**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**FORM      10-QSB**

| **x** | **QUARTERLY                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF                1934** |
|-------|---------------------------------------------------------------------------------------------------------------------|

| **o** | **TRANSITION                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF                1934** |
|-------|----------------------------------------------------------------------------------------------------------------------|

**0-31641**

**SCI      ENGINEERED MATERIALS, INC.**

| **Ohio**                                       | **31-1210318**                     |
|------------------------------------------------|------------------------------------|
| (State                or other jurisdiction of | (I.R.S.                Employer    |
| incorporation                or organization)  | Identification                No.) |

**2839      Charter Street, Columbus, Ohio 43228**

**(614)      486-0261**

**Superconductive      Components, Inc.**

----

**FORM      10-QSB**

**SCI      ENGINEERED MATERIALS, INC.**

**Table      of Contents**

|                        |                                                                           | **Page                No.** |
|-----------------------------|--------------------------------------------------------------------------------|-----------------------------|
| **PART                I.**  | **FINANCIAL                INFORMATION**                                       |                   |
|                        |                                                                           |                        |
| Item                1.      | Financial                Statements.                                           |                   |
|                        |                                                                           |                        |
|                   | Balance                Sheets as of September 30, 2007 (unaudited)             |                   |
|                   | and                December 31, 2006                                           | 3                           |
|                        |                                                                           |                        |
|                   | Statements                of Operations for the Three Months and Nine Months   |                   |
|                   | Ended                September 30, 2007 and 2006 (unaudited)                   | 5                           |
|                        |                                                                           |                        |
|                   | Statements                of Cash Flows for the Nine Months                    |                   |
|                   | Ended                September 30, 2007 and 2006 (unaudited)                   | 6                           |
|                        |                                                                           |                        |
|                   | Notes                to Financial Statements (unaudited)                       | 8                           |
|                        |                                                                           |                        |
| Item                2.      | Management's                Discussion and Analysis of Financial Condition and |                   |
|                   | Results                of Operations.                                          | 14                          |
|                        |                                                                           |                        |
| Item                3.      | Controls                and Procedures.                                        | 19                          |
|                        |                                                                           |                        |
| **PART                II.** | **OTHER                INFORMATION**                                           |                        |
|                        |                                                                           |                        |
| Item                1.      | Legal                Proceedings.                                              | N/A                         |
|                        |                                                                           |                        |
| Item                2.      | Unregistered                Sales of Equity Securities and Use of Proceeds.    | N/A                         |
|                        |                                                                           |                        |
| Item                3.      | Defaults                Upon Senior Securities.                                | N/A                         |
|                        |                                                                           |                        |
| Item                4.      | Submission                of Matters to a Vote of Security Holders.            | 20                          |
|                        |                                                                           |                        |
| Item                5.      | Other                Information.                                              | N/A                         |
|                        |                                                                           |                        |
| Item                6.      | Exhibits.                                                                      | 20                          |
|                        |                                                                           |                        |
| Signatures.                 | 21                                                                             |

----

**PART        I. FINANCIAL INFORMATION **

| **ITEM                1.** | **FINANCIAL                  STATEMENTS** |
|----------------------------|-------------------------------------------|

**SCI        ENGINEERED MATERIALS, INC. **

**BALANCE      SHEETS **

| **ASSETS**                                                                |
|-------------------------------------------------------------------------------------|
|                                                                                |   | **September                  30,** |   |  **December                  31,** |   |
|                                                                                |   | **2007** |   |  **2006** |   |
|                                                                                |   | **(UNAUDITED)** |   |    |   |
| **CURRENT                  ASSETS**                                                 |   |   |   |   |   |   |   |
| Cash                                                                                |   | $ | 1,517,031 |   | $ | 648,494 |   |
| Accounts                  receivable                                                |   |   |   |   |   |   |   |
| Trade,                  less allowance for doubtful accounts of $24,700 and $25,000 |   |   | 289,548 |   |   | 439,946 |   |
| Contract                                                                            |   |   | 67,598 |   |   | 52,760 |   |
| Other                                                                               |   |   | 5,000 |   |   | - |   |
| Inventories                                                                         |   |   | 1,496,006 |   |   | 1,189,732 |   |
| Prepaid                  expenses                                                   |   |   | 30,395 |   |   | 47,466 |   |
| Total                  current assets                                               |   |   | 3,405,578 |   |   | 2,378,398 |   |
|                                                                                |   |   |  |   |   |   |   |
| **PROPERTY                  AND EQUIPMENT,**                                        |   |   |   |   |   |   |   |
| **AT                  COST**                                                   |   |   |   |   |   |   |   |
| Machinery                  and equipment                                            |   |   | 3,354,043 |   |   | 2,697,368 |   |
| Furniture                  and fixtures                                             |   |   | 72,464 |   |   | 23,643 |   |
| Leasehold                  improvements                                             |   |   | 301,551 |   |   | 299,551 |   |
| Construction                  in progress                                           |   |   | 574,904 |   |   | 95,590 |   |
|                                                                                |   |   | 4,302,962 |   |   | 3,116,152 |   |
| Less                  accumulated depreciation                                      |   |   | (2,144,242 | ) |   | (2,012,312 | ) |
|                                                                                |   |   | 2,158,720 |   |   | 1,103,840 |   |
|                                                                                |   |   |   |   |   |   |   |
| **OTHER                  ASSETS**                                                   |   |   |   |   |   |   |   |
| Deposits                                                                            |   |   | 24,728 |   |   | 289,816 |   |
| Intangibles                                                                         |   |   | 28,578 |   |   | 30,894 |   |
| Total                  other assets                                                 |   |   | 53,306 |   |   | 320,710 |   |
|                                                                                |   |   |   |   |   |   |   |
| **TOTAL                  ASSETS**                                                   |   | $ | 5,617,604 |   | $ | 3,802,948 |   |

