UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C.  20549
 
 FORM
10-Q
 
 (MARK
ONE)
 
 x           QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
 
 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, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check one).
  Large
      accelerated filer o
                Accelerated
      filer o
                Non-accelerated
      filer x
                Smaller
      reporting company o
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes o     No  x
 
 APPLICABLE
ONLY TO REGISTRANTS INVOLVED IN
 BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS.
 
 Indicate
by checkmark whether the registrant has filed all documents and reports required
to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a
court.  Yes x     No  o
 
 Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
  Class
                        
                        Outstanding
      at October 31, 2008Common
      Stock, $.01 par value
                        
                        3,420,000
      shares
 
 
 1
  FANSTEELINC.
 FORM 10-Q
– INDEX
 SEPTEMBER
30, 2008
 
 
 PART
      I.
                    FINANCIAL INFORMATION
                    Page No.Item
      1
                    Consolidated Financial StatementsConsolidated Statement of Operations (unaudited) – Three months
      ended September 30, 2008 and 2007; Nine months ended September 30, 2008
      and 2007
                    3-4Consolidated Balance Sheet – September 30, 2008 (unaudited)
      and December 31, 2007
                    5-6Consolidated Statement of Cash Flows (unaudited) – Nine months
      ended September 30, 2008 and 2007
                    7Notes to Unaudited Consolidated Financial
      Statements
                    8-16Item
      2
                    Management's Discussion and Analysis of Financial Condition and
      Results of Operations
                    17-30Item
      3
                    Quantitative and Qualitative Disclosures About Market
      Risk
                    31Item
      4T
                    Controls and Procedures
                    31PART
      II
                    OTHER INFORMATIONItem
      1
                    Legal Proceedings
                    32-33Item
      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
                    35Item
      6
                    Exhibits
                    36SignaturesExhibit
      3.2
                    Amended
      and Restated By-laws of Fansteel Inc.Exhibit
      31.1
                    Certifications-
      Gary L. TessitoreExhibit
      31.2
                    Certifications-
      Robert R. CompernolleExhibit
      32.1
                    Certification
 2
 Index
  PARTI.    FINANCIAL INFORMATION
 
 ITEM
1 - FINANCIAL STATEMENTS
 
  Fansteel
Inc.
 Consolidated
Statement of Operations
 (Unaudited)
 
 Three
      Months
                    Ended
                    September
      30, 2008
                  
                  
                  Three
      Months
                    Ended
                    September
      30, 2007Net
      Sales
                  
                  $
                  18,645,766
                  
                  
                  $
                  18,516,829Cost
      and ExpensesCost
      of products sold
                  
                  
                  17,162,589
                  
                  
                  
                  15,865,908Selling,
      general and administrative
                  
                  
                  1,536,984
                  
                  
                  
                  1,646,52818,699,573
                  
                  
                  
                  17,512,436Operating
      (Loss) Income
                  
                  
                  (53,807
                  )
                  
                  
                  1,004,393Other
      Income (Expense)Interest
      expense
                  
                  
                  (438,399
                  )
                  
                  
                  (492,754
                  )Other
                  
                  
                  2,594
                  
                  
                  
                  (66,453
                  )(435,805
                  )
                  
                  
                  (559,207
                  )(Loss)
      Income from Continuing Operations Before
      Income     Taxes
                  
                  
                  (489,612
                  )
                  
                  
                  445,186Income
      Taxes
                  
                  
                  20,406
                  
                  
                  
                  -Net
      (Loss) Income from Continuing Operations
                  
                  
                  (510,018
                  )
                  
                  
                  445,186Loss
      from Discontinued Operations
                  
                  
                  (814,861
                  )
                  
                  
                  (1,487,312
                  )Net
      Loss
                  
                  $
                  (1,324,879
                  )
                  
                  $
                  (1,042,126
                  )Weighted
      Average Number of Common Shares Outstanding
                  
                  
                  3,420,000
                  
                  
                  
                  3,420,000Basic
      and Diluted Net Income (Loss) per ShareaContinuing
      Operations
                  
                  $
                  (0.15
                  )
                  
                  $
                  0.13Discontinued
      Operations
                  
                  
                  (0.24
                  )
                  
                  
                  (0.43
                  )Net
      Loss
                  
                  $
                  (0.39
                  )
                  
                  $
                  (0.30
                  )
 
 
 See Notes
to Consolidated Financial Statements
 
 a Basic
earnings per share and diluted earnings per share are the same.
  3
 Index
  Fansteel
Inc.
 Consolidated
Statement of Operations
 (Unaudited)
 
 Nine
      Months
                              Ended
                              September
      30, 2008
                            
                            
                            Nine
      Months
                              Ended
                              September
      30, 2007Net
      Sales
                            
                            $
                            59,172,894
                            
                            
                            $
                            56,058,135Cost
      and ExpensesCost
      of products sold
                            
                            
                            51,048,491
                            
                            
                            
                            47,472,462Selling,
      general and administrative
                            
                            
                            4,983,536
                            
                            
                            
                            5,783,33356,032,027
                            
                            
                            
                            53,255,795Operating
      Income
                            
                            
                            3,140,867
                            
                            
                            
                            2,802,340Other
      Income (Expense)Interest
      expense
                            
                            
                            (1,239,205
                            )
                            
                            
                            (1,253,368
                            )Other
                            
                            
                            21,488
                            
                            
                            
                            (120,520
                            )(1,217,717
                            )
                            
                            
                            (1,373,888
                            )Income
      from Continuing Operations Before Income Taxes
                            
                            
                            1,923,150
                            
                            
                            
                            1,428,452Income
      Taxes
                            
                            
                            55,504
                            
                            
                            
                            -Net
      Income from Continuing Operations
                            
                            
                            1,867,646
                            
                            
                            
                            1,428,452Loss
      from Discontinued Operations
                            
                            
                            (2,373,298
                            )
                            
                            
                            (3,365,555
                            )Net
      Loss
                            
                            $
                            (505,652
                            )
                            
                            $
                            (1,937,103
                            )Weighted
      Average Number of Common Shares Outstanding
                            
                            
                            3,420,000
                            
                            
                            
                            3,420,000Basic
      and Diluted Net Income (Loss) per ShareaContinuing
      Operations
                            
                            $
                            0.55
                            
                            
                            $
                            0.42Discontinued
      Operations
                            
                            
                            (0.69
                            )
                            
                            
                            (0.98
                            )Net
      Loss
                            
                            $
                            (0.14
                            )
                            
                            $
                            (0.56
                            )
 
 
 See Notes
to Consolidated Financial Statements







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





4
 Index





FansteelInc.


Consolidated
Balance Sheet





September
      30,
                  2008
                
                
                December
      31,
                  2007(Unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                629,872
                
                
                $
                298,352Accounts
      receivable, less allowance of $203,000 and $170,000 at September 30, 2008
      and December 31, 2007, respectively
                
                
                9,583,496
                
                
                
                10,568,513InventoriesRaw
      material and supplies
                
                
                1,730,146
                
                
                
                1,308,731Work-in
      process
                
                
                8,724,331
                
                
                
                8,554,360Finished
      goods
                
                
                516,616
                
                
                
                574,686Total
      inventories
                
                
                10,971,093
                
                
                
                10,437,777Prepaid
      expenses
                
                
                284,817
                
                
                
                1,830,489Total
      current assets
                
                
                21,469,278
                
                
                
                23,135,131Property,
      plant and equipmentLand
                
                
                917,419
                
                
                
                917,419Buildings
                
                
                4,135,458
                
                
                
                4,122,886Machinery
      and equipment
                
                
                9,672,565
                
                
                
                8,103,28714,725,442
                
                
                
                13,143,592Less
      accumulated depreciation
                
                
                5,010,600
                
                
                
                4,140,642Net
      property, plant and equipment
                
                
                9,714,842
                
                
                
                9,002,950Other
      assetsDeposits
                
                
                227,593
                
                
                
                660,799Reorganization
      value in excess of amounts allocable to identified assets
                
                
                12,893,734
                
                
                
                12,893,734Property
      held for sale
                
                
                720,000
                
                
                
                1,178,116Other
                
                
                337,657
                
                
                
                337,652Total
      other assets
                
                
                14,178,984
                
                
                
                15,070,301$
                45,363,104
                
                
                $
                47,208,382




See Notes
to Consolidated Financial Statements


5
 Index





See Notes to Consolidated Financial
Statements


Fansteel
Inc.


