UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





(MARK
ONE)





T           QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008





OR





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


From
_______________ to
_______________





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  T     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 T
            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  T





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 T     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 July 31,
2008Common
      Stock, $.01 par value
            
            3,420,000
      shares







1





FANSTEEL INC.


FORM 10-Q
– INDEX


JUNE 30,
2008








PART
      I.
            FINANCIAL INFORMATION
            Page
      No.Item
      1
            Consolidated Financial StatementsConsolidated Statement of Operations (unaudited) – Three months
      ended June 30, 2008 and 2007; Six months ended June 30, 2008 and
      2007
            3-4Consolidated Balance Sheet – June 30, 2008 (unaudited) and
      December 31, 2007
            5-6Consolidated Statement of Cash Flows (unaudited) – Six months
      ended June 30, 2008 and 2007
            7Notes to Unaudited Consolidated Financial
      Statements
            8-15Item
      2
            Management's Discussion and Analysis of Financial Condition
      and Results of Operations
            16-29Item
      3
            Quantitative and Qualitative Disclosures About Market
      Risk
            30Item
      4T
            Controls and Procedures
            30PART
      II
            OTHER INFORMATIONItem
      1
            Legal Proceedings
            31-32Item
      1A
            Risk Factors
            32-34Item
      2
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            34Item
      3
            Defaults Upon Senior Securities
            34Item
      4
            Submission of Matters to a Vote of Security
      Holders
            34Item
      5
            Other Information
            34Item
      6
            Exhibits
            34Signatures
            
            35Exhibit
      10.1
            Letter
      to President and Chief Executive Officer regarding non-renewal
      of Employment ContractExhibit
      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 June 30,
      2008
            
            
            Three Months Ended June 30,
      2007Net
      Sales
            
            $
            20,540,984
            
            
            $
            19,208,510Cost
      and ExpensesCost
      of products sold
            
            
            17,008,804
            
            
            
            16,025,143Selling,
      general and administrative
            
            
            1,666,129
            
            
            
            2,579,68818,674,933
            
            
            
            18,604,831Operating
      Income
            
            
            1,866,051
            
            
            
            603,679Other
      Income (Expense)Interest
      expense
            
            
            (409,858
            )
            
            
            (392,625
            )Other
            
            
            66,618
            
            
            
            (12,406
            )(343,240
            )
            
            
            (405,031
            )Income
      from Continuing Operations Before Income Taxes
            
            
            1,522,811
            
            
            
            198,648Income
      Taxes
            
            
            35,098
            
            
            
            -Net
      Income from Continuing Operations
            
            
            1,487,713
            
            
            
            198,648Loss
      from Discontinued Operations
            
            
            (766,958
            )
            
            
            (1,082,908
            )Net
      Income (Loss)
            
            $
            720,755
            
            
            $
            (884,260
            )Weighted
      Average Number of Common Shares Outstanding
            
            
            3,420,000
            
            
            
            3,420,000Basic
      and Diluted Net Income (Loss) per ShareaContinuing
      Operations
            
            $
            0.43
            
            
            $
            0.06Discontinued
      Operations
            
            
            (0.22
            )
            
            
            (0.32
            )Net
      Income (Loss)
            
            $
            0.21
            
            
            $
            (0.26
            )




See Notes to Consolidated Financial
Statements






aBasic
earnings per share and diluted earnings per share are the
same.




3
 Index




Fansteel
Inc.


Consolidated
Statement of Operations


(Unaudited)





Six Months Ended June 30,
      2008
            
            
            Six Months Ended June 30,
      2007Net
      Sales
            
            $
            40,527,128
            
            
            $
            37,541,306Cost
      and ExpensesCost
      of products sold
            
            
            33,885,902
            
            
            
            31,606,554Selling,
      general and administrative
            
            
            3,446,552
            
            
            
            4,136,80537,332,454
            
            
            
            35,743,359Operating
      Income
            
            
            3,194,674
            
            
            
            1,797,947Other
      Income (Expense)Interest
      expense
            
            
            (800,806
            )
            
            
            (760,614
            )Other
            
            
            18,894
            
            
            
            (54,067
            )(781,912
            )
            
            
            (814,681
            )Income
      from Continuing Operations Before Income Taxes
            
            
            2,412,762
            
            
            
            983,266Income
      Taxes
            
            
            35,098
            
            
            
            -Net
      Income from Continuing Operations
            
            
            2,377,664
            
            
            
            983,266Loss
      from Discontinued Operations
            
            
            (1,558,437
            )
            
            
            (1,878,243
            )Net
      Income (Loss)
            
            $
            819,227
            
            
            $
            (894,977
            )Weighted
      Average Number of Common Shares Outstanding
            
            
            3,420,000
            
            
            
            3,420,000Basic
      and Diluted Net Income (Loss) per ShareaContinuing
      Operations
            
            $
            0.70
            
            
            $
            0.29Discontinued
      Operations
            
            
            (0.46
            )
            
            
            (0.55
            )Net
      Income (Loss)
            
            $
            0.24
            
            
            $
            (0.26
            )





See Notes
to Consolidated Financial Statements




aBasic
earnings per share and diluted earnings per share are the
same.


4
 Index




Fansteel Inc.