----

**SCI        ENGINEERED MATERIALS, INC. **

**BALANCE        SHEETS **

| **LIABILITIES                AND SHAREHOLDERS' EQUITY**                 |
|-----------------------------------------------------------------------------------|
|                                                                              |   |   |   |    |   |
|                                                                              |   | **September                30,** |   |  **December                31,** |   |
|                                                                              |   | **2007** |   |  **2006** |   |
|                                                                              |   | **(UNAUDITED)** |   |    |   |
| **CURRENT                LIABILITIES**                                            |   |   |   |   |   |   |   |
| Capital                lease obligation, current portion                          |   | $ | 256,896 |   | $ | 70,799 |   |
| Accounts                payable                                                   |   |   | 611,577 |   |   | 297,161 |   |
| Accrued                contract expenses                                          |   |   | 30,494 |   |   | 27,258 |   |
| Accrued                personal property taxes                                    |   |   | 13,226 |   |   | 22,500 |   |
| Customer                deposits                                                  |   |   | 875,541 |   |   | 526,581 |   |
| Accrued                expenses and other                                         |   |   | 142,708 |   |   | 208,494 |   |
| Total                current liabilities                                          |   |   | 1,930,442 |   |   | 1,152,793 |   |
|                                                                              |   |   |   |   |   |   |   |
| **CAPITAL                LEASE OBLIGATION, NET OF**                               |   |   |   |   |   |   |   |
| **CURRENT                PORTION**                                                |   |   | 919,935 |   |   | 145,693 |   |
|                                                                              |   |   |   |   |   |   |   |
| **COMMITMENTS                AND CONTINGENCIES**                                  |   |   | - |   |   | - |   |
|                                                                              |   |   |   |   |   |   |   |
| **SHAREHOLDERS'                EQUITY**                                           |   |   |   |   |   |   |   |
| Convertible                preferred stock, Series B, 10% cumulative, nonvoting   |   |   |   |   |   |   |   |
| no                par value, $10 stated value, optional redemption at 103%;       |   |   |   |   |   |   |   |
| 24,566                and 25,185 issued and outstanding respectively              |   |   | 369,719 |   |   | 360,146 |   |
| Common                stock, no par value, authorized 15,000,000 shares;          |   |   |   |   |   |   |   |
| 3,474,338                and 3,432,915 shares issued and outstanding respectively |   |   | 9,061,378 |   |   | 9,007,817 |   |
| Additional                paid-in capital                                         |   |   | 989,674 |   |   | 995,586 |   |
| Accumulated                deficit                                                |   |   | (7,653,544 | ) |   | (7,859,087 | ) |
|                                                                              |   |   | 2,767,227 |   |   | 2,504,462 |   |
|                                                                              |   |   |   |   |   |   |   |
| **TOTAL                LIABILITIES AND SHAREHOLDERS' EQUITY**                     |   | $ | 5,617,604 |   | $ | 3,802,948 |   |

