**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 June 30, 2008 (unaudited) and December 31,                2007                                                 | 3                       |
|                                             |                    |                                                                                                                                               |                    |
|                                             |                    | Statements                of Operations for the Three Months and Six Months Ended June 30,                2008 and                2007 (unaudited) | 5                       |
|                                             |                    |                                                                                                                                               |                    |
|                                             |                    | Statements                of Cash Flows for the Six Months Ended June 30, 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.                               | 14                      |
|                                             |                    |                                                                                                                                               |                    |
|                                             | Item                3.  | Quantitative                and Qualitative Disclosures About Market Risk.                                                                         | N/A                     |
|                                             |                    |                                                                                                                                               |                    |
|                                             | Item                4.  | Controls                and Procedures.                                                                                                            | 19                      |
|                                             |                    |                                                                                                                                               |                    |
| **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.                                                                                | 21                      |
|                                             |                    |                                                                                                                                               |                    |
|                                             | Item                5.  | Other                Information.                                                                                                                  | N/A                     |
|                                             |                    |                                                                                                                                               |                    |
|                                             | Item                6.  | Exhibits.                                                                                                                                          | 21                      |
|                                             |                    |                                                                                                                                               |                    |
|                                             | Signatures.             | 22                                                                                                                                                 |

----

**PART            I. FINANCIAL INFORMATION**

**ITEM            1. FINANCIAL STATEMENTS**

**SCI            ENGINEERED MATERIALS, INC. **

**BALANCE            SHEETS**

| **ASSETS**                                                                                         |
|----------------------------------------------------------------------------------------------------|
|                                                                                               |   | **June 30, ** |   |  **December 31,** |   |
|                                                                                               |   | **2008** |   |  **2007** |   |
|                                                                                               |   | **(UNAUDITED)** |   |    |   |
| **CURRENT                    ASSETS**                                                              |   |   |   |    |   |
| Cash                                                                                               |   | $ | 846,333 |   | $ | 1,182,086 |   |
| Accounts                    receivable                                                             |   |   |   |   |   |   |   |
| Trade,                    less allowance for doubtful accounts of $24,700                          |   |   | 423,481 |   |   | 219,222 |   |
| Contract                                                                                           |   |   | 52,760 |   |   | 65,954 |   |
| Other                                                                                              |   |   | 3,004 |   |   | 550 |   |
| Inventories                                                                                        |   |   | 2,060,653 |   |   | 756,999 |   |
| Prepaid                    expenses                                                                |   |   | 81,837 |   |   | 21,148 |   |
| Total                    current assets                                                            |   |   | 3,468,068 |   |   | 2,245,959 |   |
|                                                                                               |   |   |   |   |   |   |   |
| **PROPERTY                      AND EQUIPMENT, ** **AT                      COST**  |   |   |   |   |   |   |   |
| Machinery                    and equipment                                                         |   |   | 4,150,383 |   |   | 3,386,778 |   |
| Furniture                    and fixtures                                                          |   |   | 81,155 |   |   | 74,222 |   |
| Leasehold                    improvements                                                          |   |   | 313,951 |   |   | 301,551 |   |
| Construction                    in progress                                                        |   |   | 12,582 |   |   | 599,753 |   |
|                                                                                               |   |   | 4,558,071 |   |   | 4,362,304 |   |
| Less                    accumulated depreciation                                                   |   |   | (2,329,917 | ) |   | (2,185,277 | ) |
|                                                                                               |   |   | 2,228,154 |   |   | 2,177,027 |   |
|                                                                                               |   |   |   |   |   |   |   |
| **OTHER                    ASSETS**                                                                |   |   |   |   |   |   |   |
| Deposits                                                                                           |   |   | 27,174 |   |   | 18,639 |   |
| Intangibles                                                                                        |   |   | 35,210 |   |   | 29,202 |   |
| Total                    other assets                                                              |   |   | 62,384 |   |   | 47,841 |   |
|                                                                                               |   |   |   |   |   |   |   |
| **TOTAL                    ASSETS**                                                                |   | $ | 5,758,606 |   | $ | 4,470,827 |   |

