**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C.  20549**





**FORM
      10-Q**





(MARK
      ONE)





x            
       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007





OR





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


From ____________to____________





Commission
      File Number 1-8676


**FANSTEEL
      INC.**


(Exact
      Name of Registrant as Specified in Its Charter)





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





570
      Lake
      Cook Road, Suite 200


Deerfield,
      Illinois 60015


(Address
      of principal executive offices and zip code)


(847)
      689-4900


(Registrant’s
      Telephone Number, Including Area Code)





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





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


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


Yes
o     No  x





APPLICABLE
      ONLY TO REGISTRANTS INVOLVED IN


BANKRUPTCY
      PROCEEDINGS DURING THE PRECEDING FIVE YEARS.





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




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




Class
            
            Outstanding
                at April 30, 2007Common
                Stock, $.01 par value
            
            3,420,000
                shares







1




FANSTEELINC.


FORM
      10-Q
– INDEX


March
      31,
      2007








**PART
                I.**
            **FINANCIAL
                INFORMATION**
            Page
                No.Item
                1
            Consolidated
                Financial StatementsConsolidated
                Statement of Operations (unaudited) – Three months
                ended March 31, 2007 and three months ended March 31,
                2006
            3Consolidated
                Balance Sheet – March 31, 2007 (unaudited) and
                December 31, 2006
            4-5Consolidated
                Statement of Cash Flows (unaudited) – Three months
                ended March 31, 2007 and three months ended March 31,
                2006
            6Notes
                to Unaudited Consolidated Financial
                Statements
            7-13Item
                2
            Management's
                Discussion and Analysis of Financial Condition
                and Results of Operations
            14-24Item
                3
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            24Item
                4
            Controls
                and Procedures
            24**PART
                II**
            **OTHER
                INFORMATION**Item
                1
            Legal
                Proceedings
            25-27Item
                1A
            Risk
                Factors
            27-29Item
                2
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            29Item
                3
            Defaults
                Upon Senior Securities
            29Item
                4
            Submission
                of Matters to a Vote of Security
                Holders
            29Item
                5
            Other
                Information
            29Item
                6
            Exhibits
            29Signatures
            
            30Exhibit
                31.1
            Certifications-
                Gary L. TessitoreExhibit
                31.2
            Certifications-
                R. Michael McEnteeExhibit
                32.1
            Certification


2
 *Index*




**PARTI.    FINANCIAL
        INFORMATION**
 
 **ITEM1
        - FINANCIAL STATEMENTS**
 FansteelInc.
 Consolidated
        Statement of Operations
 (Unaudited)
 
 Three
                  Months
                Ended
                March
                  31, 2007
              
              
              Three
                  Months
                Ended
                March
                  31, 2006Net
                  Sales
              
              $
              18,332,796
              
              
              $
              16,571,640Cost
                  and ExpensesCost
                  of products sold
              
              
              15,581,411
              
              
              
              14,567,903Selling,
                  general and administrative
              
              
              1,557,117
              
              
              
              1,572,74017,138,528
              
              
              
              16,140,643Operating
                  Income
              
              
              1,194,268
              
              
              
              430,997Other
                  ExpenseInterest
                  expense
              
              
              (367,989
              )
              
              
              (319,943
              )Other
              
              
              (41,661
              )
              
              
              (5,328
              )(409,650
              )
              
              
              (325,271
              )Income
                  from Continuing Operations Before Income Taxes
              
              
              784,618
              
              
              
              105,726Income
                  Taxes
              
              
              -
              
              
              
              -Net
                  Income from Continuing Operations
              
              
              784,618
              
              
              
              105,726Loss
                  from Discontinued Operations
              
              
              (795,335
              )
              
              
              (821,098
              )Net
                  Loss
              
              $
              (10,717
              )
              
              $
              (715,372
              )Weighted
                  Average Number of Common Shares Outstanding
              
              
              3,420,000
              
              
              
              3,420,000Basic
                  and Diluted Net Income (Loss) per ShareaContinuing
                  operations
              
              $
              0.23
              
              
              $
              0.03Discontinued
                  operations
              
              
              (0.23
              )
              
              
              (0.24
              )Net
                  income (loss)
              
              $
              0.00
              
              
              $
              (0.21
              )
 
 a
          Basic earnings per share and diluted earnings per share are the
          same.
  See
          Notes
          to Consolidated Financial Statements
  3
 *Index*
 
 FansteelInc.
 Consolidated
        Balance Sheet
 
 March
                  31,
                2007
                (Unaudited)
              
              
              December 31,
                2006ASSETSCurrent
                  assetsCash
                  and cash equivalents
              
              $
              17,688
              
              
              $
              17,672Accounts
                  receivable, less allowance of $435,000 and $408,000 atMarch
                  31, 2007 and December 31, 2006, respectively
              
              
              11,183,718
              
              
              
              11,449,317InventoriesRaw
                  material and supplies
              
              
              1,243,390
              
              
              
              1,285,758Work-in
                  process
              
              
              7,053,662
              
              
              
              7,525,358Finished
                  goods
              
              
              566,813
              
              
              
              549,687Total
                  inventories
              
              
              8,863,865
              
              
              
              9,360,803Prepaid
                  expenses
              
              
              1,092,408
              
              
              
              1,466,475Total
                  current assets
              
              
              21,157,679
              
              
              
              22,294,267Property,
                  plant and equipmentLand
              
              
              957,630
              
              
              
              957,630Buildings
              
              
              4,511,460
              
              
              
              4,511,443Machinery
                  and equipment
              
              
              7,332,058
              
              
              
              7,092,49312,801,148
              
              
              
