Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  o

     Check 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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes  þ       No  o

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

     Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B contained in this form, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  o

     The issuer’s revenues for the fiscal year ended December 31, 2006, were $8,045,792.

     The aggregate market value of the Registrant’s common equity held by non-affiliates of the Registrant was approximately $10,432,375 on March 2, 2007 .

     There were 3,440,191 shares of the Registrant’s Common Stock outstanding on March 2, 2007.

     Transitional Small Business Disclosure Format (check one): Yes  o       No  þ

Documents Incorporated By Reference

     Portions of our Proxy Statement for the 2007 Annual Meeting of Stockholders are incorporated by reference in Part III.

 

 

				Page
Part I
Item 1.		Description of Business			3
Item 2.		Description of Property			9
Item 3.		Legal Proceedings			9
Item 4.		Submission of Matters to a Vote of Security Holders			9
Part II
Item 5.		Market for Common Equity and Related Stockholder Matters			10
Item 6.		Management’s Discussion and Analysis or Plan of Operation			12
Item 7.		Financial Statements			16
Item 8.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			16
Item 8A.		Controls and Procedures			16
Item 8B.		Other Information			16
Part III
Item 9.		Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act			17
Item 10.		Executive Compensation			17
Item 11.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			17
Item 12.		Certain Relationships and Related Transactions			17
Item 13.		Exhibits			18
Item 14.		Principal Accountant Fees and Services			20
		Signatures			21
EX-23
EX-24
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Note Regarding Forward-Looking Statements

     This Annual Report on Form 10-KSB contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 26A of the Securities Act of 1933, as amended. The words “anticipate,” “believe,” “expect,” “estimate,” and “project” and similar words and expressions identify forward-looking statements, which speak only as of the date hereof. Investors are cautioned that such statements involve risks and uncertainties that could cause actual results to differ materially from historical or anticipated results due to many factors, including, but not limited to, the factors discussed in “Description of Business — Risk Factors.” The Company undertakes no obligation to publicly update or revise any forward-looking statements.

PART I

     Photonics/Optical currently represents the largest market for our materials. Our customers are continually identifying new materials that improve the utility of optical coating. This includes improvements in their ability to focus or filter light, and coatings that improve wear and chemical attack resistance, all of which increase the potential demand for the types and amounts of materials we sell in this market. Photonic applications continue to expand as new methods are found to manipulate light waves to enhance the various properties of light. Currently, these include optic devices, photonic integrated circuits, reflective coatings and solar products.

     Thin Film Battery materials is a developing market where manufacturers of batteries use our targets, especially lithium orthophosphate and lithium cobalt oxide as key elements to produce power supplies with small quantities of stored energy. A typical Thin Film Battery would be produced via Physical Vapor Deposition (PVD) with five or more thin layers. These batteries are often one centimeter square but only 15 microns thick. Potential applications for these batteries include, but are not limited to, active RFID tags, battery on chip, portable electronics, and medical implant devices.

     We achieved ISO 9001:2000 certification during 2005. This immediately resulted in the return of a major customer and the addition of another major customer which helped to increase our sales in the second half of 2005 and through out 2006.

     We had total annual revenues of $8,045,792, $3,457,182, and $2,172,864 in the years ended December 31, 2006, 2005, and 2004, respectively.

     Principal suppliers in 2006 were Polema S.A., Engelhard Corporation and Johnson Matthey. In every case, we believe that suitable alternate vendors can be used to ensure availability of required materials. As volume grows, we may enter into alliances or purchasing contracts with these or other vendors.

     Our largest customer represented over 60% of total revenues in 2006. We had contract research revenue of $42,092 and $289,439, representing 0.5% and 8.4%, for the years ending December 31, 2006 and 2005, respectively.

Marketing and Sales

     We use various distribution channels to reach end user markets, including direct sales by our sales persons, independent manufacturers’ representatives in the United States, and independent distributors for international markets. The Internet provides tremendous reach for new customers to be able to identify us as a source of their product needs. We have an operating website www.sciengineeredmaterials.com, which we upgraded in 2006 to include expanded online product inquiry capabilities and additional product information. In 2006, we added a marketing manager to further drive our sales efforts, especially in the Semiconductor market.

Ceramics

     We are capable of producing ceramic powders via several different processing techniques including solid state, precipitation and combustion synthesis. Ceramic targets can also be produced in a variety of ways depending on the end user applications. Production techniques include sintering, cold isostatic pressing and hot pressing.

     Most of our products are manufactured from component chemicals and metals supplied by various vendors. If we suddenly lost the services of a supplier, there could be a disruption in its manufacturing process until the supplier was replaced. We have identified several firms as potential back-up suppliers who would be capable of supplying these materials to us as necessary. To date, we have not experienced an interruption of raw material supplies.

Metals

     In addition to the ceramic targets previously mentioned, we produce metal sputtering targets and backing plates. The targets are bonded to the backing plates for application in the PVD industry. These targets can be produced by casting, hot pressing and machining of metals and metal alloys depending on the application.

     Applications for metal targets are highly varied from applying decorative coatings for end uses such as sink faucets to the production of various electronic, photonic and semiconductor products.

     We purchase various metals of reasonably high purity (often above 99.9%) for our applications. We are not dependent on a single source for these metals and do not believe losing a vendor would materially affect our business.

     We have continually added production processes and testing equipment for the many product compositions that can be used as PVD materials.

Competition

     We have a number of domestic and international competitors in both the ceramic and metal fields, many of whom have resources far in excess of our resources. Williams Advanced Materials provides both powders and thin film deposition products. Kurt Lesker is another supplier of ceramic targets and Dowa Chemicals of Japan supplies HTS materials. Tosoh, Williams Advanced Materials, Kurt Lesker and Plasmaterials are competing suppliers in regard to metal targets.

Research and Development

     We are developing sputtering targets for semiconductor applications which could be used to produce high K dielectric films via PVD processing. We focus our research and development efforts in areas that build on our expertise in multi-component ceramic oxides.

     Contract research revenues were $42,092 during 2006, compared to $289,439 for 2005 . The decrease was due to the completion of work performed on a Phase II Small Business Innovation Research grant for $523,612 from the United States Department of Energy that was awarded in 2003. This award was to develop an advanced method to manufacture continuous reacted lengths of High Tc Superconductor: Bismuth Strontium Calcium Copper Oxide — 2212 Wire. The work on this contract was completed in 2005. Revenues of $0 and $231,738 from this grant were included in 2006 and 2005, respectively.

     We received notification in 2005 from the United States Department of Energy of a Notice of Financial Assistance Award in the amount of $99,793. This award provided support for Phase I of an SBIR entitled “Feasibility of Cost Effective, Long Length, BSCCO 2212 Round Wires, for Very High Field Magnets Beyond 12 Tesla at 4.2 Kelvin.” The work on the contract has been completed. Revenues of $42,092 and $57,701 were recognized in 2006 and 2005, respectively.

     We intend to continue to seek funded research opportunities that maintain and expand technical understanding within our company.

