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 MARCH 31, 2008
 
 OR
 
  ̈           TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD
 From 
____________ to ____________
 
 Commission
File Number 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   ̈
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check one).
  Large
      accelerated filer  ̈
                Accelerated
      filer  ̈
                Non-accelerated
      filer x
                Smaller
      reporting company  ̈
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes  ̈     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   ̈
 
 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 April 30, 2008Common
      Stock, $.01 par value
              
              3,420,000
      shares
  1
  FANSTEEL INC.
 FORM 10-Q
– INDEX
 MARCH 31,
2008
 
 
 PART
      I.
              FINANCIAL INFORMATION
              Page
      No.Item
      1
              Consolidated Financial StatementsConsolidated Statement of Operations (unaudited) – Three
      months ended March 31, 2008 and 2007
              3Consolidated Balance Sheet – March 31, 2008 (unaudited) and
      December 31, 2007
              4-5Consolidated Statement of Cash Flows (unaudited) – Three
      months ended March 31, 2008 and  2007
              6Notes to Unaudited Consolidated Financial
      Statements
              7-15Item
      2
              Management's Discussion and Analysis of Financial Condition
      and Results of Operations
              16-25Item
      3
              Quantitative and Qualitative Disclosures About Market
      Risk
              26Item
      4T
              Controls and Procedures
              26-27PART
      II
              OTHER INFORMATIONItem
      1
              Legal Proceedings
              28-30Item
      1A
              Risk Factors
              30-31Item
      2
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              32Item
      3
              Defaults Upon Senior Securities
              32Item
      4
              Submission of Matters to a Vote of Security
      Holders
              32Item
      5
              Other Information
              32Item
      6
              Exhibits
              32Signatures
              
              33Exhibit
      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 March 31, 2008
              
              
              Three
      Months Ended March 31, 2007Net
      Sales
              
              $
              19,986,144
              
              
              $
              18,332,796Cost
      and ExpensesCost
      of products sold
              
              
              16,877,098
              
              
              
              15,581,411Selling,
      general and administrative
              
              
              1,780,423
              
              
              
              1,557,11718,657,521
              
              
              
              17,138,528Operating
      Income
              
              
              1,328,623
              
              
              
              1,194,268Other
      ExpenseInterest
      expense
              
              
              (390,948
              )
              
              
              (367,989
              )Other
              
              
              (47,724
              )
              
              
              (41,661
              )(438,672
              )
              
              
              (409,650
              )Income
      from Continuing Operations Before Income Taxes
              
              
              889,951
              
              
              
              784,618Income
      Taxes
              
              
              -
              
              
              
              -Net
      Income from Continuing Operations
              
              
              889,951
              
              
              
              784,618Loss
      from Discontinued Operations
              
              
              (791,479
              )
              
              
              (795,335
              )Net
      Income (Loss)
              
              $
              98,472
              
              
              $
              (10,717
              )Weighted
      Average Number of Common Shares Outstanding
              
              
              3,420,000
              
              
              
              3,420,000Basic
      and Diluted Net Income (Loss) per ShareaContinuing
      Operations
              
              $
              0.26
              
              
              $
              0.23Discontinued
      Operations
              
              
              (0.23
              )
              
              
              (0.23
              )Net
      Income (Loss)
              
              $
              0.03
              
              
              $
              0.00
   See Notes
to Consolidated Financial Statements
   a Basic
earnings per share and diluted earnings per share are the
same.
 3
 Index
  Fansteel Inc.
 Consolidated
Balance Sheet
 
  March 31, 2008
                (Unaudited)
              
              
              December
      31, 2007ASSETSCurrent
      assetsCash
      and cash equivalents
              
              $
              16,292
              
              
              $
              298,352Accounts
      receivable, less allowance of $189,000 and $170,000 at March 31, 2008 and
      December 31, 2007, respectively
              
              
              10,384,033
              
              
              
              10,568,513InventoriesRaw
      material and supplies
              
              
              1,660,048
              
              
              
              1,308,731Work-in
      process
              
              
              9,031,550
              
              
              
              8,554,360Finished
      goods
              
              
              565,323
              
              
              
              574,686Total
      inventories
              
              
              11,256,921
              
              
              
              10,437,777Prepaid
      expenses
              
              
              1,512,037
              
              
              
              1,830,489Total
      current assets
              
              
              23,169,283
              
              
              
              23,135,131Property,
      plant and equipmentLand
              
              
              917,419
              
              
              
              917,419Buildings
              
              
              4,125,459
              
              
              
              4,122,886Machinery
      and equipment
              
              
              8,422,979
              
              
              
              8,103,28713,465,857
              
              
              
              13,143,592Less
      accumulated depreciation
              
              
              4,420,699
              
              
              
              4,140,642Net
      property, plant and equipment
              
              
              9,045,158
              
              
              
              9,002,950Other
      assetsDeposits
              
              
              660,799
              
              
              
              660,799Reorganization
      value in excess of amounts allocable to identified assets
              
              
              12,893,734
              
              
              
              12,893,734Property
      held for sale
              
              
              720,000
              
              
              
              1,178,116Other
              
              
              351,674
              
              
              
              337,652Total
      other assets
              
              
              14,626,207
              
              
              
              15,070,301$
              46,840,648
              
              
              $
              47,208,382
   See Notes to Consolidated Financial
Statements
  4
 Index
  Fansteel
Inc.
 Consolidated
Balance Sheet
  
 March 31, 2008
                (Unaudited)
              
              
              December
      31, 2007LIABILITIES
      AND SHAREHOLDERS' DEFICITCurrent
      liabilitiesAccounts
      payable
              
              $
              7,782,909
              
              
              $
              7,589,036Accrued
      liabilities
              
              
              7,896,087
              
              
              
              8,040,875Short-term
      borrowings
              
              
              13,854,077
              
              
              
              15,010,884Current
      maturities of long-term debt
              
              
              3,825,933
              
              
              
              900,254Total
      current liabilities
              
              
              33,359,006
              
              
              
              31,541,049Long-term
      debt, less current maturities
              
              
              3,861,646
              
              
              
              6,491,265Other
      liabilitiesEnvironmental
      remediation
              
              
              21,333,760
              
              
              
              20,989,571Non-current
      pension liability
              
              
              716,992
              
              
              
              716,992Total
      other liabilities
              
              
              22,050,752
              
              
              
              21,706,563Total
      liabilities
              
              
              59,271,404
              
              
              
              59,738,877Minority
      interest
              
              
              191,220
              
              
              
              180,777Shareholders'
      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
              
              
              (12,852,671
              )
              
              
              (12,951,143
              )Accumulated
      other comprehensive loss
              
              
              (99,819
              )
              
              
              (90,643
              )Total
      shareholders’ deficit
              
              
              (12,621,976
              )
              