----

| **SCI                    ENGINEERED MATERIALS, INC.**                          |
|--------------------------------------------------------------------------------|
|                                                                           |
| **BALANCE                    SHEETS**                                          |
|                                                                           |
| **LIABILITIES                    AND SHAREHOLDERS'                    EQUITY** |

|                                                                                                                                                                                                                                                                                                           |   | **June 30, ** |       |  **December 31, ** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|-----------------------------------|--------|
|                                                                                                                                                                                                                                                                                                           |   | **2008**                |       |  **2007**                    |   |
|                                                                                                                                                                                                                                                                                                           |   | **(UNAUDITED)**         |       |                         |   |
| **CURRENT                    LIABILITIES**                                                                                                                                                                                                                                                                     |   |                    |       |                              |   |   |   |
| Capital                    lease obligation, current portion                                                                                                                                                                                                                                                   |   | $                       | 307,611    |                              | $      | 259,714 |   |
| Accounts                    payable                                                                                                                                                                                                                                                                            |   |                    | 359,832    |                              |   | 160,468 |   |
| Accrued                    contract expenses                                                                                                                                                                                                                                                                   |   |                    | 27,258     |                              |   | 47,702 |   |
| Customer                    deposits                                                                                                                                                                                                                                                                           |   |                    | 1,244,505  |                              |   | 19,483 |   |
| Accrued                    compensation                                                                                                                                                                                                                                                                        |   |                    | 68,652     |                              |   | 138,190 |   |
| Accrued                    expenses and other                                                                                                                                                                                                                                                                  |   |                    | 112,419    |                              |   | 100,184 |   |
| Total                    current liabilities                                                                                                                                                                                                                                                                   |   |                    | 2,120,277  |                              |   | 725,741 |   |
|                                                                                                                                                                                                                                                                                                           |   |                    |            |                              |   |   |   |
| **CAPITAL                        LEASE OBLIGATION, NET OF****CURRENT                        PORTION**                                                                                                                                                                                                          |   |                    | 815,948    |                              |   | 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%; 24,524                          and 24,566 issued and outstanding                          respectively |   |                    | 362,955    |                              |   | 375,861 |   |
|                                                                                                                                                                                                                                                                                                           |   |                    |       |                              |   |   |   |
| Common                        stock, no par value, authorized 15,000,000 shares;  3,560,071 and                        3,474,338 shares issued and outstanding                        respectively                                                                                                        |   |                    | 9,175,629  |                              |   | 9,061,378 |   |
| Additional                    paid-in capital                                                                                                                                                                                                                                                                  |   |                    | 985,185    |                              |   | 987,840 |   |
| Accumulated                    deficit                                                                                                                                                                                                                                                                         |   |                    | (7,701,388 | )                                 |   | (7,526,426 | ) |
|                                                                                                                                                                                                                                                                                                           |   |                    | 2,822,381  |                              |   | 2,898,653 |   |
|                                                                                                                                                                                                                                                                                                           |   |                    |       |                              |   |   |   |
| **TOTAL                    LIABILITIES AND SHAREHOLDERS' EQUITY**                                                                                                                                                                                                                                              |   | $                       | 5,758,606  |                              | $      | 4,470,827 |   |