     We have certain proprietary knowledge and trade secrets related to the manufacture of ceramic oxide PVD materials and patents covering some HTS products.

New Product Initiatives

     During 2006, we began work to develop transparent conductive oxide materials for the fast growing Photovoltaic (PV or Solar Cell) market. Three materials were identified for development. One of these three materials was being tested in a prototype application in 2006.

     We have undertaken research and development opportunities with respect to new and innovative materials and processes to be used in connection with the production of Thin Film Batteries. Presently, there are approximately five manufacturers of Thin Film Batteries in the country, each in various stages of development from prototype to small scale production. In addition there are several firms and research institutes conducting tests on Thin Film Batteries. We believe this market may potentially become very large with significant growth expected during the next two years. There are numerous applications for Thin Film Batteries, including, but not limited to, active RFID tags, battery on chip, portable electronics, and medical implant devices. Given the many potential uses for Thin Film Batteries, we anticipate that the market for materials it produces will grow in direct correlation to the Thin Film Battery market itself.

     We currently face competition from other producers of materials used in connection with the manufacture of Thin Film Batteries. We believe that we have certain competitive advantages in terms of quality, but acknowledge that we are currently at a disadvantage in terms of capital resources. We intend to actively market our materials to Thin Film Battery producers in the upcoming year in order maintain our strong presence in this market. Currently, SCI is the leading supplier of targets to this market.

     At present, we have several customers for the materials we produce for Thin Film Batteries. Since we have begun producing materials for the Thin Film Battery market, we have experienced no problems securing the supplies

needed to produce the materials. We do not anticipate supply problems in the near future. However, changes in production methods and advancing technologies could render our current products obsolete and the new production protocols may require supplies that are less available in the marketplace, which may cause a slowing or complete halt to production as well as expanding costs which we may or may not be able to pass on to our customers.

     In October of 2003, we were awarded a $1.2 million grant from the State of Ohio’s Third Frontier Action Fund. We have teamed with Lithchem Inc. to produce raw materials for the Lithium Thin Film Battery sputtering target manufacturing process. The funds were used to procure capital equipment required to commercialize the manufacturing process for target manufacturing. In addition, three manufacturers of Lithium Thin Film Batteries have agreed to participate in the program and will provide testing and manufacturing qualification evaluations of targets produced using the commercial scale processes developed during the grant period. The term of the grant was two years. An extension has been approved and the program is expected to be completed by September 30, 2007. We have received and are using equipment funded by this grant.

Intellectual Property

     We have received a patent for Fine-Particle Bi-Sr-Ca-Cu-O Having High Phase Purity made by a Chemical Precipitation and Low-Pressure Calcination method from the United States Patent and Trademark Office. We also have received a patent for a new process to join two individual strongly linked super-conductors utilizing a melt processing technique.

     In the future, we may submit additional patent applications covering various applications, which have been developed by us. Because U.S. patent applications are maintained in secret until patents are issued, and because publications of discoveries in the scientific or patent literature tend to lag behind actual discoveries by several months, we may not be the first creator of inventions covered by issued patents or pending patent applications or the first to file patent applications for such inventions. Additionally, other parties may independently develop similar technologies, duplicate our technologies or, if patents are issued to us or rights licensed by us, design around the patented aspects of any technologies we developed or licensed.

     We rely on a combination of patent and trademark law, license agreements, internal procedures and nondisclosure agreements to protect our intellectual property. Unfortunately, these may be invalidated, circumvented or challenged. In addition, the laws of some foreign countries in which our products may be produced or sold do not protect our intellectual property rights to the same extent as the laws of the United States.

Employees

     We had 21 full-time employees as of December 31, 2006. Of these employees one held a PhD in Material Science. We have never experienced work stoppage and consider our relations with employees to be good. The employees do not have a bargaining unit.

Environmental Matters

     We handle all materials according to Federal, State and Local environmental regulations and include Material Safety Data Sheets (MSDS) with all shipments to customers. We maintain a collection of MSDS sheets for all raw materials used in the manufacture of products and maintenance of equipment and insure that all personnel follow the handling instructions contained in the MSDS for each material. We contract with a reputable fully permitted hazardous waste disposal company to dispose of the small amount of hazardous waste materials generated.

Collections and Write-offs

     We collected receivables in an average of 24 days in 2006. We have occasionally been forced to write-off negligible amount of accounts receivable as uncollectible. We consider credit management critical to our success.

Seasonal Trends

     We have not experienced and do not expect to experience seasonal trends in future business operations.

Risk Factors

     We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The following factors have affected or could affect actual results and could cause such results to differ materially from those expressed in any forward-looking statements made. Investors should consider carefully the following risks and speculative factors inherent in and affecting the business of SCI and an investment in the our common stock.

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

     The Company reported net income applicable to common shares of $277,083 for 2006. Our accumulated deficit since inception in 1987 was $7,859,087 at December 31, 2006.

     We have financed our historical losses primarily from additional investments and loans by our major shareholders and private offerings of common stock and warrants to purchase common stock in 2004 and 2005. We cannot assure you, however, that we will be able to raise additional capital in the future to fund our operations.

We have limited marketing and sales capabilities.

     We hired a full time marketing manager in 2006, to expand our marketing activities, especially in the semiconductor market. We must continue to develop appropriate marketing, sales, technical, customer service and distribution capabilities, or enter into agreements with third parties to provide these services to successfully market our products. A failure to develop these capabilities or obtain third-party agreements could adversely affect us.

Our success depends on our ability to retain key management personnel.

     Our success depends in large part on our ability to attract and retain highly qualified management, administrative, manufacturing, sales, and research and development personnel. Due to the specialized nature of our business, it may be difficult to locate and hire qualified personnel. The loss of services of one of our executive officers or other key personnel, or our failure to attract and retain other executive officers or key personnel could have a material adverse effect on our business, operating results and financial condition. Although we have been successful in planning for and retaining highly capable and qualified successor management in the past, there can be no assurance that it will be able to do so in the future.

We may need to seek additional capital in the future, which may reduce the value of our common stock.

     We reported net income applicable to common shares of $277,083 for 2006. We incurred substantial operating losses prior to 2006. We could be required to seek additional capital in the future for growth and working capital purposes. There is no assurance that new capital will be available or that it will be available on terms that will not result in substantial dilution or reduction in value of our common stock.

Our competitors have far greater financial and other resources than we have.

     The market for Physical Vapor Deposition Materials is a substantial market with significant competition in both ceramic and metal materials. While we believe that our products enjoy certain competitive advantages in design, function, quality, and availability, considerable competition exists from well-established firms such as a Williams Advanced Materials, Kurt Lesker and Dowa Chemicals of Japan, all of which have more resources than we have.

     In addition, a significant portion of our business is in the very competitive market for sputtering targets made of ceramics, metals, and alloys. We face substantial competition in this area from companies with far greater financial and other resources than we have. We cannot provide assurance that developments by others will not render our products or technologies obsolete or less competitive.

Government contracts may be terminated or suspended for noncompliance or other events beyond our control.