Consolidated
Balance Sheet





September
      30,
                      2008
                    
                    
                    December
      31,
                      2007(Unaudited)LIABILITIES
      AND SHAREHOLDERS' DEFICITCurrent
      liabilitiesAccounts
      payable
                    
                    $
                    7,983,326
                    
                    
                    $
                    7,589,036Accrued
      liabilities
                    
                    
                    6,663,935
                    
                    
                    
                    8,040,875Short-term
      borrowings
                    
                    
                    13,443,376
                    
                    
                    
                    15,010,884Current
      maturities of long-term debt
                    
                    
                    1,540,213
                    
                    
                    
                    900,254Total
      current liabilities
                    
                    
                    29,630,850
                    
                    
                    
                    31,541,049Long-term
      debt, less current maturities
                    
                    
                    6,412,890
                    
                    
                    
                    6,491,265Other
      liabilitiesEnvironmental
      remediation
                    
                    
                    21,766,878
                    
                    
                    
                    20,989,571Non-current
      pension liability
                    
                    
                    716,992
                    
                    
                    
                    716,992Total
      other liabilities
                    
                    
                    22,483,870
                    
                    
                    
                    21,706,563Total
      liabilities
                    
                    
                    58,527,610
                    
                    
                    
                    59,738,877Minority
      interest
                    
                    
                    197,894
                    
                    
                    
                    180,777Shareholders'
      equity (deficit)Common
      stock, par value $0.01 Authorized 3,600,000 shares, issued and outstanding
      3,420,000
                    
                    
                    34,200
                    
                    
                    
                    34,200Capital
      in excess of par value
                    
                    
                    296,314
                    
                    
                    
                    296,314Accumulated
      deficit
                    
                    
                    (13,456,795
                    )
                    
                    
                    (12,951,143
                    )Accumulated
      other comprehensive loss
                    
                    
                    (236,119
                    )
                    
                    
                    (90,643
                    )Total
      shareholders’ deficit
                    
                    
                    (13,362,400
                    )
                    
                    
                    (12,711,272
                    )Total
      liabilities and shareholders' deficit
                    
                    $
                    45,363,104
                    
                    
                    $
                    47,208,382








See Notes
to Consolidated Financial Statements





6
 Index




FansteelInc.


Consolidated
Statement of Cash Flows


(Unaudited)





Nine
      Months
                    
                    
                    Nine
      MonthsEnded
                    
                    
                    EndedSeptember
      30, 2008
                    
                    
                    September
      30, 2007Cash
      Flows From Operating Activities:Net
      loss
                    
                    $
                    (505,652
                    )
                    
                    $
                    (1,937,103
                    )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation
      and amortization
                    
                    
                    869,958
                    
                    
                    
                    759,015Minority
      interest and compensation expense
                    
                    
                    17,117
                    
                    
                    
                    176,843Accretion
      on long-term debt and other liabilities
                    
                    
                    131,853
                    
                    
                    
                    168,481(Gain)
      loss from disposal of property, plant and equipment
                    
                    
                    (400
                    )
                    
                    
                    689Loss
      from discontinued operations
                    
                    
                    2,373,298
                    
                    
                    
                    3,365,555Change
      in assets and liabilities:Decrease
      in accounts receivable
                    
                    
                    935,272
                    
                    
                    
                    575,850Increase
      in inventories
                    
                    
                    (533,316
                    )
                    
                    
                    (2,091,122
                    )Decrease
      in prepaid expenses
                    
                    
                    1,503,704
                    
                    
                    
                    987,393(Decrease)
      increase in accounts payable and accrued liabilities
                    
                    
                    (1,030,618
                    )
                    
                    
                    726,814Increase
      (decrease) in income taxes payable
                    
                    
                    23,089
                    
                    
                    
                    (3,838
                    )Decrease
      in other assets
                    
                    
                    433,201
                    
                    
                    
                    181,746Net
      cash provided by operating activities
                    
                    
                    4,217,506
                    
                    
                    
                    2,910,323Cash
      Flows From Investing Activities:Capital
      expenditures
                    
                    
                    (1,591,450
                    )
                    
                    
                    (892,019
                    )Proceeds
      from sale of property, plant and equipment
                    
                    
                    10,000
                    
                    
                    
                    -Net
      cash used in investing activities
                    
                    
                    (1,581,450
                    )
                    
                    
                    (892,019
                    )Cash
      Flows From Financing Activities:Proceeds
      from short-term borrowing
                    
                    
                    -
                    
                    
                    
                    679,032Proceeds
      from long-term borrowing
                    
                    
                    1,000,000
                    
                    
                    
                    1,600,000Payments
      on short-term borrowing
                    
                    
                    (1,567,508
                    )
                    
                    
                    -Payments
      on long-term debt
                    
                    
                    (77,386
                    )
                    
                    
                    (232,795
                    )Net
      cash (used in) provided by financing activities
                    
                    
                    (644,894
                    )
                    
                    
                    2,046,237Net
      Increase in Cash and Cash Equivalents from Continuing
      Operations
                    
                    
                    1,991,162
                    
                    
                    
                    4,064,541Cash
      Flows of Discontinued Operations:Operating
      cash flows
                    
                    
                    (1,659,642
                    )
                    
                    
                    (4,062,991
                    )Total
      Cash Flows of Discontinued Operations
                    
                    
                    (1,659,642
                    )
                    
                    
                    (4,062,991
                    )Net
      Increase in Cash and Cash Equivalents
                    
                    
                    331,520
                    
                    
                    
                    1,550Cash
      and Cash Equivalents at Beginning of Period
                    
                    
                    298,352
                    
                    
                    
                    17,672Cash
      and Cash Equivalents at End of Period
                    
                    $
                    629,872
                    
                    
                    $
                    19,222Supplemental
      disclosures of cash flow information:Cash
      paid during the year for:Interest
                    
                    $
                    1,239,205
                    
                    
                    $
                    1,004,823Income
      taxes
                    
                    
                    32,413
                    
                    
                    
                    3,838





See Notes
to Consolidated Financial Statements





7
 Index





Notesto Unaudited Consolidated Financial Statements








Note
1 - Description of Business





The
consolidated financial statements as of and for the periods ending September 30,
2008 and September 30, 2007 of Fansteel Inc. are unaudited but include all
adjustments (consisting only of normal recurring adjustments) that management
considers necessary for a fair presentation of such financial
statements.  These financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with Article 10 of SEC Regulation
S-X.  Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements.  Operating results for the
three months and nine months ended September 30, 2008 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2008.





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





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





The
Company also has special purpose subsidiaries included as part of discontinued
operations that were established solely for the obligation of remediation of
environmental issues at former operations of the Company as part of the Second
Amended Joint Reorganization Plan (the "Reorganization Plan") that was effective
January 23, 2004 (the "Effective Date").





The
consolidated financial statements include the accounts of Fansteel Inc. and its
subsidiaries.  Inter-company accounts and transactions have been
eliminated in consolidation. Key managers of Wellman Dynamics Corporation
(“Wellman”), a wholly owned subsidiary of Fansteel included in the Advanced
Structures segment, were granted 12 shares of Wellman stock in the second
quarter 2007, and in conjunction with this grant, compensation expense of
$164,000 was recorded. Fansteel’s ownership in Wellman was reduced to 98.8%
after the grant.





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





8
 Index





Note
2 – Earnings (Loss) per Share





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





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





Three
      Months Ended
                
                
                Nine
      Months EndedNumerator:
                
                September
      30, 2008
                
                
                September
      30, 2007
                
                
                September
      30, 2008
                
                
                September
      30, 2007Net
      loss
                
                $
                (1,324,879
                )
                
                $
                (1,042,126
                )
                
                $
                (505,652
                )
                
                $
                (1,937,103
                )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
                
                $
                (0.39
                )
                
                $
                (0.30
                )
                
                $
                (0.14
                )
                
                $
                (0.56
                )Diluted
      earnings per share
                
                $
                (0.39
                )
                
                $
                (0.30
                )
                
                $
                (0.14
                )
                
                $
                (0.56
                )








Note
3 - Discontinued Operations including Certain Environmental
Remediation




Muskogee
Facility





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





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





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





9
 Index





During
2003, the Predecessor Company continued to maintain the safety and security of
the Muskogee Facility.  Pursuant to the Reorganization Plan, the
Company negotiated with the NRC to develop acceptable mechanisms for providing
financial assurance for the decommissioning of the Muskogee
Facility.  In December 2003, the NRC approved the issuance and
transfer of an amended NRC License and related Decommissioning Plan to
FMRI.  At January 23, 2004, the liability for the environmental
remediation was $38.7 million, and the recorded discounted liability using a
discount rate of 11.3% as part of fresh-start accounting, which was required to
be applied upon reemergence from Chapter 11 bankruptcy, was $19.2
million.   In 2005, FMRI began removal of the residues under
Phase 1 of the decommissioning plan, which is expected to remove over 80% of the
radioactive contaminated residues. Phase 1 is behind schedule, but continued
into 2008.  The NRC has been kept informed on the status of the
decommissioning activities and was notified that FMRI’s current plans are only
to continue maintenance and safety controls on the site after 2008 until
sufficient funds are in place to complete Phase 1 activities, anticipated to
begin in late 2010. FMRI is currently discussing this approach with the NRC. At
September 30, 2008 and December 31, 2007, the gross estimated liability was
$26,528,000 and $27,654,000, respectively, and the recorded discounted
liability, using a discount rate of 11.3%, was $17,734,000 and $17,111,000,
respectively.





FMRI can
draw up to $4.5 million from an existing decommissioning trust owned by Fansteel
established in accordance with the Amended Decommissioning Trust Agreement with
the NRC. At September 30, 2008 and December 31, 2007, FMRI had drawn $4.4
million and $2.8 million from the Trust.