Consolidated
Balance Sheet





June 30, 2008
    (Unaudited)
            
            
            December 31, 2007ASSETSCurrent
      assetsCash
      and cash equivalents
            
            $
            802,879
            
            
            $
            298,352Accounts
      receivable, less allowance of $197,000 and $170,000 at June 30, 2008 and
      December 31, 2007, respectively
            
            
            10,251,849
            
            
            
            10,568,513InventoriesRaw
      material and supplies
            
            
            1,826,451
            
            
            
            1,308,731Work-in
      process
            
            
            9,372,124
            
            
            
            8,554,360Finished
      goods
            
            
            739,288
            
            
            
            574,686Total
      inventories
            
            
            11,937,863
            
            
            
            10,437,777Prepaid
      expenses
            
            
            723,745
            
            
            
            1,830,489Total
      current assets
            
            
            23,716,336
            
            
            
            23,135,131Property,
      plant and equipmentLand
            
            
            917,419
            
            
            
            917,419Buildings
            
            
            4,134,562
            
            
            
            4,122,886Machinery
      and equipment
            
            
            9,290,543
            
            
            
            8,103,28714,342,524
            
            
            
            13,143,592Less
      accumulated depreciation
            
            
            4,716,903
            
            
            
            4,140,642Net
      property, plant and equipment
            
            
            9,625,621
            
            
            
            9,002,950Other
      assetsDeposits
            
            
            227,593
            
            
            
            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
            
            
            337,657
            
            
            
            337,652Total
      other assets
            
            
            14,178,984
            
            
            
            15,070,301$
            47,520,941
            
            
            $
            47,208,382





See Notes to Consolidated Financial
Statements




5
 Index




Fansteel
Inc.


Consolidated
Balance Sheet





June 30,2008
    (Unaudited)
            
            
            December 31, 2007LIABILITIES
      AND SHAREHOLDERS' DEFICITCurrent
      liabilitiesAccounts
      payable
            
            $
            7,170,436
            
            
            $
            7,589,036Accrued
      liabilities
            
            
            7,091,396
            
            
            
            8,040,875Short-term
      borrowings
            
            
            14,619,088
            
            
            
            15,010,884Current
      maturities of long-term debt
            
            
            3,789,676
            
            
            
            900,254Total
      current liabilities
            
            
            32,670,596
            
            
            
            31,541,049Long-term
      debt, less current maturities
            
            
            4,045,115
            
            
            
            6,491,265Other
      liabilitiesEnvironmental
      remediation
            
            
            21,803,527
            
            
            
            20,989,571Non-current
      pension liability
            
            
            716,992
            
            
            
            716,992Total
      other liabilities
            
            
            22,520,519
            
            
            
            21,706,563Total
      liabilities
            
            
            59,236,230
            
            
            
            59,738,877Minority
      interest
            
            
            197,230
            
            
            
            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
            
            
            (12,131,916
            )
            
            
            (12,951,143
            )Accumulated
      other comprehensive loss
            
            
            (111,117
            )
            
            
            (90,643
            )Total
      shareholders’ deficit
            
            
            (11,912,519
            )
            
            
            (12,711,272
            )Total
      liabilities and shareholders' deficit
            
            $
            47,520,941
            
            
            $
            47,208,382





See Notes
to Consolidated Financial Statements




6
 Index





Fansteel Inc.


Consolidated
Statement of Cash Flows


(Unaudited)





Six
      Months
            
            
            Six
      MonthsEnded
            
            
            EndedJune 30, 2008
            
            
            June 30, 2007Cash
      Flows From Operating Activities:Net
      income (loss)
            
            $
            819,227
            
            
            $
            (894,977
            )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      and amortization
            
            
            576,261
            
            
            
            482,086Minority
      interest expense
            
            
            16,453
            
            
            
            166,804Accretion
      on long-term debt and other liabilities
            
            
            91,173
            
            
            
            113,560Gain
      from disposal of property, plant and equipment
            
            
            (400
            )
            
            
            -Loss
      from discontinued operations
            
            
            1,558,437
            
            
            
            1,878,243Change
      in assets and liabilities:Decrease
      in accounts receivable
            
            
            266,919
            
            
            
            174,655Increase
      in inventories
            
            
            (1,500,086
            )
            
            
            (379,514
            )Decrease
      in prepaid expenses
            
            
            1,078,865
            
            
            
            666,108(Decrease)
      increase in accounts payable and accrued liabilities
            
            
            (919,050
            )
            
            
            605,725Increase
      (decrease) in income taxes payable
            
            
            19,774
            
            
            
            (3,468
            )Decrease
      in other assets
            
            
            433,201
            
            
            
            142,643Net
      cash provided by operating activities
            
            
            2,440,774
            
            
            
            2,951,865Cash
      Flows From Investing Activities:Capital
      expenditures
            
            
            (1,208,532
            )
            
            
            (565,765
            )Proceeds
      from property, plant and equipment
            
            
            10,000
            
            
            
            -Net
      cash used in investing activities
            
            
            (1,198,532
            )
            
            
            (565,765
            )Cash
      Flows From Financing Activities:Proceeds
      from long-term borrowing
            
            
            1,000,000
            
            
            
            667,240Payments
      on short-term borrowing
            
            
            (393,112
            )
            
            
            -Payments
      on long-term debt
            
            
            (66,614
            )
            
            
            (154,075
            )Net
      cash provided by financing activities
            
            
            540,274
            
            
            
            513,165Net
      Increase in Cash and Cash Equivalents from Continuing
      Operations
            
            
            1,782,516
            
            
            
            2,899,265Cash
      Flows of Discontinued Operations:Operating
      cash flows
            
            
            (1,277,989
            )
            
            
            (2,899,282
            )Total
      Cash Flows of Discontinued Operations
            
            
            (1,277,989
            )
            
            
            (2,899,282
            )Net
      Increase (Decrease) in Cash and Cash Equivalents
            
            
            504,527
            
            
            
            (17
            )Cash
      and Cash Equivalents at Beginning of Period
            
            
            298,352
            
            
            
            17,672Cash
      and Cash Equivalents at End of Period
            
            $
            802,879
            
            
            $
            17,655Supplemental
      disclosures of cash flow information:Cash
      paid during the year for:Interest
            
            $
            748,306
            
            
            $
            609,614Income
      taxes (refunds)
            
            
            15,324
            
            
            
            (3,468
            )





See Notes
to Consolidated Financial Statements





7
 Index





Notesto Unaudited Consolidated Financial Statements





Note
1 - Description of Business





The
consolidated financial statements as of and for the periods ending June 30, 2008
and June 30, 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 and six months
ended June 30, 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 casting, 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.