              12,561,566Less
                  accumulated depreciation
              
              
              3,443,224
              
              
              
              3,212,147Net
                  property, plant and equipment
              
              
              9,357,924
              
              
              
              9,349,419Other
                  assetsDeposits
              
              
              880,450
              
              
              
              880,450Reorganization
                  value in excess of amounts allocable toidentified
                  assets
              
              
              12,893,734
              
              
              
              12,893,734Property
                  held for sale
              
              
              1,327,500
              
              
              
              1,327,500Other
              
              
              301,681
              
              
              
              289,796Total
                  other assets
              
              
              15,403,365
              
              
              
              15,391,480$
              45,918,968
              
              
              $
              47,035,166
 
 See
        Notes to Consolidated Financial
        StatementsFansteel Inc.
  4
 *Index*
  FansteelInc.
 Consolidated
          Balance Sheet
 March
                  31,
                2007
                (Unaudited)
              
              
              December 31,
                2006LIABILITIES
                  AND SHAREHOLDERS' DEFICITCurrent
                  liabilitiesAccounts
                  payable
              
              $
              8,177,657
              
              
              $
              8,459,078Accrued
                  liabilities
              
              
              6,548,268
              
              
              
              6,440,003Short-term
                  borrowings
              
              
              13,689,895
              
              
              
              13,357,786Current
                  maturities of long-term debt
              
              
              1,066,882
              
              
              
              1,062,750Total
                  current liabilities
              
              
              29,482,702
              
              
              
              29,319,617Long-term
                  debt
              
              
              4,146,186
              
              
              
              4,838,630Other
                  liabilitiesEnvironmental
                  remediation
              
              
              21,847,716
              
              
              
              22,428,823Non-current
                  pension liability
              
              
              917,872
              
              
              
              917,872Total
                  other liabilities
              
              
              22,765,588
              
              
              
              23,346,695Total
                  liabilities
              
              
              56,394,476
              
              
              
              57,504,942Shareholders'
                  equity (deficit)Common
                  stock, par value $0.01Authorized
                  3,600,000 shares, issued and outstanding 3,420,000
              
              
              34,200
              
              
              
              34,200Capital
                  in excess of par value
              
              
              296,314
              
              
              
              296,314Accumulated
                  deficit
              
              
              (10,460,876
              )
              
              
              (10,450,159
              )Other
                  comprehensive incomeForeign
                  currency translation
              
              
              (1,982
              )
              
              
              (6,967
              )Accumulated
                  other comprehensive income
              
              
              (343,164
              )
              
              
              (343,164
              )Total
                  other comprehensive income
              
              
              (345,146
              )
              
              
              (350,131
              )Total
                  shareholders’ deficit
              
              
              (10,475,508
              )
              
              
              (10,469,776
              )Total
                  liabilities and shareholders' deficit
              
              $
              45,918,968
              
              
              $
              47,035,166
 
 See
        Notes
        to Consolidated Financial Statements
  5
 *Index*
 
 FansteelInc.
 Consolidated
        Statement of Cash Flows
 (Unaudited)
 Three
                  Months
              
              
              Three
                  MonthsEnded
              
              
              EndedMarch
                  31, 2007
              
              
              March
                  31, 2006**Cash
                  Flows From Operating Activities:**Net
                  loss
              
              $
              (10,717
              )
              
              $
              (715,372
              )Adjustments
                  to reconcile net loss to net cash provided by (used in)operating
                  activities:Depreciation
                  and amortization
              
              
              231,077
              
              
              
              243,131Accretion
                  on long-term debt and other liabilities
              
              
              53,506
              
              
              
              82,561Loss
                  from discontinued operations
              
              
              795,335
              
              
              
              821,098Change
                  in assets and liabilitiesDecrease
                  (increase) in accounts receivable
              
              
              265,599
              
              
              
              (1,484,819
              )Decrease
                  (increase) in inventories
              
              
              496,938
              
              
              
              (572,665
              )Decrease
                  in other assets-current
              
              
              372,733
              
              
              
              215,656(Decrease)
                  increase in accounts payable and accrued liabilities
              
              
              (624,604
              )
              
              
              1,057,544(Decrease)
                  increase in income taxes payable
              
              
              (1,188
              )
              
              
              1,000Increase
                  in other assets
              
              
              (11,885
              )
              
              
              (24,097
              )**Net
                  cash provided by (used in) operating activities**
              
              
              1,566,794
              
              
              
              (375,963
              )**Cash
                  Flows From Investing Activities:**Capital
                  expenditures
              
              
              (239,582
              )
              
              
              (368,147
              )**Net
                  cash used in investing activities**
              
              
              (239,582
              )
              
              
              (368,147
              )**Cash
                  Flows From Financing Activities:**Proceeds
                  from short-term borrowing
              
              
              332,109
              
              
              
              2,829,546Payments
                  on long-term debt
              
              
              (76,578
              )
              
              
              (70,872
              )**Net
                  cash provided by financing activities**
              
              
              255,531
              
              
              
              2,758,674**Net
                  Increase in Cash and Cash Equivalents from****Continuing
                  Operations**
              
              
              1,582,743
              
              
              
              2,014,564**Cash
                  Flows of Discontinued Operations:**Operating
                  cash flows
              
              
              (1,582,727
              )
              
              
              (1,679,208
              )**Total
                  Cash Flows of Discontinued Operations**
              
              
              (1,582,727
              )
              
              
              (1,679,208
              )**Net
                  Increase in Cash and Cash Equivalents**
              
              
              16
              
              
              
              335,356**Cash
                  and Cash Equivalents at Beginning of Period**
              
              
              17,672
              
              
              
