**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





(MARK
      ONE)





x QUARTERLY
          REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
          OF 1934
          FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006





OR





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




From
            
            to








Commission
      File Number 1-8676


**FANSTEEL
      INC.**


(Exact
      Name of Registrant as Specified in Its Charter)





Delaware
            
            36-1058780(State
                or Other Jurisdiction of Incorporation or Organization)
            
            (I.R.S.
                Employer Identification No.)





570
      Lake
      Cook Road, Suite 200


Deerfield,
      Illinois 60015


(Address
      of principal executive offices and zip code)


(847)
      689-4900


(Registrant’s
      Telephone Number, Including Area Code)





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





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


Large
                accelerated filero
            
            Accelerated
                filero
            
            Non-accelerated
                filerx





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes o No x





APPLICABLE
      ONLY TO REGISTRANTS INVOLVED IN


BANKRUPTCY
      PROCEEDINGS DURING THE PRECEDING FIVE YEARS.





Indicate
      by checkmark whether the registrant has filed all documents and reports required
      to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934
      subsequent to the distribution of securities under a plan confirmed by a court.
      Yes x No o





Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date.





Class
            
            Outstanding
                at October 31, 2006Common
                Stock, $.01 par value
            
            3,420,000
                shares














FANSTEEL
      INC.


FORM
      10-Q
      - INDEX


September
      30, 2006








**PART
                I.**
            **FINANCIAL
                INFORMATION**
            Page
                No.Item
                1
            Consolidated
                Financial StatementsConsolidated
                Statement of Operations (unaudited) -
                Three months ended September 30, 2006 and three months ended September
                30,
                2005; nine months ended September 30, 2006 and nine months ended
                September
                30, 2005
            3-4Consolidated
                Balance Sheet - September 30, 2006
                (unaudited) and December 31, 2005
            5-6Consolidated
                Statement of Cash Flows (unaudited) - Nine
                months ended September 30, 2006 and nine months ended September 30,
                2005
            7Notes
                to Unaudited Consolidated Financial
                Statements
            8-15Item
                2
            Management's
                Discussion and Analysis of Financial Condition
                and Results of Operations
            16-30Item
                3
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            30Item
                4
            Controls
                and Procedures
            31**PART
                II**
            **OTHER
                INFORMATION**Item
                1
            Legal
                Proceedings
            32-35Item
                1A
            Risk
                Factors
            35-37Item
                2
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            38Item
                3
            Defaults
                Upon Senior Securities
            38Item
                4
            Submission
                of Matters to a Vote of Security
                Holders
            38Item
                5
            Other
                Information
            38Item
                6
            Exhibits
            38Signatures
            
            39Exhibit
                31.1
            Certifications-
                Gary L. TessitoreExhibit
                31.2
            Certifications-
                R. Michael McEnteeExhibit
                32.1
            Certification




2
 *Index*




**PART
      I. FINANCIAL INFORMATION**





**ITEM
      1 - FINANCIAL STATEMENTS**


Fansteel
      Inc.


Consolidated
      Statement of Operations


(Unaudited)





Three
                Months
              Ended
              September
                30, 2006
            
            Three
                Months
              Ended
              September
                30, 2005Net
                Sales
            
            $
            16,884,892
            
            $
            13,205,621Cost
                and ExpensesCost
                of products sold
            
            
            15,738,633
            
            
            11,563,269Selling,
                general and administrative
            
            
            1,691,926
            
            
            1,525,15817,430,559
            
            
            13,088,427Operating
                Income (Loss)
            
            
            (545,667
            )
            
            117,194Other
                ExpenseInterest
                expense
            
            
            (414,091
            )
            
            (494,613
            )Other
            
            
            (8,524
            )
            
            (14,153
            )(422,615
            )
            
            (508,766
            )Loss
                from Continuing Operations Before Reorganization Items and Income
                Taxes
            
            
            (968,282
            )
            
            (391,572
            )Reorganization
                ItemsUS
                trustee fees
            
            
            -
            
            
            (18,000
            )-
            
            
            (18,000
            )Loss
                from Continuing Operations Before Income Taxes
            
            
            (968,282
            )
            
            (409,572
            )Income
                Taxes
            
            
            -
            
            
            -Net
                Loss from Continuing Operations
            
            
            (968,282
            )
            
            (409,572
            )Loss
                from Discontinued Operations
            
            
            (1,078,850
            )
            
            (649,145
            )Net
                Loss
            
            $
            (2,047,132
            )
            $
            (1,058,717
            )Weighted
                Average Number of Common Shares Outstanding
            
            
            3,420,000
            
            
            3,420,000Basic
                and Diluted Net Loss per ShareaContinuing
                operations
            
            $
            (0.28
            )
            $
            (0.12
            )Discontinued
                operations
            
            
            (0.32
            )
            
            (0.19
            )Net
                loss
            
            $
            (0.60
            )
            $
            (0.31
            )





a Basic
        earnings per share and diluted earnings per share are the same.
  See
        Notes
        to Consolidated Financial Statements


3
 *Index*





Fansteel
      Inc.


Consolidated
      Statement of Operations


(Unaudited)





Nine
                Months
              Ended
              September
                30, 2006
            
            Nine
                Months
              Ended
              September
                30, 2005Net
                Sales
            
            $
            50,766,725
            
            $
            41,080,314Cost
                and ExpensesCost
                of products sold
            
            
            44,726,014
            
            
            34,501,437Selling,
                general and administrative
            
            
            4,967,870
            
            
            5,004,01449,693,884
            
            
            39,505,451Operating
                Income
            
            
            1,072,841
            
            
            1,574,863Other
                ExpenseInterest
                expense
            
            
            (1,108,097
            )
            
            (954,323
            )Other
            
            
            (2,470
            )
            
            (26,422
            )(1,110,567
            )
            
            (980,745
            )Income
                (Loss) from Continuing Operations Before Reorganization Items and
                Income
                Taxes
            
            
            (37,726
            )
            
            594,118Reorganization
                ItemsUS
                trustee fees
            
            
            -
            
            
            (54,000
            )-
            
            
            (54,000
            )Income
                (Loss) from Continuing Operations Before Income Taxes
            
            
            (37,726
            )
            
            540,118Income
                Taxes
            
            
            -
            
            
            -Net
                Income (Loss) from Continuing Operations
            
            
            (37,726
            )
            
            540,118Loss
                from Discontinued Operations
            
            
            (2,922,316
            )
            
            (1,433,437
            )Net
                Loss
            
            $
            (2,960,042
            )
            $
            (893,319
            )Weighted
                Average Number of Common Shares Outstanding
            
            
            3,420,000
            
            
            3,420,000Basic
                and Diluted Net Income (Loss) per ShareaContinuing
                operations
            
            $
            (0.01
            )
            $
            0.16Discontinued
                operations
            
            
            (0.85
            )
            
            (0.42
            )Net
                income (loss)
            
            $
            (0.86
            )
            $
            (0.26
            )


a Basic
        earnings per share and diluted earnings per share are the same.
  See
        Notes
        to Consolidated Financial Statements


4
 *Index*





Fansteel
      Inc.


Consolidated
      Balance Sheet




September
                30,
              2006
              (Unaudited)
            
            December
                31,
              2005ASSETSCurrent
                assetsCash
                and cash equivalents
            
            $
            29,356
            
            $
            791,453Accounts
                receivable, less allowance of $754,000 and $126,000 atSeptember
                30, 2006 and December 31, 2005, respectively
            
            
            12,034,103
            
            
            9,720,207InventoriesRaw
                material and supplies
            
            
            1,509,171
            
            
            1,344,841Work-in
                process
            
            
            6,930,371
            
            
            4,712,644Finished
                goods
            
            
            670,100
            
            
            648,167Total
                inventories
            
            
            9,109,642
            
            
            6,705,652Other
                assets - current
            
            
            317,065
            
            
            1,227,153Total
                current assets
            
            
            21,490,166
            
            
            18,444,465Property,
                plant and equipmentLand
            
            
            1,084,419
            
            
            1,084,419Buildings
            
            
            5,108,331
            
            
            5,108,331Machinery
                and equipment
            
            
            6,487,475
            
            
            5,432,87112,680,225
            
            
            11,625,621Less
                accumulated depreciation
            
            
            2,947,215
            
            
            2,189,763Net
                property, plant and equipment
            
            
            9,733,010
            
            
            9,435,858Other
                assetsDeposits
            
            
            879,950
            
            
            879,950Reorganization
                value in excess of amounts allocable toidentified assets
            
            
            12,893,734
            
            
            12,893,734Property
                held for sale
            
            
            1,327,500
            
            
            1,327,500Other
            
            
            325,798
            
            
            223,047Total
                other assets
            
            
            15,426,982
            
            
            15,324,231$
            46,650,158
            
            $
            43,204,554





See
      Notes
      to Consolidated Financial Statements





5
 *Index*





Fansteel
      Inc.


Consolidated
      Balance Sheet




September
                30,
              2006
              (Unaudited)
            
            December
                31,
              2005LIABILITIES
                AND SHAREHOLDERS' (DEFICIT)Current
                liabilitiesAccounts
                payable
            
            $
            7,056,899
            
            $
            4,438,835Accrued
                liabilities
            
            
            6,185,721
            
            
            6,103,073Short-term
                borrowings
            
            
            13,942,792
            
            
            9,681,872Current
                maturities of long-term debt
            
            
            1,051,186
            
            
            1,039,290Total
                current liabilities
            
            
            28,236,598
            
            
            21,263,070Long-term
                debt
            
            
            4,741,989
            
            
            5,273,501Other
                liabilities - environmental remediation
            
            
            21,500,675
            
            
            21,533,459Total
                liabilities
            
            
            54,479,262
            
            
            48,070,030Shareholders'
                equity (deficit)Common
                stock, par value $0.01 Authorized 3,600,000 shares, issued and outstanding
                3,420,000
            
            
            34,200
            
            
            34,200Capital
                in excess of par value
            
            
            296,314
            
            
            296,314Accumulated
                (deficit)
            
            
            (8,142,395
            )
            
            (5,182,353
            )Other
                comprehensive incomeForeign
                currency translation
            
            
            (17,223
            )
            
            (13,637
            )Total
                other comprehensive income
            
            
            (17,223
            )
            
            (13,637
            )Total
                shareholders’ (deficit)
            
            
            (7,829,104
            )
            
            (4,865,476
            )Total
                liabilities and shareholders' (deficit)
            
            $
            46,650,158
            
            $
            43,204,554





See
      Notes
      to Consolidated Financial Statements





6
 *Index*





Fansteel
      Inc.


Consolidated
      Statement of Cash Flows


(Unaudited)





Nine
                Months
            
            Nine
                MonthsEnded
            
            EndedSeptember
                30, 2006
            
            September
                30, 2005**Cash
                Flows From Operating Activities:**Net
                loss
            
            $
            (2,960,042
            )
            $
            (893,319
            )Adjustments
                to reconcile net loss to net cash used inoperating
                activities:Depreciation
                and amortization
            
            
            733,872
            
            
            780,198Accretion
                on long-term debt and other liabilities
            
            
            234,762
            
            
            248,825Loss
                from discontinued operations
            
            
            2,922,316
            
            
            1,433,437Change
                in assets and liabilities:(Increase)
                in accounts receivable
            
            
            (2,435,302
            )
            
            (1,035,028
            )(Increase)
                in inventories
            
            
            (2,403,990
            )
            
            (1,358,691
            )Decrease
                in other assets-current
            
            
            910,752
            
            
            682,495Increase
                (decrease) in accounts payable and accrued liabilities
            
            
            2,422,247
            
            
            (2,811,648
            )Increase
                in income taxes payable
            
            
            5,657
            
            
            5,595(Increase)
                in other assets
            
            
            (102,751
            )
            
            (82,952
            )**Net
                cash provided by (used in) operating activities**
            
            
            (672,479
            )
            
            (3,031,088
            )**Cash
                Flows From Investing Activities:**Decrease
                in restricted cash
            
            
            -
            
            
            394,034Capital
                expenditures
            
            
            (1,054,604
            )
            
            (312,829
            )**Net
                cash (used in) provided by investing activities**
            
            
            (1,054,604
            )
            
            81,205**Cash
                Flows From Financing Activities:**Proceeds
                from short-term borrowing
            
            
            4,264,940
            
            
            5,062,299Payments
                on long-term debt
            
            
            (219,523
            )
            
            (204,247
            )**Net
                cash provided by financing activities**
            
            
            4,045,417
            
            
            4,858,052**Net
                Increase in Cash and Cash Equivalents from****Continuing
                Operations**
            
            
            2,318,334
            
            
            1,908,169**Cash
                Flows of Discontinued Operations:**(Revised
                - see Note 1)Operating
                cash flows
            
            
            (2,330,431
            )
            
            (2,130,715
            )Investing
                cash flow
            
            
            -
            
            
            1,400,000Financing
                cash flows
            
            
            (750,000
            )
            
            -**Total
                Cash Flows of Discontinued Operations**
            
            
            (3,080,431
            )
            
            (730,715
            )**Net
                Increase (Decrease) in Cash and Cash Equivalents**
            
            
            (762,097
            )
            
            1,177,454**Cash
                and Cash Equivalents at Beginning of Period**
            
            
            791,453
            
            
            7,597**Cash
                and Cash Equivalents at End of Period**
            
            $
            29,356
            
            $
            1,185,051**Supplemental
                disclosures of cash flow information:**Cash
                paid during the year for:Interest
                (net of amounts capitalized)
            
            $
            735,000
            
            $
            662,000Income
                tax refunds
            
            
            (5,657
            )
            
            (5,595
            )





See
      Notes
      to Consolidated Financial Statements





7
 *Index*




**Notesto
      Unaudited Consolidated Financial
      Statements**








**Note
      1 - Description of Business**





The
      consolidated financial statements as of and for the periods ending September
      30,
      2006 and September 30, 2005 of Fansteel Inc. are unaudited but include all
      adjustments (consisting only of normal recurring adjustments) that management
      considers necessary for a fair presentation of such financial statements. These
      financial statements have been prepared in accordance with accounting principles
      generally accepted in the United States for interim financial information and
      with Article 10 of SEC Regulation S-X. Accordingly, they do not include all
      of
      the information and footnotes required by accounting principles generally
      accepted in the United States for complete financial statements. Operating
      results during the three and nine months ended September 30, 2006 are not
      necessarily indicative of the results that may be expected for the year ending
      December 31, 2006.