              
              (12,711,272
              )Total
      liabilities and shareholders' deficit
              
              $
              46,840,648
              
              
              $
              47,208,382
 
 
 See Notes
to Consolidated Financial Statements
  5
 Index
  Fansteel Inc.
 Consolidated
Statement of Cash Flows
 (Unaudited)
 
 Three
      Months
              
              
              Three
      MonthsEnded
              
              
              EndedMarch
      31, 2008
              
              
              March
      31, 2007Cash
      Flows From Operating Activities:Net
      income (loss)
              
              $
              98,472
              
              
              $
              (10,717
              )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
              
              
              280,057
              
              
              
              231,077Minority
      interest expense
              
              
              10,443
              
              
              
              -Accretion
      on long-term debt and other liabilities
              
              
              42,664
              
              
              
              53,506Loss
      from discontinued operations
              
              
              791,479
              
              
              
              795,335Change
      in assets and liabilities:Decrease
      in accounts receivable
              
              
              134,735
              
              
              
              265,599(Increase)
      decrease in inventories
              
              
              (819,144
              )
              
              
              496,938Decrease
      in prepaid expenses
              
              
              304,512
              
              
              
              372,733Increase
      (decrease) in accounts payable and accrued liabilities
              
              
              328,074
              
              
              
              (624,604
              )Increase
      (decrease) in income taxes payable
              
              
              7,155
              
              
              
              (1,188
              )Increase
      in other assets
              
              
              (14,022
              )
              
              
              (11,885
              )Net
      cash provided by operating activities
              
              
              1,164,425
              
              
              
              1,566,794Cash
      Flows From Investing Activities:Capital
      expenditures
              
              
              (322,265
              )
              
              
              (239,582
              )Net
      cash used in investing activities
              
              
              (322,265
              )
              
              
              (239,582
              )Cash
      Flows From Financing Activities:Proceeds
      from long-term borrowing
              
              
              1,000,000
              
              
              
              -(Payments)
      proceeds on short-term borrowing
              
              
              (1,157,089
              )
              
              
              332,109Payments
      on long-term debt
              
              
              (80,646
              )
              
              
              (76,578
              )Net
      cash (used in) provided by financing activities
              
              
              (237,735
              )
              
              
              255,531Net
      Increase in Cash and Cash Equivalents from Continuing
      Operations
              
              
              604,425
              
              
              
              1,582,743Cash Flows of Discontinued
      Operations:Operating
      cash flows
              
              
              (1,344,601
              )
              
              
              (1,582,727
              )Investing
      cash flows
              
              
              458,116
              
              
              
              -Total
      Cash Flows of Discontinued Operations
              
              
              (886,485
              )
              
              
              (1,582,727
              )Net
      (Decrease) Increase in Cash and Cash Equivalents
              
              
              (282,060
              )
              
              
              16Cash
      and Cash Equivalents at Beginning of Period
              
              
              298,352
              
              
              
              17,672Cash
      and Cash Equivalents at End of Period
              
              $
              16,292
              
              
              $
              17,688Supplemental
      disclosures of cash flow information:Cash
      paid during the year for:Interest
              
              $
              311,351
              
              
              $
              293,447Income
      taxes (refunds)
              
              
              7,155
              
              
              
              (1,188
              )
 
  See Notes
to Consolidated Financial Statements
  6
 Index
  Notes toUnaudited Consolidated Financial Statements
 
 
 Note
1 - Description of Business
 
 The
consolidated financial statements as of and for the periods ending March 31,
2008 and March 31, 2007 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 for the
three months ended March 31, 2008 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2008.
 
 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 military and commercial aerospace, automotive, energy, agricultural
and construction machinery, lawn and garden equipment, marine, plumbing and
electrical hardware, flow control valves and pumps, and general
industrial.
 
 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 purpose subsidiaries included as part of discontinued
operations that were established solely for the obligation of remediation of
environmental issues at former operations of the Company as part of the Second
Amended Joint Reorganization Plan (the "Reorganization Plan") that was effective
January 23, 2004 (the "Effective Date").
 
 The
consolidated financial statements include the accounts of Fansteel Inc. and its
subsidiaries.  Inter-company accounts and transactions have been
eliminated in consolidation. Key managers of Wellman Dynamics Corporation
(“Wellman”), a wholly owned subsidiary of Fansteel included in the Advanced
Structures segment, were granted 12 shares of Wellman stock in the second
quarter 2007, and in conjunction with this grant, compensation expense of
$164,000 was recorded. Fansteel’s ownership in Wellman was reduced to 98.8%
after the grant.
 
 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.
  7
 Index
  Note
2 – Earnings (Loss) 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.
 
 The
following table sets forth the computation of basic and diluted earnings per
share:
 
 Three
      Months EndedNumerator:
              
              March
      31, 2008
              
              
              March
      31, 2007Net
      income (loss)
              
              $
              98,472
              
              
              $
              (10,717
              )Denominator:Denominator
      for basic earnings per share- weighted average shares
              
              
              3,420,000
              
              
              
              3,420,000Effect
      of dilutive securitiesEmployee
      stock options
              
              
              -
              
              
              
              -Employee
      restricted stock
              
              
              -
              
              
              
              -Dilutive
      potential common shares
              
              
              3,420,000
              
              
              
              3,420,000Basic
      earnings per share
              
              $
              0.03
              
              
              $
              0.00Diluted
      earnings per share
              
              $
              0.03
              
              
              $
              0.00
 
  Note
3 - Discontinued Operations including Certain Environmental
Remediation
  Muskogee
Facility
 
 The
Company prior to the Effective Date (“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.
  8
 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 and
transfer 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, which was required to
be applied upon reemergence from Chapter 11 bankruptcy, 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. Phase 1 is behind schedule, but continued
into 2008.  The NRC has been kept informed on the status of the
decommissioning activities and was notified that FMRI’s current plans are only
to continue maintenance and safety controls on the site after 2008 until
sufficient funds are in place to complete Phase 1 activities, anticipated to
begin in late 2010. Completion of Phase 1 is scheduled for 2012. At March 31,
2008 and December 31, 2007, the gross estimated liability was $27,423,000 and
$27,654,000, respectively, and the recorded discounted liability, using a
discount rate of 11.3%, was $17,456,000 and $17,111,000,
respectively.
 
