**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C.  20549**





**FORM
      10-Q**





(MARK
      ONE)





x           QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
      FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007





OR





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


From ____________ to ____________





Commission
      File Number 1-8676


**FANSTEEL
      INC.**


(Exact
      Name of Registrant as Specified in Its Charter)





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





570
      Lake
      Cook Road, Suite 200


Deerfield,
      Illinois 60015


(Address
      of principal executive offices and zip code)


(847)
      689-4900


(Registrant’s
      Telephone Number, Including Area Code)





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





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


Large
                accelerated filer  o
            Accelerated
                filer o
            Non-accelerated
                filerx





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes  o  No  x





APPLICABLE
      ONLY TO REGISTRANTS INVOLVED IN


BANKRUPTCY
      PROCEEDINGS DURING THE PRECEDING FIVE YEARS.





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





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




Class
            
            Outstanding
                at July 31, 2007Common
                Stock, $.01 par value
            
            3,420,000
                shares







1





FANSTEEL
      INC.


FORM
      10-Q
– INDEX


June
      30,
      2007








**PART
                I.**
            **FINANCIAL
                INFORMATION**
            Page
                No.Item
                1
            Consolidated
                Financial StatementsConsolidated
                Statement of Operations (unaudited) – Three
                months ended June 30, 2007 and 2006; six months ended June 30, 2007
                and
                2006
            3-4Consolidated
                Balance Sheet – June 30, 2007 (unaudited) and
                December 31, 2006
            5-6Consolidated
                Statement of Cash Flows (unaudited) – Six months
                ended June 30, 2007 and six months ended June 30, 2006
            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
                4
            Controls
                and Procedures
            30**PART
                II**
            **OTHER
                INFORMATION**Item
                1
            Legal
                Proceedings
            31-33Item
                1A
            Risk
                Factors
            33-35Item
                2
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            35Item
                3
            Defaults
                Upon Senior Securities
            35Item
                4
            Submission
                of Matters to a Vote of Security
                Holders
            35Item
                5
            Other
                Information
            36Item
                6
            Exhibits
            36Signatures
            
            37Exhibit
                10.1
            Letter
                to Vice President and Chief Financial 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
            
            
            Three
                MonthsEnded
            
            
            EndedJune
                30, 2007
            
            
            June
                30, 2006Net
                Sales
            
            $
            19,208,510
            
            
            $
            17,310,193Cost
                and ExpensesCost
                of products sold
            
            
            16,025,143
            
            
            
            14,419,478Selling,
                general and administrative
            
            
            2,579,688
            
            
            
            1,703,20418,604,831
            
            
            
            16,122,682Operating
                Income
            
            
            603,679
            
            
            
            1,187,511Other
                Income (Expense)Interest
                expense
            
            
            (392,625
            )
            
            
            (374,063
            )Other
            
            
            (12,406
            )
            
            
            11,382(405,031
            )
            
            
            (362,681
            )Income
                from Continuing Operations Before Income Taxes
            
            
            198,648
            
            
            
            824,830Income
                Taxes
            
            
            -
            
            
            
            -Net
                Income from Continuing Operations
            
            
            198,648
            
            
            
            824,830Loss
                from Discontinued Operations
            
            
            (1,082,908
            )
            
            
            (1,022,368
            )Net
                Loss
            
            $
            (884,260
            )
            
            $
            (197,538
            )Weighted
                Average Number of Common Shares Outstanding
            
            
            3,420,000
            
            
            
            3,420,000Basic
                and Diluted Net Income (Loss) per ShareaContinuing
                operations
            
            $
            0.06
            
            
            $
            0.24Discontinued
                operations
            
            
            (0.32
            )
            
            
            (0.30
            )Net
                income (loss)
            
            $
            (0.26
            )
            
            $
            (0.06
            )




a
        Basic earnings per
        share and diluted earnings per share are the same.


See
      Notes to Consolidated Financial
      Statements




3
 *Index*




Fansteel
      Inc.


Consolidated
      Statement of Operations


(Unaudited)





Six
                Months
            
            
            Six
                MonthsEnded
            
            
            EndedJune
                30, 2007
            
            
            June
                30, 2006Net
                Sales
            
            $
            37,541,306
            
            
            $
            33,881,833Cost
                and ExpensesCost
                of products sold
            
            
            31,606,554
            
            
            
            28,987,381Selling,
                general and administrative
            
            
            4,136,805
            
            
            
            3,275,94435,743,359
            
            
            
            32,263,325Operating
                Income
            
            
            1,797,947
            
            
            
            1,618,508Other
                Income (Expense)Interest
                expense
            
            
            (760,614
            )
            
            
            (694,006
            )Other
            
            
            (54,067
            )
            
            
            6,054(814,681
            )
            
            
            (687,952
            )Income
                from Continuing Operations Before Income Taxes
            
            
            983,266
            
            
            
            930,556Income
                Taxes
            
            
            -
            
            
            
            -Net
                Income from Continuing Operations
            
            
            983,266
            
            
            
            930,556Loss
                from Discontinued Operations
            
            
            (1,878,243
            )
            
            
            (1,843,466
            )Net
                Loss
            
            $
            (894,977
            )
            
            $
            (912,910
            )Weighted
                Average Number of Common Shares Outstanding
            
            
            3,420,000
            
            
            
            3,420,000Basic
                and Diluted Net Income (Loss) per ShareaContinuing
                operations
            
            $
            0.29
            
            
            $
            0.27Discontinued
                operations
            
            
            (0.55
            )
            
            
            (0.54
            )Net
                income (loss)
            
            $
            (0.26
            )
            
            $
            (0.27
            )




a
        Basic earnings per
        share and diluted earnings per share are the same.


See
      Notes
      to Consolidated Financial Statements




4
 *Index*




Fansteel
      Inc.


Consolidated
      Balance Sheet




June
                30,
            
            
            December
                31,2007
            
            
            2006(Unaudited)ASSETSCurrent
                assetsCash
                and cash equivalents
            
            $
            17,655
            
            
            $
            17,672Accounts
                receivable, less allowance of $471,000 and $408,000 at June 30, 2007
                and
                December 31, 2006, respectively
            
            
            11,274,662
            
            
            
            11,449,317InventoriesRaw
                material and supplies
            
            
            1,496,809
            
            
            
            1,285,758Work-in
                process
            
            
            7,769,792
            
            
            
            7,525,358Finished
                goods
            
            
            473,716
            
            
            
            549,687Total
                inventories
            
            
            9,740,317
            
            
            
            9,360,803Prepaid
                expenses
            
            
            801,568
            
            
            
            1,466,475Total
                current assets
            
            
            21,834,202
            
            
            
            22,294,267Property,
                plant and equipmentLand
            
            
            917,419
            
            
            
            917,419Buildings
            
            
            4,027,296
            
            
            
            4,027,059Machinery
                and equipment
            
            
            7,658,021
            
            
            
            7,092,49312,602,736
            
            
            
            12,036,971Less
                accumulated depreciation
            
            
            3,644,638
            
            
            
            3,162,552Net
                property, plant and equipment
            
            
            8,958,098
            
            
            
            8,874,419Other
                assetsDeposits
            
            
            710,002
            
            
            
            880,450Reorganization
                value in excess of amounts allocable to identified assets
            
            
            12,893,734
            
            
            
            12,893,734Property
                held for sale
            
            
            1,802,500
            
            
            
            1,802,500Other
            
            
            317,601
            
            
            
            289,796Total
                other assets
            
            
            15,723,837
            
            
            
            15,866,480$
            46,516,137
            
            
            $
            47,035,166


See
        Notes
        to Consolidated Financial Statements


5
 *Index*




See
      Notes to Consolidated Financial
      StatementsFansteel Inc.


