME FROM OPERATIONS                             269,749            177,538             844,563           457,806

LOSS ON INVESTMENT                                       -                  -                   -           (74,666)
INTEREST INCOME                                      9,158             12,161              25,037            27,827
                                                ----------        -----------       -------------    --------------

INCOME BEFORE INCOME TAXES                         278,907            189,699             869,600           410,967

FEDERAL AND STATE INCOME
     TAX EXPENSE                                    73,672             50,858             229,294            85,968
                                                ----------        -----------       -------------    --------------

NET INCOME                                      $  205,235        $   138,841       $     640,306    $      324,999
                                                ==========        ===========       =============    ==============
EARNINGS PER COMMON SHARE (1):
   Basic                                         $    0.11        $      0.07       $        0.34    $         0.17
                                                 =========        ===========       =============    ==============

   Diluted                                       $    0.10        $      0.07       $        0.32    $         0.17
                                                 =========        ===========       =============    ==============

WEIGHTED AVERAGE COMMON SHARES
     ASSUMED OUTSTANDING (1):
   Basic                                         1,910,851          1,872,190           1,901,140         1,872,190
                                                ==========         ==========       =============    ==============

   Diluted                                       2,014,707          1,900,446           2,008,202         1,888,131
                                                ==========         ==========       =============    ==============
</TABLE>

See notes to financial statements.

(1) Retroactively adjusted for the 3-for-2 stock split approved by the Company's
Board of Directors on April 29, 2004, as if it happened on the earliest date
presented.

                                       4
<PAGE>

IKONICS CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
                                                         NINE MONTHS
                                                      ENDED SEPTEMBER 30
                                                -----------------------------
                                                    2004            2003
<S>                                             <C>             <C>
CASH FLOWS FROM OPERATING
     ACTIVITIES:
   Net income                                   $    640,306    $     324,999
   Adjustments to reconcile net income to net
       cash provided by operating activities:
     Depreciation                                    261,863          229,760
     Amortization                                     21,320           17,852
     Gain on sale of property and equipment                -           (5,500)
     Loss on investment                                    -           74,666
     Deferred Income Tax                                   -          (55,000)
     Provision for doubtful accounts                   1,185          131,324
     Changes in working capital components:
       Decrease (increase) in:
         Trade receivables                            66,269         (192,780)
         Inventories                                (228,191)          58,938
         Prepaid expenses and other assets            11,571           35,163
       (Decrease) increase in:
         Accounts payable                            246,835           64,169
         Accrued expenses                            112,665           88,528
         Income taxes payable                        (54,558)         289,860
                                                ------------    -------------
           Net cash provided by
              operating activities                 1,079,265        1,061,979

CASH FLOWS FROM INVESTING
     ACTIVITIES:
   Purchase of property and equipment               (226,988)        (160,337)
   Proceeds on sale of property and equipment                           5,500
   Purchase of intangibles                            (4,331)         (32,936)
   Purchase of marketable securities                       -           (8,006)
   Proceeds from sales of marketable securities       78,909                -
                                                ------------    -------------
           Net cash used in investing
                 activities                         (152,410)        (195,779)

CASH FLOWS FROM FINANCING
     ACTIVITIES:
   Proceeds from exercise of stock options           182,372                -
                                                ------------    -------------

NET INCREASE IN CASH
   AND CASH EQUIVALENTS                            1,109,227          866,200

CASH AND CASH EQUIVALENTS AT
   BEGINNING OF PERIOD                             1,507,794          384,107
                                                ------------    -------------

CASH AND CASH EQUIVALENTS AT
   END OF PERIOD                                $  2,617,021    $   1,250,307
                                                ============    =============

SUPPLEMENTAL DISCLOSURES OF
     CASH FLOW INFORMATION:
     Income taxes paid (refunded)               $    283,288    $    (148,892)
                                                ============    =============
</TABLE>

See notes to financial statements.

                                       5
<PAGE>

                               IKONICS CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

                                   (Unaudited)

1.    Notes to Financial Statements

      The balance sheet of IKONICS Corporation (the "Company") as of September
      30, 2004, and the related statements of operations for the three and nine
      months ended September 30, 2004 and 2003, and cash flows for the nine
      months ended September 30, 2004 and 2003, 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 September 30,
      2004, 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, 2003.