 FMRI can
draw up to $4.5 million from an existing decommissioning trust owned by Fansteel
established in accordance with the Amended Decommissioning Trust Agreement with
the NRC.  Draws against the decommissioning trust may be made on a
revolving basis as long as the aggregate amounts outstanding under such draws
shall not exceed $2 million and provided certain terms and conditions are
satisfied.  On April 13, 2005, the decommissioning trust was amended,
with the consent of the NRC, to allow additional draws of up to $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, among other things, the
weight of material disposed of offsite at the approved disposal site. Consistent
with the NRC License, FMRI in April 2004 drew $525,000 from the
Trust.  In the second quarter of 2005, FMRI drew an additional
$500,000 from the Trust.  In the third quarter of 2005, FMRI drew an
additional $1,160,000 from the Trust.  In 2005, Fansteel prepaid
$768,000 to FMRI from net insurance proceeds, which FMRI used to reduce amounts
owing to the Trust. In 2006, FMRI drew an additional $652,000 and Fansteel
prepaid $70,000 to FMRI from insurance proceeds. In 2007, FMRIdrew an additional
$776,000 from the Trust, bringing total draws from the Trust to $2.8 million at
December 31, 2007. In the first three months of 2008, FMRIdrew an additional
$629,000 from the Trust, bringing total draws from the Trust to $3.4 million at
March 31, 2008.
 
 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.  On September 12, 2007, FLRI received notice
that the Kentucky Department for Environmental Protection had accepted the site
characterization report that had been submitted and that FLRI should prepare the
Corrective Action Plan for the site. 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. During 2007, new estimates of costs to complete the
remediation reduced the gross liability by $324,000. At March 31, 2008 and
December 31, 2007, the gross estimated liability was $858,000 and $875,000,
respectively, and the recorded discounted liability, using a discount rate of
11.3%, was $841,000 and $857,000, respectively.
  9
 Index
  The land
and building of the Lexington facility are included on the balance sheet as
property held for sale at $720,000, which includes a reduction of $608,000 made
in September 2007 based on the latest appraisal of its current market value. A
number of third parties had expressed interest in purchasing this
facility.  In the second quarter of 2007, FLRI entered into a right of
first refusal agreement to purchase the property with a third party for their
maintenance of the site. On November 1, 2007, FLRI executed a lease with an
option to purchase at fair market value with this third party.  FLRI
is in negotiations with the KNREPC and the Lessee to finalize the transfer of
the property and obligation to remediate the site.
 
 Actual
costs to be incurred in future periods to decommission the Muskogee facility and
the Lexington facility 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.
 
 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 six months after issuance. In July 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 all the payments due under the
promissory note as of September 2007, and therefore, there is no further
liability.
  10
 Index
  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” to Whitesell Corporation (“Whitesell”), a customer of Washington
Manufacturing.
 
 Whitesell
had been leasing the buildings of Washington Manufacturing until it vacated in
December 2006 at which time the Company began to actively try to sell the
Washington Manufacturing property and classified it as property held for sale in
the accompanying balance sheet.   In December 2006 the value of
the property was reduced by $738,000 to reflect current market value, less
selling costs. On January 22, 2008, the Company entered into an agreement with a
buyer for the purchase of the remaining assets at the Washington Manufacturing
facility for $475,000, which is approximately equal to the book value. The
Company closed on the sale of this property onMarch 13,
2008.
 
 Results
of Discontinued Operations
 
 The
operations described above are classified as discontinued operations for all
periods presented.
 
 Discontinued
operations reported losses of $791,000and $795,000 for the
three months ended March 31, 2008 and March 31, 2007,
respectively.  The losses for both time periods relate primarily to
the accretion of discounted environmental liabilities arising from the Company's
unsecured note obligations to its special purpose subsidiaries and the pension
note for the terminated pension plan.
 
 The
components of net liabilities of discontinued operations, which are included on
the Consolidated Balance Sheet, consist of the following at March 31, 2008 and
December 31, 2007:
 
 
 March 31,
                2008
              
              
              December
      31,
                2007Cash
              
              $
              449,511
              
              
              $
              855,712Other
      notes and accounts receivable
              
              
              -
              
              
              
              49,745Prepaid
      expenses
              
              
              50,667
              
              
              
              64,607Property
      held for sale
              
              
              720,000
              
              
              
              1,178,116Total
      assets
              
              $
              1,220,178
              
              
              $
              2,148,180Current
      liabilities
              
              $
              491,841
              
              
              $
              812,742Long-term
      debt (PBGC note)
              
              
              4,588,351
              
              
              
              5,213,971Environmental
      remediation
              
              
              18,297,217
              
              
              
              17,967,503Total
      liabilities
              
              $
              23,377,409
              
              
              $
              23,994,216Net
      liabilities of discontinued operations
              
              $
              22,157,231
              
              
              $
              21,846,036
  11
 Index
  Note
4 - 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 $2,166,000 through 2009.  At March 31,
2008 and December 31, 2007 the gross estimated liability was $1,852,000 and
$1,877,000, respectively, and the recorded discounted liability, using a
discount rate of 11.3%, was $1,816,000 and $1,834,000,
respectively.
 
 Wellman
is permitted to operate a sanitary landfill for the disposal of its foundry
sand.  It is anticipated that, based upon current regulation and
projections by third-party consultants, Wellman is likely to be required to
close the landfill no earlier than 2018 at a future cost approximating
$1,166,000. Changes in regulations for non-public landfills may result in
closure at an earlier date, which cannot be determined from current information
known. The recorded discounted liability, using a discount rate of 11.3%, at
March 31, 2008 and December 31, 2007 was $631,000 and $613,000,
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 March 31, 2008 and December 31,
2007 was $590,000 and $575,000, 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.
 
 
 Note
5 - Debt
 
 In order
to increase the Company’s liquidity and ability to meet operational and
strategic needs, Fansteel Inc. and its subsidiary, Wellman Dynamics Corporation,
as borrowers, entered into a Loan and Security Agreement with Fifth Third Bank
(Chicago), as lender, on July 15, 2005 with an original principal amount of
$15,000,000. 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 sought to
increase its revolving line of credit above the $15 million level. Accordingly,
this loan agreement with Fifth Third Bank was amended on December 4,
2006.
  12
 Index
  Under the
December 4, 2006 amended loan facility, subject to certain borrowing conditions,
the Company could incur revolving loans, credit card charges and letter of
credit issuances in an amount up to $21.5 million from a borrowing base
comprised of a percentage of eligible accounts receivable and inventories and $2
million for machinery and equipment.  Revolving loans included $1.5
million for borrowing under credit cards issued by the Lender, not subject to
the borrowing base. The term was extended with revolving loans due and payable
in full on January 5, 2009. 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 June
5, 2007, the Company and Fifth Third Bank again amended the loan facility,
increasing the maximum revolving loan amount to $22.5
million.  Revolving loans were amended to include $1.5 million for
borrowing that is not subject to the borrowing base limits.  Amounts
borrowed as part of the $1.5 million were charged interest at prime rate plus
one percentage point.  The $1.5 million borrowing revolving note was
scheduled to terminate on September 30, 2007.
 