----

**SCI        ENGINEERED MATERIALS, INC.**

**STATEMENTS        OF OPERATIONS**

**THREE        MONTHS ENDED SEPTEMBER 30, 2007 AND 2006**

**AND        NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006**

**(UNAUDITED)**

|                                                        |   | **THREE                  MONTHS ENDED SEPT. 30,** |      | **NINE                  MONTHS ENDED SEPT. 30,** |   |
|-------------------------------------------------------------|--------|---------------------------------------------------|-----------|--------------------------------------------------|--------|
|                                                        |   | **2007**                                          |      |  **2006**                                   |   | **2007** |   |  **2006** |   |
|                                                        |   |                                              |      |                                        |   |   |   |    |   |
| **TOTAL                  REVENUE**                          |   |                                              | 2,589,938 |                                             |   | 2,064,497 |   |   | 8,447,689 |   |   | 4,423,554 |   |
|                                                        |   |                                              |      |                                             |   |   |   |   |   |   |   |   |   |
| **TOTAL                  COST OF REVENUE**                  |   |                                              | 2,100,305 |                                             |   | 1,595,490 |   |   | 6,986,308 |   |   | 3,401,034 |   |
|                                                        |   |                                              |      |                                             |   |   |   |   |   |   |   |   |   |
| **GROSS                  PROFIT**                           |   |                                              | 489,633   |                                             |   | 469,007 |   |   | 1,461,381 |   |   | 1,022,520 |   |
|                                                        |   |                                              |      |                                             |   |   |   |   |   |   |   |   |   |
| **GENERAL                  AND ADMINISTRATIVE EXPENSE**     |   |                                              | 213,111   |                                             |   | 221,759 |   |   | 669,423 |   |   | 667,013 |   |
|                                                        |   |                                              |      |                                             |   |   |   |   |   |   |   |   |   |
| **RESEARCH                  AND DEVELOPMENT EXPENSE**       |   |                                              | 108,943   |                                             |   | 58,582 |   |   | 253,980 |   |   | 144,974 |   |
|                                                        |   |                                              |      |                                             |   |   |   |   |   |   |   |   |   |
| **SELLING                  EXPENSE**                        |   |                                              | 123,852   |                                             |   | 76,066 |   |   | 331,703 |   |   | 210,162 |   |
|                                                        |   |                                              |      |                                             |   |   |   |   |   |   |   |   |   |
| **INCOME                  FROM OPERATIONS**                 |   |                                              | 43,727    |                                             |   | 112,600 |   |   | 206,275 |   |   | 371 |   |
|                                                        |   |                                              |      |                                             |   |   |   |   |   |   |   |   |   |
| **OTHER                  INCOME (EXPENSE)**                 |   |                                              |      |                                             |   |   |   |   |   |   |   |   |   |
| Interest                  income                            |   |                                              | 21,733    |                                             |   | 11,448 |   |   | 48,721 |   |   | 32,501 |   |
| Interest                  expense                           |   |                                              | (32,317   | )                                                |   | (4,861 | ) |   | (56,433 | ) |   | (10,367 | ) |
| Gain                  on disposal of equipment              |   |                                              | 3,570     |                                             |   | - |   |   | 8,352 |   |   | - |   |
| Miscellaneous,                  net                         |   |                                              | (457      | )                                                |   | (2,655 | ) |   | (1,372 | ) |   | 4,846 |   |
|                                                        |   |                                              | (7,471    | )                                                |   | 3,932 |   |   | (732 | ) |   | 26,980 |   |
|                                                        |   |                                              |           |                                             |   |   |   |   |  |   |   |   |   |
| **INCOME                  BEFORE PROVISION FOR INCOME TAX** |   |                                              | 36,256    |                                             |   | 116,532 |   |   | 205,543 |   |   | 27,351 |   |
|                                                        |   |                                              |           |                                             |   |   |   |   |   |   |   |   |   |
| **INCOME                  TAX EXPENSE**                     |   |                                              | -         |                                             |   | - |   |   | - |   |   | - |   |
|                                                        |   |                                              |      |                                             |   |   |   |   |   |   |   |   |   |
| **NET                  INCOME**                             |   |                                              | 36,256    |                                             |   | 116,532 |   |   | 205,543 |   |   | 27,351 |   |
|                                                        |   |                                              |      |                                             |   |   |   |   |   |   |   |   |   |
| **DIVIDENDS                  ON PREFERRED STOCK**           |   |                                              | (6,245    | )                                                |   | (6,296 | ) |   | (18,837 | ) |   | (18,888 | ) |
|                                                        |   |                                              |      |                                             |   |   |   |   |   |   |   |   |   |
| **INCOME                  APPLICABLE TO COMMON SHARES**     |   | $                                                 | 30,011    |                                             | $      | 110,236 |   | $ | 186,706 |   | $ | 8,463 |   |
|                                                        |   |                                              |      |                                             |   |   |   |   |   |   |   |   |   |
| **EARNINGS                  PER SHARE - BASIC AND DILUTED** |   |                                              |      |                                             |   |   |   |   |   |   |   |   |   |
| (Note                  5)                                   |   |                                              |      |                                             |   |   |   |   |   |   |   |   |   |
|                                                        |   |                                              |      |                                             |   |   |   |   |   |   |   |   |   |
| **NET                  INCOME PER COMMON SHARE BEFORE**     |   |                                              |      |                                             |   |   |   |   |   |   |   |   |   |
| **DIVIDENDS                  ON PREFERRED STOCK**           |   |                                              |      |                                             |   |   |   |   |   |   |   |   |   |
| Basic                                                       |   | $                                                 | 0.01      |                                             | $      | 0.03 |   | $ | 0.06 |   | $ | 0.01 |   |
| Diluted                                                     |   | $                                                 | 0.01      |                                             | $      | 0.03 |   | $ | 0.05 |   | $ | 0.01 |   |
|                                                        |   |                                              |      |                                             |   |   |   |   |   |   |   |   |   |
| **NET                  INCOME PER COMMON SHARE AFTER**      |   |                                              |      |                                             |   |   |   |   |   |   |   |   |   |
| **DIVIDENDS                  ON PREFERRED STOCK**           |   |                                              |      |                                             |   |   |   |   |   |   |   |   |   |
| Basic                                                       |   | $                                                 | 0.01      |                                             | $      | 0.03 |   | $ | 0.05 |   | $ | 0.00 |   |
| Diluted                                                     |   | $                                                 | 0.01      |                                             | $      | 0.03 |   | $ | 0.04 |   | $ | 0.00 |   |
|                                                        |   |                                              |      |                                             |   |   |   |   |   |   |   |   |   |
| **WEIGHTED                  AVERAGE SHARES OUTSTANDING**    |   |                                              |      |                                             |   |   |   |   |   |   |   |   |   |
| Basic                                                       |   |                                              | 3,468,756 |                                             |   | 3,425,980 |   |   | 3,457,005 |   |   | 3,425,937 |   |
| Diluted                                                     |   |                                              | 4,216,320 |                                             |   | 3,907,837 |   |   | 4,224,899 |   |   | 3,946,035 |   |

