UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)


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


For the quarterly period ended June 30,
2009


or





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


For the transition period
from _______________________ to _______________________





Commission
file number:  0-31641





SCI
ENGINEERED MATERIALS, INC.


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





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





2839
Charter Street, Columbus, Ohio 43228


(Address
of principal executive offices) (Zip Code)





(614)
486-0261


(Registrant’s
telephone number, including area code)





Not
Applicable


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





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes x  No  ̈





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


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





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





3,562,259
shares of Common Stock, without par value, were outstanding at July 31,
2009.





FORM
10-Q





SCI
ENGINEERED MATERIALS, INC.





Table of
Contents





Page No.PART
      I. FINANCIAL INFORMATIONItem
      1. Financial Statements.Balance
      Sheets as of June 30, 2009 (unaudited) and December 31,
    2008
                3Statements
      of Operations for the Three Months and Six Months Ended June 30, 2009 and
      2008 (unaudited)
                5Statements
      of Cash Flows for the Six Months Ended June 30, 2009 and 2008
      (unaudited)
                6Notes
      to Financial Statements (unaudited)
                8Item
      2. Management's Discussion and Analysis of Financial Condition and Results
      of Operations.
                15Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk.
                N/AItem
      4. Controls and Procedures.
                22PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings.
                N/AItem
      1A.Risk Factors
                N/AItem
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.
                N/AItem
      3. Defaults Upon Senior Securities.
                N/AItem
      4. Submission of Matters to a Vote of Security Holders.
                23Item
      5. Other Information.
                N/AItem
      6. Exhibits.
                24Signatures.
                24


2





PART
I.  FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS





SCI
ENGINEERED MATERIALS, INC.





BALANCE
SHEETS





June 30,
                  
                  
                  December 31,2009
                  
                  
                  2008(UNAUDITED)ASSETSCURRENT
      ASSETSCash
                  
                  $
                  1,040,495
                  
                  
                  $
                  1,399,050Accounts
      receivableTrade,
      less allowance for doubtful accounts of $15,753 and
$24,700
                  
                  
                  327,321
                  
                  
                  
                  464,016Contract
                  
                  
                  114,025
                  
                  
                  
                  109,717Other
                  
                  
                  6,336
                  
                  
                  
                  3,423Inventories
                  
                  
                  858,681
                  
                  
                  
                  1,264,433Prepaid
      expenses
                  
                  
                  725,678
                  
                  
                  
                  42,562Total
      current assets
                  
                  
                  3,072,536
                  
                  
                  
                  3,283,201PROPERTY
      AND EQUIPMENT, AT COSTMachinery
      and equipment
                  
                  
                  4,999,148
                  
                  
                  
                  4,192,516Furniture
      and fixtures
                  
                  
                  107,998
                  
                  
                  
                  107,998Leasehold
      improvements
                  
                  
                  313,951
                  
                  
                  
                  313,951Construction
      in progress
                  
                  
                  -
                  
                  
                  
                  144,6825,421,097
                  
                  
                  
                  4,759,147Less
      accumulated depreciation
                  
                  
                  (2,693,048
                  )
                  
                  
                  (2,469,030
                  )2,728,049
                  
                  
                  
                  2,290,117OTHER
      ASSETSDeposits
                  
                  
                  24,953
                  
                  
                  
                  29,002Intangibles
                  
                  
                  41,277
                  
                  
                  
                  34,254Total
      other assets
                  
                  
                  66,230
                  
                  
                  
                  63,256TOTAL
      ASSETS
                  
                  $
                  5,866,815
                  
                  
                  $
                  5,636,574





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


3





SCI
ENGINEERED MATERIALS, INC.





BALANCE
SHEETS





LIABILITIES AND
SHAREHOLDERS' EQUITY





June 30,
                
                
                December 31,2009
                
                
                2008(UNAUDITED)CURRENT
      LIABILITIESCapital
      lease obligation, current portion
                
                $
                377,198
                
                
                $
                285,408Note
      payable, current portion
                
                
                51,350
                
                
                
                20,386Accounts
      payable
                
                
                274,165
                
                
                
                249,309Accrued
      contract expenses
                
                
                -
                
                
                
                52,525Customer
      deposits
                
                
                903,732
                
                
                
                700,118Accrued
      compensation
                
                
                91,311
                
                
                
                94,167Accrued
      expenses and other
                
                
                108,402
                
                
                
                94,928Total
      current liabilities
                
                
                1,806,158
                
                
                
                1,496,841Capital
      lease obligation, net current portion
                
                
                915,187
                
                
                
                622,769Note
      payable, net current portion
                
                
                348,650
                
                
                
                379,614Total
      liabilities
                
                
                3,069,995
                
                
                
                2,499,224COMMITMENTS
      AND CONTINGENCIES
                
                
                -
                
                
                
                -SHAREHOLDERS'
      EQUITYConvertible
      preferred stock, Series B, 10% cumulative, nonvoting, no par value, $10
      stated value, optional redemption at 103%; 24,430 issued and
      outstanding
                
                
                361,432
                
                
                
                373,647Common
      stock, no par value, authorized 15,000,000 shares; 3,562,259 and 3,560,259
      shares issued and outstanding respectively
                
                
                9,187,733
                
                
                
                9,180,183Additional
      paid-in capital
                
                
                1,324,770
                
                
                
                985,396Accumulated
      deficit
                
                
                (8,077,115
                )
                
                
                (7,401,876
                )2,796,820
                
                
                
                3,137,350TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
                
                $
                5,866,815
                
                
                $
                5,636,574





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


4





SCI
ENGINEERED MATERIALS, INC.





