**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**                                                                                                                                                                                                                                        |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       | For                the quarterly period ended September 30, 2008                                                                                                                                                                                                                                                                                                                   |
| or         |
|       |                                                                                                                                                                                                                                                                                                                                                                               |
| ** ̈** | **TRANSITION                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE                SECURITIES****EXCHANGE                ACT OF 1934**                                                                                                                                                                                                                                       |
|       | For the transition period from                           to                           |

**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 September 30, 2008 (unaudited)                     |   |
|                                                                                 |          | and December 31, 2007                                                                       | 3 |
|                                                                                 |          |                                                                                                       |   |
|                                                                                 |          | Statements of Operations for the Three Months and Nine Months |   |
|                                                                                 |          | Ended September 30, 2008 and 2007 (unaudited)                                | 5 |
|                                                                                 |          |                                                                                                       |   |
|                                                                                 |          | Statements of Cash Flows for the Nine Months                            |   |
|                                                                                 |          | Ended September 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.                                                                         | 20 |
|                                                                                 |          |                                                                                                       |   |
| **PART II.      OTHER INFORMATION**          |          |
|                                                                                 |          |                                                                                                       |   |
|                                                                                 | Item 1.  | Legal Proceedings.                                                                                    | N/A |
|                                                                                 |          |                                                                                                       |   |
|                                                                                 | Item 1A. | Risk Factors                                                                                          | N/A |
|                                                                                 |          |                                                                                                       |   |
|                                                                                 | Item 2.  | Unregistered Sales of Equity Securities and Use of Proceeds.       | N/A |
|                                                                                 |          |                                                                                                       |   |
|                                                                                 | Item 3.  | Defaults Upon Senior Securities.                                                            | N/A |
|                                                                                 |          |                                                                                                       |   |
|                                                                                 | Item 4.  | Submission of Matters to a Vote of Security Holders.               | N/A |
|                                                                                 |          |                                                                                                       |   |
|                                                                                 | Item 5.  | Other Information.                                                                                    | N/A |
|                                                                                 |          |                                                                                                       |   |
|                                                                                 | Item 6.  | Exhibits.                                                                                                  | 21 |
|                                                                                 |          |                                                                                                       |   |
|                                                                                 | Signatures.   | 21                                                                                                         |

----

**PART      I. FINANCIAL INFORMATION**

**ITEM      1. FINANCIAL STATEMENTS**

**SCI      ENGINEERED MATERIALS, INC.**

**BALANCE      SHEETS**

**ASSETS**

|                                                                  |   | **September 30,** |       | **December 31,** |   |
|-----------------------------------------------------------------------|--------|------------------------|------------|-----------------------|--------|
|                                                                  |   | **2008**               |       | **2007**              |   |
|                                                                  |   | **(UNAUDITED)**        |       |                  |   |
| **CURRENT                ASSETS**                                     |   |                   |       |                  |   |   |   |
| Cash                                                                  |   | $                      | 906,409    |                  | $      | 1,182,086 |   |
| Accounts                receivable                                    |   |                   |       |                  |   |   |   |
| Trade,                less allowance for doubtful accounts of $24,700 |   |                   | 605,061    |                  |   | 219,222 |   |
| Contract                                                              |   |                   | 78,137     |                  |   | 65,954 |   |
| Other                                                                 |   |                   | -          |                  |   | 550 |   |
| Inventories                                                           |   |                   | 1,513,458  |                  |   | 756,999 |   |
| Prepaid                expenses                                       |   |                   | 180,241    |                  |   | 21,148 |   |
| Total                current assets                                   |   |                   | 3,283,306  |                  |   | 2,245,959 |   |
|                                                                  |   |                   |       |                  |   |   |   |
| **PROPERTY                AND EQUIPMENT,** **AT COST**           |   |                   |       |                  |   |   |   |
| Machinery                and equipment                                |   |                   | 4,198,407  |                  |   | 3,386,778 |   |
| Furniture                and fixtures                                 |   |                   | 105,089    |                  |   | 74,222 |   |
| Leasehold                improvements                                 |   |                   | 313,951    |                  |   | 301,551 |   |
| Construction                in progress                               |   |                   | 17,535     |                  |   | 599,753 |   |
|                                                                  |   |                   | 4,634,982  |                  |   | 4,362,304 |   |
| Less                accumulated depreciation                          |   |                   | (2,380,180 | )                     |   | (2,185,277 | ) |
|                                                                  |   |                   | 2,254,802  |                  |   | 2,177,027 |   |
|                                                                  |   |                   |       |                  |   |   |   |
|                                                                  |   |                   |       |                  |   |   |   |
| **OTHER                ASSETS**                                       |   |                   |       |                  |   |   |   |
| Deposits                                                              |   |                   | 27,530     |                  |   | 18,639 |   |
| Intangibles                                                           |   |                   | 34,850     |                  |   | 29,202 |   |
| Total                other assets                                     |   |                   | 62,380     |                  |   | 47,841 |   |
|                                                                  |   |                   |       |                  |   |   |   |
| **TOTAL                ASSETS**                                       |   | $                      | 5,600,488  |                  | $      | 4,470,827 |   |