----

**SCI        ENGINEERED MATERIALS, INC.**

**STATEMENTS        OF OPERATIONS**

**THREE        MONTHS ENDED JUNE 30, 2008 AND 2007**

**AND        SIX MONTHS ENDED JUNE 30, 2008 AND 2007**

**(UNAUDITED)**

|                                                                                                         |   | **THREE MONTHS ENDED JUNE 30,** |      | **SIX MONTHS ENDED JUNE 30,** |   |
|--------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|-----------|---------------------------------------------------|--------|
|                                                                                                         |   | **2008**                                            |      | **2007**                                          |   | **2008** |   | **2007** |   |
|                                                                                                         |   |                                                |      |                                              |   |   |   |   |   |   |   |   |   |
| **SALES                  REVENUE**                                                                           |   | $                                                   | 1,517,513 |                                              | $      | 3,403,742 |   | $ | 3,231,453 |   | $ | 5,857,751 |   |
|                                                                                                         |   |                                                |      |                                              |   |   |   |   |   |   |   |   |   |
| **COST                  OF SALES REVENUE**                                                                   |   |                                                | 1,079,666 |                                              |   | 2,890,574 |   |   | 2,364,581 |   |   | 4,886,003 |   |
|                                                                                                         |   |                                                |      |                                              |   |   |   |   |   |   |   |   |   |
| **GROSS                  PROFIT**                                                                            |   |                                                | 437,847   |                                              |   | 513,168 |   |   | 866,872 |   |   | 971,748 |   |
|                                                                                                         |   |                                                |      |                                              |   |   |   |   |   |   |   |   |   |
| **GENERAL                  AND ADMINISTRATIVE EXPENSE**                                                      |   |                                                | 250,408   |                                              |   | 219,716 |   |   | 510,461 |   |   | 456,312 |   |
|                                                                                                         |   |                                                |      |                                              |   |   |   |   |   |   |   |   |   |
| **RESEARCH                  AND DEVELOPMENT EXPENSE**                                                        |   |                                                | 125,563   |                                              |   | 81,873 |   |   | 222,719 |   |   | 145,037 |   |
|                                                                                                         |   |                                                |      |                                              |   |   |   |   |   |   |   |   |   |
| **MARKETING                  AND SALES EXPENSE**                                                             |   |                                                | 145,762   |                                              |   | 110,449 |   |   | 272,032 |   |   | 207,851 |   |
|                                                                                                         |   |                                                |      |                                              |   |   |   |   |   |   |   |   |   |
| **(LOSS)                  INCOME FROM OPERATIONS**                                                           |   |                                                | (83,886   | )                                                 |   | 101,130 |   |   | (138,340 | ) |   | 162,548 |   |
|                                                                                                         |   |                                                |      |                                              |   |   |   |   |   |   |   |   |   |
| **OTHER                  INCOME (EXPENSE)**                                                                  |   |                                                |      |                                              |   |   |   |   |   |   |   |   |   |
| Interest                  income                                                                             |   |                                                | 5,345     |                                              |   | 14,432 |   |   | 14,175 |   |   | 26,988 |   |
| Interest                  expense                                                                            |   |                                                | (25,395   | )                                                 |   | (18,212 | ) |   | (51,997 | ) |   | (24,116 | ) |
| Gain                  on disposal of equipment                                                               |   |                                                | 1,200     |                                              |   | 4,782 |   |   | 1,200 |   |   | 4,782 |   |
| Miscellaneous,                  net                                                                          |   |                                                | -         |                                              |   | (457 | ) |   | - |   |   | (915 | ) |
|                                                                                                         |   |                                                | (18,850   | )                                                 |   | 545 |   |   | (36,622 | ) |   | 6,739 |   |