Lexington
Facility





The
Lexington Facility was constructed in 1954 and ceased operations in 2003.
Investigations performed in 1997 as part of a company-wide environmental audit
revealed the presence of volatile organic compounds ("VOCs") and PCBs in soils
and groundwater in excess of state cleanup levels. The contaminants are believed
to have been discharged through a former drainage field. While VOCs were
detected at the down gradient boundary of the facility, no VOCs were detected in
an unnamed stream that is located down gradient of the facility.  To
Fansteel's knowledge, the contamination at this site does not pose an imminent
threat to health, safety or welfare.  In May 2003, the Kentucky
Natural Resources and Environmental Protection Cabinet ("KNREPC") requested that
the Predecessor Company submit a plan for further characterization of the
facility.  The Predecessor Company submitted a letter to the KNREPC in
September 2003 advising the agency that a detailed Site Characterization Plan
would be submitted by FLRI, a special purpose subsidiary, which pursuant to the
Reorganization Plan now owns the Lexington facility.  Cost of remedial
activities was estimated at $1.78 million and a liability in that amount was
recorded at January 23, 2004. In September 2005, the Company received insurance
recoveries from its insurers of which $111,000 of net insurance recoveries were
allocated to FLRI as a prepayment of the inter-company FLRI $1.78 million note.
On September 12, 2007, FLRI received notice that the Kentucky Department for
Environmental Protection had accepted the site characterization report that had
been submitted and that FLRI should prepare the Corrective Action Plan for the
site.  During 2007, new estimates of costs to complete the remediation
reduced the gross liability by $324,000. At September 30, 2008 and December 31,
2007, the gross estimated liability was $846,000 and $875,000, respectively, and
the recorded discounted liability, using a discount rate of 11.3%, was $831,000
and $857,000, respectively.





10
 Index





The land
and building of the Lexington facility are included on the balance sheet as
property held for sale at $720,000, which includes a reduction of $608,000 made
in September 2007 based on the latest appraisal of its current market value. A
number of third parties had expressed interest in purchasing this
facility.  In the second quarter of 2007, FLRI entered into a right of
first refusal agreement to purchase the property with a third party for their
maintenance of the site. On November 1, 2007, FLRI executed a lease with an
option to purchase at fair market value with this third party.  FLRI
is in negotiations with the KNREPC and the Lessee to finalize the transfer of
the property and obligation to remediate the site. The slow progress by the
KNREPC on the consent decree and the elimination of the primary inter-company
note has delayed the timeframe for closing, although it is anticipated that a
transaction will be completed in the second quarter 2009.





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





North
Chicago Facility





In
September 2000, the EPA issued a unilateral administrative order under Section
106 of CERCLA requiring the Predecessor Company to investigate and abate
releases of hazardous substances from the North Chicago Facility that were
contributing to contamination at an adjacent vacant lot (the "Vacant Lot
Site").  The Predecessor Company completed an engineering
evaluation/cost analysis and submitted it to EPA for review in
2003.  The proposed remedial actions at the North Chicago Facility
were estimated to cost $2.17 million, for which a liability was recorded at
January 23, 2004 as part of the bankruptcy reorganization for a newly formed
special purpose subsidiary, North Chicago, Inc (“NCI”).  On March 7,
2005, NCI sold the real property to the City of North Chicago (the “City”),
transferred the proceeds of $1,400,000 received from the City to the EPA and the
Company delivered to the EPA an unsecured, non-interest bearing promissory note
in the principal amount of $677,232, payable in equal semi-annual payments to be
made over a three-year period beginning six months after issuance. In July 2005,
the Company received insurance recoveries from its insurers of which $147,000 of
net insurance recoveries were remitted as a prepayment of the note delivered to
the EPA.  The Company has made all the payments due under the
promissory note as of September 2007, and therefore, there is no further
liability.





Washington
Manufacturing





On
December 31, 2004, the Company sold substantially all of the assets (including,
but not limited to, machinery and equipment, raw material items, work-in-process
items, finished goods items, receivables, machinery and equipment contracts,
customer contracts and supplier contracts, but excluding real estate, fixtures
and certain other assets) of the division of the Company known as "Washington
Manufacturing” to Whitesell Corporation (“Whitesell”), a customer of Washington
Manufacturing.





Whitesell
had been leasing the buildings of Washington Manufacturing until it vacated in
December 2006 at which time the Company began to actively try to sell the
Washington Manufacturing property and classified it as property held for sale in
the accompanying balance sheet.   In December 2006 the value of
the property was reduced by $738,000 to reflect current market value, less
selling costs. On January 22, 2008, the Company entered into an agreement with a
buyer for the purchase of the remaining assets at the Washington Manufacturing
facility for $475,000, which was approximately equal to the book value. The
Company closed on the sale of this property onMarch 13,
2008.





11
 Index





Results
of Discontinued Operations





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





Discontinued
operations reported losses of $815,000 and $1,487,000 for the three months ended
September 30, 2008 and September 30, 2007, respectively, and $2,373,000and $3,366,000 for the
nine months ended September 30, 2008 and September 30, 2007,
respectively.  The losses for both time periods relate primarily to
the accretion of discounted environmental liabilities arising from the Company's
unsecured note obligations to its special purpose subsidiaries and the pension
note for the terminated pension plan.





The
components of net liabilities of discontinued operations, which are included on
the Consolidated Balance Sheet, consist of the following at September 30, 2008
and December 31, 2007:





September
      30,
                          2008
                        
                        
                        December
      31,
                          2007Cash
                        
                        $
                        558,902
                        
                        
                        $
                        855,712Other
      notes and accounts receivable
                        
                        
                        -
                        
                        
                        
                        49,745Prepaid
      expenses
                        
                        
                        22,639
                        
                        
                        
                        64,607Property
      held for sale
                        
                        
                        720,000
                        
                        
                        
                        1,178,116Total
      assets
                        
                        $
                        1,301,541
                        
                        
                        $
                        2,148,180Current
      liabilities
                        
                        $
                        751,975
                        
                        
                        $
                        812,742Long-term
      debt (PBGC note)
                        
                        
                        4,841,257
                        
                        
                        
                        5,213,971Environmental
      remediation
                        
                        
                        18,564,811
                        
                        
                        
                        17,967,503Total
      liabilities
                        
                        $
                        24,158,043
                        
                        
                        $
                        23,994,216Net
      liabilities of discontinued operations
                        
                        $
                        22,856,502
                        
                        
                        $
                        21,846,036








Note
4 - Other Environmental Remediation




Wellman
Dynamics Corporation ("Wellman"), a subsidiary of Fansteel Inc., entered into an
Administrative Order on Consent with the EPA to perform a RCRA Facility
Investigation ("RFI") for the purpose of determining the extent of releases of
hazardous wastes and/or hazardous constituents, and, if appropriate, a
Corrective Measures Study ("CMS") to evaluate possible corrective action
measures that may be necessary at the Iowa Facility owned and operated by
Wellman.  At January 23, 2004, Wellman had estimated that the cost for
conducting the RFI/CMS would be $2,166,000 through 2009.  At September
30, 2008 and December 31, 2007 the gross estimated liability was $1,806,000 and
$1,877,000, respectively, and the recorded discounted liability, using a
discount rate of 11.3%, was $1,784,000 and $1,834,000,
respectively.





Wellman
is permitted to operate a sanitary landfill for the disposal of its foundry
sand.  It is anticipated that, based upon current regulation and
projections by third-party consultants, the estimated cost to close the landfill
will be $1,297,000 after an updated 2008 cost study of the landfill closure
costs increased the gross liability by $131,000.  This charge was
taken in the second quarter 2008. Changes in regulations for non-public
landfills may result in closure at an earlier date than originally
anticipated.  The Iowa Department of Natural Resources notified
Wellman in the July 2008 landfill permit renewal that disposal should cease by
July 2011 unless synthetic liners are installed. Wellman has appealed this
permit limitation since the landfill should be excluded from liner requirements
under a grandfather exclusion provided in the current
regulations.  The recorded discounted liability, using a discount rate
of 11.3%, at September 30, 2008 and December 31, 2007 was $796,000 and $613,000,
respectively.





12
 Index





In
October 2000, Wellman provided the Iowa Department of Health (the "IDPH") with a
"Historical Site Assessment" that identified uranium and thorium concentrations
at the site.  The IDPH required Wellman to perform a Risk Assessment
("RA") to determine whether the thorium-containing materials are a threat to
human health or the environment.  Wellman is awaiting the final
report, but to its knowledge, the existing data forming the basis for the RA
indicates that there is no imminent threat to health, safety or the
environment.  Wellman anticipates that the IDPH will allow it to
address the thorium issue when it closes the sanitary
landfill.  However, there is a risk that the IDPH will require Wellman
to remove or remediate the thorium prior to that time.  The current
estimated cost to remediate the thorium is $1,075,000. The recorded discounted
liability, using a discount rate of 11.3%, at September 30, 2008 and December
31, 2007 was $622,000 and $575,000, respectively.





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








Note
5 - Debt





In order
to increase the Company’s liquidity and ability to meet operational and
strategic needs, Fansteel Inc. and its subsidiary, Wellman Dynamics Corporation,
as borrowers, entered into a Loan and Security Agreement with Fifth Third Bank
(Chicago), as lender, on July 15, 2005 with an original principal amount of
$15,000,000. This loan agreement with Fifth Third Bank was amended on December
4, 2006 increasing the borrowing base to $21.5 million.





Revolving
loans included $1.5 million for borrowing under credit cards issued by the
Lender, not subject to the borrowing base. The term was extended with revolving
loans due and payable in full on January 5, 2009. As borrowers under this Loan
and Security Agreement, the Company is required to meet certain covenants,
including those that require minimum EBITDA levels, limit leverage and establish
debt service requirements.  The interest rate on the line is at prime
and there is a 0.25% unused line fee.  Substantially all of the assets
of the borrowers are pledged as security for this financing.