      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 September 30, 2004 and December 31,
      2003 are as follows:

<TABLE>
<CAPTION>
                        Sep 30, 2004   Dec 31, 2003
                        ------------   ------------
<S>                     <C>            <C>
Raw materials           $  1,162,841   $    928,949
Work-in-progress             277,455        231,269
Finished goods               882,032        911,419
Reduction to LIFO cost      (286,904)      (264,404)
                        ------------   ------------

Total Inventory         $  2,035,424   $  1,807,233
                        ============   ============
</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 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 options, had been issued.

                                       6
<PAGE>

      Shares (adjusted for the 3-for-2 stock split that occurred on April 29,
      2004 for all periods presented) used in the calculation of diluted EPS are
      summarized below:

<TABLE>
<CAPTION>
                                                                                  Three Months Ended
                                                                             Sep 30, 2004     Sep 30, 2003
                                                                             ------------     ------------
<S>                                                                          <C>              <C>
Weighted average common shares outstanding                                      1,910,851        1,872,190
Dilutive effect of stock options                                                  103,856           28,256
                                                                             ------------     ------------
Weighted average common and common equivalent shares outstanding                2,014,707        1,900,446
                                                                             ============     ============
</TABLE>

<TABLE>
<CAPTION>
                                                                                   Nine Months Ended
                                                                             Sep 30, 2004     Sep 30, 2003
                                                                             ------------     ------------
<S>                                                                          <C>              <C>
Weighted average common shares outstanding                                      1,901,140        1,872,190
Dilutive effect of stock options                                                  107,062           15,941
                                                                             ------------     ------------
Weighted average common and common equivalent shares outstanding                2,008,202        1,888,131
                                                                             ============     ============
</TABLE>

      Options to purchase 207,052 and 250,512 shares of common stock were
      outstanding during the quarters ended September 30, 2004 and 2003,
      respectively.

4.    Employee Stock Plans

      The Company has a stock-based compensation plan. The Company accounts for
      this plan under the recognition and measurement principles of APB Opinion
      No. 25, Accounting for Stock Issued to Employees, and related
      interpretations. Accordingly, no stock-based employee compensation cost
      has been recognized, as all options granted under this plan had an
      exercise price equal to the market value of the underlying common stock on
      the date of grant. The following table illustrates the effect on net
      income and earnings per share (adjusted for the 3-for-2 stock split) had
      compensation cost for the stock-based compensation plan been determined
      based on the grant date fair values of awards (the method described in
      FASB Statement No. 123, Accounting for Stock-Based Compensation):

<TABLE>
<CAPTION>
                                           Three Months Ended Sep 30    Nine Months Ended Sep 30
                                           -------------------------   -------------------------
                                              2004          2003           2004         2003
                                              ----          ----           ----         ----
<S>                                        <C>           <C>           <C>           <C>
Net income:
  As reported                              $   205,235   $   138,841   $   640,306   $   324,999

 Deduct total stock-based employee
 compensation expense determined under
 fair value based method for all awards,
 net of tax                                      7,377        31,572        22,132        64,511
                                           -----------   -----------   -----------   -----------
 Pro forma                                 $   197,858   $   107,269   $   618,174   $   260,488
                                           ===========   ===========   ===========   ===========

Basic earnings per share:
 As reported                               $      0.11   $      0.07   $      0.34   $      0.17
 Pro forma                                 $      0.10   $      0.06   $      0.33   $      0.14

 Diluted earnings per share:
   As reported                             $      0.10   $      0.07   $      0.32   $      0.17
   Pro forma                               $      0.10   $      0.06   $      0.31   $      0.14
</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 agreement. Estimated
      amortization expense for each of the next five years is $28,000 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.

                                       7
<PAGE>

6.    Stock Split

      On April 29, 2004, the Company's Board of Directors approved the issuance
      of additional shares necessary to effect a 3-for-2 stock split in the form
      of a 50 percent stock dividend payable on May 13, 2004 to shareholders of
      record on May 6, 2004. Stockholders equity, share and per share amounts,
      including shares to be issued under the stock-based compensation plan have
      been retroactively adjusted to reflect the 3-for-2 stock split as if it
      occurred on the earliest date presented.

                                       8
<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 third quarter of 2004, the nine months ended September 30,
2004 and the same periods of 2003. 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 effective 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 amount and use of planned
            capital expenditures and that capital expenditures will be funded
            with cash generated from operating activities--These expectations
            may be affected by changes in the Company's anticipated capital
            expenditure requirements resulting from unforeseen required
            maintenance or repairs or from other unexpected events. 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 and changes in regulatory
            and competitive conditions or a change in the amount or geographic
            focus of the Company's international sales.