8
 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 Company has no outstanding stock options or common
stock equivalents outstanding for the three and six months presented, and
therefore, basic and diluted earnings per share are the same.





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





Three Months Ended
            
            
            Six Months EndedNumerator:
            
            June 30, 2008
            
            
            June 30, 2007
            
            
            June 30, 2008
            
            
            June 30, 2007Net
      income (loss)
            
            $
            720,755
            
            
            $
            (884,260
            )
            
            $
            819,227
            
            
            $
            (894,977
            )Denominator:Denominator
      for basic earnings per share- weighted average shares
            
            
            3,420,000
            
            
            
            3,420,000
            
            
            
            3,420,000
            
            
            
            3,420,000Effect
      of dilutive securities:Employee
      stock options
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Employee
      restricted stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Denominator:Denominator
      for diluted earnings per share – weighted average shares
            
            
            3,420,000
            
            
            
            3,420,000
            
            
            
            3,420,000
            
            
            
            3,420,000Basic
      earnings per share
            
            $
            0.21
            
            
            $
            (0.26
            )
            
            $
            0.24
            
            
            $
            (0.26
            )Diluted
      earnings per share
            
            $
            0.21
            
            
            $
            (0.26
            )
            
            $
            0.24
            
            
            $
            (0.26
            )





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.





9
 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. FMRI is currently discussing this approach with the NRC. At
June 30, 2008 and December 31, 2007, the gross estimated liability was
$27,183,000 and $27,654,000, respectively, and the recorded discounted
liability, using a discount rate of 11.3%, was $17,800,000 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. As of June 30, 2008 FMRI has drawn $4.1 million from the
Trust.





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 advising the agency that a detailed Site Characterization Plan
would be submitted by FLRI, a special purpose subsidiary, which pursuant to the
Reorganization Plan now owns the Lexington facility.  Cost of remedial
activities was estimated at $1.78 million 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.
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.  During 2007, new estimates of costs to complete the remediation
reduced the gross liability by $324,000. At June 30, 2008 and December 31, 2007,
the gross estimated liability was $856,000 and $875,000, respectively, and the
recorded discounted liability, using a discount rate of 11.3%, was $840,000 and
$857,000, respectively.





10
 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 with anticipation that a
transaction will be completed in the third quarter 2008.





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.





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 was approximately equal to the book value. The
Company closed on the sale of this property onMarch 13,
2008.





11
 Index





Results
of Discontinued Operations





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





Discontinued
operations reported losses of $767,000 and $1,083,000 for the three months ended
June 30, 2008 and June 30, 2007, respectively, and $1,558,000and $1,878,000 for the
six months ended June 3, 2008 and June 30, 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 June 30, 2008 and
December 31, 2007:





June 30,
              2008
            
            
            December 31,
              2007Cash
            
            $
            765,266
            
            
            $
            855,712Other
      notes and accounts receivable
            
            
            -
            
            
            
            49,745Prepaid
      expenses
            
            
            36,728
            
            
            
            64,607Property
      held for sale
            
            
            720,000
            
            
            
            1,178,116Total
      assets
            
            $
            1,521,994
            
            
            $
            2,148,180Current
      liabilities
            
            $
            385,016
            
            
            $
            812,742Long-term
      debt (PBGC note)
            
            
            4,714,113
            
            
            
            5,213,971Environmental
      remediation
            
            
            18,639,795
            
            
            
            17,967,503Total
      liabilities
            
            $
            23,738,924
            
            
            $
            23,994,216Net
      liabilities of discontinued operations
            
            $
            22,216,930
            
            
            $
            21,846,036





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 June 30,
2008 and December 31, 2007 the gross estimated liability was $1,808,000 and
$1,877,000, respectively, and the recorded discounted liability, using a
discount rate of 11.3%, was $1,779,000 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, the estimated cost to close the landfill
will be $1,297,000 after an updated 2008 cost study of the landfill closure
costs increased the gross liability by $131,000.  This charge was
taken in the second quarter 2008. Changes in regulations for non-public
landfills may result in closure at an earlier date than originally
anticipated.  The Iowa Department of Natural Resources notified
Wellman in the July 2008 landfill permit renewal that disposal should cease by
July 2011 unless synthetic liners are installed. Wellman has appealed this
permit limitation since the landfill should be excluded from liner requirements
under a grandfather exclusion provided in the current
regulations.  The recorded discounted liability, using a discount rate
of 11.3%, at June 30, 2008 and December 31, 2007 was $779,000 and $613,000,
respectively.





12
 Index





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 June 30, 2008 and December 31,
2007 was $606,000 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. This loan agreement with Fifth Third Bank was amended on December
4, 2006 increasing the borrowing base to $21.5 million.





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 0.25% 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.





13
 Index





At June
30, 2008 the Company had letters of credit of $771,000 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 $1,002,000 at June 30, 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 June 30, 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.





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 June
30, 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. Due to the recent ownership change, the tax loss
carry-forwards of the Company will be subject to limitation by Section 382 of
the Internal Revenue Code with respect to the amount utilizable each year. The
amount of the limitation has not been quantified by the Company. 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.