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





13
 Index





On
September 12, 2007, the Company amended its Loan and Security Agreement with
Fifth Third Bank for the third time.  Under this amended loan
facility, subject to certain borrowing conditions, the Company may incur
revolving loans in an amount up to $21.5 million from a borrowing base comprised
of a percentage of eligible accounts receivable and inventories and $2 million
for machinery and equipment until March 2, 2009. Revolving loans were amended to
eliminate $1.5 million for borrowing that is not subject to the borrowing base
limits.  A term loan for a maximum of $3 million was added to the loan
facility.  Draws on the term loan could be made until February 29,
2008, at which time the Company drew the maximum $3 million. Interest on the
term loan is at 13%.  The term loan includes a success fee of 3% to 7%
of principal amount repaid before March 2, 2009 depending on when the repayment
occurs. Fansteel Inc. pledged its 1,000 shares of Wellman stock as security for
the term loan.





On August
29, 2008 and September 3, 2008, the Company amended its Loan and Security
Agreement with Fifth Third Bank (Chicago), as lender for the fourth and fifth
times.  Under the amended loan facility, subject to certain borrowing
conditions, the Company may incur revolving loans in an amount up to $19.5
million from a borrowing base comprised of a percentage of eligible accounts
receivable and inventories and $2.2 million for machinery and equipment until
September 5, 2010.  Revolving loans were amended by reducing the
maximum by $2 million as this is anticipated to be unused.  The
revolving line has a 25 basis point fee for unused revolving credit, excluding
the $1.5 million revolving credit established for credit card payments. The
interest on the revolving portion of the line, excluding credit usage, is at
prime unless an option is elected to use LIBOR plus 275 basis points. The $3
million term loan was amended to a 36 month term with monthly payments beginning
on January 5, 2009.  The maturity date for the term loan is September
5, 2011. An annual cash flow sweep of excess cash, with a maximum of $300,000
payment, was added.  The sweep is eliminated after the term loan
principal is below $2 million. Interest on the term loan is at
prime.  The Fourth and Fifth Amendments to the Loan and Security
Agreement were executed in order to provide the borrowers with short-term
liquidity and the ability to meet operational and strategic needs.





At
September 30, 2008 the Company had letters of credit of $771,000 under its Loan
and Security Agreement with Fifth Third Bank for casualty insurance collateral
and environmental assurance with an interest rate of 1.5%. The Company’s credit
availability was $2,019,000 at September 30, 2008.  Borrowing under
the revolving line of credit is included as short-term borrowings. Borrowing
from the term loan under the credit facility is included as current portion of
long-term debt for $750,000 and long-term debt for $2,250,000 at September 30,
2008 and long-term debt of $2,000,000 at December 31, 2007.








Note
6 - Income Taxes





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





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





At
September 30, 2008 and December 31, 2007, the Company had potential federal and
state income tax benefits from net operating loss carry-forwards of $22.3 million, which expire in
various years through 2023. Due to the recent ownership change, the tax loss
carry-forwards of the Company will be subject to limitation by Section 382 of
the Internal Revenue Code with respect to the amount utilizable each year. The
amount of the limitation has been computed as $14,000. Valuation allowances have
been recorded for the full amount of all net operating loss carry-forwards and
the other deferred tax assets as the net operating loss carry-forwards and other
deferred tax assets are not anticipated to be realized before expiration. The
Company does not expect a significant increase or decrease in unrecognized tax
benefits within the next twelve months. The Company and its subsidiaries file
income tax returns in various tax jurisdictions, including the United States and
several states. The Company has substantially concluded all U.S. Federal and
State income tax matters for the period up to and including 2002.





14
 Index





Note
7 - Business Segments





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





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





Three
      Months Ended
                
                
                Nine
      Months EndedNet
      Sales:
                
                September
      30, 2008
                
                
                September
      30, 2007
                
                
                September
      30, 2008
                
                
                September
      30, 2007Advanced
      Structures
                
                $
                11,700,975
                
                
                $
                10,502,156
                
                
                $
                35,434,131
                
                
                $
                31,912,545Industrial
      Metal Components
                
                
                6,944,791
                
                
                
                8,014,673
                
                
                
                23,738,763
                
                
                
                24,145,590Total
      Net Sales
                
                $
                18,645,766
                
                
                $
                18,516,829
                
                
                $
                59,172,894
                
                
                $
                56,058,135Operating
      Income (Loss):Advanced
      Structures
                
                $
                233,205
                
                
                $
                887,732
                
                
                $
                2,804,603
                
                
                $
                2,286,579Industrial
      Metal Components
                
                
                (287,012
                )
                
                
                136,657
                
                
                
                336,264
                
                
                
                1,101,314Corporate
                
                
                -
                
                
                
                (19,996
                )
                
                
                -
                
                
                
                (585,553
                )Total
      Operating (Loss) Income
                
                $
                (53,807
                )
                
                $
                1,004,393
                
                
                $
                3,140,867
                
                
                $
                2,802,340








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





Identifiable
      assets:
                
                September
      30,
                  2008
                
                
                December
      31,
                  2007Advanced
      Structures
                
                $
                19,625,188
                
                
                $
                19,520,969Industrial
      Metal Components
                
                
                10,000,354
                
                
                
                10,139,992Corporate
                
                
                14,436,021
                
                
                
                15,399,241Discontinued
                
                
                1,301,541
                
                
                
                2,148,180Total
      Assets
                
                $
                45,363,104
                
                
                $
                47,208,382





15
 Index





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





Three
      Months Ended
                    
                    
                    Nine
      Months EndedDepreciation
      and amortization:
                    
                    September
      30, 2008
                    
                    
                    September
      30, 2007
                    
                    
                    September
      30,
                      2008
                    
                    
                    September
      30,
                      2007Advanced
      Structures
                    
                    $
                    147,288
                    
                    
                    $
                    139,554
                    
                    
                    $
                    428,238
                    
                    
                    $
                    378,135Industrial
      Metal Components
                    
                    
                    140,495
                    
                    
                    
                    132,767
                    
                    
                    
                    423,627
                    
                    
                    
                    367,112Corporate
                    
                    
                    5,914
                    
                    
                    
                    4,608
                    
                    
                    
                    18,093
                    
                    
                    
                    13,768Total
      depreciation and amortization
                    
                    $
                    293,697
                    
                    
                    $
                    276,929
                    
                    
                    $
                    869,958
                    
                    
                    $
                    759,015Capital
      expenditures:Advanced
      Structures
                    
                    $
                    295,010
                    
                    
                    $
                    159,732
                    
                    
                    $
                    1,021,161
                    
                    
                    $
                    496,255Industrial
      Metal Components
                    
                    
                    87,908
                    
                    
                    
                    166,522
                    
                    
                    
                    549,420
                    
                    
                    
                    394,646Corporate
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    20,869
                    
                    
                    
                    1,118Total
      capital expenditures
                    
                    $
                    382,918
                    
                    
                    $
                    326,254
                    
                    
                    $
                    1,591,450
                    
                    
                    $
                    892,019





16
 Index





ITEM2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS





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





Results
of Operations





Three
Months Ended September 30, 2008 As Compared To Three Months Ended September 30,
2007




Net
Sales





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




Three
      Months
                    Ended
                    September
      30,2008
                  
                  
                  Three
      Months
                    Ended
                    September
      30, 2007Advanced
      Structures
                  
                  $
                  11,700,975
                  
                  
                  $
                  10,502,156Industrial
      Metal Components
                  
                  
                  6,944,791
                  
                  
                  
                  8,014,673$
                  18,645,766
                  
                  
                  $
                  18,516,829





The
Company’s consolidated net sales for the three months ended September 30, 2008
increased $128,000, or 0.7%, compared to the three months ended September 30,
2007. The increase was due to higher sales of sand castings in the Advanced
Structures segment nearly offset by reduced sales in the Industrial Metal
Components segment.





Advanced
Structures’ net sales for the three months ended September 30, 2008 increased by
$1,199,000, or 11.4%, compared to the three months ended September 30, 2007.
Strong demand for helicopter components provided the majority of the increase,
with lower sales of NASCAR parts and commercial air products partially reducing
the improvement.





Industrial
Metal Components' net sales for the three months ended September 30, 2008
decreased $1,070,000, or 13.3%, compared with the three months ended September
30, 2007.  Investment casting sales were lower by $906,000, or 16.7%,
primarily related to diesel engine programs for trucks and buses. Sales of
powdered metal components decreased by $164,000, or 6.3%, due to the soft
automotive market and lower sales of recreational vehicles, partially offset by
improvement in the lawn and garden market.