     We have had government contracts in the past but do not currently have any government contracts. Should we receive such contracts in the future, the government has the right to cancel virtually all of the contracts, which are terminable at its option. While we have complied with applicable government rules and regulations and contract provisions in the past, we could fail to comply in the future. Noncompliance with government procurement regulations or contract provisions could result in the termination of government contracts.

     Inventions conceived or actually reduced to practice under a government contract generally result in the government obtaining a royalty-free, non-exclusive license to practice the invention. Similarly, technologies developed in whole or in part at government expense generally result in the government obtaining unlimited rights to use, duplicate or disclose technical data produced under the contract. These licenses and rights may result in a loss of potential revenues or the disclosure of our proprietary information, either of which could adversely affect us.

Our revenues depend on patents and proprietary rights that may not be enforceable.

     We rely on a combination of patent and trademark law, license agreements, internal procedures and nondisclosure agreements to protect our intellectual property. These may be invalidated, circumvented or challenged. In addition, the laws of some foreign countries in which our products may be produced or sold do not protect our intellectual property rights to the same extent as the laws of the United States. Our failure to protect our proprietary information could adversely affect us.

Rights we have to patents and pending patent applications may be challenged.

     We have received, from the United States Patent and Trademark Office, a patent for Fine-Particle Bi-Sr-Ca-Cu-O Having High Phase Purity made by a Chemical Precipitation and Low-Pressure Calcination method, and have also received a patent for a process to join two individual strongly linked super-conductors utilizing a melt processing technique. In the future, we may submit additional patent applications covering various applications. The patent application we filed and patent applications that we may file in the future may not result in patents being issued, and any patents issued may not afford meaningful protection against competitors with similar technology, and may be challenged by third parties. Because U.S. patent applications are maintained in secret until patents are issued, and because publications of discoveries in the scientific or patent literature tend to lag behind actual discoveries by several months, we may not be the first creator of inventions covered by issued patents or pending patent applications or the first to file patent applications for such inventions. Moreover, other parties may independently develop similar technologies, duplicate our technologies or, if patents are issued to us or rights licensed by us, design around the patented aspects of any technologies we developed or licensed. We may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine the priority of inventions, which could result in substantial costs. Litigation may also be necessary to enforce any patents held by or issued to us or to determine the scope and validity of others’ proprietary rights, which could result in substantial costs.

The rapid technological changes of our industry may adversely affect us if we do not keep pace with advancing technology.

     The Physical Vapor Deposition Market is characterized by rapidly advancing technology. Our success depends on our ability to keep pace with advancing technology and processes and industry standards. We have focused our development efforts on powders and sputtering targets. We intend to continue to develop and integrate advances in the thin film coatings industry. However, our development efforts may be rendered obsolete by research efforts and technological advances made by others, and materials other than those we currently use may prove more advantageous.

Additional development of our products may be necessary due to uncertainty regarding development of markets.

     Some of our products are in the early stages of commercialization and we believe that it will be several years before these products will have significant commercial end-use applications, and that significant additional development work may be necessary to improve the commercial feasibility and acceptance of these products. There can be no assurance that we will be able to commercialize any of the products currently under development.

     To date, there has been no widespread commercial use of High Temperature Superconductive (HTS) products. Additionally, the market for the Thin Film Battery materials is still in its nascent stages.

The market for our common stock is limited, and as such our shareholders may have difficulty reselling their shares when desired or at attractive market prices.

     Our stock price and our listing may make it more difficult for our shareholders to resell shares when desired or at attractive prices. In 2001, our stock began trading on The Over the Counter Bulletin Board (“OTC Bulletin Board”). Nevertheless, our common stock has continued to trade in low volumes and at low prices. Some investors view low-priced stocks as unduly speculative and therefore not appropriate candidates for investment. Many institutional investors have internal policies prohibiting the purchase or maintenance of positions in low-priced stocks.

     This has the effect of limiting the pool of potential purchases of our common stock at present price levels. Shareholders may find greater percentage spreads between bid and asked prices, and more difficulty in completing transactions and higher transaction costs when buying or selling our common stock than they would if our stock were listed on a major stock exchange, such as The New York Stock Exchange or The Nasdaq National Market.

Prior to the fourth quarter of 2006 our common stock was subject to the Securities and Exchange Commission’s “penny stock” regulations, which limited the liquidity of common stock held by our shareholders .

     Based on trading prices prior to the fourth quarter of 2006, our common stock was considered a “penny stock” for purposes of federal securities laws, and therefore was subject to regulations, which affected the ability of broker-dealers to sell our securities. Broker-dealers who recommend a “penny stock” to persons (other than established customers and accredited investors) must make a special written suitability determination and receive the purchaser’s written agreement to a transaction prior to sale. There can be no assurances that our common stock will not again fall under these regulations.

     If penny stock regulations apply to our common stock, it may be difficult to trade the stock because compliance with the regulations can delay and/or preclude certain trading transactions. Broker-dealers may be discouraged from effecting transactions in common stock because of the sales practice and disclosure requirements for penny stock. This could adversely affect the liquidity and/or price of our common stock, and impede the sale of the common stock in the secondary market.

Our Articles of Incorporation authorize us to issue additional shares of stock.

     We are authorized to issue up to 15,000,000 shares of common stock, which may be issued by our board of directors for such consideration, as they may consider sufficient without seeking shareholder approval. The issuance of additional shares of common stock in the future may reduce the proportionate ownership and voting power of current shareholders.

     Our Articles of Incorporation authorize us to issue up to 260,000 shares of preferred stock. The issuance of preferred stock in the future could create additional securities which would have dividend and liquidation preferences prior in right to the outstanding shares of common stock. These provisions could also impede a non-negotiated change in control.

We have not paid dividends on our common stock in the past and do not expect to do so in the future.

     We cannot assure you that our operations will result in sufficient revenues to enable us to operate at profitable levels or to generate positive cash flow sufficient to pay dividends. We have never paid dividends on our common shares in the past and do not expect to do so in the foreseeable future. The Company intends to retain future earnings for use in the business.

PART II

Equity Compensation Plan Information

     The following table sets forth additional information as of December 31, 2006, concerning shares of our common stock that may be issued upon the exercise of options and other rights under our existing equity compensation plans and arrangements, divided between plans approved by our shareholders and plans or arrangements not submitted to the shareholders for approval. The information includes the number of shares covered by, and the weighted average exercise price of, outstanding options and other rights and the number of shares remaining available for future grants excluding the shares to be issued upon exercise of outstanding options, warrants, and other rights.

ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

Overview

     Superconductive Components, Inc. (“SCI” or the “Company”), dba SCI Engineered Materials, an Ohio corporation, was incorporated in 1987, to develop, manufacture and market products based on or incorporating high temperature superconductive (“HTS”) materials. We manufacture ceramic and metal targets for a variety of industrial applications including: Photonics/Optical, Semiconductor, Thin Film Batteries and, to a lesser extent HTS. Photonics/Optical currently represents our largest market for its targets. Semiconductor is the newest market we have entered. We added a full time Marketing Manager in late 2006 to pursue opportunities in this market. Thin Film Battery is a developing market where manufacturers of batteries use our targets to produce very small power supplies, with small quantities of stored energy. The production and sale of HTS materials was the initial focus of our operations and these materials continue to be a part of our development efforts.