14
 Index





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





Three Months Ended
            
            
            Six Months EndedNet
      Sales:
            
            June 30, 2008
            
            
            June 30, 2007
            
            
            June 30, 2008
            
            
            June 30, 2007Advanced
      Structures
            
            $
            12,141,342
            
            
            $
            10,468,672
            
            
            $
            23,733,156
            
            
            $
            21,410,389Industrial
      Metal Components
            
            
            8,399,642
            
            
            
            8,739,838
            
            
            
            16,793,972
            
            
            
            16,130,917Total
      Net Sales
            
            $
            20,540,984
            
            
            $
            19,208,510
            
            
            $
            40,527,128
            
            
            $
            37,541,306Operating
      Income (Loss):Advanced
      Structures
            
            $
            1,659,658
            
            
            $
            552,493
            
            
            $
            2,571,398
            
            
            $
            1,398,847Industrial
      Metal Components
            
            
            206,393
            
            
            
            616,743
            
            
            
            623,276
            
            
            
            964,657Corporate
            
            
            -
            
            
            
            (565,557
            )
            
            
            -
            
            
            
            (565,557
            )Total
      Operating Income
            
            $
            1,866,051
            
            
            $
            603,679
            
            
            $
            3,194,674
            
            
            $
            1,797,947





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





Identifiable
      assets:
            
            June 30, 2008
            
            
            December 31, 2007Advanced
      Structures
            
            $
            19,631,658
            
            
            $
            19,520,969Industrial
      Metal Components
            
            
            11,064,349
            
            
            
            10,139,992Corporate
            
            
            15,302,940
            
            
            
            15,399,241Discontinued
            
            
            1,521,994
            
            
            
            2,148,180Total
      Assets
            
            $
            47,520,941
            
            
            $
            47,208,382





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





Three Months Ended
            
            
            Six Months EndedDepreciation
      and amortization:
            
            June 30, 2008
            
            
            June 30, 2007
            
            
            June 30, 2008
            
            
            June 30, 2007Advanced
      Structures
            
            $
            147,288
            
            
            $
            125,948
            
            
            $
            280,950
            
            
            $
            238,581Industrial
      Metal Components
            
            
            142,536
            
            
            
            120,465
            
            
            
            283,132
            
            
            
            234,345Corporate
            
            
            6,380
            
            
            
            4,596
            
            
            
            12,179
            
            
            
            9,160Total
      depreciation and amortization
            
            $
            296,204
            
            
            $
            251,009
            
            
            $
            576,261
            
            
            $
            482,086Capital
      expenditures:Advanced
      Structures
            
            $
            523,020
            
            
            $
            206,492
            
            
            $
            726,151
            
            
            $
            336,523Industrial
      Metal Components
            
            
            363,247
            
            
            
            118,573
            
            
            
            461,512
            
            
            
            228,124Corporate
            
            
            -
            
            
            
            1,118
            
            
            
            20,869
            
            
            
            1,118Total
      capital expenditures
            
            $
            886,267
            
            
            $
            326,183
            
            
            $
            1,208,532
            
            
            $
            565,765





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 June 30, 2008 As Compared To Three Months Ended June 30,
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 June 30,
      2008
            
            
            Three MonthsEnded June 30,
      2007Advanced
      Structures
            
            $
            12,141,342
            
            
            $
            10,468,672Industrial
      Metal Components
            
            
            8,399,642
            
            
            
            8,739,838$
            20,540,984
            
            
            $
            19,208,510





The
Company’s consolidated net sales for the three months ended June 30, 2008
increased $1.3 million, or 6.9%, compared to the three months ended June 30,
2007. The increase was due to higher sales of sand castings in the Advanced
Structures segment.





Advanced
Structures’ net sales for the three months ended June 30, 2008 increased by
$1,673,000, or 16.0%, compared to the three months ended June 30, 2007. Strong
demand for engine components used in the private jet and regional jet markets
provided the majority of the increase, but were partially offset by lower
tooling sales.





Industrial
Metal Components' net sales for the three months ended June 30, 2008 decreased
$340,000, or 3.9%, compared with the three months ended June 30,
2007.  Included in segment sales are surcharges for increased metal
costs in the quarter ended June 30, 2008 of $1.4 million, which were $188,000
higher than the quarter ended June 30, 2007 due to increases in metal prices,
primarily stainless steel. Investment casting sales were lower by $141,000, or
2.4%, primarily related to diesel engine programs for trucks and buses. Sales of
powdered metal components decreased by $199,000, or 6.8%, due to the soft
automotive market.





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 June 30,
      2008
            
            
            % Of Net Sales
            
            
            Three Months Ended June 30,
      2007
            
            
            % Of Net SalesAdvanced
      Structures
            
            $
            9,723,387
            
            
            80.1%
            
            
            $
            8,963,281
            
            
            
            85.6%Industrial
      Metal Components
            
            
            7,285,417
            
            
            86.7%
            
            
            
            7,061,862
            
            
            
            80.8%$
            17,008,804
            
            
            82.8%
            
            
            $
            16,025,143
            
            
            
            83.4%





Cost of
products sold of $17.0 million for the three months ended June 30, 2008
increased by $984,000 compared to $16.0 million for the three months ended June
30, 2007, due largely to the increase in sales volume for magnesium and aluminum
sand castings. As a percent of sales, cost of products sold were 82.8% and 83.4%
for the three month periods ended June 30, 2008 and June 30, 2007,
respectively.





In the
Advanced Structures segment, cost of products sold of $9.7 million for the three
months ended June 30, 2008 increased $760,000 compared with cost of products
sold of $9.0 million for the three months ended June 30, 2007. As a percent of
net sales, cost of products decreased by 5.5 points for the three months ended
June 30, 2008 compared with the three months ended June 30, 2007. For the three
months ended June 30, 2008, training grant money of $1,050,000 was received from
the state of Iowa, which improved cost of products sold by 8.6 percentage
points, while in the same period of 2007 no training grant money was
received.  Partially offsetting the improvement from the training
grants and the higher volume were increased scrap, outside processing, material
and environmental costs for the three months ended June 30, 2008.





The
Industrial Metal Components’ cost of products sold increased to $7.3 million for
the three months ended June 30, 2008 compared to cost of products sold of $7.1
million for the three months ended June 30, 2007.  As a percent of net
sales, cost of products were 86.7% for the three months ended June 30, 2008
compared with 80.8% for the three months ended June 30, 2007. Lower volume and
higher material costs for the three months ended June 30, 2008 had a negative
impact on results.