Consolidated
      Balance Sheet




June
                30,
            
            
            December
                31,2007
            
            
            2006(Unaudited)LIABILITIES
                AND SHAREHOLDERS' DEFICITCurrent
                liabilitiesAccounts
                payable
            
            $
            8,902,311
            
            
            $
            8,459,078Accrued
                liabilities
            
            
            6,669,082
            
            
            
            6,440,003Short-term
                borrowings
            
            
            14,025,169
            
            
            
            13,357,786Current
                maturities of long-term debt
            
            
            1,045,804
            
            
            
            1,062,750Total
                current liabilities
            
            
            30,642,366
            
            
            
            29,319,617Long-term
                debt
            
            
            4,228,132
            
            
            
            4,838,630Other
                liabilitiesEnvironmental
                remediation
            
            
            21,923,817
            
            
            
            22,428,823Non-current
                pension liability
            
            
            917,872
            
            
            
            917,872Total
                other liabilities
            
            
            22,841,689
            
            
            
            23,346,695Total
                liabilities
            
            
            57,712,187
            
            
            
            57,504,942Minority
                interest
            
            
            166,804
            
            
            
            -Shareholders'
                equity (deficit)Common
                stock, par value $0.01
            
            
            34,200
            
            
            
            34,200Authorized
                3,600,000 shares, issued and outstanding 3,420,000Capital
                in excess of par value
            
            
            296,314
            
            
            
            296,314Accumulated
                deficit
            
            
            (11,345,136
            )
            
            
            (10,450,159
            )Other
                comprehensive lossForeign
                currency translation
            
            
            (5,068
            )
            
            
            (6,967
            )Accumulated
                unfunded pension liability
            
            
            (343,164
            )
            
            
            (343,164
            )Total
                other comprehensive loss
            
            
            (348,232
            )
            
            
            (350,131
            )Total
                shareholders’ deficit
            
            
            (11,362,854
            )
            
            
            (10,469,776
            )Total
                liabilities and shareholders' deficit
            
            $
            46,516,137
            
            
            $
            47,035,166




See
      Notes
      to Consolidated Financial Statements




6
 *Index*




Fansteel
      Inc.


Consolidated
      Statement of Cash Flows


(Unaudited)





Six
                Months
            
            
            Six
                MonthsEnded
            
            
            EndedJune
                30, 2007
            
            
            June
                30, 2006**Cash
                Flows From Operating Activities:**Net
                loss
            
            $
            (894,977
            )
            
            $
            (912,910
            )Adjustments
                to reconcile net loss to net cash provided by  operating
                activities:Depreciation
                and amortization
            
            
            482,086
            
            
            
            487,362Compensation
                expense
            
            
            166,804
            
            
            
            -Accretion
                on long-term debt and other liabilities
            
            
            113,560
            
            
            
            166,902Loss
                from discontinued operations
            
            
            1,878,243
            
            
            
            1,843,466Change
                in assets and liabilities:Decrease
                (increase) in accounts receivable
            
            
            174,655
            
            
            
            (1,690,927
            )(Increase)
                in inventories
            
            
            (379,514
            )
            
            
            (1,987,395
            )Decrease
                in prepaid expenses
            
            
            666,108
            
            
            
            455,203Increase
                in accounts payable and accrued liabilities
            
            
            605,725
            
            
            
            2,443,198(Decrease)
                increase in income taxes payable
            
            
            (3,468
            )
            
            
            692Decrease
                (increase) in other assets
            
            
            142,643
            
            
            
            (27,811
            )**Net
                cash provided by operating activities**
            
            
            2,951,865
            
            
            
            777,780**Cash
                Flows From Investing Activities:**Capital
                expenditures
            
            
            (565,765
            )
            
            
            (619,425
            )**Net
                cash used in investing activities**
            
            
            (565,765
            )
            
            
            (619,425
            )**Cash
                Flows From Financing Activities:**Proceeds
                from short-term borrowing
            
            
            667,240
            
            
            
            2,265,498Payments
                on long-term debt
            
            
            (154,075
            )
            
            
            (146,363
            )**Net
                cash provided by financing activities**
            
            
            513,165
            
            
            
            2,119,135**Net
                Increase in Cash and Cash Equivalents from Continuing
                Operations**
            
            
            2,899,265
            
            
            
            2,277,490**Cash
                Flows of Discontinued Operations:**Operating
                cash flows
            
            
            (2,899,282
            )
            
            
            (2,473,354
            )**Total
                Cash Flows of Discontinued Operations**
            
            
            (2,899,282
            )
            
            
            (2,473,354
            )**Net
                Decrease in Cash and Cash Equivalents**
            
            
            (17
            )
            
            
            (195,864
            )**Cash
                and Cash Equivalents at Beginning of Period**
            
            
            17,672
            
            
            
            791,453**Cash
                and Cash Equivalents at End of Period**
            
            $
            17,655
            
            
            $
            595,589**Supplemental
                disclosures of cash flow information:**Cash
                paid during the year for:Interest
                (net of amounts capitalized)
            
            $
            609,614
            
            
            $
            449,509Income
                taxes (refunds)
            
            
            (3,468
            )
            
            
            692





See
      Notes
      to Consolidated Financial Statements





7
 *Index*




**Notes
      to Unaudited Consolidated Financial
      Statements**





**Note
      1 - Description of Business**





The
      consolidated financial statements as of and for the periods ending June 30,
      2007
      and June 30, 2006 of Fansteel Inc. are unaudited but include all adjustments
      (consisting only of normal recurring adjustments) that management considers
      necessary for a fair presentation of such financial statements.  These
      financial statements have been prepared in accordance with accounting principles
      generally accepted in the United States for interim financial information and
      with Article 10 of SEC Regulation S-X.  Accordingly, they do not
      include all of the information and footnotes required by accounting principles
      generally accepted in the United States for complete financial
      statements.  Operating results during the three and six months ended
      June 30, 2007 are not necessarily indicative of the results that may be expected
      for the year ending December 31, 2007.





Fansteel
      Inc. and its subsidiaries ("Fansteel" or the "Company") are manufacturers of
      engineered metal components using the sand castings, investment casting and
      powdered metal processes. Products manufactured are used in a variety of markets
      including military and commercial aerospace, automotive, energy, agricultural
      and construction machinery, lawn and garden equipment, marine, plumbing and
      electrical hardware 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. Compensation expense of $164,000 was recorded in the second
      quarter 2007. 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.





In
      the
      2006 Annual Report on Form 10-K, the Company disclosed 2006 Comprehensive Loss
      of $5,604,300 which included the adoption of SFAS 158. Comprehensive Loss for
      2006 should not have included the impact of adopting SFAS 158. The effect of
      adopting SFAS 158 should have been only included in Accumulated Other
      Comprehensive Loss. The correct Comprehensive Loss for 2006 should have been
      $5,261,136. The Company will correct the 2006 Comprehensive Loss when it
      publishes its 2007 Annual Report on Form 10-K.





Certain
      reclassifications have been made to prior periods’ financial statements to
      conform to the 2007 presentation.





8
 *Index*





**Note
      2 - Earnings per Share**




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





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





Three
                  Months Ended
              
              
              Six
                  Months EndedNumerator:
              
              June
                  30, 2007
              
              
              June
                  30, 2006
              
              
              June
                  30, 2007
              
              
              June
                  30, 2006Net
                  loss
              
              $
              (884,260
              )
              
              $
              (197,538
              )
              
              $
              (894,977
              )
              
              $
              (912,910
              )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
              
              $
              (0.26
              )
              
              $
              (0.06
              )
              
              $
              (0.26
              )
              
              $
              (0.27
              )Diluted
                  earnings per share
              
              $
              (0.26
              )
              
              $
              (0.06
              )
              
              $
              (0.26
              )
              
              $
              (0.27
              )






**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 of an
      amended NRC License and related Decommissioning Plan to FMRI.  At
      January 23, 2004, the liability for the environmental remediation was $38.7
      million, and the recorded discounted liability using a discount rate of 11.3%
      as
      part of fresh-start accounting, was $19.2 million.   In 2005,
      FMRI began removal of the residues under phase 1 of the decommissioning plan,
      which is expected to remove over 80% of the radioactive contaminated residues.
      In 2005 and 2006, the Company received insurance recoveries from its insurers
      of
      which $768,000 and $70,000, respectively, of net insurance recoveries were
      allocated for a prepayment of the inter-company FMRI $30.6 million note, which
      in turn was used to reduce its borrowing from the Decommissioning Trust. Phase
      1
      is behind schedule, but continues in 2007.  At June 30, 2007 and
      December 31, 2006, the gross estimated liability was $29,340,000 and
      $30,971,000, respectively, and the recorded discounted liability, using a
      discount rate of 11.3%, was $17,627,000 and $18,106,000,
      respectively.