      -     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

                                       9
<PAGE>

            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 operating results, or the inability to
            identify attractive acquisition targets or other business
            opportunities.

CRITICAL ACCOUNTING POLICIES

      The Company prepares the 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. The concentration of credit
risk is not significant except for receivables from two of the Company's larger
customers. One of these customers accounts for 10.5% of total receivables as of
September 30, 2004, while the other customer accounts for 9.4% of total
receivables as of September 30, 2004.

      Inventories. 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 September 30, 2004, the Company had approximately
$194,000 of deferred tax assets. The deferred tax assets result primarily from
timing differences in intangible assets and property and equipment. The Company
has recorded a $46,000 valuation allowance to reserve for items for which the
likelihood of realization is in question. The Company has determined that it is
more likely than not that the remaining deferred tax assets 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 SEPTEMBER 30, 2004 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2003

      Sales. The Company realized significant sales growth during the third
quarter of 2004 with sales of $3.3 million, which was 8.6% higher than the $3.1
million in sales during the same period in 2003. All areas and product groups
experienced growth. The sales increase was aided by new products, economic
growth in Asia and North America, and an increasing market share.

                                       10
<PAGE>

      Cost of Goods Sold. Cost of goods sold during the third quarter of 2004
was $1.8 million, or 55.5% of sales, compared to $1.7 million, or 54.5% of
sales, during the same period in 2003. The increase in the cost of sales in the
third quarter of 2004 as a percentage of sales reflects a slightly less
favorable product mix and price increases for some raw materials.

      Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the third quarter of 2004 were $1.1 million, or
32.3% of sales, compared to $1.1 million, or 34.9% of sales, for the third
quarter of 2003. Selling, general, and administrative expenses for the third
quarter 2004 compared to the third quarter of 2003 reflect lower bad debt
expense offset by higher advertising and payroll expenses.

      Research and Development Expenses. Research and development expenses
during the third quarter of 2004 were $136,000, or 4.1% of sales, versus
$149,000, or 4.9% of sales, for the same period in 2003. The reduction was due
to lower research and development payroll expenses.

      Interest Income. Interest income for the third quarter of 2004 was $9,000
compared to $12,000 for the same period in 2003. The interest income decrease
was primarily due to a lower rate of return. Interest is earned primarily from
government obligation revenue bonds of various municipalities and school
districts in the State of Minnesota.

      Income Taxes. Income taxes were $74,000, or an effective rate of 26%,
during the third quarter of 2004, versus income taxes of $51,000, or an
effective rate of 27%, for the third quarter of 2003.

NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2003

      Sales. The Company realized a 15% increase in sales during the first nine
months of 2004 compared to the same period in 2003. Sales during the first nine
months of 2004 were $10.4 million compared to $9.1 million during the first nine
months of 2003. New products, increasing market share, a strong Euro and
economic growth in Asia and North America all contributed to the sales increase.

      Cost of Goods Sold. Cost of goods sold during the first nine months of
2004 was $5.7 million, or 55.1% of sales, compared to $5.0 million, or 55.0% of
sales, during the same period in 2003. The slight increase in cost of sales
reflects price increases for some raw materials during the second and third
quarter partially offset by improved margins during the first quarter.

      Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $3.4 million, or 32.6% of sales, in the
first nine months of 2004, from $3.1 million, or 34.5% of sales, for the same
period in 2003. The amount of these expenses in the first nine months of 2004
reflects higher payroll related expenses. Professional service expenses related
to external reporting and compliance, along with some technical consulting, were
also higher in the first nine months of 2004. These expenses were partially
offset by lower bad debt expense during the first nine months of 2004.

      Loss on Investment. The Company wrote down the value of its investment in
Apprise Technologies by $74,666 in the second quarter of 2003. This resulted
from the offering price for shares of Apprise Technologies being below the value
carried on the Company's books and the determination that the decline is other
than temporary.

      Research and Development Expenses. Research and development expenses
during the first nine months of 2004 were $431,000, or 4.1% of sales, versus
$492,000, or 5.4% of sales, for the same period in 2003. The reduction was due
to the expiration of a service contract with an outside contractor.