 On
September 12, 2007, the Company amended its Loan and Security Agreement with
Fifth Third Bank for the third time.  Under this amended loan
facility, subject to certain borrowing conditions, the Company may incur
revolving loans in an amount up to $21.5 million from a borrowing base comprised
of a percentage of eligible accounts receivable and inventories and $2 million
for machinery and equipment until March 2, 2009. Revolving loans were amended to
eliminate $1.5 million for borrowing that is not subject to the borrowing base
limits.  A term loan for a maximum of $3 million was added to the loan
facility.  Draws on the term loan could be made until February 29,
2008, at which time the Company drew the maximum $3 million. Interest on the
term loan is at 13%.  The term loan includes a success fee of 3% to 7%
of principal amount repaid before March 2, 2009 depending on when the repayment
occurs. Fansteel Inc. pledged its 1,000 shares of Wellman stock as security for
the term loan.
 
 At March
31, 2008 the Company had letters of credit of $770,000 under its Loan and
Security Agreement with Fifth Third Bank for casualty insurance collateral and
environmental assurance with an interest rate of 1.5%. The Company’s credit
availability was $1,906,000 at March 31, 2008.  Borrowing under the
revolving line of credit is included as short-term borrowings. Borrowing from
the term loan under the credit facility is included as current portion of
long-term debt for $3,000,000 at March 31, 2008 and long-term debt of $2,000,000
at December 31, 2007.
 
 
 Note
6 - 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.
  13
 Index
  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 March
31, 2008 and December 31, 2007, the Company had potential federal and state
income tax benefits from net operating loss carry-forwards of $22.3 million, which expire in
various years through 2023. Valuation allowances have been recorded for the full
amount of all net operating loss carry-forwards and the other deferred tax
assets as the net operating loss carry-forwards and other deferred tax assets
are not anticipated to be realized before expiration.
 
 The
Company does not expect a significant increase or decrease in unrecognized tax
benefits within the next twelve months. The Company and its subsidiaries file
income tax returns in various tax jurisdictions, including the United States and
several states. The Company has substantially concluded all U.S. Federal and
State income tax matters for the period up to and including 2002.
 
 
 Note
7 - Business Segments
 
 The
Company is a manufacturer of engineered metal components used in a variety of
markets including military and commercial aerospace, automotive, energy,
agricultural and construction machinery, lawn and garden equipment, marine,
plumbing and electrical hardware, flow control, valve and pump and general
industrial. 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.
 
 Financial
information concerning the Company's segments is as follows:
 
 Three
      Months EndedNet
      Sales:
              
              March
      31, 2008
              
              
              March
      31, 2007Advanced
      Structures
              
              $
              11,591,814
              
              
              $
              10,941,717Industrial
      Metal Components
              
              
              8,394,330
              
              
              
              7,391,079Total
      Net Sales
              
              $
              19,986,144
              
              
              $
              18,332,796Operating
      Income:Advanced
      Structures
              
              $
              911,740
              
              
              $
              846,354Industrial
      Metal Components
              
              
              416,883
              
              
              
              347,914Total
      Operating Income
              
              $
              1,328,623
              
              
              $
              1,194,268
  14
 Index
  The
identifiable assets by business segment, for the periods indicated, are set
forth below:
 
 Identifiable
      assets:
              
              March
      31, 2008
              
              
              December
      31, 2007Advanced
      Structures
              
              $
              19,033,133
              
              
              $
              19,520,969Industrial
      Metal Components
              
              
              11,169,930
              
              
              
              10,139,992Corporate
              
              
              15,417,407
              
              
              
              15,399,241Discontinued
              
              
              1,220,178
              
              
              
              2,148,180Total
      Assets
              
              $
              46,840,648
              
              
              $
              47,208,382
 
 Depreciation
and capital expenditures by business segment, for the periods indicated, are set
forth below:
  Three
      Months EndedDepreciation
      and amortization:
              
              March
      31, 2008
              
              
              March
      31, 2007Advanced
      Structures
              
              $
              133,662
              
              
              $
              112,633Industrial
      Metal Components
              
              
              140,596
              
              
              
              113,880Corporate
              
              
              5,799
              
              
              
              4,564Total
      depreciation and amortization
              
              $
              280,057
              
              
              $
              231,077Capital
      expenditures:Advanced
      Structures
              
              $
              203,131
              
              
              $
              130,031Industrial
      Metal Components
              
              
              98,265
              
              
              
              109,551Corporate
              
              
              20,869
              
              
              
              -Total
      capital expenditures
              
              $
              322,265
              
              
              $
              239,582
  15
 Index
  ITEM2 - MANAGEMENT'S DISCUSSION 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 March 31, 2008 As Compared To Three Months Ended March 31,
2007
  Net
Sales
 
 The
following table sets forth the combined net sales of the Company included in the
consolidated statement of operations:
 
 Three
      Months Ended
                March
      31, 2008
              
              
              Three
      Months Ended
                March
      31, 2007Advanced
      Structures
              
              $
              11,591,814
              
              
              $
              10,941,717Industrial
      Metal Components
              
              
              8,394,330
              
              
              
              7,391,079$
              19,986,144
              
              
              $
              18,332,796
 
 Consolidated
Company net sales of $19,986,000 for the three months ended March 31, 2008
increased $1.7 million, or 9.0%, compared to net sales of $18,333,000 for the
three months ended March 31, 2007. Both business segments showed improvement,
with the investment casting operation in the Industrial Metal Components segment
leading the sales growth.
 
 For the
three months ended March 31, 2008, Advanced Structure net sales increased by
$650,000, or 5.9%, compared to the three months ended March 31,
2007.  Sand casting sales to the private jet, regional jet and
commercial air markets provided most of the improvement, which was partially
offset by a decrease in military flight sales. Tooling sales for the first three
months of 2008 were also lower as the first three months of 2007 included
tooling for a large program, while no significant programs have yet been
completed in 2008.
 
 Net sales
for the Industrial Metal Components segment increased $1,003,000, or 13.6%, for
the three months ended March 31, 2008 compared with the three months ended March
31, 2007.  Net sales of investment castings increased by $778,000, or
18.5%, with improvement in most product lines, led by the automotive line, which
has benefited from engine programs for diesel engine components.Powdered metal
components sales improved $225,000, or 7.1%, due to improvements in automotive
and lawn and garden product lines.Included in this
segment’s sales are surcharges for increased metal costs in the first quarter of
2008 of $1.0 million, which were $49,000 less than the first quarter of 2007.
While material prices have continued to rise, some customers have requested new
pricing rather than surcharges.
  16
 Index
  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:
 
 Three
      Months Ended
                March
      31, 2008
              
              
              %
      Of
                Net
      Sales
              
              
              Three
      Months Ended
                March
      31, 2007
              
              
              %
      Of
                Net
      SalesAdvanced
      Structures
              
              $
              9,894,606
              
              
              
              85.4%
              
              
              $
              9,346,865
              
              
              
              85.4%Industrial
      Metal Components
              
              
              6,982,492
              
              
              
              83.2%
              
              
              
              6,234,546
              
              
              
              84.4%$
              16,877,098
              
              
              
              84.4%
              
              
              $
              15,581,411
              
              
              
              85.0%
 
 Cost of
products sold of $16.9 million for the three months ended March 31, 2008
increased by $1.3 million compared to $15.6 million for the three months ended
March 31, 2007, due largely to the increase in sales volume. As a percent of
sales, cost of products sold improved to 84.4% in 2008 compared to 85.0% in
2007.
 