*Lexington
      Facility*





The
      Lexington Facility was constructed in 1954 and ceased operations in 2003.
      Investigations performed in 1997 as part of a company-wide environmental audit
      revealed the presence of volatile organic compounds ("VOCs") and PCBs in soils
      and groundwater in excess of state cleanup levels. The contaminants are believed
      to have been discharged through a former drainage field. While VOCs were
      detected at the down gradient boundary of the facility, no VOCs were detected
      in
      an unnamed stream that is located down gradient of the facility.  To
      Fansteel's knowledge, the contamination at this site does not pose an imminent
      threat to health, safety or welfare.  In May 2003, the Kentucky
      Natural Resources and Environmental Protection Cabinet ("KNREPC") requested
      that
      the Predecessor Company submit a plan for further characterization of the
      facility.  The Predecessor Company submitted a letter to the KNREPC in
      September 2003 setting forth a conceptual characterization plan and advising
      the
      agency that a detailed Site Characterization Plan will be submitted by FLRI,
      a
      special purpose subsidiary, which pursuant to the Reorganization Plan now owns
      the Lexington facility.  An estimated $1.78 million to perform the
      remedial activities was determined and a liability in that amount was recorded
      at January 23, 2004.  In September 2005, the Company received
      insurance recoveries from its insurers of which $111,000 of net insurance
      recoveries were allocated to FLRI as a prepayment of the inter-company FLRI
      $1.78 million note. FLRI anticipates implementing the Site Characterization
      Plan
      in 2007.  At June 30, 2007 and December 31, 2006, the gross estimated
      liability was $1,217,000 and $1,233,000, respectively, and the recorded
      discounted liability, using a discount rate of 11.3%, was $1,155,000 and
      $1,129,000, respectively.





The
      land
      and building of the Lexington facility is included on the balance sheet as
      property held for sale at $1,327,500, which is the latest appraisal of the
      property.  A number of third parties have expressed interest in the
      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.





10
 *Index*





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 nine months after issuance. In September
      2005, the Company received insurance recoveries from its insurers of which
      $147,000 of net insurance recoveries were remitted as a prepayment of the note
      delivered to the EPA.  The Company has made the first four payments
      due under the promissory note to date. At June 30, 2007 and December 31, 2006,
      the gross estimated liability was $79,000****and $192,000,
      respectively, and the recorded discounted liability, using a discount rate
      of
      11.3%, was $51,000****and $147,000,
      respectively.





*Washington
      Manufacturing*





On
      December 31, 2004, the Company sold substantially all of the assets (including,
      but not limited to, machinery and equipment, raw material items, work-in-process
      items, finished goods items, receivables, machinery and equipment contracts,
      customer contracts and supplier contracts, but excluding real estate, fixtures
      and certain other assets) of the division of the Company known as "Washington
      Manufacturing" (the "Washington Division") to Whitesell Corporation
      (“Whitesell”), a customer of the Washington Division, for consideration
      consisting of a combination of (i) cash (in the initial amount of approximately
      $2.0 million, subject to post-closing adjustment) and (ii) the assumption by
      Whitesell of certain liabilities of the Washington Division (in the initial
      amount of approximately $1.0 million, determined in accordance with U.S.
      generally accepted accounting principles consistently applied, subject to
      post-closing adjustment) (collectively, the “Washington Sale”). Whitesell had
      been leasing the buildings until it vacated in December 2006. The Company is
      actively trying to sell the property and has classified the property 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.





On
      April
      23, 2007, the Company received a deposit in escrow for the purchase of the
      Washington facility at the current book value, but in July 2007 the buyer
      decided not to purchase the property due to issues with its own
      financing.





11
 *Index*




*Results
      of Discontinued Operations*





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





Discontinued
      operations reported losses of $1,083,000 and $1,022,000 for the three months
      ended June 30, 2007 and June 30, 2006, respectively, and $1,878,000 and
      $1,843,000 for the six months ended June 30, 2007 and June 30, 2006,
      respectively.  The losses for all 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.





**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 $2,147,000 from 2005 to 2009.  At June
      30, 2007 and December 31, 2006 the gross estimated liability was $2,003,000
      and
      $2,057,000, respectively, and the recorded discounted liability, using a
      discount rate of 11.3%, was $1,920,000 and $1,934,000,
      respectively.





Wellman
      is permitted to operate a sanitary landfill for the disposal of its foundry
      sand.  It is anticipated that, based upon recent projections by
      third-party consultants, Wellman is likely to be required to close the landfill
      in 2037 at a future cost approximating $1,166,000. The recorded discounted
      liability, using a discount rate of 11.3%, at June 30, 2007 and December 31,
      2006 was $582,000 and $551,000, respectively.





In
      October 2000, Wellman provided the Iowa Department of Health (the "IDPH") with
      a
      "Historical Site Assessment" that identified uranium and thorium concentrations
      at the site.  The IDPH required Wellman to perform a Risk Assessment
      ("RA") to determine whether the thorium-containing materials are a threat to
      human health or the environment.  Wellman is awaiting the final
      report, but to its knowledge, the existing data forming the basis for the RA
      indicates that there is no imminent threat to health, safety or the
      environment.  Wellman anticipates that the IDPH will allow it to
      address the thorium issue when it closes the sanitary
      landfill.  However, there is a risk that the IDPH will require Wellman
      to remove or remediate the thorium prior to that time.  The current
      estimated cost to remediate the thorium is $1,075,000. The recorded discounted
      liability, using a discount rate of 11.3%, at June 30, 2007 and December 31,
      2006 was $546,000 and $518,000, 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.





12
 *Index*




**Note
      5 - Debt**





In
      order
      to increase the Company’s liquidity and ability to meet operational and
      strategic needs, Fansteel Inc. and its wholly-owned subsidiary, Wellman Dynamics
      Corporation, as borrowers, entered into a Loan and Security Agreement with
      Fifth
      Third Bank (Chicago), as lender, on July 15, 2005 with an original principal
      amount of $15,000,000. As the Company’s businesses have grown, so have the
      Company’s needs for funding working capital, capital expenditures and other
      requirements. With the corresponding increase in its borrowing base, consisting
      of accounts receivable, inventories and machinery and equipment, the Company
      sought to increase its revolving line of credit above the $15 million level.
      Accordingly, this loan agreement with Fifth Third Bank was amended on December
      4, 2006.





Under
      the
      December 4, 2006 amended loan facility, subject to certain borrowing conditions,
      the Company could incur revolving loans, credit card charges and letter of
      credit issuances in an amount up to $21.5 million from a borrowing base
      comprised of a percentage of eligible accounts receivable and inventories and
      $2
      million for machinery and equipment.  Revolving loans included $1.5
      million for borrowing under credit cards issued by the Lender, not subject
      to
      the borrowing base. The term was extended with revolving loans due and payable
      in full on January 5, 2009. As borrowers under this Loan and Security Agreement,
      the Company is required to meet certain covenants, including those that require
      minimum EBITDA levels, limit leverage and establish debt service
      requirements.  The interest rate on the line is at prime and there is
      a .25% unused line fee.  Substantially all of the assets of the
      borrowers are pledged as security for this financing.





On
      June
      5, 2007 the Company and Fifth Third Bank again amended the loan facility,
      increasing the maximum revolving loan amount to $22.5
      million.  Revolving loans were amended to include $1.5 million for
      borrowing that is not subject to the borrowing base limits.  Any
      amounts borrowed as part of the $1.5 million will be charged interest at prime
      rate plus one percentage point.  The $1.5 million borrowing revolving
      note will terminate on September 30, 2007.





At
      June
      30, 2007 the Company had letters of credit of $770,000 for casualty insurance
      collateral and environmental assurance with an interest rate of 1.5%. The
      Company’s credit availability was $2,587,000 at June 30,
      2007.  Borrowing under the revolving line of credit is included as
      short-term borrowings.





**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, 2007 and December 31, 2006, the Company had potential federal and state
      income tax benefits from net operating loss carry-forwards of $22.1 million
      that
      expire in various years through 2023.





13
 *Index*





Valuation
      allowances have been recorded for the full amount of all net operating loss
      carry-forwards as the net operating loss carry-forwards are not anticipated
      to
      be realized before expiration.