----

**SCI        ENGINEERED MATERIALS, INC.**

**STATEMENTS      OF CASH FLOWS**

**NINE      MONTHS ENDED SEPTEMBER 30, 2007 AND 2006**

**(UNAUDITED)**

|                                                              |   | **2007** |      |  **2006** |   |
|-------------------------------------------------------------------|--------|----------|-----------|----------------|--------|
| **CASH                  FLOWS FROM OPERATING ACTIVITIES**         |   |     |      |           |   |   |   |
| Net                  income                                       |   | $        | 205,543   |           | $      | 27,351 |   |
| Adjustments                  to reconcile net income to net cash  |   |     |      |           |   |   |   |
| provided                  by operating activities:                |   |     |      |           |   |   |   |
| Depreciation                  and accretion                       |   |     | 216,618   |           |   | 158,009 |   |
| Amortization                                                      |   |     | 2,316     |           |   | 2,316 |   |
| Stock                  based compensation                         |   |     | 42,938    |           |   | 5,744 |   |
| Gain                  on sale of equipment                        |   |     | (8,352    | )              |   | - |   |
| Inventory                  reserve                                |   |     | 8,765     |           |   | (410 | ) |
| Provision                  for doubtful accounts                  |   |     | (300      | )              |   | - |   |
| Changes                  in operating assets and liabilities:     |   |     |      |           |   |   |   |
| (Increase)                  decrease in assets:                   |   |     |      |           |   |   |   |
| Accounts                  receivable                              |   |     | 130,860   |           |   | (136,027 | ) |
| Inventories                                                       |   |     | (315,039  | )              |   | (91,163 | ) |
| Prepaid                  expenses                                 |   |     | 27,076    |           |   | (22,124 | ) |
| Other                  assets                                     |   |     | 265,088   |           |   | (4,266 | ) |
| Increase                  in liabilities:                         |   |     |      |           |   |   |   |
| Accounts                  payable                                 |   |     | 314,416   |           |   | 24,957 |   |
| Accrued                  expenses and customer deposits           |   |     | 274,652   |           |   | 501,907 |   |
| Total                  adjustments                                |   |     | 959,038   |           |   | 438,943 |   |
| Net                  cash provided by operating activities        |   |     | 1,164,581 |           |   | 466,294 |   |
|                                                              |   |     |      |           |   |   |   |
| **CASH                  FLOWS FROM INVESTING ACTIVITIES**         |   |     |      |           |   |   |   |
| Proceeds                  on sale of equipment                    |   |     | 18,670    |           |   | - |   |
| Purchases                  of property and equipment              |   |     | (212,016  | )              |   | (164,155 | ) |
| Net                  cash used in investing activities            |   |     | (193,346  | )              |   | (164,155 | ) |
|                                                              |   |     |      |           |   |   |   |
| **CASH                  FLOWS FROM FINANCING ACTIVITIES**         |   |     |      |           |   |   |   |
| Proceeds                  from exercise of common stock options   |   |     | 9,625     |           |   | 1,200 |   |
| Proceeds                  from exercise of common stock warrants  |   |     | 26,909    |           |   | - |   |
| Payments                  related to registration of common stock |   |     | (32,255   | )              |   | (50,131 | ) |
| Principal                  payments on capital lease obligations  |   |     | (106,977  | )              |   | (45,834 | ) |
| Net                  cash used in financing activities            |   |     | (102,698  | )              |   | (94,765 | ) |

