<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, 2005

                                       or

[ ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934

     For the Transition Period From _______________ to ________________.

Commission file number 000-25727

                               IKONICS CORPORATION
        (Exact name of small business issuer as specified in its charter)

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

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

                                 (218) 628-2217
                            Issuer's telephone number

                                 Not Applicable
             (Former name, former address and former fiscal year, if
                           changed since last report)

     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.

Yes [X] No [ ]

     Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

     State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date: Common Stock, $.10 par value -
1,950,192 shares outstanding as of October 28, 2005.

     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 September 30, 2005 (unaudited) and
        December 31, 2004                                                   3

        Statements of Operations for the Three Months and Nine
        Months Ended September 30, 2005 and 2004 (unaudited)                4

        Statements of Cash Flows for the Nine Months Ended
        September 30, 2005 and 2004 (unaudited)                             5

        Condensed 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                                            14

PART II. OTHER INFORMATION                                                 15

        SIGNATURES                                                         17
</TABLE>


                                        2

<PAGE>

                         PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

IKONICS CORPORATION
BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                          SEPTEMBER 30
                                                                              2005       DECEMBER 31
                                                                           (UNAUDITED)       2004
                                                                          ------------   -----------
<S>                                                                       <C>            <C>
ASSETS

CURRENT ASSETS:
   Cash and cash equivalents                                               $3,064,082    $2,737,460
   Marketable securities                                                       84,609       124,358
   Trade receivables, less allowance for doubtful accounts of
      $60,000 in 2005 and $75,000 in 2004                                   1,817,585     1,642,904
   Inventories                                                              2,186,778     2,201,282
   Prepaid expenses and other assets                                           77,814        57,345
   Deferred income taxes                                                      143,000       143,000
                                                                           ----------    ----------
         Total current assets                                               7,373,868     6,906,349
                                                                           ----------    ----------
PROPERTY, PLANT, AND EQUIPMENT, at cost:
   Land and building                                                        1,499,418     1,466,898
   Machinery and equipment                                                  2,468,501     2,442,295
   Office equipment                                                         1,229,082     1,239,811
   Vehicles                                                                   176,347       175,406
                                                                           ----------    ----------
                                                                            5,373,348     5,324,410
   Less accumulated depreciation                                            4,473,846     4,295,580
                                                                           ----------    ----------
                                                                              899,502     1,028,830
                                                                           ----------    ----------
INTANGIBLE ASSETS, less accumulated amortization of $128,465 in
   2005 and $109,728 in 2004                                                  304,035       292,349

DEFERRED INCOME TAXES                                                          65,000        65,000

INVESTMENTS IN NON-MARKETABLE EQUITY SECURITIES                               450,790       197,460
                                                                           ----------    ----------
                                                                           $9,093,194    $8,489,988
                                                                           ==========    ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable                                                        $  534,173    $  536,391
   Accrued compensation                                                       192,714       263,510
   Other accrued expenses                                                     216,393       245,702
   Income taxes payable                                                        65,427        30,169
                                                                           ----------    ----------
         Total current liabilities                                          1,008,707     1,075,772
                                                                           ----------    ----------

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 1,948,197 shares in 2005 and
      1,930,545 shares in 2004                                                194,820       193,055
   Additional paid-in capital                                               1,556,995     1,477,815
   Retained earnings                                                        6,332,043     5,745,662
   Accumulated other comprehensive income (loss)                                  629        (2,316)
                                                                           ----------    ----------
         Total stockholders' equity                                         8,084,487     7,414,216
                                                                           ----------    ----------
                                                                           $9,093,194    $8,489,988
                                                                           ==========    ==========
</TABLE>

See condensed notes to financial statements.


                                        3

<PAGE>

IKONICS CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                THREE MONTHS               NINE MONTHS
                                             ENDED SEPTEMBER 30         ENDED SEPTEMBER 30
                                          -----------------------   -------------------------
                                             2005         2004          2005          2004
                                          ----------   ----------   -----------   -----------
<S>                                       <C>          <C>          <C>           <C>
NET SALES                                 $3,462,253   $3,324,135   $10,532,775   $10,390,348