**Note
      7 - Business Segments**





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





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





Three
                Months Ended
            
            
            Six
                Months EndedNet
                Sales:
            
            June
                30, 2007
            
            
            June
                30, 2006
            
            
            June
                30, 2007
            
            
            June
                30, 2006Advanced
                Structures
            
            $
            10,468,672
            
            
            $
            10,240,143
            
            
            $
            21,410,389
            
            
            $
            20,236,181Industrial
                Metal Components
            
            
            8,739,838
            
            
            
            7,070,050
            
            
            
            16,130,917
            
            
            
            13,645,652Total
                Net Sales
            
            $
            19,208,510
            
            
            $
            17,310,193
            
            
            $
            37,541,306
            
            
            $
            33,881,833Operating
                Income (Loss):Advanced
                Structures
            
            $
            552,493
            
            
            $
            1,379,703
            
            
            $
            1,398,847
            
            
            $
            2,657,866Industrial
                Metal Components
            
            
            616,743
            
            
            
            (192,192
            )
            
            
            964,657
            
            
            
            (1,039,358
            )Corporate
            
            
            (565,557
            )
            
            
            -
            
            
            
            (565,557
            )
            
            
            -Total
                Operating Income
            
            $
            603,679
            
            
            $
            1,187,511
            
            
            $
            1,797,947
            
            
            $
            1,618,508





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





In
      the
      second quarter of 2007, Corporate incurred $566,000 of expenses 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. Corporate did not have any of these expenses in
      2006.





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





June
                30,
            
            
            December
                31,Identifiable
                assets:
            
            2007
            
            
            2006Advanced
                Structures
            
            $
            17,823,268
            
            
            $
            18,581,014Industrial
                Metal Components
            
            
            11,188,284
            
            
            
            10,562,719Corporate
            
            
            15,597,671
            
            
            
            14,853,488Discontinued
            
            
            1,906,914
            
            
            
            3,037,945Total
                Assets
            
            $
            46,516,137
            
            
            $
            47,035,166




14
 *Index*





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




Three
                Months Ended
            
            
            Six
                Months EndedJune
                30,
            
            
            June
                30,
            
            
            June
                30,
            
            
            June
                30,Depreciation
                and amortization:
            
            2007
            
            
            2006
            
            
            2007
            
            
            2006Advanced
                Structures
            
            $
            125,948
            
            
            $
            98,680
            
            
            $
            238,581
            
            
            $
            197,360Industrial
                Metal Components
            
            
            120,465
            
            
            
            142,376
            
            
            
            234,345
            
            
            
            283,808Corporate
            
            
            4,596
            
            
            
            3,175
            
            
            
            9,160
            
            
            
            6,194Discontinued
            
            
            -
            
            
            
            7,860
            
            
            
            -
            
            
            
            15,720Total
                depreciation and amortization
            
            $
            251,009
            
            
            $
            252,091
            
            
            $
            482,086
            
            
            $
            503,082Capital
                expenditures:Advanced
                Structures
            
            $
            206,492
            
            
            $
            210,359
            
            
            $
            336,523
            
            
            $
            543,433Industrial
                Metal Components
            
            
            118,573
            
            
            
            36,209
            
            
            
            228,124
            
            
            
            69,401Corporate
            
            
            1,118
            
            
            
            4,710
            
            
            
            1,118
            
            
            
            6,591Total
                capital expenditures
            
            $
            326,183
            
            
            $
            251,278
            
            
            $
            565,765
            
            
            $
            619,425




15
 *Index*




**ITEM
      2 - 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, 2007 As Compared To Three Months Ended June 30,
      2006***




*Net
      Sales*





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





Three
                Months
            
            
            Three
                MonthsEnded
            
            
            EndedJune
                30, 2007
            
            
            June
                30, 2006Advanced
                Structures
            
            $
            10,468,672
            
            
            $
            10,240,143Industrial
                Metal Components
            
            
            8,739,838
            
            
            
            7,070,050$
            19,208,510
            
            
            $
            17,310,193





The
      Company’s consolidated net sales for the three months ended June 30, 2007
      increased $1.9 million, or 11.0%, compared to the three months ended June 30,
      2006. The increase was due largely to increased sales of investment castings
      in
      the Industrial Metal Components segment.





Advanced
      Structures’ net sales for the three months ended June 30, 2007 increased by
      $229,000, or 2.2%, compared to the three months ended June 30,
      2006.  Strong demand for helicopter components, military flight parts
      and tooling on new programs offset the loss in the second quarter 2006 of a
      key
      components contract for missile components.





Industrial
      Metal Components' net sales for the three months ended June 30, 2007 increased
      $1.7 million, or 23.6%, compared with the three months ended June 30,
      2006.  Included in segment sales are surcharges for increased metal
      costs in the quarter ended June 30, 2007 of $1.2 million, which were $525,000
      higher than the quarter ended June 30, 2006 due to significant increases in
      brass, bronze and stainless steel prices. The remainder of this increase was
      attributable to higher investment casting sales, primarily for new diesel engine
      programs for trucks and buses. Slightly offsetting this improvement were sales
      of powdered metal components, which decreased by $90,000, or 3.0%, due to weaker
      demand from heavy-duty truck customers.





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
            
            
            %
                Of
            
            
            Three
                Months
            
            
            %
                OfEnded
            
            
            Net
            
            
            Ended
            
            
            NetJune
                30, 2007
            
            
            Sales
            
            
            June
                30, 2006
            
            
            SalesAdvanced
                Structures
            
            $
            8,963,281
            
            
            
            85.6%
            
            
            $
            8,003,727
            
            
            
            78.2%Industrial
                Metal Components
            
            
            7,061,862
            
            
            
            80.8%
            
            
            
            6,415,751
            
            
            
            90.7%$
            16,025,143
            
            
            
            83.4%
            
            
            $
            14,419,478
            
            
            
            83.3%





Cost
      of
      products sold of $16.0 million for the three months ended June 30, 2007
      increased by $1.6 million compared to $14.4 million for the three months ended
      June 30, 2006, due largely to the increase in sales volume. As a percent of
      sales, cost of products sold at 83.4% for the three months ended June 30, 2007
      remained level compared with 83.3% for the three months ended June 30,
      2006.





In
      the
      Advanced Structures segment, cost of products sold of $9.0 million for the
      three
      months ended June 30, 2007 increased $1.0 million compared with cost of products
      sold of $8.0 million for the three months ended June 30, 2006. As a percent
      of
      net sales, cost of products increased by 7.4 points for the three months ended
      June 30, 2007 compared with the three months ended June 30, 2006. Training
      grant
      money received in June 2006 and not received in 2007, reduced cost of products
      sold by 6.0 percentage points in the three months ended June 30,
      2006.  The remaining increase was mainly due to higher scrap and
      rework that resulted from a more technically demanding product mix in
      2007.





The
      Industrial Metal Components’ cost of products sold increased to $7.1 million for
      the three months ended June 30, 2007 compared to cost of products sold of $6.4
      million for the three months ended June 30, 2006.  As a percent of net
      sales, cost of products were 80.8% for the three months ended June 30, 2007
      compared with 90.7% for the three months ended June 30, 2006. Higher volume
      for
      investment castings and cost reduction efforts provided the improvement in
      cost
      of sales.  In addition, the second quarter of 2006 was negatively
      impacted by expedited freight, inspection costs and scrap related to product
      issues with a major customer at the investment casting operation that increased
      cost of products sold for the segment by 1.4 percentage points.





*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:




17
 *Index*




Three
                Months
            
            
            %
                Of
            
            
            Three
                Months
            
            
            %
                OfEnded
            
            
            Net
            
            
            Ended
            
            
            NetJune
                30, 2007
            
            
            Sales
            
            
            June
                30, 2006
            
            
            SalesAdvanced
                Structures
            
            $
            952,898
            
            
            
            9.1%
            
            
            $
            856,713
            
            
            
            8.4%Industrial
                Metal Components
            
            
            1,061,233
            
            
            
            12.1%
            
            
            
            846,491
            
            
            
            12.0%Corporate
            
            
            565,557
            
            
            
            NA
            
            
            
            -
            
            
            
            NA$
            2,579,688
            
            
            
            13.4%
            
            
            $
            1,703,204
            
            
            
            9.8%





Selling,
      general and administrative expenses for the three months ended June 30, 2007
      were $2,580,000, an increase of $877,000 over the three months ended June 30,
      2006 expenses of $1,703,000. As a percent of sales, selling, general and
      administrative expenses increased to 13.4% in the second three months of 2007
      compared with 9.8% for the second three months of 2006.





In
      the
      Advanced Structures segment, selling, general and administrative expenses for
      the three months ended June 30, 2007 increased by $96,000 compared with the
      three months ended June 30, 2006. As a percent of sales, selling, general and
      administrative expenses increased to 9.1% in the second three months of 2007
      compared to 8.4% in the second three months of 2006. The higher volume and
      lower
      selling expenses were offset by $164,000 of compensation expense for 12 shares
      of stock that were granted in the second quarter of 2007 to key managers of
      Wellman Dynamics Corporation, a 98.8% owned subsidiary (after the grant) of
      Fansteel Inc. included in this segment.





