<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, 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 - 1,914,442 shares outstanding as of July 19, 2004.

             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, 2004 (unaudited) and December 31, 2003                               3

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

                       Statements of Cash Flows
                       for the Six Months Ended June 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                                                                            16
</TABLE>

                                       2

<PAGE>

                         PART I -- FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

IKONICS CORPORATION
BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                           JUNE 30      DECEMBER 31
                                                                             2004          2003
                                                                         (UNAUDITED)
<S>                                                                      <C>            <C>
ASSETS

CURRENT ASSETS:

   Cash and cash equivalents                                             $  2,076,738   $ 1,507,794
   Marketable securities                                                      150,101       221,907
   Trade receivables, less allowance for doubtful accounts of
     $100,000                                                               2,015,959     1,859,480
   Inventories                                                              1,961,301     1,807,233
   Prepaid expenses and other assets                                          125,367        73,260
   Deferred taxes                                                             128,000       128,000
                                                                         ------------   -----------
           Total current assets                                             6,457,466     5,597,674

PROPERTY, PLANT, AND EQUIPMENT, at cost:
   Land, building and leasehold improvements                                1,482,978     1,406,377
   Machinery and equipment                                                  2,394,571     2,237,166
   Office equipment                                                         1,219,620     1,185,098
   Vehicles                                                                   191,628       191,628
                                                                         ------------   -----------
                                                                            5,288,797     5,120,269

   Less accumulated depreciation                                            4,186,034     4,010,110
                                                                         ------------   -----------
                                                                            1,102,763     1,110,159

INTANGIBLE ASSETS, less accumulated amortization of $99,367 in
    2004 and $85,154 in 2003                                                  297,546       308,017

DEFERRED TAXES                                                                 66,000        66,000

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

                                                                         $  8,036,609   $ 7,194,684
                                                                         ============   ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable                                                      $    556,946   $   264,744
   Accrued compensation                                                       228,346       227,318
   Other accrued expenses                                                     231,903       207,506
   Income taxes payable                                                        45,436       126,766
                                                                         ------------   -----------
           Total current liabilities                                        1,062,631       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 1,914,242 shares in 2004 and 1,872,190
     shares in 2003 (adjusted for the 3-for-2 stock split
     described below)                                                         191,424       187,219
   Additional paid-in capital                                               1,368,614     1,207,083
   Retained earnings                                                        5,422,382     4,987,311
   Accumulated other comprehensive loss                                        (8,442)      (13,263)
                                                                         ------------   -----------
         Total stockholders' equity                                         6,973,978     6,368,350
                                                                         ------------   -----------
                                                                         $  8,036,609   $ 7,194,684
                                                                         ============   ===========
</TABLE>

See notes to financial statements.

                                       3
<PAGE>

IKONICS CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                         THREE MONTHS                         SIX MONTHS
                                                         ENDED JUNE 30                       ENDED JUNE 30
                                                ------------------------------      -------------------------------
                                                   2004               2003              2004              2003
<S>                                             <C>               <C>               <C>              <C>
SALES                                           $3,683,415        $ 3,161,731       $   7,066,213    $    5,992,378

COSTS AND EXPENSES:
   Cost of goods sold                            1,992,264          1,689,079           3,880,344         3,314,937
   Selling, general, and administrative          1,187,869          1,050,256           2,316,325         2,053,951
   Research and development                        144,210            174,898             294,730           343,222
                                                ----------        -----------       -------------    --------------
                                                 3,324,343          2,914,233           6,491,399         5,712,110
                                                ----------        -----------       -------------    --------------

INCOME FROM OPERATIONS                             359,072            247,498             574,814           280,268

LOSS ON INVESTMENT                                       -            (74,666)                  -           (74,666)
INTEREST INCOME                                     11,996              2,778              15,879            15,666
                                                ----------        -----------       -------------    --------------

INCOME BEFORE INCOME TAXES                         371,068            175,610             590,693           221,268

FEDERAL AND STATE INCOME
     TAX EXPENSE                                    96,655             19,131             155,622            35,111
                                                ----------        -----------       -------------    --------------

NET INCOME                                      $  274,413        $   156,479       $     435,071    $      186,157
                                                ==========        ===========       =============    ==============

EARNINGS PER COMMON SHARE (1):
   Basic                                        $     0.14         $     0.08       $        0.23    $         0.10
                                                ==========         ==========       =============    ==============