----

**SCI        ENGINEERED MATERIALS, INC.**

**BALANCE        SHEETS**

**LIABILITIES        AND SHAREHOLDERS' EQUITY**

|                                                                                                                                                                                                                                                                      |   | **September 30, ** |       |  **December 31,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|-----------------------------|--------|
|                                                                                                                                                                                                                                                                      |   | **2008**                     |       |  **2007**              |   |
|                                                                                                                                                                                                                                                                      |   | **(UNAUDITED)**              |       |                   |   |
| **CURRENT                  LIABILITIES**                                                                                                                                                                                                                                  |   |                         |       |                        |   |   |   |
| Capital                  lease obligation, current portion                                                                                                                                                                                                                |   | $                            | 272,530    |                        | $      | 259,714 |   |
| Accounts                  payable                                                                                                                                                                                                                                         |   |                         | 231,475    |                        |   | 160,468 |   |
| Accrued                  contract expenses                                                                                                                                                                                                                                |   |                         | 39,892     |                        |   | 47,702 |   |
| Customer                  deposits                                                                                                                                                                                                                                        |   |                         | 806,618    |                        |   | 19,483 |   |
| Accrued                  compensation                                                                                                                                                                                                                                     |   |                         | 83,941     |                        |   | 138,190 |   |
| Accrued                  expenses and other                                                                                                                                                                                                                               |   |                         | 100,861    |                        |   | 100,184 |   |
| Note                  payable, current portion                                                                                                                                                                                                                            |   |                         | 5,077      |                        |   | - |   |
| Total                  current liabilities                                                                                                                                                                                                                                |   |                         | 1,540,394  |                        |   | 725,741 |   |
|                                                                                                                                                                                                                                                                      |   |                         |       |                        |   |   |   |
|                                                                                                                                                                                                                                                                      |   |                         |       |                        |   |   |   |
| **LONG                  TERM LIABILITIES**                                                                                                                                                                                                                                |   |                         |       |                        |   |   |   |
| Capital                  lease obligation, net of current portion                                                                                                                                                                                                         |   |                         | 628,649    |                        |   | 846,433 |   |
| Note                  payable, net of current portion                                                                                                                                                                                                                     |   |                         | 394,923    |                        |   | - |   |
| Total                  long term liabilities                                                                                                                                                                                                                              |   |                         | 1,023,572  |                        |   | 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%; 24,430 and 24,566 issued                  and                  outstanding respectively |   |                         | 367,675    |                        |   | 375,861 |   |
| Common                  stock, no par value, authorized 15,000,000 shares; 3,560,259 and                  3,474,338                  shares issued and outstanding respectively                                                                                           |   |                         | 9,180,183  |                        |   | 9,061,378 |   |
| Additional                  paid-in capital                                                                                                                                                                                                                               |   |                         | 985,298    |                        |   | 987,840 |   |
| Accumulated                  deficit                                                                                                                                                                                                                                      |   |                         | (7,496,634 | )                           |   | (7,526,426 | ) |
|                                                                                                                                                                                                                                                                      |   |                         | 3,036,522  |                        |   | 2,898,653 |   |
|                                                                                                                                                                                                                                                                      |   |                         |       |                        |   |   |   |
| **TOTAL                  LIABILITIES AND SHAREHOLDERS' EQUITY**                                                                                                                                                                                                           |   | $                            | 5,600,488  |                        | $      | 4,470,827 |   |