              791,453**Cash
                  and Cash Equivalents at End of Period**
              
              $
              17,688
              
              
              $
              1,126,809**Supplemental
                  disclosures of cash flow information:**Cash
                  paid during the year for:Interest
                  (net of amounts capitalized)
              
              $
              293,447
              
              
              $
              203,495Income
                  taxes (refunds)
              
              
              (1,188
              )
              
              
              1,000
  See
        Notes
        to Consolidated Financial Statements
  6
 *Index*
  **Notesto
        Unaudited Consolidated Financial
        Statements**
 
 **Note
        1 - Description of Business**
 
 The
        consolidated financial statements as of and for the periods ending March
        31,
        2007 and March 31, 2006 of Fansteel Inc. are unaudited but include all
        adjustments (consisting only of normal recurring adjustments) that management
        considers necessary for a fair presentation of such financial
        statements.  These financial statements have been prepared in
        accordance with accounting principles generally accepted in the United States
        for interim financial information and with Article 10 of SEC Regulation
        S-X.  Accordingly, they do not include all of the information and
        footnotes required by accounting principles generally accepted in the United
        States for complete financial statements.  Operating results during
        the three months ended March 31, 2007 are not necessarily indicative of the
        results that may be expected for the year ending December 31, 2007.
 
 Fansteel
        Inc. and its subsidiaries ("Fansteel" or the "Company") are manufacturers
        of
        engineered metal components using the sand castings, investment casting and
        powdered metal processes. Products manufactured are used in a variety of
        markets
        including military and commercial aerospace, automotive, energy, agricultural
        and construction machinery, lawn and garden equipment, marine, plumbing and
        electrical hardware and general industrial.
 
 For
        financial reporting purposes, the Company classifies its products into the
        following two business segments: Advanced Structures, which produces aluminum
        and magnesium sand castings and Industrial Metal Components, which produces
        powdered metal components and investment castings. The Company's business
        segments have separate management teams and infrastructures that offer different
        products and services.
 
 The
        Company also has special purpose subsidiaries included as part of discontinued
        operations that were established solely for the obligation of remediation
        of
        environmental issues at former operations of the Company as part of the Second
        Amended Joint Reorganization Plan (the "Reorganization Plan") that was effective
        January 23, 2004 (the "Effective Date") .
 
 The
        consolidated financial statements include the accounts of Fansteel Inc. and
        its
        subsidiaries.  Inter-company accounts and transactions have been
        eliminated in consolidation.
 
 The
        Company’s annual Form 10-K includes more detailed information than is required
        by the Form 10-Q and it should be read in conjunction with the Company’s Form
        10-Q.
 
 Certain
        reclassifications have been made to prior periods’ financial statements to
        conform to the 2007 presentation.
 
 **Note
        2 - Earnings per Share**
  SFAS
        No.
        128, "Earnings per Share", requires a dual presentation of earnings per share,
        basic and diluted. Basic earnings per share are computed by dividing net
        income
        (loss) applicable to common shareholders by the weighted average number of
        common shares outstanding. Diluted earnings per share reflects the increase
        in
        average common shares outstanding that would result from the assumed exercise
        of
        outstanding stock options, calculated using the treasury stock method, if
        dilutive.
  7
 *Index*
 
 The
        following table sets forth the computation of basic and diluted loss per
        share:
 
 Three
                  Months EndedNumerator:
              
              March
                  31, 2007
              
              
              March
                  31, 2006Net
                  loss
              
              $
              (10,717
              )
              
              $
              (715,372
              )Denominator:Denominator
                  for basic earnings per share -weighted
                  average shares
              
              
              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
              
              
              
              3,420,000Basic
                  loss per share
              
              $
              0.00
              
              
              $
              (0.21
              )Diluted
                  loss per share
              
              $
              0.00
              
              
              $
              (0.21
              )
  **Note
        3 - Discontinued Operations including Certain Environmental
        Remediation**
  *Muskogee
        Facility*
 
 The
        Company prior to the Effective Date (“Predecessor Company”) had been licensed by
        the Nuclear Regulatory Commission (the “NRC”) to possess and use source material
        at the Muskogee Facility since 1967.  Under the Predecessor Company's
        NRC permit, it was authorized to process ore concentrates and tin slags in
        the
        production of refined tantalum products.  Licensable quantities of
        natural uranium and thorium are present in the slags, ores, concentrates
        and
        process residues.
 
 The
        Predecessor Company discontinued its Metal Products business segment in
        1989.  In 1990, the NRC included the Muskogee Facility in the NRC's
        Site Decommissioning Management Plan.  The Predecessor Company
        completed a remedial assessment in 1993 to determine what areas of the Muskogee
        Facility were required to undergo decommissioning.
 
 During
        2002, the Predecessor Company,
        with the assistance of its third party environmental consultants, prepared
        a
        revised Decommissioning Plan, which was submitted to the NRC on January 15,
        2003. The revised Decommissioning Plan assumed offsite disposal of all
        contaminated residues and soils as well as groundwater treatment and monitoring
        using current criteria for acceptable decommissioning under NRC regulations.
        Based on then available information, with assistance from third party
        environmental consultants, the Predecessor Company estimated the total future
        costs of the revised Decommissioning Plan based upon current costs of
        decommissioning activities to be $41.6 million.   The estimated
        decommissioning costs consisted of $20.4 million for excavating, hauling,
        and
        offsite disposal of residues and soils, $15.6 million for site plans,
        maintenance, safety, security and consulting costs, and $5.6 million for
        groundwater treatment and monitoring.
  8
 *Index*
 