STATEMENTS
OF OPERATIONS





THREE
MONTHS ENDED JUNE 30, 2009 AND 2008


AND
SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(UNAUDITED)





THREE MONTHS ENDED JUNE 30,
                  
                  
                  SIX MONTHS ENDED JUNE 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008SALES
      REVENUE
                  
                  $
                  1,055,404
                  
                  
                  $
                  1,517,513
                  
                  
                  $
                  2,710,514
                  
                  
                  $
                  3,191,332CONTRACT
      RESEARCH REVENUE
                  
                  
                  254,649
                  
                  
                  
                  -
                  
                  
                  
                  501,074
                  
                  
                  
                  40,1211,310,053
                  
                  
                  
                  1,517,513
                  
                  
                  
                  3,211,588
                  
                  
                  
                  3,231,453COST
      OF SALES REVENUE
                  
                  
                  881,904
                  
                  
                  
                  1,079,666
                  
                  
                  
                  2,169,047
                  
                  
                  
                  2,333,637COST
      OF CONTRACT RESEARCH REVENUE
                  
                  
                  179,159
                  
                  
                  
                  -
                  
                  
                  
                  366,031
                  
                  
                  
                  30,9441,061,063
                  
                  
                  
                  1,079,666
                  
                  
                  
                  2,535,078
                  
                  
                  
                  2,364,581GROSS
      PROFIT
                  
                  
                  248,990
                  
                  
                  
                  437,847
                  
                  
                  
                  676,510
                  
                  
                  
                  866,872MARKETING
      AND SALES EXPENSE
                  
                  
                  146,358
                  
                  
                  
                  145,762
                  
                  
                  
                  314,450
                  
                  
                  
                  272,032GENERAL
      AND ADMINISTRATIVE EXPENSE
                  
                  
                  288,634
                  
                  
                  
                  250,408
                  
                  
                  
                  703,958
                  
                  
                  
                  510,461RESEARCH
      AND DEVELOPMENT EXPENSE
                  
                  
                  79,247
                  
                  
                  
                  125,563
                  
                  
                  
                  204,577
                  
                  
                  
                  222,719LOSS
      FROM OPERATIONS
                  
                  
                  (265,249
                  )
                  
                  
                  (83,886
                  )
                  
                  
                  (546,475
                  )
                  
                  
                  (138,340
                  )OTHER
      INCOME (EXPENSE)Interest
      income
                  
                  
                  2,352
                  
                  
                  
                  5,345
                  
                  
                  
                  4,846
                  
                  
                  
                  14,175Interest
      expense
                  
                  
                  (28,635
                  )
                  
                  
                  (25,395
                  )
                  
                  
                  (57,223
                  )
                  
                  
                  (51,997
                  )Financing
      expense
                  
                  
                  (76,387
                  )
                  
                  
                  -
                  
                  
                  
                  (76,387
                  )
                  
                  
                  -Gain
      on disposal of equipment
                  
                  
                  -
                  
                  
                  
                  1,200
                  
                  
                  
                  -
                  
                  
                  
                  1,200(102,670
                  )
                  
                  
                  (18,850
                  )
                  
                  
                  (128,764
                  )
                  
                  
                  (36,622
                  )LOSS
      BEFORE PROVISION FOR INCOME TAX
                  
                  
                  (367,919
                  )
                  
                  
                  (102,736
                  )
                  
                  
                  (675,239
                  )
                  
                  
                  (174,962
                  )INCOME
      TAX EXPENSE
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -NET
      LOSS
                  
                  
                  (367,919
                  )
                  
                  
                  (102,736
                  )
                  
                  
                  (675,239
                  )
                  
                  
                  (174,962
                  )DIVIDENDS
      ON PREFERRED STOCK
                  
                  
                  (6,108
                  )
                  
                  
                  (6,142
                  )
                  
                  
                  (12,215
                  )
                  
                  
                  (12,283
                  )LOSS
      APPLICABLE TO COMMON SHARES
                  
                  $
                  (374,027
                  )
                  
                  $
                  (108,878
                  )
                  
                  $
                  (687,454
                  )
                  
                  $
                  (187,245
                  )EARNINGS
      PER SHARE - BASIC AND DILUTED(Note
      7)NET
      LOSS PER COMMON SHARE BEFORE DIVIDENDS ON PREFERRED STOCKBasic
                  
                  $
                  (0.10
                  )
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.19
                  )
                  
                  $
                  (0.05
                  )Diluted
                  
                  $
                  (0.10
                  )
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.19
                  )
                  
                  $
                  (0.05
                  )LOSS
      PER COMMON SHARE AFTER DIVIDENDS ON PREFERRED STOCKBasic
                  
                  $
                  (0.10
                  )
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.19
                  )
                  
                  $
                  (0.05
                  )Diluted
                  
                  $
                  (0.10
                  )
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.19
                  )
                  
                  $
                  (0.05
                  )WEIGHTED
      AVERAGE SHARES OUTSTANDINGBasic
                  
                  
                  3,562,259
                  
                  
                  
                  3,510,964
                  
                  
                  
                  3,562,149
                  
                  
                  
                  3,500,419Diluted
                  
                  
                  3,562,259
                  
                  
                  
                  3,510,964
                  
                  
                  
                  3,562,149
                  
                  
                  
                  3,500,419





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


5





SCI
ENGINEERED MATERIALS, INC.





