**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**FORM      10-Q**

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

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

**0-31641**

**SCI      ENGINEERED MATERIALS, INC.**

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

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

**(614)      486-0261**

**Not      Applicable**

----

**FORM      10-Q**

**SCI      ENGINEERED MATERIALS, INC.**

**Table      of Contents**

|                                               |                      |                                                                                                                      | **Page                  No.** |
|----------------------------------------------------|---------------------------|---------------------------------------------------------------------------------------------------------------------------|-------------------------------|
|                                               |                      |                                                                                                                      |                          |
| **PART                  I. FINANCIAL INFORMATION** |                      |
|                                               |                      |                                                                                                                      |                          |
|                                               | Item                  1.  | Financial                  Statements.                                                                                    |                          |
|                                               |                      |                                                                                                                      |                          |
|                                               |                      | Balance                  Sheets as of March 31, 2008 (unaudited) and December 31,                  2007                   | 3                             |
|                                               |                      |                                                                                                                      |                          |
|                                               |                      | Statements                  of Operations for the Three Months Ended March 31, 2008 and 2007                  (unaudited) | 5                             |
|                                               |                      |                                                                                                                      |                          |
|                                               |                      | Statements                  of Cash Flows for the Three Months Ended March 31, 2008 and 2007                  (unaudited) | 6                             |
|                                               |                      |                                                                                                                      |                          |
|                                               |                      | Notes                  to Financial Statements (unaudited)                                                                | 8                             |
|                                               |                      |                                                                                                                      |                          |
|                                               | Item                  2.  | Management's                  Discussion and Analysis of Financial Condition and Results of                  Operations.  | 13                            |
|                                               |                      |                                                                                                                      |                          |
|                                               | Item                  3.  | Quantitative                  and Qualitative Disclosures About Market Risk.                                              | N/A                           |
|                                               |                      |                                                                                                                      |                          |
|                                               | Item                  4.  | Controls                  and Procedures.                                                                                 | 18                            |
|                                               |                      |                                                                                                                      |                          |
| **PART                  II. OTHER INFORMATION**    |                      |
|                                               |                      |                                                                                                                      |                          |
|                                               | Item                  1.  | Legal                  Proceedings.                                                                                       | N/A                           |
|                                               |                      |                                                                                                                      |                          |
|                                               | Item                  1A. | Risk                  Factors                                                                                             | N/A                           |
|                                               |                      |                                                                                                                      |                          |
|                                               | Item                  2.  | Unregistered                  Sales of Equity Securities and Use of Proceeds.                                             | N/A                           |
|                                               |                      |                                                                                                                      |                          |
|                                               | Item                  3.  | Defaults                  Upon Senior Securities.                                                                         | N/A                           |
|                                               |                      |                                                                                                                      |                          |
|                                               | Item                  4.  | Submission                  of Matters to a Vote of Security Holders.                                                     | N/A                           |
|                                               |                      |                                                                                                                      |                          |
|                                               | Item                  5.  | Other                  Information.                                                                                       | N/A                           |
|                                               |                      |                                                                                                                      |                          |
|                                               | Item                  6.  | Exhibits.                                                                                                                 | 19                            |
|                                               |                      |                                                                                                                      |                          |
|                                               | Signatures.               | 20                                                                                                                        |