17
 Index





Cost
of Products Sold





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





Three
      Months Ended
                      September
      30, 2008
                    
                    
                    %
      Of
                      Net
                      Sales
                    
                    
                    Three
      Months Ended
                      September
      30, 2007
                    
                    
                    %
      Of
                      Net
                      SalesAdvanced
      Structures
                    
                    $
                    10,773,298
                    
                    
                    
                    92.1%
                    
                    
                    $
                    8,938,524
                    
                    
                    
                    85.1%Industrial
      Metal Components
                    
                    
                    6,389,291
                    
                    
                    
                    92.0%
                    
                    
                    
                    6,927,384
                    
                    
                    
                    86.4%$
                    17,162,589
                    
                    
                    
                    92.0%
                    
                    
                    $
                    15,865,908
                    
                    
                    
                    85.7%





Cost of
products sold of $17.2 million for the three months ended September 30, 2008
increased by $1.3 million compared to $15.9 million for the three months ended
September 30, 2007, due largely to the increase in sales volume for magnesium
and aluminum sand castings. As a percent of sales, cost of products sold were
92.0% and 85.7% for the three month periods ended September 30, 2008 and
September 30, 2007, respectively.





In the
Advanced Structures segment, cost of products sold of $10.8 million for the
three months ended September 30, 2008 increased $1.9 million compared with cost
of products sold of $8.9 million for the three months ended September 30, 2007.
As a percent of net sales, cost of products increased by 7.0 points for the
three months ended September 30, 2008 compared with the three months ended
September 30, 2007.  Higher volume benefits were offset by increased
scrap, outside processing, material and environmental costs for the three months
ended September 30, 2008.





The
Industrial Metal Components’ cost of products sold decreased to $6.4 million for
the three months ended September 30, 2008 compared to cost of products sold of
$6.9 million for the three months ended September 30, 2007.  As a
percent of net sales, cost of products for the segment were 92.0% for the three
months ended September 30, 2008 compared with 86.4% for the three months ended
September 30, 2007. Lower volume and higher material costs for the three months
ended September 30, 2008 negatively impacted results.





Selling,
General and Administrative Expense





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





Three
      Months Ended
                  September
      30, 2008
                
                
                %
      Of
                  Net
                  Sales
                
                
                Three
      Months Ended
                  September
      30, 2007
                
                
                %
      Of
                  Net
                  SalesAdvanced
      Structures
                
                $
                694,472
                
                
                
                5.9%
                
                
                $
                675,900
                
                
                
                6.4%Industrial
      Metal Components
                
                
                842,512
                
                
                
                12.1%
                
                
                
                950,632
                
                
                
                11.9%Corporate
                
                
                -
                
                
                NA
                
                
                
                19,996
                
                
                NA$
                1,536,984
                
                
                
                8.2%
                
                
                $
                1,646,528
                
                
                
                8.9%





18
 Index





Selling,
general and administrative expenses for the three months ended September 30,
2008 were $1.5 million, a decrease of $110,000 over expenses of $1.6 million for
the three months ended September 30, 2007. As a percent of sales, selling,
general and administrative expenses decreased to 8.2% in the for the three
months ended September 30, 2008 compared with 8.9% for the three months
September 30, 2007.





In the
Advanced Structures segment, selling, general and administrative expenses for
the three months ended September 30, 2008 increased by $18,000 compared with the
three months ended September 30, 2007. As a percent of sales, selling, general
and administrative expenses decreased to 5.9% for the three months ended
September 30, 2008 as a result of the higher volume compared to 6.4% for the
three months ended September 30, 2007.





Selling,
general and administrative expenses for Industrial Metal Components segment for
the three months ended September 30, 2008 decreased $108,000 compared with the
three months ended September 30, 2007 due to reduced headcount, lower
commissions and lower health care costs. Selling, general and administrative
expenses as a percent of sales increased to 12.1% for the three months ended
September 30, 2008 compared with 11.9% for the three months ended September 30,
2007 as a result of the lower sales volume.





Corporate
selling, general and administrative expenses (not allocated to operations) were
$0 for the three months ended September 30, 2008 compared with $20,000 for the
three months ended September 30, 2007. Corporate expenses for the three months
ended September 30, 2007 were for unusual professional fees for strategic
initiatives and an investigation by a special committee of the Board of
Directors.





Operating
Income (Loss)





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





Three
      Months
                  Ended
                  September
      30, 2008
                
                
                %
      Of
                  Net
                  Sales
                
                
                Three
      Months
                  Ended
                  September
      30, 2007
                
                
                %
      Of
                  Net
                  SalesAdvanced
      Structures
                
                $
                233,205
                
                
                
                2.0%
                
                
                $
                887,732
                
                
                
                8.5%Industrial
      Metal Components
                
                
                (287,012
                )
                
                
                (4.1%)
                
                
                
                136,657
                
                
                
                1.7%Corporate
                
                
                -
                
                
                NA
                
                
                
                (19,996
                )
                
                NA$
                (53,807
                )
                
                
                (0.3%)
                
                
                $
                1,004,393
                
                
                
                5.4%





Operating
income for the three months ended September 30, 2008 decreased $1,058,000, or
105.4%, compared to the three months ended September 30, 2007, despite the
higher sales volume due to increased manufacturing costs.





Advanced
Structures operating income of $233,000 for the three months ended September 30,
2008 decreased by $655,000 from operating income of $888,000 for the three
months ended September 30, 2007. Despite the higher sales volume in this
segment, operating income decreased due to increased scrap, outside processing,
material and environmental costs.





Industrial
Metal Components had on operating loss of $287,000 for the three months ended
September 30, 2008 compared to operating income of $137,000 for the three months
ended September 30, 2007. The decrease in volume and higher material costs had a
negative impact on this segment’s operating income for the three months ended
September 30, 2008.





19
 Index





Corporate’s
operating loss was $0 for the three months ended September 30, 2008 compared
with an operating loss of $20,000 for the three months ended September 30, 2007.
The loss in 2007 related to unusual professional fees for strategic initiatives
and an investigation by a special committee of the Board of Directors that are
not allocable to the operating segments.





Other Income
(Expenses)





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





Three
      months
                    Ended
                    September
      30,2008
                  
                  
                  Three
      months
                    Ended
                    September
      30, 2007Interest
      expenses
                  
                  $
                  (438,399
                  )
                  
                  $
                  (492,754
                  )Other
      income (expenses)
                  
                  
                  2,594
                  
                  
                  
                  (66,453
                  )$
                  (435,805
                  )
                  
                  $
                  (559,207
                  )





Other
expense decreased $123,000 in the three months ended September 30, 2008 compared
to the three months ended September 30, 2007. Interest expense in the three
months ended September 30, 2008 was lower by $54,000 compared with the three
months ended September 30, 2007 due to the decreased level of borrowings from
the revolving line of credit.Other income for the
three months ended September 30, 2008 increased by $68,000 due to $25,000 in
income for equipment purchased by a customer for use by the sand casting
operation in producing their products, $34,000 less foreign currency translation
at the investment casting operation, and $9,000 less minority interest related
to the Wellman Dynamics subsidiary.





Discontinued
Operations





Discontinued
operations reported a loss of $815,000 in the three months ended September 30,
2008 and a loss of $1,487,000 in the three months ended September 30, 2007. The
losses for both time periods relate primarily to the accretion of discounted
environmental liabilities arising from the Company’s unsecured note obligations
to its special purpose subsidiaries and the note payable to the Pension Benefit
Guarantee Corporation for the terminated pension plan. Losses in the third
quarter 2007 also included $608,000 to write-down the value of property held for
sale at the FLRI facility based on an updated appraisal.





Income
taxes





A tax
provision of $20,000 was recorded for the three months ended September 30, 2008
compared with a tax provision of $0 for the three months ended September 30,
2007. The tax provision in 2008 relates to foreign taxes in Mexico that are not
likely to be recovered. In 2007, no income tax provision or benefit was
recognized as valuation allowances had been recorded for all net operating loss
benefits and net deferred tax assets.





Net
Loss





The
Company had net losses of $1,325,000 and $1,042,000 for the three months ended
September 30, 2008 and 2007, respectively.





20
 Index





2008
Nine Months As Compared To 2007 Nine Months




Net
Sales





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





Nine
      Months Ended
                  September
      30, 2008
                
                
                Nine
      Months Ended
                  September
      30, 2007Advanced
      Structures
                
                $
                35,434,131
                
                
                $
                31,912,545Industrial
      Metal Components
                
                
                23,738,763
                
                
                
                24,145,590$
                59,172,894
                
                
                $
                56,058,135





Consolidated
Company net sales of $59.2 million for the nine months ended September 30, 2008
increased $3.1 million, or 5.6%, compared to net sales of $56.1 million for the
nine months ended September 30, 2007. Sales of sand castings in the Advanced
Structures segment provided the improvement, partially offset by decreased sales
in the Industrial Metal Components segment.





For the
nine months ended September 30, 2008, Advanced Structures net sales increased by
$3.5 million, or 11.0%, compared to the nine months ended September 30,
2007.  Strong sales of sand castings for private jet engines lead the
sales improvement along with increased demand for helicopter components and
regional jet engines. Sales of military fight components and NASCAR parts
declined from the prior year. Tooling sales for the first nine months of 2008
were lower as the first nine months of 2007 included tooling for a large
program.





Net sales
for the Industrial Metal Components segment decreased $407,000, or 1.7%, for the
nine months ended September 30, 2008 compared with the nine months ended
September 30, 2007.  Included in this segment’s sales were surcharges
for increased metal costs in the first nine months of 2008 of $3,619,000, which
were $124,000 more than the first nine months of 2007. Net sales of investment
castings decreased by $269,000, or 1.7%, with declines in the automotive sector
being partially offset by improvement from flow control customers and related
surcharges. Powdered metal components sales decreased $138,000, or 1.6%, as the
soft automotive market and reduced demand for recreational vehicles offset
improvements in the hardware and lawn and garden markets.