----

**SCI              ENGINEERED MATERIALS, INC.**

**STATEMENTS              OF OPERATIONS**

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

**AND              NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007**

**(UNAUDITED)**

|                                                                                                              |   | **THREE MONTHS ENDED SEPT. 30,** |      | **NINE MONTHS ENDED SEPT. 30,** |   |
|-------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------|-----------|-----------------------------------------------------|--------|
|                                                                                                              |   | **2008**                                             |      | **2007**                                            |   | **2008** |   | **2007** |   |
|                                                                                                              |   |                                                 |      |                                                |   |   |   |   |   |
| **SALES                        REVENUE**                                                                          |   | $                                                    | 4,008,635 |                                                | $      | 2,589,938 |   | $ | 7,240,088 |   | $ | 8,447,689 |   |
|                                                                                                              |   |                                                 |      |                                                |   |   |   |   |   |   |   |   |   |
| **COST                        OF SALES REVENUE**                                                                  |   |                                                 | 3,239,069 |                                                |   | 2,100,305 |   |   | 5,603,650 |   |   | 6,986,308 |   |
|                                                                                                              |   |                                                 |      |                                                |   |   |   |   |   |   |   |   |   |
| **GROSS                        PROFIT**                                                                           |   |                                                 | 769,566   |                                                |   | 489,633 |   |   | 1,636,438 |   |   | 1,461,381 |   |
|                                                                                                              |   |                                                 |      |                                                |   |   |   |   |   |   |   |   |   |
| **GENERAL                        AND ADMINISTRATIVE EXPENSE**                                                     |   |                                                 | 241,101   |                                                |   | 213,111 |   |   | 751,562 |   |   | 669,423 |   |
|                                                                                                              |   |                                                 |      |                                                |   |   |   |   |   |   |   |   |   |
| **RESEARCH                        AND DEVELOPMENT EXPENSE**                                                       |   |                                                 | 133,066   |                                                |   | 108,943 |   |   | 355,785 |   |   | 253,980 |   |
|                                                                                                              |   |                                                 |      |                                                |   |   |   |   |   |   |   |   |   |
| **MARKETING                        AND SALES EXPENSE**                                                            |   |                                                 | 169,524   |                                                |   | 123,852 |   |   | 441,556 |   |   | 331,703 |   |
|                                                                                                              |   |                                                 |      |                                                |   |   |   |   |   |   |   |   |   |
| **INCOME                        FROM OPERATIONS**                                                                 |   |                                                 | 225,875   |                                                |   | 43,727 |   |   | 87,535 |   |   | 206,275 |   |
|                                                                                                              |   |                                                 |      |                                                |   |   |   |   |   |   |   |   |   |
| **OTHER                        INCOME (EXPENSE)**                                                                 |   |                                                 |      |                                                |   |   |   |   |   |   |   |   |   |
| Interest                        income                                                                            |   |                                                 | 5,569     |                                                |   | 21,733 |   |   | 19,744 |   |   | 48,721 |   |
| Interest                        expense                                                                           |   |                                                 | (27,490   | )                                                   |   | (32,317 | ) |   | (79,487 | ) |   | (56,433 | ) |
| Gain                        on disposal of equipment                                                              |   |                                                 | 800       |                                                |   | 3,570 |   |   | 2,000 |   |   | 8,352 |   |
| Miscellaneous,                        net                                                                         |   |                                                 | -         |                                                |   | (457 | ) |   | - |   |   | (1,372 | ) |