----

**PART        I. FINANCIAL INFORMATION**

**ITEM        1. FINANCIAL STATEMENTS**

**SCI        ENGINEERED MATERIALS, INC.**

**BALANCE        SHEETS**

**ASSETS**

|                                                                    |   | **March 31, ** |       |  **December 31,** |   |
|-------------------------------------------------------------------------|--------|--------------------------|------------|-----------------------------|--------|
|                                                                    |   | **2008**                 |       |  **2007**              |   |
|                                                                    |   | **(UNAUDITED)**          |       |                   |   |
|                                                                    |   |                     |       |                        |   |   |   |
| **CURRENT                  ASSETS**                                     |   |                     |       |                        |   |   |   |
| Cash                                                                    |   | $                        | 853,500    |                        | $      | 1,182,086 |   |
| Accounts                  receivable                                    |   |                     |       |                        |   |   |   |
| Trade,                  less allowance for doubtful accounts of $24,700 |   |                     | 501,313    |                        |   | 219,222 |   |
| Contract                                                                |   |                     | 52,760     |                        |   | 65,954 |   |
| Other                                                                   |   |                     | 60         |                        |   | 550 |   |
| Inventories                                                             |   |                     | 869,549    |                        |   | 756,999 |   |
| Prepaid                  expenses                                       |   |                     | 78,041     |                        |   | 21,148 |   |
| Total                  current assets                                   |   |                     | 2,355,223  |                        |   | 2,245,959 |   |
|                                                                    |   |                     |       |                        |   |   |   |
| **PROPERTY                  AND EQUIPMENT,**                            |   |                     |       |                        |   |   |   |
|  **AT                  COST**                                 |   |                     |       |                        |   |   |   |
| Machinery                  and equipment                                |   |                     | 4,178,480  |                        |   | 3,386,778 |   |
| Furniture                  and fixtures                                 |   |                     | 81,155     |                        |   | 74,222 |   |
| Leasehold                  improvements                                 |   |                     | 301,551    |                        |   | 301,551 |   |
| Construction                  in progress                               |   |                     | 8,735      |                        |   | 599,753 |   |
|                                                                    |   |                     | 4,569,921  |                        |   | 4,362,304 |   |
| Less                  accumulated depreciation                          |   |                     | (2,276,751 | )                           |   | (2,185,277 | ) |
|                                                                    |   |                     | 2,293,170  |                        |   | 2,177,027 |   |
|                                                                    |   |                     |       |                        |   |   |   |
| **OTHER                  ASSETS**                                       |   |                     |       |                        |   |   |   |
| Deposits                                                                |   |                     | 18,260     |                        |   | 18,639 |   |
| Intangibles                                                             |   |                     | 31,647     |                        |   | 29,202 |   |
| Total                  other assets                                     |   |                     | 49,907     |                        |   | 47,841 |   |
|                                                                    |   |                     |       |                        |   |   |   |
| **TOTAL                  ASSETS**                                       |   | $                        | 4,698,300  |                        | $      | 4,470,827 |   |

----

**SCI        ENGINEERED MATERIALS, INC.**

**BALANCE        SHEETS**

**LIABILITIES          AND SHAREHOLDERS' EQUITY**

|                                                                                                                                                                                                                             |   | **March 31, ** |       |  **December 31, ** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|------------|-----------------------------------|--------|
|                                                                                                                                                                                                                             |   | **2008**                 |       |  **2007**                    |   |
|                                                                                                                                                                                                                             |   | **(UNAUDITED)**          |       |                         |   |
|                                                                                                                                                                                                                             |   |                     |       |                              |   |   |   |
| **CURRENT                  LIABILITIES**                                                                                                                                                                                         |   |                     |       |                              |   |   |   |
| Capital                  lease obligation, current portion                                                                                                                                                                       |   | $                        | 301,420    |                              | $      | 259,714 |   |
| Accounts                  payable                                                                                                                                                                                                |   |                     | 319,457    |                              |   | 160,468 |   |
| Accrued                  contract expenses                                                                                                                                                                                       |   |                     | 49,910     |                              |   | 47,702 |   |
| Accrued                  personal property taxes                                                                                                                                                                                 |   |                     | 13,216     |                              |   | 10,216 |   |
| Customer                  Deposits                                                                                                                                                                                               |   |                     | 61,269     |                              |   | 19,483 |   |
| Accrued                  Compensation                                                                                                                                                                                            |   |                     | 56,140     |                              |   | 138,190 |   |
| Accrued                  expenses and other                                                                                                                                                                                      |   |                     | 95,570     |                              |   | 89,968 |   |
| Total                  current liabilities                                                                                                                                                                                       |   |                     | 896,982    |                              |   | 725,741 |   |
|                                                                                                                                                                                                                             |   |                     |       |                              |   |   |   |
| **CAPITAL                  LEASE OBLIGATION, NET OF CURRENT PORTION**                                                                                                                                                            |   |                     | 894,914    |                              |   | 846,433 |   |
|                                                                                                                                                                                                                             |   |                     |       |                              |   |   |   |
| **COMMITMENTS                  AND CONTINGENCIES**                                                                                                                                                                               |   |                     | -          |                              |   | - |   |
|                                                                                                                                                                                                                             |   |                     |       |                              |   |   |   |
| **SHAREHOLDERS'                  EQUITY**                                                                                                                                                                                        |   |                     |       |                              |   |   |   |
| Convertible                  preferred stock, Series B, 10% cumulative, nonvoting, no par value,                  $10                  stated value, optional redemption at 103%; 24,566 issued and                  outstanding |   |                     | 382,002    |                              |   | 375,861 |   |
| Common                  stock, no par value, authorized 15,000,000 shares; 3,501,966 and                  3,474,338                  shares issued and outstanding respectively                                                  |   |                     | 9,137,047  |                              |   | 9,061,378 |   |
| Additional                  paid-in capital                                                                                                                                                                                      |   |                     | 986,007    |                              |   | 987,840 |   |
| Accumulated                  deficit                                                                                                                                                                                             |   |                     | (7,598,652 | )                                 |   | (7,526,426 | ) |
|                                                                                                                                                                                                                             |   |                     | 2,906,404  |                              |   | 2,898,653 |   |
|                                                                                                                                                                                                                             |   |                     |       |                              |   |   |   |
| **TOTAL                  LIABILITIES AND SHAREHOLDERS' EQUITY**                                                                                                                                                                  |   | $                        | 4,698,300  |                              | $      | 4,470,827 |   |