Cost
of Products Sold





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





Nine
      Months Ended
                      September
      30, 2008
                    
                    
                    %
      Of
                      Net
                      Sales
                    
                    
                    Nine
      Months Ended
                      September
      30, 2007
                    
                    
                    %
      Of
                      Net
                      SalesAdvanced
      Structures
                    
                    $
                    30,391,291
                    
                    
                    
                    85.8%
                    
                    
                    $
                    27,248,670
                    
                    
                    
                    85.4%Industrial
      Metal Components
                    
                    
                    20,657,200
                    
                    
                    
                    87.0%
                    
                    
                    
                    20,223,792
                    
                    
                    
                    83.8%$
                    51,048,491
                    
                    
                    
                    86.3%
                    
                    
                    $
                    47,472,462
                    
                    
                    
                    84.7%





21
 Index





Cost of
products sold of $51.0 million for the nine months ended September 30, 2008
increased by $3.5 million compared to $47.5 million for the nine months ended
September 30, 2007, due largely to the increase in sales volume. As a percent of
sales, cost of products sold increased 1.6 percentage points to 86.3% in 2008
compared to 84.7% in 2007.





In the
Advanced Structures segment cost of products sold of $30.4 million for the nine
months ended September 30, 2008 increased $3.2 million compared with cost of
products sold of $27.2 million for the nine months ended September 30, 2007.
Cost of products sold increased due to the higher volume and increased scrap,
which were partially offset by $1,050,000 in training grant reimbursements
received.As a
percent of net sales, cost of products were nearly flat at 85.8% in the first
nine months of 2008 compared with 85.4% in the first nine months of
2007.





The
Industrial Metal Components’ cost of products sold were $20.6 million for the
nine months ended September 30, 2008 compared to cost of products sold of $20.2
million for the nine months ended September 30, 2007.  Despite the
lower sales volume, cost of products sold increased due to increased material
costs and high utility costs.As a percent of net
sales, cost of products increased to 87.0% for the first nine months of 2008
compared with 83.8% for the first nine months of 2007 primarily due to the lower
volume.





Selling,
General and Administrative Expense





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





Nine
      Months
                    Ended
                    September
      30, 2008
                  
                  
                  %Of
                    Net
                    Sales
                  
                  
                  Nine
      Months Ended
                    September
      30, 2007
                  
                  
                  %Of
                    Net
                    SalesAdvanced
      Structures
                  
                  $
                  2,238,237
                  
                  
                  
                  6.3%
                  
                  
                  $
                  2,377,296
                  
                  
                  
                  7.4%Industrial
      Metal Components
                  
                  
                  2,745,299
                  
                  
                  
                  11.6%
                  
                  
                  
                  2,820,484
                  
                  
                  
                  11.7%Corporate
                  
                  
                  -
                  
                  
                  NA
                  
                  
                  
                  585,553
                  
                  
                  NA$
                  4,983,536
                  
                  
                  
                  8.4%
                  
                  
                  $
                  5,783,333
                  
                  
                  
                  10.3%





Selling,
general and administrative expenses for the first nine months of 2008 were $5.0
million compared with $5.8 million in the first nine months of 2007. As a
percent of sales, selling, general and administrative expenses decreased to 8.4%
in the first nine months of 2008 compared with 10.3% for the first nine months
of 2007. Results in the first nine months of 2007 included $586,000 for unusual
professional fees related to strategic initiatives and an investigation by a
special committee of the Board of Directors that were not incurred in the first
nine months of 2008.





In the
Advanced Structures segment, selling, general and administrative expenses for
the nine months ended September 30, 2008 decreased by $139,000, or 5.8%,
compared with the nine months ended September 30, 2007. As a percent of sales,
selling, general and administrative expenses improved to 6.3% for the nine
months ended September 30, 2008 compared with 7.4% for the nine months ended
September 30, 2007, due largely  to the higher volume of sales.
Results for the nine months ended September 30, 2007 included compensation
expense of $164,000 for the grant of 12 shares of stock to key managers of
Wellman Dynamics Corporation, a 98.8% owned subsidiary (after the grant) of
Fansteel Inc., which is included in this segment.





22
 Index





Selling,
general and administrative expenses for Industrial Metal Components segment for
the nine months ended September 30, 2008 decreased$75,000, or 2.7%,
compared with the nine months ended September 30, 2007 due mainly to headcount
reductions. As a percent of sales, selling, general and administrative expenses
remained nearly flat at 11.6% compared with 11.7%.





Corporate
unallocated selling, general and administrative expenses were $0 for the nine
months ended September 30, 2008 compared with $586,000 for the nine months ended
September 30, 2007. These charges in 2007 were for unusual professional fees
related to strategic initiatives and an investigation by a special committee of
the Board of Directors.





Operating
Income





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





Nine
      Months Ended
                            September
      30, 2008
                          
                          
                          %
                            Of
                            Net
      Sales
                          
                          
                          Nine
      Months Ended
                            September
      30, 2007
                          
                          
                          %
                            Of
                            Net
      SalesAdvanced
      Structures
                          
                          $
                          2,804,603
                          
                          
                          
                          7.9%
                          
                          
                          $
                          2,286,579
                          
                          
                          
                          7.2%Industrial
      Metal Components
                          
                          
                          336,264
                          
                          
                          
                          1.4%
                          
                          
                          
                          1,101,314
                          
                          
                          
                          4.6%Corporate
                          
                          
                          -
                          
                          
                          
                          NA
                          
                          
                          
                          (585,553
                          )
                          
                          
                          NA$
                          3,140,867
                          
                          
                          
                          5.3%
                          
                          
                          $
                          2,802,340
                          
                          
                          
                          5.0%





Operating
income for the nine months ended September 30, 2008 increased $339,000 compared
to the nine months ended September 30, 2007,with improvement in the
Advanced Structures segment and reduced Corporate costs. Operating income as a
percent of sales improved to 5.3% for the nine months ended September 30, 2008
compared with 5.0% for the nine months ended September 30, 2007.





Advanced
Structures operating income of $2.8 millionfor the nine months
ended September 30, 2008 increased $518,000 from operating income of $2.3
million for the nine months ended September 30, 2007. Operating income as a
percent of sales improved to 7.9% for the nine months ended September 30, 2008
compared with 7.2% for the nine months ended September 30, 2007. Higher volume,
reimbursements for a training grant, and reduced compensation expense provided
the majority of the improvement.





Industrial
Metal Components had operating income of $336,000 for the nine months ended
September 30, 2008 compared to operating income of $1,101,000 for the nine
months ended September 30, 2007, a decrease of $765,000. Segment operating
income as a percent of sales decreased to 1.4% for the nine months ended
September 30, 2008 compared with 4.6% for the nine months ended September 30,
2007. Lower volume, increased material costs and high utility costs accounted
for the majority of the decrease in operating income.





Corporate
had $0 operating income for the nine months ended September 30, 2008 compared
with an operating loss of $586,000 for the nine months ended September 30, 2007.
The 2007 loss resulted from unusual professional fees related to strategic
initiatives and an investigation by a special committee of the Board of
Directors that were not allocable back to the business segments.





23
 Index





Other Income
(Expenses)





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





Nine
      Months Ended
                    September
      30, 2008
                  
                  
                  Nine
      Months Ended
                    September
      30, 2007Interest
      expense
                  
                  $
                  (1,239,205
                  )
                  
                  $
                  (1,253,368
                  )Other
      income (expenses)
                  
                  
                  21,488
                  
                  
                  
                  (120,520
                  )$
                  (1,217,717
                  )
                  
                  $
                  (1,373,888
                  )





Other
expenses decreased $156,000 for the nine months ended September 30, 2008
compared to the nine months ended September 30, 2007. Interest expense decreased
by $14,000 due to lower borrowings from the revolving line of credit in the nine
months ended September 30, 2008.Other expenses decreased
$142,000 as other income of $151,000 was recorded in the first nine months of
2008 for equipment purchased by a customer and given to the sand casting
operation to be used exclusively for producing this customer’s
products.





Discontinued
Operations





Discontinued
operations reported a loss of $2,373,000 for the nine months ended September 30,
2008 and a loss of $3,366,000 for the nine months ended September 30, 2007. The
losses for both periods relate primarily to the accretion of discounted
environmental liabilities from the Company’s special purpose subsidiaries and
the note payable to the Pension Benefit Guarantee Corporation.  The 2007
loss also includes a write-down of $608,000 related to a reduction in value of
property held for sale at the special purpose subsidiary, FLRI,
Inc.





Income
taxes





A tax provision of $56,000 was recorded
for the nine months ended September 30, 2008 compared with a tax provision of $0
for the nine months ended September 30, 2007. The tax provision in 2008 is
related to foreign taxes in Mexico that are not likely to be recovered. In 2007,
no income tax provision or benefit was recognized as valuation allowances had
been recorded for all net operating loss benefits and net deferred tax
assets.





Net
Income (Loss)





The
Company had a net loss of $506,000 for the nine months ended September 30, 2008
and a net loss of $1,937,000 for the nine months ended September 30,
2007.





24
 Index





Liquidity
and Capital Resources




On
September 30, 2008 and December 31, 2007, the Company had cash and available
credit of $2,649,000 and $2,261,000 respectively.