STATEMENTS
OF CASH FLOWS





SIX
MONTHS ENDED JUNE 30, 2009 AND 2008





(UNAUDITED)





2009
                    
                    
                    2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss income
                    
                    $
                    (675,239
                    )
                    
                    $
                    (174,962
                    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and accretion
                    
                    
                    227,329
                    
                    
                    
                    185,355Amortization
                    
                    
                    1,544
                    
                    
                    
                    1,544Stock
      based compensation
                    
                    
                    281,203
                    
                    
                    
                    29,637Financing
      expense related to warrant expiration date extension
                    
                    
                    76,387
                    
                    
                    
                    -Gain
      on sale of equipment
                    
                    
                    -
                    
                    
                    
                    (1,200
                    )Inventory
      reserve
                    
                    
                    12,000
                    
                    
                    
                    4,334Provision
      for doubtful accounts
                    
                    
                    (8,947
                    )
                    
                    
                    -Changes
      in operating assets and liabilities:(Increase)
      decrease in assets:Accounts
      receivable
                    
                    
                    138,422
                    
                    
                    
                    (193,519
                    )Inventories
                    
                    
                    393,752
                    
                    
                    
                    (1,307,988
                    )Prepaid
      expenses
                    
                    
                    (683,116
                    )
                    
                    
                    (40,680
                    )Other
      assets
                    
                    
                    (4,518
                    )
                    
                    
                    (16,087
                    )Increase
      in liabilities:Accounts
      payable
                    
                    
                    24,856
                    
                    
                    
                    199,364Accrued
      expenses and customer deposits
                    
                    
                    158,394
                    
                    
                    
                    1,161,020Total
      adjustments
                    
                    
                    617,306
                    
                    
                    
                    21,780Net
      cash used in operating activities
                    
                    
                    (57,933
                    )
                    
                    
                    (153,182
                    )CASH
      FLOWS FROM INVESTING ACTIVITIESProceeds
      on sale of equipment
                    
                    
                    -
                    
                    
                    
                    1,200Purchases
      of property and equipment
                    
                    
                    (106,250
                    )
                    
                    
                    (75,723
                    )Net
      cash used in investing activities
                    
                    
                    (106,250
                    )
                    
                    
                    (74,523
                    )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from exercise of common stock options
                    
                    
                    1,550
                    
                    
                    
                    10,250Proceeds
      from exercise of common stock warrants
                    
                    
                    -
                    
                    
                    
                    68,021Payments
      related to registration of common stock
                    
                    
                    -
                    
                    
                    
                    (20,061
                    )Payments
      related to Preferred Series B dividend
                    
                    
                    (24,430
                    )
                    
                    
                    (24,566
                    )Principal
      payments on capital lease obligations
                    
                    
                    (171,492
                    )
                    
                    
                    (141,692
                    )Net
      cash used in financing activities
                    
                    
                    (194,372
                    )
                    
                    
                    (108,048
                    )





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


6





SCI
ENGINEERED MATERIALS, INC.





STATEMENTS
OF CASH FLOWS (CONTINUED)





SIX
MONTHS ENDED JUNE 30, 2009 AND 2008





(UNAUDITED)





2009
                
                
                2008NET
      DECREASE IN CASH
                
                $
                (358,555
                )
                
                $
                (335,753
                )CASH - Beginning of
      period
                
                
                1,399,050
                
                
                
                1,182,086CASH - End of
      period
                
                $
                1,040,495
                
                
                $
                846,333SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid during the years for:Interest,
      net
                
                $
                57,223
                
                
                $
                51,997Income
      taxes
                
                $
                -
                
                
                $
                -SUPPLEMENTAL
      DISCLOSURES OF NONCASH FINANCING ACTIVITIESProperty
      and equipment purchased by capital lease
                
                $
                555,700
                
                
                $
                159,103Machinery
      & equipment accrued asset retirement obligation
    increase
                
                $
                3,312
                
                
                $
                1,656Financing
      expense related to warrant expiration date extension
                
                $
                76,387
                
                
                $
                -SUPPLEMENTAL
      DISCLOSURES OF NONCASH OPERATING ACTIVITIESStock
      based compensation expense
                
                $
                281,203
                
                
                $
                29,637





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


7





SCI
ENGINEERED MATERIALS, INC.


NOTES
TO FINANCIAL STATEMENTS





Note
      1.
            Business
      Organization and Purpose





SCI
Engineered Materials, Inc. (“SCI” or the “Company”), formerly Superconductive
Components, Inc., an Ohio corporation, was incorporated in 1987.  The
Company manufactures ceramic and metal sputtering targets for a variety of
industrial applications including: Photonics, Thin Film Solar, Thin Film
Battery, Semiconductor, and, to a lesser extent High Temperature Superconductive
(HTS) materials.  Photonics currently represents the Company’s largest
market for its targets.  Thin Film Solar is an industry that is
exhibiting rapid growth.  Thin Film Battery is a developing market
where manufacturers of batteries use the Company’s targets to produce very small
power supplies with small quantities of stored energy.  Semiconductor
is a developing market for the Company.





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, 2008.  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.  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 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
      June 30, 2009, the Company had disbursed the entire amount
      received.  The grant and contract both provide that as long as
      the Company performed in compliance with the grant/contract, the Company
      retained the rights to the equipment.  The grant was completed
      in January 2009.  The Company was in compliance with the
      requirements and retained the
equipment.


8





SCI
ENGINEERED MATERIALS, INC.


NOTES
TO FINANCIAL STATEMENTS





Note
      2.
            Summary
      of Significant Accounting Policies
(continued)





Stock
Based Compensation





In
December 2004, the FASB issued SFAS No. 123 (Revised), “Share Based Payment”
(SFAS No. 123R).  SFAS No. 123R replaced SFAS No. 123, and superseded
APB Opinion No. 25.  Effective January 1, 2006, the Company adopted
the fair value recognition provisions of SFAS No. 123R and related
interpretations using the modified-prospective transition
method.  Under this method, compensation cost recognized in 2009 and
2008 includes compensation cost for all stock-based awards granted on or
subsequent to January 1, 2006, based on the grant date fair value estimated in
accordance with the provisions of SFAS No. 123R.  Non cash stock based
compensation costs were $281,203 and $29,637 for the six months ended June 30,
2009 and 2008, respectively.   On January 2, 2009, the Stock
Option and Compensation Committee (the “Committee”) of the Board of Directors of
the Company approved the grant of options to purchase a total of 450,000 shares
of the Company’s common stock, effective January 2, 2009, to the Company’s Chief
Executive Officer and three other executive officers.  The Committee
also approved the grant of options to purchase 90,000 shares to the four
non-employee board members.  Pursuant to the terms of the agreements,
the options have an exercise price of $6.00 per share, the closing price of the
Company’s common stock as reported on the OTC Bulletin Board regulated quotation
service on January 2, 2009.  The four non-employee board members each
received compensation of 1,819 shares of the Company’s common stock and $5,000
in 2008.