   Diluted                                      $     0.14         $     0.08       $        0.22    $         0.10
                                                ==========         ==========       =============    ==============

WEIGHTED AVERAGE COMMON SHARES
     ASSUMED OUTSTANDING (1):
   Basic                                         1,906,869          1,872,190           1,892,504         1,872,190
                                                ==========        ===========       =============    ==============

   Diluted                                       2,016,595          1,881,449           2,004,158         1,879,606
                                                ==========        ===========       =============    ==============
</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>
                                                              SIX MONTHS
                                                              ENDED JUNE 30
                                                     -----------------------------
                                                          2004              2003
<S>                                                  <C>             <C>
CASH FLOWS FROM OPERATING
     ACTIVITIES:
   Net income                                        $    435,071    $     186,157
   Adjustments to reconcile net income to net
       cash provided by operating activities:
     Depreciation                                         175,924          143,875
     Amortization                                          14,213           11,902
     Gain on sale of property and equipment                     -           (5,500)
     Loss on investment                                         -           74,666
     Provision for doubtful accounts                        8,945           50,000
     Changes in working capital components:
       Decrease (increase) in:
         Trade receivables                               (165,424)        (179,728)
         Inventories                                     (154,067)        (152,335)
         Prepaid expenses and other assets                (52,108)          23,678
       (Decrease) increase in:
         Accounts payable                                 292,202          288,445
         Accrued expenses                                  25,425          (11,298)
         Income taxes payable                             (81,330)         127,083
                                                     ------------    -------------
           Net cash provided by
              operating activities                        498,851          556,945

CASH FLOWS FROM INVESTING
     ACTIVITIES:
   Purchase of property and equipment                    (168,528)         (92,145)
    Proceeds on sale of plant and equipment                                  5,500
   Purchase of intangibles                                 (3,742)         (27,119)
   Purchase of marketable securities                            -           (4,235)
   Proceeds from sales of marketable securities            76,628                -
                                                     ------------    -------------
           Net cash used in investing
                 activities                               (95,643)        (119,199)

CASH FLOWS FROM FINANCING
     ACTIVITIES:
   Proceeds from exercise of stock options                165,736                -
                                                     ------------    -------------

NET INCREASE IN CASH
   AND CASH EQUIVALENTS                                   568,944          437,746

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

CASH AND CASH EQUIVALENTS AT
   END OF PERIOD                                     $  2,076,738    $     821,853
                                                     ============    =============

SUPPLEMENTAL DISCLOSURES OF
     CASH FLOW INFORMATION:
     Income taxes paid                               $    236,388    $      21,480
                                                     ============    =============
</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 June 30,
         2004, and the related statements of operations for the three and six
         months ended June 30, 2004 and 2003, and cash flows for the six months
         ended June 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 June 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 June 30, 2004 and December 31,
         2003 are as follows:

<TABLE>
<CAPTION>
                                   June 30, 2004     Dec 31, 2003
                                   -------------     ------------
<S>                                <C>               <C>
Raw materials                      $ 1,052,339        $  928,949
Work-in-progress                       269,757           231,269
Finished goods                         918,609           911,419
Reduction to LIFO cost                (279,404)         (264,404)
                                   -----------        ----------

Total Inventory                    $ 1,961,301        $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 during the quarter. Diluted EPS is
         similar to Basic except that the weighted average of common shares
         outstanding is increased to include the number of additional common
         shares that would have been outstanding if the dilutive potential
         common shares, such as options, had been issued.

                                       6
<PAGE>

         Shares (adjusted for the 3-for-2 stock split for all periods presented)
         used in the calculation of diluted EPS are summarized below:

<TABLE>
<CAPTION>
                                                                                  Three Months Ended
                                                                             Jun 30, 2004     Jun 30, 2003
                                                                             ------------     ------------
<S>                                                                          <C>              <C>
Weighted average common shares outstanding                                      1,906,869        1,872,190
Dilutive effect of stock options                                                  109,726            9,259
                                                                             ------------     ------------
Weighted average common and common equivalent shares outstanding                2,016,595        1,881,449
                                                                             ============     ============
</TABLE>

<TABLE>
<CAPTION>
                                                                                    Six Months Ended
                                                                              Jun 30, 2004     Jun 30, 2003
                                                                             -------------     ------------
<S>                                                                          <C>              <C>
Weighted average common shares outstanding                                      1,892,504        1,872,190
Dilutive effect of stock options                                                  111,654            7,416
                                                                             ------------     ------------
Weighted average common and common equivalent shares outstanding                2,004,158        1,879,606
                                                                             ============     ============
</TABLE>