Selling,
      general and administrative expenses for Industrial Metal Components segment
      for
      the three months ended June 30, 2007 increased $215,000 compared with the three
      months ended June 30, 2006. The increase is primarily related to higher costs
      related to audit charges for the Mexico operation and professional fees related
      to employee recruitment and management training. Selling, general and
      administrative expenses as a percent of sales increased to 12.1% for the three
      months ended June 30, 2007 compared with 12.0% for the three months ended June
      30, 2006. The increase in volume had a favorable effect.





Corporate
      selling, general and administrative expenses (not allocated to operations)
      were
      $566,000 for the three months ended June 30, 2007 compared with $0 for the
      three
      months ended June 30, 2006. Expenses in 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
            
            
            Three
                monthsEnded
            
            
            EndedJune
                30, 2007
            
            
            June
                30, 2006Advanced
                Structures
            
            $
            552,493
            
            
            $
            1,379,703Industrial
                Metal Components
            
            
            616,743
            
            
            
            (192,192
            )Corporate
            
            
            (565,557
            )
            
            
            -$
            603,679
            
            
            $
            1,187,511




18
 *Index*





Operating
      income for the three months ended June 30, 2007 decreased $584,000, or 49.2%,
      compared to the three months ended June 30, 2006. Unusual professional fees
      of
      $566,000 incurred in the second quarter of 2007 at Corporate had a negative
      impact along with $164,000 of compensation expense in the Advanced Structures
      segment. Results in 2006 included $617,000 in training grant monies at the
      Advanced Structures segment. Excluding these items, 2007 adjusted operating
      income would be $763,000 or 134% better than adjusted 2006 operating
      income.





Advanced
      Structures operating income of $552,000 for the three months ended June 30,
      2007
      decreased from operating income of $1,380,000 for the three months ended June
      30, 2006. 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. Operating income in the second three months
      of
      2006 included $617,000 of training grants from the state of Iowa.





Industrial
      Metal Components had operating income of $617,000 for the three months ended
      June 30, 2007 compared to an operating loss of $192,000 for the three months
      ended June 30, 2006.  Higher investment casting sales in 2007 provided
      much of the improvement for the three months ended June 30, 2007 compared with
      June 30, 2006.





Corporate’s
      operating loss of $566,000 at June 30, 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. Unallocated
      operating expenses for Corporate for the three months ended June 30, 2006 were
      $0.





*Other
      Expenses*





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


Three
                months
            
            
            Three
                monthsEnded
            
            
            EndedJune
                30, 2007
            
            
            June
                30, 2006Interest
                expenses
            
            $
            (392,625
            )
            
            $
            (374,063
            )Other
            
            
            (12,406
            )
            
            
            11,382$
            (405,031
            )
            
            $
            (362,681
            )





Other
      expense increased $42,000 in the three months ended June 30, 2007 compared
      to
      the three months ended June 30, 2006, as interest expense was higher due to
      the
      increased level of borrowing.





*Discontinued
      Operations*





Discontinued
      operations reported a loss of $1,083,000 in the three months ended June 30,
      2007
      and a loss of $1,022,000 in the three months ended June 30, 2006. 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.




19
 *Index*





*Income
      taxes*





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





*Net
      Income (Loss)*





The
      Company had a net loss of $884,000 for the three months ended June 30, 2007
      and
      a net loss of $198,000 for the three months ended June 30, 2006.




***2007
      Six Months As Compared To 2006 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
            
            
            Six
                MonthsEnded
            
            
            EndedJune
                30, 2007
            
            
            June
                30, 2006Advanced
                Structures
            
            $
            21,410,389
            
            
            $
            20,236,181Industrial
                Metal Components
            
            
            16,130,917
            
            
            
            13,645,652$
            37,541,306
            
            
            $
            33,881,833





Consolidated
      net sales for the six months ended June 30, 2007 increased $3.7 million, or
      10.8%, from the first six months of 2006 with the majority of the improvement
      coming from increased sales of investment castings in the Industrial Metal
      Components segment.





In
      the
      Advanced Structures segment, net sales for the six months ended June 30, 2007
      increased by $1.2 million, or 5.8%, compared to the six months ended June 30,
      2006.   Helicopter product demand has been strong along with
      increased demand for military and NASCAR products. These improvements have
      more
      than offset the May 2006 loss of a key contract for missile components that
      accounted for $2.0 million in sales for the six months ended June 30,
      2006.  Increased tooling sales for aircraft and military products
      provided additional improvement in this segment.





The
      Industrial Metal Components' net sales for the six months ended June 30, 2007
      increased $2.5 million, or 18.2%, compared with the six months ended June 30,
      2006.  This increase was due to improvement in investment casting
      sales, which increased $2.6 million, or 34.4%. Investment casting sales
      benefited from higher volume in all product lines, particularly in the diesel
      engine product line which provided the majority of the increase.
****Net sales of powdered metal components decreased $79,000,
      or 1.3%, primarily due to reduced demand for heavy-duty truck products and
      recreational vehicle parts.  Included in segment sales are surcharges
      for increased metal costs for the six months ended June 30, 2007 of $2.3
      million, which were $1.1 million higher than the six months ended June 30,
      2006
      due to significant increases in brass, bronze and stainless steel
      prices.








20
 *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:





Six
                Months
            
            
            %
                Of
            
            
            Six
                Months
            
            
            %
                OfEnded
            
            
            Net
            
            
            Ended
            
            
            NetJune
                30, 2007
            
            
            Sales
            
            
            June
                30, 2006
            
            
            SalesAdvanced
                Structures
            
            $
            18,310,146
            
            
            
            85.5%
            
            
            $
            15,975,753
            
            
            
            78.9%Industrial
                Metal Components
            
            
            13,296,408
            
            
            
            82.4%
            
            
            
            13,011,628
            
            
            
            95.4%$
            31,606,554
            
            
            
            84.2%
            
            
            $
            28,987,381
            
            
            
            85.6%





Cost
      of
      products sold of $31.6 million for the six months ended June 30, 2007 increased
      by $2.6 million, or 9.0%, compared to $29.0 million for the six months ended
      June 30, 2006, largely due to the increase in sales volume. As a percent of
      net
      sales, cost of products sold improved to 84.2% for the six months ended June
      30,
      2007 compared with 85.6% for the six months ended June 30, 2006.





In
      the
      Advanced Structures segment cost of products sold were $18.3 million for the
      six
      months ended June 30, 2007 compared with cost of products sold of $16.0 million
      for the six months ended June 30, 2006, an increase of $2.3 million. The
      increase related to training grant monies received in 2006 of $617,000, higher
      volume and an increase in scrap and rework resulting from a technically more
      demanding product mix in 2007. As a percent of net sales, cost of products
      increased by 6.6 points in the first six months of 2007 compared with the first
      six months of 2006, with training monies reducing 2006 costs by 3.1 percentage
      points.





The
      Industrial Metal Components’ cost of products sold were $13.3 million for the
      six months ended June 30, 2007 compared to cost of products sold of $13.0
      million for the six months ended June 30, 2006.  As a percent of net
      sales, cost of products were 82.4% for the first six months of 2007 compared
      with 95.4% for the first six months of 2006. Results in 2006 included unusual
      charges of $799,000 at the investment casting operation for expedited freight,
      inspection costs and scrap related to the start-up of new customer
      parts.  The balance of the improvement was due primarily to the higher
      volume at the investment casting operation along with cost reductions at both
      the investment casting and powder metal plants.





*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
                Months
            
            
            %
                Of
            
            
            Six
                Months
            
            
            %
                OfEnded
            
            
            Net
            
            
            Ended
            
            
            NetJune
                30, 2007
            
            
            Sales
            
            
            June
                30, 2006
            
            
            SalesAdvanced
                Structures
            
            $
            1,701,396
            
            
            
            7.9%
            
            
            $
            1,602,562
            
            
            
            7.9%Industrial
                Metal Components
            
            
            1,869,852
            
            
            
            11.6%
            
            
            
            1,673,382
            
            
            
            12.3%Corporate
            
            
            565,557
            
            
            NA
            
            
            
            -
            
            
            NA$
            4,136,805
            
            
            
            11.0%
            
            
            $
            3,275,944
            
            
            
            9.7%





Selling,
      general and administrative expenses for the first six months of 2007 were
      $4,137,000, an increase of $861,000 over the first six months of 2006 expenses
      of $3,276,000. Despite the increase in sales volume, selling, general and
      administrative expenses increased to 11.0% as a percent of net sales in the
      first six months of 2007 compared with 9.7% as a percent of sales for the first
      six months of 2006 due largely to $566,000 in unusual professional fees incurred
      in the second quarter of 2007.