Reclassification





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


9





SCI
ENGINEERED MATERIALS, INC.


NOTES
TO FINANCIAL STATEMENTS





Note
      3.
            Common
      Stock and Stock Options





The
cumulative status of options granted and outstanding at June 30, 2009, and
December 31, 2008, as well as options which became exercisable in connection
with the Stock Option Plans is summarized as follows:





Employee Stock OptionsAverageStock Options
                      
                      
                      Exercise PriceOutstanding
      at December 31, 2007
                      
                      
                      343,250
                      
                      
                      $
                      2.08Granted
                      
                      
                      21,000
                      
                      
                      
                      3.10Exercised
                      
                      
                      -
                      
                      
                      
                      -Forfeited
                      
                      
                      (1,500
                      )
                      
                      
                      3.10Outstanding
      at December 31, 2008
                      
                      
                      362,750
                      
                      
                      $
                      2.14Granted
                      
                      
                      450,000
                      
                      
                      
                      6.00Exercised
                      
                      
                      (1,000
                      )
                      
                      
                      1.55Forfeited
                      
                      
                      (10,000
                      )
                      
                      
                      3.10Outstanding
      at June 30, 2009
                      
                      
                      801,750
                      
                      
                      $
                      4.29Shares
      exercisable at December 31, 2008
                      
                      
                      321,050
                      
                      
                      $
                      2.00Shares
      exercisable at June 30, 2009
                      
                      
                      372,450
                      
                      
                      $
                      2.51





Non-Employee Director Stock OptionsWeightedAverageStock Options
                      
                      
                      Exercise PriceOutstanding
      at December 31, 2007
                      
                      
                      241,000
                      
                      
                      $
                      2.51Granted
                      
                      
                      -
                      
                      
                      
                      -Exercised
                      
                      
                      (7,500
                      )
                      
                      
                      1.37Expired
                      
                      
                      -
                      
                      
                      
                      -Forfeited
                      
                      
                      -
                      
                      
                      
                      -Outstanding
      at December 31, 2008
                      
                      
                      233,500
                      
                      
                      $
                      2.54Granted
                      
                      
                      90,000
                      
                      
                      
                      6.00Exercised
                      
                      
                      -
                      
                      
                      
                      -Expired
                      
                      
                      -
                      
                      
                      
                      -Forfeited
                      
                      
                      -
                      
                      
                      
                      -Outstanding
      at June 30, 2009
                      
                      
                      323,500
                      
                      
                      $
                      3.50Shares
      exercisable at December 31, 2008
                      
                      
                      233,500
                      
                      
                      $
                      2.54Shares
      exercisable at June 30, 2009
                      
                      
                      263,500
                      
                      
                      $
                      2.94


10





SCI
ENGINEERED MATERIALS, INC.


NOTES
TO FINANCIAL STATEMENTS





Note
      3.
            Common
      Stock and Stock Options (continued)





Exercise
prices for options range from $1.00 to $6.00 at June 30, 2009.  The
weighted average option price for all options outstanding is $4.07 with a
weighted average remaining contractual life of 6.2 years.





Note
      4.
            Common
      Stock Warrants





On
      May 1, 2009 the Board of Directors authorized the extension of the
      expiration date of the common stock purchase warrants that were due to
      expire in May 2009 and November 2009.  The expiration dates were
      extended to May 2010 and November 2010, respectively.  In total,
      this extension of the expiration date applied to an aggregate of 160,418
      warrants.  The non-cash financing expense associated with this
      extension was approximately
$76,000.





Note
      5.
            Preferred
      Stock





On
January 15, 2009 the Board of Directors approved the payment of one year of
accrued dividends on convertible preferred stock, Series B, to shareholders of
record as of December 31, 2008.  Payment was disbursed on June 30,
2009.





Note
      6.
            Inventory





Inventory
      is comprised of the following:





June 30,
                  
                  
                  December 31,2009
                  
                  
                  2008(unaudited)Raw
      materials
                  
                  $
                  305,010
                  
                  
                  $
                  299,750Work-in-progress
                  
                  
                  290,673
                  
                  
                  
                  754,097Finished
      goods
                  
                  
                  324,041
                  
                  
                  
                  259,629Inventory
      reserve
                  
                  
                  (61,043
                  )
                  
                  
                  (49,043
                  )$
                  858,681
                  
                  
                  $
                  1,264,433


11




SCI
ENGINEERED MATERIALS, INC.


NOTES
TO FINANCIAL STATEMENTS





Note
      7.
            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 June 30, 2009 and 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 June 30,
                                      
                                      
                                      Six
      months ended June 30,2009
                                      
                                      
                                      2008
                                      
                                      
                                      2009
                                      
                                      
                                      2008Loss
      applicable to common shares
                                      
                                      $
                                      (374,027
                                      )
                                      
                                      $
                                      (108,878
                                      )
                                      
                                      $
                                      (687,454
                                      )
                                      
                                      $
                                      (187,245
                                      )Weighted
      average common shares outstanding – basic
                                      
                                      
                                      3,562,259
                                      
                                      
                                      
                                      3,510,964
                                      
                                      
                                      
                                      3,562,149
                                      
                                      
                                      
                                      3,500,419Effect
      of dilutions
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Weighted
      average shares outstanding –diluted
                                      
                                      
                                      3,562,259
                                      
                                      
                                      
                                      3,510,964
                                      
                                      
                                      
                                      3,562,149
                                      
                                      
                                      
                                      3,500.419





Note
      8.
              Capital
      Requirements





The
Company’s accumulated deficit since inception was $8,077,115 (unaudited) at June
30, 2009.  While the Company has been profitable in recent years, the
historical losses have been financed primarily from additional investments and
loans by major shareholders and private offerings of common stock and warrants
to purchase common stock.  The Company cannot assure that it will
continue to operate at a profit or it will be able to raise additional capital
in the future to fund its operations.