----

**SCI        ENGINEERED MATERIALS, INC.**

**STATEMENTS        OF OPERATIONS**

**THREE        MONTHS ENDED MARCH 31, 2008 AND 2007**

**(UNAUDITED)**

|                                                                                                         |   | **2008** |      | **2007** |   |
|--------------------------------------------------------------------------------------------------------------|--------|----------|-----------|----------|--------|
|                                                                                                         |   |     |      |     |   |
| **SALES                  REVENUE**                                                                           |   | $        | 1,713,940 |     | $      | 2,454,009 |   |
|                                                                                                         |   |     |      |     |   |   |   |
| **COST                  OF SALES REVENUE**                                                                   |   |     | 1,284,915 |     |   | 1,995,429 |   |
|                                                                                                         |   |     |      |     |   |   |   |
| **GROSS                  PROFIT**                                                                            |   |     | 429,025   |     |   | 458,580 |   |
|                                                                                                         |   |     |      |     |   |   |   |
| **GENERAL                  AND ADMINISTRATIVE EXPENSE**                                                      |   |     | 260,053   |     |   | 236,596 |   |
|                                                                                                         |   |     |      |     |   |   |   |
| **RESEARCH                  AND DEVELOPMENT EXPENSE**                                                        |   |     | 97,156    |     |   | 63,164 |   |
|                                                                                                         |   |     |      |     |   |   |   |
| **MARKETING                  AND SALES EXPENSE**                                                             |   |     | 126,270   |     |   | 97,402 |   |
|                                                                                                         |   |     |      |     |   |   |   |
| **(LOSS)                  INCOME FROM OPERATIONS**                                                           |   |     | (54,454   | )        |   | 61,418 |   |
|                                                                                                         |   |     |      |     |   |   |   |
| **OTHER                  INCOME (EXPENSE)**                                                                  |   |     |      |     |   |   |   |
| Interest                  income                                                                             |   |     | 8,830     |     |   | 12,556 |   |
| Interest                  expense                                                                            |   |     | (26,602   | )        |   | (5,904 | ) |
| Miscellaneous,                  net                                                                          |   |     | -         |     |   | (458 | ) |
|                                                                                                         |   |     | (17,772   | )        |   | 6,194 |   |
|                                                                                                         |   |     |           |     |   |   |   |
| **(LOSS)                  INCOME BEFORE PROVISION FOR INCOME TAX**                                           |   |     | (72,226   | )        |   | 67,612 |   |
|                                                                                                         |   |     |      |     |   |   |   |
| **INCOME                  TAX EXPENSE**                                                                      |   |     | -         |     |   | - |   |
|                                                                                                         |   |     |      |     |   |   |   |
| **NET                  (LOSS) INCOME**                                                                       |   |     | (72,226   | )        |   | 67,612 |   |
|                                                                                                         |   |     |      |     |   |   |   |
| **DIVIDENDS                  ON PREFERRED STOCK**                                                            |   |     | (6,142    | )        |   | (6,296 | ) |
|                                                                                                         |   |     |      |     |   |   |   |
| **(LOSS)                  INCOME APPLICABLE TO COMMON SHARES**                                               |   | $        | (78,368   | )        | $      | 61,316 |   |
|                                                                                                         |   |     |      |     |   |   |   |
| **EARNINGS                  PER SHARE - BASIC AND DILUTED**                                                  |   |     |      |     |   |   |   |
| ** **(Note                  6)                                                                          |   |     |      |     |   |   |   |
|                                                                                                         |   |     |      |     |   |   |   |
| **NET                  (LOSS) INCOME PER COMMON SHARE BEFORE DIVIDENDS ON PREFERRED                  STOCK** |   |     |      |     |   |   |   |
| Basic                                                                                                        |   | $        | (0.02     | )        | $      | 0.02 |   |
| Diluted                                                                                                      |   | $        | (0.02     | )        | $      | 0.02 |   |
|                                                                                                         |   |     |      |     |   |   |   |
| **NET                  (LOSS) INCOME PER COMMON SHARE AFTER DIVIDENDS ON PREFERRED                  STOCK**  |   |     |      |     |   |   |   |
| Basic                                                                                                        |   | $        | (0.02     | )        | $      | 0.02 |   |
| Diluted                                                                                                      |   | $        | (0.02     | )        | $      | 0.01 |   |
|                                                                                                         |   |     |      |     |   |   |   |
| **WEIGHTED                  AVERAGE SHARES OUTSTANDING**                                                     |   |     |      |     |   |   |   |
| Basic                                                                                                        |   |     | 3,489,874 |     |   | 3,439,868 |   |
| Diluted                                                                                                      |   |     | 3,489,874 |     |   | 4,206,751 |   |