21
 *Index*




In
      the
      Advanced Structures segment, selling, general and administrative expenses for
      the six months ended June 30, 2007 were $1,701,000 compared with $1,603,000
      for
      the six months ended June 30, 2006. As a percent of sales, selling, general
      and
      administrative expenses were flat at 7.9% in the first six months of 2007
      compared to the first six months of 2006.  Lower administrative costs
      for salaries and operating expenses for the six months ended June 30, 2007
      were
      offset by 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 the Industrial Metal Components segment
      for the six months ended June 30, 2007 increased $196,000 compared with the
      six
      months ended June 30, 2006.  As a percent of sales, selling, general
      and administrative expenses improved to 11.6% compared with
      12.3%.   ****The increase in sales volume and
      cost reductions had a favorable impact in 2007.





Unallocated
      selling, general and administrative expenses for unusual professional fees
      related to strategic initiatives and an investigation by a special committee
      of
      the Board of Directors were $566,000 at Corporate for the six months ended
      June
      30, 2007 compared with $0 at June 30, 2006.





*Operating
      Income (Loss)*





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




Six
                Months
            
            
            Six
                MonthsEnded
            
            
            EndedJune
                30, 2007
            
            
            June
                30, 2006Advanced
                Structures
            
            $
            1,398,847
            
            
            $
            2,657,866Industrial
                Metal Components
            
            
            964,657
            
            
            
            (1,039,358
            )Corporate
            
            
            (565,557
            )
            
            
            -$
            1,797,947
            
            
            $
            1,618,508





Operating
      income of $1.8 million for the six months ended June 30, 2007 increased by
      $179,000 compared to $1.6 million for the six months ended June 30, 2006, due
      primarily to the higher sales volume partially offset by higher manufacturing
      costs and unusual professional charges in 2007.





Operating
      income of $1,399,000 in the Advanced Structures segment for the six months
      ended
      June 30, 2007 decreased by $1,259,000 from operating income of $2,658,000 in
      the
      six months ended June 30, 2006.   Despite the increase in volume
      for this segment, higher manufacturing costs, particularly scrap, had a negative
      impact along with compensation expense related to the granting of shares of
      stock to key management in this segment. Additionally, results for the first
      six
      months of 2006 included $617,000 of training grants from the state of
      Iowa.





The
      Industrial Metal Components segment had operating income of $965,000 for the
      six
      months ended June 30, 2007 compared to an operating loss of $1,039,000 for
      the
      six months ended June 30, 2006.  The investment casting operation was
      the main reason for the income improvement based on the higher sales volume,
      cost reductions and the decrease in unusual charges for the start-up of new
      customer parts, which totaled $726,000 for the first six months of
      2006.  Income for the powdered metal operation improved despite the
      decrease in sales volume due to tighter expense control.





22
 *Index*




An
      operating loss of $566,000 for the six months ended June 30, 2007 at Corporate
      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. Corporate’s operating income was $0 for
      the six months ended June 30, 2006.





*Other
      Income (Expenses)*





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





Six Months
            
            
            Six MonthsEnded
            
            
            EndedJune
                30, 2007
            
            
            June
                30, 2006Interest
                expenses
            
            $
            (760,614
            )
            
            $
            (694,006
            )Other
            
            
            (54,067
            )
            
            
            6,054$
            (814,681
            )
            
            $
            (687,952
            )





Other
      expenses increased $127,000 in the six months ended June 30, 2007 compared
      to
      the six months ended June 30, 2006, with increased borrowing in 2007 resulting
      in higher interest expense.





*Discontinued
      Operations*





Discontinued
      operations reported losses of $1,878,000 and $1,843,000 in the six months ended
      June 30, 2007 and June 30, 2006, respectively. The losses for both 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*





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





*Net
      Income (Loss)*





The
      Company had a net loss of $895,000 for the six months ended June 30, 2007 and
      a
      net loss of $913,000 for the six months ended June 30, 2006.





**Liquidity
      and Capital Resources**




On
      June
      30, 2007 and on June 30, 2006, the Company had cash of $18,000.





Continuing
      operations provided cash of $2,899,000 for the first six months of 2007, due
      mostly from improvements to 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.





23
 *Index*




Continuing
      operations provided cash of $2,277,000 for the first six months of 2006, due
      largely to the $2,265,000 in borrowings from the revolving line of credit with
      Fifth Third.  Excluding net borrowings, continuing operations provided
      $158,000 for the six months ended June 30, 2006. Discontinued operations used
      $2,473,000 for the six months ended June 30, 2006 primarily for funding the
      on-going environmental remediation at the Muskogee, Oklahoma
      property.





*Operating
      Activities*





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,
      current assets and other assets along with increases in accounts payable and
      accrued liabilities.  During the six months ended June 30, 2006
      operating activities provided $778,000, with increases in accounts payable
      and
      accrued liabilities, offset by increases in accounts receivable and
      inventories.





*Investing
      Activities*





For
      the
      six months ended June 30, 2007, investing activities consumed $566,000 for
      capital expenditures for both business segments. For the six months ended June
      30, 2006, investing activities used $619,000 for capital expenditures primarily
      in the Advanced Structures business segment.





*Financing
      Activities*





Financing
      activities provided $513,000 for the six months ended June 30, 2007, as compared
      to $2,119,000 for the six months ended June 30, 2006. 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.  In the first six months of
      2006, net borrowing from the revolving line of credit was $2.3 million and
      long-term debt payments were $146,000.





In
      order
      to increase the Company’s liquidity and ability to meet operational and
      strategic needs, Fansteel Inc. and its wholly-owned subsidiary, Wellman Dynamics
      Corporation, as borrowers, entered into a Loan and Security Agreement with
      Fifth
      Third Bank (Chicago), as lender, on July 15, 2005 with an original principal
      amount of $15,000,000. As the Company’s businesses have grown, so have the
      Company’s needs for funding working capital, capital expenditures and other
      requirements. With the corresponding increase in its borrowing base, consisting
      of accounts receivable, inventories and machinery and equipment, the Company
      sought to increase its revolving line of credit above the $15 million level.
      Accordingly, this loan agreement with Fifth Third Bank was amended on December
      4, 2006.





Under
      the
      December 4, 2006 amended loan facility, subject to certain borrowing conditions,
      the Company could incur revolving loans, credit card charges and letter of
      credit issuances in an amount up to $21.5 million from a borrowing base
      comprised of a percentage of eligible accounts receivable and inventories and
      $2
      million for machinery and equipment.  Revolving loans included $1.5
      million for borrowing under credit cards issued by the Lender, not subject
      to
      the borrowing base. The term was extended with revolving loans due and payable
      in full on January 5, 2009. As borrowers under this Loan and Security Agreement,
      the Company is required to meet certain covenants, including those that require
      minimum EBITDA levels, limit leverage and establish debt service
      requirements.  The interest rate on the line is at prime and there is
      a 0.25% unused line fee.  Substantially all of the assets of the
      borrowers are pledged as security for this financing.





24
 *Index*




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.  Any
      amounts borrowed as part of the $1.5 million will be charged interest at prime
      rate plus one percentage point.  The $1.5 million borrowing revolving
      note will terminate on September 30, 2007. At June 30, 2007, the Company had
      letters of credit for $770,000 outstanding, primarily for casualty insurance
      collateral, under the new credit facility with an interest rate of 1.5%. At
      June
      30, 2007 the credit availability was $2,587,000, including the June 5, 2007
      loan
      amendment.