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 June 30,
      2008
            
            
            % Of Net Sales
            
            
            Three Months Ended June 30,
      2007
            
            
            % Of Net SalesAdvanced
      Structures
            
            $
            758,297
            
            
            6.2%
            
            
            $
            952,898
            
            
            9.1%Industrial
      Metal Components
            
            
            907,832
            
            
            10.8%
            
            
            
            1,061,233
            
            
            12.1%Corporate
            
            
            -
            
            
            NA
            
            
            
            565,557
            
            
            NA$
            1,666,129
            
            
            8.1%
            
            
            $
            2,579,688
            
            
            13.4%





Selling,
general and administrative expenses for the three months ended June 30, 2008
were $1,666,000, a decrease of $914,000 over expenses of $2,580,000 for the
three months ended June 30, 2007. As a percent of sales, selling, general and
administrative expenses decreased to 8.1% in the second three months of 2008
compared with 13.4% for the second three months of 2007. Expenses in 2007
included $566,000 for unusual professional fees for strategic initiatives and an
investigation by a special committee of the Board of Directors. Without these
unusual professional fees in the three months ended June 30, 2007, selling,
general and administrative expense would have been 10.5% of net sales, which is
an improvement of 2.4 percentage points for the three months ended June 30,
2008.





17
 Index





In the
Advanced Structures segment, selling, general and administrative expenses for
the three months ended June 30, 2008 decreased by $195,000 compared with the
three months ended June 30, 2007. Results in the second quarter of 2007 included
$164,000 of compensation expense for 12 shares of stock that were granted to key
managers of Wellman Dynamics Corporation, a 98.8% owned subsidiary (after the
grant) of Fansteel Inc. included in this segment. As a percent of sales,
selling, general and administrative expenses decreased to 6.2% in the second
three months of 2008 as a result of the higher volume compared to 9.1% in the
second three months of 2007.





Selling,
general and administrative expenses for Industrial Metal Components segment for
the three months ended June 30, 2008 decreased $153,000 compared with the three
months ended June 30, 2007 due to lower commissions and reduced health care
costs. Selling, general and administrative expenses as a percent of sales
decreased to 10.8% for the three months ended June 30, 2008 compared with 12.1%
for the three months ended June 30, 2007.





Corporate
selling, general and administrative expenses (not allocated to operations) were
$0 for the three months ended June 30, 2008 compared with $566,000 for the three
months ended June 30, 2007. Expenses for the three months ended June 30, 2007
were for unusual professional fees for strategic initiatives and an
investigation by a special committee of the Board of Directors.





Operating
Income (Loss)





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





Three months Ended June 30,
      2008
            
            
            Three months Ended June 30,
      2007Advanced
      Structures
            
            $
            1,659,658
            
            
            $
            552,493Industrial
      Metal Components
            
            
            206,393
            
            
            
            616,743Corporate
            
            
            -
            
            
            
            (565,557
            )$
            1,866,051
            
            
            $
            603,679





Operating
income for the three months ended June 30, 2008 increased $1,262,000, or 209.1%,
compared to the three months ended June 30, 2007. The higher sales volume and
training monies of $1,050,000 in the Advanced Structures segment provided most
of the improvement for the three months ended June 30, 2008. Results in the
second quarter of 2007 included unusual professional fees of $566,000 at
Corporate and $164,000 of compensation expense in the Advanced Structures
segment.





Advanced
Structures operating income of $1,660,000 for the three months ended June 30,
2008 increased by $1,108,000 from operating income of $552,000 for the three
months ended June 30, 2007. The higher sales volume and training grant money of
$1,050,000 were the key factors in the operating income improvement for the
three months ended June 30, 2008. Results in the second quarter 2007 included
$164,000 of compensation expense for 12 shares of stock that were granted to key
managers of Wellman Dynamics Corporation, a 98.8% owned subsidiary (after the
grant) of Fansteel Inc. included in this segment.





18
 Index





Industrial
Metal Components had operating income of $206,000 for the three months ended
June 30, 2008 compared to operating income of $617,000 for the three months
ended June 30, 2007. The decrease in volume had a negative impact on this
segment’s operating income for the three months ended June 30,
2008.





Corporate’s
operating loss was $0 for the three months ended June 30, 2008 compared with an
operating loss of $566,000 for the three months ended June 30, 2007. The loss in
2007 related to unusual professional fees for strategic initiatives and an
investigation by a special committee of the Board of Directors that are not
allocable to the operating segments.





Other Income
(Expenses)





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





Three months Ended June 30,
      2008
            
            
            Three months Ended June 30,
      2007Interest
      income (expenses)
            
            $
            (409,858
            )
            
            $
            (392,625
            )Other
      income (expenses)
            
            
            66,618
            
            
            
            (12,406
            )$
            (343,240
            )
            
            $
            (405,031
            )





Other
expense decreased $62,000 in the three months ended June 30, 2008 compared to
the three months ended June 30, 2007. Interest expense in the three months ended
June 30, 2008 was higher by $17,000 compared with the three months ended June
30, 2007 due to the increased level of borrowings from the revolving line of
credit, including the term loan.Other income of $67,000 for
the three months ended June 30, 2008 included $126,000 in income for equipment
purchased by a customer for use by the sand casting operation in producing their
products. This was partially offset by foreign currency translation at the
investment casting operation and minority interest related to the Wellman
Dynamics subsidiary.





Discontinued
Operations





Discontinued
operations reported a loss of $767,000 in the three months ended June 30, 2008
and a loss of $1,083,000 in the three months ended June 30, 2007. 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 note payable to the Pension Benefit Guarantee
Corporation for the terminated pension plan.





Income
taxes





A tax
provision of $35,000 was recorded for the three months ended June 30, 2008
compared with a tax provision of $0 for the three months ended June 30, 2007.
The tax provision in 2008 relates to foreign taxes in Mexico that are not likely
to be recovered. In 2007, no income tax provision or benefit was recognized as
valuation allowances had been recorded for all net operating loss benefits and
net deferred tax assets.