Continuing
operations provided cash of $1,991,000 for the nine months ended September 30,
2008, due mostly to operating activities of $4,218,000. Excluding net debt
payments of $645,000, continuing operations provided $2,636,000 for the nine
months ended September 30, 2008. Discontinued operations used $1,660,000 for the
nine months ended September 30, 2008, primarily for funding the on-going
environmental remediation at the Muskogee, Oklahoma property, but were partially
offset by the March 2008 sale of the Washington Manufacturing property that
provided $458,000.





Continuing
operations provided cash of $4,065,000 for the first nine months of 2007, due
mostly to improvements in working capital of $2,910,000 and borrowings from the
Fifth Third revolving line of credit of $2,279,000. Excluding net borrowings,
continuing operations provided $2,018,000 for the nine months ended September
30, 2007. Discontinued operations used $4,063,000 for the nine months ended
September 30, 2007 primarily for funding the on-going environmental remediation
at the Muskogee, Oklahoma property.





Operating
Activities





For the
nine months ended September 30, 2008, operating activities provided $4,218,000
in cash with improvements in working capital coming from decreases in
receivables, prepaids and other assets, partially offset by decreases in
accounts payable and accrued liabilities and increases in
inventories.  Accounts receivable decreased by $935,000 due to strong
collections and a 6-day decrease in days outstanding. Inventories increased by
$533,000 due to the higher sales volume.   Accounts payable and
accrued liabilities decreased $1,031,000 due to timing of vendor payments and
reduced purchases. Prepaid expenses decreased $1,504,000 due mainly to
amortization of insurance.





For the
nine months ended September 30, 2007, operating activities provided $2,910,000
in cash with improvements in working capital coming from income from continuing
operations, decreases in receivables, current assets and other assets along with
increases in accounts payable and accrued liabilities.





Investing
Activities





For the
nine months ended September 30, 2008, investing activities used $1,581,000,
which included $1,591,000for capital
expenditures, primarily for replacement equipment and upgrades for both business
segments, partially offset by $10,000 in proceeds for the sale of equipment. One
customer provided $151,000 to the Company to purchase one piece of equipment for
use in producing the customer’s parts.  Two other customers committed
to provide nearly $4 million of capital for equipment, which will remain their
property, and a building addition. The first phase of the equipment is scheduled
to be fully operational in the second half of 2008 while the second phase of the
equipment and building installation is scheduled to be operation in the first
half of 2009.





For the
nine months ended September 30, 2007, investing activities used $892,000 for
capital expenditures for both business segments.





25
 Index





Financing
Activities





Financing
activities used $645,000 for the nine months ended September 30, 2008.
Borrowings for 2008 from the term loan within the revolving line of credit with
Fifth Third were $1,000,000 for funding operations, capital expenditures and
environmental remediation of discontinued operations. Payments of $1,568,000
were made in 2008 for short-term borrowings from the revolving line of credit.
Payments of $77,000 were made in 2008 of long-term debt were for loans from
various economic agencies in Pennsylvania.





Financing
activities provided $2,046,000 for the nine months ended September 30, 2007. Net
borrowings for the first nine months of 2007 from the revolving line of credit
were $2,279,000, with payments of long-term debt of $233,000.





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





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





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





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





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





-
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.





26
 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 documented completion of all requirements under the
specific purchase agreement, which is considered customer
acceptance.





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





27
 Index





Recent
Accounting Pronouncements





In
October 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (FSP) Statement of Financial Accounting Standards (SFAS) No.
157-3 (“SFAS 157-3”), “Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active” which clarifies the application of SFAS 157
in an inactive market and illustrates how an entity would determine fair value
when the market for a financial asset is not active. FSP SFAS 157-3 is effective
immediately and applies to prior periods for which financial statements have
been issued, including interim or annual periods ending on or before September
30, 2008. The adoption of FSP SFAS 157-3 did not have a material impact on the
Company’s consolidated financial statements.





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





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





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





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities - an amendment of FASB Statement No. 133” (“SFAS
161”).  SFAS 161 amends and expands the disclosure requirements of
Statement 133 to provide a better understanding of how and why an entity uses
derivative instruments, how derivative instruments and related hedged items are
accounted for, and their effect on an entity’s financial position, financial
performance, and cash flows.  SFAS 161 is effective for fiscal years
beginning after November 15, 2008. The Company is currently evaluating the
impact that the adoption of SFAS 161 will have on the consolidated financial
statements.





In
December 2007 the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 amends ARB No. 51 to establish accounting and reporting standards for
the non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also amends certain of ARB No. 51’s consolidation procedures for
consistency with the requirements of SFAS 141 (revised 2007), “Business
Combinations”. SFAS 160 is effective for fiscal years and interim periods within
those fiscal years beginning on or after December 15, 2008. Earlier adoption is
prohibited. SFAS 160 shall be applied prospectively as of the beginning of the
fiscal year in which the Statement is adopted, except for the presentation and
disclosure requirements. The presentation and disclosure requirements shall be
applied retrospectively for all periods presented. The effect of adopting SFAS
160 is not expected to be material.





28
 Index





In
December 2007 the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R retains the fundamental requirements of
the original pronouncement requiring that the purchase method be used for all
business combinations. SFAS 141R defines the acquirer as the entity that obtains
control of one or more businesses in the business combination, establishes the
acquisition date as the date that the acquirer achieves control and requires the
acquirer to recognize the assets and liabilities assumed and any non-controlling
interest at their fair values as of the acquisition date. SFAS 141R requires,
among other things, that the acquisition related costs be recognized separately
from the acquisition. SFAS 141R is applied prospectively to business
combinations for which the acquisition date is on or after January 1, 2009. The
effect of adopting SFAS 141R will be dependent on the nature and the size of the
acquisition completed after the adoption of SFAS 141R.





In
February 2007 the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities-Including an Amendment of FASB Statement No.
115” (“SFAS 159”). SFAS 159 permits an entity to elect to measure eligible items
at fair value (“fair value option”) including many financial instruments. The
provisions of SFAS 159 are effective for the Company as of January 1, 2008. If
the fair value option is elected, the Company will report unrealized gains and
losses on items for which the fair value option has been elected in earnings at
each subsequent reporting date. Upfront costs and fees related to an item for
which the fair value option is elected shall be recognized in earnings as
incurred and not deferred. The fair value option may be applied for a single
eligible item without electing it for other identical items, with certain
exceptions, and must be applied to the entire eligible item and not to a portion
of the eligible item. The adoption of SFAS 159 in 2008 did not have an impact on
our results of operations or financial position.





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”), which defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements. SFAS 157 is partially effective for the Company
beginning on January 1, 2008. The requirements of SFAS 157 will be applied
prospectively except for certain derivative instruments that would be adjusted
through the opening balance of retained earnings in the period of adoption. In
February 2008, FASB issued Staff Position No. FAS 157-2which
provides for a one-year deferral of the effective date of SFAS 157 for
non-financial assets and liabilities that are not recognized or disclosed at
fair value in the financial statements on a recurring basis. The adoption of
SFAS 157 in 2008 did not have an impact on the Company’s results of operations
or financial position.





Inflation




Inflationary
factors such as increases in the costs of raw materials, labor, and overhead
affect the Company's operating profits.  Significant portions of raw
materials consumed by the Company are various steel alloys.  In 2004,
price increases were experienced and these price increases have continued into
2008.  To offset these price increases, the Company began adding
material surcharges in March 2004 and in 2008 the Company continues to add
material surcharges.  Material surcharges accounted for 6.1% of net
sales for the nine months ended September 30, 2008 and 6.2% of net sales for the
nine months ended September 30, 2007, a decrease of 0.1% as customers have begun
to request price increases instead of surcharges.





29
 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 September 30, 2008:





(In
      thousands)
                      
                      Total
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2011
                      
                      
                      2012
                      
                      
                      After
      2012PBGC
      Note
                      
                      $
                      6,500
                      
                      
                      $
                      -
                      
                      
                      $
                      750
                      
                      
                      $
                      1,150
                      
                      
                      $
                      1,150
                      
                      
                      $
                      1,150
                      
                      
                      $
                      2,300PA
      economic agencies notes
                      
                      
                      19
                      
                      
                      
                      5
                      
                      
                      
                      14
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Operating
      and capital leases
                      
                      
                      477
                      
                      
                      
                      59
                      
                      
                      
                      123
                      
                      
                      
                      79
                      
                      
                      
                      64
                      
                      
                      
                      152
                      
                      
                      
                      -Fifth
      Third revolving line
                      
                      
                      14,708
                      
                      
                      
                      406
                      
                      
                      
                      547
                      
                      
                      
                      13,755
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Fifth
      Third term loan
                      
                      
                      3,390
                      
                      
                      
                      30
                      
                      
                      
                      1,120
                      
                      
                      
                      1,120
                      
                      
                      
                      1,120
                      
                      
                      
                      -
                      
                      
                      
                      -Letters
      of credit
                      
                      
                      771
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      771
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Environmental
      liabilities
                      
                      
                      31,552
                      
                      
                      
                      2,295
                      
                      
                      
                      2,432
                      
                      
                      
                      2,736
                      
                      
                      
                      1,978
                      
                      
                      
                      1,978
                      
                      
                      
                      20,133Total
                      
                      $
                      57,417
                      
                      
                      $
                      2,795
                      
                      
                      $
                      4,986
                      
                      
                      $
                      19,611
                      
                      
                      $
                      4,312
                      
                      
                      $
                      3,280
                      
                      
                      $
                      22,433





The above table excludes discounts of
the long-term debt and environmental liabilities, but does include any related
interest.  The Fifth Third revolving line is at prime and the rate
used for this table is 4.00%.