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





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





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





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





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





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





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





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





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





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





25
 *Index*




**Critical
      Accounting Policies**




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





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





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





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





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





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





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





26
 *Index*




**Recent
      Accounting Pronouncements**





In
      February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
      Financial Instruments – An Amendment of FASB Statements No. 133 and 140 and is
      effective for all financial instruments acquired or issued after the beginning
      of an entity’s first fiscal year that begins after September 15,
      2006.  SFAS No. 155 permits fair value remeasurement for any hybrid
      financial instrument that contains an embedded derivative that otherwise would
      require bifurcation, clarifies which interest-only strips and principal-only
      strips are not subject to the requirements of SFAS No. 133, establishes a
      requirement to evaluate interest in securitized financial assets to identify
      interest that are freestanding derivatives or that are hybrid financial
      instruments that contain an embedded derivative requiring bifurcation, clarifies
      that concentrations of credit risk in the form of subordination are not embedded
      derivatives and amends SFAS No. 140 to eliminate the prohibition on a qualifying
      special-purpose entity from holding a derivative financial instrument that
      pertains to a beneficial interest other than another derivative financial
      instrument.  The Company was required to adopt SFAS No. 155 beginning
      January 1, 2007, and such adoption did not have a material impact on its
      consolidated results of operations and financial condition.





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





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





In
      September 2006, the FASB issued SFAS NO. 157, Fair Value Measurements and is
      effective for fiscal years beginning after November 15, 2007. SFAS No. 157
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles, and expands disclosures about fair
      value measurements. SFAS No. 157 applies under other accounting pronouncements
      that require or permit fair value measurements, the FASB having previously
      concluded in those accounting pronouncements that fair value is the relevant
      measurement attributed. Accordingly, FAS No. 157 does not require any new fair
      value measurements.  The Company is required to adopt SFAS No. 157
      effective January 1, 2008, but does not expect it to have a material impact
      on
      its consolidated results of operations and financial condition.





27
 *Index*




In
      September 2006, the FASB also issued SFAS No. 158, Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plans – an Amendment of FASB
      Statements No. 87, 88, 106, and 132(R) and is effective for employers with
      publicly traded equity securities as of the end of the fiscal year ending after
      December 15, 2006, and for employers without publicly traded equity securities
      as of the end of the fiscal year ending after June 15, 2007. SFAS No. 158
      requires an employer to recognize the over funded or under funded status of
      a
      defined benefit postretirement plan (other than a multiemployer plan) as an
      asset or liability in its statement of financial position and to recognize
      changes in that funded status in the year in which the changes occur through
      comprehensive income of a business entity or changes in which the changes occur
      through comprehensive income of a business entity or changes in unrestricted
      net
      assets of a not-for-profit organization. SFAS No. 158 also requires an employer
      to measure the funded status of a plan as of the date of its year-end statement
      of financial position, with limited exceptions. The Company adopted SFAS No.
      158
      effective December 31, 2006. The non-cash effect of the adoption resulted in
      an
      increase in total liabilities of $343,000 and a reduction in total shareholders’
equity of $343,000, net of tax.  The adoption of SFAS 158 did not
      affect our results of operations. In the 2006 Annual Report on Form 10-K, the
      Company disclosed 2006 Comprehensive Loss of $5,604,300 which included the
      adoption of SFAS 158. Comprehensive Loss for 2006 should not have included
      the
      impact of adopting SFAS 158. The effect of adopting SFAS 158 should have been
      only included in Accumulated Other Comprehensive Loss. The correct Comprehensive
      Loss for 2006 should have been $5,261,136. The Company will correct the 2006
      Comprehensive Loss when it publishes its 2007 Annual Report on Form
      10-K.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities.”  This standard permits
      companies to make a one-time election to carry eligible types of financial
      assets and liabilities at fair value (“FV”), even if FV measurement is not
      required under generally accepted accounting principles. SFAS No. 159 is
      effective for fiscal years beginning after November 15, 2007, and early adoption
      is permitted.  The Company does not plan on early adoption of SFAS No. 159
      and is in the process of determining its impact on the Company’s financial
      position and results of operations.





**Inflation**




Inflationary
      factors such as increases in the costs of raw materials, labor, and overhead
      affect the Company's operating profits.  Significant portions of raw
      materials consumed by the Company are various steel alloys.  Price
      increases were experienced beginning in 2004 and these price increases have
      continued into 2007.  To offset these price increases, the Company
      began adding material surcharges in March 2004 and in 2007 the Company continues
      to add material surcharges. Material surcharges are a pass through of costs
      and
      do not include normal mark-up.  Material surcharges accounted for 6.1%
      of net sales for the six months ended June 30, 2007 and 3.6% of net sales for
      the six months ended June 30, 2006.****Surcharges were 87%
      higher in the first six months of 2007 compared to the first six months of
      2006.





28
 *Index*





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, 2007:





*(In
                thousands)*
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            AfterTotal
            
            
            2007
            
            
            2008
            
            
            2009
            
            
            2010
            
            
            2011
            
            
            2011PBGC
                Note
            
            $
            7,250
            
            
            $
            -
            
            
            $
            750
            
            
            $
            750
            
            
            $
            1,150
            
            
            $
            1,150
            
            
            $
            3,450PA
                economic agenciesnotes
            
            
            311
            
            
            
            154
            
            
            
            143
            
            
            
            14
            
            
            
            -
            
            
            ****
            **-**
            
            
            ****
            **-**Operating
                leases
            
            
            662
            
            
            
            123
            
            
            
            170
            
            
            
            101
            
            
            
            71
            
            
            
            197
            
            
            ****
            **-**Revolving
                line
            
            
            14,025
            
            
            
            -
            
            
            
            -
            
            
            
            14,025
            
            
            ****
            **-**
            
            
            ****
            **-**
            
            
            ****
            **-**Letters
                of credit
            
            
            770
            
            
            
            -
            
            
            
            -
            
            
            
            770
            
            
            ****
            **-**
            
            
            ****
            **-**
            
            
            ****
            **-**Environmental
                liabilities
            
            
            34,921
            
            
            
            1,547
            
            
            
            2,624
            
            
            
            2,372
            
            
            
            2,586
            
            
            
            1,836
            
            
            
            23,956Total
            
            $
            57,939
            
            
            $
            1,824
            
            
            $
            3,687
            
            
            $
            18,032
            
            
            $
            3,807
            
            
            $
            3,183
            
            
            $
            27,406




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





The
      payments for environmental liabilities are based on estimated timing of
      remediation activities and not mandatory payment schedules.  A minimum
      annual funding of $1.4 million is required for environmental liabilities related
      to FMRI through 2008 with an increase to $1,682,000 in 2009.





The
      revolving line of credit has a renewal date of January 5, 2009.  The
      revolving line of credit requires immediate repayment from cash
      receipts.  Borrowings can be made as needed, based on
      availability.  The availability at June 30, 2007 was $2,587,000,
      compared with $1,360,000 at December 31, 2006.





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 increase have continued into
      2007.  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 2007.




**ITEM
      4- CONTROLS AND PROCEDURES**





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





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





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




30
 *Index*





**PART
      II.   OTHER INFORMATION**





**ITEM1
      - LEGAL PROCEEDINGS**





**FMRI**





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





On
      September 29, 2006 A&M Engineering and Environmental Services Inc.
      (“A&M”) filed suit in the District Court for Tulsa County, State of Oklahoma
      against FMRI, a special purpose subsidiary of Fansteel, and Penn Environmental
      & Remediation Inc (“Penn”).  On April 27, 2005, A&M and FMRI
      entered into a contract to excavate, dry, bag, stage and transport residue
      material to an acceptable offsite depository.  Penn was designated as
      the engineer for purposes of the contract.  In May 2006, FMRI was
      notified by A&M that they were canceling the transportation portion of the
      contract, but continued to perform under the balance of the
      contract.  A&M submitted change orders totaling $1.2 million under
      the contract that required approval by the engineer.  The changes
      orders were not approved.  A&M subsequently filed
      suit.  The contract provisions require the use of mediation for
      resolution before filing suit.  In November 2006, FMRI participated in
      failed meetings with A&M to stay their suit and enter into
      mediation.  On December 1, 2006, FMRI notified A&M that the
      contract was being terminated for cause.  Since A&M took no
      actions to commence cure efforts, the contract was terminated effective December
      20, 2006 with FMRI expressly reserving its rights under the contract. On
      December 7, 2006, FMRI filed with the District Court for Tulsa County in
      response to the A&M complaint.  In these pleadings, FMRI objected
      to venue and requested transfer to Muskogee County and cited A&M for breach
      of contract, breach of change order, fraud, breach of implied duty of good
      faith
      and fair dealing, and sought damages including liquidation damages, project
      completion costs, and faulty work.  FMRI believes it has counter
      claims against A&M for amounts well in excess of the $1.2 million claimed by
      A&M.   Both sides have filed interrogatories and document
      requests for the suit.  A Scheduling Order was filed with the District
      Court of Tulsa County after a February 26, 2007 scheduling conference with
      the
      presiding judge.  The order includes a schedule for an evidentiary
      hearing with the judge from September 17 – 21, 2007 regarding A&M’s
      intentions to enjoin FMRI’s access to a portion of the Decommissioning Trust
      Fund (i.e., at least equal to A&M’s monetary claims against
      FMRI).  The briefs and responses for this hearing are to occur between
      June and August 2007.  Per this order, the actual jury trial for this
      suit is to be scheduled sometime after June 2008. On May 29, 2007, A&M filed
      another Notice to the Court stating that it will be unable to file its Motion
      on
      June 1, 2007 for Injunctive Relief in accordance with the Scheduling Order.
      A&M cited more time was needed to review documents. This notice also stated
      that A&M did not know what the delayed dates for these activities might be
      and therefore they are not rescheduling dates at this time. The first of the
      A&M depositions of FMRI personnel were scheduled to begin May 23 and 24,
      2007. A&M also postponed these depositions and have not rescheduled them to
      date.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.