As of
June 30, 2009, cash on-hand was $1,040,495.  Management believes,
based on forecasted sales and expenses, that funding will be adequate to sustain
operations at least through June 30, 2010.





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


12


SCI
ENGINEERED MATERIALS, INC.


NOTES
TO FINANCIAL STATEMENTS





Note
      9.
            Note
      Payable





On
January 22, 2009, the Company issued a Promissory Note dated as of January 13,
2009, to The Huntington National Bank, as Lender, pursuant to a Business Loan
Agreement dated as of January 13, 2009.  The Note is secured by a
Commercial Security Agreement granting the Lender a security interest in the
Company’s inventory, equipment and accounts.  The balance owed on the
Note at June 30, 2009 was $0.





Among
other items, the Note provides for the following:





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





Interest
on the note is subject to change from time to time based on changes in an
independent index which is the LIBO rate.  The index at the inception
of the note was 0.386% per annum.  The interest rate to be applied to
the unpaid principal balance during this note will be at a rate of 3.500
percentage points over the index.





All
accrued interest is payable monthly.  The outstanding principal and
accrued interest owed on the Note matures on January 1, 2010.





Note
      10.
              Subsequent
      Event





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





Note11.
              Recently
      Issued Accounting Standards





In May
2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165). SFAS 165 is
intended to establish general standards of accounting for and disclosures of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. SFAS 165 requires the disclosure of
the date through which an entity has evaluated subsequent events and the basis
for that date. The Company has evaluated subsequent events through the date of
this report and there are none except those listed in Note 10.





In June
2009, the FASB issued Statement No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles (SFAS
168).  SFAS 168 will become the single source of authoritative
nongovernmental U.S. generally accepted accounting principles (GAAP),
superseding existing FASB, American Institute of Certified Public Accountants
(AICPA), Emerging Issues Task Force (EITF), and related accounting
literature.  SFAS 168 reorganizes the thousands of GAAP pronouncements
into roughly 90 accounting topics and displays them using a consistent
structure.  Also included is relevant Securities and Exchange
Commission guidance organized using the same topical structure in separate
sections.  SFAS 168 will be effective for financial statements issued
for reporting periods
that end after September 15, 2009.  This will have an impact on the
Company’s financial statements since all future references to authoritative
accounting literature will be references in accordance with
SFAS 168.


13


SCI
ENGINEERED MATERIALS, INC.


NOTES
TO FINANCIAL STATEMENTS





Note12.
              Concentrations





At June
30, 2009 the Company had a prepaid expense of approximately $664,000 to a
supplier for the purchase of raw material.  The Company is confident the
supplier, with revenues of several billion dollars, will deliver the raw
material as agreed upon.


14


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





The
following discussion should be read in conjunction with the Financial Statements
and Notes contained herein and with those in our Form 10-K for the year ended
December 31, 2008.




Except
for the historical information contained herein, the matters discussed in this
Quarterly Report on Form 10-Q include certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby.  Those
statements include, but may not be limited to, all statements regarding our
intent, belief, and expectations, such as statements concerning our future
profitability and operating and growth strategy.  Words such as
“believe,” “anticipate,” “expect,” “will,” “may,” “should,” “intend,” “plan,”
“estimate,” “predict,” “potential,” “continue,” “likely” and similar expressions
are intended to identify forward-looking statements.  Investors are
cautioned that all forward-looking statements contained in this Quarterly Report
on Form 10-Q and in other statements we make involve risks and uncertainties
including, without limitation, the factors set forth under the caption “Risk
Factors” included in our Annual Report on Form 10-K for the year ended December
31, 2008, and other factors detailed from time to time in our other filings with
the Securities and Exchange Commission.  One or more of these factors
have affected, and in the future could affect our business and financial
condition and could cause actual results to differ materially from plans and
projections.  Although we believe the assumptions underlying the
forward-looking statements contained herein are reasonable, there can be no
assurance that any of the forward-looking statements included in this Quarterly
Report on Form 10-Q will prove to be accurate.  In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by us or any other person that our objectives and plans will be
achieved.




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




Overview




SCI
Engineered Materials, Inc. (“SCI” or the “Company”), formerly Superconductive
Components, Inc., an Ohio corporation, was incorporated in 1987.  We
manufacture ceramic and metal sputtering targets for a variety of industrial
applications including: Photonics, Thin Film Solar, Thin Film Battery,
Semiconductor, and, to a lesser extent HTS materials.  Photonics
currently represents the largest market for our targets.  Thin Film
Solar is an industry that is exhibiting rapid growth and we expect this market
to grow quickly.  Thin Film Battery is a developing market where
manufacturers of batteries use our targets to produce very small power supplies
with small quantities of stored energy.    Semiconductor is
a developing market for us.  We added to our sales staff in late 2007
for the purpose of focusing on opportunities for our products in the Solar
industry.  We also added staff to our Technology group during the
second half of 2007 for the development of innovative
products.  During the fourth quarter of 2008 we added an exclusive
manufacturer’s representative for Europe.  Late in the second quarter
of 2009 we received an order from a Thin Film Solar customer that was more than
$1 million.  The entire amount is scheduled to ship during the second
half of 2009.


15


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





Executive
Summary





For the
six months ended June 30, 2009, we had $339,451 in non-cash expenses for the
following items: stock based compensation for stock options issued in January of
2009 and charges related to the extension of the expiration date of common stock
warrants in May of 2009.  The non-cash stock based compensation
expense included a one time charge of $175,376 for options that vested
immediately and ongoing charges of $87,688.  These ongoing non-cash
charges will continue through 2010 and then decline beginning in the first
quarter of 2011.  The non-cash financing expense related to the
extension of the expiration date of common stock warrants was a one time charge
of $76,387.  For the six months ended June 30, 2008, we had $29,637 in
non-cash stock based compensation expense.  The increase in these
non-cash charges of $309,814 had a material effect on our Statement of
Operations in 2009.