 In the
Advanced Structures segment cost of products sold of $9.9 million for the three
months ended March 31, 2008 increased $548,000 compared with cost of products
sold of $9.3 million for the three months ended March 31, 2007. Cost of products
sold increased due to the higher volume, increased material costs and more
outside service costs, which were offset by reduced scrap and improved overhead
costs.As a percent
of net sales, cost of products remained flat at 85.4% in the first three months
of 2008 compared with the first three months of 2007.
 
 The
Industrial Metal Components’ cost of products sold were $7.0 million for the
three months ended March 31, 2008 compared to cost of products sold of $6.2
million for the three months ended March 31, 2007.  Higher volume and
increased material costs accounted for the majority of the increase. As a
percent of net sales, cost of products improved to 83.2% for the first three
months of 2008 compared with 84.4% for the first three months of 2007 as a
result of the higher volume and lower overhead costs.
 
 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:
 
 Three
      Months Ended March 31, 2008
              
              
              %
      Of
                Net
      Sales
              
              
              Three
      Months Ended March 31, 2007
              
              
              %Of
                Net
      SalesAdvanced
      Structures
              
              $
              785,468
              
              
              
              6.8%
              
              
              $
              748,498
              
              
              
              6.8%Industrial
      Metal Components
              
              
              994,955
              
              
              
              11.9%
              
              
              
              808,619
              
              
              
              10.9%$
              1,780,423
              
              
              
              8.9%
              
              
              $
              1,557,117
              
              
              
              8.5%
  17
 Index
  Selling,
general and administrative expenses for the first three months of 2008 were
$1,780,000 compared with $1,557,000 in the first three months of 2007, due
largely to higher commissions, payroll costs and professional fees. As a percent
of sales, selling, general and administrative expenses increased to 8.9% in the
first three months of 2008 compared with 8.5% for the first three months of
2007.
 
 In the
Advanced Structures segment, selling, general and administrative expenses for
the three months ended March 31, 2008 increased by $37,000, or 4.9%, compared
with the three months ended March 31, 2007 due to increased payroll and sales
commissions. As a percent of sales, selling, general and administrative expenses
remained flat at 6.8% for both time periods.
 
 Selling,
general and administrative expenses for Industrial Metal Components segment for
the three months ended March 31, 2008 increased$186,000, or 23.0%,
compared with the three months ended March 31, 2007 due to higher sales
commissions, employment recruiting expenses, professional fees and payroll
costs.  As a percent of sales, selling, general and administrative
expenses increased to 11.9% compared with 10.9%, as the volume increase did not
offset the cost increases.
 
 Operating
Income
 
 The
following table sets forth the combined operating income of the Company included
in the consolidated statement of operations:
 
 
 Three
      Months Ended
                March
      31, 2008
              
              
              %
      Of
                Net
      Sales
              
              
              Three
      Months Ended
                March
      31, 2007
              
              
              %
      Of
                Net
      SalesAdvanced
      Structures
              
              $
              911,740
              
              
              
              7.9%
              
              
              $
              846,354
              
              
              
              7.7%Industrial
      Metal Components
              
              
              416,883
              
              
              
              5.0%
              
              
              
              347,914
              
              
              
              4.7%$
              1,328,623
              
              
              
              6.6%
              
              
              $
              1,194,268
              
              
              
              6.5%
 
 Operating
income for the three months ended March 31, 2008 increased $134,000 compared to
the three months ended March 31, 2007,with both segments providing
nearly equal improvements. Operating income as a percent of sales improved
slightly to 6.6% for the three months ended March 31, 2008 compared with 6.5%
for the three months ended March 31, 2007.
 
 Advanced
Structures operating income of $912,000for the three months
ended March 31, 2008 increased $66,000 from operating income of $846,000 for the
three months ended March 31, 2007. Operating income as a percent of sales
improved to 7.9% for the three months ended March 31, 2008 compared with 7.7%
for the three months ended March 31, 2007. Higher volume, reduced scrap and
lower overhead costs provided the majority of the improvement.
 
 Industrial
Metal Components had operating income of $417,000 for the three months ended
March 31, 2008 compared to operating income of $348,000 for the three months
ended March 31, 2007, an increase of $69,000. Segment operating income as a
percent of sales improved to 5.0% for the three months ended March 31, 2008
compared with 4.7% for the three months ended March 31, 2007. The higher volume
and lower overhead costs were the key factors in this
improvement.
  18
 Index
  Other Expenses
 
 The
following table sets forth the combined other expenses of the Company included
in the consolidated statement of operations:
 
 Three
      Months Ended
                March
      31, 2008
              
              
              Three
      Months Ended
                March
      31, 2007Interest
      expense
              
              $
              (390,948
              )
              
              $
              (367,989
              )Other
              
              
              (47,724
              )
              
              
              (41,661
              )$
              (438,672
              )
              
              $
              (409,650
              )
 
 Other
expenses increased $29,000 for the three months ended March 31, 2008 compared to
the three months ended March 31, 2007 due to largely to increased borrowings
from the revolving line of credit, including the term loan.
 
 Discontinued
Operations
 
 Discontinued
operations reported a loss of $791,000 for the three months ended March 31, 2008
and a loss of $795,000 for the three months ended March 31, 2007. The losses 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.
 
 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 net income of $98,000 for the three months ended March 31, 2008 and
a net loss of $11,000 for the three months ended March 31, 2007.
 
 Liquidity
and Capital Resources
  On March
31, 2008 and December 31, 2007, the Company had cash of $16,000 and $298,000
respectively.
 
 Continuing
operations provided cash of $604,000for the three months
ended March 31, 2008, due mostly to operating activities of $1,164,000.
Excluding net debt payments of $238,000, continuing operations
provided $842,000 for the three months ended March 31, 2008. Discontinued
operations used $886,000 for the three months ended March 31, 2008, primarily
for funding the on-going environmental remediation at the Muskogee, Oklahoma
property, but were partially offset by the March 2008 sale of the Washington
Manufacturing property that provided $458,000.
 