31
 *Index*




**Environmental
      Claims and Insurance Recoveries**





Certain
      environmental claims have been made against the Company by the EPA and various
      other regulatory agencies, entities and persons in connection with the
      investigation and cleanup of certain sites. Pursuant to the Reorganization
      Plan,
      all such claims were treated and resolved and as part of such treatment, the
      Company has sought recovery from certain of its insurers in respect of certain
      defense and cleanup costs relating to the claims.  The Department of
      Justice notified the Company on April 29, 2005 that the NRC and other interested
      federal agencies did consent to the following settlements: On May 26, 2005,
      the
      Company reached agreement with Zurich American Insurance Company and Zurich
      International (Bermuda) Ltd. (collectively, "Zurich") and on April 18, 2005
      with
      KWELM Management Services Limited on behalf of the Scheme Administrator for
      KWELM in an insolvency proceeding under the laws of Great Britain and the Joint
      Liquidators for The Bermuda Fire & Marine Insurance Company (collectively,
      "KWELM"). Zurich agreed to a settlement providing for a cash settlement payment
      to the Company of $1.4 million, which was received on June 9,
      2005.  KWELM agreed to a Notified Scheme Claim totaling $400,000. Cash
      distributions in respect of the claims would be paid out to the Company in
      accordance with KWELM's approved Scheme of Arrangement.  The Scheme
      administrator has represented that Fansteel can anticipate total cash payments
      equal to approximately 50% to 57% of its Notified Scheme Claim (approximately
      $200,000 - $228,000).  Payments from KWELM during 2005 were $330,304
      and during 2006 were $5,349 for a total of $335,653, or 84% of the total
      claim.  The proceeds of the settlements were used in accordance with
      the Reorganization Plan to pay certain professional fees and expenses related
      to
      such settlements.  The net proceeds from the settlements were
      allocated in accordance with the Reorganization Plan and, among other things,
      resulting in prepayments under the FMRI Notes of $831,000, the FLRI Primary
      Note
      of $111,000 and the ED Note of $147,000 and payments aggregating $66,000 on
      account of EPA CERCLA claims.





32
 *Index*





**Other
      Legal Actions**





In
      May
      2005, a complaint for toxic injuries was filed by Garfield and Susan Perry
      against numerous defendants, including Wellman Dynamics, a wholly owned
      subsidiary of Fansteel Inc., claiming injuries related to exposure to products
      containing beryllium. The Company’s insurance carriers have been notified and
      are defending the Company.  On June 13, 2007, the Company received
      notice from the insurance carrier’s lawyers that the plaintiffs had filed a
      dismissal without prejudice on April 30, 2007.





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.





In
      October 2006 the Company filed a suit in the United States District Court for
      the Northern District of Illinois, Eastern Division, to recover monies owed
      from
      a customer for non-payment of $594,000 on a trade accounts
      receivable.  The customer claims $212,000 of the amount owed is not
      due, but has refused to pay any of the $594,000 accounts receivable
      owed.  Both parties agreed to mediation/arbitration, which began on
      July 11, 2007. Settlement discussions are continuing.





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





**ITEM
      1A – RISK FACTORS**





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





**Emergence
      From Bankruptcy**





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





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





33
 *Index*





**Environmental
      Issues**





The
      Company has significant environmental issues primarily related to special
      purpose entities included in discontinued operations, particularly in Muskogee,
      OK, that could have a material impact on the Company’s results. The ability of
      the Company to fund the clean up of this site could have a material adverse
      impact on the Company. For further details, see Note 3 Discontinued Operations
      including Certain Environmental Remediation.





**High
      Level Of Debt**





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





**The
      Company Has A Few Large Customers**





The
      companies controlled by United Technologies Corporation (“UTC”) and
      International Truck and Engine Corporation (“International Engine”) are
      significant customers of the Company.





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 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.





34
 *Index*




**Material
      Prices**





The
      Company started to experience raw material price increases beginning in 2004
      and
      these material price increases have continued into 2007.  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 2007 the Company continues to add material surcharges. There is
      no
      guarantee that the Company will be able to continue to pass on these material
      surcharges to its customers, and in fact, some customers have refused to accept
      these surcharges. In light of these customers refusal to accept surcharges,
      analysis on these customers’ margins is underway to determine if this business
      is profitable enough to retain.





**Manufacturing
      in Foreign Countries**





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





**Liquidity
      of the Company Stock**





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




**ITEM2
–
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**




The
      Annual Meeting of Shareholders was held on May 10, 2007.





The
      nominations for Directors of the Company were brought before shareholders of
      the
      Company at the Annual Meeting of Shareholders.  The votes cast for and
      votes withheld for each of the following nominees are as follows:





**Nominee**
            
            **Votes For**
            
            
            **Votes
                Withheld**J.
                G. Vogelsang
            
            
            2,594,807
            
            
            
            62,508D.
                A. Groshoff
            
            
            2,594,807
            
            
            
            62,508J.
                R. Parker
            
            
            2,594,807
            
            
            
            62,508G.
                L. Tessitore
            
            
            2,569,266
            
            
            
            88,049





The
      appointment of BDO Seidman, LLP as the Company’s independent registered public
      accounting firm was placed before shareholders for ratification at the Annual
      Meeting of Shareholders and was ratified with 2,627,601 votes cast for, 22,125
      votes cast against, and 7,589 abstentions.





35
 *Index*





**ITEM
      5 – OTHER INFORMATION**




Special
      Committee of the Board of Directors:





On
      April
      26, 2007, the board of directors of Fansteel Inc. (“the Company”) adopted a
      resolution authorizing the formation of a special committee comprised of
      independent board members to examine a written loan agreement between the
      Company and FMRI, Inc., a wholly owned subsidiary, as well as an examination
      of
      a payment made by the Company to FMRI, Inc.





The
      special committee has concluded its work and has confirmed through their
      findings that there was no financial statement impact from these transactions;
      that there exists no evidence that any members of management personally profited
      from the transactions examined; and that there is no indication that any third
      party will have been harmed.





Notwithstanding
      the foregoing, the special committee made certain recommendations with regard
      to
      corporate governance. The board of directors and management are implementing
      the
      recommendations.





Changes
      of Executive Officers:





At
      the
      Board Meeting held on August 13, 2007, Mr. Tessitore resigned as Chairman of
      the
      Board.  The board of directors elected Mr. John Parker as Chairman of
      the Board.





The
      Chairman of the Compensation Committee provided a letter to the Vice President
      and Chief Financial Officer on August 13, 2007 notifying him that his contract
      would not be renewed effective January 23, 2008.





**ITEM
      6 – EXHIBITS**




Exhibit
                #
            
            Description
                of Exhibit10.1
            
            Letter
                to Vice President and Chief Financial Officer regarding non-renewal
                of
                Employment Contract31.1
            
            Certification
                by Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a)
                under
                the Securities Exchange Act of 1934, as adopted pursuant to Section
                203 of
                the Sarbanes-Oxley Act of 200231.2
            
            Certification
                by Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a)
                under
                the Securities Exchange Act of 1934, as adopted pursuant to Section
                203 of
                the Sarbanes-Oxley Act of 200232.1
            
            Certifications
                by Chief Executive Officer and Chief Financial Officer pursuant to
                18
                U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002




36
 *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, 2007
            President
                and Chief Executive Officer/s/
                R. Michael McEnteeR.
                Michael McEnteeVice
                President andAugust
                14, 2007
            Chief
                Financial Officer






37