----

**SCI        ENGINEERED MATERIALS, INC.**

**STATEMENTS      OF CASH FLOWS (CONTINUED)**

**NINE      MONTHS ENDED SEPTEMBER 30, 2007 AND 2006**

|                                                                               |   | **2007** |      |  **2006** |   |
|------------------------------------------------------------------------------------|--------|----------|-----------|----------------|--------|
| **NET                INCREASE IN CASH**                                            |   | $        | 868,537   |           | $      | 207,374 |   |
|                                                                               |   |     |      |           |   |   |   |
| **CASH**                -                Beginning of period                       |   |     | 648,494   |           |   | 1,161,369 |   |
|                                                                               |   |     |      |           |   |   |   |
| **CASH**                -                End of period                             |   | $        | 1,517,031 |           | $      | 1,368,743 |   |
|                                                                               |   |     |           |           |   |   |   |
| **SUPPLEMENTAL                DISCLOSURES OF CASH**                                |   |     |           |           |   |   |   |
| **FLOW                INFORMATION**                                                |   |     |      |           |   |   |   |
| Cash                paid during the years for:                                     |   |     |      |           |   |   |   |
| Interest,                net                                                       |   | $        | 56,433    |           | $      | 10,367 |   |
| Income                taxes                                                        |   | $        | -         |           | $      | - |   |
|                                                                               |   |     |      |           |   |   |   |
| **SUPPLEMENTAL                DISCLOSURES OF NONCASH**                             |   |     |      |           |   |   |   |
| **FINANCING                ACTIVITIES**                                            |   |     |      |           |   |   |   |
|                                                                               |   |     |      |           |   |   |   |
| Property                and equipment purchased by capital lease                   |   | $        | 1,067,315 |           | $      | 134,268 |   |
|                                                                               |   |     |      |           |   |   |   |
| Property                and equipment accrued asset retirement obligation increase |   | $        | 2,484     |           | $      | 2,484 |   |
|                                                                               |   |     |      |           |   |   |   |
| **SUPPLEMENTAL                DISCLOSURES OF NONCASH**                             |   |     |      |           |   |   |   |
| **OPERATING                ACTIVITIES**                                            |   |     |      |           |   |   |   |
|                                                                               |   |     |      |           |   |   |   |
| Stock                based compensation expense                                    |   | $        | 42,938    |           | $      | 5,744 |   |

----

**SCI      ENGINEERED MATERIALS, INC.**

**NOTES      TO FINANCIAL STATEMENTS**

| **Note              1.** | **Business                Organization and Purpose** |
|--------------------------|------------------------------------------------------|

| **Note              2.** | **Summary                of Significant Accounting                Policies** |
|--------------------------|------------------------------------------------------------------------------|

|   |   | The                accompanying unaudited financial statements have been prepared in                accordance with accounting principles generally accepted in the United                States of America for interim financial information and with instructions                to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they                do not                include all of the information and footnotes required by accounting                principles generally accepted in the United States of America for                complete                financial statements. In the opinion of management, all adjustments                considered necessary for fair presentation of the results of operations                for the periods presented have been included. The financial statements                should be read in conjunction with the audited financial statements                and                the notes thereto for the year ended December 31, 2006. Interim results                are not necessarily indicative of results for the full                year. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | The                preparation of financial statements in conformity with accounting                principles generally accepted in the United States of America requires                management to make estimates and assumptions that 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 reporting                period. Actual results could differ from those                estimates. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Equipment      purchased with grant funding**

|   |   | In                2004, the Company received funds of $517,935 from the Ohio Department                of                Development’s Third Frontier Action Fund (TFAF) for the purchase of                equipment related to the grant’s purpose. The Company has elected to                record the funds disbursed as a contra asset; therefore, the assets                are                not reflected in the Company’s financial statements. As assets were                purchased, the liability initially created when the cash was received                was                reduced with no revenue recognized or fixed asset recorded on the                balance                sheet. As of September 30, 2007, the Company had disbursed the entire                amount received. The grant and contract both provide that as long                as the                Company performs in compliance with the grant/contract, the Company                retains the rights to the equipment. Management states that the Company                will be in compliance with the requirements and, therefore, will                retain                the equipment at the end of the grant in                2008. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**SCI      ENGINEERED MATERIALS, INC.**