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





The Fifth
Third Credit facility has a renewal date of September 5, 2010.  The
revolving line of credit requires immediate repayment from cash
receipts.  Borrowings can be made as needed, based on
availability.  The term loan is payable in monthly installments
starting January 5, 2009 with a maturity date of September 5, 2011. The
availability at September 30, 2008 was $2,019,000, compared with $1,963,000 at
December 31, 2007.





30
 Index





ITEM3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




The
Company's operations are not currently subject to market risks of a material
nature for interest risks, foreign currency rates or other market price
risks.  The only debt subject to interest fluctuations is the
short-term borrowing under the revolving line of credit.  A
significant portion of raw materials consumed by the Company is various steel
alloys.  The Company began to experience price increases on raw
materials in 2004 and raw material price increases have continued into
2008.  To offset these price increases in raw materials, the Company
began adding material surcharges in March 2004 and has continued to add material
surcharges into 2008, although some customers have begun to request price
increases rather than surcharges.





ITEM4T - CONTROLS AND PROCEDURES





Disclosure
Controls and Procedures





The Company has carried out an
evaluation of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) or
15d-15(e)) as of the end of the period covered by this quarterly report on Form
10-Q. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company‘s disclosure controls and
procedures were effective in all material respects as of September 30,
2008.





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





Remedial
Actions and Changes in Internal Control over Financial Reporting





Management has developed and
implemented remediation plans to address the material weakness noted at prior
year 10-K and otherwise enhance the Company’s internal control over financial
reporting.





In the
first quarter of 2008, the Company implemented a plan to further enhance its
revenue recognition process, which specifically improved the design and
operating effectiveness of certain revenue recognition controls over
non-standard billing of tooling.





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





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





31
 Index





PARTII.   OTHER INFORMATION





ITEM
1 - LEGAL PROCEEDINGS





FMRI





On
September 29, 2006 A&M Engineering and Environmental Services Inc.
(“A&M”) filed suit in the District Court for Tulsa County, State of Oklahoma
against FMRI, a special purpose subsidiary of Fansteel, and Penn Environmental
& Remediation Inc. (“Penn”).  On April 27, 2005, A&M and FMRI
entered into a contract to excavate, dry, bag, stage and transport residue
material to an acceptable offsite depository.  Penn was designated as
the engineer for purposes of the contract.  In May 2006, FMRI was
notified by A&M that they were canceling the transportation portion of the
contract, but continued to perform under the balance of the
contract.  A&M submitted change orders totaling $1.2 million under
the contract that required approval by the engineer.  The changes
orders were not approved.  A&M subsequently filed
suit.  The contract provisions require the use of mediation for
resolution before filing suit.  In November 2006, FMRI participated in
failed meetings with A&M to stay their suit and enter into
mediation.  On December 1, 2006, FMRI notified A&M that the
contract was being terminated for cause.  Since A&M took no
actions to commence cure efforts, the contract was terminated effective December
20, 2006 with FMRI expressly reserving its rights under the
contract.





On
December 7, 2006, FMRI filed with the District Court for Tulsa County in
response to the A&M complaint.  In these pleadings, FMRI objected
to venue and requested transfer to Muskogee County and cited A&M for breach
of contract, breach of change order, fraud, breach of implied duty of good faith
and fair dealing, and sought damages including liquidation damages, project
completion costs, and faulty work.  FMRI believes it has counter
claims against A&M for amounts well in excess of the $1.2 million claimed by
A&M.   As a result of repeated delays by A&M, the date
for the actual Jury Trial was expected to be no earlier than November 1, 2008.
However, A&M has since been granted a 120 day trial extension and no
discovery is anticipated until 2009 and a trial is not expected until
2010.





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





FMRI
cannot provide any assurance to a successful outcome and an unsuccessful outcome
could hinder FMRI in its obligation to remediate the Muskogee
Facility.  Any exposure is limited to FMRI and not
Fansteel.




Environmental
Claims and Insurance Recoveries





Certain environmental claims have been
made against the Company by the EPA and various other regulatory agencies,
entities and persons in connection with the investigation and cleanup of certain
sites. Pursuant to the Reorganization Plan, all such claims were treated and
resolved and as part of such treatment, the Company has sought recovery from
certain of its insurers in respect of certain defense and cleanup costs relating
to the claims. These actions have resulted in insurance recoveries of $1,730,000
in 2005, $5,000 in 2006 and $400,000 in 2007.  No recoveries have been
received in 2008. The net proceeds from the settlements were allocated in
accordance with the Reorganization Plan and, among other things, resulted in
prepayments under the FMRI Notes, FLRI Note, ED Note and on account of EPA
CERCLA claims.





32
 Index





Other
Legal Actions





During the third quarter 2006, Fansteel
filed to close its bankruptcy case, as it believed all bankruptcy issues had
been substantially resolved.  On September 23, 2006, the Company
received notice that the Department of Justice ("DOJ") objected to the case
closure, stating that the Company had not responded to a letter requesting
information regarding the status of various environmental remediation
sites.  The Company did not receive the DOJ letter until 2 days after
the DOJ notice of objection was filed.  The Company through legal
counsel has had discussions with the DOJ to resolve their objection, but with no
satisfactory resolution as yet.





In October 2006 the Company filed a
suit in the United States District Court for the Northern District of Illinois,
Eastern Division, to recover monies owed from a customer for non-payment of
$594,000 on a trade accounts receivable.  The customer claimed
$212,000 of the amount owed was not due and refused to pay any of the $594,000
accounts receivable owed.  Both parties agreed to
mediation/arbitration, which began on July 11, 2007. On September 23, 2007, a
settlement agreement was reached whereby the Company received a payment of
$175,000 and then will receive $25,000 per month for twelve months until an
additional $300,000 is received.  The settlement agreement does
provide for the ability to receive security in property held by the owner of the
customer if the monthly payments are defaulted. As of the end of the third
quarter 2008, the customer was in full compliance with the payment schedule
pursuant to the terms of the settlement agreement.





In August 2007, the Company received
notice that a former business of the Company was being added as party to a
lawsuit involving a product liability issue with hard metal lung disease.The lawsuit is proceeding
through discovery, with depositions being taken and documents being
exchanged.One of the Company’s insurance carriers is committed to defending the
Company in this lawsuit.





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








ITEM1A – RISK FACTORS





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





Environmental
Issues





The Company has significant
environmental issues ongoing from the emergence of bankruptcy on January 23,
2004, primarily related to special purpose entities included in discontinued
operations, particularly in Muskogee, OK, that must be funded from continuing
operations and could have a material impact on the Company’s
results.





33
 Index





High
Level of Debt





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





The
Company Has A Few Large Customers





The
companies controlled by United Technologies Corporation (“UTC”) and
International Truck and Engine Corporation (“International Engine”) are
significant customers of the Company and each represents 10% or more of Company
net sales.  In addition to UTC and International Engine, the Company
sells to several other customers that make up a significant portion of the
Company’s total sales. While none of these other customers individually
represent more than 10% of the Company’s net sales, as a group they make up a
considerable portion of the Company’s total sales.





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. This situation has been exacerbated with financial market
turmoil, tighter credit underwriting standards, reduced credit availability and
general shift to lighter and more fuel efficient vehicles, all of which have
reduced demand significantly.





Competition





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





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





Material
Prices





The
Company started to experience raw material price increases beginning in 2004 and
these material price increases have continued into 2008.  The
Industrial Metal Components segment has been impacted particularly hard with
some material prices nearly doubling from 2005 levels.  To offset
these price increases, the Company began adding material surcharges in March
2004 and in 2008 the Company continues to add material surcharges. There is no
guarantee that the Company will be able to continue to pass these material
surcharges on to its customers, and in fact, some customers have refused to
accept these surcharges. These customers’ margins are being analyzed to
determine if their business is profitable enough to retain. In 2008 some
customers have begun to request new pricing rather than
surcharges.  In the Advanced Structures segment, primarily serving the
aerospace industry, customers have accepted price increases related to higher
material prices, generally on an annual basis.  Raw material prices
for the Advanced Structures segment have been relatively stable, although prices
have increased for 2008.





34
 Index





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.








ITEM3 – DEFAULTS UPON SENIOR SECURITIES




None.








ITEM4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS




None.








ITEM5 – OTHER INFORMATION




None.





35
 Index





ITEM6 – EXHIBITS




Exhibit
      #
                      
                      Description of Exhibit3.2
                      
                      Amended
      and Restated By-laws of Fansteel Inc.31.1
                      
                      Certification
      by Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under
      the Securities Exchange Act of 1934, as adopted pursuant to Section 203 of
      the Sarbanes-Oxley Act of 200231.2
                      
                      Certification
      by Interim 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 Interim 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. TessitoreNovember 13, 2008
                                  President
      and Chief Executive Officer/s/Robert R. CompernolleRobert
      R. CompernolleNovember 13, 2008
                                  Interim
      Vice President and Chief Financial
Officer
   37