For the
six months ended June 30, 2009, we had revenues of $3,211,588.  This
was a decrease of $19,865, or less than 1% when compared to the six months ended
June 30, 2008.  Contract research revenue increased to $501,074 for
the first six months of 2009 from $40,121 for the same period in 2008, an
increase of $460,953, reflecting the position of our company in key
technologies.  This increase in contract research revenue combined
with revenue from new markets substantially offsets the decrease in our
automotive market revenue.  The slight decline in total revenue can be
attributed to the current economic downturn as customers have decreased spending
and reduced inventory levels.





Gross
profit was $676,510 for the six months ended June 30, 2009 compared to $866,872
for the same six months in 2008.  Gross margin was 21.1% of total
revenues for the first six months of 2009 compared to 26.8% for the same period
in 2008.  The decline can be attributed primarily to the decrease in
product revenue as mentioned above.  Also, research and development
labor (approximately $103,000) was included as cost of contract research
revenue.





Given
current market conditions, we continued to invest in expanding production
capabilities, R&D, marketing and sales.  This should allow us to
gain market share now and to be poised to receive large orders in targeted
applications when this current business downturn recovers.





Benefits
from these investments have been trial and qualification orders that were
shipped to customers in the Thin Film Solar industry.  The revenue
from these shipments totaled approximately $100,000 in the first quarter and
$312,000 in the second quarter of 2009, respectively.   Some of
these trials and qualifications have resulted in orders of approximately $1.2
million that are scheduled to ship during the second half of
2009.  Additionally, late in the second quarter we received some
orders from our traditional markets that had been slow during the first six
months of 2009. This could be an indication that restocking inventories or
increased business levels is occurring.





For the
six months ended June 30, 2009, we had net loss applicable to common shares of
$687,454 compared to a net loss of $187,245 for the same period in
2008.  The increase in net loss can be attributed to additional
operating expenses of approximately $218,000 along with the decline in product
revenue and gross profit mentioned above. Non-cash stock based compensation
expense increased approximately $252,000 in the first six months of 2009 versus
the first six months of 2008.  A non-cash financing expense related to
the extension of the expiration date for warrants due to expire in 2009 was
approximately $76,000 which was booked in the second quarter of
2009.


16


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





It is
possible that the revenues for the entire year of 2009 could be less than 2008
due to the significant reduction in a high priced raw material.  After
two years of unusually high prices above the long term average price of this raw
material, the price has returned to its long term average.  In
addition, the global economic condition has weakened our traditional
markets.  All of our employees are committed to fighting through this
economic downturn.  During the first six months of 2009 we reduced
hours in most departments and members of management agreed to salary reductions
to help reduce costs in the coming months.





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





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





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





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





RESULTS
OF OPERATIONS





Six
and three months ended June 30, 2009 (unaudited) compared to six and three
months ended June 30, 2008 (unaudited):





Revenues




For the
six months ended June 30, 2009, we had revenues of $3,211,588.  This
was a slight decrease of $19,865, or 0.6%, compared to the six months ended June
30, 2008.  Contract research revenue increased to $501,074 for the
first six months of 2009 from $40,121 for the same period in 2008, an increase
of $460,953, reflecting our position in key technologies.  This
increase in contract research revenue combined with revenue from new markets
substantially offsets the decrease in our automotive market
revenue.  The slight decline in total revenue can be attributed
to the current economic downturn as customers have decreased spending and
reduced inventory levels.   For the three months ended June 30,
2009 we had revenues of $1,310,053 compared to $1,517,513 for the same period in
2008.  Contract research revenue was $254,649 for the three months
ended June 30, 2009 versus $0 for the three months ended June 30,
2008.  Product revenue was $1,055,404 for the second quarter of 2009
compared to $1,517,513 for the second quarter of 2008, a decrease of
$462,109.  This decrease can be attributable to the automotive
market.  As mentioned above, this decline in product revenue can be
attributed to the current economic downturn as customers have decreased spending
and reduced inventory levels.  Late in the second quarter of 2009, we
began receiving some additional orders from our traditional
markets.  This could be an indication of a need to restock inventories
or an increase in business levels is occurring.




17


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





Gross
Profit





Gross
profit for the six months ended June 30, 2009 was $676,510 which represents a
gross margin of 21.1% of total revenue compared to $866,872 and 26.8% of total
revenue for the six months ended June 30, 2008.  Gross profit for the
three months ended June 30, 2009 was $248,990 which represents a gross margin of
19.0% of total revenue compared to $437,847 and 28.9% of total revenue for the
three months ended June 30, 2008.   The decline can be attributed
primarily to the decrease in product revenue previously
mentioned.  Also, labor (approximately $103,000) normally classified
as research and development expense was included as cost of contract research
revenue.





Marketing
and Sales Expense





Marketing
and Sales expense for the six months ended June 30, 2009 increased 15.6% to
$314,450 from $272,032 for the same period in 2008.  The increase was
due to increased non-cash stock based compensation expense of approximately
$33,000, and higher expenses related to trade shows as well as commissions to
our outside manufacturing sales representatives.  A portion of this
increase was offset by a reduction in compensation to our inside
personnel.  Marketing and Sales expense for the three months ended
June 30, 2009 increased 0.4% to $146,358 from $145,762 for the same period in
2008.





General
and Administrative Expense





General
and administrative expense for the six months ended June 30, 2009 increased to
$703,958 from $510,461 for the six months ended June 30, 2008, or
37.9%.  The increase was primarily the result of non-cash stock based
compensation expense of approximately $207,000 compared to approximately $24,000
for the same period in 2008, as well as higher insurance premiums and
professional fees.  General and administrative expense for the three
months ended June 30, 2009 increased to $288,634 from $250,408 for the three
months ended June 30, 2008, or 15.3%.  The increase was primarily the
result of non-cash stock based compensation expense as well as higher insurance
premiums and professional fees.  A portion of this increase was offset
by a reduction in compensation.