         Options to purchase 211,918 and 242,412 shares of common stock were
         outstanding during the quarter ended June 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>
                                                   Six Months Ended         Three Months Ended
                                              June 30,       June 30,     June 30,        June 30,
                                               2004            2003        2004             2003
                                            -----------     ---------    ---------       ----------
<S>                                         <C>             <C>          <C>             <C>
Net income:

 As reported                                $   435,071     $ 186,157    $ 274,413       $  156,479

 Deduct total stock-based employee               14,755        32,939        5,890           18,560
                                            -----------     ---------    ---------       ----------
 compensation expense determined under
 fair value based method for all awards,
 net of tax Pro forma                       $   420,316     $ 153,218    $ 268,523       $  137,919
                                            ===========     =========    =========       ==========

Basic earnings per share:
 As reported                                $      0.23     $    0.10    $    0.14       $     0.08
 Pro forma                                  $      0.22     $    0.08    $    0.14       $     0.07

 Diluted earnings per share:
   As reported                              $      0.22     $    0.10    $    0.14       $     0.08
   Pro forma                                $      0.21     $    0.08    $    0.13       $     0.07
</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 day 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 second quarter of 2004, the six months ended June 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
                  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 10.0% of total receivables as of
June 30, 2004 while the other customer accounts for 9.7% of total receivables as
of June 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 June 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 JUNE 30, 2004 COMPARED TO QUARTER ENDED JUNE 30, 2003

         Sales. The Company realized significant sales growth during the second
quarter of 2004 with sales of $3.7 million, which was 16% higher than the $3.2
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, increasing market share, and a strong Euro.

                                       10
<PAGE>

         Cost of Goods Sold. Cost of goods sold during the second quarter of
2004 was $2.0 million, or 54.1% of sales, compared to $1.7 million, or 53.4% of
sales, during the same period in 2003. The increase in the cost of sales in the
second 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 increased to $1.2 million, or 32.2% of sales, in the
second quarter of 2004, from $1.1 million, or 33.2% of sales, for the same
period in 2003. The amount of these expenses in the second quarter of 2004
reflects higher payroll related expenses and increased professional service
expenses related to financial reporting and compliance.

         Research and Development Expenses. Research and development expenses
during the second quarter of 2004 were $144,000, or 3.9% of sales, versus
$175,000, or 5.5% of sales, for the same period in 2003. The reduction is due to
the expiration of a service contract with an outside contractor.

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

         Interest Income. Interest income for the second quarter of 2004 was
$12,000 compared to $3,000 for the same period in 2003. The interest income
increase is primarily due to a larger investment balance. 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 $97,000, or an effective rate of 26%,
during the second quarter of 2004, versus income taxes of $19,000, or an
effective rate of 12%, for the second quarter of 2003. The lower effective tax
rate during the second quarter of 2003 relates to a higher level of tax benefits
during that period from the extraterritorial income exclusion on foreign sales.

SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2003

         Sales. The Company's realized an 18% increase in sales during the first
six months of 2004 compared to the same period in 2003. Sales during the first
half of 2004 were $7.1 million compared to $6.0 million during the first half 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 half of 2004
was $3.9 million, or 54.9% of sales, compared to $3.3 million, or 55.3% of
sales, during the same period in 2003. The reduction in cost of sales reflects
the improved margins during the first quarter, partially offset by price
increases for some raw materials during the second quarter.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $2.3 million, or 32.7% of sales, in the
first half of 2004, from $2.1 million, or 34.3% of sales, for the same period in
2003. The amount of these expenses in the first half 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 half of 2004.

         Loss on Investment. The Company wrote down the value of its investment
in Apprise by $74,666 in the second quarter of 2003. This resulted from the
offering price for shares of Apprise 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 half of 2004 were $294,000, or 4.2% of sales, versus $343,000,
or 5.7% of sales, for the same period in 2003. The reduction is due to the
expiration of a service contract with an outside contractor.

                                       11
<PAGE>

         Interest Income. Interest income was $16,000 for the first half of 2004
and the first half of 2003.