Net
Income (Loss)





The
Company had net income of $721,000 for the three months ended June 30, 2008 and
a net loss of $884,000 for the three months ended June 30, 2007, an improvement
of $1,605,000.




19
 Index




2008
Six Months As Compared To 2007 Six Months




Net
Sales





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





Six Months Ended June 30,
      2008
            
            
            Six Months Ended June 30,
      2007Advanced
      Structures
            
            $
            23,733,156
            
            
            $
            21,410,389Industrial
      Metal Components
            
            
            16,793,972
            
            
            
            16,130,917$
            40,527,128
            
            
            $
            37,541,306





Consolidated
Company net sales of $40,527,000 for the six months ended June 30, 2008
increased $3.0 million, or 8.0%, compared to net sales of $37,541,000 for the
six months ended June 30, 2007. Sales for both business segments increased, with
the sand casting operation in the Advanced Structures segment providing the
majority of the improvement.





For the
six months ended June 30, 2008, Advanced Structure net sales increased by
$2,323,000, or 10.8%, compared to the six months ended June 30,
2007.  Sand casting sales for private jet and regional jet engine
components provided most of the sales growth. Demand for most aerospace programs
remains very strong, while industry capacity in magnesium and aluminum sand
casting is limited. Tooling sales for the first six months of 2008 were lower as
the first six months of 2007 included tooling for a large program.





Net sales
for the Industrial Metal Components segment increased $663,000, or 4.1%, for the
six months ended June 30, 2008 compared with the six months ended June 30,
2007.  Net sales of investment castings increased by $637,000, or
6.4%. The improvement was led by sales to flow control customers. Sales were
lower in the major market served, automotive, primarily for diesel engine
components. Powdered metal components sales improved $26,000, or 0.4%, as the
soft automotive market has been offset by improvement in hardware and lawn and
garden customers. Included in this segment’s sales are surcharges for increased
metal costs in the first six months of 2008 of $2,422,000, which were $139,000
more than the first six months of 2007.




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:





Six Months Ended June 30,
      2008
            
            
            % Of Net Sales
            
            
            Six Months Ended June 30,
      2007
            
            
            % Of Net SalesAdvanced
      Structures
            
            $
            19,617,993
            
            
            82.7%
            
            
            $
            18,310,146
            
            
            85.5%Industrial
      Metal Components
            
            
            14,267,909
            
            
            85.0%
            
            
            
            13,296,408
            
            
            82.4%$
            33,885,902
            
            
            83.6%
            
            
            $
            31,606,554
            
            
            84.2%





Cost of
products sold of $33.9 million for the six months ended June 30, 2008 increased
by $2.3 million compared to $31.6 million for the six months ended June 30,
2007, due largely to the increase in sales volume. As a percent of sales, cost
of products sold improved to 83.6% in 2008 compared to 84.2% in
2007.





20
 Index





In the
Advanced Structures segment cost of products sold of $19.6 million for the six
months ended June 30, 2008 increased $1.3 million compared with cost of products
sold of $18.3 million for the six months ended June 30, 2007. Cost of products
sold increased due to the higher volume, increased material costs and higher
scrap, which were partially offset by improved overhead costs and training grant
reimbursement.As a
percent of net sales, cost of products improved to 82.7% in the first six months
of 2008 compared with 85.5% in the first six months of 2007.





The
Industrial Metal Components’ cost of products sold were $14.3 million for the
six months ended June 30, 2008 compared to cost of products sold of $13.3
million for the six months ended June 30, 2007.  Higher volume,
increased material costs and high utility costs accounted for the majority of
the increase. As a percent of net sales, cost of products increased to 85.0% for
the first six months of 2008 compared with 82.4% for the first six months of
2007 despite the higher volume as result of the higher material and utility
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:





Six MonthsEnded June 30,
      2008
            
            
            % Of Net Sales
            
            
            Six Months Ended June 30,
      2007
            
            
            % Of Net SalesAdvanced
      Structures
            
            $
            1,543,765
            
            
            6.5%
            
            
            $
            1,701,396
            
            
            7.9%Industrial
      Metal Components
            
            
            1,902,787
            
            
            11.3%
            
            
            
            1,869,852
            
            
            11.6%Corporate
            
            
            -
            
            
            NA
            
            
            
            565,557
            
            
            NA$
            3,446,552
            
            
            8.5%
            
            
            $
            4,136,805
            
            
            11.0%





Selling,
general and administrative expenses for the first six months of 2008 were
$3,447,000 compared with $4,137,000 in the first six months of 2007. As a
percent of sales, selling, general and administrative expenses decreased to 8.5%
in the first six months of 2008 compared with 11.0% for the first six months of
2007. Results in the first six months of 2007 included $565,000 for unusual
professional fees related to strategic initiatives and an investigation by a
special committee of the Board of Directors that were not incurred in the first
six months of 2008.





In the
Advanced Structures segment, selling, general and administrative expenses for
the six months ended June 30, 2008 decreased by $158,000, or 9.3%, compared with
the six months ended June 30, 2007. As a percent of sales, selling, general and
administrative expenses improved to 6.5% for the six months ended June 30, 2008
compared with 7.9% for the six months ended June 30, 2007. Results for the six
months ended June 30, 2007 included compensation expense of $164,000 for the
grant of 12 shares of stock to key managers of Wellman Dynamics Corporation, a
98.8% owned subsidiary (after the grant) of Fansteel Inc., which is included in
this segment.





Selling,
general and administrative expenses for Industrial Metal Components segment for
the six months ended June 30, 2008 increased$33,000, or 1.8%,
compared with the six months ended June 30, 2007 due to mainly to higher bad
debt expenses. As a percent of sales, selling, general and administrative
expenses decreased to 11.3% compared with 11.6% due to the sales volume
increase.





Corporate
unallocated selling, general and administrative expenses were $0 for the six
months ended June 30, 2008 compared with $566,000 for the six months ended June
30, 2007. These charges in 2007 were for unusual professional fees related to
strategic initiatives and an investigation by a special committee of the Board
of Directors.