 For the
three months ended March 31, 2007, cash from continuing operations increased
$1,583,000, due largely to improvements in working capital.Excluding borrowings,
continuing operations have provided $1,327,000 in the first three months of
2007. Cash flows from discontinued operations used $1,583,000 for the three
months ended March 31, 2007, primarily for funding the on-going environmental
remediation at the Muskogee, Oklahoma property.
  19
 Index
 
 Operating
Activities
 
 For the
three months ended March 31, 2008, operating activities provided $1,164,000 in
cash with improvements in working capital coming from decreases in receivables
and prepaids, increases in accounts payable and accrued liabilities partially
offset by increases in inventories.  Accounts receivable decreased by
$135,000 due to strong collections and a 1-day decrease in days outstanding.
Inventories increased by $819,000 due to the higher sales demand.
 
 For the
three months ended March 31, 2007, operating activities provided $1,567,000 in
cash. Accounts receivable decreased by $266,000,despite higher sales,
due to strong collections. Days outstanding were 56 days, a decrease of 8 days
in the quarter.
Inventories decreased by $497,000as customers took
releases in January that had been held at year-end 2006.Accounts payable and
accrued liabilities decreased by $625,000 due to the timing of payments to trade
vendors.
 
 Investing
Activities
 
 For the
three months ended March 31, 2008, investing activities used $322,000for capital
expenditures, primarily for replacement equipment and upgrades for both business
segments.
 
 For the
three months ended March 31, 2007, investing activities consumed $240,000 for
capital expenditures for capacity expansion and replacement equipment for both
business segments.
 
 Financing
Activities
 
 Financing
activities used $238,000 for the three months ended March 31, 2008. Borrowings
for 2008 from the term loan within the revolving line of credit with Fifth Third
were $1,000,000 for funding operations, capital expenditures and environmental
remediation of discontinued operations. Payments of $1,157,000 were made in 2008
for short-term borrowings from the revolving line of credit. Payments of $81,000
in 2008 of long-term debt were for loans from various economic agencies in
Pennsylvania.
 
 Financing
activities provided $256,000 for the three months ended March 31, 2007. For the
first three months of 2007, short-term borrowings from the revolving line of
credit with Fifth Third Bank were $332,000. Payments of long-term debt in the
first three months of 2007 were $77,000 for loans from various economic agencies
in Pennsylvania.
 
 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 with an original principal
amount of $15,000,000. 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
sought to increase its revolving line of credit above the $15 million level.
Accordingly, this loan agreement with Fifth Third Bank was amended on December
4, 2006.
  20
 Index
  Under the
December 4, 2006 amended loan facility, subject to certain borrowing conditions,
the Company could incur revolving loans, credit card charges and letter of
credit issuances in an amount up to $21.5 million from a borrowing base
comprised of a percentage of eligible accounts receivable and inventories and $2
million for machinery and equipment.  Revolving loans included $1.5
million for borrowing under credit cards issued by the Lender, not subject to
the borrowing base. The term was extended with revolving loans due and payable
in full on January 5, 2009. 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 June
5, 2007 the Company and Fifth Third Bank again amended the loan facility,
increasing the maximum revolving loan amount to $22.5
million.  Revolving loans were amended to include $1.5 million for
borrowing that is not subject to the borrowing base limits.  Amounts
borrowed as part of the $1.5 million were charged interest at prime rate plus
one percentage point.  The $1.5 million borrowing revolving note was
scheduled to terminate on September 30, 2007.
 
 On
September 12, 2007, the Company amended its Loan and Security Agreement with
Fifth Third Bank for the third time.  Under this amended loan
facility, subject to certain borrowing conditions, the Company may incur
revolving loans in an amount up to $21.5 million from a borrowing base comprised
of a percentage of eligible accounts receivable and inventories and $2 million
for machinery and equipment until March 2, 2009. Revolving loans were amended to
eliminate $1.5 million for borrowing that is not subject to the borrowing base
limits.  A term loan for a maximum of $3 million was added to the loan
facility.  Draws on the term loan could be made until February 29,
2008, at which time the Company had drawn the maximum $3
million.  Interest on the term loan is at 13%.  The term
loan includes a success fee of 3% to 7% of principal amount repaid before March
2, 2009 depending on when the repayment occurs. Fansteel Inc. pledged its 1,000
shares of Wellman stock as security for the term loan.
 
 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;
  21
 Index
  -
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.
 
 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 No. 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, initially determined as of the Effective Date, represents
the excess of the 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.
  22
 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 documented completion of all requirements under the
specific purchase agreement, which is considered 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 March
2008, the Financial Accounting Standards Board (“FASB”)  issued SFAS
No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an
amendment of FASB Statement No. 133” (SFAS No. 161).  SFAS No. 161
amends and expands the disclosure requirements of Statement 133 to provide a
better understanding of how and why an entity uses derivative instruments, how
derivative instruments and related hedged items are accounted for, and their
effect on an entity’s financial position, financial performance, and cash
flows.  SFAS No. 161 is effective for fiscal years beginning after
November 15, 2008. The Company is currently evaluating the impact that the
adoption of SFAS No. 161 will have on the consolidated financial
statements.
 
 In
December 2007 the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 amends ARB No. 51
to establish accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. It also amends
certain of ARB No. 51’s consolidation procedures for consistency with the
requirements of SFAS 141 (revised 2007), “Business Combinations”. SFAS 160 is
effective for fiscal years and interim periods within those fiscal years
beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS
160 shall be applied prospectively as of the beginning of the fiscal year in
which the Statement is adopted, except for the presentation and disclosure
requirements. The presentation and disclosure requirements shall be applied
retrospectively for all periods presented. The effect of adopting SFAS 160 is
not expected to be material.
 
 In
December 2007 the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R retains the fundamental requirements of
the original pronouncement requiring that the purchase method be used for all
business combinations. SFAS 141R defines the acquirer as the entity that obtains
control of one or more businesses in the business combination, establishes the
acquisition date as the date that the acquirer achieves control and requires the
acquirer to recognize the assets and liabilities assumed and any non-controlling
interest at their fair values as of the acquisition date. SFAS 141R requires,
among other things, that the acquisition related costs be recognized separately
from the acquisition. SFAS 141R is applied prospectively to business
combinations for which the acquisition date is on or after January 1, 2009. The
effect of adopting SFAS 141R will be dependent on the nature and the size of the
acquisition completed after the adoption of SFAS 141R.
  23
 Index
  In
February 2007 the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities-Including an Amendment of FASB Statement No.
115” (“SFAS 159”). SFAS 159 permits an entity to elect to measure eligible items
at fair value (“fair value option”) including many financial instruments. The
provisions of SFAS 159 are effective for the Company as of January 1, 2008. If
the fair value option is elected, the Company will report unrealized gains and
losses on items for which the fair value option has been elected in earnings at
each subsequent reporting date. Upfront costs and fees related to an item for
which the fair value option is elected shall be recognized in earnings as
incurred and not deferred. The fair value option may be applied for a single
eligible item without electing it for other identical items, with certain
exceptions, and must be applied to the entire eligible item and not to a portion
of the eligible item. The adoption of SFAS 159 in 2008 did not have an impact on
our results of operations or financial position.
 