 During
        2003, the Predecessor Company continued to maintain the safety and security
        of
        the Muskogee Facility.  Pursuant to the Reorganization Plan, the
        Company negotiated with the NRC to develop acceptable mechanisms for providing
        financial assurance for the decommissioning of the Muskogee
        Facility.  In December 2003, the NRC approved the issuance of an
        amended NRC License and related Decommissioning Plan to FMRI.  At
        January 23, 2004**,** the liability for the environmental
        remediation was $38.7 million, and the recorded discounted liability using
        a
        discount rate of 11.3% as part of fresh-start accounting, was $19.2
        million.   In 2005, FMRI began removal of the residues under
        phase 1 of the decommissioning plan, which is expected to remove over 80%
        of the
        radioactive contaminated residues. In September 2005 and August 2005, the
        Company received insurance recoveries from its insurers of which $764,000
        and
        $4,000, respectively, of net insurance recoveries were allocated for a
        prepayment of the inter-company FMRI $30.6 million note, which in turn was
        used
        to reduce its borrowing from the Decommissioning Trust. Phase 1 is behind
        schedule, but continues in 2007.  At March 31, 2007 and December 31,
        2006, the gross estimated liability was $29,862,000****and
        $30,971,000, respectively, and the recorded discounted liability, using a
        discount rate of 11.3%, was $17,570,000 and $18,106,000,
        respectively.
 
 *North
        Chicago Facility*
 
 In
        September 2000, the EPA issued a unilateral administrative order under Section
        106 of CERCLA requiring the Predecessor Company to investigate and abate
        releases of hazardous substances from the North Chicago Facility that were
        contributing to contamination at an adjacent vacant lot (the "Vacant Lot
        Site").  The Predecessor Company completed an engineering
        evaluation/cost analysis and submitted it to EPA for review in
        2003.  The proposed remedial actions at the North Chicago Facility
        were estimated to cost $2.17 million, for which a liability was recorded
        at
        January 23, 2004 as part of the bankruptcy reorganization for a newly formed
        special purpose subsidiary, North Chicago, Inc (“NCI”).  On March 7,
        2005, NCI sold the real property to the City of North Chicago (the “City”),
        transferred the proceeds of $1,400,000 received from the City to the EPA
        and the
        Company delivered to the EPA an unsecured, non-interest bearing promissory
        note
        in the principal amount of $677,232, payable in equal semi-annual payments
        to be
        made over a three-year period beginning nine months after issuance. In September
        2005, the Company received insurance recoveries from its insurers of which
        $147,000 of net insurance recoveries were remitted as a prepayment of the
        note
        delivered to the EPA.  The Company has made the first four payments
        due under the promissory note to date. At March 31, 2007 and December 31,
        2006,
        the gross estimated liability was $79,000****and $192,000,
        respectively, and the recorded discounted liability, using a discount rate
        of
        11.3%, was $43,000****and $147,000,
        respectively.
 
 *Lexington
        Facility*
 
 The
        Lexington Facility was constructed in 1954 and ceased operations in 2003.
        Investigations performed in 1997 as part of a company-wide environmental
        audit
        revealed the presence of volatile organic compounds ("VOCs") and PCBs in
        soils
        and groundwater in excess of state cleanup levels. The contaminants are believed
        to have been discharged through a former drainage field. While VOCs were
        detected at the down gradient boundary of the facility, no VOCs were detected
        in
        an unnamed stream that is located down gradient of the facility.  To
        Fansteel's knowledge, the contamination at this site does not pose an imminent
        threat to health, safety or welfare.  In May 2003, the Kentucky
        Natural Resources and Environmental Protection Cabinet ("KNREPC") requested
        that
        the Predecessor Company submit a plan for further characterization of the
        facility.  The Predecessor Company submitted a letter to the KNREPC in
        September 2003 setting forth a conceptual characterization plan and advising
        the
        agency that a detailed Site Characterization Plan will be submitted by FLRI,
        a
        special purpose subsidiary, which pursuant to the Reorganization Plan now
        owns
        the Lexington facility.  An estimated $1.78 million to perform the
        remedial activities was determined and a liability in that amount was recorded
        at January 23, 2004.  In September 2005, the Company received
        insurance recoveries from its insurers of which $111,000 of net insurance
        recoveries were allocated to FLRI as a prepayment of the inter-company FLRI
        $1.78 million note. FLRI anticipates implementing the Site Characterization
        Plan
        in 2007.  At March 31, 2007 and December 31, 2006, the gross estimated
        liability was $1,226,000 and $1,233,000, respectively, and the recorded
        discounted liability, using a discount rate of 11.3%, was $1,143,000 and
        $1,129,000, respectively.
  9
 *Index*
 
 Actual
        costs to be incurred in future
        periods to decommission the above sites may vary, which could result in
        adjustment to future accruals, from the estimates, due to, among other things,
        assumptions related to the quantities of soils to be remediated and inherent
        uncertainties in costs over time of actual disposal. No anticipated insurance
        recoveries are included in the recorded environmental liabilities.
 
 *Washington
        Manufacturing*
 
 On
        December 31, 2004, the Company sold substantially all of the assets (including,
        but not limited to, machinery and equipment, raw material items, work-in-process
        items, finished goods items, receivables, machinery and equipment contracts,
        customer contracts and supplier contracts, but excluding real estate, fixtures
        and certain other assets) of the division of the Company known as "Washington
        Manufacturing" (the "Washington Division") to Whitesell Corporation
        (“Whitesell”), a customer of the Washington Division, for consideration
        consisting of a combination of (i) cash (in the initial amount of approximately
        $2.0 million, subject to post-closing adjustment) and (ii) the assumption
        by
        Whitesell of certain liabilities of the Washington Division (in the initial
        amount of approximately $1.0 million, determined in accordance with U.S.
        generally accepted accounting principles consistently applied, subject to
        post-closing adjustment) (collectively, the “Washington Sale”). Whitesell had
        been leasing the buildings until it vacated in December 2006. The Company
        is
        actively trying to sell the property.  In December 2006 the value of
        the property was reduced by $738,000 to reflect current market
        value.
 
