UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q


(Mark
One)


x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended March 31,
2010





 ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from  to





Commission
file number:  0-31641





SCI
ENGINEERED MATERIALS, INC.


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





Ohio
              31-1210318(State
      or other jurisdiction of
              (I.R.S.
      Employerincorporation
      or organization)
              Identification
      No.)





2839
Charter Street, Columbus, Ohio 43228


(Address
of principal executive offices) (Zip Code)





(614)
486-0261


(Registrant’s
telephone number, including area code)





Not
Applicable


(Former
name, former address and former fiscal year, if changed since last
report)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such
files).    Yes  ̈  No    ̈





Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company.  See definition of “large
accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.


Large
accelerated filer   ̈  Accelerated
filer   ̈  Non-accelerated
filer   ̈  Smaller
reporting company  x





Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).  Yes   ̈  No  x





3,723,775
shares of Common Stock, without par value, were outstanding at April 26,
2010.





FORM
10-Q





SCI
ENGINEERED MATERIALS, INC.





Table of
Contents





Page
      No.PART
      I.     FINANCIAL INFORMATIONItem
      1.
                                              Financial
      Statements.Balance
      Sheets as of March 31, 2010 (unaudited)and December 31,
      2009
                                              3-4Statements
      of Operations for the Three MonthsEnded March 31, 2010 and 2009
      (unaudited)
                                              5Statements
      of Cash Flows for the Three MonthsEnded March 31, 2010 and 2009
      (unaudited)
                                              6-7Notes
      to Financial Statements (unaudited)
                                              8Item
      2.
                                              Management's
      Discussion and Analysis of Financial Condition and Results
      of Operations.
                                              13Item
      3.
                                              Quantitative
      and Qualitative Disclosures About Market Risk.
                                              N/AItem
      4.
                                              Controls
      and Procedures.
                                              19PART
      II.  OTHER
      INFORMATIONItem
      1.
                                              Legal
      Proceedings.
                                              N/AItem
      1A.
                                              Risk
      Factors
                                              N/AItem
      2.
                                              Unregistered
      Sales of Equity Securities and Use of Proceeds.
                                              N/AItem
      3.
                                              Defaults
      Upon Senior Securities.
                                              N/AItem
      4.
                                              (Removed
      and Reserved).
                                              N/AItem
      5.
                                              Other
      Information.
                                              N/AItem
      6.
                                              Exhibits.
                                              21Signatures.
                                              21


2


PART
I.  FINANCIAL INFORMATION
 
 ITEM
1. FINANCIAL STATEMENTS
 
 SCI
ENGINEERED MATERIALS, INC.
 
 BALANCE
SHEETS
 
 ASSETS
 
 March
      31,
                                    
                                    
                                    December
      31,2010
                                    
                                    
                                    2009(UNAUDITED)CURRENT
      ASSETSCash
                                    
                                    $
                                    1,392,032
                                    
                                    
                                    $
                                    1,107,216Accounts
      receivableTrade,
      less allowance for doubtful accounts of $ 15,753
                                    
                                    
                                    615,228
                                    
                                    
                                    
                                    539,398Contract
                                    
                                    
                                    169,553
                                    
                                    
                                    
                                    19,714Other
                                    
                                    
                                    11,175
                                    
                                    
                                    
                                    11,000Inventories
                                    
                                    
                                    1,071,162
                                    
                                    
                                    
                                    1,031,777Deferred
      taxes
                                    
                                    
                                    101,000
                                    
                                    
                                    
                                    156,000Prepaid
      expenses
                                    
                                    
                                    1,207,603
                                    
                                    
                                    
                                    977,536Total
      current assets
                                    
                                    
                                    4,567,753
                                    
                                    
                                    
                                    3,842,641PROPERTY
      AND EQUIPMENT, AT COSTMachinery
      and equipment
                                    
                                    
                                    4,944,525
                                    
                                    
                                    
                                    4,933,855Furniture
      and fixtures
                                    
                                    
                                    129,389
                                    
                                    
                                    
                                    127,451Leasehold
      improvements
                                    
                                    
                                    315,054
                                    
                                    
                                    
                                    315,054Construction
      in progress
                                    
                                    
                                    172,106
                                    
                                    
                                    
                                    22,9665,561,074
                                    
                                    
                                    
                                    5,399,326Less
      accumulated depreciation
                                    
                                    
                                    (2,985,552
                                    )
                                    
                                    
                                    (2,868,198
                                    )2,575,522
                                    
                                    
                                    
                                    2,531,128OTHER
      ASSETSDeposits
                                    
                                    
                                    23,882
                                    
                                    
                                    
                                    21,909Intangibles
                                    
                                    
                                    40,585
                                    
                                    
                                    
                                    41,358Total
      other assets
                                    
                                    
                                    64,467
                                    
                                    
                                    
                                    63,267TOTAL
      ASSETS
                                    
                                    $
                                    7,207,742
                                    
                                    
                                    $
                                    6,437,036
 
 The
accompanying notes are an integral part of these financial
statements.
  3
 
 SCI
ENGINEERED MATERIALS, INC.
 
 BALANCE
SHEETS
 
 LIABILITIES AND
SHAREHOLDERS' EQUITY
 
 March
      31,
                                  
                                  
                                  December
      31,2010
                                  
                                  
                                  2009(UNAUDITED)CURRENT
      LIABILITIESCapital
      lease obligation, current portion
                                  
                                  $
                                  373,475
                                  
                                  
                                  $
                                  363,270Note
      payable, current portion
                                  
                                  
                                  62,864
                                  
                                  
                                  
                                  62,394Accounts
      payable
                                  
                                  
                                  321,460
                                  
                                  
                                  
                                  263,468Customer
      deposits
                                  
                                  
                                  1,481,897
                                  
                                  
                                  
                                  1,319,455Accrued
      compensation
                                  
                                  
                                  104,864
                                  
                                  
                                  
                                  67,863Accrued
      expenses and other
                                  
                                  
                                  210,892
                                  
                                  
                                  
