##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-QSB
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2008
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period From _______________ to _______________.
 000-25727
 IKONICS CORPORATION
  Minnesota
    
    41-0730027(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. employer
identification no.)4832 Grand Avenue 
Duluth, Minnesota
    
    55807(Address of principal executive offices)
    
    (Zip code)(218) 628-2217Issuers telephone numberNot Applicable(Former name, former address and former fiscal year, if changed since last report)
 x o
 o x
  o x




---



##### 



IKONICS Corporation
  PAGE NO.PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Condensed Balance Sheets as of March 31, 2008 (unaudited) and December 31, 2007
    
        
    3Condensed Statements of Operations for the Three Months Ended March 31, 2008 and 2007 (unaudited)
    
        
    4Condensed Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007 (unaudited)
    
        
    5Notes to Condensed Financial Statements (unaudited)
    
        
    6Item 2.
    
    Management's Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    
    10Item 3.
    
    Controls and Procedures
    
        
    16PART II.
    
    OTHER INFORMATION
    
        
    17SIGNATURES
    
    
    
    18Certifications of CEOCertifications of CFOSection 1350 Certifications
  2




---



##### Table of Contents



ITEM 1. Financial Statements
 
 IKONICS CORPORATION
 BALANCE SHEETS
 March 31
    
    
    December 312008
    
    
    2007(unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    4,050,206
    
    
    $
    1,230,020Short-term investments
    
    
    675,000
    
    
    
    3,550,000Trade receivables, less allowances of $45,000
    
    
    2,126,803
    
    
    
    2,025,257Inventories
    
    
    2,212,809
    
    
    
    2,355,864Deposits, prepaid expenses and other assets
    
    
    302,610
    
    
    
    130,596Income tax refund receivable
    
    
    6,207
    
    
    
    Deferred income taxes
    
    
    24,000
    
    
    
    24,000Total current assets
    
    
    9,397,635
    
    
    
    9,315,737PROPERTY, PLANT, AND EQUIPMENT, at cost:Land and building
    
    
    1,745,750
    
    
    
    1,631,142Machinery and equipment
    
    
    2,709,766
    
    
    
    2,700,816Office equipment
    
    
    822,913
    
    
    
    812,120Vehicles
    
    
    223,094
    
    
    
    219,9645,501,523
    
    
    
    5,364,042Less accumulated depreciation
    
    
    4,098,150
    
    
    
    4,043,4511,403,373
    
    
    
    1,320,591INTANGIBLE ASSETS, less accumulated amortization of $226,448 in
2008 and $213,061 in 2007
    
    
    492,825
    
    
    
    479,888DEFERRED INCOME TAXES
    
    
    11,000
    
    
    
    11,000INVESTMENTS IN NON-MARKETABLE EQUITY SECURITIES
    
    
    855,201
    
    
    
    855,201$
    12,160,034
    
    
    $
    11,982,417LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    568,361
    
    
    $
    435,572Accrued compensation
    
    
    232,676
    
    
    
    347,691Other accrued expenses
    
    
    121,737
    
    
    
    148,149Income taxes payable
    
    
    
    
    
    
    5,291Total current liabilities
    
    
    922,774
    
    
    
    936,703STOCKHOLDERS EQUITY:Preferred stock, par value $.10 per share; authorized 250,000 shares; issued noneCommon stock, par value $.10 per share; authorized 4,750,000 shares;
issued and outstanding 2,063,485 in 2008 and 2,045,961 in 2007
    
    
    206,349
    
    
    
    204,596Additional paid-in capital
    
    
    2,208,497
    
    
    
    2,124,342Retained earnings
    
    
    8,822,414
    
    
    
    8,716,776Total stockholders equity
    
    
    11,237,260
    
    
    
    11,045,714$
    12,160,034
    
    
    $
    11,982,417
  3




---



##### Table of Contents



IKONICS CORPORATION
 STATEMENTS OF OPERATIONS (Unaudited)
 Three MonthsEnded March 312008
    
    
    2007NET SALES
    
    $
    3,780,848
    
    
    $
    3,507,767COSTS AND EXPENSES:Cost of goods sold
    
    
    2,151,793
    
    
    
    2,074,070Selling, general and administrative
    
    
    1,367,080
    
    
    
    1,231,092Research and development
    
    
    214,855
    
    
    
    206,2723,733,728
    
    
    
    3,511,434INCOME (LOSS) FROM OPERATIONS
    
    
    47,120
    
    
    
    (3,667
    )GAIN ON SALE OF NON-MARKETABLE
EQUITY SECURITIES
    
    
    