----

**SCI        ENGINEERED MATERIALS, INC.**

**STATEMENTS        OF CASH FLOWS**

**THREE        MONTHS ENDED MARCH 31, 2008 AND 2007**

**(UNAUDITED)**

|                                                                                                                                                     |   | **2008** |     | **2007** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|----------|----------|--------|
| **CASH                    FLOWS FROM OPERATING ACTIVITIES**                                                                                              |   |     |     |     |   |   |   |
| Net                    (loss) income                                                                                                                     |   | $        | (72,226  | )        | $      | 67,612 |   |
| Adjustments                    to reconcile net (loss) income to net cash (used) provided by                    operating                    activities: |   |     |     |     |   |   |   |
| Depreciation                    and accretion                                                                                                            |   |     | 92,302   |     |   | 61,949 |   |
| Amortization                                                                                                                                             |   |     | 772      |     |   | 772 |   |
| Stock                    based compensation                                                                                                              |   |     | 14,313   |     |   | 14,313 |   |
| Inventory                    reserve                                                                                                                     |   |     | 3,000    |     |   | 2,765 |   |
| Changes                    in operating assets and liabilities:                                                                                          |   |     |     |     |   |   |   |
| (Increase)                    decrease in assets:                                                                                                        |   |     |     |     |   |   |   |
| Accounts                    receivable                                                                                                                   |   |     | (268,407 | )        |   | 50,276 |   |
| Inventories                                                                                                                                              |   |     | (115,550 | )        |   | 31,338 |   |
| Prepaid                    expenses                                                                                                                      |   |     | (26,880  | )        |   | (26,154 | ) |
| Other                    assets                                                                                                                          |   |     | (2,838   | )        |   | 8,657 |   |
| Increase                    (decrease) in liabilities:                                                                                                   |   |     |     |     |   |   |   |
| Accounts                    payable                                                                                                                      |   |     | 158,989  |     |   | (21,726 | ) |
| Accrued                    expenses and cutomer deposits                                                                                                 |   |     | (14,881  | )        |   | 108,800 |   |
| Total                    adjustments                                                                                                                     |   |     | (159,180 | )        |   | 230,990 |   |
| Net                    cash (used) provided by operating activities                                                                                      |   |     | (231,406 | )        |   | 298,602 |   |
|                                                                                                                                                     |   |     |     |     |   |   |   |
| **CASH                    FLOWS FROM INVESTING ACTIVITIES**                                                                                              |   |     |     |     |   |   |   |
| Purchases                    of property and equipment                                                                                                   |   |     | (48,513  | )        |   | (7,310 | ) |
| Net                    cash used in investing activities                                                                                                 |   |     | (48,513  | )        |   | (7,310 | ) |
|                                                                                                                                                     |   |     |     |     |   |   |   |
| **CASH                    FLOWS FROM FINANCING ACTIVITIES**                                                                                              |   |     |     |     |   |   |   |
| Proceeds                    from exercise of common stock options                                                                                        |   |     | 10,250   |     |   | - |   |
| Proceeds                    from exercise of common stock warrants                                                                                       |   |     | 10,000   |     |   | - |   |
| Principal                    payments on capital lease obligations                                                                                       |   |     | (68,917  | )        |   | (20,961 | ) |
| Net                    cash used in financing activities                                                                                                 |   |     | (48,667  | )        |   | (20,961 | ) |