|                                                                                                         |   |                                                |      |                                              |   |   |   |   |   |   |   |   |   |
| **(LOSS)                  INCOME BEFORE PROVISION FOR INCOME TAX**                                           |   |                                                | (102,736  | )                                                 |   | 101,675 |   |   | (174,962 | ) |   | 169,287 |   |
|                                                                                                         |   |                                                |      |                                              |   |   |   |   |   |   |   |   |   |
| **INCOME                  TAX EXPENSE**                                                                      |   |                                                | -         |                                              |   | - |   |   | - |   |   | - |   |
|                                                                                                         |   |                                                |      |                                              |   |   |   |   |   |   |   |   |   |
| **NET                  (LOSS) INCOME**                                                                       |   |                                                | (102,736  | )                                                 |   | 101,675 |   |   | (174,962 | ) |   | 169,287 |   |
|                                                                                                         |   |                                                |      |                                              |   |   |   |   |   |   |   |   |   |
| **DIVIDENDS                  ON PREFERRED STOCK**                                                            |   |                                                | (6,142    | )                                                 |   | (6,296 | ) |   | (12,283 | ) |   | (12,592 | ) |
|                                                                                                         |   |                                                |      |                                              |   |   |   |   |   |   |   |   |   |
| **(LOSS)                  INCOME APPLICABLE TO COMMON SHARES**                                               |   | $                                                   | (108,878  | )                                                 | $      | 95,379 |   | $ | (187,245 | ) | $ | 156,695 |   |
|                                                                                                         |   |                                                |      |                                              |   |   |   |   |   |   |   |   |   |
| **EARNINGS                  PER SHARE - BASIC AND DILUTED**(Note 6)                                          |   |                                                |      |                                              |   |   |   |   |   |   |   |   |   |
|                                                                                                         |   |                                                |      |                                              |   |   |   |   |   |   |   |   |   |
| **NET                  (LOSS) INCOME PER COMMON SHARE BEFORE DIVIDENDS ON PREFERRED                  STOCK** |   |                                                |      |                                              |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                        |   | $                                                   | (0.03     | )                                                 | $      | 0.03 |   | $ | (0.05 | ) | $ | 0.05 |   |
| Diluted                                                                                                      |   | $                                                   | (0.03     | )                                                 | $      | 0.02 |   | $ | (0.05 | ) | $ | 0.04 |   |
|                                                                                                         |   |                                                |      |                                              |   |   |   |   |   |   |   |   |   |
| **NET                  (LOSS) INCOME PER COMMON SHARE AFTER DIVIDENDS ON PREFERRED                  STOCK**  |   |                                                |      |                                              |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                        |   | $                                                   | (0.03     | )                                                 | $      | 0.03 |   | $ | (0.05 | ) | $ | 0.05 |   |
| Diluted                                                                                                      |   | $                                                   | (0.03     | )                                                 | $      | 0.02 |   | $ | (0.05 | ) | $ | 0.04 |   |
|                                                                                                         |   |                                                |      |                                              |   |   |   |   |   |   |   |   |   |
| **WEIGHTED                  AVERAGE SHARES OUTSTANDING**                                                     |   |                                                |      |                                              |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                        |   |                                                | 3,510,964 |                                              |   | 3,462,073 |   |   | 3,500,419 |   |   | 3,451,032 |   |
| Diluted                                                                                                      |   |                                                | 3,510,964 |                                              |   | 4,287,082 |   |   | 3,500,419 |   |   | 4,240,350 |   |