                                  210,294Total
      current liabilities
                                  
                                  
                                  2,555,452
                                  
                                  
                                  
                                  2,286,744Capital
      lease obligation, net of current portion
                                  
                                  
                                  719,423
                                  
                                  
                                  
                                  738,750Note
      payable, net of current portion
                                  
                                  
                                  301,326
                                  
                                  
                                  
                                  317,219Total
      liabilities
                                  
                                  
                                  3,576,201
                                  
                                  
                                  
                                  3,342,713COMMITMENTS
      AND CONTINGENCIES
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -SHAREHOLDERS'
      EQUITYConvertible
      preferred stock, Series B, 10% cumulative, nonvoting, no par value, $10
      stated value, optional redemption at 103%;   24,297 issued
      and outstanding
                                  
                                  
                                  377,686
                                  
                                  
                                  
                                  371,612Common
      stock, no par value, authorized 15,000,000 shares; 3,723,775 and 3,571,775
      shares issued and outstanding respectively
                                  
                                  
                                  9,590,299
                                  
                                  
                                  
                                  9,209,424Additional
      paid-in capital
                                  
                                  
                                  1,456,222
                                  
                                  
                                  
                                  1,412,382Accumulated
      deficit
                                  
                                  
                                  (7,792,666
                                  )
                                  
                                  
                                  (7,899,095
                                  )3,631,541
                                  
                                  
                                  
                                  3,094,323TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
                                  
                                  $
                                  7,207,742
                                  
                                  
                                  $
                                  6,437,036
 
 The
accompanying notes are an integral part of these financial
statements.
  4
 
 SCI
ENGINEERED MATERIALS, INC.
 
 STATEMENTS
OF OPERATIONS
 
 THREE
MONTHS ENDED MARCH 31, 2010 AND 2009
 (UNAUDITED)
 
 2010
                                                      
                                                      
                                                      2009PRODUCT
      REVENUE
                                                      
                                                      $
                                                      2,002,599
                                                      
                                                      
                                                      $
                                                      1,655,110CONTRACT
      RESEARCH REVENUE
                                                      
                                                      
                                                      238,513
                                                      
                                                      
                                                      
                                                      246,4252,241,112
                                                      
                                                      
                                                      
                                                      1,901,535COST
      OF PRODUCT REVENUE
                                                      
                                                      
                                                      1,389,180
                                                      
                                                      
                                                      
                                                      1,287,143COST
      OF CONTRACT RESEARCH
                                                      
                                                      
                                                      174,230
                                                      
                                                      
                                                      
                                                      186,8721,563,410
                                                      
                                                      
                                                      
                                                      1,474,015GROSS
      PROFIT
                                                      
                                                      
                                                      677,702
                                                      
                                                      
                                                      
                                                      427,520MARKETING
      AND SALES EXPENSE
                                                      
                                                      
                                                      154,322
                                                      
                                                      
                                                      
                                                      168,092GENERAL
      AND ADMINISTRATIVE EXPENSE
                                                      
                                                      
                                                      281,230
                                                      
                                                      
                                                      
                                                      415,037RESEARCH
      AND DEVELOPMENT EXPENSE
                                                      
                                                      
                                                      53,256
                                                      
                                                      
                                                      
                                                      125,330INCOME
      (LOSS) FROM OPERATIONS
                                                      
                                                      
                                                      188,894
                                                      
                                                      
                                                      
                                                      (280,939
                                                      )OTHER
      INCOME (EXPENSE)Interest
      income
                                                      
                                                      
                                                      1,055
                                                      
                                                      
                                                      
                                                      2,494Interest
      expense
                                                      
                                                      
                                                      (21,822
                                                      )
                                                      
                                                      
                                                      (28,588
                                                      )(20,767
                                                      )
                                                      
                                                      
                                                      (26,094
                                                      )INCOME
      (LOSS) BEFORE PROVISION FOR INCOME TAX
                                                      
                                                      
                                                      168,127
                                                      
                                                      
                                                      
                                                      (307,033
                                                      )INCOME
      TAX EXPENSE
                                                      
                                                      
                                                      (61,698
                                                      )
                                                      
                                                      
                                                      (287
                                                      )INCOME
      (LOSS)
                                                      
                                                      
                                                      106,429
                                                      
                                                      
                                                      
                                                      (307,320
                                                      )DIVIDENDS
      ON PREFERRED STOCK
                                                      
                                                      
                                                      (6,074
                                                      )
                                                      
                                                      
                                                      (6,107
                                                      )INCOME
      (LOSS) APPLICABLE TO COMMON SHARES
                                                      
                                                      $
                                                      100,355
                                                      
                                                      
                                                      $
                                                      (313,427
                                                      )EARNINGS PER SHARE - BASIC AND
      DILUTED(Note 6)INCOME
      (LOSS) BEFORE PROVISION FOR INCOME TAX PER COMMON SHAREBasic
                                                      
                                                      $
                                                      0.05
                                                      
                                                      
                                                      $
                                                      (0.09
                                                      )Diluted
                                                      
                                                      $
                                                      0.04
                                                      
                                                      
                                                      $
                                                      (0.09
                                                      )INCOME
      (LOSS) APPLICABLE TO COMMON SHARES PER COMMON SHAREBasic
                                                      
                                                      $
                                                      0.03
                                                      
                                                      
                                                      $
                                                      (0.09
                                                      )Diluted
                                                      
                                                      $
                                                      0.03
                                                      
                                                      
                                                      $
                                                      (0.09
                                                      )WEIGHTED
      AVERAGE SHARES OUTSTANDINGBasic
                                                      
                                                      
                                                      3,711,942
                                                      
                                                      
                                                      
                                                      3,562,037Diluted
                                                      
                                                      
                                                      3,869,583
                                                      
                                                      
                                                      
                                                      3,562,037
 
 The
accompanying notes are an integral part of these financial
statements.
  5
 
 SCI
ENGINEERED MATERIALS, INC.
 