----

**SCI        ENGINEERED MATERIALS, INC.**

**STATEMENTS        OF CASH FLOWS (CONTINUED)**

**THREE        MONTHS ENDED MARCH 31, 2008 AND 2007**

|                                                                                                    |   | **2008** |      |  **2007** |   |
|---------------------------------------------------------------------------------------------------------|--------|----------|-----------|----------------|--------|
| **NET                  (DECREASE) INCREASE IN CASH**                                                    |   | $        | (328,586  | )              | $      | 270,331 |   |
|                                                                                                    |   |     |      |           |   |   |   |
| **CASH**                  -                  Beginning of period                                        |   |     | 1,182,086 |           |   | 648,494 |   |
|                                                                                                    |   |     |      |           |   |   |   |
| **CASH**                  -                  End of period                                              |   | $        | 853,500   |           | $      | 918,825 |   |
|                                                                                                    |   |     |           |           |   |   |   |
| **SUPPLEMENTAL                  DISCLOSURES OF CASH FLOW INFORMATION**                                  |   |     |      |           |   |   |   |
| Cash                  paid during the years for:                                                        |   |     |      |           |   |   |   |
| Interest,                  net                                                                          |   | $        | 26,602    |           | $      | 5,904 |   |
| Income                  taxes                                                                           |   | $        | -         |           | $      | - |   |
|                                                                                                    |   |     |      |           |   |   |   |
| **SUPPLEMENTAL                  DISCLOSURES OF NONCASH FINANCING ACTIVITIES**                           |   |     |      |           |   |   |   |
|                                                                                                    |   |     |      |           |   |   |   |
| Property                  and equipment purchased by capital lease                                      |   | $        | 159,104   |           | $      | 84,595 |   |
|                                                                                                    |   |     |      |           |   |   |   |
| Property                  & equipment accrued asset retirement obligation                  increase |   | $        | 828       |           | $      | 828 |   |

----

**SCI      ENGINEERED MATERIALS, INC.**

** **
** **
**NOTES      TO FINANCIAL STATEMENTS**

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

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

|   |   | The                accompanying unaudited financial statements have been prepared in                accordance with accounting principles generally accepted in the United                States of America for interim financial information and with instructions                to Form 10-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, 2007. Interim results                are not necessarily indicative of results for the full                year. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | The                preparation of financial statements in conformity with accounting                principles generally accepted in the United States of America requires                management to make estimates and assumptions that affect the reported                amounts of assets and liabilities at the date of the financial statements                and the reported amounts of revenues and expenses during the reporting                period. Actual results could differ from those                estimates. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Equipment      purchased with grant funding**

|   |   | In                2004, the Company received funds of $517,935 from the Ohio Department                of                Development’s Third Frontier Action Fund (TFAF) for the purchase of                equipment related to the grant’s purpose. The Company has elected to                record the funds disbursed as a contra asset; therefore, the assets                are                not reflected in the Company’s financial statements. As assets were                purchased, the liability initially created when the cash was received                was                reduced with no revenue recognized or fixed asset recorded on the                balance                sheet. As of March 31, 2008, 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, the Company retains the rights                to                the equipment. Management states that the Company will be in compliance                with the requirements and, therefore, will retain the equipment at                the end                of the grant in 2008. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**SCI      ENGINEERED MATERIALS, INC.**