Executive Summary

     For the year ended December 31, 2006, we had record revenues of $8,045,792, which was a 133% increase over 2005. Revenues for the second half were substantially higher compared to the first half of the year.

     For the year ended December 31, 2006, we recorded net income applicable to common shares of $277,083 compared to a net loss of $(358,405) for 2005. We adopted SFAS 123R effective January 1, 2006. SFAS 123R requires compensation costs related to share based payment transactions to be recognized in the financial statements. Included in expenses for 2006 is non-cash compensation expense to employees related to the granting of stock options. The net income applicable to common shares would have been $287,135 in 2006 without this expense. Earnings Before Interest, Taxes, Deprecation and Amortization (EBITDA) was $494,101 during 2006 versus $(64,936) during 2005.

     Orders received in 2006 were $8,841,827, which was $5,382,744 or 155.6% more than 2005.

Results of Operations

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 the Annual Report on Form 10-KSB for the year ended December 31, 2006 describes the significant accounting policies and methods used in the preparation of the Financial Statements. Estimates are used for, but not limited to, the 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 collectibility 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 or there 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 provide benefit to 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.

Year 2006 As Compared to Year 2005

      Revenues

     Revenues increased by 132.7% in 2006 to $8,045,792 from $3,457,182 the prior year.

     Product sales increased 152.7% to $8,003,700 in 2006 from $3,167,743 in 2005. The increase in revenues was due to the return of a major customer and the addition of another major customer following the receipt of ISO

9001:2000 certification, in the second quarter of 2005, as well as the addition of other new customers since the third quarter of 2005. In addition, a portion of the revenue increase was attributable to an increase in a commodity raw material. Revenues include the ongoing purchase of commodities whose prices have historically experienced periods of significant fluctuation. These changes are regularly reflected in selling prices and we are not exposed to risks associated with price fluctuations of those commodities.

     Government development contract revenue was $42,092, or 0.5% of total revenues in 2006 and $289,439 or 8.4% of total revenues in 2005. The decrease was due to the completion of work performed on a Phase II Small Business Innovation Research (SBIR) grant for $523,612 from the United States Department of Energy that began in 2003. This award was to develop an advanced method to manufacture continuous reacted lengths of High Tc Superconductor: Bismuth Strontium Calcium Copper Oxide — 2212 Wire. The work on the contract was completed in 2005. Revenues of $0 and $231,738 from this grant were included in 2006 and 2005, respectively.

     During 2005, the Company received notification from the Department of Energy of a Notice of Financial Assistance Award that provides support for Phase I of an SBIR entitled “Feasibility of Cost Effective, Long Length, BSCCO 2212 Round Wires, for Very High Field Magnets Beyond 12 Tesla at 4.2 Kelvin.” The work on this contract was completed in 2006. Revenues of $42,092 and $57,701 were recognized during 2006 and 2005, respectively.

     We currently have no government contracts.

      Gross Margin

     Total gross margin in 2006 was $1,788,244 or 22.2% of total revenue as compared to $919,861 or 26.6% in 2005. The primary reason for the decrease expressed as a percentage of revenues was due to sales mix of higher value product with lower gross margin.

     Gross margin percent for product revenue was 22.0% in 2006 versus 23.0% in 2005. Gross margin percent for contract research revenue was 58.6% for 2006 compared to 66.0% in 2005. The decrease was due to the completion of the Phase II SBIR grant.

     Gross margin on our products vary widely and are impacted from period to period by sales mix and utilization of production capacity. We expect improved volume in 2007 as the efforts of the Sales Manager and Marketing Manager lead to new sales opportunities with new customers. This added volume is expected to improve manufacturing overhead absorption yielding improved gross margins.

     Inventory reserves are established for obsolete inventory, excess inventory quantities based on our estimate of net realizable value and for lower-of-cost or market. Reductions in this reserve were $13,399 and $26,269 for the years ended December 31, 2006, and 2005, respectively. We believe the inventory reserve, after its assessment of obsolete inventory, at December 31, 2006, of $75,862 will be adequate for excess inventory and a lower of cost-or-market analysis. The decrease in the reserve for 2006 is a result of a portion of obsolete inventory sold at reduced prices.

      Selling Expense

     Selling expense increased 49.3% to $354,609 from $237,569 in 2005. This increase was primarily due to the addition of a marketing manager and the implementation of an incentive compensation program.

      General and Administrative Expense

     General and administrative expense in 2006 was $928,506 compared to $765,748 in 2005, an increase of 21.3%. This was due to increased wages, higher public relations and legal expenses and the implementation of an incentive compensation program.

      Research and Development Expense

     Research and development expense for 2006 was $212,507 compared to $183,403 in 2005, an increase of 15.9%. The increase is due to higher wages and continued Ruthenium, Thin Film Battery, Transparent Conductive Oxide and High K dielectric material and process developments.

      Interest Income and Expense

     Interest income was $43,427 and $9,843 for 2006 and 2005, respectively. This was due to funds received from the private equity placement in the fourth quarter of 2005 and cash from operations in 2006.

     Interest expense was $15,508 or 0.2% of revenues in 2006, compared to $75,624, or 2.2% or revenues in 2005. Interest expense for 2005 included $70,684 for related party interest expense. The decline was due to the elimination of interest expense to related parties on a note that was repaid, and another note that converted to equity in 2005.

Income (Loss) Applicable To Common Shares

     Income (loss) applicable to common shares was $277,083 and $(358,405) for 2006 and 2005, respectively. Net income (loss) per common share based on the income (loss) applicable to common shares for 2006 and 2005 was $0.08 and $(0.13), respectively. The income (loss) applicable to common shares includes the net income (loss) from operations and the accretion of Series B preferred stock dividends. The net income (loss) per common share before dividends on preferred stock was $0.09 and $(0.13) for 2006 and 2005, respectively.

     Dividends on the Series B preferred stock accrue at 10% annually on the outstanding shares. Accrued dividends on the Series B preferred stock was $25,185 for both 2006 and 2005.

     Basic earnings for 2006 were $0.08 per common share based on 3,427,236 average shares outstanding compared to a loss of $(0.13) per common share based on 2,665,078 weighted average shares outstanding for 2005.

     Diluted earnings per common share for 2006 were $0.07 based on 3,982,905 average shares outstanding compared to a loss of $(0.13) per share based on 2,665,078 weighted average shares outstanding for 2005. All outstanding common stock equivalents were anti-dilutive in 2005 due to the net loss.