 STATEMENTS
OF CASH FLOWS
 
 THREE
MONTHS ENDED MARCH 31, 2010 AND 2009
 
 (UNAUDITED)
 
 2010
                                      
                                      
                                      2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
                                      
                                      $
                                      106,429
                                      
                                      
                                      $
                                      (307,320
                                      )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      and accretion
                                      
                                      
                                      119,010
                                      
                                      
                                      
                                      116,054Amortization
                                      
                                      
                                      772
                                      
                                      
                                      
                                      772Stock
      based compensation
                                      
                                      
                                      53,663
                                      
                                      
                                      
                                      231,290Decrease
      in deferred tax asset
                                      
                                      
                                      55,000
                                      
                                      
                                      
                                      -Inventory
      reserve
                                      
                                      
                                      2,037
                                      
                                      
                                      
                                      6,000Provision
      for doubtful accounts
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (8,947
                                      )Changes
      in operating assets and liabilities:(Increase)
      decrease in assets:Accounts
      receivable
                                      
                                      
                                      (225,843
                                      )
                                      
                                      
                                      245,410Inventories
                                      
                                      
                                      (41,422
                                      )
                                      
                                      
                                      376,845Prepaid
      expenses
                                      
                                      
                                      (230,067
                                      )
                                      
                                      
                                      (312,950
                                      )Other
      assets
                                      
                                      
                                      (1,972
                                      )
                                      
                                      
                                      3,258Increase
      (decrease) in liabilities:Accounts
      payable
                                      
                                      
                                      57,992
                                      
                                      
                                      
                                      7,007Accrued
      expenses and customer deposits
                                      
                                      
                                      198,384
                                      
                                      
                                      
                                      (170,205
                                      )Total
      adjustments
                                      
                                      
                                      (12,446
                                      )
                                      
                                      
                                      494,534Net
      cash provided by operating activities
                                      
                                      
                                      93,983
                                      
                                      
                                      
                                      187,214CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of property and equipment
                                      
                                      
                                      (75,086
                                      )
                                      
                                      
                                      (60,116
                                      )Net
      cash used in investing activities
                                      
                                      
                                      (75,086
                                      )
                                      
                                      
                                      (60,116
                                      )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from exercise of common stock options
                                      
                                      
                                      2,125
                                      
                                      
                                      
                                      1,550Proceeds
      from exercise of common stock warrants
                                      
                                      
                                      375,000
                                      
                                      
                                      
                                      -Principal
      payments on capital lease obligations and note payable
                                      
                                      
                                      (111,206
                                      )
                                      
                                      
                                      (84,467
                                      )Net
      cash provided by (used in) financing activities
                                      
                                      
                                      265,919
                                      
                                      
                                      
                                      (82,917
                                      )
 
 The
accompanying notes are an integral part of these financial
statements.
  6
 
 SCI
ENGINEERED MATERIALS, INC.
 
 STATEMENTS
OF CASH FLOWS (CONTINUED)
 
 THREE
MONTHS ENDED MARCH 31, 2010 AND 2009
 
 2010
                      
                      
                      2009NET
      INCREASE IN CASH
                      
                      $
                      284,816
                      
                      
                      $
                      44,181CASH - Beginning of
      period
                      
                      
                      1,107,216
                      
                      
                      
                      1,399,050CASH - End of
      period
                      
                      $
                      1,392,032
                      
                      
                      $
                      1,443,231SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid during the years for:Interest,
      net
                      
                      $
                      21,822
                      
                      
                      $
                      28,588Income
      taxes
                      
                      $
                      150
                      
                      
                      $
                      150SUPPLEMENTAL
      DISCLOSURES OF NONCASH FINANCING ACTIVITIESProperty
      and equipment purchased by capital lease
                      
                      $
                      86,661
                      
                      
                      $
                      468,350Property
      & equipment accrued asset retirement obligation
    increase
                      
                      $
                      1,656
                      
                      
                      $
                      1,656SUPPLEMENTAL
      DISCLOSURES OF NONCASH OPERATING ACTIVITIESStock
      based compensation
                      
                      $
                      53,663
                      
                      
                      $
                      231,290
 
 The
accompanying notes are an integral part of these financial
statements.
  7




SCI
ENGINEERED MATERIALS, INC.


NOTES
TO FINANCIAL STATEMENTS





Note
1.                   
Business Organization and Purpose





SCI
Engineered Materials, Inc. (“SCI” or the “Company”), formerly Superconductive
Components, Inc., an Ohio corporation, was incorporated in 1987.  The
Company develops, commercializes technologies and manufactures ceramics and
metals for advanced applications in the physical vapor deposition industry
including: Photonics, Solar, Thin Film Battery, Semiconductor, and, to a lesser
extent High Temperature Superconductor (HTS) materials.  Photonics
currently represents the Company’s largest market.  Solar is an
industry that is exhibiting rapid growth.  Thin Film Battery is a
developing market where manufacturers of batteries use the Company’s products to
produce very small power supplies with small quantities of stored
energy.    Semiconductor is a developing
market.





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-Q 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, 2009.  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.





Stock
Based Compensation





Stock
Based Compensation - Compensation cost recognized in 2010 and 2009 includes
compensation cost for all stock-based awards granted on or subsequent to January
1, 2006, based on the grant date fair value estimated in accordance with the
Stock Compensation Topic of the FASB Accounting Standards
Codification.  Non cash stock based compensation costs were $53,663
and $231,290 for the three months ended March 31, 2010 and 2009,
respectively.   On January 2, 2009, the Stock Option and
Compensation Committee (the “Committee”) of the Board of Directors of the
Company approved the grant of options to purchase a total of 450,000 shares of
the Company’s common stock, effective January 2, 2009, to the Company’s Chief
Executive Officer and three other executive officers.  The Committee
also approved the grant of options to purchase 90,000 shares to the four
non-employee board members.  Pursuant to the terms of the agreements,
the options have an exercise price of $6.00 per share, the closing price of the
Company’s common stock as reported on the OTC Bulletin Board regulated quotation
service on January 2, 2009.