         Income Taxes. Income taxes were $156,000, or an effective rate of 26%,
during the first half of 2004 compared to $35,000, or an effective rate of 16%,
for the first half of 2003. The lower effective tax rate during the first six
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 $2,077,000 and $822,000 at June 30, 2004
and 2003, respectively. The Company generated $499,000 in cash from operating
activities during the six months ended June 30, 2004, compared to generating
$557,000 in cash from operating activities during the six month period ending
June 30, 2003. The decrease in cash provided by operating activities is
primarily due to unfavorable changes in working capital components partially
offset by higher net income. Cash provided by operating activities is primarily
the result of adjusting net income for non-cash depreciation, amortization, loss
on investment, provision for doubtful accounts, and certain changes in working
capital components.

         During the first six months of 2004, trade receivables increased by
$165,000. The increase in receivables was driven by higher sales partially
offset by increased 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 increased $154,000 due to increased raw
materials for the Company's Accuart and Accublack products. Prepaid expenses and
other assets increased $52,000 reflecting the timing of annual insurance
premiums. Accounts payable increased $292,000, reflecting timing of payments for
inventory to suppliers. Accrued expenses increased $25,000. Income taxes payable
decreased $81,000 due to the payment of 2003 taxes during the first half of
2004.

         The Company used $96,000 and $119,000, in cash for investing activities
during the six months ended June 30, 2004 and 2003, respectively. During the
first six months of 2004, the Company purchased $169,000 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 $77,000 during the first six months of 2004 from
the sale of marketable securities. During the first six months of 2003, the
Company purchased $92,000 in capital equipment and business software and
incurred $27,000 in patent application costs.

         During the first half of 2004, $166,000 in proceeds from financing
activities was received from 42,052 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 June 30, 2004 and there was no debt outstanding under
this line as of June 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.

                                       12
<PAGE>

CAPITAL EXPENDITURES

         As discussed above, during the six months ended June 30, 2004, the
Company spent $169,000 on capital expenditures. This spending consisted of plant
equipment upgrades to improve efficiency and safety, reduce operating costs, and
update facilities.

         Plans for additional capital expenditures of approximately $100,000
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 33% of total sales for the three months ended June 30, 2004 and
30% of total sales for the three months ended June 30, 2003. Sales to foreign
markets were 33% for the six months ended June 30, 2004 and 30% for the same
period in 2003. Foreign sales in 2004 reflect higher sales to India.
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 June 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.           CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF
                  EQUITY SECURITIES

                  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 29, 2004. 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 Against
                                     ---------       -------------
<S>                                  <C>             <C>
Charles H. Andresen                  1,091,865           43,370
David O. Harris                      1,129,485            5,750
Gerald W. Simonson                   1,129,485            5,750
William C. Ulland                    1,123,055           12,180
Rondi Erickson                       1,129,185            6,050
H. Leigh Severance                   1,129,485            5,750
</TABLE>

         The shareholders elected to amend the Company's 1995 Stock Incentive
Plan by extending the expiration date from February 26, 2005 to February 22,
2014, reserving 25,000 additional shares of Common Stock for future awards and
removing the restriction on the aggregate number of shares that may be issued to
any one participant. The shareholders present in person or by proxy cast the
following numbers of votes in connection with the amendments to the 1995 Stock
Incentive Plan, resulting in the approval of all amendments:

<TABLE>
<CAPTION>
                                               Broker
Votes For     Votes Against     Abstain      Non-Votes
---------     -------------     -------      ---------
<S>           <C>               <C>          <C>
 595,754          81,790         4,445        453,246
</TABLE>

ITEM 5.           OTHER INFORMATION

                  None

                                       14
<PAGE>

ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K

                  (a)      EXHIBITS

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

10.1                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.

                  (b)      REPORTS ON FORM 8-K

         On April 22, 2004, the Company filed a Current Report on Form 8-K
including a press release announcing the Company's financial results for the
quarter ended March 31, 2004.

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

                                       15
<PAGE>

                               IKONICS CORPORATION

                                   SIGNATURES

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

                                            IKONICS CORPORATION

DATE: August 13, 2004                       By: /s/ Jon Gerlach
                                                --------------------------------
                                                Jon Gerlach,
                                                 Chief Financial Officer, and
                                                 Vice President of Finance

                                       16
<PAGE>

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit                                       Description                                            Page
-------                                       -----------                                            ----
<S>            <C>                                                                         <C>
3.1            Restated Articles of Incorporation of Company, as amended.................  Incorporated by reference
3.2            By-Laws of the Company, as amended........................................  Incorporated by reference
10.1           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>