**NOTES      TO FINANCIAL STATEMENTS**

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

**Stock      Based Compensation **

**Reclassification      **

----

**      SCI ENGINEERED MATERIALS, INC.**

** **
**NOTES      TO FINANCIAL STATEMENTS**

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

**Employee      Stock Options**

|                                                   |   | **Stock****Options** |    | **Weighted****Average ****Exercise Price** |   |
|--------------------------------------------------------|--------|----------------------|---------|------------------------------------------------------|--------|
|                                                   |   |                 |    |                                                 |   |
| Outstanding                at December 31, 2006        |   |                 | 343,750 |                                                 | $      | 2.09 |   |
| Granted                                                |   |                 | -       |                                                 |   | - |   |
| Exercised                                              |   |                 | -       |                                                 |   | - |   |
| Forfeited                                              |   |                 | (500    | )                                                    |   | 3.25 |   |
| Outstanding                at December 31, 2007        |   |                 | 343,250 |                                                 | $      | 2.08 |   |
| Granted                                                |   |                 | -       |                                                 |   | - |   |
| Exercised                                              |   |                 | -       |                                                 |   | - |   |
| Forfeited                                              |   |                 | -       |                                                 |   | - |   |
| Outstanding                at March 31, 2008           |   |                 | 343,250 |                                                 | $      | 2.08 |   |
| Shares                exercisable at December 31, 2007 |   |                 | 313,650 |                                                 | $      | 1.97 |   |
| Shares                exercisable at March 31, 2008    |   |                 | 313,650 |                                                 | $      | 1.97 |   |

**Non-Employee      Director Stock Options**

|                                                   |   | **Stock****Options** |    | **Weighted ****Average ****Exercise Price** |   |
|--------------------------------------------------------|--------|----------------------|---------|------------------------------------------------------------|--------|
|                                                   |   |                 |    |                                                       |   |
| Outstanding                at December 31, 2006        |   |                 | 247,000 |                                                       | $      | 2.48 |   |
| Granted                                                |   |                 | -       |                                                       |   | - |   |
| Exercised                                              |   |                 | (6,000  | )                                                          |   | 1.60 |   |
| Expired                                                |   |                 | -       |                                                       |   | - |   |
| Forfeited                                              |   |                 | -       |                                                       |   | - |   |
| Outstanding                at December 31, 2007        |   |                 | 241,000 |                                                       | $      | 2.51 |   |
| Granted                                                |   |                 | -       |                                                       |   | - |   |
| Exercised                                              |   |                 | (7,500  | )                                                          |   | 1.37 |   |
| Expired                                                |   |                 | -       |                                                       |   | - |   |
| Forfeited                                              |   |                 | -       |                                                       |   | - |   |
| Outstanding                at March 31, 2008           |   |                 | 233,500 |                                                       | $      | 2.54 |   |
| Shares                exercisable at December 31, 2007 |   |                 | 241,000 |                                                       | $      | 2.51 |   |
| Shares                exercisable at March 31, 2008    |   |                 | 233,500 |                                                       | $      | 2.54 |   |

----

**SCI      ENGINEERED MATERIALS, INC.**

**NOTES      TO FINANCIAL STATEMENTS**

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

**Note          4.    Preferred          Stock**

**Note        5.    **
**Inventory**

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

|                             |   | **March                31,****2008** |    | **December                31,****2007** |   |
|----------------------------------|--------|--------------------------------------|---------|-----------------------------------------|--------|
|                             |   | (unaudited)                          |    |                                    |   |
| Raw                materials     |   | $                                    | 400,605 |                                    | $      | 392,937 |   |
| Work-in-progress                 |   |                                 | 283,927 |                                    |   | 205,528 |   |
| Finished                goods    |   |                                 | 270,176 |                                    |   | 240,693 |   |
| Inventory                reserve |   |                                 | (85,159 | )                                       |   | (82,159 | ) |
|                             |   | $                                    | 869,549 |                                    | $      | 756,999 |   |

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**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, 2008 all common stock options and warrants                are anti-dilutive due to the net loss. The following is provided                to                reconcile the earnings per share                calculations: |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                   |   | Three                months ended March 31, |      |
|----------------------------------------------------------------------------------------|--------|---------------------------------------------|-----------|
|                                                                                   |   |                                        |      |   |   |
|                                                                                   |   | 2008                                        |      | 2007 |   |
| (Loss)                Income applicable to common shares                               |   | $                                           | (78,368   | ) | $ | 61,316 |   |
|                                                                                   |   |                                        |      |   |   |   |   |
| Weighted                average common shares outstanding – basic           |   |                                        | 3,489,874 |   |   | 3,439,868 |   |
|                                                                                   |   |                                        |      |   |   |   |   |
| Effect                of dilutions - stock options                                     |   |                                        | -         |   |   | 766,883 |   |
|                                                                                   |   |                                        |      |   |   |   |   |
| Weighted                average shares                outstanding – diluted |   |                                        | 3,489,874 |   |   | 4,206,751 |   |