21
 Index





Operating
Income





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





Six Months Ended June 30,
      2008
            
            
            % Of Net Sales
            
            
            Six Months Ended June 30,
      2007
            
            
            % Of Net SalesAdvanced
      Structures
            
            $
            2,571,398
            
            
            10.8%
            
            
            $
            1,398,847
            
            
            6.5%Industrial
      Metal Components
            
            
            623,276
            
            
            3.7%
            
            
            
            964,657
            
            
            6.0%Corporate
            
            
            -
            
            
            NA
            
            
            
            (565,557
            )
            
            NA$
            3,194,674
            
            
            7.9%
            
            
            $
            1,797,947
            
            
            4.8%





Operating
income for the six months ended June 30, 2008 increased $1,397,000 compared to
the six months ended June 30, 2007,with the Advanced Structures
segment providing most of the improvement, along with reduced Corporate costs.
Operating income as a percent of sales improved to 7.9% for the six months ended
June 30, 2008 compared with 4.8% for the six months ended June 30,
2007.





Advanced
Structures operating income of $2,571,000for the six months ended
June 30, 2008 increased $1,172,000 from operating income of $1,399,000 for the
six months ended June 30, 2007. Operating income as a percent of sales improved
to 10.8% for the six months ended June 30, 2008 compared with 6.5% for the six
months ended June 30, 2007. Higher volume, improved overhead costs,
reimbursements for a training grant, and reduced compensation expense provided
the majority of the improvement.





Industrial
Metal Components had operating income of $623,000 for the six months ended June
30, 2008 compared to operating income of $965,000 for the six months ended June
30, 2007, a decrease of $342,000. Segment operating income as a percent of sales
decreased to 3.7% for the six months ended June 30, 2008 compared with 6.0% for
the six months ended June 30, 2007. Higher volume, increased material costs and
high utility costs accounted for the majority of the decrease in operating
income.





Corporate
had $0 operating income for the six months ended June 30, 2008 compared with an
operating loss of $566,000 for the six months ended June 30, 2007. The 2007 loss
resulted from unusual professional fees related to strategic initiatives and an
investigation by a special committee of the Board of Directors that were not
allocable back to the business segments.





Other Income
(Expenses)





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





Six Months Ended June 30,
      2008
            
            
            Six
      Months Ended June 30, 2007Interest
      expense
            
            $
            (800,806
            )
            
            $
            (760,614
            )Other
      income (expenses)
            
            
            18,894
            
            
            
            (54,067
            )$
            (781,912
            )
            
            $
            (814,681
            )





22
 Index





Other
expenses decreased $33,000 for the six months ended June 30, 2008 compared to
the six months ended June 30, 2007. Interest expense increased by $40,000 due to
higher borrowings from the revolving line of credit, including the term loan, in
the six months ended June 30, 2008.Other expenses decreased
$73,000 as other income of $126,000 was recorded for equipment purchased by a
customer and given to the sand casting operation to be used exclusively for
producing this customer’s products.





Discontinued
Operations





Discontinued
operations reported a loss of $1,558,000 for the six months ended June 30, 2008
and a loss of $1,878,000 for the six months ended June 30, 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





A tax
provision of $35,000 was recorded for the six months ended June 30, 2008
compared with a tax provision of $0 for the six months ended June 30, 2007. The
tax provision in 2008 is related to foreign taxes in Mexico that are not likely
to be recovered. In 2007, no income tax provision or benefit was recognized as
valuation allowances had been recorded for all net operating loss benefits and
net deferred tax assets.





Net
Income (Loss)





The
Company had net income of $819,000 for the six months ended June 30, 2008 and a
net loss of $895,000 for the six months ended June 30, 2007.








Liquidity
and Capital Resources





On June
30, 2008 and December 31, 2007, the Company had cash of $803,000 and $298,000
respectively.





Continuing
operations provided cash of $1,783,000 for the six months ended June 30, 2008,
due mostly to operating activities of $2,441,000. Excluding net debt borrowings
of $540,000, continuing operations provided $1,243,000 for the six months ended
June 30, 2008. Discontinued operations used $1,278,000 for the six months ended
June 30, 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.





Continuing
operations provided cash of $2,899,000 for the first six months of 2007, due
mostly to improvements in working capital. Excluding borrowings, continuing
operations provided $2,386,000 for the six months ended June 30, 2007.
Discontinued operations used $2,899,000 for the six months ended June 30, 2007
primarily for funding the on-going environmental remediation at the Muskogee,
Oklahoma property.





Operating
Activities





For the
six months ended June 30, 2008, operating activities provided $2,441,000 in cash
with improvements in working capital coming from decreases in receivables,
prepaids and other assets, partially offset by decreases in accounts payable and
accrued liabilities and increases in inventories.  Accounts receivable
decreased by $267,000 due to strong collections and a 5-day decrease in days
outstanding. Inventories increased by $1,500,000 due to the higher sales
demand.





23
 Index





For the
six months ended June 30, 2007, operating activities provided $2,952,000 in cash
with improvements in working capital coming from decreases in
receivables, prepaids and other assets along with increases in accounts
payable and accrued liabilities.





Investing
Activities





For the
six months ended June 30, 2008, investing activities used $1,199,000, which
included $1,209,000for capital
expenditures, primarily for replacement equipment and upgrades for both business
segments, partially offset by $10,000 in proceeds for the sale of equipment. One
customer provided $126,000 to the Company to purchase one piece of equipment for
use in producing the customer’s parts.  Two other customers committed
to provide nearly $4 million of capital for equipment, which will remain their
property, and a building addition. The first phase of the equipment is scheduled
to be fully operational in the second half of 2008 while the second phase of the
equipment and building installation is scheduled to be in operation in the
first half of 2009.





For the
six months ended June 30, 2007, investing activities consumed $566,000 for
capital expenditures for both business segments.