----

**SCI        ENGINEERED MATERIALS, INC.**

**STATEMENTS        OF CASH FLOWS**

**SIX        MONTHS ENDED JUNE 30, 2008 AND 2007**

**(UNAUDITED)**

|                                                                                                                                                        |   | **2008** |       | **2007** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|------------|----------|--------|
| **CASH                    FLOWS FROM OPERATING ACTIVITIES**                                                                                                 |   |     |       |     |   |   |   |
| Net                    (loss) income                                                                                                                        |   | $        | (174,962   | )        | $      | 169,287 |   |
| Adjustments                    to reconcile net (loss) income to net cash (used in) provided                    by operating                    activities: |   |     |       |     |   |   |   |
| Depreciation                    and accretion                                                                                                               |   |     | 185,355    |     |   | 137,683 |   |
| Amortization                                                                                                                                                |   |     | 1,544      |     |   | 1,544 |   |
| Stock                    based compensation                                                                                                                 |   |     | 29,637     |     |   | 28,626 |   |
| Gain                    on sale of equipment                                                                                                                |   |     | (1,200     | )        |   | (4,782 | ) |
| Inventory                    reserve                                                                                                                        |   |     | 4,334      |     |   | 5,765 |   |
| Provision                    for doubtful accounts                                                                                                          |   |     | -          |     |   | (300 | ) |
| Changes                    in operating assets and liabilities:                                                                                             |   |     |       |     |   |   |   |
| (Increase)                    decrease in assets:                                                                                                           |   |     |       |     |   |   |   |
| Accounts                    receivable                                                                                                                      |   |     | (193,519   | )        |   | 61,941 |   |
| Inventories                                                                                                                                                 |   |     | (1,307,988 | )        |   | (65,355 | ) |
| Prepaid                    expenses                                                                                                                         |   |     | (40,680    | )        |   | (15,944 | ) |
| Other                    assets                                                                                                                             |   |     | (16,087    | )        |   | 262,110 |   |
| Increase                    in liabilities:                                                                                                                 |   |     |       |     |   |   |   |
| Accounts                    payable                                                                                                                         |   |     | 199,364    |     |   | 77,714 |   |
| Accrued                    expenses and customer deposits                                                                                                   |   |     | 1,161,020  |     |   | 93,261 |   |
| Total                    adjustments                                                                                                                        |   |     | 21,780     |     |   | 582,263 |   |
| Net                    cash (used in) provided by operating activities                                                                                      |   |     | (153,182   | )        |   | 751,550 |   |
|                                                                                                                                                        |   |     |       |     |   |   |   |
| **CASH                    FLOWS FROM INVESTING ACTIVITIES**                                                                                                 |   |     |       |     |   |   |   |
| Proceeds                    on sale of equipment                                                                                                            |   |     | 1,200      |     |   | 15,100 |   |
| Purchases                    of property and equipment                                                                                                      |   |     | (75,723    | )        |   | (78,146 | ) |
| Net                    cash used in investing activities                                                                                                    |   |     | (74,523    | )        |   | (63,046 | ) |
|                                                                                                                                                        |   |     |       |     |   |   |   |
| **CASH                    FLOWS FROM FINANCING ACTIVITIES**                                                                                                 |   |     |       |     |   |   |   |
| Proceeds                    from exercise of common stock options                                                                                           |   |     | 10,250     |     |   | - |   |
| Proceeds                    from exercise of common stock warrants                                                                                          |   |     | 68,021     |     |   | 26,909 |   |
| Payments                    related to registration of common stock                                                                                         |   |     | (20,061    | )        |   | (8,435 | ) |
| Payments                    related to Preferred Series B dividend                                                                                          |   |     | (24,566    | )        |   | - |   |
| Principal                    payments on capital lease obligations                                                                                          |   |     | (141,692   | )        |   | (52,468 | ) |
| Net                    cash used in financing activities                                                                                                    |   |     | (108,048   | )        |   | (33,994 | ) |

----

**SCI        ENGINEERED MATERIALS, INC.**

**STATEMENTS        OF CASH FLOWS (CONTINUED)**

**SIX        MONTHS ENDED JUNE 30, 2008 AND 2007**

**(UNAUDITED)**

|                                                                                                     |   | **2008** |      |  **2007** |   |
|----------------------------------------------------------------------------------------------------------|--------|----------|-----------|----------------|--------|
| **NET                  (DECREASE) INCREASE IN CASH**                                                     |   | $        | (335,753  | )              | $      | 654,510 |   |
|                                                                                                     |   |     |      |           |   |   |   |
| **CASH**                  -                  Beginning of period                                         |   |     | 1,182,086 |           |   | 648,494 |   |
|                                                                                                     |   |     |      |           |   |   |   |
| **CASH**                  -                  End of period                                               |   | $        | 846,333   |           | $      | 1,303,004 |   |
|                                                                                                     |   |     |      |           |   |   |   |
| **SUPPLEMENTAL                  DISCLOSURES OF CASH FLOW INFORMATION**                                   |   |     |      |           |   |   |   |
| Cash                  paid during the years for:                                                         |   |     |      |           |   |   |   |
| Interest,                  net                                                                           |   | $        | 51,997    |           | $      | 24,116 |   |
| Income                  taxes                                                                            |   | $        | -         |           | $      | - |   |
|                                                                                                     |   |     |      |           |   |   |   |
| **SUPPLEMENTAL                  DISCLOSURES OF NONCASH FINANCING ACTIVITIES**                            |   |     |      |           |   |   |   |
|                                                                                                     |   |     |      |           |   |   |   |
| Property                  and equipment purchased by capital lease                                       |   | $        | 159,103   |           | $      | 888,879 |   |
|                                                                                                     |   |     |      |           |   |   |   |
| Machinery                  & equipment accrued asset retirement obligation                  increase |   | $        | 1,656     |           | $      | 1,656 |   |
|                                                                                                     |   |     |      |           |   |   |   |
| **SUPPLEMENTAL                  DISCLOSURES OF NONCASH OPERATING ACTIVITIES**                            |   |     |      |           |   |   |   |
|                                                                                                     |   |     |      |           |   |   |   |
| Stock                  based compensation expense                                                        |   | $        | 29,637    |           | $      | 28,626 |   |