Fansteel
      Inc. and its subsidiaries ("Fansteel" or the "Company") are manufacturers of
      engineered metal components using the sand castings, investment casting and
      powdered metal processes. Products manufactured are used in a variety of markets
      including automotive, energy, military and commercial aerospace, agricultural
      and construction machinery, lawn and garden equipment, marine, plumbing and
      electrical hardware industries.





For
      financial reporting purposes, the Company classifies its products into the
      following two business segments: Advanced Structures, which produces aluminum
      and magnesium sand castings and Industrial Metal Components, which produces
      powdered metal components and investment castings. The Company's business
      segments have separate management teams and infrastructures that offer different
      products and services.





The
      Company also has special purposes subsidiaries included as part of discontinued
      operations that were established as part of the Reorganization Plan solely
      for
      the obligation of remediation of environmental issues at former operations
      of
      the Company.





The
      consolidated financial statements include the accounts of Fansteel Inc. and
      its
      subsidiaries. Inter-company accounts and transactions have been eliminated
      in
      consolidation.





For
      the
      nine months ended September 30, 2006 and September 30, 2005, the Company has
      separately disclosed the operating, investing and financing portions of the
      cash
      flows attributable to its discontinued operations, which was previously reported
      on a combined basis as a single amount on the third quarter 10-Q for the nine
      months ended September 30, 2005.





The
      Company’s annual Form 10-K includes more detailed information than is required
      by the Form 10-Q and it should be read in conjunction with the Company’s Form
      10-Q.





Certain
      reclassifications have been made to prior periods’ financial statements to
      conform to the 2006 presentation.





8
 *Index*





**Note
      2 - Stock-Based Compensation**





Effective
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      (SFAS) No. 123(R), Share-Based Payment, which is a revision of SFAS No. 123,
      Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes Accounting
      Principles Board Opinion (“APB”) Opinion No. 25, Accounting for Stock Issued
      to Employees, and amends SFAS No. 95, Statement of Cash Flows. SFAS
      123(R) requires all share-based compensation to employees, including grants
      of
      employee stock options, to be recognized in the income statement based on
      their estimated fair values . There
      was
      no impact on earnings or earnings per share because the Company has no
      outstanding options. Prior to January 1, 2006, the Company used the
      intrinsic-value method for accounting for stock-based employee compensation
      as
      specified in APB No. 25 with the proforma impact shown below:




*(Dollars
                  in millions, except for earnings per-share)*
              
              Three
                  Months
                Ended
                September
                  30,
                2005
              
              Nine
                  Months
                Ended
                September
                  30,
                2005Net
                  loss as reported
              
              $
              (1,058,717
              )
              $
              (893,319
              )Deduct:
                  Total stock based compensation expense determined under the fair
                  value
                  based method, net of related tax effect
              
              
              -
              
              
              -Pro
                  forma - net loss
              
              $
              (1,058,717
              )
              $
              (893,319
              )Basic/diluted
                  loss per share:As
                  reported
              
              $
              (0.31
              )
              $
              (0.26
              )Pro
                  forma
              
              $
              (0.31
              )
              $
              (0.26
              )




**Note
      3 - Reorganization and Emergence From Chapter 11**




On
      January 15, 2002 (the "Petition Date"), Fansteel Inc. and eight of its then
      subsidiaries (collectively, the "Debtors") filed voluntary petitions for
      reorganization relief under Chapter 11 of the U.S. Bankruptcy Code. After the
      Petition Date, the Predecessor Company (referring to the Company prior to the
      Effective Date) continued to operate its business and manage its affairs as
      debtor-in-possession ("DIP") with court approval for transactions outside the
      ordinary course of business. By order dated December 23, 2003, the U.S.
      Bankruptcy Court for the District of Delaware (the "Court") confirmed the Second
      Amended Joint Reorganization Plan (the "Reorganization Plan"). All the Debtors
      emerged from Chapter 11 of the U.S. Bankruptcy Code on January 23, 2004 (the
      "Effective Date").




**Note
      4 - Earnings per Share**




SFAS
      No.
      128, "Earnings per Share" requires a dual presentation of earnings per share,
      basic and diluted. Basic earnings per share are computed by dividing net income
      (loss) applicable to common shareholders by the weighted average number of
      common shares outstanding. Diluted earnings per share reflects the increase
      in
      average common shares outstanding that would result from the assumed exercise
      of
      outstanding stock options, calculated using the treasury stock method, if
      dilutive.





9
 *Index*





The
      following table sets forth the computation of basic and diluted earnings per
      share:




Three
                  Months Ended
              
              Nine
                  Months EndedNumerator:
              
              September
                  30,
                2006
              
              September
                  30,
                2005
              
              September
                  30,
                2006
              
              September
                  30,
                2005Net
                  loss
              
              $
              (2,047,132
              )
              $
              (1,058,717
              )
              $
              (2,960,042
              )
              $
              (893,319
              )Denominator:Denominator
                  for basic earnings per share-weighted average shares
              
              
              3,420,000
              
              
              3,420,000
              
              
              3,420,000
              
              
              3,420,000Effect
                  of dilutive securities:Employee
                  stock options
              
              
              -
              
              
              -
              
              
              -
              
              
              -Employee
                  restricted stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -Denominator:Denominator
                  for diluted earnings per share - weighted average shares
              
              
              3,420,000
              
              
              3,420,000
              
              
              3,420,000
              
              
              3,420,000Basic
                  loss per share
              
              $
              (0.60
              )
              $
              (0.31
              )
              $
              (0.86
              )
              $
              (0.26
              )Diluted
                  loss per share
              
              $
              (0.60
              )
              $
              (0.31
              )
              $
              (0.86
              )
              $
              (0.26
              )





As
      discussed in Note 3, the Company emerged from Chapter 11 protection on January
      23, 2004 and has a reorganized equity structure. In particular, implementation
      of the Reorganization Plan resulted in the cancellation of all of the shares
      of
      the Predecessor Company's common stock and options that were outstanding prior
      to the Effective Date and the issuance of New Common Stock as of the Effective
      Date.





**Note
      5 - Discontinued Operations including Certain Environmental
      Remediation**




*Muskogee
      Facility*





The
      Predecessor Company had been licensed by the Nuclear Regulatory Commission
      (the
“NRC”) to possess and use source material at the Muskogee Facility since 1967.
      Under the Predecessor Company's NRC permit, it was authorized to process ore
      concentrates and tin slags in the production of refined tantalum products.
      Licensable quantities of natural uranium and thorium are present in the slags,
      ores, concentrates and process residues.





The
      Predecessor Company discontinued its Metal Products business segment in 1989.
      In
      1990, the NRC included the Muskogee Facility in the NRC's Site Decommissioning
      Management Plan. The Predecessor Company completed a remedial assessment in
      1993
      to determine what areas of the Muskogee Facility were required to undergo
      decommissioning.





During
      2002, the Predecessor Company, with the assistance of its third party
      environmental consultants, prepared a revised Decommissioning Plan, which was
      submitted to the NRC on January 15, 2003. The revised Decommissioning Plan
      assumed offsite disposal of all contaminated residues and soils as well as
      groundwater treatment and monitoring using current criteria for acceptable
      decommissioning under NRC regulations. Based on then available information,
      with
      assistance from third party environmental consultants, the Predecessor Company
      estimated the total future costs of the revised Decommissioning Plan based
      upon
      current costs of decommissioning activities to be $41.6 million. The estimated
      decommissioning costs consisted of $20.4 million for excavating, hauling, and
      offsite disposal of residues and soils, $15.6 million for site plans,
      maintenance, safety, security and consulting costs, and $5.6 million for
      groundwater treatment and monitoring.





10
 *Index*





During
      2003, the Predecessor Company continued to maintain the safety and security
      of
      the Muskogee Facility. Pursuant to the Reorganization Plan, the Company
      negotiated with the NRC to develop acceptable mechanisms for providing financial
      assurance for the decommissioning of the Muskogee Facility. In December 2003,
      the NRC approved the issuance of an amended NRC License and related
      Decommissioning Plan to FMRI. At January 23, 2004 **,** the
      liability for the environmental remediation was $38.7 million, and the recorded
      discounted liability using a discount rate of 11.3% as part of fresh-start
      accounting, was $19.2 million. In 2005, FMRI began removal of the residues
      under
      phase 1 of the decommissioning plan, which is expected to remove over 80% of
      the
      radioactive contaminated residues. In September 2005 and August 2005, the
      Company received insurance recoveries from its insurers of which $764,000 and
      $4,000, respectively, of net insurance recoveries were allocated for a
      prepayment of the inter-company FMRI $30.6 million note, which in turn was
      used
      to reduce its borrowing from the Decommissioning Trust. Phase 1 is behind
      schedule, but continues in 2006. At September 30, 2006 and December 31, 2005,
      the gross estimated liability was $30,720,000 and $32,481,000, respectively,
      and
      the recorded discounted liability, using a discount rate of 11.3%, was
      $17,282,000 and $17,341,000, respectively.





*North
      Chicago Facility*





In
      September 2000, the EPA issued a unilateral administrative order under Section
      106 of CERCLA requiring the Predecessor Company to investigate and abate
      releases of hazardous substances from the North Chicago Facility that were
      contributing to contamination at an adjacent vacant lot (the "Vacant Lot Site").
      The Predecessor Company completed an engineering evaluation/cost analysis and
      submitted it to EPA for review in 2003. The proposed remedial actions at the
      North Chicago Facility were estimated to cost $2.17 million, for which a
      liability was recorded at January 23, 2004 as part of the bankruptcy
      reorganization for a newly formed special purpose subsidiary, North Chicago,
      Inc
      (“NCI”). On March 7, 2005, NCI sold the real property to the City of North
      Chicago (the “City”), transferred the proceeds of $1,400,000 received from the
      City to the EPA and the Company delivered to the EPA an unsecured, non-interest
      bearing promissory note in the principal amount of $677,232, payable in equal
      semi-annual payments to be made over a three-year period beginning nine months
      after issuance. In September 2005, the Company received insurance recoveries
      from its insurers of which $147,000 of net insurance recoveries were remitted
      as
      a prepayment of the note delivered to the EPA. The Company has made the first
      three payments due under the promissory note to date. At September 30, 2006
      and
      December 31, 2005, the gross estimated liability was $192,000 and $440,000,
      respectively, and the recorded discounted liability, using a discount rate
      of
      11.3%, was $134,000 and $343,000, respectively.





*Lexington
      Facility*





The
      Lexington Facility was constructed in 1954 and ceased operations in 2003.
      Investigations performed in 1997 as part of a company-wide environmental audit
      revealed the presence of volatile organic compounds ("VOCs") and PCBs in soils
      and groundwater in excess of state cleanup levels. The contaminants are believed
      to have been discharged through a former drainage field. While VOCs were
      detected at the down gradient boundary of the facility, no VOCs were detected
      in
      an unnamed stream that is located down gradient of the facility. To Fansteel's
      knowledge, the contamination at this site does not pose an imminent threat
      to
      health, safety or welfare. In May 2003, the Kentucky Natural Resources and
      Environmental Protection Cabinet ("KNREPC") requested that the Predecessor
      Company submit a plan for further characterization of the facility. The
      Predecessor Company submitted a letter to the KNREPC in September 2003 setting
      forth a conceptual characterization plan and advising the agency that a detailed
      Site Characterization Plan will be submitted by FLRI, a special purpose
      subsidiary, which pursuant to the Reorganization Plan now owns the Lexington
      facility. An estimated $1.78 million to perform the remedial activities was
      determined and a liability in that amount was recorded at January 23, 2004.
      In
      September 2005, the Company received insurance recoveries from its insurers
      of
      which $111,000 of net insurance recoveries were allocated to FLRI as a
      prepayment of the inter-company FLRI $1.78 million note. FLRI anticipates
      implementing the Site Characterization Plan in 2007. At September 30, 2006
      and
      December 31, 2005, the gross estimated liability was $1,241,000 and $1,320,000,
      respectively, and the recorded discounted liability, using a discount rate
      of
      11.3%, was $1,098,000 and $1,064,000, respectively.