Reclassification





Certain
amounts in the prior year financial statements have been reclassified to conform
to the current year presentation.


8





SCI
ENGINEERED MATERIALS, INC.


NOTES
TO FINANCIAL STATEMENTS





Note
      3.
            Common
      Stock and Stock Options





On
January 8, 2010 a total of 150,000 common stock warrants, which were originally
in the estates of Dr. Edward R. Funk Sc.D., and Ingeborg V. Funk, founders of
the Company, were exercised at a price of $2.50 per share.  The cash
proceeds received were $375,000.  407,057 common stock warrants are
due to expire in 2010.





The
cumulative status of options granted and outstanding at March 31, 2010, and
December 31, 2009, as well as options which became exercisable in connection
with the Stock Option Plans is summarized as follows:





Employee Stock
Options




WeightedAverageStock
      Options
                
                
                Exercise
      PriceOutstanding
      at December 31, 2008
                
                
                362,750
                
                
                $
                2.14Granted
                
                
                450,000
                
                
                
                6.00Exercised
                
                
                (6,250
                )
                
                
                2.03Forfeited
                
                
                (10,250
                )
                
                
                3.05Outstanding
      at December 31, 2009
                
                
                796,250
                
                
                $
                4.31Granted
                
                
                -
                
                
                
                -Exercised
                
                
                -
                
                
                
                -Forfeited
                
                
                (500
                )
                
                
                2.13Outstanding
      at March 31, 2010
                
                
                795,750
                
                
                $
                4.31Shares
      exercisable at December 31, 2009
                
                
                369,325
                
                
                $
                2.52Shares
      exercisable at March 31, 2010
                
                
                413,825
                
                
                $
                2.90




9





SCI
ENGINEERED MATERIALS, INC.


NOTES
TO FINANCIAL STATEMENTS





Note
      3.
            Common
      Stock and Stock Options (continued)





Non-Employee Director Stock
Options





WeightedAverageStockOptions
                    
                    
                    Exercise PriceOutstanding
      at December 31, 2008
                    
                    
                    233,500
                    
                    
                    $
                    2.54Granted
                    
                    
                    90,000
                    
                    
                    
                    6.00Exercised
                    
                    
                    (4,000
                    )
                    
                    
                    2.13Expired
                    
                    
                    -
                    
                    
                    
                    -Forfeited
                    
                    
                    -
                    
                    
                    
                    -Outstanding
      at December 31, 2009
                    
                    
                    319,500
                    
                    
                    $
                    3.52Granted
                    
                    
                    -
                    
                    
                    
                    -Exercised
                    
                    
                    (1,000
                    )
                    
                    
                    2.13Expired
                    
                    
                    (1,000
                    )
                    
                    
                    2.13Forfeited
                    
                    
                    -
                    
                    
                    
                    -Outstanding
      at March 31, 2010
                    
                    
                    317,500
                    
                    
                    $
                    3.53Shares
      exercisable at December 31, 2009
                    
                    
                    259,500
                    
                    
                    $
                    2.95Shares
      exercisable at March 31, 2010
                    
                    
                    287,500
                    
                    
                    $
                    3.27





Exercise
prices for options range from $1.00 to $6.00 at March 31, 2010.  The
weighted average option price for all options outstanding is $4.09 with a
weighted average remaining contractual life of 5.6 years.





Note
      4.
            Preferred
      Stock





On
February 15, 2010 the Board of Directors voted not to authorize the payment of a
cash dividend on convertible preferred stock, Series B, to shareholders of
record as of December 31, 2009.





Note
      5.
            Inventory





Inventory
      is comprised of the following:





March 31,
                  
                  
                  December31,2010
                  
                  
                  2009(unaudited)Raw
      materials
                  
                  $
                  392,118
                  
                  
                  $
                  371,060Work-in-progress
                  
                  
                  519,688
                  
                  
                  
                  506,288Finished
      goods
                  
                  
                  210,989
                  
                  
                  
                  204,026Inventory
      reserve
                  
                  
                  (51,633
                  )
                  
                  
                  (49,597
                  )$
                  1,071,162
                  
                  
                  $
                  1,031,777


10





SCI
ENGINEERED MATERIALS, INC.


NOTES
TO FINANCIAL STATEMENTS





Note
      6.
            Earnings
      Per Share





Basic
      income (loss) per share is calculated as income (loss) 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.  At March 31, 2009 all common stock options and
      warrants were anti-dilutive due to the net loss.  The following
      is provided to reconcile the earnings per share
    calculations:





Three
      months ended March 31,2010
                                
                                
                                2009Income
      (loss) applicableto common
      shares
                                
                                $
                                100,355
                                
                                
                                $
                                (313,427
                                )Weighted
      averagecommon
      sharesoutstanding
      – basic
                                
                                
                                3,711,942
                                
                                
                                
                                3,562,037Effect
      of dilutions -options
      and warrants
                                
                                
                                157,641
                                
                                
                                
                                -Weighted
      averageshares
      outstanding –diluted
                                
                                
                                3,869,583
                                
                                
                                
                                3,562,037





Note
7.                   Capital
Requirements





The
Company’s accumulated deficit since inception was $7,792,666 (unaudited) at
March 31, 2010.  While the Company has been profitable in three of the
past four years, the historical losses have been financed primarily from
additional investments and loans by major shareholders and private offerings of
common stock and warrants to purchase common stock.  The Company
cannot assure that it will continue to operate at a profit or it will be able to
raise additional capital in the future to fund its operations.





As of
March 31, 2010, cash on-hand was $1,392,032.  Management believes,
based on forecasted sales and expenses, that funding will be adequate to sustain
operations at least through March 31, 2011.