     The following schedule represents our outstanding common shares during the period of 2007 through 2016 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 1,262,737 to 4,702,928 by December 31, 2016. Exercise prices for options and warrants range from $1.00 to $4.00 at December 31, 2006. Assuming all such options and warrants are exercised in the year of expiration, the effect on shares outstanding is illustrated as follows:

Liquidity and Working Capital

     At December 31, 2006, working capital was $1,225,605 compared to $1,443,380 at December 31, 2005, a decrease of $217,775. The decrease compared to the prior year was due to $271,000 of deposits we made for equipment in the fourth quarter of 2006. Cash used in operating activities was approximately $76,000 for the twelve months ended December 31, 2006 compared to approximately $365,000 for the twelve months ended December 31, 2005. Significant non-cash items including depreciation, accretion and amortization, stock based compensation expense, warrants issued for

consulting and debt, acceleration of stock options, inventory reserve on excess and obsolete inventory, and allowance for doubtful accounts were approximately $216,000 and $232,000, for the twelve months ended December 31, 2006 and 2005, respectively. Accounts receivable, inventory, prepaid expenses and other assets increased approximately $616,000 for the twelve months ended December 31, 2006 compared to approximately $156,000 for the same period in 2005. Accounts payable, accrued expenses and deferred revenue increased approximately $21,000 during 2006 versus a decrease of approximately $106,000 during 2005.

     Cash of approximately $334,000 and $75,000 was used for investing activities for the twelve months ended December 31, 2006 and 2005, respectively. The amounts invested were used to purchase machinery and equipment for increased production capacity, new product lines and leasehold improvements for the new facility. Proceeds on sale of equipment totaled $100 and $2,250 during 2006 and 2005, respectively.

     Cash of approximately $103,000 was used for financing activities during the twelve months ended December 31, 2006. Of this amount, principal payments to third parties for capital lease obligations approximated $63,000, cash payments for services provided for the registration of common stock were approximately $52,000, and proceeds from the exercise of stock options were $12,000. We incurred new capital lease obligations of approximately $168,000 for a forklift and production equipment.

     Cash of approximately $1,412,000 was provided for financing activities for the twelve months ended December 31, 2005. Of this amount, principal payments to third parties for capital lease obligations approximated $37,000, proceeds from notes payable totaled $300,000 and proceeds from the sale of common stock were approximately $1,349,000. In addition, principal payments on notes payable to shareholder totaled $200,000.

     During the third quarter of 2006, we met with the Development Financing Advisory Council (DFAC) of the Ohio Department of Development and applied for a loan from the Innovation Ohio Loan Fund. The DFAC has approved our request for a $631,687 loan at an interest rate of 7.5% plus certain fees over 7 years. These funds will be used to purchase production equipment in 2007.

     In November 2004, a director agreed to loan SCI up to $200,000 for working capital, to be drawn in increments of $50,000. The interest rate was Huntington National Bank’s prime rate plus 2%, accruing and compounding monthly. The loan was secured by a first lien on substantially all of our assets. For each $50,000 increment drawn on the loan, the director received 5,000 warrants to purchase our common stock at a purchase price of $2.50 per share exercisable until November 1, 2009. The loan was drawn based on the following schedule: November 3, 2004, $100,000, January 7, 2005, $50,000; and April 1, 2005, $50,000. The entire loan balance (principal and accrued interest) was repaid in October 2005.

     In April 2005, the same director who agreed to provide a secured loan for $200,000 to SCI in November 2004, agreed to provide an additional $200,000 secured loan to the Company for working capital. The interest rate was 10%, accruing and compounding monthly. On April 14, 2005, $100,000 was drawn on this loan. $100,000 was also drawn on the loan on May 20, 2005. By the terms of the loan, because we completed an equity financing of at least $500,000 during 2005, the principal and accrued interest on this loan totaling $209,110 automatically converted on the same basis as the new financing to 104,555 shares of common stock ($2.00 per share) and warrants to purchase an aggregate of 26,139 shares of our common stock at a purchase price of $3.00 per share exercisable until October 2010.

     In the fourth quarter of 2005, we completed a private placement to accredited investors. The investors purchased 986,555 shares of common stock at a price of $2.00 per share and warrants to purchase an additional 246,639 shares of common stock at $3.00 per share until October 14, 2010. We received $1,386,000 in cash from certain investors for 693,000 shares of common stock and warrants to purchase 173,250 shares of Common Stock. Four other investors cancelled indebtedness owed by SCI in the aggregate amount of $587,110 in exchange for 293,555 shares of common stock and warrants to purchase 73,389 shares of common stock. The indebtedness cancelled was as follows: (i) the Estate of Edward R. Funk cancelled indebtedness of $188,411.71 in exchange for 94,000 shares of common stock, warrants to purchase 23,500 shares of common stock at $3.00 per share exercisable until October 2010, and payment of $411.71; (ii) the Estate of Ingeborg V. Funk cancelled $100,000 of indebtedness in exchange for 50,000 shares of common stock, warrants to purchase 12,500 shares of common stock at $3.00 per share exercisable until October 2010, and payment of $980.21; (iii) Porter, Wright, Morris & Arthur LLP (PWMA) cancelled $90,000 of indebtedness for legal fees in exchange for 45,000 shares of common stock and warrants to purchase an additional 11,250 shares of common stock at $3.00 per share exercisable until October 2010; and (iv) a director cancelled $209,110 of a secured loan in exchange for 104,555 shares of common stock and warrants to

purchase an additional 26,139 shares of common stock at $3.00 per share exercisable until October 2010 (as described in preceding paragraph).

     While certain of our major shareholders have advanced funds in the form of subordinated debt, accounts payable and guaranteeing bank debt in the past, there is no commitment by these individuals to continue funding the Company 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 new funds.

Inflation

     We believe that there has not been a significant impact from inflation on our operations during the past three fiscal years.

Future Operating Results

     We plan to place some of our larger purchase commitments for raw materials on an annualized basis because they can be purchased in larger quantities at reduced prices. In general, we attempt to limit inventory price increases by making an annual commitment, and drawing the material either as required, or on a monthly or quarterly basis. Such annual commitments may reach $500,000 in 2007 and greater in 2008 depending on sales volume increases. The terms of payment for such commitments are worked out with the vendor on a case-by-case basis, but in all cases are cancelable at our discretion without penalty.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

     This document contains forward-looking statements that reflect the views of management with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. See “Risk Factors” above. These uncertainties and other factors include, but are not limited to, the words “anticipates,” “believes,” “estimates,” “expects,” “plans,” “projects,” “targets” and similar expressions which identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date the statements were made. We undertake no obligation to publicly update or revise any forward-looking statements.

PART III

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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.

		SUPERCONDUCTIVE COMPONENTS, INC.
Date: March 7, 2007				By:		/s/ Daniel Rooney
						Daniel Rooney, Chairman of the Board of
						Directors, President and Chief Executive
						Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 7 ^th day of March 2007.

		Signature				Title
		/s/ 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)
		Robert J. Baker*   Robert J. Baker				Director
		Edward W. Ungar*				Director
		Edward W. Ungar
		Robert H. Peitz*				Director
		Robert H. Peitz
		Walter J. Doyle*				Director
		Walter J. Doyle

*By:		/s/ Daniel Rooney   Daniel Rooney, Attorney-in-Fact

INDEX TO FINANCIAL STATEMENTS

		Page
Report of Independent Registered Public Accounting Firm		F-1
Balance Sheet		F-2
Statements of Operations		F-4
Statements of Shareholders’ Equity		F-5
Statements of Cash Flows		F-6
Notes to Financial Statements		F-8

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders
Superconductive Components, Inc.
Columbus, Ohio

     We have audited the accompanying balance sheet of Superconductive Components, Inc. as of December 31, 2006, and the related statements of operations, shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Superconductive Components, Inc. as of December 31, 2006, and the results of its operations and its cash flows for each of the two years in the period then ended in conformity with accounting principles generally accepted in the United States of America.