Research
and Development Expense





Research
and development expense for the first six months of 2009 was $204,577 compared
to $222,719 for the same period in 2008, a decrease of 8.1%.  Research
and development expense for the three months ended June 30, 2009 was $79,247
compared to $125,563 for the same period in 2008,
a decrease of 36.9%.  We continue to incur expenses associated with
the continued development efforts in the Photonic, Thin Film Solar, Thin Film
Battery and Semiconductor markets, as well as research related to the SBIRs and
TFAEP.   The decrease in expense was a result of approximately
$103,000 of compensation that was assigned to Cost of ContractResearch
Revenue.


18


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





Other
Income and Expense





Interest
income was $4,846 and $14,175 for the six months ended June 30, 2009 and 2008,
respectively.   Interest income was $2,352 and $5,345 for the
three months ended June 30, 2009 and 2008, respectively.   While
our cash position increased over the past 12 months the decrease in interest
rates reduced the amount of interest earned.





Interest
expense was $57,223 and $51,997 for the six months ended June 30, 2009 and 2008,
respectively and $28,635 and $25,395 for the three months ended June 30, 2009
and 2008, respectively.  The increase was due to additional capital
lease obligations incurred for the purchase of production equipment for
increased production capacity.  We received loan proceeds in the
amount of $400,000 from the Ohio Department of Development in
2008.  These proceeds were used to reduce the balance on outstanding
capital lease obligations.  The favorable interest rate on this loan
(3%) helped offset the interest expense related to new capital lease
obligations.





Non-cash
financing expense associated with the extension of the warrant expiration date
previously mentioned was approximately $76,000 in the six and three months ended
June 30, 2009 versus $0 in 2008.





LOSS
APPLICABLE TO COMMON SHARES





Loss
applicable to common shares was $687,454 compared to $187,245 for the six months
ended June 30, 2009 and 2008, respectively.  Basic net loss per common
share after dividends on preferred stock and based on income applicable to
common shares was $0.19 and $0.05 for the six months ended June 30, 2009 and
2008, respectively.  The loss applicable to common shares includes net
loss from operations and the accretion of Series B preferred stock
dividends.  Dividends on the Series B preferred stock accrue at 10%
annually on the outstanding shares.  Accrued dividends on the Series B
preferred stock was $12,215 and $12,283 for the six months ended June 30, 2009
and 2008, respectively.  The weighted averaged shares outstanding were
3,562,149 at June 30, 2009 and 3,500,419 at June 30, 2008.  All
outstanding common stock equivalents were anti-dilutive for the six months ended
June 30, 2009 and 2008 due to the net loss.




Loss
applicable to common shares was $374,027 compared to $108,878 for the three
months ended June 30, 2009 and 2008, respectively.  Basic net loss per
common share after dividends on preferred stock and based on income applicable
to common shares was $0.10 and $0.03 for the three months ended June 30, 2009
and 2008, respectively.  The loss applicable to common shares includes
net loss from operations and the accretion of Series B preferred stock
dividends.  Dividends on the Series B preferred stock accrue at 10%
annually on the outstanding shares.  Accrued dividends on the Series B
preferred stock was $6,108 and $6,142 for the three months ended June 30, 2009
and 2008, respectively.  The weighted averaged shares outstanding were
3,562,259 at June 30, 2009 and 3,510,964 at June 30, 2008.  All
outstanding common stock equivalents were anti-dilutive for the three months
ended June 30, 2009 and 2008 due to the net loss.


19


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





The
following schedule represents our outstanding common shares during the period of
2009 through 2019 assuming all outstanding stock options and stock warrants are
exercised during the year of expiration.  If each shareholder
exercises his or her options or warrants, it could increase our common shares by
1,682,307 to 5,244,566 by December 31, 2019.  Exercise prices for
options and warrants range from $1.00 to $6.00 at June 30,
2009.  Assuming all such options and warrants are exercised in the
year of expiration, the effect on shares outstanding is illustrated as
follows:





Options and Warrants due to
      expire
                            
                            Potential Shares
  Outstanding2009
                            
                            -
                            
                            3,562,2592010
                            
                            603,807
                            
                            4,166,0662011
                            
                            62,500
                            
                            4,228,5662012
                            
                            169,000
                            
                            4,397,5662013
                            
                            30,500
                            
                            4,428,0662014
                            
                            180,000
                            
                            4,608,0662015
                            
                            140,000
                            
                            4,748,0662016
                            
                            37,000
                            
                            4,785,0662017
                            
                            -
                            
                            4,785,0662018
                            
                            9,500
                            
                            4,794,5662019
                            
                            450,000
                            
                            5,244,566





LIQUIDITY
AND WORKING CAPITAL





At June
30, 2009, working capital was $1,266,378 compared to $1,347,791 at June 30,
2008.  We used cash in operations of approximately $58,000 for the six
months ended June 30, 2009 and approximately $153,000 for the six months ended
June 30, 2008.   Significant non-cash items including
depreciation, accretion and amortization, stock based compensation expense,
financing expense of warrant extension, inventory reserve on excess and obsolete
inventory, and provision for doubtful accounts were approximately $590,000 and
$220,000, respectively, for the six months ended June 30, 2009 and
2008.  Accounts receivable, inventory, prepaid expenses and other
assets increased approximately $155,000 for the six months ended June 30,
2009.  Accounts receivable, inventory, prepaid expenses and other
assets increased approximately $1,558,000 for the six months ended June 30,
2008.  Accounts payable, accrued expenses and customer deposits
increased approximately $183,000 for the six months ended June 30, 2009 and
approximately $1,360,000 for the same period in 2008.  Cash of
approximately $106,000 and $75,000 was used for investing activities for the six
months ended June 30, 2009 and 2008, respectively.  The amounts
invested were used to purchase machinery and equipment for increased production
capacity and new product lines.