 On
        April
        23, 2007, the Company received a deposit in escrow for the purchase of the
        Washington facility at the current book value.  The buyer has 60 days
        for due diligence before buying that property on an as is, where is
        basis.
 
 *Results
        of Discontinued Operations*
 
 The
        operations described above are classified as discontinued operations for
        all
        periods presented.
 
 Discontinued
        operations reported losses of $795,000 and $821,000 for the three months
        ended
        March 31, 2007 and March 31, 2006, respectively.  The losses for both
        periods relate primarily to the accretion of discounted environmental
        liabilities from the Company’s special purpose subsidiaries and the pension note
        for the terminated pension plan.
 
 **Note
        4 - Other Environmental Remediation**
  Wellman
        Dynamics Corporation ("Wellman"), a subsidiary of Fansteel Inc., entered
        into an
        Administrative Order on Consent with the EPA to perform a RCRA Facility
        Investigation ("RFI") for the purpose of determining the extent of releases
        of
        hazardous wastes and/or hazardous constituents, and, if appropriate, a
        Corrective Measures Study ("CMS") to evaluate possible corrective action
        measures that may be necessary at the Iowa Facility owned and operated by
        Wellman.  At January 23, 2004, Wellman had estimated that the cost for
        conducting the RFI/CMS would be $2,147,000 from 2005 to 2009.  At
        March 31, 2007 and December 31, 2006 the gross estimated liability was
        $2,053,000 and $2,057,000, respectively, and the recorded discounted liability,
        using a discount rate of 11.3%, was $1,950,000 and $1,934,000,
        respectively.
  10
 *Index*
 
 Wellman
        is permitted to operate a sanitary landfill for the disposal of its foundry
        sand.  It is anticipated that, based upon recent projections by
        third-party consultants, Wellman is likely to be required to close the landfill
        at the earliest in 2028 at a future cost approximating $1,166,000. The recorded
        discounted liability, using a discount rate of 11.3%, at March 31, 2007 and
        December 31, 2006 was $567,000 and $551,000, respectively.
 
 In
        October 2000, Wellman provided the Iowa Department of Health (the "IDPH")
        with a
        "Historical Site Assessment" that identified uranium and thorium concentrations
        at the site.  The IDPH required Wellman to perform a Risk Assessment
        ("RA") to determine whether the thorium-containing materials are a threat
        to
        human health or the environment.  Wellman is awaiting the final
        report, but to its knowledge, the existing data forming the basis for the
        RA
        indicates that there is no imminent threat to health, safety or the
        environment.  Wellman anticipates that the IDPH will allow it to
        address the thorium issue when it closes the sanitary
        landfill.  However, there is a risk that the IDPH will require Wellman
        to remove or remediate the thorium prior to that time.  The current
        estimated cost to remediate the thorium is $1,075,000. The recorded discounted
        liability, using a discount rate of 11.3%, at March 31, 2007 and December
        31,
        2006 was $532,000****and $518,000, respectively.
 
 The
        liabilities were recorded for estimated environmental investigatory and
        remediation costs based upon an evaluation of currently available facts,
        including the results of environmental studies and testing conducted for
        all
        Predecessor Company-owned sites in 1997 and since, and considering existing
        technology, presently enacted laws and regulations and prior experience in
        remediation of contaminated sites. Actual costs to be incurred in future
        periods
        at identified sites may vary from the estimates, given the inherent
        uncertainties in evaluating environmental exposures. Future information and
        developments will require the Company to continually reassess the expected
        impact of these environmental matters.  These liabilities could be
        reduced by potential net insurance recoveries that the Company is seeking from
        its insurers, but there is no assurance any additional net recoveries will
        be
        received.  No anticipated insurance recoveries are included in the
        recorded environmental liabilities.
 
 **Note
        5 - Debt**
  In
        order
        to increase the Company’s liquidity and ability to meet operational and
        strategic needs, Fansteel Inc. and its wholly-owned subsidiary, Wellman Dynamics
        Corporation, as borrowers, entered into a Loan and Security Agreement with
        Fifth
        Third Bank (Chicago), as lender, on July 15, 2005 with an original principal
        amount of $15,000,000. As the Company’s businesses have grown, so have the
        Company’s needs for funding working capital, capital expenditures and other
        requirements. With the corresponding increase in it’s borrowing base, consisting
        of accounts receivable, inventories and machinery and equipment, the Company
        sought to increase its revolving line of credit above the $15 million level.
        Accordingly, this loan agreement with Fifth Third Bank was amended on December
        4, 2006.
 