----

**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 June 30, 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. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**SCI      ENGINEERED MATERIALS, INC.**

**NOTES      TO FINANCIAL STATEMENTS**

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

**Stock      Based Compensation **

**Reclassification      **

----

**      SCI ENGINEERED MATERIALS, INC.**

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

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

**Employee      Stock Options**

|                                                   |   |                   |    | **Weighted**            |   |
|--------------------------------------------------------|--------|------------------------|---------|-------------------------|--------|
|                                                   |   |                   |    | **Average**             |   |
|                                                   |   | **Stock Options** |    | **Exercise Price** |   |
|                                                   |   |                   |    |                    |   |
| Outstanding                at December 31, 2006        |   |                   | 343,750 |                    | $      | 2.09 |   |
| Granted                                                |   |                   | -       |                    |   | - |   |
| Exercised                                              |   |                   | -       |                    |   | - |   |
| Forfeited                                              |   |                   | (500    | )                       |   | 3.25 |   |
| Outstanding                at December 31, 2007        |   |                   | 343,250 |                    | $      | 2.08 |   |
| Granted                                                |   |                   | 21,000  |                    |   | 3.10 |   |
| Exercised                                              |   |                   | -       |                    |   | - |   |
| Forfeited                                              |   |                   | -       |                    |   | - |   |
| Outstanding                at June 30, 2008            |   |                   | 364,250 |                    | $      | 2.14 |   |
| Shares                exercisable at December 31, 2007 |   |                   | 313,650 |                    | $      | 1.97 |   |
| Shares                exercisable at June 30, 2008     |   |                   | 321,050 |                    | $      | 2.00 |   |

**Non-Employee      Director Stock Options**

|                                                            |   |                   |    | **Weighted**            |   |
|-----------------------------------------------------------------|--------|------------------------|---------|-------------------------|--------|
|                                                            |   |                   |    | **Average**             |   |
|                                                            |   | **Stock Options** |    | **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 June 30, 2008                     |   |                   | 233,500 |                    | $      | 2.54 |   |
| Shares                exercisable at December 31, 2007          |   |                   | 241,000 |                    | $      | 2.51 |   |
| Shares                exercisable at June 30, 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: |
|--------|---------------------------------------------------------|

|                             |   | **June                30,** |      | **December                31,** |   |
|----------------------------------|--------|-----------------------------|-----------|---------------------------------|--------|
|                             |   | **2008**                    |      | **2007**                        |   |
|                             |   | (unaudited)                 |      |                            |   |
| Raw                materials     |   | $                           | 322,792   |                            | $      | 392,937 |   |
| Work-in-progress                 |   |                        | 1,512,521 |                            |   | 205,528 |   |
| Finished                goods    |   |                        | 311,832   |                            |   | 240,693 |   |
| Inventory                reserve |   |                        | (86,492   | )                               |   | (82,159 | ) |
|                             |   | $                           | 2,060,653 |                            | $      | 756,999 |   |

----

**    **

**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 June 30, 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, 2008 |      | Three                months ended                June 30, 2007 |   | Six                months ended                June 30, 2008 |   | Six                months ended                June 30, 2007 |      |
|------------------------------------------------------------------------------|--------|----------------------------------------------------------------|-----------|----------------------------------------------------------------|--------|--------------------------------------------------------------|--------|--------------------------------------------------------------|-----------|
| (Loss)                income applicable to common shares                     |   | $                                                              | (108,878  | )                                                              | $      | 95,379                                                       |   | $                                                            | (187,245  | ) | $ | 156,695 |   |
| Weighted                average common shares outstanding – basic |   |                                                           | 3,510,964 |                                                           |   | 3,462,073                                                    |   |                                                         | 3,500,419 |   |   | 3,451,032 |   |
| Effect                of dilutions – stock options/warrants            |   |                                                           | 0         |                                                           |   | 825,009                                                      |   |                                                         | 0         |   |   | 789,318 |   |
| Weighted                average common shares outstanding – basic      |   |                                                           | 3,510,964 |                                                           |   | 4,287,082                                                    |   |                                                         | 3,500,419 |   |   | 4,240,350 |   |