|                                                                                                              |   |                                                 | (21,121   | )                                                   |   | (7,471 | ) |   | (57,743 | ) |   | (732 | ) |
|                                                                                                              |   |                                                 |      |                                                |   |   |   |   |   |   |   |   |   |
| **INCOME                        BEFORE PROVISION FOR INCOME TAX**                                                 |   |                                                 | 204,754   |                                                |   | 36,256 |   |   | 29,792 |   |   | 205,543 |   |
|                                                                                                              |   |                                                 |      |                                                |   |   |   |   |   |   |   |   |   |
| **INCOME                        TAX EXPENSE**                                                                     |   |                                                 | -         |                                                |   | - |   |   | - |   |   | - |   |
|                                                                                                              |   |                                                 |      |                                                |   |   |   |   |   |   |   |   |   |
| **NET                        INCOME**                                                                             |   |                                                 | 204,754   |                                                |   | 36,256 |   |   | 29,792 |   |   | 205,543 |   |
|                                                                                                              |   |                                                 |      |                                                |   |   |   |   |   |   |   |   |   |
| **DIVIDENDS                        ON PREFERRED STOCK**                                                           |   |                                                 | (6,119    | )                                                   |   | (6,245 | ) |   | (18,402 | ) |   | (18,837 | ) |
|                                                                                                              |   |                                                 |      |                                                |   |   |   |   |   |   |   |   |   |
| **INCOME                        APPLICABLE TO COMMON SHARES**                                                     |   | $                                                    | 198,635   |                                                | $      | 30,011 |   | $ | 11,390 |   | $ | 186,706 |   |
|                                                                                                              |   |                                                 |      |                                                |   |   |   |   |   |   |   |   |   |
| **EARNINGS                        PER SHARE - BASIC AND DILUTED**(Note 6)                                         |   |                                                 |      |                                                |   |   |   |   |   |   |   |   |   |
|                                                                                                              |   |                                                 |      |                                                |   |   |   |   |   |   |   |   |   |
| **NET                        INCOME PER COMMON SHARE BEFORE DIVIDENDS ON PREFERRED                        STOCK** |   |                                                 |      |                                                |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                             |   | $                                                    | 0.06      |                                                | $      | 0.01 |   | $ | 0.01 |   | $ | 0.06 |   |
| Diluted                                                                                                           |   | $                                                    | 0.05      |                                                | $      | 0.01 |   | $ | 0.01 |   | $ | 0.05 |   |
|                                                                                                              |   |                                                 |      |                                                |   |   |   |   |   |   |   |   |   |
| **NET                        INCOME PER COMMON SHARE AFTER DIVIDENDS ON PREFERRED                        STOCK**  |   |                                                 |      |                                                |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                             |   | $                                                    | 0.06      |                                                | $      | 0.01 |   | $ | 0.00 |   | $ | 0.05 |   |
| Diluted                                                                                                           |   | $                                                    | 0.05      |                                                | $      | 0.01 |   | $ | 0.00 |   | $ | 0.04 |   |
|                                                                                                              |   |                                                 |      |                                                |   |   |   |   |   |   |   |   |   |
| **WEIGHTED                        AVERAGE SHARES OUTSTANDING**                                                    |   |                                                 |      |                                                |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                             |   |                                                 | 3,560,196 |                                                |   | 3,468,756 |   |   | 3,520,490 |   |   | 3,457,005 |   |
| Diluted                                                                                                           |   |                                                 | 4,086,906 |                                                |   | 4,216,320 |   |   | 4,122,439 |   |   | 4,224,899 |   |