11
 *Index*





The
      Company is pursuing the sale of its Lexington Facility, which is owned by its
      special purpose subsidiary FLRI. During the fresh start reporting process,
      the
      land and buildings held for sale were adjusted to a carrying value of
      $1,327,500, which was based on a third party appraisal of the property,
      excluding environmental remediation costs, and discounted for estimated selling
      cost. While prospective buyers have expressed interest, final approval by the
      regulatory agencies of the remediation methods has not been received, resulting
      in hesitation to purchase by potential buyers. The Company has been successful
      in disposing of two other such properties that were further in the regulatory
      approval process in the last two years at amounts that approximated carrying
      value.





Actual
      costs to be incurred in future periods to decommission the above sites may
      vary,
      which could result in adjustment to future accruals, from the estimates, due
      to,
      among other things, assumptions related to the quantities of soils to be
      remediated and inherent uncertainties in costs over time of actual disposal.
      No
      anticipated insurance recoveries are included in the recorded environmental
      liabilities.





*Washington
      Manufacturing*





On
      December 31, 2004, the Company sold substantially all of the assets (including,
      but not limited to, machinery and equipment, raw material items, work-in-process
      items, finished goods items, receivables, machinery and equipment contracts,
      customer contracts and supplier contracts, but excluding real estate, fixtures
      and certain other assets) of the division of the Company known as "Washington
      Manufacturing" (the "Washington Division") to Whitesell Corporation
      (“Whitesell”), a customer of the Washington Division, for consideration
      consisting of a combination of (i) cash (in the initial amount of approximately
      $2.0 million, subject to post-closing adjustment) and (ii) the assumption by
      Whitesell of certain liabilities of the Washington Division (in the initial
      amount of approximately $1.0 million, determined in accordance with U.S.
      generally accepted accounting principles consistently applied, subject to
      post-closing adjustment) (collectively, the “Washington Sale”).





*Results
      of Discontinued Operations*





The
      operations described above are classified as discontinued operations for all
      periods presented.





Discontinued
      operations reported losses of $2,922,000 and $1,433,000 in the nine months
      ended
      September 30, 2006 and September 30, 2005, respectively. The losses for the
      first nine months of both 2006 and 2005 relate primarily to the accretion of
      discounted environmental liabilities from the Company’s special purpose
      subsidiaries. Results in 2006 also include a charge of $258,000 to write-down
      the receivable from Whitesell for the settlement of the purchase price for
      the
      December 2004 sale of Washington Manufacturing. Results in 2005 were positively
      impacted by net insurance recoveries of $1.2 million and $155,000 for the
      favorable arbitration ruling regarding the valuation of the sale of Washington
      Manufacturing operation, reduced by additional costs of $129,000 for closing
      the
      sale of the North Chicago facility in March 2005.





12
 *Index*





**Note
      6 - Other Environmental Remediation**




Wellman
      Dynamics Corporation ("Wellman"), a subsidiary of Fansteel Inc., entered into
      an
      Administrative Order on Consent with the EPA to perform a RCRA Facility
      Investigation ("RFI") for the purpose of determining the extent of releases
      of
      hazardous wastes and/or hazardous constituents, and, if appropriate, a
      Corrective Measures Study ("CMS") to evaluate possible corrective action
      measures that may be necessary at the Iowa Facility owned and operated by
      Wellman. At January 23, 2004, Wellman had estimated that the cost for conducting
      the RFI/CMS would be $2,147,000 from 2005 to 2009. At September 30, 2006 and
      December 31, 2005 the gross estimated liability was $2,067,000 and $2,079,000,
      respectively, and the recorded discounted liability, using a discount rate
      of
      11.3%, was $1,901,000 and $1,779,000, respectively.





Wellman
      is permitted to operate a sanitary landfill for the disposal of its foundry
      sand. It is anticipated that, based upon recent projections by third-party
      consultants, Wellman is likely to be required to close the landfill in 2037
      at a
      future cost approximating $1,166,000. The recorded discounted liability, using
      a
      discount rate of 11.3%, at September 30, 2006 and December 31, 2005 was $537,000
      and $495,000, respectively.





In
      October 2000, Wellman provided the Iowa Department of Health (the "IDPH") with
      a
      "Historical Site Assessment" that identified uranium and thorium concentrations
      at the site. The IDPH required Wellman to perform a Risk Assessment ("RA")
      to
      determine whether the thorium-containing materials are a threat to human health
      or the environment. Wellman is awaiting the final report, but to its knowledge,
      the existing data forming the basis for the RA indicates that there is no
      imminent threat to health, safety or the environment. Wellman anticipates that
      the IDPH will allow it to address the thorium issue when it closes the sanitary
      landfill. However, there is a risk that the IDPH will require Wellman to remove
      or remediate the thorium prior to that time. The current estimated cost to
      remediate the thorium is $1,075,000. The recorded discounted liability, using
      a
      discount rate of 11.3%, at September 30, 2006 and December 31, 2005 was $505,000
      and $467,000, respectively.





The
      liabilities were recorded for estimated environmental investigatory and
      remediation costs based upon an evaluation of currently available facts,
      including the results of environmental studies and testing conducted for all
      Predecessor Company-owned sites in 1997 and since, and considering existing
      technology, presently enacted laws and regulations and prior experience in
      remediation of contaminated sites. Actual costs to be incurred in future periods
      at identified sites may vary from the estimates, given the inherent
      uncertainties in evaluating environmental exposures. Future information and
      developments will require the Company to continually reassess the expected
      impact of these environmental matters. These liabilities could be reduced by
      potential net insurance recoveries that the Company is seeking from its
      insurers, but there is no assurance any additional net recoveries will be
      received. No anticipated insurance recoveries are included in the recorded
      environmental liabilities.





13
 *Index*





**Note
      7 - Debt**





In
      order
      to increase the Company’s liquidity and ability to meet operational and
      strategic needs, Fansteel Inc. and its wholly-owned subsidiary, Wellman Dynamics
      Corporation, as borrowers, entered into a Loan and Security Agreement with
      Fifth
      Third Bank (Chicago), as lender, on July 15, 2005. Borrowing under the revolving
      line of credit is included as short-term borrowings.





Under
      the
      credit facility, subject to certain borrowing conditions, the Company may incur
      revolving loans and letter of credit issuances in an amount up to $15 million
      from a borrowing base comprised of a percentage of eligible accounts receivable
      and inventories and $2 million for machinery and equipment. Revolving loans
      are
      due and payable in full on January 15, 2007, but prior to this date the Company
      expects the secured loan to be renewed by Fifth Third Bank or another lender
      under similar terms and conditions, although there is no assurance. As borrowers
      under this Loan and Security Agreement, the Company is required to meet certain
      covenants, including those that require minimum EBITDA levels, limit leverage
      and establish debt service requirements. The interest rate on the line is at
      prime and there is a .25% unused line fee. Substantially all of the assets
      of
      the borrowers are pledged as security for this financing. On September 25,
      2006,
      Fifth Third Bank notified the Company it would not be required to comply with
      the financial covenants under the Loan and Security agreement for the third
      quarter of 2006 after the Company had notified them of unusual charges (see
      Management’s Discussion & Analysis of Financial Condition and Results of
      Operations) to be recorded in the third quarter 2006. At September 30, 2006
      the
      Company had letters of credit of $770,000 for casualty insurance collateral
      and
      environmental assurance with an interest rate of 1.5%. The Company’s credit
      availability was $779,000 at September 30, 2006.





**Note
      8 - Income Taxes**





Deferred
      income taxes reflect the tax effect of temporary differences between carrying
      amounts of assets and liabilities for financial reporting purposes and the
      amounts for income tax purposes.





Valuation
      allowances are established in accordance with provisions of FASB Statement
      No.
      109 “Accounting for Income Taxes”. The valuation allowances are attributable to
      federal and state deferred tax assets.





At
      September 30, 2006 and December 31, 2005, the Company had potential federal
      and
      state income tax benefits from net operating loss carry-forwards of $19.4 and
      $18.8 million, respectively, which expire in various years through 2023.
      Valuation allowances have been recorded for the full amount of all net operating
      loss carry-forwards as the net operating loss carry-forwards are not anticipated
      to be realized before expiration.





**Note
      9 - Business Segments**





The
      Company is a manufacturer of engineered metal components used in a variety
      of
      markets including automotive, energy, military and commercial aerospace,
      agricultural and construction machinery, lawn and garden equipment, marine,
      and
      plumbing and electrical hardware industries. For financial reporting purposes,
      the Company classifies its products into the following two business segments:
      Advanced Structures, which produces aluminum and magnesium sand castings and
      Industrial Metal Components, which produces powdered metal components and
      investment castings. The Company's business segments offer different products
      and services and have separate management teams and
      infrastructures.





14
 *Index*





Financial
      information concerning the Company's segments is as follows:




Three
                  Months Ended
              
              Nine
                  Months EndedNet
                  Sales:
              
              September
                  30,
                2006
              
              September
                  30,
                2005
              
              September
                  30,
                2006
              
              September
                  30,
                2005Advanced
                  Structures
              
              $
              10,174,556
              
              $
              7,828,830
              
              $
              30,410,737
              
              $
              22,827,323Industrial
                  Metal Components
              
              
              6,710,336
              
              
              5,376,791
              
              
              20,355,988
              
              
              18,252,991Total
                  Net Sales
              
              $
              16,884,892
              
              $
              13,205,621
              
              $
              50,766,725
              
              $
              41,080,314Operating
                  Income (Loss):Advanced
                  Structures
              
              $
              165,729
              
              $
              440,728
              
              $
              2,823,595
              
              $
              1,688,060Industrial
                  Metal Components
              
              
              (711,396
              )
              
              (323,534
              )
              
              (1,750,754
              )
              
              (113,197
              )Total
                  Operating Income
              
              $
              (545,667
              )
              $
              117,194
              
              $
              1,072,841
              
              $
              1,574,863




Intersegment
      sales are accounted for at prices equivalent to the competitive market prices
      for similar products.





The
      identifiable assets by business segment, for the periods indicated, are set
      forth below:





Identifiable
                assets:
            
            September
                30,
              2006
            
            December
                31,
              2005Advanced
                Structures
            
            $
            18,417,238
            
            $
            14,541,132Industrial
                Metal Components
            
            
            10,370,848
            
            
            9,208,344Corporate
            
            
            15,070,820
            
            
            14,315,495Discontinued
            
            
            2,791,252
            
            
            5,139,583Total
                Assets
            
            $
            46,650,158
            
            $
            43,204,554





Depreciation
      and capital expenditures by business segment, for the periods indicated, are
      set
      forth below:




Three
                  Months Ended
              
              Nine
                  Months EndedDepreciation
                  and amortization:
              
              September
                  30,
                2006
              
              September
                  30,
                2005
              
              September
                  30,
                2006
              
              September
                  30,
                2005Advanced
                  Structures
              
              $
              98,680
              
              $
              82,296
              
              $
              296,040
              
              $
              231,001Industrial
                  Metal Components
              
              
              144,628
              
              
              182,946
              
              
              428,436
              
              
              548,733Corporate
              
              
              3,202
              
              
              464
              
              
              9,396
              
              
              464Discontinued
              
              
              7,860
              
              
              7,857
              
              
              23,580
              
              
              23,571Total
                  depreciation and amortization
              
              $
              254,370
              
              $
              273,563
              
              $
              757,452
              
              $
              803,769Capital
                  expenditures:Advanced
                  Structures
              
              $
              314,198
              
              $
              27,391
              
              $
              857,631
              
              $
              159,687Industrial
                  Metal Components
              
              
              118,319
              
              
              118,368
              
              
              187,720
              
              
              135,796Corporate
              
              
              2,662
              
              
              17,346
              
              
              9,253
              
              
              17,346Total
                  capital expenditures
              
              $
              435,179
              
              $
              163,105
              
              $
              1,054,604
              
              $
              312,829





15
 *Index*





**ITEM
      2 - MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS**





The
      following discussion should be read in conjunction with the Consolidated
      Financial Statements and related notes thereto that are included in this Form
      10-Q. Certain statements made in this section or elsewhere in this report
      contain "forward-looking statements" within the meaning of the Private
      Securities Litigation Reform Act of 1995. Forward-looking statements are subject
      to certain risks, uncertainties and assumptions, which could cause actual
      results to differ materially from those projected. From time to time,
      information provided by the Company or statements made by its employees may
      contain other forward-looking statements. Factors that could cause actual
      results to differ materially from the forward-looking statements include, but
      are not limited to: general economic conditions, including inflation, interest
      rate fluctuations, trade restrictions and general debt levels; competitive
      factors, including price pressures, technological development and products
      offered by competitors; inventory risks due to changes in market demand or
      business strategies; and changes in effective tax rates. Readers are cautioned
      not to place undue reliance on these forward-looking statements, which speak
      only as of the date made. The Company undertakes no obligation to publicly
      update or revise any forward-looking statements, whether as a result of new
      information, future events or otherwise.