COSTS AND EXPENSES:
   Cost of goods sold                      1,877,244    1,844,447     5,912,178     5,724,791
   Selling, general, and administrative    1,028,592    1,073,879     3,359,970     3,390,204
   Research and development                  154,821      136,060       470,534       430,790
                                          ----------   ----------   -----------   -----------
                                           3,060,657    3,054,386     9,742,682     9,545,785
                                          ----------   ----------   -----------   -----------
INCOME FROM OPERATIONS                       401,596      269,749       790,093       844,563
INTEREST INCOME                               15,018        9,158        40,217        25,037
                                          ----------   ----------   -----------   -----------
INCOME BEFORE INCOME TAXES                   416,614      278,907       830,310       869,600
INCOME TAX EXPENSE                           129,150       73,672       243,929       229,294
                                          ----------   ----------   -----------   -----------
NET INCOME                                $  287,464   $  205,235   $   586,381   $   640,306
                                          ==========   ==========   ===========   ===========
EARNINGS PER COMMON SHARE:
   Basic                                  $     0.15   $     0.11   $      0.30   $      0.34
                                          ==========   ==========   ===========   ===========
   Diluted                                $     0.14   $     0.10   $      0.30   $      0.32
                                          ==========   ==========   ===========   ===========
WEIGHTED AVERAGE COMMON SHARES
   OUTSTANDING:
   Basic                                   1,941,962    1,910,851     1,937,764     1,901,140
                                          ==========   ==========   ===========   ===========
   Diluted                                 1,986,033    2,014,707     1,980,151     2,008,202
                                          ==========   ==========   ===========   ===========
</TABLE>

See condensed notes to financial statements.


                                        4

<PAGE>

IKONICS CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
                                                        NINE MONTHS
                                                     ENDED SEPTEMBER 30
                                                  -----------------------
                                                     2005         2004
                                                  ----------   ----------
<S>                                               <C>          <C>
CASH FLOWS FROM OPERATING
   ACTIVITIES:
   Net income                                     $  586,381   $  640,306
   Adjustments to reconcile net income to net
      cash provided by operating activities:
      Depreciation                                   208,141      261,863
      Amortization                                    33,342       21,320
      Tax benefit from stock option exercise          25,850           --
      Changes in working capital components:
         Trade receivables                          (174,681)      67,454
         Inventories                                  14,504     (228,191)
         Prepaid expenses and other assets           (20,469)      11,571
         Accounts payable                             (2,218)     246,835
         Accrued liabilities                        (100,105)     112,665
         Income taxes payable                         35,258      (54,558)
                                                  ----------   ----------
            Net cash provided by
               operating activities                  606,004    1,079,265
                                                  ----------   ----------
CASH FLOWS FROM INVESTING
   ACTIVITIES:
   Purchase of property and equipment                (84,147)    (226,988)
   Purchase of intangibles                           (39,693)      (4,331)
   Purchase of non-marketable equity securities     (253,330)          --
   Proceeds from sales of marketable securities       42,694       78,909
                                                  ----------   ----------
            Net cash used in investing
               activities                           (334,476)    (152,410)
                                                  ----------   ----------
CASH FLOWS FROM FINANCING
   ACTIVITIES:
   Proceeds from exercise of stock options           170,758      182,372
   Redemption of common stock                       (115,664)          --
                                                  ----------   ----------
            Net cash provided by financing
               activities                             55,094      182,372
                                                  ----------   ----------
NET INCREASE IN CASH AND
   CASH EQUIVALENTS                                  326,622    1,109,227

CASH AND CASH EQUIVALENTS AT
   BEGINNING OF PERIOD                             2,737,460    1,507,794
                                                  ----------   ----------
CASH AND CASH EQUIVALENTS AT
   END OF PERIOD                                  $3,064,082   $2,617,021
                                                  ==========   ==========
SUPPLEMENTAL DISCLOSURES OF
   CASH FLOW INFORMATION:
   Income taxes paid                              $  198,242   $  283,288
                                                  ==========   ==========
</TABLE>

See condensed notes to financial statements.


                                        5

<PAGE>

                               IKONICS CORPORATION

                     CONDENSED NOTES TO FINANCIAL STATEMENTS

                                   (Unaudited)

1.   Basis of Presentation

     The balance sheet of IKONICS Corporation (the "Company") as of September
     30, 2005, and the related statements of operations for the three and nine
     months ended September 30, 2005 and 2004, and cash flows for the nine
     months ended September 30, 2005 and 2004, 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,
     2005, 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, 2004.

     The results of operations for interim periods are not necessarily
     indicative of results that will be realized for the full fiscal year.