 Under
        this amended loan facility, subject to certain borrowing conditions, the
        Company
        may incur revolving loans, credit card charges and letter of credit issuances
        in
        an amount up to $21.5 million from a borrowing base comprised of a percentage
        of
        eligible accounts receivable and inventories and $2 million for machinery
        and
        equipment.  Revolving loans include $1.5 million for borrowing under
        credit cards issued by the Lender, not subject to the borrowing base. The
        term
        was extended with revolving loans due and payable in full on January 5, 2009.
        As
        borrowers under this Loan and Security Agreement, the Company is required
        to
        meet certain covenants, including those that require minimum EBITDA levels,
        limit leverage and establish debt service requirements.  The interest
        rate on the line is at prime and there is a .25% unused line
        fee.  Substantially all of the assets of the borrowers are pledged as
        security for this financing.****At March 31, 2007 the Company
        had letters of credit of $770,000 for casualty insurance collateral and
        environmental assurance with an interest rate of 1.5%. The Company’s credit
        availability was $887,000 at March 31, 2007. Borrowing under the revolving
        line
        of credit is included as short-term borrowings.
  11
 *Index*
 
 **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
        March
        31, 2007 and December 31, 2006, the Company had potential federal and state
        income tax benefits from net operating loss carry-forwards of $22.1 million,
        respectively, which expire in various years through 2023. Valuation allowances
        have been recorded for the full amount of all net operating loss carry-forwards
        as the net operating loss carry-forwards are not anticipated to be realized
        before expiration.
 
 **Note
        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 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:
 
 Net
                  Sales:
              
              Three
                  Months
                Ended
                March 31, 2007
              
              
              Three
                  Months
                Ended
                March 31, 2006Advanced
                  Structures
              
              $
              10,941,717
              
              
              $
              9,996,038Industrial
                  Metal Components
              
              
              7,391,079
              
              
              
              6,575,602Total
                  Net Sales
              
              $
              18,332,796
              
              
              $
              16,571,640Operating
                  Income (Loss):Advanced
                  Structures
              
              $
              846,354
              
              
              $
              1,278,163Industrial
                  Metal Components
              
              
              347,914
              
              
              
              (847,166
              )Total
                  Operating Income
              
              $
              1,194,268
              
              
              $
              430,997
  12
 *Index*
 
 Intersegment
        sales are accounted for at prices equivalent to the competitive market prices
        for similar products.
 
 The
        identifiable assets by business segment, for the periods indicated, are set
        forth below:
 
 Identifiable
                  assets:
              
              March 31,
                2007
              
              
              December 31,
                2006Advanced
                  Structures
              
              $
              17,909,549
              
              
              $
              18,581,014Industrial
                  Metal Components
              
              
              10,203,462
              
              
              
              10,562,719Corporate
              
              
              15,305,263
              
              
              
              14,853,488Discontinued
              
              
              2,500,694
              
              
              
              3,037,945Total
                  Assets
              
              $
              45,918,968
              
              
              $
              47,035,166
 
 Depreciation
        and capital expenditures by business segment, for the periods indicated,
        are set
        forth below:
  Depreciation
                  and amortization:
              
              Three
                  Months Ended
                March 31, 2007
              
              
              Three
                  Months Ended
                March 31, 2006Advanced
                  Structures
              
              $
              112,633
              
              
              $
              98,680Industrial
                  Metal Components
              
              
              113,880
              
              
              
              141,432Corporate
              
              
              4,564
              
              
              
              3,019Discontinued
              
              
              -
              
              
              
              7,860Total
                  depreciation and amortization
              
              $
              231,077
              
              
              $
              250,991Capital
                  expenditures:Advanced
                  Structures
              
              $
              130,031
              
              
              $
              333,074Industrial
                  Metal Components
              
              
              109,551
              
              
              
              33,192Corporate
              
              
              -
              
              
              
              1,881Total
                  capital expenditures
              
              $
              239,582
              
              
              $
              368,147
  13
 *Index*
  **ITEM2
        - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 The
        following discussion should be read in conjunction with the Consolidated
        Financial Statements and related notes thereto that are included in this
        Form
        10-Q.  Certain statements made in this section or elsewhere in this
        report contain "forward-looking statements" within the meaning of the Private
        Securities Litigation Reform Act of 1995.  Forward-looking statements
        are subject to certain risks, uncertainties and assumptions, which could
        cause
        actual results to differ materially from those projected.  From time
        to time, information provided by the Company or statements made by its employees
        may contain other forward-looking statements.  Factors that could
        cause actual results to differ materially from the forward-looking statements
        include, but are not limited to: general economic conditions, including
        inflation, interest rate fluctuations, trade restrictions and general debt
        levels; competitive factors, including price pressures, technological
        development and products offered by competitors; inventory risks due to changes
        in market demand or business strategies; and changes in effective tax
        rates.  Readers are cautioned not to place undue reliance on these
        forward-looking statements, which speak only as of the date made.  The
        Company undertakes no obligation to publicly update or revise any
        forward-looking statements, whether as a result of new information, future
        events or otherwise.
 
 
 **Results
        of Operations**
 
 ***Three
        Months Ended March 31, 2007 As Compared To Three Months Ended March 31,
        2006***
  *Net
        Sales*
 
 The
        following table sets forth the
        combined net sales of the Company included in the consolidated statement
        of
        operations:
 
 Three
                  Months
                Ended
                March 31, 2007
              
              
              Three
                  Months
                Ended
                March 31, 2006Advanced
                  Structures
              
              $
              10,941,717
              
              
              $
              9,996,038Industrial
                  Metal Components
              
              
              7,391,079
              
              
              
              6,575,602$
              18,332,796
              
              
              $
              16,571,640
 
 The
        Company’s consolidated net sales for the three months ended March 31, 2007
        increased $1.8 million, or 10.6%, compared to the three months ended March
        31,
        2006.
 
 Advanced
        Structure net sales for the three months ended March 31, 2007 increased by
        $946,000, or 9.5%, compared to the three months ended March 31,
        2006.****This improvement is attributed to strong demand from
        helicopter customers, other military flight parts and tooling on new
        programs.  This increased demand offset the loss of a missile
        components contract that had $1.4 million of sales in the first quarter
        2006.
 