**Note        7.    **
**Capital        Requirements**

----

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

**Overview**

----

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

**Executive      Summary**

**RESULTS      OF OPERATIONS**

**Three      months ended March 31, 2008 (unaudited) compared to three months ended March      31,      2007 (unaudited):**

**Revenues**

----

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

**Gross      Profit **

**Marketing      and Sales Expense**

**General      and Administrative Expense**

**Research      and Development Expense**

**Interest      Income and Expense**

**(LOSS)      INCOME APPLICABLE TO COMMON SHARES **

----

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

|   |   | Options and Warrants due to expire |    | Potential Shares Outstanding |   |
|--------|--------|-------------------------------------------------------------|---------|----------------------------------------|--------|
|   |   |                                                        |    |                                   |   |
| 2008   |   |                                                        | 63,021  |                                   |   | 3,565,071 |   |
| 2009   |   |                                                        | 160,418 |                                   |   | 3,725,489 |   |
| 2010   |   |                                                        | 443,389 |                                   |   | 4,168,878 |   |
| 2011   |   |                                                        | 62,500  |                                   |   | 4,231,378 |   |
| 2012   |   |                                                        | 170,000 |                                   |   | 4,401,378 |   |
| 2013   |   |                                                        | 30,500  |                                   |   | 4,431,878 |   |
| 2014   |   |                                                        | 90,000  |                                   |   | 4,521,878 |   |
| 2015   |   |                                                        | 140,000 |                                   |   | 4,661,878 |   |
| 2016   |   |                                                        | 37,000  |                                   |   | 4,698,878 |   |

**LIQUIDITY      AND WORKING CAPITAL**

----

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

**RISK      FACTORS**

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

**Off      Balance Sheet Arrangements**

**Critical      Accounting Policies**

*.      *

----

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

| **Item              4.** | **Controls                and Procedures** |
|--------------------------|--------------------------------------------|

**Evaluation      of Disclosure Controls and Procedures**

**Inherent      Limitations Over Internal Controls**

----

| **Item              4.** | **Controls                and Procedures (continued)** |
|--------------------------|--------------------------------------------------------|

**Part      II. Other Information**

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

| *10.1* | Notification                  from existing customer regarding reduction in orders for 2008                  (Incorporated by reference to the Company’s Current Report on Form 8-K,                  dated February 21, 2008).                               |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                |
| *10.2* | Description                  of material terms of 2008 Compensation agreement with the Company’s                  Executive Officers (Incorporated by reference to the Company’s Current                  Report on Form 8-K, dated February 29, 2008). |
|   |                                                                                                                                                                                                                                                                |
| *31.1* | Rule                  13a-14(a) Certification of Principal Executive                  Officer.*                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                |
| *31.2* | Rule                  13a-14(a) Certification of Principal Financial                  Officer.*                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                |
| *32.1* | Section                  1350 Certification of Principal Executive Officer.*                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                |
| *32.2* | Section                  1350 Certification of Principal Executive Officer and Principal                  Financial                  Officer.*                                                                                                                      |
|   |                                                                                                                                                                                                                                                                |
| *99.1* | Press                  Release dated May 5, 2008, entitled “SCI Engineered Materials, Inc.                  Reports First Quarter 2008                  Results.”**                                                                                     |

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**Signatures**

|                             | **SCI                ENGINEERED MATERIALS, INC.**                                                                     |
|----------------------------------|-----------------------------------------------------------------------------------------------------------------------|
|                             |                                                                                                                  |
| Date:                May 5, 2008 | /s/                Daniel Rooney                                                                                      |
|                             | Daniel                Rooney, Chairman of the Board ofDirectors,                President and Chief Executive Officer |
|                             | (Principal                Executive Officer)                                                                          |
|                             |                                                                                                                  |
|                             | /s/                Gerald S. Blaskie                                                                                  |
|                             | Gerald                S. Blaskie, Vice President and ChiefFinancial                Officer                            |
|                             | (Principal                Financial Officer and Principal AccountingOfficer)                                          |

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