Numerous
factors may make it necessary for the Company to seek additional
capital.  In order to support the initiatives included in its business
plan, the Company may need to raise additional funds through public or private
financing, collaborative relationships or other arrangements.  Its
ability to raise additional financing depends on many factors beyond its
control, including the state of capital markets, the market price of its common
stock and the development or prospects for development of competitive products
by others.  Because the common stock is not listed on a major stock
exchange, many investors may not be willing or allowed to purchase it or may
demand steep discounts.  The additional financing may not be available
or may be available only on terms that would result in further dilution to the
current owners of the common stock.


11





SCI
ENGINEERED MATERIALS, INC.


NOTES
TO FINANCIAL STATEMENTS





Note
8.                  Note
Payable





On
December 14, 2009, the Company issued a Promissory Note dated as of December 14,
2009, to The Huntington National Bank, as Lender, pursuant to a Business Loan
Agreement dated as of December 14, 2009.  The Note is secured by a
Commercial Security Agreement granting the Lender a security interest in the
Company’s inventory, equipment and accounts.  This Note replaces the
Note previously signed on January 13, 2009 which matured on January 1,
2010.  As of March 31, 2010 there was no outstanding
balance.





Among
other items, the Note provides for the following:





·
            At
      no time shall the outstanding balance of the principal sum of the
      Revolving Loan exceed the lesser of (1) $500,000 or (2) an amount equal to
      the sum of 80% of Eligible Accounts plus the lesser of (A) 50% of Eligible
      inventory or (B) $200,000.





·
            Interest
      on the Note is subject to change from time to time based on changes in an
      independent index, which is the LIBO rate.  The index at the
      inception of the Note was 0.235% per annum.  The interest rate
      to be applied to the unpaid principal balance during this Note will be at
      a rate of 2.75 percentage points over the
index.





·
            All
      accrued interest is payable monthly.  The outstanding principal
      and accrued interest owed on the Note matures on January 15,
      2011.





Note
9.                  Concentration
- Supplier





At March
31, 2010 the Company had a prepaid expense of approximately $1.1 million to a
supplier for the purchase of raw material.  The Company is confident the
supplier, with revenues of several billion dollars, will continue to deliver the
raw material as agreed upon.





Note
10.               Income
Taxes





Income
tax expense consists of the following:





2009
                            
                            
                            2008Federal – deferred
                            
                            $
                            55,000
                            
                            
                            $
                            -State and local
                            
                            
                            6,698
                            
                            
                            
                            287$
                            61,698
                            
                            
                            
                            287


12





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





The
following discussion should be read in conjunction with the Financial Statements
and Notes contained herein and with those in our Form 10-K for the year ended
December 31, 2009.




Except
for the historical information contained herein, the matters discussed in this
Quarterly Report on Form 10-Q include certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby.  Those
statements include, but may not be limited to, all statements regarding our
intent, belief, and expectations, such as statements concerning our future
profitability and operating and growth strategy.  Words such as
“believe,” “anticipate,” “expect,” “will,” “may,” “should,” “intend,” “plan,”
“estimate,” “predict,” “potential,” “continue,” “likely” and similar expressions
are intended to identify forward-looking statements.  Investors are
cautioned that all forward-looking statements contained in this Quarterly Report
on Form 10-Q and in other statements we make involve risks and uncertainties
including, without limitation, the factors set forth under the caption “Risk
Factors” included in our Annual Report on Form 10-K for the year ended December
31, 2009, and other factors detailed from time to time in our other filings with
the Securities and Exchange Commission.  One or more of these factors
have affected, and in the future could affect our business and financial
condition and could cause actual results to differ materially from plans and
projections.  Although we believe the assumptions underlying the
forward-looking statements contained herein are reasonable, there can be no
assurance that any of the forward-looking statements included in this Quarterly
Report on Form 10-Q will prove to be accurate.  In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by us or any other person that our objectives and plans will be
achieved.




Any
forward-looking statement speaks only as of the date on which such statement is
made, and we undertake no obligation to update any forward-looking statement or
statements to reflect events or circumstances after the date on which such
statements are made or reflect the occurrence of unanticipated events, unless
necessary to prevent such statements from becoming misleading.  New
factors emerge from time to time and it is not possible for us to predict all
factors, nor can it assess the impact of each such factor on the business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking
statements.




Overview




SCI
Engineered Materials, Inc. (“SCI” or the “Company”), formerly Superconductive
Components, Inc., an Ohio corporation, was incorporated in 1987.  We
develop, commercialize technologies and manufacture ceramics and metals for
advanced applications in the physical vapor deposition industry including:
Photonics, Solar, Thin Film Battery, Semiconductor, and, to a lesser extent HTS
materials.  Photonics currently represents the largest market for our
targets.  Solar is an industry that is exhibiting rapid growth and we
expect this market to grow quickly.  Thin Film Battery is a developing
market where manufacturers of batteries use our products to produce very small
power supplies with small quantities of stored
energy.    Semiconductor is a developing market for
us.  In recent years we added to our sales staff for the purpose of
focusing on opportunities for our products in the Solar industry.  We
also added staff to our Technology group for the development of innovative
products.  Late in the second quarter of 2009 we received an order
from a solar customer that was in excess of $1 million.  Nearly the
entire amount shipped before December 31, 2009.  Late in the fourth
quarter this same customer placed another order greater than $1
million.  This entire order is expected to ship during the first half
of 2010.


13




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





Executive
Summary





For the
three months ended March 31, 2010, we had revenues of
$2,241,112.  This was an increase of $339,577, or 17.9%, compared to
the three months ended March 31, 2009.  The increase in revenues can
be attributed to an increase in product revenue, particularly in the Solar
market.  Product revenue increased $347,489 for the three months ended
March 31, 2010 from the same time period in 2009, or
21.0%.    Contract research revenue decreased slightly to
$238,513 from $246,425 for the first quarter of 2010 compared to the first
quarter of 2009.





Gross
profit increased $250,182 to $677,702, or 58.5% for the three months ended March
31, 2010 compared to the same three months in 2009.  The increase in
gross profit can be attributed to the increase in product revenue as mentioned
above, particularly in the Solar market.  Gross margin was 30.2% of
total revenues for the first three months of 2010 compared to 22.5% for the same
period in 2009.