		/s/ HAUSSER + TAYLOR LLC
Columbus, Ohio
February 26, 2007

F-1

The accompanying notes are an integral part of these financial statements.

The accompanying notes are an integral part of these financial statements.

SUPERCONDUCTIVE COMPONENTS, INC.

SUPERCONDUCTIVE COMPONENTS, INC.

NOTES TO FINANCIAL STATEMENTS

Note 2.		Summary of Significant Accounting Policies (Continued)
D.		Contract research and development costs are expensed when the contracted work has been performed or as milestone results have been achieved. These contracts vary from six months to three years in duration. The terms of the contracts, which are fixed price, require the Company to submit final reports and/or progress reports to the sponsor. While the contracts are subject to cancellation, management believes that the Company will comply with all terms of the contracts and that all of the amounts awarded to the Company will be collected.
		Research revenue and expenses associated to third parties are separately identified in the Statements of Operations.
		During 2006 and 2005, the Company earned $42,092 and $289,439, respectively, in contract revenue.
		During 2005, the Company was awarded a nine-month contract in the amount of $99,793 that ended in 2006.
E.		Equipment — 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. In a separate contract with the Department of Energy the Company received $27,500 for the purchase of equipment related to the contract’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 December 31, 2006, 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/contract.
F.		Licenses — The Company has secured licenses to produce various superconductive materials for periods up to the expiration of the applicable patents. The license fees, included in “Other Assets” on the balance sheet, are being amortized over the expected life of the agreement or applicable patent, which is seventeen years. Cost and accumulated amortization of licenses at December 31, 2006 are $21,000 and $13,972, respectively. Amortization expense was $1,259 for the years ended December 31, 2006 and 2005. Amortization expense is estimated to be $1,259 for each of the next five years.

SUPERCONDUCTIVE COMPONENTS, INC.

NOTES TO FINANCIAL STATEMENTS

Note 2.		Summary of Significant Accounting Policies (Continued)
G.		Patent — The Company has secured patents for manufacturing processes used in its operations. Costs incurred to secure the patents have been capitalized, included in “Other Assets” on the balance sheet, and are being amortized over the life of the patents. Cost and accumulated amortization of the patent at December 31, 2006 are $36,473 and $12,607, respectively. Amortization expense was $1,830 for the years ended December 31, 2006 and December 31, 2005. Amortization expense is estimated to be $1,830 for each of the next five years.
H.		Income Taxes — Income taxes are provided for by utilizing the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities using presently enacted tax rates. Deferred tax assets are recognized for net operating loss carryforwards, reduced by a valuation allowance which is established when “it is more likely than not” that some portion or all of the deferred tax assets will not be recognized.
I.		Stock Based Compensation — During 2005 the Company accounted for stock based compensation using the intrinsic value method prescribed in APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 123, “Accounting for Stock Based Compensation” (SFAS 123), which established accounting and disclosure requirements using a fair value based methodology. SFAS 123 allowed the intrinsic value method to be used, and required disclosure of the impact to the financial statements of utilizing the intrinsic value versus the fair value based method on a pro forma basis, as set forth in the table below. For all periods prior to January 1, 2006, the Company utilized the fair value method as provided for in SFAS 123 to account for stock based compensation to non-employees.
		The Company’s pro forma information for 2005, in accordance with the provisions of SFAS 123 is provided below. For purposes of pro forma disclosures, stock based compensation was amortized to expense on a straight-line basis over the vesting period.

For the twelve months ended December 31, 2006 and 2005, there was $10,052 and $27,215 respectively, of stock based compensation cost included in the determination of net income (loss) as reported.

SUPERCONDUCTIVE COMPONENTS, INC.

NOTES TO FINANCIAL STATEMENTS

Note 2.		Summary of Significant Accounting Policies (Continued)
		In December 2004, the FASB issued SFAS 123 (Revised), “Shared Based Payment” (SFAS 123R). SFAS 123R replaced SFAS 123, and superseded APB Opinion No. 25. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R and related interpretations using the modified-prospective transition method. Under this method, compensation cost recognized in 2006 includes (a) compensation cost for all stock-based awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and (b) 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 provisions of SFAS 123R. Stock based compensation expense recognized in 2006 was $10,052.
		In December 2005, the Board of Directors approved the acceleration of vesting of unvested stock options previously awarded to employees and officers of the Company. As a result of this action, options to purchase 149,500 shares of common stock that would otherwise have vested over the next one to five years became fully vested. The decision to accelerate the vesting of these options was considered to be in the best interest of the Company’s shareholders and was made primarily to reduce non-cash compensation expense that would have been recorded in future periods following the adoption of FAS 123R.
J.		Income (Loss) Per Common Share – Income (loss) per common share amounts are based on the weighted average number of shares outstanding. Due to the net loss in 2005, the assumed conversion of preferred stock and exercise of stock options and warrants are anti-dilutive and have not been considered in the calculation of per share amounts.
K.		Statements of Cash Flows — For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with maturity of three months or less to be cash. No such investments were purchased.
L.		Concentrations of Credit Risk — The Company’s cash balances, which are at times in excess of federally insured levels, are maintained at a large regional bank and a global investment banking group, and are continually monitored to minimize the risk of loss. The Company grants credit to its customers, who are varied in terms of size, geographic location and financial strength. Customer balances are continually monitored to minimize the risk of loss.
		The Company had four major customers in 2006 and 2005, which accounted for approximately $6,435,000 and $1,534,000, respectively, of the total revenue and $352,000 of the trade accounts receivable at December 31, 2006. The largest customer represented over 60% of total revenues in 2006. A portion of the revenue was attributable to an increase in a commodity raw material which can fluctuate significantly.
M.		Use of Estimates — 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 and disclosure of contingent 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.

SUPERCONDUCTIVE COMPONENTS, INC.