 Industrial
        Metal Components' net sales for the three months ended March 31, 2007 increased
        $815,000, or 12.4%, compared with the three months ended March 31,
        2006.  Net sales of investment castings increased by $804,000, or
        23.7%,****due primarily to new diesel engine programs for
        trucks and buses. Net sales of powdered metal components were flat compared
        to
        the first three months of 2006 as increased demand for hardware components
        offset declines in automotive and lawn & garden products. Automotive
        customers, with 32% of the powdered metal components sales in the first quarter
        2007, remain the largest product line for powdered metal
        components.  Included in sales are surcharges for increased metal
        costs in the first quarter 2007 of $1.1 million, which were $536,000 higher
        than
        the first quarter 2006 due to mix and significant increases in brass, bronze
        and
        stainless steel prices.
  14
 *Index*
 
 *Cost
        of Products Sold*
 
 The
        following table sets forth the combined cost of products sold of the Company
        included in the consolidated statement of operations:
 
 Three
                  Months
                Ended
                March 31, 2007
              
              
              %
                  Of
                Net
                Sales
              
              
              Three
                  Months
                Ended
                March 31, 2006
              
              
              %
                  Of
                Net
                SalesAdvanced
                  Structures
              
              $
              9,346,865
              
              
              
              85.4%
              
              
              $
              7,972,026
              
              
              
              79.8%Industrial
                  Metal Components
              
              
              6,234,546
              
              
              
              84.4%
              
              
              
              6,595,877
              
              
              
              100.3%$
              15,581,411
              
              
              
              85.0%
              
              
              $
              14,567,903
              
              
              
              87.9%
 
 Cost
        of
        products sold of $15.6 million for the three months ended March 31, 2007
        increased by $1.0 million compared to $14.6 million for the three months
        ended
        March 31, 2006, due to largely to the increase in sales volume.
 
 In
        the
        Advanced Structures segment cost of products sold of $9.3 million for the
        three
        months ended March 31, 2007 increased $1.3 million compared with cost of
        products sold of $8.0 million for the three months ended March 31, 2006,
        due to
        higher volume and an increase in scrap and rework as the product mix is
        technically more demanding. As a percent of net sales, cost of products
        increased by 5.6 points in the first three months of 2007 compared with the
        first three months of 2006, due primarily to negative manufacturing variances
        related to scrap and rework.
 
 The
        Industrial Metal Components’ cost of products sold were $6.2 million for the
        three months ended March 31, 2007 compared to cost of products sold of $6.6
        million for the three months ended March 31, 2006.  As a percent of
        net sales, cost of products were 84.4% for the first three months of 2007
        compared with 100.3% for the first three months of 2006. Results in 2006
        included unusual charges of $699,000 at the investment casting operation
        for
        expedited freight, inspection costs and scrap related to the start-up of
        new
        customer parts.  Volume and cost reduction efforts provided the
        balance of the improvement in cost of sales.
 
 *Selling,
        General and Administrative Expense*
 
 The
        following table sets forth the combined selling, general and administrative
        expenses of the Company included in the consolidated statement of
        operations:
 
 Three
                  Months Ended
                March 31, 2007
              
              
              %
                  Of
                Net
                Sales
              
              
              Three
                  Months Ended
                March 31, 2006
              
              
              %
                  Of
                Net
                SalesAdvanced
                  Structures
              
              $
              748,498
              
              
              
              6.8%
              
              
              $
              745,849
              
              
              
              7.5%Industrial
                  Metal Components
              
              
              808,619
              
              
              
              10.9%
              
              
              
              826,891
              
              
              
              12.6%$
              1,557,117
              
              
              
              8.5%
              
              
              $
              1,572,740
              
              
              
              9.5%
  15
 *Index*
 
 Selling,
        general and administrative expenses for the first three months of 2007 were
        $1,557,000, a decrease of $16,000 over the first three months of 2006 expenses
        of $1,573,000. As a percent of sales, selling, general and administrative
        expenses improved to 8.5% in the first three months of 2007 compared with
        9.5%
        for the first three months of 2006.
 
 In
        the
        Advanced Structures segment, selling, general and administrative expenses
        for
        the three months ended March 31, 2007 were flat compared with the three months
        ended March 31, 2006. As a percent of sales, selling, general and administrative
        expenses improved to 6.8% in the first three months of 2007 compared to 7.5%
        in
        the first three months of 2006 due to higher volume.
 
 Selling,
        general and administrative expenses for Industrial Metal Components segment
        for
        the  three months ended March 31, 2007 decreased $18,000 compared with
        the three months ended March 31, 2006, as 2006 included $28,000 in charges
        for
        bad debts.  As a percent of sales, selling, general and administrative
        expenses improved to 10.9% compared with 12.6%, as the relationship of cost
        reductions was favorable to the volume increase.
 
 *Operating
        Income (Loss)*
 
 The
        following table sets forth the
        combined operating income (loss) of the Company included in the consolidated
        statement of operations:
 
 Three
                  Months Ended
                March 31, 2007
              
              
              %
                  Of Net Sales
              
              
              Three
                  Months Ended
                March 31, 2006
              
              
              %
                  Of Net SalesAdvanced
                  Structures
              
              $
              846,354
              
              
              
              7.7%
              
              
              $
              1,278,163
              
              
              
              12.8%Industrial
                  Metal Components
              
              
              347,914
              
              
              
              4.7%
              
              
              
              (847,166
              )
              
              
              (12.9%)$
              1,194,268
              
              
              
              6.5%
              
              
              $
              430,997
              
              
              
              2.6%
 
 Operating
        income for the three months ended March 31, 2007 increased $763,000 compared
        to
        the three months ended March 31, 2006**.**Results in 2006 included
        unusual charges of $699,000 in the Industrial Metal Components segment at
        the
        investment casting operation for expedited freight, inspection costs and
        scrap
        related to the start-up of new customer parts.
 