For the
three months ended March 31, 2010, we had income before provision for income tax
of $168,127 compared to a loss of $307,033 for the three months ended March 31,
2009.  We had income applicable to common shares of $100,355 for the
three months ended March 31, 2010 compared to a loss of $313,427 for the
same period in 2009.  This increase can be attributed to the increase
in revenue previously mentioned and a reduction of operating expenses of
approximately $220,000. Non-cash stock based compensation operating expenses
decreased to approximately $49,000 in the first quarter of 2010 from
approximately $224,000 in the first quarter of 2009.





Given
current market opportunities, we continued to invest in expanding production,
R&D, marketing, and sales.  This has resulted in trial and
qualification orders that were shipped to customers in the solar industry
throughout 2009 and the first quarter of 2010.  This should allow us
to gain market share and to be poised to receive large orders in targeted
applications.





Subsequent
to the first quarter of 2010, in April, we received ISO 9001:2008 registration,
an internationally recognized quality standard.  Prior to April 2010
we were ISO 9001:2000 registered.





During
the first quarter of 2010 a total of 150,000 common stock warrants, which were
originally in the estates of Dr. Edward R. Funk Sc.D., and Ingeborg V. Funk,
founders of our company, were exercised at a price of $2.50 per
share.  The cash proceeds received were $375,000.





During
the fourth quarter of 2009 we were notified we had been awarded a grant in the
amount of $775,400 by the Ohio Department of Development’s Third Frontier
Photovoltaic Program (OTFPVP) to commercialize advanced technology for high
power density rotatable ceramic sputtering targets.  These targets are
used in the manufacture of thin film photovoltaics.  This technology
will enable manufacturers to operate rotatable sputtering targets at higher
power densities than current technology.   The approval of the
grant was received during January 2010 and the work on the contract commenced in
the first quarter of 2010.





During
the third quarter of 2009 we received notification from the Department of Energy
of an Assistance Agreement in the amount of approximately
$750,000.   The award was subsequently reduced to approximately
$650,000.  An amount of $117,076 was approved so the work could begin
in the third quarter of 2009.  The remaining balance is expected to be
approved during the second quarter of 2010.  This grant provides
support for Phase II of a Small Business Innovation


14





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





Research
(SBIR) award entitled “Homogenous BSCCO-2212 Round Wires for Very High Field
Magnet Applications.”  The work on the contract is expected to
continue through August 2011.





In July
2009, the Company was selected by a customer as a subcontractor for an award
recently granted by the Ohio Department of Development.  This award is
entitled “Ohio-Based Manufacturing of Thin-Film Photovoltaics” and provides
support for the development of alternate transparent conductive
oxides.    The work on the contract began during the third
quarter of 2009 and is projected to be completed during 2010.  The
amount of the subcontract work to be performed by the Company is
$125,000.





We
received notification during the fourth quarter of 2008 from the Ohio Department
of Development’s Third Frontier Advanced Energy Program (TFAEP) of an award in
the amount of $708,715.  This grant provides support to commercialize
technologies for the manufacture of rotatable ceramic sputtering targets for the
production of transparent conductive oxide-coated glass used in manufacturing
thin film photovoltaic solar cell panels.   The work on the
contract began in January of 2009 and is expected to continue through January
2011.





During
the third quarter of 2008 we received notification from the Department of Energy
of a Notice of Financial Assistance Award in the amount of approximately
$750,000.  The initial $125,000 was formally approved during
2008.  The remaining balance was approved in February
2009.  This grant provides support for Phase II of a Small Business
Innovation Research (SBIR) award entitled “Flux Pinning Additions to Increase Jc
Performance in BSCCO-2212 Round Wire for Very High Field
Magnets.”  The work on the contract began during the third quarter of
2008 and is expected to continue through August 2010.





We
received notification during the second quarter of 2008 from the Department of
Energy of a Notice of Financial Assistance Award in the amount of
$99,961.  This award provided support for Phase I of an SBIR award
entitled “Homogenous BSCCO-2212 Round Wires for Very High Field Magnet
Applications.”  The work on the contract began during the third
quarter of 2008 and was completed during the first quarter of 2009.




RESULTS
OF OPERATIONS





Three
months ended March 31, 2010 (unaudited) compared to three months ended March 31,
2009 (unaudited):





Revenues





Revenues
for the three months ended March 31, 2010 were $2,241,112 compared to
$1,901,535, for the same period last year, an increase of $339,577 or
17.9%.  The increase in revenues can be attributed to an increase in
product revenue, particularly in the Solar market.  Product revenue
increased $347,489 for the three months ended March 31, 2010 from the same time
period in 2009, or 21.0%.    Contract research revenue
decreased slightly to $238,513 from $246,425 for the first quarter of 2010
compared to the first quarter of 2009.


15





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





Gross
Profit





Gross
profit for the three months ended March 31, 2010 was $677,702 which represented
gross margin of 30.2% of total revenue compared to $427,520 and 22.5% of total
revenue for the three months ended March 31, 2009.  The increase in
gross profit and gross margin can be attributed to the increase in product
revenue previously mentioned, particularly in the Solar market.





Marketing
and Sales Expense





Marketing
and Sales expense for the three months ended March 31, 2010 decreased 8.2% to
$154,322 from $168,092 for the same period in 2009.  The decrease was
due to less non-cash stock based compensation expense of approximately
$21,000.  A decrease in wages partially offset an increase in
manufacturer’s sales representative commissions in the first quarter of
2010.




General
and Administrative Expense





General
and administrative expense for the three months ended March 31, 2010 decreased
to $281,230 from $415,037 for the three months ended March 31, 2009, or
32.2%.  The decrease was the result of less non-cash stock based
compensation expense of approximately $136,000.