2.   Inventory

     The major components of inventory are as follows:

<TABLE>
<CAPTION>
                         Sep 30, 2005   Dec 31, 2004
                         ------------   ------------
<S>                      <C>            <C>
Raw materials             $1,394,616     $1,260,457
Work-in-progress             249,291        268,419
Finished goods             1,024,644      1,019,952
Reduction to LIFO cost      (481,773)      (347,546)
                          ----------     ----------
Total Inventory           $2,186,778     $2,201,282
                          ==========     ==========
</TABLE>

3.   Earnings Per Common Share (EPS)

     Basic EPS is calculated using net income divided by the weighted average of
     common shares outstanding. Diluted EPS is similar to Basic EPS except that
     the weighted average number of common shares outstanding is increased to
     include the number of additional common shares that would have been
     outstanding if the dilutive potential common shares, such as options, had
     been issued.


                                        6

<PAGE>

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

<TABLE>
<CAPTION>
                                                                        Three Months Ended
                                                                   ---------------------------
                                                                   Sep 30, 2005   Sep 30, 2004
                                                                   ------------   ------------
<S>                                                                <C>            <C>
Weighted average common shares outstanding                           1,941,962      1,910,851
Dilutive effect of stock options                                        44,071        103,856
                                                                     ---------      ---------
Weighted average common and common equivalent shares outstanding     1,986,033      2,014,707
                                                                     =========      =========
</TABLE>

<TABLE>
<CAPTION>
                                                                        Nine Months Ended
                                                                   ---------------------------
                                                                   Sep 30, 2005   Sep 30, 2004
                                                                   ------------   ------------
<S>                                                                <C>            <C>
Weighted average common shares outstanding                           1,937,764      1,901,140
Dilutive effect of stock options                                        42,387        107,062
                                                                     ---------      ---------
Weighted average common and common equivalent shares outstanding     1,980,151      2,008,202
                                                                     =========      =========
</TABLE>

     Options to purchase 145,625 and 207,052 shares of common stock were
     outstanding as of September 30, 2005 and 2004, respectively.

4.   Stock-Based Compensation Plan

     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 common share 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    Nine Months Ended
                                             -------------------   -------------------
                                              Sep 30,    Sep 30,    Sep 30,    Sep 30,
                                               2005       2004       2005       2004
                                             --------   --------   --------   --------
<S>                                          <C>        <C>        <C>        <C>
Net income:
   As reported                               $287,464   $205,235   $586,381   $640,306

   Deduct total stock-based employee
   compensation expense determined under
   fair value based method for all awards,
   net of tax                                   5,304      7,377     15,911     22,132
                                             --------   --------   --------   --------
   Pro forma                                 $282,160   $197,858   $570,470   $618,174
                                             ========   ========   ========   ========

Basic earnings per share:
   As reported                               $   0.15   $   0.11   $   0.30   $   0.34
   Pro forma                                 $   0.15   $   0.10   $   0.29   $   0.33

Diluted earnings per share:
   As reported                               $   0.14   $   0.10   $   0.30   $   0.32
   Pro forma                                 $   0.14   $   0.10   $   0.29   $   0.31
</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 $25,000 annually.
     In connection with license agreements, the Company has agreed to pay
     royalties ranging from 3% to 5% on the future sales of products subject to
     the agreements.


                                        7

<PAGE>

6.   Comprehensive income

     Comprehensive income includes unrealized gains and losses on the Company's
     available for sale marketable securities. Total comprehensive income was
     $287,678 and $207,459 for the three months ended September 2005 and 2004,
     respectively. Total comprehensive income was $589,326 and $647,351 for the
     nine months ended September 30, 2005 and 2004, respectively.


                                        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 2005, the nine months ended September 30, 2005 and
the same periods of 2004. It should be read in connection with the Company's
unaudited financial statements and notes thereto included in this Form 10-QSB.

FACTORS THAT MAY AFFECT FUTURE RESULTS

     Certain statements made in this Quarterly Report on Form 10-QSB, including
those summarized below, are forward-looking statements within the meaning of the
safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as
amended, that involve risks and uncertainties, and actual results may differ.
Factors that could cause actual results to differ include those identified
below.

     -    The Company's belief that the quality of its receivables is high and
          that strong internal controls are in place to maintain proper
          collections--This belief may be impacted by domestic economic
          conditions, by economic, political, regulatory or social conditions in
          foreign markets, or by the failure of the Company to properly
          implement or maintain strong internal controls.