**Results
      of Operations**





***Three
      Months Ended September 30, 2006 (Third Quarter 2006) As Compared To Three Months
      Ended September 30, 2005 (Third Quarter 2005)***







*Net
      Sales*





The
      following table sets forth the combined net sales of the Company included in
      the
      consolidated statement of operations:





Third
                Quarter
              Ended
              September
                30,
              2006
            
            Third
                Quarter
              Ended
              September
                30,
              2005Advanced
                Structures
            
            $
            10,174,556
            
            $
            7,828,830Industrial
                Metal Components
            
            
            6,710,336
            
            
            5,376,791$
            16,884,892
            
            $
            13,205,621





The
      Company’s consolidated net sales for the quarter ended September 30, 2006
      increased $3.7 million, or 27.9%, compared to the quarter ended September 30,
      2005, the majority of which was due to increased sales volume in the aerospace
      market in the Advanced Structures business segment along with improvements
      in
      sales of truck diesel engine components in the Industrial Metal Components
      segment.





Advanced
      Structures’ net sales for the quarter ended September 30, 2006 increased by $2.3
      million, or 30.0%, compared to the quarter ended September 30, 2005. Sales
      of
      tooling, primarily for new programs, were $1.9 million for the current quarter,
      an increase of $1.4 million from the same quarter last year. Casting sales
      improved due primarily to the strong aerospace market, with increased sales
      of
      helicopter components along with additional volume for regional and private
      jet
      aircraft parts. These improvements were partially offset by a decrease in
      missile sales, which were impacted by a program cancellation in the second
      quarter of 2006.





16
 *Index*





Industrial
      Metal Components' net sales for the quarter ended September 30, 2006 increased
      $1.3 million, or 24.8% of which 7.7 percentage points of the increase related
      to
      material surcharges, compared with the quarter ended September 30, 2005. The
      majority of this segment’s increase is due to higher sales of investment
      castings, which increased by $1.2 million, or 39.8%, with $217,000 of this
      increase attributable to customer surcharges for material. Investment casting
      sales of truck diesel engine components improved, but was partially offset
      by
      sales declines in industrial products and power tools. Net sales of powdered
      metal components increased $138,000, or 5.8%, compared to the third quarter
      of
      2005. This increase included $200,000 in additional material surcharges in
      the
      third quarter of 2006 over the third quarter of 2005. Sales of hardware
      components improved while the other product lines remained flat or had small
      decreases.








*Cost
      of Products Sold*





The
      following table sets forth the combined cost of products sold of the Company
      included in the consolidated statement of operations:





Third
                Quarter Ended
              September
                30, 2006
            
            %
                Of
              Net
                Sales
            
            Third
                Quarter Ended
              September
                30, 2005
            
            %
                Of
              Net
                SalesAdvanced
                Structures
            
            $
            9,121,887
            
            
            89.7%
            
            $
            6,706,610
            
            
            85.7%Industrial
                Metal Components
            
            
            6,616,746
            
            
            98.6%
            
            
            4,856,659
            
            
            90.3%$
            15,738,633
            
            
            93.2%
            
            $
            11,563,269
            
            
            87.6%





Cost
      of
      products sold of $15.7 million for the quarter ended September 30, 2006
      increased by $4.2 million compared to $11.6 million for the quarter ended
      September 30, 2005, due to the higher volume, higher material costs in the
      Industrial Metal Components business segment, and unusual charges of $258,000
      in
      the quarter at the investment casting operation related to charge backs from
      a
      customer for engine testing and obsolete inventory.





In
      the
      Advanced Structures segment cost of products sold of $9.1 million for the third
      quarter ended September 30, 2006 increased $2.4 million compared with cost
      of
      products sold of $6.7 million in the quarter ended September 30, 2005, due
      to
      the increase in sales volume along with higher scrap and rework costs that
      resulted from the hot and humid weather during the quarter which created
      significant problems with throughput. As a percent of net sales, cost of
      products increased by 4.0 points in the third quarter of 2006 compared with
      the
      third quarter of 2005, due primarily to the higher operational costs resulting
      in unfavorable manufacturing variances. The most significant variance was in
      scrap, which increased to 9.1% of casting sales compared with 5.7% for the
      quarter ended September 30, 2005.





The
      Industrial Metal Components’ cost of products sold were $6.6 million for the
      quarter ended September 30, 2006 compared to cost of products sold of $4.9
      million for the quarter ended September 30, 2005. As a percent of net sales,
      cost of products increased by 8.3 points to 98.6% for the third quarter of
      2006
      compared with 90.3% for the third quarter of 2005. Higher material costs and
      manufacturing expenses had a negative impact on the third quarter 2006 operating
      results. Material costs have increased due to a higher mix of costly stainless
      steel, along with some material costs, such as copper and remilled powder,
      more
      than doubling since the prior year. Costs of material were 8.0 percentage points
      higher as a percentage of sales for the segment as a result of higher material
      prices reflected in material surcharges, customers not accepting surcharges
      and
      mix of more expensive materials. Material surcharges, which do not include
      any
      mark-up, had a 0.2 percentage point impact on margins. The investment casting
      operation incurred unusual charges of $258,000 in the third quarter of 2006
      for
      charge backs from a customer for engine testing and obsolete inventory.





17
 *Index*





*Selling,
      General and Administrative Expense*





The
      following table sets forth the combined selling, general and administrative
      expenses of the Company included in the consolidated statement of
      operations:





Third
                Quarter Ended
              September
                30, 2006
            
            %
                Of
              Net
                Sales
            
            Third
                Quarter Ended
              September
                30, 2005
            
            %
                Of
              Net
                SalesAdvanced
                Structures
            
            $
            886,940
            
            
            8.7%
            
            $
            681,492
            
            
            8.7%Industrial
                Metal Components
            
            
            804,986
            
            
            12.0%
            
            
            843,666
            
            
            15.7%$
            1,691,926
            
            
            10.0%
            
            $
            1,525,158
            
            
            11.5%





Third
      quarter 2006 selling, general and administrative expenses of $1,692,000
      increased $167,000 over third quarter 2005 expenses of $1,525,000. As a percent
      of sales, selling, general and administrative expenses improved to 10.0% in
      the
      third quarter of 2006 compared with 11.5% in the third quarter of 2005. Lower
      professional fees in 2006 accounted for the majority of the improvement.





In
      the
      Advanced Structures segment, selling, general and administrative expenses for
      the quarter ended September 30, 2006 increased $205,000 compared with the
      quarter ended September 30, 2005, due primarily to the increase in commissions
      related to higher sales volume partially offset by reduction of administrative
      staff and professional fees at the Corporate offices. As a percent of sales,
      selling, general and administrative expenses were flat at 8.7%. Third quarter
      2006 expenses also included an unusual charge of $141,000 to reserve for
      disputed accounts receivable with a customer, which increased selling expenses
      by 1.4 percentage points of sales.





Selling,
      general and administrative expenses for Industrial Metal Components segment
      for
      the third quarter ended September 30, 2006 decreased $39,000 compared with
      the
      third quarter ended September 30, 2005, due primarily to a reduction of
      administrative staff and professional fees at the Corporate offices. As a
      percent of sales selling, general and administrative expenses improved to 12.0%
      compared with 15.7%, as the relationship of cost reductions was favorable to
      the
      volume increase.





*Operating
      Income (Loss)*





The
      following table sets forth the combined operating income (loss) of the Company
      included in the consolidated statement of operations:





18
 *Index*




Third
                Quarter Ended
              September
                30, 2006
            
            %
                Of
              Net
                Sales
            
            Third
                Quarter Ended
              September
                30, 2005
            
            %
                Of
              Net
                SalesAdvanced
                Structures
            
            $
            165,729
            
            
            1.6%
            
            $
            440,728
            
            
            5.6%Industrial
                Metal Components
            
            
            (711,396
            )
            
            (10.6%)
            
            
            (323,534
            )
            
            (6.0%)$
            (545,667
            )
            
            (3.2%)
            
            $
            117,194
            
            
            0.9%





The
      company had an operating loss of $546,000 for the quarter ended September 30,
      2006 compared with operating income of $117,000 in the third quarter of 2005,
      a
      decrease of $663,000. Results in the third quarter of 2006 were negatively
      impacted by poor operating performances at both segments, along with charges
      of
      $400,000 related to bad debts and customer charge backs.





Despite
      the increase in sales volume, Advanced Structures operating income of $166,000
      for the quarter ended September 30, 2006 decreased from operating income of
      $441,000 for the quarter ended September 30, 2005. The decrease is due primarily
      to the production problems that occurred during the humid summer months as
      well
      as a charge of $141,000 to reserve for disputed customer accounts receivable.
      Positively impacting income was an additional $100,000 in training grants that
      were received from the state of Iowa in the third quarter of 2006.





Industrial
      Metal Components had an operating loss of $711,000 for the quarter ended
      September 30, 2006 compared to an operating loss of $322,000 for the quarter
      ended September 30, 2005. The benefits of the higher sales volume were offset
      by
      the higher material costs and manufacturing expenses. While some of the material
      costs have been passed on to customers via surcharges, other customers have
      refused to accept the surcharges, particularly in the automotive market.
      Discussions are underway with these customers to address the surcharge issues
      and margin analysis continues to be performed to monitor the profitability
      of
      these customers. Surcharges, while increasing sales, provide no benefits to
      income as only costs are being passed back to the customer. Further eroding
      quarterly profits in this segment were unusual charges of $258,000 at the
      investment casting operation related to charge backs from a
      customer.





*Other
      Expenses*





The
      following table sets forth the combined other expenses of the Company included
      in the consolidated statement of operations:




Third
                QuarterEnded
              September
                30,2006
            
            Third
                QuarterEnded
              September
                30, 2005Interest
                expense
            
            $
            (414,091
            )
            $
            (494,613
            )Other
            
            
            (8,524
            )
            
            (14,153
            )$
            (422,615
            )
            $
            (508,766
            )





Other
      expense decreased $86,000 in the quarter ended September 30, 2006 compared
      to
      the quarter ended September 30, 2005. Results in the third quarter of 2005
      included termination fees of $200,000 paid to Wachovia Credit as part of the
      July 15, 2005 refinancing with Fifth Third Bank.





19
 *Index*




*Reorganization
      Items*





Reorganization
      expenses related to bankruptcy were $0 and $18,000 for the quarters ended
      September 30, 2006 and September 30, 2005, respectively. The Company emerged
      from Chapter 11 bankruptcy on January 23, 2004.





*Discontinued
      Operations*





Discontinued
      operations reported a loss of $1,079,000 in the quarter ended September 30,
      2006
      and a loss of $649,000 in the quarter ended September 30, 2005. Results for
      both
      periods relate primarily to the accretion of discounted environmental
      liabilities from the Company’s special purpose subsidiaries and the note payable
      to the Pension Benefit Guarantee Corporation. Third quarter results in 2006
      included a charge of $258,000 to write-down the receivable from the settlement
      of the purchase price for the December 2004 sale of Washington Manufacturing
      while the third quarter 2005 included $155,000 for the favorable arbitration
      ruling regarding the valuation of the sale of Washington Manufacturing
      operation.





*Income
      taxes*





No
      income
      tax provision or benefit has been recognized for any periods presented as
      valuation allowances have been recorded for all net operating loss benefits
      and
      net deferred tax assets, except for the gain in discontinued operations from
      the
      carry-back refund from the net operating loss related to environmental
      liabilities.





*Net
      Income (Loss)*





The
      Company had a net loss of $2 million for the quarter ended September 30, 2006
      and a net loss of $1.1 million for the quarter September 30, 2005.





***2006
      Nine Months As Compared To 2005 Nine Months***




*Net
      Sales*





The
      following table sets forth the combined net sales of the Company included in
      the
      consolidated statement of operations:




Nine
                Months Ended
              September
                30, 2006
            
            Nine
                Months Ended
              September
                30, 2005Advanced
                Structures
            
            $
            30,410,737
            
            $
            22,827,323Industrial
                Metal Components
            
            
            20,355,988
            
            
            18,252,991$
            50,766,725
            
            $
            41,080,314





Consolidated
      net sales for the nine months ended September 30, 2006 increased $9.7 million,
      or 23.6%, from the first nine months of 2005, with increases in both business
      segments, but primarily in the Advanced Structures business segment, which
      has
      benefited from a strong aerospace market.