Research
and Development Expense





During
the first quarter of 2010 most of our research and development resources were
applied to the five ongoing R&D contracts.  Research and
development expense for the first three months of 2010 was $53,256 compared to
$125,330 for the same period in 2009, a decrease of 57.5%.  The
decrease was due to less non-cash stock based compensation expense
(approximately $20,000) and less materials used for internal
research.





Interest
Income and Expense





Interest
income was $1,055 and $2,494 for the three months ended March 31, 2010 and 2009,
respectively.   The decrease in interest rates reduced the amount
of interest earned.





Interest
expense was $21,822 and $28,588 for the three months ended March 31, 2010 and
2009, respectively.  The decrease was due to the maturity of four
capital leases plus more principal and less interest being applied to ongoing
capital lease payments.





Income
Tax Expense





Income
      tax expense for the three months ended March 31, 2010 was $61,698 compared
      to $287 for the three months ended March 31, 2009.  The deferred
      tax benefit of $156,000 at December 31, 2009 was reduced by $55,000 during
      the first quarter of 2010 to account for usage of prior net operating
      losses against current year income.




INCOME
      (LOSS) APPLICABLE TO COMMON SHARES





Income
applicable to common shares was $100,355, or $0.03 per common share, for the
three months ended March 31, 2010 compared to a loss applicable to common shares
of $313,427, or $(0.09) per common share for the three months ended March 31,
2009.  The income or loss applicable to common shares includes loss or
income after provision for income tax and the accretion of Series B preferred
stock dividends.  Dividends on the Series B preferred stock accrue at
10% annually on the outstanding shares.  Accrued dividends on the
Series B preferred stock was $6,074 and $6,107 for the three months ended March
31, 2010 and 2009, respectively.  Basic income or loss per common
share before provision for income tax was $0.05 and $(0.09) for the three months
ended March 31, 2010 and 2009, respectively.


16




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




Basic and
diluted income applicable to common shares for the three months ended March 31,
2010 was $0.03 per common share based on 3,711,942 and 3,869,583 weighted
average shares outstanding, respectively.  The weighted averaged
shares outstanding were 3,562,037 at March 31, 2009.  All outstanding
common stock equivalents were anti-dilutive for the three months ended March 31,
2009 due to the net loss.




The
following schedule represents our outstanding common shares during the period of
2010 through 2019 assuming all outstanding stock options and stock warrants are
exercised during the year of expiration.  If each shareholder
exercises his or her options or warrants, it could increase our common shares by
1,520,307 to 5,244,082 by December 31, 2019.  Exercise prices for
options and warrants range from $1.00 to $6.00 at March 31,
2010.  Assuming all such options and warrants are exercised in the
year of expiration, the effect on shares outstanding is illustrated as
follows:





Options and Warrants due to expire
                                        
                                        
                                        Potential Shares Outstanding2010
                                        
                                        
                                        442,057
                                        
                                        
                                        
                                        4,165,8322011
                                        
                                        
                                        62,500
                                        
                                        
                                        
                                        4,228,3322012
                                        
                                        
                                        169,000
                                        
                                        
                                        
                                        4,397,3322013
                                        
                                        
                                        30,250
                                        
                                        
                                        
                                        4,427,5822014
                                        
                                        
                                        180,000
                                        
                                        
                                        
                                        4,607,5822015
                                        
                                        
                                        140,000
                                        
                                        
                                        
                                        4,747,5822016
                                        
                                        
                                        37,000
                                        
                                        
                                        
                                        4,784,5822017
                                        
                                        
                                        -
                                        
                                        
                                        
                                        4,784,5822018
                                        
                                        
                                        9,500
                                        
                                        
                                        
                                        4,794,0822019
                                        
                                        
                                        450,000
                                        
                                        
                                        
                                        5,244,082





LIQUIDITY
AND WORKING CAPITAL





At March
31, 2010, working capital was $2,012,301 compared to $1,597,662 at March 31,
2009. We provided cash from operations of approximately $94,000 and $187,000 for
the three months ended March 31, 2010 and March 31, 2009,
respectively.   Non-cash items including depreciation, accretion
and amortization, stock based compensation, change in deferred tax asset,
inventory reserve on excess and obsolete inventory, and provision for doubtful
accounts were approximately $230,000 and $345,000, respectively, for the three
months ended March 31, 2010 and 2009.  Accounts receivable, inventory,
prepaid expenses and other assets increased approximately $499,000 for the three
months ended March 31, 2010.  Accounts receivable, inventory, prepaid
expenses and other assets decreased approximately $313,000 for the three months
ended March 31, 2009.  Accounts payable, accrued expenses and customer
deposits increased approximately $256,000 for the three months ended March 31,
2010.  Accounts payable, accrued expenses and customer deposits
decreased approximately $163,000 for the three months ended March 31,
2009.  Cash of approximately $75,000 and $60,000 was used for
investing activities for the three months ended March 31, 2010 and 2009,
respectively.  The amounts invested were used to purchase machinery
and equipment for increased production capacity and new product
lines.


17





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





Cash of
approximately $266,000 was provided by financing activities during the three
months ended March 31, 2010.  Principal payments to third parties for
capital lease obligations and a note payable approximated
$111,000.  Proceeds received from the exercise of common stock
warrants were $375,000. Proceeds
received from the exercise of common stock options were $2,125.  We
incurred new capital lease obligations of approximately $87,000 for new
production equipment.





During
the three months ended March 31, 2009 cash of approximately $83,000 was used for
financing activities.  Principal payments to third parties for capital
lease obligations approximated $84,000.  Proceeds received from the
exercise of common stock options were $1,550.  We incurred new capital
lease obligations of approximately $468,000 for new production
equipment.





RISK
FACTORS





We
      desire to take advantage of the “safe harbor” provisions of the Private
      Securities Litigation Reform Act of 1995.  The following
      factors, as well as the factors listed under the caption “Risk Factors” in
      our Form 10-K filed with the Securities and Exchange Commission on
      February 17, 2010, have affected or could affect our actual results and
      could cause such results to differ materially from those expressed in any
      forward-looking statements made by us.  Investors should
      consider carefully these risks and speculative factors inherent in and
      affecting our business and an investment in our common
    stock.