 In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”), which defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements. SFAS 157 is partially effective for the Company
beginning on January 1, 2008. The requirements of SFAS 157 will be applied
prospectively except for certain derivative instruments that would be adjusted
through the opening balance of retained earnings in the period of adoption. In
February 2008, FASB issued Staff Position No. FAS 157-2which
provides for a one-year deferral of the effective date of SFAS 157 for
non-financial assets and liabilities that are not recognized or disclosed at
fair value in the financial statements on a recurring basis. The adoption of
SFAS 157 in 2008 did not have an impact on our results of operations or
financial position.
 
 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.  In 2004,
price increases were experienced and these price increases have continued into
2008.  To offset these price increases, the Company began adding
material surcharges in March 2004 and in 2008 the Company continues to add
material surcharges.  Material surcharges accounted for 5.2% of net
sales for the three months ended March 31, 2008 and 6.0% of net sales for the
three months ended March 31, 2007.Surcharges were 4.5%
lower in the first quarter of 2008 compared to the first quarter of 2007 as
customers have begun to request price increases instead of
surcharges.
 
 Although
the Company's recent results have not been significantly affected by inflation,
there can be no assurance that a high rate of inflation in the future would not
have an adverse effect on its operating results.
 
 Off-Balance
Sheet Arrangements
 
 The
Company is not party to off-balance sheet arrangements other than normal
operating leases for any period presented.
  24
 Index
 
 Contractual
Obligations
 
 The
following table summarizes payments due by year for the contractual obligations
at March 31, 2008:
 
 (In
      thousands)
              
              Total
              
              
              2008
              
              
              2009
              
              
              2010
              
              
              2011
              
              
              2012
              
              
              After
      2012PBGC
      Note
              
              $
              6,500
              
              
              $
              -
              
              
              $
              750
              
              
              $
              1,150
              
              
              $
              1,150
              
              
              $
              1,150
              
              
              $
              2,300PA
      economic agencies notes
              
              
              79
              
              
              
              65
              
              
              
              14
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Operating
      and capital leases
              
              
              587
              
              
              
              175
              
              
              
              117
              
              
              
              79
              
              
              
              64
              
              
              
              152
              
              
              
              -Fifth
      Third revolving line
              
              
              14,521
              
              
              
              546
              
              
              
              13,975
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Fifth
      Third term loan
              
              
              3,568
              
              
              
              293
              
              
              
              3,275
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Letters
      of credit
              
              
              770
              
              
              
              -
              
              
              
              770
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Environmental
      liabilities
              
              
              32,373
              
              
              
              1,516
              
              
              
              3,129
              
              
              
              2,596
              
              
              
              1,838
              
              
              
              1,838
              
              
              
              21,456Total
              
              $
              58,398
              
              
              $
              2,595
              
              
              $
              22,030
              
              
              $
              3,825
              
              
              $
              3,052
              
              
              $
              3,140
              
              
              $
              23,756
 
 The above
table excludes discounts of the long-term debt and environmental liabilities,
but does include any related interest.  The Fifth Third revolving line
is at prime and the rate used for this table is 5.25%.
 
 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 through 2008 with an increase to $1,682,000 in 2009.
 
 The Fifth
Third Credit facility has a renewal date of March 2, 2009.  The
revolving line of credit requires immediate repayment from cash
receipts.  Borrowings can be made as needed, based on
availability.  Any outstanding term loan is repayable in full on the
renewal date. The availability at March 31, 2008 was $1,906,000, compared with
$1,963,000 at December 31, 2007.
  25
 Index
  ITEM3– 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 increases have continued into
2008.  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 2008, but some customers have begun to request price increases
rather than surcharges
 
 ITEM
4T - CONTROLS AND PROCEDURES
 
 Disclosure
Controls and Procedures
 
 The
Company has carried out an evaluation of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures (as defined in
Exchange Act Rule 13a-15(e) or 15d-15(e)) as of the end of the period covered by
this quarterly report on Form 10-Q. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer were required to conclude that the
Company‘s disclosure controls and procedures were not effective due to the one
material weakness identified as part of their evaluation of internal control
over financial reporting discussed below.
 
 Disclosure
controls and procedures are the Company’s control and other procedures that are
designed to ensure that information required to be disclosed by the Company in
reports that the Company files or submits 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 the Company in reports that
file under the Exchange Act is accumulated and communicated to Company
management, including the principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required
disclosure.
 
 Management’s
Report on Internal Control over Financial Reporting
 
 The
Company is responsible for establishing and maintaining adequate internal
control over financial reporting in accordance with Exchange Act Rule 12a-15.
Internal control over financial reporting is a process to provide reasonable
assurance regarding the reliability of the Company’s financial reporting for
external purposes in accordance with accounting principles generally accepted in
the United States of America. Internal control over financial reporting includes
maintaining records that in reasonable detail accurately and fairly reflect the
Company’s transactions; providing reasonable assurance that transactions are
recorded as necessary for preparation of the Company’s financial statements;
providing reasonable assurance that receipts and expenditures are made in
accordance with management authorization; and providing reasonable assurance
that unauthorized acquisition use or disposition of Company assets that could
have a material effect on the Company’s financial statements would be prevented
or detected on a timely basis. Because of the limitations, internal control over
financial reporting is not intended to provide absolute assurance that a
misstatement of the Company’s financial statements would be prevented or
detected.
  26
 Index
  Management
conducted an evaluation of the effectiveness of the Company’s internal control
over financial reporting based on the framework and criteria established in Internal Control- Integrated
Framework; issued by the Committee of Sponsoring Organizations of the Treadway
Commission. This evaluation included review of the documentation of
controls, evaluation of the design effectiveness of controls, testing of the
operating effectiveness of controls and a conclusion of this evaluation. Based
on this evaluation, management was required to conclude that the Company’s
internal control over financial reporting was not effective as of December 31,
2007.
 
 A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statements will not be prevented or detected on a timely basis.
 
 As of
December 31, 2007, management identified a material weakness in the Company’s
revenue recognition process for non-standard billing of tooling at one of its
subsidiaries. The subsidiary properly recognized the revenue but did not
adequately document the processes it went through to determine that the revenue
should be recognized based on the verbal authorization from their customer. This
material weakness could have resulted in an overstatement of revenue that could
have resulted in a material misstatement to the annual and interim financial
statements if not detected and prevented.
 
 This
quarterly report does not include an attestation of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this quarterly report.
 
 Remedial
Actions and Changes in Internal Control over Financial Reporting
 
 Management
has developed and implemented remediation plans to address the material weakness
and otherwise enhance the Company’s internal control over financial
reporting.
 
 In the
first quarter of 2008, the Company implemented a plan to further enhance its
revenue recognition process, which specifically improved the design and
operating effectiveness of certain revenue recognition controls over
non-standard billing of tooling.
 