Advanced
      Structures’ net sales for the nine months ended September 30, 2006 were higher
      by $7.6 million, or 33.2%, compared to the nine months ended September 30,
      2005.
      A number of new programs for the aerospace market have resulted in strong
      tooling sales, which represent 26% of the sales growth for the year. All product
      lines have experienced improvements, except for missile products where a loss
      of
      a program in the second quarter of 2006 has resulted in a decrease in this
      product line.





20
 *Index*





The
      Industrial Metal Components' net sales for the nine months ended September
      30,
      2006 increased $2.1 million, or 11.5%, compared with the nine months ended
      September 30, 2005, with 50% of the increase related to material surcharges.
      Net
      sales of investment castings increased by $2.4 million, or 26.5%. Of this
      increase, $450,000 was due to higher material surcharges in 2006, with the
      remaining increase due to higher volume to automotive and flow control
      customers, offset by sales shortfalls in other product lines. Net sales of
      powdered metal components decreased $338,000, or 3.7%. Material surcharges
      increased $623,000 compared with last year. Sales volume of powdered metal
      products exclusive of surcharges decreased by $960,000 or 11.1% due to lower
      sales of recreational vehicles, lawn and garden products, industrial products
      and power tools, partially offset by improvements in hardware and heavy truck
      sales. **** The
      automotive market was flat in the quarter, but plant shutdowns by the major
      auto
      companies are expected to have a negative impact on existing business going
      forward.





*Cost
      of Products Sold*





The
      following table sets forth the combined cost of products sold of the Company
      included in the consolidated statement of operations:





Nine
                Months Ended
              September
                30, 2006
            
            %
                Of
              Net
                Sales
            
            Nine
                Months Ended
              September
                30, 2005
            
            %
                Of
              Net
                SalesAdvanced
                Structures
            
            $
            25,097,640
            
            
            82.5%
            
            $
            18,813,658
            
            
            82.4%Industrial
                Metal Components
            
            
            19,628,374
            
            
            96.4%
            
            
            15,687,779
            
            
            85.9%$
            44,726,014
            
            
            88.1%
            
            $
            34,501,437
            
            
            84.0%





Cost
      of
      products sold of $44.7 million for the nine months ended September 30, 2006
      increased by $10.2 million compared to $34.5 million for the nine months ended
      September 30, 2005, due to the higher volume in both segments as well as higher
      material costs and unusual charges of $984,000 in the Industrial Metals business
      segment.





Cost
      of
      products sold of $25,098,000 in the Advanced Structures segment for the nine
      months ended September 30, 2006 increased $6,284,000 compared with cost of
      products sold of $18,814,000 in the nine months ended September 30, 2005,
      primarily due to the higher volume. As a percent of net sales, cost of products
      increased by 0.1 points in this segment as improved performance in the first
      two
      quarters of 2006 were offset by reduced performance in the third quarter 2006.
      Scrap costs at 6.0% of net sales are 0.7 percentage points higher than 2005
      related to excessive heat and humidity during the third quarter 2006.





The
      Industrial Metal Components’ cost of products sold were $19,628,000 for the nine
      months ended September 30, 2006 compared to cost of products sold of $15,688,000
      for the nine months ended September 30, 2005. As a percent of net sales, cost
      of
      products increased to 96.4% for the first nine months of 2006 compared with
      85.9% for the first nine months of 2005. Outside of the increase in cost of
      products sold related to the higher sales volume, the investment casting
      operation incurred unusual charges in the first four months of 2006 that totaled
      $726,000 and unusual charges of $258,000 in the third quarter of 2006 for
      expedited freight, inspection costs and scrap related to the start-up of new
      customer parts. These total charges of $984,000 increased cost of products
      sold
      by 4.8 percentage points to net sales. Additionally, this segment has been
      negatively impacted by higher material costs, which in some cases have more
      that
      doubled since 2005. Material surcharges, which do not include mark-up, had
      a
      negative 0.4 percentage point impact on margins. Material costs have increased
      by 7.4 percentage points due to higher material prices and the mix of higher
      costs materials.





21
 *Index*





*Selling,
      General and Administrative Expense*





The
      following table sets forth the combined selling, general and administrative
      expenses of the Company included in the consolidated statement of
      operations:





Nine
                Months Ended
              September
                30, 2006
            
            %
                Of
              Net
                Sales
            
            Nine
                Months Ended
              September
                30, 2005
            
            %
                Of
              Net
                SalesAdvanced
                Structures
            
            $
            2,489,502
            
            
            8.2%
            
            $
            2,326,736
            
            
            10.2%Industrial
                Metal Components
            
            
            2,478,368
            
            
            12.2%
            
            
            2,677,278
            
            
            14.7%$
            4,967,870
            
            
            9.8%
            
            $
            5,004,014
            
            
            12.2%





Despite
      the higher sales volume for the first nine months of 2006, total selling,
      general and administrative expenses were nearly the same as the nine months
      ended September 30, 2005, improving to 9.8% of sales from 12.2% of sales.
      Reduced administrative staff and lower professional fees in 2006 were the main
      factor for this improvement.





In
      the
      Advanced Structures segment, selling, general and administrative expenses for
      the nine months ended September 30, 2006 increased by $163,000 compared with
      the
      nine months ended September 30, 2005, but as a percent of sales improved to
      8.2%
      compared with 10.2%, due primarily to the increase in sales volume coupled
      with
      cost reductions. Expenses in 2006 also included a third quarter 2006 unusual
      charge of $141,000 to reserve for disputed accounts receivable with a
      customer.





Selling,
      general and administrative expenses in the Industrial Metal Components segment
      for the nine months ended September 30, 2006 decreased by $199,000 compared
      with
      the nine months ended September 30, 2005, and as a percent of sales improved
      to
      12.2% compared with 14.7%, due primarily to cost reductions in
      2006.





*Operating
      Income (Loss)*





The
      following table sets forth the combined operating income (loss) of the Company
      included in the consolidated statement of operations:





Nine
                Months Ended
              September
                30, 2006
            
            %
                Of
              Net
                Sales
            
            Nine
                Months Ended
              September
                30, 2005
            
            %
                Of
              Net
                SalesAdvanced
                Structures
            
            $
            2,823,595
            
            
            9.3%
            
            $
            1,688,060
            
            
            7.4%Industrial
                Metal Components
            
            
            (1,750,754
            )
            
            (8.6)%
            
            
            (113,197
            )
            
            (0.6)%$
            1,072,841
            
            
            2.1%
            
            $
            1,574,863
            
            
            3.8%




22
 *Index*





Operating
      income of $1.1 million for the nine months ended September 30, 2006 decreased
      by
      $500,000 compared to $1.6 million for the nine months ended September 30, 2005,
      due primarily to higher material costs and unusual charges of $984,000 related
      to the start-up of new customer parts in the Industrial Metals business
      segment.





Operating
      income of $2,824,000 in the Advanced Structures segment for the nine months
      ended September 30, 2006 improved $1,136,000 compared with operating income
      of
      $1,688,000 in the nine months ended September 30, 2005, due to the higher
      volume. Results in 2006 were also positively impacted by $717,000 in training
      grants received from the state of Iowa.





The
      Industrial Metal Components segment had an operating loss of $1,751,000 for
      the
      nine months ended September 30, 2006 compared to an operating loss of $113,000
      for the nine months ended September 30, 2005. The primary reason for the higher
      operating loss was unusual charges of $984,000 in 2006 at the investment casting
      operation for expedited freight, inspection costs and scrap related to the
      start-up of new customer parts. A major process improvement initiative is
      underway to restore this business to acceptable margins by the end of the year.
      Margins on certain parts are presently below expectations due to high material
      costs, but some of these low margin parts are scheduled to be replaced with
      more
      profitable parts in 2007. The powdered metal operation experienced a loss in
      the
      first nine months of 2006 due to the lower sales volume and higher material
      costs. Higher material prices have not been passed on to some major customers,
      primarily in the automotive markets, as they continue to refuse to pay
      surcharges. A review of all customers is currently underway to address those
      not
      providing satisfactory margins. While the material surcharges have had a
      positive impact on sales volume, these surcharges, which are passed on to
      customers at cost, have not provided any corresponding improvements to
      margins.




*Other
      Expenses*





The
      following table sets forth the combined other expenses of the Company included
      in the consolidated statement of operations:


Nine
                Months Ended
              September
                30, 2006
            
            Nine
                Months Ended
              September
                30, 2005Interest
                expenses
            
            $
            (1,108,097
            )
            $
            (954,323
            )Other
            
            
            (2,470
            )
            
            (26,422
            )$
            (1,110,567
            )
            $
            (980,745
            )





Other
      expense increased $130,000 in the nine months ended September 30, 2006 compared
      to the nine months ended September 30, 2005, as interest expense was higher
      due
      to increased borrowing. The first nine months of 2005 also included termination
      fees of $200,000 paid to Wachovia Credit as part of the July 15, 2005
      refinancing with Fifth Third Bank.





*Reorganization
      Items*





Reorganization
      expenses related to bankruptcy were zero for the nine months ended September
      30,
      2006 as compared to $54,000 for the nine months ended September 30, 2005. The
      Company emerged from Chapter 11 on January 23, 2004.





23
 *Index*





*Discontinued
      Operations*





Discontinued
      operations reported losses of $2,922,000 and $1,433,000 in the nine months
      ended
      September 30, 2006 and September 30, 2005, respectively. The losses for the
      first nine months of both 2005 and 2006 relate primarily to the accretion of
      discounted environmental liabilities from the Company’s special purpose
      subsidiaries. Results in 2006 also include a charge of $258,000 to write-down
      the receivable for the settlement of the purchase price for the December 2004
      sale of Washington Manufacturing. Results in 2005 were positively impacted
      by
      net insurance recoveries of $1.2 million and $155,000 for the favorable
      arbitration ruling regarding the valuation of the sale of Washington
      Manufacturing operation, reduced by additional costs of $129,000 for closing
      the
      sale of the North Chicago facility in March 2005.





*Income
      taxes*





No
      income
      tax provision or benefit has been recognized for any periods presented as
      valuation allowances have been recorded for all net operating loss benefits
      and
      net deferred tax assets.





*Net
      Income (Loss)*





The
      Company had a net loss of $2,960,000 for the nine months ended September 30,
      2006 and a net loss for the nine months ended September 30, 2005 was $893,000.





**Liquidity
      and Capital Resources**




On
      September 30, 2006, the Company had cash of $29,000 compared to $791,000 of
      cash
      on December 31, 2005. For the nine months ended September 30, 2006, cash from
      continuing operations increased $2,318,000, due largely to $4,265,000 in
      short-term borrowings. Excluding borrowings, continuing operations have used
      $1,947,000 for the nine-month period in 2006 due primarily to poor operating
      performance in the Industrial Metal Components segment as well as $1,055,000
      in
      capital expenditures for the Company. Cash flows from discontinued operations
      used $3,080,000 for the nine months ended September 30, 2006, primarily for
      funding the on-going environmental remediation at the Muskogee, Oklahoma
      property.





*Operating
      Activities*





For
      the
      nine months ended September 30, 2006, operating activities consumed $672,000
      in
      cash. Accounts receivable increased by $2.4 million due to the increased sales
      volume as days outstanding at 57 days improved by 1 day. Inventories increased
      by $2.4 million also due to the higher sales volume and a decrease in inventory
      turns. The major inventory increase relates to the Advanced Structures segment,
      which requires higher inventory levels due to the length of through put times
      in
      the complicated sand casting process. Accounts payable and accrued liabilities
      increased by $2.4 million due to higher volume and the timing of payments to
      trade vendors. During the nine months ended September 30, 2005, operating
      activities consumed $3,031,000 of cash with increases in accounts receivable
      of
      $1.0 million and increases in inventory of $1.4 million, along with decreases
      in
      accounts payable and accrued liabilities of $2.8 million.





24
 *Index*





*Investing
      Activities*





For
      the
      nine months ended September 30, 2006, investing activities consumed $1,055,000
      for capital expenditures, primarily in the Advanced Structures business segment
      where the 33% increase in 2006 sales over 2005 has created the need for
      additional manufacturing equipment. For the nine months ended September 30,
      2005, investing activities provided $81,000 due to a decrease in restricted
      cash
      of $394,000 offset by $313,000 in capital expenditures.





*Financing
      Activities*





Financing
      activities provided $4,045,000 for the nine months ended September 30, 2006,
      compared with $4,858,000 provided for the nine months ended September 30, 2005.
      For the first nine months of 2006, short-term borrowings from the revolving
      line
      of credit with Fifth Third Bank were $4.3 million. These borrowings were needed
      for funding operations, capital expenditures and environmental remediation
      of
      discontinued operations. Payments of long-term debt were $220,000 for loans
      from
      various economic agencies in Pennsylvania. In the first nine months of 2005,
      short-term borrowing from the revolving line of credit was $5,062,000 and
      long-term debt payments were $204,000.