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





While we
have had profitable operations in three of the past four years, profits have not
been consistent and we financed the historical losses primarily from additional
investments and loans by our major shareholders and private offerings of common
stock and warrants to purchase common stock. We cannot assure you that we will
be able to raise additional capital in the future to fund our
operations.  While certain of our major shareholders have advanced
funds in the form of secured debt, subordinated debt, accounts payable and
guaranteeing bank debt in the past, there is no commitment by these individuals
to continue funding us or guaranteeing bank debt in the future.





We will
continue to seek new financing or equity financing
arrangements.  However, we cannot be certain that it will be
successful in efforts to raise additional funds.







Off
Balance Sheet Arrangements





We have
no off balance sheet arrangements including special purpose
entities.





18





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


Critical Accounting
Policies
 
 The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States requires
management to make judgments, assumptions and estimates that affect the amounts
reported in the Financial Statements and accompanying notes.Note
2 to the Financial Statements in our Annual Report on Form 10-K for the year
ended December 31, 2009 describes the significant accounting policies and
methods used in the preparation of the Financial
Statements.  Estimates are used for, but not limited to, accounting
for the allowance for doubtful accounts, inventory allowances, property and
equipment depreciable lives, patents and licenses useful lives, and assessing
changes in which impairment of certain long-lived assets may
occur.   Actual results could differ from these
estimates.  The following critical accounting policies are impacted
significantly by judgments, assumptions and estimates used in the preparation of
the Financial Statements.  The allowance for doubtful accounts is
based on our assessment of the collectability of specific customer accounts and
the aging of the accounts receivable.  If there is a deterioration of
a major customer’s credit worthiness or actual defaults are higher than our
historical experience, our estimates of the recoverability of amounts due us
could be adversely affected.  Inventory purchases and commitments are
based upon future demand forecasts. If there is a sudden and significant
decrease in demand for our products orthere is a higher risk of
inventory obsolescence because of rapidly changing technology and customer
requirements, we may be required to increase our inventory allowances and our
gross margin could be adversely affected.  Depreciable and useful
lives estimated for property and equipment, licenses and patents are based on
initial expectations of the period of time these assets and intangibles will
benefit us.  Changes in circumstances related to a change in our
business, change in technology or other factors could result in these assets
becoming impaired, which could adversely affect the value of these
assets.





Item
4.                    Controls
and Procedures





Evaluation of Disclosure Controls and
Procedures





Based on
an evaluation under the supervision and with the participation of our
management, our principal executive officer and principal financial officer have
concluded that the our disclosure controls and procedures as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as  amended ("Exchange Act") were effective as of March 31, 2010 to
ensure that information required to be disclosed in reports that are filed or
submitted under the Exchange Act is (i) recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission rules and forms and (ii) accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required
disclosure.




Inherent Limitations over Internal
Controls





Our
internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. Our internal control over financial reporting
includes those policies and procedures that: (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets;  (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted  accounting
principles, and that receipts and expenditures are being made only in accordance
with authorizations of management and directors; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of assets that could have a material effect on the financial
statements.


19





Item
4.                    Controls
and Procedures (continued)





Management,
including our Chief Executive Officer and Chief Financial Officer, does not
expect that our internal controls will prevent or detect all errors and all
fraud. A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of internal controls can provide absolute
assurance that all control issues and instances of fraud, if any, have been
detected.  Also, any evaluation of the effectiveness of controls in
future periods is subject to the risk that those internal controls may become
inadequate because of changes in business conditions or that the degree of
compliance with the policies or procedures may deteriorate.





Management
previously disclosed a material weakness in internal control over financial
reporting in its annual report on Form 10-K, filed on February 17, 2010 for the
year ended December 31, 2009, relating to insufficient segregation of duties
consistent with control objectives.  Management is aware of the risks
associated with the lack of segregation of duties due to the small number of
employees currently working with general administrative and financial
matters.  Due to our size and nature, segregation of all conflicting
duties may not always be possible and may not be economically
feasible.  However, to the extent possible, the initiation of
transactions, the custody of assets and the recording of transactions shall be
performed by separate individuals.





In order
to remediate this weakness, we will need to hire additional
employees.  Although we will periodically reevaluate this situation,
at this point we consider that the risks associated with such lack of
segregation of duties and the potential benefits of adding employees to
segregate such duties are not cost justified.  Until we are able to
hire additional employees, we will continue to report to the Audit Committee and
the Board of Directors at least monthly (and more often as
necessary).  We believe this will continue to mitigate this
weakness.  This reporting includes balance sheets, statements of
operations, statements of cash flows, and other detail supporting these
statements.





There
were no changes in our internal controls over financial reporting for the three
months ended March 31, 2010 that materially affected or were reasonably likely
to materially affect our disclosure controls and
procedures.  Additionally, there were no changes in our internal
controls that could materially affect our disclosure controls and procedures
subsequent to the date of their evaluation.   As a result, no
corrective actions were required or undertaken.


20





Part
II.   Other Information





Item
      6.
                      Exhibits.10.1
                      Description
      of exercise of 150,000 common stock warrants (Incorporated by reference to
      the Company’s Current Report on Form 8-K, dated January 8,
      2010).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 and Certification of
      Principal Financial Officer and Principal Accounting
    Officer.*99.1
                      Press
      Release dated April 29, 2010, entitled “SCI Engineered Materials, Inc.
      Reports Significantly Improved First Quarter 2010
  Results.”*
      Filed with this
report





Signatures





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





SCI
      ENGINEERED MATERIALS, INC.Date:  April
      29, 2010
              /s/ Daniel RooneyDaniel
      Rooney, Chairman of the Board of Directors, President and Chief Executive
      Officer(Principal
      Executive Officer)/s/ Gerald S. BlaskieGerald
      S. Blaskie, Vice President and Chief Financial Officer(Principal
      Financial Officer and Principal Accounting
  Officer)


21