 There
were no changes in the Company’s internal controls over financial reporting that
occurred during the first quarter 2008 that materially affected, or are
reasonably likely to material affect, the Company’s internal control over
financial reporting.
  27
 Index
  PART II.   OTHER INFORMATION
 
 ITEM 1 - LEGAL PROCEEDINGS
 
 FMRI
 
 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 contract provisions require the use of mediation for
resolution before filing suit.  In November 2006, FMRI participated in
failed meetings with A&M to stay their suit and enter into
mediation.  On December 1, 2006, FMRI notified A&M that the
contract was being terminated for cause.  Since A&M took no
actions to commence cure efforts, the contract was terminated effective December
20, 2006 with FMRI expressly reserving its rights under the
contract.
 
 On
December 7, 2006, FMRI filed with the District Court for Tulsa County in
response to the A&M complaint.  In these pleadings, FMRI objected
to venue and requested transfer to Muskogee County and cited A&M for breach
of contract, breach of change order, fraud, breach of implied duty of good faith
and fair dealing, and sought damages including liquidation damages, project
completion costs, and faulty work.  FMRI believes it has counter
claims against A&M for amounts well in excess of the $1.2 million claimed by
A&M.   Both sides have filed interrogatories and document
requests for the suit.  A Scheduling Order was filed with the District
Court of Tulsa County after a February 26, 2007 scheduling conference with the
presiding judge.  The order included a schedule for an evidentiary
hearing with the judge from September 17 – 21, 2007 regarding A&M’s
intentions to enjoin FMRI’s access to a portion of the Decommissioning Trust
Fund (i.e., at least equal to A&M’s monetary claims against
FMRI).  The briefs and responses for this hearing occurred between
June and August 2007.  Per this order, the actual jury trial for this
suit was to be scheduled sometime after June 2008.
 
 On May
29, 2007, A&M filed another Notice to the Court stating that it would be
unable to file its Motion on June 1, 2007 for Injunctive Relief in accordance
with the Scheduling Order. A&M cited more time was needed to review
documents. This notice also stated that A&M did not know what the delayed
dates for these activities might be and therefore would not reschedule dates at
that time. The first of the A&M depositions of FMRI personnel were scheduled
to begin May 23 and 24, 2007. A&M also postponed these depositions and has
not rescheduled them to date.In October 2007,
A&M requested a 120-day extension to the Scheduling Order, which was
subsequently granted and moved the start of expert briefs and reviews from
January 2008 to late April 2008. The date for the actual Jury Trial would be no
earlier than November 1, 2008.In March of
2008, A&M agreed in principal to non-binding mediation.  A date of
June 24, 2008 has been set to begin mediation.
 
 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.
  28
 Index
  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 June 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, which the Scheme
administrator had represented that Fansteel could anticipate total cash payments
equal to approximately 50% to 57% of its Notified Scheme Claim (approximately
$200,000 - $228,000).  Payments from KWELM during 2005 were $330,304
and during 2006 were $5,349 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,
resulted 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.  In December 2007, the Company received
a settlement payment from Hartford Insurance. The net proceeds from the
settlements were allocated in accordance with the Reorganization Plan and, among
other things, resulted in prepayments under the FMRI Notes of $50,000, and
payments aggregating $17,000 on account of EPA CERCLA claims.
 
 Other
Legal Actions
 
 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 has had discussions with the DOJ to resolve their objection, but
with no satisfactory resolution as yet.
 
 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 claimed $212,000 of the amount owed was not
due and refused to pay any of the $594,000 accounts receivable
owed.  Both parties agreed to mediation/arbitration, which began on
July 11, 2007. On September 23, 2007, a settlement agreement was reached whereby
the Company received a payment of $175,000 and then will receive $25,000 per
month for twelve months until an additional $300,000 is received.  The
settlement agreement does provide for the ability to receive security in
property held by the owner of the customer if the monthly payments are
defaulted. As of the end of the first quarter in 2008, the customer was in full
compliance with the payment schedule pursuant to the terms of the settlement
agreement.
  29
 Index
  In August
2007, the Company received notice that a former business of the Company was
being added as party to a lawsuit involving a product liability issue with hard
metal lung disease.  One of the Company’s insurance carriers is
committed to defending the Company in this lawsuit.
 
 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 risks and uncertainties.
Careful consideration should be given to the following risks, along with the
cautionary statement regarding “forward-looking statements” in Part I, 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 considered to be immaterial,
but may also impact business or adversely affect the Company’s financial
condition or results of operations.
 
 Environmental
Issues
 
 The
Company has significant environmental issues ongoing from the emergence of
bankruptcy on January 23, 2004, primarily related to special purpose entities
included in discontinued operations, particularly in Muskogee, OK, that must be
funded from continuing operations and could have a material impact on the
Company’s results.
 
 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
companies controlled by United Technologies Corporation (“UTC”) and
International Truck and Engine Corporation (“International Engine”) are
significant customers of the Company and each represents 10% or more of Company
net sales.  In addition to UTC and 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 other customers individually
represent more than 10% of the Company’s net sales, as a group they make up a
considerable portion of the Company’s total sales.
  30
 Index
  Although
it is not anticipated, the loss of UTC, International Engine or one or more of
these other significant customers would have a substantial impact on the
Company’s operations and profitability. While the Company has long-term
relationships with these companies, there is no guarantee that these
relationships will continue.  In addition, these customers are in the
aerospace and automotive industries, which tend to be volatile. In particular,
the United States automotive industry 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 2008.  The
Industrial Metal Components segment has been impacted particularly hard with
some material prices nearly doubling from 2005 levels.  To offset
these price increases, the Company began adding material surcharges in March
2004 and in 2008 the Company continues to add material surcharges. There is no
guarantee that the Company will be able to continue to pass these material
surcharges on to its customers, and in fact, some customers have refused to
accept these surcharges. These customers’ margins are being analyzed to
determine if their business is profitable enough to retain. In 2008 some
customers have begun to request new pricing rather than
surcharges.  In the Advanced Structures segment, primarily serving the
aerospace industry, customers have accepted price increases related to higher
material prices, generally on an annual basis.  Raw material prices
have been relatively stable, although prices have increased for
2008.
 
 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 the stock is thinly
traded.
  31
 Index
  ITEM2– UNREGISTERED SALES OF SECURITIES AND USE OF
PROCEEDS
  None.
 
 ITEM
3 – DEFAULTS UPON SENIOR SECURITIES
  None.
 
 ITEM4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
  None.
 
 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
  32
 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. TessitoreMay 8,
      2008
              President
      and Chief Executive Officer/s/ R. Michael McEnteeR.
      Michael McEnteeVice
      President andMay 8,
      2008
              Chief
      Financial Officer
   33