In
      order
      to increase the Company’s liquidity and ability to meet operational and
      strategic needs, Fansteel Inc. and its wholly-owned subsidiary, Wellman Dynamics
      Corporation, as borrowers, entered into a Loan and Security Agreement with
      Fifth
      Third Bank (Chicago), as lender, on July 15, 2005. Borrowing under the revolving
      line of credit is included as short-term borrowings.





Under
      the
      credit facility, subject to certain borrowing conditions, the Company may incur
      revolving loans and letter of credit issuances in an amount up to $15 million
      from a borrowing base comprised of a percentage of eligible accounts receivable
      and inventories and $2 million for machinery and equipment. Revolving loans
      are
      due and payable in full on January 15, 2007. The interest rate on the line
      is at
      prime and there is a .25% unused line fee. Substantially all of the assets
      of
      the borrowers are pledged as security for this financing. As borrowers under
      this Loan and Security Agreement, the Company is required to meet certain
      covenants, including those that require minimum EBITDA levels, limit leverage
      and establish debt service requirements. Fifth Third Bank notified the Company
      on September 25, 2006 that the Company would not be required to comply with
      the
      financial covenants in the Loan and Security Agreement for the third quarter
      2006 after the Company had notified the Bank of unusual charges to be taken
      in
      the third quarter 2006. At September 30, 2006, the Company had letters of credit
      for $770,000 outstanding, primarily for casualty insurance collateral, under
      the
      new credit facility with an interest rate of 1.5%. At September 30, 2006 the
      credit availability was $779,000.





As
      the
      Company’s businesses have grown, so have the Company’s needs for funding working
      capital, capital expenditures and other requirements. With the corresponding
      increase in its borrowing base, consisting of accounts receivable, inventories
      and machinery and equipment, the Company anticipates that it will be able to
      increase its revolving line of credit above the current $15 million level.
      The
      Company expects the loan agreement to be renewed before the January 15, 2007
      due
      date, with similar terms as those currently in place, although there is no
      assurance.





25
 *Index*





The
      Company's high level of debt could have important consequences, including,
      among
      others, the following:





-
      the
      inability of the Company's current cash generation level to support future
      interest and principal payments on the Company's existing
      indebtedness;




-
      inadequate cash for other purposes, such as capital expenditures and the
      Company's other business activities, since the Company may need to use all
      or
      most of the operating cash flow to pay principal and interest on its outstanding
      debt;





-
      making
      it more difficult for the Company to satisfy its contractual
      obligations;




-
      increasing the Company's vulnerability to general adverse economic and industry
      conditions;




-
      limiting the Company's ability to fund future working capital, capital
      expenditures or other general corporate requirements;




-
      placing
      the Company at a competitive disadvantage compared to the Company's competitors
      that have less debt relative to their operating scale;





-
      limiting the Company's flexibility in planning for, or reacting to, changes
      in
      the Company's business and its industry; and




-
      limiting, along with the financial and other restrictive covenants in the
      Company's indebtedness, among other things, the Company's ability to borrow
      additional funds, make acquisitions, dispose of assets or pay cash
      dividends.





In
      the
      longer term, the Company's ability to pay debt service and other contractual
      obligations will depend on improving the Company's future performance and cash
      flow generation, which in turn will be affected by prevailing economic and
      industry conditions and financial, business and other factors, many of which
      are
      beyond the Company's control. If the Company has difficulty providing for debt
      service or other contractual obligations in the future, the Company may be
      forced to take actions such as reducing or delaying capital expenditures,
      reducing costs, selling assets, refinancing or reorganizing its debt or other
      obligations and seeking additional equity capital, or any combination of the
      above. The Company may not be able to take any of these actions on satisfactory
      terms, or at all.





The
      current loan facility provides for certain financial and other covenants
      including affirmative and negative covenants with respect to, among others,
      accounts receivable, inventory, equipment and real property, insurance,
      indebtedness or guarantees, liens or other encumbrances, declaration or payment
      of dividends, sales of capital stock, assets or indebtedness, mergers,
      liquidations or dissolutions, loans, investments, minimum EBITDA, changes in
      business, limitation of restrictions affecting subsidiaries of the Company,
      restrictions on activities of certain special purpose subsidiaries of the
      Company, maintenance of existence, payment of taxes and compliance with laws.
      Payment on the debt outstanding under the facility may be accelerated following
      certain events of default including, among others, failure to make payments
      when
      due, noncompliance with covenants, breaches of representations and warranties,
      dissolution or insolvency, commencement of bankruptcy or insolvency proceedings,
      rendering of judgment against Fansteel Inc., Wellman or certain specified
      obligors in excess of $100,000 in any one case or in excess of $250,000 in
      the
      aggregate, certain types of non-compliance by banks at which deposit accounts
      of
      Fansteel Inc. or Wellman are maintained or by financial institutions in
      possession of investment property of Fansteel Inc. or Wellman, uncured defaults
      under specified agreements or notes with entities other than Fifth Third Bank,
      the unenforceability, or a party challenging the enforceability, of a material
      provision of the revolving loan facility with respect to Fansteel Inc. or
      Wellman, the occurrence of certain specified events relating to the Employee
      Retirement Income Security Act of 1974 which results in a material adverse
      effect on the assets, business or prospects of Fansteel Inc. and Wellman taken
      as a whole, certain specified criminal indictments or threatened criminal
      indictments or the commencement of certain specified criminal or civil
      proceedings against Fansteel Inc. or Wellman, certain specified changes of
      control of the Company, and the occurrence of a material adverse change in
      the
      business or assets of Fansteel Inc., Wellman and certain specified obligors
      taken as a whole. The Company may have difficulty satisfying the covenants
      in
      the revolving loan facility and could default on the facility, which, if not
      cured (if there is an applicable cure period) or waived, could have a material
      adverse effect on the Company.





26
 *Index*





The
      Company's liquidity, including its ability to meet its ongoing operational
      obligations, is dependent upon, among other things, the Company's ability to
      (i)
      maintain adequate cash on hand, (ii) generate positive cash flow from
      operations, (iii) comply with the revolving loan facility, and (iv) achieve
      profitability.








**Critical
      Accounting Policies**




The
      Company's discussion and analysis of financial conditions and results of
      operations is based upon its consolidated financial statements, which have
      been
      prepared in accordance with generally accepted accounting principles in the
      United States. The preparation of the financial statements in conformity with
      generally accepted accounting principles requires management to make estimates
      and assumptions that affect the amounts reported in the financial statements
      and
      accompanying notes. The Company bases its estimates on historical experience
      and
      assumptions that it believes to be reasonable under the circumstances. Actual
      results could differ from those estimates. The Company believes the accounting
      policies described below are the policies that most frequently require estimates
      and judgments and are therefore critical to the understanding of its results
      of
      operations.





Trade
      accounts receivable are classified as current assets and are reported net of
      allowances for doubtful accounts. The Company records such allowances based
      on a
      number of factors, including historical trends and specific customer
      liquidity.





In
      accordance with Statement of Position 96-1, there are no future recoveries
      included as net amounts in the environmental liabilities or any insurance
      receivables included on the balance sheet. Insurance recoveries are not recorded
      until a settlement is received.





Excess
      reorganization value represents the excess of the Successor Company's enterprise
      value over the aggregate fair value of the Company's tangible and identifiable
      intangible assets and liabilities at the balance sheet date. Excess
      reorganization value is not amortized, however, it is evaluated at a minimum
      annually or when events or changes occur that suggest impairment in carrying
      value.





The
      Company periodically re-evaluates carrying values and estimated useful lives
      of
      long-lived assets to determine if adjustments are warranted. The Company uses
      estimates of undiscounted cash flows from long-lived assets to determine whether
      the book value of such assets is recoverable over the assets' remaining useful
      lives.





27
 *Index*





The
      Company recognizes sales when the risks and rewards of ownership have
      transferred to the customer, which is generally considered to have occurred
      as
      products are shipped. Revenue is recognized from sales of tooling, patterns
      and
      dies upon customer acceptance.





Statement
      of Position No. 96-1, Environmental Remediation Liabilities, provides
      authoritative guidance on the recognition, measurement, display and disclosure
      of environmental remediation liabilities. The Company is involved in numerous
      remediation actions to clean up hazardous wastes as required by federal and
      state laws. Environmental liabilities are estimated with the assistance of
      third-party environmental advisors and governmental agencies based upon an
      evaluation of currently available facts, including the results of environmental
      studies and testing, and considering existing technology, presently enacted
      laws
      and regulations, and prior experience in remediation of contaminated sites.
      Future information and developments require the Company to continually reassess
      the expected impact of these environmental matters. Environmental remediation
      is
      recorded as a discounted liability in accordance with the principles of fresh
      start accounting, which was adopted with the confirmation of the Plan of
      Reorganization as of January 23, 2004 when the Company emerged from bankruptcy.
      The expected timing of estimated cash payments at that time were used to
      determine the discounted value of those payments. Accretion of the discount
      is
      recorded each period.





**Recent
      Accounting Pronouncements**





In
      February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
      Financial Instruments - An Amendment of FASB Statements No. 133 and 140 and
      is
      effective for all financial instruments acquired or issued after the beginning
      of an entity’s first fiscal year that begins after September 13, 2006. SFAS No.
      155 permits fair far value remeasurement for any hybrid financial instrument
      that contains an embedded derivative that otherwise would require bifurcation,
      clarifies which interest-only strips and principal-only strips are not subject
      to the requirements of SFAS No. 133, establishes a requirement to evaluate
      interest in securitized financial assets to identify interest that are
      freestanding derivatives or that are hybrid financial instruments that contain
      an embedded derivative requiring bifurcation, clarifies that concentrations
      of
      credit risk in the form of subordination are not embedded derivatives and amends
      SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity
      from holding a derivative financial instrument that pertains to a beneficial
      interest other than another derivative financial instrument. The Company is
      required to adopt SFAS No. 155 beginning January 1, 2007, but does not expect
      it
      to have a material impact on its consolidated results of operations and
      financial condition.





In
      March
      2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets
      - An Amendment of FASB Statement No. 140 and is effective for fiscal years
      beginning after September 15, 2006. SFAS No. 156 requires recognition of a
      servicing asset or servicing liability each time an obligation to service a
      measurement at fair value of all separately recognized servicing assets and
      servicing liabilities, permits the use of either the amortization method or
      the
      fair value measurement method for each class of separately recognized servicing
      assets and servicing liabilities, permits a one-time reclassification of
      available-for-sale securities to trading securities at initial adoption, and
      requires separate presentation of servicing assets and servicing liabilities
      subsequently measured at affair value in the statement of financial position
      and
      additional disclosures for all separately recognized servicing assets and
      servicing liabilities. The Company is required to adopt SFAS No. 156 effective
      January 1, 2007, but does not expect it to have a material impact on its
      consolidated results of operations and financial condition.





28
 *Index*





In
      June
      2006, the FASB issued Financial Interpretation (FIN) No. 48, Accounting for
      Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 and
      is
      effective for fiscal years beginning after December 15, 2006. FIN No. 48
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise’s financial statements in accordance with SFAS No. 109, Accounting
      for Income Taxes. FIN No. 48 outlines a recognition threshold and measurement
      attribute for the financial statement recognition and measurement of a tax
      position taken or expected to be taken in a tax return. FIN No. 48 also provides
      guidance on recognition, classification, interest and penalties, accounting
      in
      interim periods, disclosure, and transition. The Company is required to adopt
      FIN No. 48 effective January 1, 2007, but does not expect it to have a material
      impact on its consolidated results of operations and financial
      condition.





In
      September 2006, the FASB issued SFAS NO. 157, Fair Value Measurements and is
      effective for fiscal years beginning after November 13, 2007. SFAS No. 157
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles, and expands disclosures about fair
      value measurements. SFAS No. 157 applies under other accounting pronouncements
      that require or permit fair value measurements, the FASB having previously
      concluded in those accounting pronouncements that fair value is the relevant
      measurement attributed. Accordingly, FAS No. 157 does not require any new fair
      value measurements. The Company is required to adopt SFAS No. 157 effective
      January 1, 2008, but does not expect it to have a material impact on its
      consolidated results of operations and financial condition.





In
      September 2006, the FASB also issued SFAS No. 158, Employers’ accounting for
      Defined Benefit Pension and Other Postretirement Plans - an Amendment of FASB
      Statements No. 87, 88, 106, and 132(R) and is effective for employers with
      publicly traded equity securities as of the end of the fiscal year ending after
      December 14, 2006, and for employers without publicly traded equity securities
      as of the end of the fiscal year ending after June 15, 2007. SFAS No. 158
      requires an employer to recognize the over funded or under funded status of
      a
      defined benefit postretirement plan (other than a multiemployer plan) as an
      asset or liability in its statement of financial position and to recognize
      changes in that funded status in the year in which the changes occur through
      comprehensive income of a business entity or changes in which the changes occur
      through comprehensive income of a business entity or changes in unrestricted
      net
      assets of a not-for-profit organization. SFAS No. 158 also requires an employer
      to measure the funded status of a plan as of the date of its year-end statement
      of financial position, with limited exceptions. The Company is required to
      adopt
      SFAS No. 158 effective December 31, 2006, but does not expect it to have a
      material impact on its consolidated financial condition.