     -    The belief that the Company's current financial resources, 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
          generated from operating activities--This expectation may be affected
          by changes in the Company's anticipated capital expenditure
          requirements resulting from unforeseen required maintenance or
          repairs. The funding of planned or unforeseen expenditures may also be
          affected by changes in anticipated operating results resulting from
          decreased sales or increased operating expenses or by other unexpected
          events affecting the Company's financial position.

     -    The Company's belief that its vulnerability to foreign currency
          fluctuations and general economic conditions in foreign countries is
          not significant--This belief may be impacted by economic, political
          and social conditions in foreign markets, changes in regulatory and
          competitive conditions, a change in the amount or geographic focus of
          the Company's international sales, or changes in purchase or sales
          terms.


                                        9

<PAGE>

     -    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 or the inability to identify attractive acquisition targets
          or other business opportunities.

CRITICAL ACCOUNTING POLICIES

     The Company prepares its financial statements in conformity with accounting
principles generally accepted in the United States of America. Therefore, the
Company is required to make certain estimates, judgments and assumptions that
the Company believes are reasonable based upon the information available. These
estimates and assumptions affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. The accounting policies, which IKONICS
believes are the most critical to aid in fully understanding and evaluating its
reported financial results, include the following:

     Accounts Receivable. The Company performs ongoing credit evaluations of its
customers and adjusts credit limits based upon payment history and the
customer's current credit worthiness, as determined by review of the current
credit information. The Company monitors collections and payments from its
customers and maintains a provision for estimated credit losses based upon
historical experience and any specific customer collection issues that have been
identified. While such credit losses have historically been within expectations
and the provisions established, the Company cannot guarantee that it will
continue to experience the same collection history that has occurred in the
past. The Company's general payment terms are net 30-45 days for domestic
customers and net 60-90 days for foreign customers.

     Inventory. Inventories are valued at the lower of cost or market value
using the last in, first out (LIFO) method. The Company monitors its inventory
for obsolescence and records reductions in cost when required.

     Deferred Tax Assets. At September 30, 2005, the Company had approximately
$208,000 of net deferred tax assets. The net deferred tax assets result
primarily due to timing differences in intangible assets and property and
equipment. The Company has recorded a $46,000 valuation allowance to reserve for
items that will more likely than not be realized. The Company has determined
that it is more likely than not that the remaining net deferred tax assets
reflected on the balance sheet will be realized and that an additional valuation
allowance for such assets is not currently required.

     Revenue Recognition. The Company recognizes revenue on products when title
passes, which is usually upon shipment. Freight billed to customers is included
in sales. Shipping costs are included in cost of goods sold.


                                       10

<PAGE>

RESULTS OF OPERATIONS

QUARTER ENDED SEPTEMBER 30, 2005 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2004

     Sales. The Company realized 4% sales growth during the third quarter of
2005 with sales of $3.5 million, compared to $3.3 million in sales during the
same period in 2004. The sales growth was driven by increased domestic shipments
across various product lines.

     Cost of Goods Sold. Cost of goods sold during the third quarter of 2005 was
$1.9 million, or 54.2% of sales, compared to $1.8 million, or 55.5% of sales,
during the same period in 2004. The decrease in the cost of sales in the third
quarter of 2005 as a percentage of sales reflects a more favorable product mix
partially offset by raw material price increases and increased transportation
costs.

     Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $1.0 million, or 29.7% of sales, in the
third quarter of 2005, from $1.1 million, or 32.3% of sales, for the same period
in 2004. The 2005 third quarter decrease reflects lower promotional and travel
expenses.

     Research and Development Expenses. Research and development expenses during
the third quarter of 2005 were $155,000, or 4.5% of sales, versus $136,000, or
4.1% of sales, for the same period in 2004. The increase is due to additional
research and development staff and higher trial production expenses.

     Interest Income. Interest income for the third quarter of 2005 was $15,000
compared to $9,000 for the same period in 2004. The interest income increase is
due to an increase in interest rates and a larger investment balance. Interest
is earned primarily from government obligation revenue bonds of various
municipalities and school districts.

     Income Taxes. Income taxes were $129,000, or an effective rate of 31%,
during the third quarter of 2005, versus income taxes of $74,000, or an
effective rate of 26%, for the third quarter of 2004. The higher effective tax
rate during the third quarter of 2005 relates to a decrease in the level of tax
benefits from the extraterritorial income exclusion on foreign sales as it
begins to phase out in 2005 and lower foreign sales compared to 2004.

NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2004

     Sales. The Company's sales grew by 1% during the first nine months of 2005
compared to the same period in 2004. Sales during the first nine months of 2005
were $10.5 million compared to $10.4 million during the first nine months of
2004. The growth was driven by increases in domestic shipments partially offset
by lower export sales.

     Cost of Goods Sold. Cost of goods sold during the first half of 2005 was
$5.9 million, or 56.1% of sales, compared to $5.7 million, or 55.1% of sales,
during the same period in 2004. The increase in the cost of sales in the first
nine months of 2005 as a percentage of sales reflects raw material price
increases and increased transportation costs.

     Selling, General and Administrative Expenses. Selling, general and
administrative expenses during the first nine months of 2005 were $3.4 million,
or 31.9% of sales compared to $3.4 million, or 32.6% of sales, for the same
period in 2004. Increased expenses related to efforts to comply with the
Sarbanes-Oxley Act and sales and marketing expenses for new product lines were
offset by lower professional service and promotional expenses during the first
nine months of 2005 as compared to the same period in 2004.

     Research and Development Expenses. Research and development expenses during
the nine months of 2005 were $471,000, or 4.5% of sales, versus $431,000, or
4.1% of sales, for the same period in 2004. The increase is due to additional
research and development staff and higher trial production and legal expenses.

     Interest Income. Interest income for the first nine months of 2005 was
$40,000 compared to $25,000 for the same period in 2004. The interest income
increase is due to an increase in interest rates and a larger investment


                                       11

<PAGE>

balance. Interest is earned primarily from government obligation revenue bonds
of various municipalities and school districts.

     Income Taxes. Income taxes were $244,000, or an effective rate of 29%,
during the nine months of 2005 compared to $229,000, or an effective rate of
26%, for the first nine months of 2004. The higher effective tax rate during the
first nine months of 2005 relates to a lower level of tax benefits during that
period from the extraterritorial income exclusion on foreign sales as it begins
to phase out in 2005 and lower foreign sales compared to 2004. The increase was
partially offset by federal tax credits for research and development. During the
first quarter of 2005, the Company performed a study of its research and
development activities resulting in tax credits totaling $15,000. The tax
credits resulted in a net income tax benefit during the period of $9,000.

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 $3,064,000 and $2,617,000 at September 30,
2005 and 2004, respectively. The Company generated $606,000 in cash from
operating activities during the nine months ended September 30, 2005, compared
to generating $1,079,000 in cash from operating activities during the nine month
period ended September 30, 2004. The decrease in cash provided by operating
activities is primarily due to lower net income and unfavorable changes in
working capital components. Cash provided by operating activities is primarily
the result of adjusting net income for depreciation, amortization, other similar
non-cash charges, and certain changes in working capital components.

     During the first nine months of 2005, trade receivables increased by
$175,000. The increase in receivables was driven by higher domestic sales during
the later part of the third quarter. 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 remain relatively flat with the
beginning of the year. Prepaid expenses and other assets increased $20,000
reflecting the timing of annual insurance premiums. Accrued expenses decreased
$100,000 due to the timing of compensation payments. The $35,000 income taxes
payable increase reflects the timing of estimated 2005 tax payments compared to
2005 calculated tax liability.

     The Company used $334,000 and $152,000, in cash for investing activities
during the nine months ended September 30, 2005 and 2004, respectively. During
the first nine months of 2005, the Company invested $253,000 in Imaging
Technology International ("iTi") to acquire 36,496 shares and warrants to
purchase an additional 33,333 shares of iTi. At the time of the acquisition, the
36,496 shares represented 3.6% of the total outstanding common shares of iTi.
iTi is a leader in the development of industrial production systems based on ink
jet technology and the Company believes iTi's expertise fits strategically with
the Company's expertise in developing substrates for a wide variety of
industrial printing processes. The Company had $84,000 of fixed asset purchases
during the first nine months of 2005. The purchases were comprised of plant
equipment upgrades to improve efficiency and safety, reduce operating costs, and
update facilities and an automobile. The Company also incurred $40,000 in patent
application costs that it records as an asset and amortizes upon successful
completion of the application process. The Company received $43,000 during the
first nine months of 2005 from the sale of marketable securities. During the
first nine months of 2004, the Company purchased $227,000 in capital equipment
and incurred $4,000 in patent application costs. The Company also received
$79,000 from the sale of marketable securities during the first nine months of
2004.