Cash of
approximately $194,000 was used for financing activities during the six months
ended June 30, 2009.  Cash payments to third parties for capital lease
obligations approximated $171,000.  Proceeds received from the
exercise of common stock options were $1,550.    Payments
related to Series B Preferred stock dividends were $24,430.  We
incurred new capital lease obligations of approximately $556,000 for new
production equipment.





Cash of
approximately $108,000 was used for financing activities during the six months
ended June 30, 2008.  Cash payments to third parties for capital lease
obligations approximated $142,000.  Proceeds received from the
exercise of common stock warrants were approximately
$68,000.  Proceeds received from the exercise of common stock options
were $10,250.  Payments related to Series B Preferred stock dividends
were $24,566.  Payments related to the registration of common
stock were approximately $20,000.  We incurred new capital lease
obligations of approximately $159,000 for new production
equipment.


20


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




RISK
FACTORS





We desire
to take advantage of the “safe harbor” provisions of the Private Securities
Litigation Reform Act of 1995.  The following factors, as well as the
factors listed under the caption “Risk Factors” in our Form 10-K filed with the
Securities and Exchange Commission on February 26, 2009, have affected or could
affect our actual results and could cause such results to differ materially from
those expressed in any forward-looking statements made by
us.  Investors should consider carefully these risks and speculative
factors inherent in and affecting our business and an investment in our common
stock.





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





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







Off
Balance Sheet Arrangements





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





Critical Accounting
Policies





The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States requires
management to make judgments, assumptions and estimates that affect the amounts
reported in the Financial Statements and accompanying notes.Note
2 to the Financial Statements in our Annual Report on Form 10-K for the year
ended December 31, 2008 describes the significant accounting policies and
methods used in the preparation of the Financial
Statements.  Estimates are used for, but not limited to, accounting
for the allowance for doubtful accounts, inventory allowances, property and
equipment depreciable lives, patents and licenses useful lives, and assessing
changes in which impairment of certain long-lived assets may
occur.   Actual results could differ from these
estimates.  The following critical accounting policies are impacted
significantly by judgments, assumptions and estimates used in the preparation of
the Financial Statements.  The allowance for doubtful accounts is
based on our assessment of the collectability of specific customer accounts and
the aging of the accounts receivable.  If there is a deterioration of
a major customer’s credit worthiness or actual defaults are higher than our
historical experience, our estimates of the recoverability of amounts due us
could be adversely affected.  Inventory purchases and commitments are
based upon future demand forecasts. If there is a sudden and significant
decrease in demand for our products 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.


21




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





Depreciable
and useful lives estimated for property and equipment, licenses and patents are
based on initial expectations of the period of time these assets and intangibles
will benefit us.  Changes in circumstances related to a change in our
business, change in technology or other factors could result in these assets
becoming impaired, which could adversely affect the value of these
assets.





Item
      4.
            Controls
      and Procedures





Evaluation of Disclosure Controls and
Procedures





Based on
an evaluation under the supervision and with the participation of our
management, our principal executive officer and principal financial officer have
concluded that the our disclosure controls and procedures as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as  amended ("Exchange Act") were effective as of June 30, 2009 to
ensure that information required to be disclosed in reports that are filed or
submitted under the Exchange Act is (i) recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission rules and forms and (ii) accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required
disclosure.


Inherent Limitations over Internal
Controls





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





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





Additionally,
there were no changes in our internal controls that could materially affect our
disclosure controls and procedures subsequent to the date of their evaluation,
nor were there any material deficiencies or material weaknesses in our internal
controls.  As a result, no corrective actions were
required.


22





Part
      II.   Other
Information





Item 4.
            Submission
      of Matters to a Vote of Security
Holders





(a)
            The
      Company held its Annual Meeting of Shareholders on June 10, 2009, for the
      following purposes:





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





(ii)
            To ratify the selection of the
      independent registered public accounting firm for the year ending December
      31, 2009.





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





(i)
                      Elect
      directors
                      FOR
                      AGAINST
      ORWITHHELDRobert
      J. Baker, Jr.
                      3,213,428
                      1,610Walter
      J. Doyle
                      3,205,320
                      9,718Robert
      H. Peitz
                      3,213,488
                      1,550Daniel
      Rooney
                      3,213,438
                      1,600Edward
      W. Ungar
                      3,213,298
                      1,740





FOR
                AGAINST
                ABSTAIN(ii)
                Ratify
      Accounting firm
                3,213,278
                1,260
                500


23





Item
      6.
            Exhibits.





10.1
              Description
      of material modification to rights of security holders of common stock
      purchase warrants set to expire in 2009 (Incorporated by reference to the
      Company’s Current Report on Form 8-K, dated May 7,
  2009).





10.2
                  Description
      of purchase order received from a new customer (Incorporated by reference
      to the Company’s Current Report on Form 8-K, dated June 22,
      2009).





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





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





32.1
            Section
      1350 Certification of Principal Executive
  Officer.*





32.2
              Section
      1350 Certification of Principal Financial Officer and Principal Accounting
      Officer.*





99.1
              Press
      Release dated August 5, 2009, entitled “SCI Engineered Materials, Inc.
      Reports Second Quarter 2009
Results.”





*Filed
with this report





Signatures





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





SCI
      ENGINEERED MATERIALS, INC.Date:  August
      5, 2009
              /s/ Daniel RooneyDaniel
      Rooney, Chairman of the Board of Directors, President and Chief Executive
      Officer(Principal
      Executive Officer)/s/ Gerald S. BlaskieGerald
      S. Blaskie, Vice President and Chief Financial Officer(Principal
      Financial Officer and Principal Accounting
  Officer)


24