**Inflation**




Inflationary
      factors such as increases in the costs of raw materials, labor, and overhead
      affect the Company's operating profits. Significant portions of raw materials
      consumed by the Company are various steel alloys. Price increases were
      experienced beginning in 2004 and these price increases have continued into
      2006. To offset these price increases, the Company began adding material
      surcharges in March 2004 and in 2006 the Company continues to add material
      surcharges. Material surcharges are a straight pass through of costs and do
      not
      include profit. For the nine months ended September 30, 2006, material
      surcharges accounted for 4.1% of net sales. For the nine months ended September
      30, 2006, operating income at 2.1% of sales including surcharges would have
      been
      an operating loss of (2.0%) of sales without the material
      surcharges.





29
 *Index*





**Off-Balance
      Sheet Arrangements**





The
      Company is not party to off-balance sheet arrangements other than normal
      operating leases for any period presented.





**Contractual
      Obligations**





The
      following table summarizes payments due by year for the contractual obligations
      at September 30, 2006:





*(In
                thousands)*
            
            Total
            
            2006
            
            2007
            
            2008
            
            2009
            
            2010
            
            After
              2010PBGC
                Note
            
            $
            8,000
            
            $
            -
            
            $
            750
            
            $
            750
            
            $
            750
            
            $
            1,150
            
            $
            4,600PA
                economic agencies notes
            
            
            536
            
            
            74
            
            
            305
            
            
            143
            
            
            14
            
            
            **-**
            
            
            **-**Operating
                leases
            
            
            167
            
            
            35
            
            
            98
            
            
            16
            
            
            12
            
            
            6
            
            
            **-**Revolving
                line
            
            
            13,943
            
            
            -
            
            
            13,943
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**Letters
                of credit
            
            
            770
            
            
            -
            
            
            770
            
            
            -
            
            
            **-**
            
            
            **-**
            
            
            **-**Environmental
                liabilities
            
            
            36,503
            
            
            776
            
            
            1,722
            
            
            2,628
            
            
            2,372
            
            
            2,600
            
            
            26,405Total
            
            $
            59,919
            
            $
            885
            
            $
            17,588
            
            $
            3,537
            
            $
            3,148
            
            $
            3,756
            
            $
            31,005





The
      above
      table excludes discounts of the long-term debt and environmental liabilities
      as
      well as any related interest.





The
      payments for environmental liabilities are based on estimated timing of
      remediation activities and not mandatory payment schedules. A minimum annual
      funding of $1.4 million is required for environmental liabilities related to
      FMRI.





The
      revolving line of credit has a renewal date of January 15, 2007. The revolving
      line of credit requires immediate repayment from cash receipts. Borrowings
      can
      be made as needed, based on availability. The availability at September 30,
      2006
      was $779,000, compared with $1,876,000 at December 31, 2005. The Company expects
      that the revolving line of credit will be renewed before the renewal date at
      terms consistent with current terms, although there is no assurance.








**ITEM
      3 -QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**




The
      Company's operations are not currently subject to market risks of a material
      nature for interest risks, foreign currency rates or other market price risks.
      The only debt subject to interest fluctuations is the short-term borrowing
      under
      the revolving line of credit. A significant portion of raw materials consumed
      by
      the Company is various steel alloys. The Company began to experience price
      increases on raw materials in 2004 and raw material price increase have
      continued into 2006. To offset these price increases in raw materials, the
      Company began adding material surcharges in March 2004 and has continued to
      add
      material surcharges into 2006.





30
 *Index*





**ITEM
      4 - CONTROLSAND PROCEDURES**





The
      Company’s Chief Executive Officer and its Chief Financial Officer, after
      evaluating the effectiveness of the Company’s “disclosure controls and
      procedures” (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the
      Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
      end
      of the period covered by this Report on Form 10-Q, have concluded that the
      Company's “disclosure controls and procedures” were effective as of the end of
      the period covered by this Report.





There
      were no significant changes in the Company’s internal controls or in other
      factors that could significantly affect the Company’s internal controls during
      the period covered by this Report.





Disclosure
      controls and procedures are the Company’s controls and other procedures that are
      designed to ensure that information required to be disclosed by the Company
      in
      the reports that we file or submit under the Exchange Act is recorded,
      processed, summarized and reported, within the time periods specified in the
      Securities and Exchange Commission’s rules and forms. Disclosure controls and
      procedures include, without limitation, controls and procedures designed to
      ensure that information required to be disclosed by us in the reports that
      we
      file under the Exchange Act is accumulated and communicated to our management,
      including our principal executive officer and principal financial officer,
      as
      appropriate to allow timely decisions regarding required
      disclosure.





31
 *Index*





**PART
      II. OTHER INFORMATION**








**ITEM1
      - LEGAL PROCEEDINGS**





**FMRI**


On
      November 3, 2003, an administrative law judge of the NRC granted a request
      of
      the State of Oklahoma for a hearing to challenge certain aspects of FMRI’s NRC
      License. The State of Oklahoma challenged a number of aspects of the NRC
      License, including the adequacy of site characterization, the appropriate
      modeling of the site of remediation levels, cost estimates, and sufficiency
      of
      the NRC Staff's environmental review. On May 26, 2004, the administrative law
      judge overseeing the proceeding issued his decision, finding in favor of FMRI
      and against the State of Oklahoma on all matters under consideration. The State
      of Oklahoma's ability to appeal the ruling of the administrative law judge
      expired on September 15, 2004 such that the ruling of the administrative law
      judge became final and non-appealable. Notwithstanding the victory by FMRI,
      the
      challenges by the State of Oklahoma, both to the NRC License and to confirmation
      of the Reorganization Plan, resulted in considerable additional expense and
      significant delays with respect to the implementation of the Decommissioning
      Plan, effectively precluding FMRI from undertaking to commence certain actions
      required by its NRC License. Among other things, the NRC License sets forth
      the
      benchmarks and timeline for the decommissioning of the Muskogee Facility.
      Specifically, the NRC License required FMRI (i) by September 1, 2004, to
      commence Phase 1 work of removing certain residue materials ("WIP") from the
      site and (ii) by March 31, 2006 to complete the removal of the WIP materials,
      taking into account preparation, scheduling, cost and weather. Realizing its
      inability to satisfy certain of its NRC License conditions, FMRI timely notified
      the NRC and commenced discussions with the NRC and third parties with a view
      to,
      as soon as possible and subject to available funding, commence and complete
      Phase 1 remediation. Such negotiations and discussions resulted in an April
      13,
      2005 amendment to the decommissioning trust that now permits an additional
      $2,500,000 to be drawn by FMRI to complete Phase 1 of the Decommissioning Plan.
      The amounts of these additional draws are dependent upon the weight of material
      disposed of offsite at the approved disposal site. Notwithstanding FMRI access
      to additional funding, FMRI has been unable, to date, to reach consensus with
      the NRC on modifications necessary to eliminate the violation of not starting
      on
      time the Phase 1 of the Decommissioning Plan, in part because certain conditions
      to the commencement of Phase 1 decommissioning still remain. As a result, FMRI
      remains in technical violation of its NRC License but did commence Phase 1
      decommissioning activities in September 2005. Fansteel can provide no assurance
      that FMRI will be able to reach consensus with the NRC and eliminate the
      existing violations. Notwithstanding FMRI’s violations, the obligations of
      Fansteel with respect to the Muskogee Facility are unchanged and remain limited
      to Fansteel’s obligations to FMRI under the FMRI Notes, as described in the
      Reorganization Plan.





On
      September 29, 2006 A&M Engineering and Environmental Services Inc.
      (“A&M”) filed suit in the District Court for Tulsa County, State of Oklahoma
      against FMRI, a special purpose subsidiary of Fansteel, and Penn Environmental
      & Remediation Inc (“Penn”). On April 27, 2005, A&M and FMRI entered into
      a contract to excavate, dry, bag, stage and transport residue material to an
      acceptable offsite depository. Penn was designated as the engineer for purposes
      of the contract. In May 2006, FMRI was notified by A&M that they were
      canceling the transportation portion of the contract, but continued to perform
      under the balance of the contract. A&M submitted change orders totaling $1.2
      million under the contract that required approval by the engineer. The changes
      orders were not approved. A&M subsequently filed suit. The three parties are
      discussing mediation to settle this dispute. In addition, FMRI believes it
      has
      counter claims against A&M for amounts well in excess of the $1.2 million
      claimed by A&M. FMRI cannot provide any assurance to a successful outcome
      and an unsuccessful outcome could hinder FMRI in its obligation to remediate
      the
      Muskogee Facility. Any exposure is limited to FMRI and not Fansteel.





32
 *Index*





**Washington
      Manufacturing Operation**





On
      December 31, 2004, the Company sold its special wire forms operation to
      Whitesell Corporation (“Whitesell” or “the buyer”). Pursuant to the asset
      purchase agreement (“APA”), the buyer had until March 1, 2005 to provide a
      closing statement of the final purchase price. On February 28, 2005, the buyer
      submitted a closing statement alleging that the Company owed $480,922 to the
      buyer. Per the APA, the Company had 30 days from receipt of the closing
      statement to object, then 20 days thereafter to negotiate a settlement and
      then
      submit any unresolved issues to an independent accounting firm for resolution.
      By agreement with the buyer, the 30-day objection period was extended for an
      additional 15 days to April 14, 2005. The Company reviewed the closing statement
      and on April 14, 2005 issued a Notice of Objection to buyer asserting that
      buyer
      owes Fansteel $441,266. The Buyer continued to dispute the Company’s purchase
      price calculation. Since a consensual resolution could not be achieved on all
      disputed items within the timeframe prescribed in the APA **,** disputed
      items of $203,000 were submitted to an independent accounting firm. In September
      2005, the Company also filed a demand for arbitration to the American
      Arbitration Association (AAA), in accordance with the APA, relating to three
      items that buyer included as a reduction of $554,000 in their closing price
      that
      the Company contends are not appropriate closing price adjustments. The
      determination by the independent accounting firm was received on August 26,
      2005, awarding $155,000 of the disputed items in the Company’s favor. The
      Company demanded payment of $339,000 owed by the buyer but received no response
      within the time period allowed in the purchase agreement.





In
      September 2005, the Company filed two (2) suits in the United States District
      Court for the Northern District of Illinois, Eastern Division, to recover monies
      owed and damages from Whitesell as a result of the Asset Purchase Agreement.
      Whitesell filed motions to dismiss both suits in November 2005. The Court held
      a
      Third status hearing on January 31, 2006, at which time the Court consolidated
      both of Fansteel’s suits into one action. A third status hearing, on March 21,
      2006, was postponed until April 18, 2006 to allow the Court time to rule on
      Whitesell’s motions. On April 10, 2006, Judge St. Eve of the Northern District
      of Illinois ruled, denying all of Whitesell’s motions, in their entirety, and
      including strong language as to the merit of Fansteel’s claims. At the next
      status hearing, on April 18, 2006, the Judge recommended mediation for
      settlement purposes, with a response required by April 26, 2006. Both parties
      responded that they would be willing to enter settlement discussions, and a
      settlement conference before a United States District Court Magistrate was
      scheduled for July 13, 2006. Fansteel and Whitesell moved forward with the
      litigation, participating in written discovery and document production pursuant
      to the scheduling order entered by the Court. On May 17, 2006, Whitesell filed
      a
      Motion to Change Venue, seeking that the case be transferred to the United
      States District Court for the Southern District of Iowa due to the presence
      of
      the majority of evidence, witnesses, and party contacts in the State of Iowa.
      The parties fully briefed Whitesell’s motion, which was strongly opposed by
      Fansteel. On July 11, 2006, Judge St. Eve granted Whitesell’s motion,
      transferring the case to the United States District Court for the Southern
      District of Iowa.





In
      December 2005, Whitesell sent a letter of renewal for the lease at Washington,
      IA. Fansteel responded that renewal was not accepted as Whitesell is in default
      of the lease for withholding rent payments since October 2005. A real estate
      firm was engaged to market the property and a sales campaign began in March
      2006. On April 17, 2006 Fansteel received notice of a suit filed in Iowa State
      Court by Whitesell requesting a temporary stay of Fansteel’s renting or selling
      the facility and determining that Whitesell is not in default under the Lease
      Agreement. The stay motion was scheduled to be heard on April 28, 2006 in Iowa
      State Court. However, Fansteel successfully removed Whitesell’s Iowa lawsuit to
      the United States District Court for the Southern District of Iowa and then
      filed a Motion to Dismiss, Transfer or Stay the Whitesell motions based upon
      the
      fact that, at the time, both of Fansteel’s Illinois lawsuits were pending before
      Judge St. Eve in the Northern District of Illinois. At a hearing on May 23,
      2006
      in the United States District Court for the Southern District of Iowa, Judge
      Charles Wolle denied Whitesell’s motion to return the case to state court and
      stayed all litigation in the Iowa court until the other Illinois litigation
      was
      resolved. On May 12, 2006, Whitesell filed the aforementioned Motion to Change
      Venue with the Northern District of Illinois, seeking to transfer the Illinois
      litigation to the Southern District of Iowa. Whitesell’s motion was granted on
      July 11, 2006 resulting in cancellation of the settlement conference scheduled
      for July 13, 2006.