**NOTES      TO FINANCIAL STATEMENTS**

| **Note              2.** | **Summary                of Significant Accounting Policies                (continued)** |
|--------------------------|------------------------------------------------------------------------------------------|

**Stock      Based Compensation **

**Reclassification      **

----

**SCI      ENGINEERED MATERIALS, INC.**

**NOTES      TO FINANCIAL STATEMENTS**

| **Note                3.** |   | **Common                Stock and Stock Options** |
|----------------------------|--------|---------------------------------------------------|

**Employee      Stock Options**

|                                                    |   |                             |    | **Weighted**                      |   |
|---------------------------------------------------------|--------|----------------------------------|---------|-----------------------------------|--------|
|                                                    |   |                             |    | **Average**                       |   |
|                                                    |   | **Stock                Options** |    | **Exercise                Price** |   |
|                                                    |   |                             |    |                              |   |
| Outstanding                at December 31, 2005         |   |                             | 328,250 |                              | $      | 1.95 |   |
| Granted                                                 |   |                             | 42,500  |                              |   | 3.25 |   |
| Exercised                                               |   |                             | (7,000  | )                                 |   | 1.71 |   |
| Forfeited                                               |   |                             | (20,000 | )                                 |   | 2.13 |   |
| Outstanding                at December 31, 2006         |   |                             | 343,750 |                              | $      | 2.09 |   |
| Granted                                                 |   |                             | -       |                              |   | - |   |
| Exercised                                               |   |                             | -       |                              |   | - |   |
| Forfeited                                               |   |                             | (500    | )                                 |   | 3.25 |   |
| Outstanding                at September 30, 2007        |   |                             | 343,250 |                              | $      | 2.08 |   |
| Shares                exercisable at December 31, 2006  |   |                             | 306,250 |                              | $      | 1.95 |   |
| Shares                exercisable at September 30, 2007 |   |                             | 313,650 |                              | $      | 1.97 |   |

**Non-Employee      Director Stock Options**

|                                                    |   |                             |    | **Weighted**                      |   |
|---------------------------------------------------------|--------|----------------------------------|---------|-----------------------------------|--------|
|                                                    |   |                             |    | **Average**                       |   |
|                                                    |   | **Stock                Options** |    | **Exercise                Price** |   |
|                                                    |   |                             |    |                              |   |
| Outstanding                at December 31, 2005         |   |                             | 247,000 |                              | $      | 2.48 |   |
| Granted                                                 |   |                             | -       |                              |   | - |   |
| Exercised                                               |   |                             | -       |                              |   | - |   |
| Expired                                                 |   |                             | -       |                              |   | - |   |
| Forfeited                                               |   |                             | -       |                              |   | - |   |
| Outstanding                at December 31, 2006         |   |                             | 247,000 |                              | $      | 2.48 |   |
| Granted                                                 |   |                             | -       |                              |   | - |   |
| Exercised                                               |   |                             | (6,000  | )                                 |   | 1.60 |   |
| Expired                                                 |   |                             | -       |                              |   | - |   |
| Forfeited                                               |   |                             | -       |                              |   | - |   |
| Outstanding                at September 30, 2007        |   |                             | 241,000 |                              | $      | 2.51 |   |
| Shares                exercisable at December 31, 2006  |   |                             | 247,000 |                              | $      | 2.48 |   |
| Shares                exercisable at September 30, 2007 |   |                             | 241,000 |                              | $      | 2.51 |   |

----

**SCI      ENGINEERED MATERIALS, INC.**

**NOTES      TO FINANCIAL STATEMENTS**

| **Note                3.** |   | **Common                Stock and Stock Options                (continued)** |
|----------------------------|--------|------------------------------------------------------------------------------|

|                                  |   | **2006** |
|---------------------------------------|--------|----------|
| Expected                life in years |   | 7.0      |
| Interest                rate          |   | 5%       |
| Volatility                            |   | 107.55%  |
| Dividend                yield         |   | 0%       |

| **Note                4.** |   | **Inventory** |
|----------------------------|--------|---------------|

|   | Inventory                is comprised of the following: |
|--------|---------------------------------------------------------|