    
    
    
    55,159INTEREST INCOME
    
    
    43,675
    
    
    
    32,907INCOME BEFORE INCOME TAXES
    
    
    90,795
    
    
    
    84,399INCOME TAX BENEFIT
    
    
    (14,843
    )
    
    
    (54,698
    )NET INCOME
    
    $
    105,638
    
    
    $
    139,097EARNINGS PER COMMON SHARE:Basic
    
    $
    0.05
    
    
    $
    0.07Diluted
    
    $
    0.05
    
    
    $
    0.07WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:Basic
    
    
    2,051,605
    
    
    
    2,015,570Diluted
    
    
    2,069,129
    
    
    
    2,064,511
  4




---



##### Table of Contents



IKONICS CORPORATION
 STATEMENTS OF CASH FLOWS (Unaudited)
 Three MonthsEnded March 312008
    
    
    2007CASH FLOWS FROM OPERATING
ACTIVITIES:Net income
    
    $
    105,638
    
    
    $
    139,097Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation
    
    
    70,096
    
    
    
    61,178Amortization
    
    
    13,428
    
    
    
    13,428Excess tax benefits from share-based payment
arrangements
    
    
    (29,636
    )
    
    
    (2,785
    )Tax benefit from stock option exercise
    
    
    3,008
    
    
    
    10,793Stock based compensation
    
    
    3,279
    
    
    
    4,728Gain on sales of vehicles
    
    
    (1,725
    )
    
    
    (2,340
    )Gain on sale of non-marketable equity securities
    
    
    
    
    
    
    (55,159
    )Deferred income taxes
    
    
    
    
    
    
    9,000Changes in working capital components:Trade receivables
    
    
    (101,546
    )
    
    
    191,680Inventories
    
    
    143,055
    
    
    
    173,969Deposits, prepaid expenses and other assets
    
    
    (172,014
    )
    
    
    (91,575
    )Income tax refund receivable
    
    
    (6,207
    )
    
    
    (6,860
    )Accounts payable
    
    
    132,789
    
    
    
    42,484Accrued liabilities
    
    
    (141,427
    )
    
    
    (202,601
    )Income taxes payable
    
    
    24,345
    
    
    
    (91,665
    )Net cash provided by operating
activities
    
    
    43,083
    
    
    
    193,372CASH FLOWS FROM INVESTING
ACTIVITIES:Purchase of property and equipment
    
    
    (159,653
    )
    
    
    (81,836
    )Proceeds on sale of vehicles
    
    
    8,500
    
    
    
    6,500Purchase of intangibles
    
    
    (26,365
    )
    
    
    (24,162
    )Proceeds on sale of short-term investments
    
    
    2,875,000
    
    
    
    Proceeds on sale of non-marketable equity
securities
    
    
    
    
    
    
    252,618Net cash provided by investing activities
    
    
    2,697,482
    
    
    
    153,120CASH FLOWS FROM FINANCING ACTIVITIES:Excess tax benefits from share-based payment
arrangements
    
    
    29,636
    
    
    
    2,785Proceeds from exercise of stock options
    
    
    49,985
    
    
    
    25,599Net cash provided by financing
activities
    
    
    79,621
    
    
    
    28,384NET INCREASE IN CASH AND
CASH EQUIVALENTS
    
    
    2,820,186
    
    
    
    374,876CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD
    
    
    1,230,020
    
    
    
    253,186CASH AND CASH EQUIVALENTS AT
END OF PERIOD
    
    $
    4,050,206
    
    
    $
    628,062SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:Income taxes paid
    
    $
    7,861
    
    
    $
    68,528
  5




---



##### Table of Contents



IKONICS CORPORATION
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
         Mar 31, 2008
    
    Dec 31, 2007Raw materials
    
    $
    1,317,547
    
    
    $
    1,373,835Work-in-progress
    
    
    344,593
    
    
    
    296,998Finished goods
    
    
    1,195,095
    
    
    
    1,308,917Reduction to LIFO cost
    
    
    (644,426
    )
    
    
    (623,886
    )Total Inventory
    
    $
    2,212,809
    
    
    $
    2,355,864
    Three Months EndedMar 31, 2008
    
    
    Mar 31, 2007Weighted average common shares outstanding
    
    
    2,051,605
    
    
    
    2,015,570Dilutive effect of stock options
    
    
    17,524
    
    
    
    48,941Weighted average common and common equivalent shares outstanding
    
    
    2,069,129
    
    
    
    2,064,511
 Options to purchase 35,098 and 76,321 shares of common stock were outstanding at
March 31, 2008 and 2007, respectively.
 6