NOTES TO FINANCIAL STATEMENTS

Note 2.		Summary of Significant Accounting Policies (Continued)
N.		Fair Value — The estimated fair value of amounts reported in the financial statements have been determined using available market information and valuation methodologies, as applicable (see Note 12).
O.		Revenue Recognition — Revenue from product sales is recognized upon shipment to customers. Provisions for discounts and rework costs for returns are established when products are shipped based on historical experience. Deferred revenues represents cash received in advance of the contract revenues earned. Revenue from contract research provided for third parties is recognized on the percentage of completion method.
P.		Accounts Receivable — The Company extends unsecured credit to customers under normal trade agreements, which require payment within 30 days. Accounts greater than 90 days past due, which amounted to $0 and $17,665 of net receivables for the years ended December 31, 2006 and 2005, respectively are considered delinquent. The Company does not charge interest on delinquent trade accounts receivable. Accounts greater than one year past due, which amount to $0 of net receivables as of December 31, 2006 and 2005 are placed on non-accrual status. Unless specified by the customer, payments are applied to the oldest unpaid invoice. Accounts receivable are presented at the amount billed.
		Management estimates an allowance for doubtful accounts, which was $25,000 as of December 31, 2006 and 2005. The estimate is based upon management’s review of delinquent accounts and an assessment of the Company’s historical evidence of collections. Bad debt expense of $0 and $2,337 was recognized for the years ended December 31, 2006 and 2005, respectively as a result of this estimate. Specific accounts are charged directly to the reserve when management obtains evidence of a customer’s insolvency or otherwise determines that the account is uncollectible. Charge-offs of specific accounts for the years ended December 31, 2006 and 2005 totaled $0 and $11,000 respectively.
Q.		Intangible Assets — The Company accounts for Intangible Assets in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 requires certain intangible assets to be tested for impairment under certain circumstances, and written off when impaired, rather than being amortized as previous standards required. There were no impairment adjustments for the years ended December 31, 2006 and 2005.
R.		Recently Issued Accounting Standards –
		Fair Value Measurements — In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements”, effective for the Company beginning on January 1, 2008. This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This statement establishes a fair value hierarchy that distinguishes between valuations obtained from sources independent of the entity and those from the entity’s own unobservable inputs that are not corroborated by observable market data. SFAS 157 expands disclosures about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. The disclosures focus on the inputs used to measure fair value and for recurring fair value measurements using

SUPERCONDUCTIVE COMPONENTS, INC.

NOTES TO FINANCIAL STATEMENTS

Note 2.		Summary of Significant Accounting Policies (Continued)
		significant unobservable inputs, the effect of the measurements on earnings or changes in net assets for the period. The Company is currently assessing the impact of this guidance on its financial statements.
		Accounting for Uncertainty in Income Taxes — In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109 “Accounting for Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 becomes effective for the Company beginning in 2007. The Company is currently evaluating the impact of its adoption on its financial position and results of operations.
		Fair Value Option for Financial Assets and Financial Liabilities — In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities”, effective for the Company beginning on January 1, 2008. This Statement provides entities with an option to report selected financial assets and liabilities at fair value, with the objective to reduce both the complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. The Company is currently assessing the impact of this guidance on its financial statements.
Note 3.		Inventories
		Inventories consist of the following at December 31, 2006:

Raw materials		$	365,335
Work-in-process			192,305
Finished goods			231,847
			789,487
Less reserve for obsolete inventory			75,862
		$	713,625

The equipment under capital lease at December 31, 2006 is included in the accompanying balance sheet under the following captions:

		These assets are amortized over three to seven years using the straight-line method and amortization is included in depreciation expense.
		Depreciation expense totaled $27,141 and $22,637 for the years ended December 31, 2006 and 2005, respectively.

SUPERCONDUCTIVE COMPONENTS, INC.

NOTES TO FINANCIAL STATEMENTS

Note 5.		Related Party Notes Payable
		During 2005, the Company entered into an agreement with the Estates of Edward R. Funk and Ingeborg V. Funk. The Company was indebted to the Estates in the amount of $289,391.92. The Estate agreed to cancel $288,000 of the indebtedness in exchange for 144,000 shares of common stock and warrants to purchase an additional 36,000 shares of common stock at $3.00 per share exercisable until October 2010. The Company transferred to the Estates $1,391.92 in full satisfaction of the remaining amount of the indebtedness.
		In November of 2004, a director agreed to loan the Company up to $200,000 for working capital, to be drawn by the Company in increments of $50,000. The interest rate was Huntington National Bank’s prime rate plus 2%, which accrued and compounded monthly. The loan was secured by the Company’s assets and perfected by the filing of a UCC-1 financing statement. For each $50,000 increment drawn on the loan the director received 5,000 warrants to purchase the Company’s common stock, without par value, at a purchase price of $2.50 per share and exercisable until November 1, 2009. The loan was drawn on the following schedule: November 3, 2004, $100,000; January 7, 2005, $50,000; and April 1, 2005, $50,000. The loan balance (principal and accrued interest) was repaid in October 2005 and the UCC-1 financing statement was terminated.
		In April of 2005, the same director who agreed to provide a loan to the Company in November 2004, agreed to provide an additional $200,000 convertible secured loan to the Company for working capital. The interest rate of 10% accrued and compounded monthly. The loan was drawn on the following schedule: April 14, 2005, $100,000; and May 20, 2005, $100,000. Because the Company completed equity financing of at least $500,000 during the fourth quarter of 2005, the principal and accrued interest totaling $209,110 automatically converted on the same basis as the new financing to 104,555 shares of common stock ($2.00 per share) and warrants to purchase an aggregate of 26,139 shares of the Company’s common stock at a purchase price of $3.00 per share exercisable until October 2010.
Note 6.		Common and Preferred Stock
		Common Stock
		7,000 stock options were exercised during 2006 resulting in proceeds of $12,000. The exercise price for these options ranged from $1.00 to $2.00.
		In 2005, the Company, in a private placement to seven accredited investors sold 693,000 shares of its common stock, without par value, at a purchase price of $2.00 per share. As part of the private placement, the accredited investors also received warrants to purchase 173,250 shares of the Company’s common stock, without par value, at a purchase price of $3.00 per share exercisable until October 2010. The net proceeds received from the sale of common stock were $1,348,912. Of the net proceeds, the warrants were valued at $304,484, which was recorded as additional paid-in capital.
		In April of 2005, as mentioned in note 5, a director agreed to provide a $200,000 convertible secured loan to the Company for working capital. Because the Company completed equity financing of at least $500,000 during 2005, the principal and accrued interest totaling $209,110 automatically converted on the same basis as the new financing

SUPERCONDUCTIVE COMPONENTS, INC.

NOTES TO FINANCIAL STATEMENTS

Note 6.		Common and Preferred Stock (continued)
		to 104,555 shares of common stock ($2.00 per share) and warrants to purchase 26,139 shares of the Company’s common stock at a purchase price of $3.00 per share exercisable until October 2010.
		During 2005, the Company entered into an agreement with the Estate of Edward R. Funk. The Company was indebted to the Estate in the amount of $188,411.71. The Estate agreed to cancel $188,000 of the indebtedness in exchange for 94,000 shares of common stock and warrants to purchase an additional 23,500 shares of common stock at $3.00 per share exercisable until October 2010. The Company transferred to the Estate $411.71 in full satisfaction of the remaining amount of the indebtedness.
		Also, during 2005, the Company entered into an agreement with the Estate of Ingeborg V. Funk. The Company was indebted to the Estate in the amount of $100,980.21. The Estate agreed to cancel $100,000 of the indebtedness in exchange for 50,000 shares of common stock and warrants to purchase an additional 12,500 shares of common stock at $3.00 per share exercisable until October 2010. The Company transferred to the Estate $980.21 in full satisfaction of the remaining amount of the indebtedness.
		In addition, during 2005, the Company entered into an agreement with Porter, Wright, Morris & Arthur LLP (PWMA). The Company was indebted to PWMA for legal services rendered to the Company. PWMA agreed to cancel $90,000 of the indebtedness in exchange for 45,000 shares of common stock and warrants to purchase an additional 11,250 shares of common stock at $3.00 per share exercisable until October 2010.
		Preferred Stock
		Shares of preferred stock authorized and outstanding at December 31, 2006 are as follows:

		Shares				Shares
		Authorized				Outstanding
Cumulative Preferred Stock			10,000				—
Voting Preferred Stock			125,000				—
Non-Voting Preferred Stock			125,000	(a)			25,185	(b)

In June 1995, the Company completed an offering of 215 shares of $1,000 stated value 1995 Series A 10% non-voting convertible preferred stock. In January 1996, the Company completed an offering of 70,000 shares of $10 stated value 1995 Series B 10% non-voting convertible preferred stock. The Series A shares are convertible to common shares at the rate of $6.00 per share and Series B shares at the rate of $5.00 per share. At the Company’s option, Series A and Series B shares are redeemable at 103% of the stated value plus the amount of any accrued and unpaid cash dividends.

SUPERCONDUCTIVE COMPONENTS, INC.

NOTES TO FINANCIAL STATEMENTS

Note 6.		Common and Preferred Stock (Continued)
		The Company redeemed the Series A preferred stock in 2003. During 2006 and 2005, no Series B cash dividends were paid. At December 31, 2006 the Company has accrued dividends on Series B preferred stock of $100,740, which is included in convertible preferred stock, Series B on the balance sheet at December 31, 2006.
		Earnings Per Share
		Basic income (loss) 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 (loss) 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 December 31, 2005 all outstanding common stock equivalents which include preferred stock, Series B, employee and director stock options and warrants were antidilutive due to the net loss.

The following is provided to reconcile the earnings per share calculations:

SUPERCONDUCTIVE COMPONENTS, INC.

NOTES TO FINANCIAL STATEMENTS

Note 7.		Stock Option Plans
		On June 9, 2006, shareholders approved the Superconductive Components, Inc. 2006 Stock Incentive Plan (the “2006 Plan”), which replaced the 1995 Stock Option Plan (“the 1995 Plan”). The Company adopted the 2006 Plan as incentive to key employees, directors and consultants under which options to purchase up to 600,000 shares of the Company’s common stock may be granted, subject to the execution of stock option agreements. Incentive stock options may be granted to key employees of the Company and non-statutory options may be granted to directors who are not employees and to consultants and advisors who render services to the Company. Options may be exercised for periods up to 10 years from the date of grant at prices not less than 100% of fair market value on the date of grant. As of December 31, 2006 there were 42,500 stock options outstanding from the 2006 Plan. On September 29, 1995, the Company adopted the 1995 Stock Option Plan (the “1995 Plan”) as incentive to key employees, directors and consultants. As of December 31, 2006 there were 548,250 stock options outstanding from the 1995 Plan. The Company adopted the 1995 Plan as incentive to key employees, directors and consultants under which options to purchase up to 900,000 shares of the Company’s common stock may be granted, subject to the execution of stock option agreements.
		In 2005, the Company elected to accelerate the vesting of incentive stock options on 149,500 shares of its common stock. The decision to accelerate vesting of these stock options was made primarily to allow the Company to avoid recognizing non-cash compensation cost on future financial statements, as required by a new accounting rule. Because these options had exercise prices below the market value at the time of acceleration the Company recognized non-cash compensation expense of $27,215 in 2005.
		The cumulative status at December 31, 2006 and 2005 of options granted and outstanding, as well as options which became exercisable in connection with the Stock Option Plans is summarized as follows:
		Employee Stock Options

						Weighted
						Average
		Stock Options				Exercise Price
Outstanding at December 31, 2004			311,250			$	1.89
Granted			40,000				2.40
Expired			(23,000	)			2.00
Forfeited			—				—
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			$	2.11
Shares exercisable at December 31, 2005			328,250			$	1.95
Shares exercisable at December 31, 2006			301,250			$	1.94

		Exercise prices for options range from $1.00 to $4.00 for options at December 31, 2006. The weighted average option price for all options outstanding is $2.25 with a weighted average remaining contractual life of 6.4 years.
		The weighted average fair values at date of grant for options granted during 2006 and 2005 were $3.03 and $2.75, respectively, and were estimated using the Black-Scholes option valuation model with the following weighted average assumptions:

SUPERCONDUCTIVE COMPONENTS, INC.

NOTES TO FINANCIAL STATEMENTS

Note 10.		Income Taxes (continued)
		A valuation allowance has been recorded against the realizability of the net deferred tax asset, such that no value is recorded for the asset in the accompanying financial statements. The valuation allowance totaled $2,252,000 and $2,517,000 at December 31, 2006 and 2005, respectively.
		The Company has net operating loss carryovers available for federal and state tax purposes of approximately $5,898,000, which expire in varying amounts through 2026.
		For the years ended December 31, 2006 and 2005, a reconciliation of the statutory rate and effective rate for the provisions for income taxes consists of the following:

The expense (benefit) for income taxes consists of the following:

Note 11.		Related Party Transactions
		The Company had trade payables, shareholders of $7,920 at December 31, 2004, pertaining to reimbursement for purchase of goods and services obtained for Company purposes. In 2005 the Estate of the shareholder agreed to cancel the indebtedness in exchange for 3,960 shares of common stock and warrants to purchase an additional 990 shares of common stock at $3.00 per share exercisable until October 2010.

SUPERCONDUCTIVE COMPONENTS, INC.

NOTES TO FINANCIAL STATEMENTS

Note 11.		Related Party Transactions (continued)
		Interest expense, shareholders was $0 and $70,684 for the years ended December 31, 2006 and 2005, respectively.
		For additional information regarding related party transactions, see Notes 5, 6 and 9.
Note 12.		Fair Value of Financial Instruments
		The fair value of financial instruments represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Significant differences can arise between the fair value and carrying amount of financial instruments that are recognized at historical cost amounts.
		The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

	•		Cash and cash equivalents, short-term debt and current maturities of long-term debt: Amounts reported in the balance sheet approximate fair market value due to the short maturity of these instruments.
	•		Long-term capital lease obligations: Amounts reported in the balance sheet approximate fair value as the interest rates on these obligations range from 7.8% to 18.5%.

Note 13.		Asset Retirement Obligation
		Included in machinery and equipment is various production equipment, which per the Company’s building lease, is required to be removed upon termination of the lease. Included in accrued expenses in the accompanying balance sheet is the asset retirement obligation that represents the expected present value of the liability to remove this equipment. There are no assets that are legally restricted for purposes of settling this asset retirement obligation.
		Following is a reconciliation of the aggregate retirement liability associated with the Company’s obligation to dismantle and remove the machinery and equipment associated with its lease of its previous facility and the current facility. The Company moved to its current facility in first quarter 2004.