|                             |   | **September                30,** |      |  **December                31,** |   |
|----------------------------------|--------|----------------------------------|-----------|---------------------------------------|--------|
|                             |   | **2007**                         |      |  **2006**                        |   |
|                             |   | (unaudited)                      |      |                             |   |
| Raw                materials     |   | $                                | 871,006   |                                  | $      | 695,819 |   |
| Work-in-progress                 |   |                             | 530,062   |                                  |   | 335,325 |   |
| Finished                goods    |   |                             | 179,565   |                                  |   | 234,450 |   |
| Inventory                reserve |   |                             | (84,627   | )                                     |   | (75,862 | ) |
|                             |   | $                                | 1,496,006 |                                  | $      | 1,189,732 |   |

----

**SCI      ENGINEERED MATERIALS, INC.**

**NOTES      TO FINANCIAL STATEMENTS**

| **Note              5.** | **Earnings                Per Share** |
|--------------------------|---------------------------------------|

|   | Basic                income per share is calculated as income available to common stockholders                divided by the weighted average of common shares outstanding. Diluted                earnings per share is calculated as diluted income available to common                stockholders divided by the diluted weighted average number of common                shares. Diluted weighted average number of common shares has been                calculated using the treasury stock method for Common Stock equivalents,                which includes Common Stock issuable pursuant to stock options and                Common                Stock warrants. The following is provided to reconcile the earnings                per                share calculations: |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                |   | Three                months ended Sept. 30, 2007 |      | Three                months ended Sept. 30, 2006 |   | Nine                monthsended                Sept. 30, 2007 |   | Nine                monthsended                Sept. 30, 2006 |      |
|---------------------------------------------------------------------|--------|--------------------------------------------------|-----------|--------------------------------------------------|--------|---------------------------------------------------------------|--------|---------------------------------------------------------------|-----------|
| Income                applicable to common shares                   |   | $                                                | 30,011    |                                             | $      | 110,236                                                       |   | $                                                             | 186,706   |   | $ | 8,463 |   |
| Weighted                average common shares outstanding - basic   |   |                                             | 3,468,756 |                                             |   | 3,425,980                                                     |   |                                                          | 3,457,005 |   |   | 3,425,937 |   |
| Effect                of dilution - stock options/warrants          |   |                                             | 747,564   |                                             |   | 481,857                                                       |   |                                                          | 767,894   |   |   | 520,098 |   |
| Weighted                average common shares outstanding - diluted |   |                                             | 4,216,320 |                                             |   | 3,907,837                                                     |   |                                                          | 4,224,899 |   |   | 3,946,035 |   |

| **Note              6.** | **Capital                Requirements** |
|--------------------------|-----------------------------------------|

----

**      SCI ENGINEERED MATERIALS, INC.**

**NOTES      TO FINANCIAL STATEMENTS**

| **Note              7.** | **Production                Equipment** |
|--------------------------|-----------------------------------------|

| **Note              8.** | **Stock                Purchase Warrants/Options** |
|--------------------------|----------------------------------------------------|

----

| **Item              2.** | **Management's                Discussion and Analysis of Financial Condition and Results of                Operations.** |
|--------------------------|--------------------------------------------------------------------------------------------------------------------------|

**Overview**

----

| **Item              2.** | **Management's                Discussion and Analysis of Financial Condition and Results of Operations                (continued).** |
|--------------------------|--------------------------------------------------------------------------------------------------------------------------------------|

**Executive      Summary**

**RESULTS      OF OPERATIONS**

**Nine      months ended September 30, 2007 (unaudited) compared to nine months ended      September 30, 2006 (unaudited):**

**Revenues**

**Gross      Profit **

----

| **Item              2.** | **Management's                Discussion and Analysis of Financial Condition and Results of Operations                (continued).** |
|--------------------------|--------------------------------------------------------------------------------------------------------------------------------------|

**Selling      Expense**

**General      and Administrative Expense**

**Research      and Development Expense**

**Interest      Income and Expense**

**INCOME      APPLICABLE TO COMMON SHARES **

----

| **Item              2.** | **Management's                Discussion and Analysis of Financial Condition and Results of Operations                (continued).** |
|--------------------------|--------------------------------------------------------------------------------------------------------------------------------------|

|   | Options                and Warrants due to expire | Potential                Shares Outstanding |
|--------|---------------------------------------------------|---------------------------------------------|
| 2007   | -                                                 | 3,474,338                                   |
| 2008   | 68,021                                            | 3,542,359                                   |
| 2009   | 160,418                                           | 3,702,777                                   |
| 2010   | 443,389                                           | 4,146,166                                   |
| 2011   | 70,000                                            | 4,216,166                                   |
| 2012   | 170,000                                           | 4,386,166                                   |
| 2013   | 30,500                                            | 4,416,666                                   |
| 2014   | 90,000                                            | 4,506,666                                   |
| 2015   | 140,000                                           | 4,646,666                                   |
| 2016   | 37,000                                            | 4,683,666                                   |