---



##### Table of Contents



WeightedAverageExerciseShares
    
    
    PriceOutstanding at beginning of period
    
    
    52,622
    
    
    $
    4.03Granted
    
    
    
    
    
    
    Exercised
    
    
    (17,524
    )
    
    
    2.85Expired and forfeited
    
    
    
    
    
    
    Outstanding at 3/31/08
    
    
    35,098
    
    
    
    4.62
  7




---



##### Table of Contents



Domestic
    
    
    Export
    
    

IKONICSImaging
        
    Other
        
    TotalNet Sales
    
    $
    1,392,226
    
    
    $
    1,228,945
    
    
    $
    1,159,677
    
    
    $
    
    
    
    $
    3,780,848Cost of good sold
    
    
    783,955
    
    
    
    806,826
    
    
    
    561,012
    
    
    
    
    
    
    
    2,151,793Selling, general and
administrative*
    
    
    291,684
    
    
    
    111,898
    
    
    
    349,198
    
    
    
    614,300
    
    
    
    1,367,080Research and
Development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    214,855
    
    
    
    214,8551,075,639
    
    
    
    918,724
    
    
    
    910,210
    
    
    
    829,155
    
    
    
    3,733,728Income
(loss) from operations
    
    $
    316,587
    
    
    $
    310,221
    
    
    $
    249,467
    
    
    $
    (829,155
    )
    
    $
    47,120
  Domestic
    
    
    Export
    
    
    IKONICS
Imaging
        
    Other
        
    TotalNet Sales
    
    $
    1,379,347
    
    
    $
    986,950
    
    
    $
    1,141,470
    
    
    $
    
    
    
    $
    3,507,767Cost of good sold
    
    
    800,604
    
    
    
    723,083
    
    
    
    550,383
    
    
    
    
    
    
    
    2,074,070Selling, general and
administrative*
    
    
    285,567
    
    
    
    123,414
    
    
    
    394,204
    
    
    
    427,907
    
    
    
    1,231,092Research and
Development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    206,272
    
    
    
    206,2721,086,171
    
    
    
    846,497
    
    
    
    944,587
    
    
    
    634,179
    
    
    
    3,511,434Income (loss) from
operations
    
    $
    293,176
    
    
    $
    140,453
    
    
    $
    196,883
    
    
    $
    (634,179
    )
    
    $
    (3,667
    )
 8




---



##### Table of Contents



Mar 31, 2008
    
    
    Dec 31, 2007Domestic
    
    $
    966,250
    
    
    $
    980,906Export
    
    
    791,647
    
    
    
    712,936IKONICS Imaging
    
    
    376,941
    
    
    
    356,272Other
    
    
    (8,035
    )
    
    
    (24,857
    )Total
    
    $
    2,126,803
    
    
    $
    2,025,257
 *
    
    The Company does not allocate all general and administrative expenses or any research and
development expenses to its operating segments for internal reporting.  Accounting for Uncertainty in Income Taxes
    Balance at January 1, 2008
    
    $
    98,000Expiration of the statute of limitations for the
assessment of taxes
    
    
    (44,000
    )Balance at March 31, 2008
    
    $
    54,000
  9




---



##### Table of Contents



The information presented below in Managements Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements within the meaning of the safe harbor
provisions of Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are
subject to risks and uncertainties, including those discussed under Factors that May Affect Future
Results below, that could cause actual results to differ materially from those projected. Because
actual results may differ, readers are cautioned not to place undue reliance on these
forward-looking statements. Certain forward-looking statements are indicated by italics.
 
 ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Factors that May Affect Future Results
  
    
    The Companys belief that additional proceeds will be received from the sale of
Apprise common and preferred stock that occurred in 2007Actual additional proceeds
received may be impacted by unanticipated expenses related to indemnification clauses
as part of the agreement between Apprise and its purchaser.
    
    The Companys expectation that its effective tax rate will return to 35% to 36% of
pretax income for the second quarter of 2008 compared to the tax benefit of 16%
recorded in the first quarter of 2008The effective tax rate for the second quarter of
2008 may be affected by changes in federal and state tax law, unanticipated changes in
the Companys financial position or the Companys actions could increase or decrease
its effective tax rate.
    
    The Companys belief that the quality of its receivables is high and that strong
internal controls are in place to maintain proper collectionsThis belief may be
impacted by domestic economic conditions, by economic, political, regulatory or social
conditions in foreign markets, or by the failure of the Company to properly implement
or maintain internal controls.
    