33
 *Index*





The
      final
      arbitrator was selected for the AAA arbitration in Detroit in April 2006 with
      the Third teleconference call for the lawyers held on April 24, 2006. The
      arbitration panel was to determine if they have jurisdiction in the disputed
      items and whether Whitesell’s deductions from the purchase price were or were
      not proper. After receiving and considering extensive briefs, the Arbitration
      Panel heard oral arguments from counsel in a conference call on August 2, 2006.
      On August 9, 2006, the Arbitration Panel issued a favorable ruling for Fansteel
      by denying Whitesell’s motion to dismiss.





The
      parties met at the direction of the Court on August 31, 2006 for a settlement
      conference. No settlement was reached, but the parties continued to negotiate
      toward settlement subsequent to that conference.





On
      October 16, 2006, a settlement was reached with Whitesell. Mutual releases
      and
      dismissal of all lawsuits and arbitration were included as well as a payment
      of
      $268,246 to Fansteel for back rent and purchase price adjustment. In addition,
      the parties agreed to extend the lease of the Washington, IA property on a
      month-to-month basis and are in active negotiations for the sale of the
      Washington facility.





**Environmental
      Claims and Insurance Recoveries**





Certain
      environmental claims have been made against the Company by the EPA and various
      other regulatory agencies, entities and persons in connection with the
      investigation and cleanup of certain sites. Pursuant to the Reorganization
      Plan,
      all such claims were treated and resolved and as part of such treatment, the
      Company has sought recovery from certain of its insurers in respect of certain
      defense and cleanup costs relating to the claims. The Department of Justice
      notified the Company on April 29, 2005 that the NRC and other interested federal
      agencies did consent to the following settlements: On May 26, 2005, the Company
      reached agreement with Zurich American Insurance Company and Zurich
      International (Bermuda) Ltd. (collectively, "Zurich") and on April 18, 2005
      with
      KWELM Management Services Limited on behalf of the Scheme Administrator for
      KWELM in an insolvency proceeding under the laws of Great Britain and the Joint
      Liquidators for The Bermuda Fire & Marine Insurance Company (collectively,
      "KWELM"). Zurich agreed to a settlement providing for a cash settlement payment
      to the Company of $1.4 million, which was received on September 9, 2005.
      KWELM agreed to a Notified Scheme Claim totaling $400,000. Cash distributions
      in
      respect of the claims would be paid out to the Company in accordance with
      KWELM's approved Scheme of Arrangement. The Scheme administrator has represented
      that Fansteel can anticipate total cash payments equal to approximately 50%
      to
      57% of its Notified Scheme Claim (approximately $200,000 - $228,000). The
      initial cash distribution from KWELM of $205,874 was received on September
      4,
      2005 with a second distribution of $36,167 received on August 11, 2005, a third
      distribution of $88,263 received on December 27, 2005, a fourth distribution
      of
      $3,964 received on September 27, 2006, and a fifth distribution of $1,385
      received on October 28, 2006 for a total of $335,653, or 84% of the total claim.
      The proceeds of the settlements were used in accordance with the Reorganization
      Plan to pay certain professional fees and expenses related to such settlements.
      The net proceeds from the settlements were allocated in accordance with the
      Reorganization Plan and, among other things, resulting in prepayments under
      the
      FMRI Notes of $831,000, the FLRI Primary Note of $111,000 and the ED Note of
      $147,000 and payments aggregating $66,000 on account of EPA CERCLA claims.





34
 *Index*





**Other
      Legal Actions**





In
      May
      2005, a complaint for toxic injuries was filed by Garfield and Susan Perry
      against numerous defendants, including Wellman Dynamics, a wholly owned
      subsidiary of Fansteel Inc., claiming injuries related to exposure to products
      containing beryllium. The Company’s insurance carriers have been notified and
      are at least one carrier has agreed to pay for defending the
      Company.





In
      August
      2005, a complaint for wrongful death from exposure to asbestos was filed by
      the
      Estate of Ivan Hand against numerous defendants, including Fansteel Inc. The
      Company’s insurance carriers have been notified and are in the process of
      evaluating coverage. One insurance carrier has agreed to defend the
      Company.





During
      the third quarter 2006, Fansteel filed to close its bankruptcy case, as it
      believed all bankruptcy issues had been substantially resolved. On September
      23,
      2006, the Company received notice that the Department of Justice ("DOJ")
      objected to the case closure, stating that the Company had not responded to
      a
      letter requesting information regarding the status of various environmental
      remediation sites. The Company did not receive the DOJ letter until 2 days
      after
      the DOJ notice of objection was filed. The Company through legal counsel is
      in
      discussion with the DOJ to resolve their objection.





In
      October 2006 the Company filed a suit in the United States District Court for
      the Northern District of Illinois, Eastern Division, to recover monies owed
      from
      a customer for non-payment of $594,000 on a trade accounts receivable. The
      customer claims $157,000 of the amount owed is not due, but has refused to
      pay
      any amount owed. Settlement discussions are continuing.





From
      time
      to time, the Company is involved in routine litigation incidental to its
      business. The Company is not a party to or aware of any pending or threatened
      legal proceeding that it believes would have a material adverse effect on its
      results of operations or financial condition.





**ITEM
      1A - RISK FACTORS**





Investment
      in the Company’s securities involves a number of risk and uncertainties. Careful
      consideration should be given to the following risks, along with the cautionary
      statement regarding “forward-looking statements” in Part 1, Item 2 of this
      report and other information included in this report, before purchasing the
      Company’s securities. Besides the risks listed below, the Company faces risks
      that are currently unknown or that are currently consider to be immaterial,
      but
      may also impact business or adversely affect the Company’s financial condition
      or results of operations.





35
 *Index*





**Emergence
      From Bankruptcy**





On
      January 15, 2002 (the "Petition Date"), Fansteel Inc. and eight of its then
      subsidiaries (collectively, the "Debtors") filed voluntary petitions for
      reorganization relief under Chapter 11 of the U.S. Bankruptcy Code. After the
      Petition Date, the Predecessor Company (referring to the Company prior to the
      Effective Date) continued to operate its business and manage its affairs as
      debtor-in-possession ("DIP") with court approval for transactions outside the
      ordinary course of business. By order dated December 23, 2003, the U.S.
      Bankruptcy Court for the District of Delaware (the "Court") confirmed the Second
      Amended Joint Reorganization Plan (the "Reorganization Plan"). All the Debtors
      emerged from Chapter 11 of the U.S. Bankruptcy Code on January 23, 2004 (the
      "Effective Date").





The
      Reorganization Plan left the Company with significant environmental liabilities
      going forward that must be funded from continuing operations.





**Environmental
      Issues**





The
      Company has significant environmental issues, particularly in Muskogee, OK,
      that
      could have a material impact on the Company’s results. The ability of the
      Company to fund the clean up of this site could have a material adverse impact
      on the Company. For further details, see Note 5 - Discontinued Operations
      including Certain Environmental Remediation.





**High
      Level Of Debt**





The
      Company's high level of debt could have important consequences. The Company's
      ability to pay debt service and other contractual obligations will depend on
      the
      Company's future performance and cash flow generation, which in turn will be
      affected by prevailing economic and industry conditions and financial, business
      and other factors, many of which are beyond the Company's control. If the
      Company has difficulty providing for debt service or other contractual
      obligations in the future, the Company may be forced to take actions such as
      reducing or delaying capital expenditures, reducing costs, selling assets,
      refinancing or reorganizing its debt or other obligations and seeking additional
      equity capital, or any combination of the above. The Company may not be able
      to
      take any of these actions on satisfactory terms, or at all.





**The
      Company Has A Few Large Customers**




The
      Company sells parts to various companies whose end user, International Engine,
      accounts for a significant portion of the Company’s overall business. In the
      fourth quarter of 2004, the Company lost $8 million in annual sales for one
      part
      sold to International Engine, which was approximately 70% of the Company’s total
      sales to this customer. The loss of business resulted when International Engine
      converted the manufacturing of this part from an investment casting to a fine
      blanking. Fansteel does not produce fine blankings. While it is not anticipated,
      the Company cannot provide any assurance that it will have the ability to
      replace all loss of revenue or profit resulting from the loss of such business
      and could suffer a material adverse impact on its operations and financial
      condition as a consequence.





36
 *Index*





In
      addition to International Engine, the Company sells to several other customers
      that make up a significant portion of the Company’s total sales. While none of
      these customers individually represent more than 10% of sales, as a group they
      make up a considerable portion of the Company’s total sales. Although it is not
      anticipated, the loss of one or more of these customers would have a substantial
      impact on the Company’s operations and profitability.





A
      large
      portion of the Company’s sales is to a limited number of customers in the
      aerospace and automotive industries. While the Company has long-term
      relationships with these companies, there is no guarantee that these
      relationships will continue. In addition, these industries tend to be volatile.
      The United States automotive industry in particular has been unstable in recent
      years, with several large automotive companies struggling financially and some
      filing Chapter 11 bankruptcy.





**Competition**





Each
      of
      the Company’s businesses participates in markets that are highly competitive.
      Many of these competitors are much larger than the Company’s businesses, have
      greater name recognition, have more financial resources and can sell their
      products at prices lower than ours, giving them a greater competitive edge.
      The
      Company competes primarily on the basis of product quality, product performance,
      value, and long-term customer relationships. The competition that the Company
      faces in these markets may prevent the Company from achieving sales and profit
      goals, which could affect the Company’s financial condition and results of
      operations.





In
      addition the Company faces increased competition, primarily in the Industrial
      Metal Components business segment, from offshore sources, such as China, that
      offer lower production costs.





**Material
      Prices**





The
      Company started to experience raw material price increases beginning in 2004
      and
      these material price increases have continued into 2006. The Industrial Metal
      Components segment has been impacted particularly hard with some material prices
      nearly doubling from 2005 level. To offset these price increases, the Company
      began adding material surcharges in March 2004 and in 2006 the Company continues
      to add material surcharges where possible. There is no guarantee that the
      Company will be able to continue to pass on these material surcharges to its
      customers, and in fact, some customers have refused to accept these surcharges.





**Manufacturing
      in Foreign Countries**





The
      Company has a manufacturing facility in Mexico that is subject to currency
      exchange rate fluctuations. While foreign currency exchange rates have not
      had a
      significant impact on the Company’s financial condition in the past, there can
      be no certainty that exchange rates will not have a financial impact in the
      future.





**Liquidity
      of the Company Stock**





The
      Company has a limited number of shareholders and its stock is thinly
      traded.





37
 *Index*





**ITEM
      2- UNREGISTERED SALES OF SECURITIES AND USE OF
      PROCEEDS**




Pursuant
      to the Reorganization Plan, on the Effective Date, all outstanding shares of
      the
      Predecessor Company’s common stock, $2.50 par value, were cancelled.





The
      Reorganization Plan authorized the issuance of 3,600,000 shares of common stock,
      $.01 par value, of the Successor Company. The general unsecured creditors
      received approximately 50% stock ownership. The PBGC received approximately
      21%
      of the common stock being issued in the reorganization as part of the settlement
      of its claims related to the under-funding of the Company’s now-terminated
      Pension Plan. The common stockholders of the Predecessor Company received
      approximately 24% of the newly issued stock. Finally, 5% of the Successor
      Company’s common stock has been set-aside in an employees’ stock options plan,
      also approved as part of the confirmation.





**ITEM
      3 - DEFAULTS UPON SENIOR SECURITIES**




None.





**ITEM
      4 - SUBMISSIONOF MATTERS TO A VOTE OF SECURITY
      HOLDERS**




No
      matters were submitted to a vote of security holders during the third quarter
      of
      2006.




**ITEM
      5- OTHER INFORMATION**




None.





**ITEM
      6 - EXHIBITS**




Exhibit
                #
            
            Description
                of Exhibit31.1
            
            Certification
                by Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a)
                under
                the Securities Exchange Act of 1934, as adopted pursuant to Section
                203 of
                the Sarbanes-Oxley Act of 200231.2
            
            Certification
                by Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a)
                under
                the Securities Exchange Act of 1934, as adopted pursuant to Section
                203 of
                the Sarbanes-Oxley Act of 200232.1
            
            Certifications
                by Chief Executive Officer and Chief Financial Officer pursuant to
                18
                U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002





38
 *Index*





**SIGNATURES**





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





FANSTEEL
                INC.(Registrant)/s/
                Gary L. TessitoreGary
                L. TessitoreChairman
                of the Board, PresidentNovember
                10, 2006
            and
                Chief Executive Officer/s/
                R. Michael McEnteeR.
                Michael McEnteeVice
                President andNovember
                10, 2006
            Chief
                Financial Officer






39