      Interest Income. Interest income was $25,000 for the first nine months of
2004 compared to $28,000 for the first nine months of 2003. The interest income
decrease was primarily due to a lower rate of return

                                       11
<PAGE>

      Income Taxes. Income taxes were $229,000, or an effective rate of 26%,
during the first nine months of 2004 compared to $86,000, or an effective rate
of 21%, for the first nine months of 2003. The lower effective tax rate during
the first nine months of 2003 relates to a higher level of tax benefits during
that period from the extraterritorial income exclusion on foreign sales.

LIQUIDITY AND CAPITAL RESOURCES

      The Company has financed its operations principally with funds generated
from operations. 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 $2,617,000 and $1,250,000 at September 30,
2004 and 2003, respectively. The Company generated $1,079,000 in cash from
operating activities during the nine months ended September 30, 2004, compared
to generating $1,062,000 in cash from operating activities during the nine month
period ended September 30, 2003. The increase in cash provided by operating
activities was primarily due to higher net income in 2004. Cash provided by
operating activities is primarily the result of adjusting net income for
non-cash depreciation, amortization, gain/loss on sale of assets, provision for
doubtful accounts, and certain changes in working capital components.

      During the first nine months of 2004, trade receivables decreased by
$66,000. The decrease in receivables was driven by increased collections
partially offset by higher sales. 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 increased $228,000 due to increased raw
materials for the Company's Accuart and Accublack products necessary to support
sales growth. Prepaid expenses and other assets increased $12,000 reflecting the
timing of annual insurance premiums. Accounts payable increased $247,000,
reflecting the timing of payments for inventory to suppliers. Accrued expenses
increased $112,000 due to the timing of payroll expenses related payments.
Income taxes payable decreased $55,000 due to the payment of 2003 taxes during
the first half of 2004.

      The Company used $152,000 and $196,000 in cash for investing activities
during the nine months ended September 30, 2004 and 2003, respectively. During
the first nine months of 2004, the Company purchased $227,000 in plant equipment
upgrades to improve efficiency and safety, reduce operating costs, and update
facilities. The Company also incurred $4,000 in patent application costs that it
records as an asset and amortizes upon successful completion of the application
process. The Company received $79,000 during the first nine months of 2004 from
the sale of marketable securities. During the first nine months of 2003, the
Company purchased $160,000 in capital equipment and business software and
incurred $33,000 in patent application costs.

      During the first nine months of 2004, $182,000 in proceeds from financing
activities was received from 47,477 shares of common stock issued upon 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 2.25 percentage points over the
30-day LIBOR rate. The Company did not utilize this line of credit during the
quarter ended September 30, 2004 and there was no debt outstanding under this
line as of September 30, 2004.

      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

      As discussed above, during the nine months ended September 30, 2004, the
Company spent $227,000 on capital expenditures. This spending consisted of plant
equipment upgrades to improve efficiency and safety, reduce operating costs, and
update facilities.

                                       12
<PAGE>

      Plans for additional capital expenditures of approximately $60,000 during
the remainder of 2004 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. Total 2004 planned expenditures are expected to be more than 2003
capital expenditures and are expected to be funded with cash generated from
operating activities.

INTERNATIONAL ACTIVITY

      The Company markets its products to over 80 countries in North America,
Europe, Latin America, Asia and other parts of the world. Foreign sales were
approximately 31% of total sales for the three months ended September 30, 2004
and 31% of total sales for the three months ended September 30, 2003. Sales to
foreign markets were 32% for the nine months ended September 30, 2004 and 31%
for the same period in 2003. 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 and are made primarily
in dollars and Euros. The Company believes its vulnerability to uncertainties
due to foreign currency fluctuations and general economic conditions in foreign
countries is not significant.

      Substantially all of the Company's foreign transactions are negotiated,
invoiced and paid in U.S. dollars or 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 September 30,
2004.

FUTURE OUTLOOK

      IKONICS has invested on average over 6% of its sales dollars for the past
several 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 undertaken to expand the Company's business may
include acquisitions, building expansion and additions, equipment additions, new
product development and pursuit of 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
controls 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.

                                       13
<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 September 30, 2004:

<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)

10.2                Form of Incentive Stock Option Agreement for use with the
                    IKONICS Corporation 1995 Stock Incentive Plan, as amended

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).

                                       14
<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: November 12, 2004               By: /s/ Jon Gerlach
                                        ------------------------------------
                                          Jon Gerlach,
                                           Chief Financial Officer, and
                                           Vice President of Finance

                                       15
<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

10.2           Form of Incentive Stock Option Agreement for use with
               the IKONICS Corporation 1995 Stock Incentive Plan, as amended.............  Filed Electronically

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>