Financing
Activities





Financing
activities provided $540,000 for the six months ended June 30, 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 $393,000 were made in 2008
for short-term borrowings from the revolving line of credit. Payments of $67,000
in 2008 of long-term debt were for loans from various economic agencies in
Pennsylvania.





Financing
activities provided $513,000 for the six months ended June 30, 2007. Net
borrowings for the first six months of 2007 from the revolving line of credit
were $667,000, with payments of long-term debt of $154,000.




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;





24
 Index





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





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





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





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





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





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.





25
 Index





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.





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 June
2008, the FASB issued FASB Staff Position (FSP) EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities.” This FSP provides that unvested share-based payment
awards that contain non-forfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in
the computation of earnings per share pursuant to the two-class method. The
Company does not currently have any share-based awards. Therefore, application
of this FSP is not expected to have an effect on the Company’s financial
reporting.





In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The
Hierarchy of Generally Accepted Accounting Principles”(“FAS 162”). This
Standard identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with generally
accepted accounting principles. FAS 162 directs the hierarchy to the entity,
rather than the independent auditors, as the entity is responsible for selecting
accounting principles for financial statements that are presented in conformity
with generally accepted accounting principles. The Standard is effective 60 days
following SEC approval of the Public Company Accounting Oversight Board
amendments to remove the hierarchy of generally accepted accounting principles
from the auditing standards. FAS 162 is not expected to have an impact on the
Company’s financial condition, results of operations or cash flows.





In April
2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, “Determination of the
Useful Life of Intangible Assets” which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible
Assets. This Staff Position is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. Early adoption is prohibited. Application of this FSP is not
expected to have a significant impact on the Company’s financial
statements.





26
 Index





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, “Non-controlling 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 non-controlling 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.





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 the Company’s results of operations
or financial position.





27
 Index





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 6.0% of net
sales for the six months ended June 30, 2008 and 6.1% of net sales for the six
months ended June 30, 2007, a decrease of 0.1% 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.





Contractual
Obligations





The
following table summarizes payments due by year for the contractual obligations
at June 30, 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
            
            
            23
            
            
            
            9
            
            
            
            14
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Operating
      and capital leases
            
            
            536
            
            
            
            118
            
            
            
            123
            
            
            
            79
            
            
            
            64
            
            
            
            152
            
            
            
            -Fifth
      Third revolving line
            
            
            15,106
            
            
            
            365
            
            
            
            14,741
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Fifth
      Third term loan
            
            
            3,470
            
            
            
            195
            
            
            
            3,275
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Letters
      of credit
            
            
            771
            
            
            
            -
            
            
            
            771
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Environmental
      liabilities
            
            
            32,219
            
            
            
            2,308
            
            
            
            2,432
            
            
            
            2,736
            
            
            
            1,978
            
            
            
            1,978
            
            
            
            20,787Total
            
            $
            58,625
            
            
            $
            2,995
            
            
            $
            22,106
            
            
            $
            3,965
            
            
            $
            3,192
            
            
            $
            3,280
            
            
            $
            23,087





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 5.00%.





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.





28
 Index





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 June 30, 2008 was $1,002,000, compared with
$1,963,000 at December 31, 2007.





29
 Index





ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





The
Company's operations are not currently subject to market risks of a material
nature for interest risks, foreign currency rates or other market price
risks.  The only debt subject to interest fluctuations is the
short-term borrowing under the revolving line of credit.  A
significant portion of raw materials consumed by the Company is various steel
alloys.  The Company began to experience price increases on raw
materials in 2004 and raw material price 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 concluded that the Company‘s
disclosure controls and procedures were effective in all material respects as of
June 30, 2008.





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.





Remedial
Actions and Changes in Internal Control over Financial Reporting





Management
has developed and implemented remediation plans to address the material weakness
noted at prior year 10-K 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.





Effective
June 13, 2008, the Board of Directors did not replace the Audit Committee
members that resigned as Directors. The current structure of the Board of
Directors would meet the financial expert conditions, but not the independence
criteria. Therefore, no Audit Committee is being formed, but the full Board will
act as an Audit Committee, understanding that independence is an
exception.





There
were no changes in the Company’s internal controls over financial reporting that
occurred during the first six months of 2008 that materially affected, or are
reasonably likely to material affect, the Company’s internal control over
financial reporting.





30
 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.   As a result of repeated delays by A&M, 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.   FMRI participated in a non-binding mediation on June
24, 2008.  The mediation was not successful and no settlements were
reached. Therefore the lawsuits are continuing, although the mediator will
continue efforts to craft a settlement.





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.





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. These actions have resulted in
insurance recoveries of $1,730,000 in 2005, $5,000 in 2006 and $400,000 in
2007.  No recoveries have been received in 2008.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, FLRI Note, ED
Note and on account of EPA CERCLA claims.





31
 Index





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 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.





32
 Index





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.





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
for the Advance Structures segment 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.





33
 Index





Liquidity
of the Company Stock





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








ITEM 2 – UNREGISTERED SALES OF SECURITIES AND USE OF
PROCEEDS





None.








ITEM 3 – DEFAULTS UPON SENIOR SECURITIES





None.








ITEM 4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS





None.








ITEM 5 – OTHER INFORMATION





The Board
of Directors has determined that the contract of President and Chief Executive
Officer, Gary L. Tessitore, which expires on January 23, 2009, will not be
renewed.








ITEM 6 – EXHIBITS





Exhibit
      #
            Description of
      Exhibit




10.1
            Letter to President and Chief Executive Officer
      regarding non-renewal of Employment
  Contract




31.1
            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 2002





31.2
            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 2002





32.1
            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





34
 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. TessitoreAugust 14.
      2008
            President
      and Chief Executive Officer/s/ R. Michael
    McEnteeR.
      Michael McEnteeVice
      President andAugust 14,
      2008
            Chief
      Financial Officer






35