----

**SCI          ENGINEERED MATERIALS, INC.**

**STATEMENTS          OF CASH FLOWS**

**NINE          MONTHS ENDED SEPTEMBER 30, 2008 AND 2007**

**(UNAUDITED)**

|                                                                                                                              |   | **2008** |     |  **2007** |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|----------|----------|----------------|--------|
| **CASH                    FLOWS FROM OPERATING ACTIVITIES**                                                                       |   |     |     |           |   |   |   |
| Net                    income                                                                                                     |   | $        | 29,792   |           | $      | 205,543 |   |
| Adjustments                    to reconcile net income to net cash (used in) provided by operating                    activities: |   |     |     |           |   |   |   |
| Depreciation                    and accretion                                                                                     |   |     | 281,446  |           |   | 216,618 |   |
| Amortization                                                                                                                      |   |     | 2,316    |           |   | 2,316 |   |
| Stock                    based compensation                                                                                       |   |     | 45,873   |           |   | 42,938 |   |
| Gain                    on sale of equipment                                                                                      |   |     | (2,000   | )              |   | (8,352 | ) |
| Inventory                    reserve                                                                                              |   |     | 7,930    |           |   | 8,765 |   |
| Provision                    for doubtful accounts                                                                                |   |     | -        |           |   | (300 | ) |
| Changes                    in operating assets and liabilities:                                                                   |   |     |     |           |   |   |   |
| (Increase)                    decrease in assets:                                                                                 |   |     |     |           |   |   |   |
| Accounts                    receivable                                                                                            |   |     | (397,472 | )              |   | 130,860 |   |
| Inventories                                                                                                                       |   |     | (764,389 | )              |   | (315,039 | ) |
| Prepaid                    expenses                                                                                               |   |     | (149,089 | )              |   | 27,076 |   |
| Other                    assets                                                                                                   |   |     | (16,855  | )              |   | 265,088 |   |
| Increase                    in liabilities:                                                                                       |   |     |     |           |   |   |   |
| Accounts                    payable                                                                                               |   |     | 71,007   |           |   | 314,416 |   |
| Accrued                    expenses and customer deposits                                                                         |   |     | 738,670  |           |   | 274,652 |   |
| Total                    adjustments                                                                                              |   |     | (182,563 | )              |   | 959,038 |   |
| Net                    cash (used in) provided by operating activities                                                            |   |     | (152,771 | )              |   | 1,164,581 |   |
|                                                                                                                              |   |     |     |           |   |   |   |
| **CASH                    FLOWS FROM INVESTING ACTIVITIES**                                                                       |   |     |     |           |   |   |   |
| Proceeds                    on sale of equipment                                                                                  |   |     | 2,000    |           |   | 18,670 |   |
| Purchases                    of property and equipment                                                                            |   |     | (93,836  | )              |   | (212,016 | ) |
| Net                    cash used in investing activities                                                                          |   |     | (91,836  | )              |   | (193,346 | ) |
|                                                                                                                              |   |     |     |           |   |   |   |
| **CASH                    FLOWS FROM FINANCING ACTIVITIES**                                                                       |   |     |     |           |   |   |   |
| Proceeds                    from exercise of common stock options                                                                 |   |     | 10,250   |           |   | 9,625 |   |
| Proceeds                    from exercise of common stock warrants                                                                |   |     | 68,021   |           |   | 26,909 |   |
| Payments                    related to registration of common stock                                                               |   |     | (16,906  | )              |   | (32,255 | ) |
| Payments                    related to Preferred Series B dividend                                                                |   |     | (24,566  | )              |   | - |   |
| Proceeds                    from note payable                                                                                     |   |     | 400,000  |           |   | - |   |
| Principal                    payments on capital lease obligations                                                                |   |     | (467,869 | )              |   | (106,977 | ) |
| Net                    cash used in financing activities                                                                          |   |     | (31,070  | )              |   | (102,698 | ) |

----

**SCI        ENGINEERED MATERIALS, INC.**

**STATEMENTS        OF CASH FLOWS (CONTINUED)**

**NINE        MONTHS ENDED SEPTEMBER 30, 2008 AND 2007**

**(UNAUDITED)**

|                                                                                           |   | **2008** |      |  **2007** |   |
|----------------------------------------------------------------------------------------------------------|--------|----------|-----------|----------------|--------|
| **NET                  (DECREASE) INCREASE IN CASH**                                                     |   | $        | (275,677  | )              | $      | 868,537 |   |
|                                                                                                     |   |     |      |           |   |   |   |
| **CASH**                  - Beginning of period                                                          |   |     | 1,182,086 |           |   | 648,494 |   |
|                                                                                                     |   |     |      |           |   |   |   |
| **CASH**                  - End of period                                                                |   | $        | 906,409   |           | $      | 1,517,031 |   |
|                                                                                                     |   |     |      |           |   |   |   |
| **SUPPLEMENTAL                  DISCLOSURES OF CASH FLOW INFORMATION**                                   |   |     |      |           |   |   |   |
| Cash                  paid during the years for:                                                         |   |     |      |           |   |   |   |
| Interest,                  net                                                                           |   | $        | 79,487    |           | $      | 56,433 |   |
| Income                  taxes                                                                            |   | $        | -         |           | $      | - |   |
|                                                                                                     |   |     |      |           |   |   |   |
| **SUPPLEMENTAL                  DISCLOSURES OF NONCASH FINANCING ACTIVITIES**                            |   |     |      |           |   |   |   |
|                                                                                                     |   |     |      |           |   |   |   |
| Property                  and equipment purchased by capital lease                                       |   | $        | 262,900   |           | $      | 1,067,315 |   |
|                                                                                                     |   |     |      |           |   |   |   |
| Machinery                  & equipment accrued asset retirement obligation                  increase |   | $        | 2,484     |           | $      | 2,484 |   |
|                                                                                                     |   |     |      |           |   |   |   |
| **SUPPLEMENTAL                  DISCLOSURES OF NONCASH OPERATING ACTIVITIES**                            |   |     |      |           |   |   |   |
|                                                                                                     |   |     |      |           |   |   |   |
| Stock                  based compensation expense                                                        |   | $        | 45,873    |           | $      | 42,938 |   |