    The belief that the Companys current financial resources, cash generated from
operations and the Companys capacity for debt and/or equity financing will be
sufficient to fund current and anticipated business operations and capital
expenditures. The belief that the Companys low debt levels and available line of
credit make it unlikely that a decrease in product demand would impair the Companys
ability to fund operationsChanges in anticipated operating results, credit
availability, equity market conditions or the Companys debt levels may further enhance
or inhibit the Companys ability to maintain or raise appropriate levels of cash.
    
    The Companys expectations as to the level and use of planned capital expenditures
and that capital expenditures will be funded with cash on hand and cash generated from
operating activitiesThis expectation may be affected by changes in the Companys
anticipated capital expenditure requirements resulting from unforeseen required
maintenance, repairs, capital asset additions or increases in construction costs. The
funding of planned or unforeseen expenditures may also be affected by changes in
anticipated operating results resulting from decreased sales, lack of acceptance of new
products or increased operating expenses or by other unexpected events affecting the
Companys financial position.
 10




---



##### Table of Contents




    
    The Companys belief that its vulnerability to foreign currency fluctuations and
general economic conditions in foreign countries is not significantThis belief may be
impacted by economic, political and social conditions in foreign markets, changes in
regulatory and competitive conditions, a change in the amount or geographic focus of
the Companys international sales, or changes in purchase or sales terms.
    
    The Companys plans to continue to invest in research and development efforts,
expedite internal product development and invest in technological alliances, as well as
the expected focus and results of such investmentsThese plans and expectations may be
impacted by general market conditions, unanticipated changes in expenses or sales,
delays in the development of new products, technological advances, the ability to find
suitable and willing technology partners or other changes in competitive or market
conditions.
    
    The Companys efforts to grow its international businessThese efforts may be
impacted by economic, political and social conditions in current and anticipated
foreign markets, regulatory conditions in such markets, unanticipated changes in
expenses or sales, changes in competitive conditions or other barriers to entry or
expansion.
    
    The Companys belief as to future activities that may be undertaken to expand the
Companys businessActual activities undertaken may be impacted by general market
conditions, competitive conditions in the Companys industry, unanticipated changes in
the Companys financial position, lack of acceptance of new products or the inability
to identify attractive acquisition targets or other business opportunities.
 Critical Accounting Policies
  Accounts Receivable.
 Inventories.
 Income Taxes.
 11




---



##### Table of Contents



Investments in Non-Marketable Equity Securities
 Revenue Recognition.
 Results of Operations
 Quarter Ended March 31, 2008 Compared to Quarter Ended March 31, 2007
 Sales. ®
 Cost of Goods Sold .
 Selling General and Administrative Expenses
 Research and Development Expenses
 Gain on Sale of Non-Marketable Equity Securities.
 Interest Income.
 12




---



##### Table of Contents



Income Taxes.
 Liquidity and Capital Resources
      13




---



##### Table of Contents



Capital Expenditures
   International Activity
   14




---



##### Table of Contents



Future Outlook
    Recent Accounting Pronouncements
     15




---



##### Table of Contents



Off Balance Sheet Arrangements
  
 ITEM 3. Controls and Procedures
   16




---



##### Table of Contents



OTHER INFORMATION
 ITEM 1. Legal Proceedings
  ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  ITEM 3. Defaults upon Senior Securities
  ITEM 4. Submission of Matters to a Vote of Security Holders
  ITEM 5. Other Information
  ITEM 6. Exhibits
  Exhibit
    
    Description3.1
    
    Restated Articles of Incorporation
of Company, as amended.13.2
    
    By-Laws of the Company, as amended.131.1
    
    Rule 13a-14(a)/15d-14(a) Certifications of CEO31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications of CFO32
    
    Section 1350 Certifications
  
 1      Incorporated by reference to the like numbered Exhibit
to the Companys Registration Statement on Form 10-SB (File No. 000-25727). 17




---



##### Table of Contents



SIGNATURES
  IKONICS CORPORATIONDATE: May 14, 2008
    By:
    /s/ Jon GerlachJon Gerlach,Chief Financial Officer, and
Vice President of Finance 18




---



##### Table of Contents



INDEX TO EXHIBITS
 Exhibit
    
    Description
    
    Page3.1
    
    Restated Articles of Incorporation of Company, as amended
    
    Incorporated by Reference3.2
    
    By-Laws of the Company, as amended.
    
    Incorporated by Reference31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications of CEO
    
    Filed Electronically31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications of CFO
    
    Filed Electronically32
    
    Section 1350 Certifications
    
    Filed Electronically