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

----

**SCI      ENGINEERED MATERIALS, INC.**

**NOTES      TO FINANCIAL STATEMENTS**

**Note      8.**
**Subsequent      Event**

----

| **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**

----

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

**RESULTS      OF OPERATIONS**

**Six      months ended June 30, 2008 (unaudited) compared to six months ended June 30,      2007 (unaudited):**

**Revenues**

**Gross      Profit**

**Marketing      and Sales Expense**

**General      and Administrative Expense**

**Research      and Development Expense**

----

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

**Interest      Income and Expense**

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

|   |   | Options and Warrants due to expire |    | Potential Shares Outstanding |   |
|--------|--------|-------------------------------------------------------------|---------|----------------------------------------|--------|
|   |   |                                                        |    |                                   |   |
| 2008   |   |                                                        | 0       |                                   |   | 3,560,071 |   |
| 2009   |   |                                                        | 160,418 |                                   |   | 3,720,489 |   |
| 2010   |   |                                                        | 443,389 |                                   |   | 4,163,878 |   |
| 2011   |   |                                                        | 62,500  |                                   |   | 4,226,378 |   |
| 2012   |   |                                                        | 170,000 |                                   |   | 4,396,378 |   |
| 2013   |   |                                                        | 30,500  |                                   |   | 4,426,878 |   |
| 2014   |   |                                                        | 90,000  |                                   |   | 4,516,878 |   |
| 2015   |   |                                                        | 140,000 |                                   |   | 4,656,878 |   |
| 2016   |   |                                                        | 37,000  |                                   |   | 4,693,878 |   |
| 2017   |   |                                                        | 0       |                                   |   | 4,693,878 |   |
| 2018   |   |                                                        | 21,000  |                                   |   | 4,714,878 |   |

----

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

**LIQUIDITY      AND WORKING CAPITAL**

**RISK      FACTORS**

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

----

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

**Off      Balance Sheet Arrangements**

**Critical      Accounting Policies**

*.      *

**Item      4.**
**Controls      and Procedures**

**Evaluation      of Disclosure Controls and Procedures**

----

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

**Inherent      Limitations Over Internal Controls**

----

**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 2, 2008,                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, 2008. |
|--|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|  | (i) | Elect                directors |
|--|-----|--------------------------------|

|                                |   | **FOR** |      | **WITHHELD** |   |
|-------------------------------------|--------|---------|-----------|--------------|--------|
| Robert                J. Baker, Jr. |   |    | 2,545,724 |         |   | 4,383 |   |
| Walter                J. Doyle      |   |    | 2,545,724 |         |   | 4,383 |   |
| Robert                H. Peitz      |   |    | 2,545,724 |         |   | 4,383 |   |
| Daniel                Rooney        |   |    | 2,542,499 |         |   | 7,608 |   |
| Edward                W. Ungar      |   |    | 2,545,164 |         |   | 4,943 |   |

|   |                                                                      |   |   | **FOR**   |   | **AGAINST** |   | **ABSTAIN** |   |
|--------|---------------------------------------------------------------------------|--------|--------|-----------|--------|-------------|--------|-------------|--------|
| (ii)   |                   Ratify              Accounting firm |   |   | 2,549,394 |   |        | 533    |        |   | 180 |   |

**Item      6.    **
**      Exhibits.**

| *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 August 5, 2008, entitled “SCI Engineered Materials, Inc.                Reports Second Quarter 2008 Results.” |
|   |                                                                                                                                                         |
|   | *              Filed with this report                                                                                                                   |

----

**Signatures**

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

----