----

**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 September 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                2009. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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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                                               |   |                   | (1,500  | )                       |   | 3.10 |   |
| Outstanding                at September 30, 2008        |   |                   | 362,750 |                    | $      | 2.14 |   |
| Shares                exercisable at December 31, 2007  |   |                   | 313,650 |                    | $      | 1.97 |   |
| Shares                exercisable at September 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 September 30, 2008        |   |                   | 233,500 |                    | $      | 2.54 |   |
| Shares                exercisable at December 31, 2007  |   |                   | 241,000 |                    | $      | 2.51 |   |
| Shares                exercisable at September 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: |
|--------|---------------------------------------------------------|

|                             |   | **September 30,** |      |  **December 31,** |   |
|----------------------------------|--------|------------------------|-----------|-----------------------------|--------|
|                             |   | **2008**               |      |  **2007**              |   |
|                             |   | (unaudited)            |      |                   |   |
| Raw                materials     |   | $                      | 298,964   |                        | $      | 392,937 |   |
| Work-in-progress                 |   |                   | 1,014,006 |                        |   | 205,528 |   |
| Finished                goods    |   |                   | 290,577   |                        |   | 240,693 |   |
| Inventory                reserve |   |                   | (90,089   | )                           |   | (82,159 | ) |
|                             |   | $                      | 1,513,458 |                        | $      | 756,999 |   |

----

**SCI      ENGINEERED MATERIALS, INC.**

**NOTES      TO FINANCIAL STATEMENTS**

| **Note                6.** | **Earnings                Per Share** |
|----------------------------|---------------------------------------|

|   | Basic                income per share is calculated as income available to common stockholders                divided by the weighted average of common shares outstanding. Diluted                earnings per share is calculated as diluted income 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. The following is provided to reconcile the earnings                per                share calculations: |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                      |   | Three monthsended Sept. 30,2008 |      | Three monthsended Sept. 30,2007 |   | Nine  monthsended Sept. 30,2008 |   | Nine monthsended Sept. 30,2007 |      |
|---------------------------------------------------------------------------|--------|------------------------------------------------|-----------|------------------------------------------------|--------|-----------------------------------------------------|--------|-----------------------------------------------|-----------|
| Income                applicable to common shares                         |   | $                                              | 198,635   |                                           | $      | 30,011                                              |   | $                                             | 11,390    |   | $ | 186,706 |   |
| Weighted                average common shares outstanding – basic   |   |                                           | 3,560,196 |                                           |   | 3,468,756                                           |   |                                          | 3,520,490 |   |   | 3,457,005 |   |
| Effect                of dilutions – stock options/warrants         |   |                                           | 526,710   |                                           |   | 747,564                                             |   |                                          | 601,949   |   |   | 767,894 |   |
| Weighted                average common shares outstanding – diluted |   |                                           | 4,086,906 |                                           |   | 4,216,320                                           |   |                                          | 4,122,439 |   |   | 4,224,899 |   |

| **Note                7.** | **Capital                Requirements** |
|----------------------------|-----------------------------------------|

----

**SCI      ENGINEERED MATERIALS, INC.**

**NOTES      TO FINANCIAL STATEMENTS**

| **Note                8.** | **Note                Payable** |
|----------------------------|---------------------------------|

----

| **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**

**Nine      months ended September 30, 2008 (unaudited) compared to nine months ended      September 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**

**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   |   |                                                        | 19,500  |                                   |   | 4,713,378 |   |

----

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

**LIQUIDITY      AND WORKING CAPITAL**

**RISK      FACTORS**

----

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

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

**Off      Balance Sheet Arrangements**

**Critical      Accounting Policies**

*.      *

----

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

**Evaluation      of Disclosure Controls and Procedures**

**Inherent      Limitations Over Internal Controls**

----

**Part      II. Other Information**

| **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 November 5, 2008, entitled “SCI Engineered Materials, Inc.                Reports Record Third Quarter 2008 Revenues.” |
|   |   |                                                                                                                                                                  |
|   |   | *                Filed with this report                                                                                                                               |

**Signatures**

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

----