     The Company realized $55,000 in cash from financing activities during the
first nine months of 2005 compared to $182,000 received in the same period of
2004. During the first nine months of 2005, the Company received $171,000 for
the issuance of 43,151 shares of common stock issued upon the exercise of stock
options compared to $182,000 received during the first nine months of 2004 for
47,477 shares of common stock issued upon the exercise of stock options. The
Company repurchased 25,499 shares of common stock at a cost of $116,000 during
the first nine months of 2005.


                                       12

<PAGE>

     A bank line of credit exists providing for borrowings of up to $1,250,000.
Outstanding debt under this line of credit is collateralized by accounts
receivable and inventory and bears interest at 2.00 percentage points over the
30-day LIBOR rate. The Company did not utilize this line of credit during the
quarter ended September 30, 2005 and there was no debt outstanding under this
line as of September 30, 2005. The line of credit was also not utilized during
2004 and there were no borrowings 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, 2005, the
Company spent $84,000 on capital expenditures. This spending consisted of plant
equipment upgrades to improve efficiency and safety, reduce operating costs, and
update facilities and an automobile.

     Plans for additional capital expenditures of approximately $100,000 during
the remainder of 2005 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 2005 planned expenditures are expected to be less than 2004
capital expenditures and are expected to be funded with cash generated from
operating activities.

INTERNATIONAL ACTIVITY

     The Company markets its products to customers in approximately 83 countries
in North America, Europe, Latin America, Asia and other parts of the world.
Foreign sales were approximately 29% of total sales for the three months ended
September 30, 2005 and 31% of total sales for the three months ended September
30, 2004. Sales to foreign markets were 29% for the nine months ended September
30, 2005 and 32% for the same period in 2004. Foreign sales in 2005 reflect
lower European sales due to weaker economic conditions and weaker sales in
certain Asian countries. 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,
2005.

FUTURE OUTLOOK

     IKONICS has invested on average over 4% 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.


                                       13

<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

     In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (revised 2004) "Share-Based
Payment" (SFAS 123R). SFAS 123R replaces FASB Statement No. 123 "Accounting for
Stock-Based Compensation", and supersedes APB Opinion No. 25 "Accounting for
Stock Issued to Employees." The statement establishes standards for accounting
for share-based payment transactions. Share-based payment transactions are those
in which an entity exchanges its equity instruments for goods or services, or in
which an entity incurs liabilities in exchange for goods or services, that are
based on the fair value of the entity's equity instruments or that may be
settled by the issuance of those equity instruments. SFAS 123R covers a wide
range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights and
employee share purchase plans. SFAS 123R requires a public entity to measure the
cost of employee services received in exchange for an award of equity
instruments based on the fair value of the award on the grant date (with limited
exceptions). That cost will be recognized in the entity's financial statements
over the period during which the employee is required to provide services in
exchange for the award. The statement will be effective for the Company's first
quarter of 2006. SFAS 123R allows two methods for determining the effects of the
transition. The Company has not yet completed its study of the transition
methods, made any decisions about how it will adopt SFAS 123R, or determined
what option-pricing model is most appropriate for future awards.

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
control and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation,
the principal executive officer and principal financial officer concluded that
the Company disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms.

     There was no change in the Company's internal control over financial
reporting identified in connection with the evaluation required by Rule
13a-15(d) and Rule 15d-15(d) of the Exchange Act that occurred during the period
covered by this report that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.


                                       14

<PAGE>

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     None

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     The Company did not purchase shares of its equity securities during the
third quarter of 2005. A total of 50,007 shares of Common Stock may yet be
purchased under the repurchase program approved by the Company's Board of
Directors in February 2005.

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, 2005:

<TABLE>
<CAPTION>
Exhibit                            Description
-------                            -----------
<S>       <C>
3.1       Restated Articles of Incorporation of Company, as amended.(1)
3.2       By-Laws of the Company, as amended.(1)
31.1      Rule 13a-14(a)/15d-14(a) Certifications of CEO
31.2      Rule 13a-14(a)/15d-14(a) Certifications of CFO
32        Section 1350 Certifications
</TABLE>

     Copies of Exhibits will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the Exhibits.

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


                                       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: November 14, 2005                 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
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>