**LIQUIDITY      AND WORKING CAPITAL**

----

| **Item              2.** | **Management's                Discussion and Analysis of Financial Condition and Results of Operations                (continued).** |
|--------------------------|--------------------------------------------------------------------------------------------------------------------------------------|

**RISK      FACTORS**

**Historically      we have experienced significant operating losses and may continue to do so      in      the future.**
** **

----

| **Item              2.** | **Management's                Discussion and Analysis of Financial Condition and Results of Operations                (continued).** |
|--------------------------|--------------------------------------------------------------------------------------------------------------------------------------|

**Off      Balance Sheet Arrangements**

**Critical      Accounting Policies**

*.      *

| **Item              3.** | **Controls                and Procedures** |
|--------------------------|--------------------------------------------|

----

**Part      II. Other Information**

| **Item              4.** | **Submission                of Matters to a Vote of Security                Holders.** |
|--------------------------|----------------------------------------------------------------------------------------|

|   | **(a)** | The                Company held its Annual Meeting of Shareholders on August 22, 2007,                for                the following purposes: |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (i) | To                elect five directors, each to serve for terms expiring at the next                Annual                Meeting of Shareholders; |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (ii) | To                approve the change of the corporate name to SCI Engineered Materials,                Inc.                and to amend the Company’s Articles of Incorporation;                and |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (iii) | To                ratify the selection of the independent registered public accounting                firm                for the year ending December 31,                2007. |
|--------|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **(c)** | The                following tables show the voting tabulations for the matters voted                upon at                the Annual Meeting of Shareholders. |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (i)    | Elect                directors      |      |         |
|--------|-------------------------------------|-----------|--------------|
|        |                                | **FOR**   | **WITHHELD** |
|   | Robert                J. Baker, Jr. | 2,802,864 | 3,900        |
|   | Walter                J. Doyle      | 2,801,764 | 5,000        |
|   | Robert                H. Peitz      | 2,802,914 | 3,850        |
|   | Daniel                Rooney        | 2,801,789 | 4,975        |
|   | Edward                W. Ungar      | 2,802,964 | 3,800        |

|   |                                       | **FOR**   | **AGAINST** | **ABSTAIN** |
|--------|--------------------------------------------|-----------|-------------|-------------|
| (ii)   | Approve                Company Name Change | 2,780,801 | 1,220       | 24,743      |
|   |                                       |      |        |        |
| (iii)  | Ratify                Accounting firm      | 2,806,074 | 100         | 590         |

| **Item              6.** | **Exhibits.** |
|--------------------------|---------------|

|  | *3.1* | Amendment                to Articles of Incorporation recording the change of the corporate                name to                SCI Engineered Materials, Inc.* |
|--|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *31.1* | Rule                13a-14(a) Certification of Principal Executive                Officer.* |
|--------|--------|---------------------------------------------------------------------------------------------|

|  | *31.2* | Rule                13a-14(a) Certification of Principal Financial                Officer.* |
|--|--------|---------------------------------------------------------------------------------------------|

|  | *32.1* | Section                1350 Certification of Principal Executive                Officer.* |
|--|--------|-------------------------------------------------------------------------------------------|

|  | *32.2* | Section                1350 Certification of Principal Financial                Officer.* |
|--|--------|-------------------------------------------------------------------------------------------|

|   | *99.1* | Press                Release dated November 7, 2007, entitled “SCI Engineered Materials, Inc.                Reports Third Quarter 2007                Results.”* |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Signatures**

|                                                 |                                                                                                                   |                           |
|------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------|--------------------------------|
|                                                 | **SCI                ENGINEERED MATERIALS, INC.**                                                                      |
|                                            |                                                                                                              |                      |
| Date:                November 5,                2007 |                                                                                                                   | /s/              Daniel Rooney |
|                                                 | Daniel                Rooney, Chairman of the Board of Directors, President and Chief Executive                Officer |
|                                                 | (Principal                Executive Officer)                                                                           |

|         |                                                                                         |                               |
|--------------|----------------------------------------------------------------------------------------------|------------------------------------|
|    |                                                                                    |                          |
|         |                                                                                         | /s/              Gerald S. Blaskie |
|         | Gerald                S. Blaskie, Vice President and Chief Financial Officer                 |
|         | (Principal                Financial Officer and Principal Accounting                Officer) |

----