 Advanced
        Structures operating income of $846,000****for the three
        months ended March 31, 2007 decreased from operating income of $1,278,000
        for
        the three months ended March 31, 2006. This decline is due to higher negative
        manufacturing variances related primarily to scrap and rework.
 
 Industrial
        Metal Components had operating income of $348,000 for the three months ended
        March 31, 2007 compared to operating loss of $847,000 for the three months
        ended
        March 31, 2006.  The primary reason for this improvement were no
        unusual charges at the investment casting operation related to the start-up
        of
        new customer parts.   Volume and cost reductions were also key
        positive factors in the improved operating income from a loss last
        year.
  16
 *Index*
 
 *Other
        Expenses*
 
 The
        following table sets forth the
        combined other expenses of the Company included in the consolidated statement
        of
        operations:
  Three
                  Months Ended
                March 31, 2007
              
              
              Three
                  Months Ended
                March 31, 2006Interest
                  expense
              
              $
              (367,989
              )
              
              $
              (319,943
              )Other
              
              
              (41,661
              )
              
              
              (5,328
              )$
              (409,650
              )
              
              $
              (325,271
              )
 
 Other
        expenses increased $84,000 for the three months ended March 31, 2007 compared
        to
        the three months ended March 31, 2006 due to increased borrowings from the
        revolving loan and negative foreign currency translation related to the
        peso.
 
 *Discontinued
        Operations*
 
 Discontinued
        operations reported a loss of $795,000 for the three months ended March 31,
        2007
        and a loss of $821,000 for the three months ended March 31, 2006. The losses
        for
        both periods relate primarily to the accretion of discounted environmental
        liabilities from the Company’s special purpose subsidiaries and the note payable
        to the Pension Benefit Guarantee Corporation.
 
 *Income
        taxes*
 
 No
        income tax provision or benefit has
        been recognized for any periods presented as valuation allowances have been
        recorded for all net operating loss benefits and net deferred tax
        assets**.**
 
 *Net
        Income (Loss)*
 
 The
        Company had net losses of $11,000 and $715,000 for the three months ended
        March
        31, 2007 and March 31, 2006, respectively.
 
 **Liquidity
        and Capital Resources**
  The
        Company had cash of $18,000 on March 31, 2007 and December 31, 2006,
        respectively.
 
 For
        the
        three months ended March 31, 2007, cash from continuing operations increased
        $1,583,000, due largely to improvements in working
        capital.****Excluding borrowings, continuing operations have
        provided $1,327,000 in the first three months of 2007. Cash flows from
        discontinued operations used $1,583,000 for the three months ended March
        31,
        2007, primarily for funding the on-going environmental remediation at the
        Muskogee, Oklahoma property.
 
 For
        the
        three months ended March 31, 2006, cash from continuing operations increased
        $2,015,000, due largely to the $2,830,000 in borrowings from the revolving
        line
        of credit with Fifth Third. ****Excluding borrowings,
        continuing operations used $744,000 in the first three months of 2006. Cash
        flows from discontinued operations used $1,679,000 for the three months ended
        March 31, 2006, primarily for funding the on-going environmental remediation
        at
        the Muskogee, Oklahoma property.
  17
 *Index*
 
 *Operating
        Activities*
 
 For
        the
        three months ended March 31, 2007, operating activities provided $1,567,000
        in
        cash. Accounts receivable decreased by $266,000,****despite
        higher sales, due to strong collections. Days outstanding were 56 days, a
        decrease of 8 days in the quarter**.** Inventories decreased by
        $497,000****as customers took releases in January that had
        been held at year-end 2006.****Accounts payable and accrued
        liabilities decreased by $625,000 due to the timing of payments to trade
        vendors.
 
 During
        the three months ended March 31, 2006, operating activities used $376,000
        in
        cash due primarily to increases in accounts receivable and inventory, partially
        offset by increases in accounts payable and accrued liabilities.
 
 *Investing
        Activities*
 
 For
        the
        three months ended March 31, 2007, investing activities consumed $240,000
        for
        capital expenditures in both business segments. For the three months ended
        March
        31, 2006, investing activities consumed $368,000 for capital expenditures,
        primarily in the Advanced Structures business segment. In both periods, the
        majority of capital expenditures were for replacement equipment.
 
 *Financing
        Activities*
 
 Financing
        activities provided $256,000 for the three months ended March 31, 2007, compared
        with $2,759,000 provided for the three months ended March 31, 2006. For the
        first three months of 2007, short-term borrowings from the revolving line
        of
        credit with Fifth Third Bank were $332,000, compared with $2,830,000 borrowed
        in
        the first three months of 2006. These borrowings for both periods were needed
        for funding operations, capital expenditures and environmental remediation
        of
        discontinued operations. Payments of long-term debt in the first three months
        of
        2007 were $76,000 for loans from various economic agencies in Pennsylvania,
        compared with $71,000 in the first three months of 2006.
 
 In
        order
        to increase the Company’s liquidity and ability to meet operational and
        strategic needs, Fansteel Inc. and its wholly-owned subsidiary, Wellman Dynamics
        Corporation, as borrowers, entered into a Loan and Security Agreement with
        Fifth
        Third Bank (Chicago), as lender, on July 15, 2005 with an original principal
        amount of $15,000,000. As the Company’s businesses have grown, so have the
        Company’s needs for funding working capital, capital expenditures and other
        requirements. With the corresponding increase in its borrowing base, consisting
        of accounts receivable, inventories and machinery and equipment, the Company
        sought to increase its revolving line of credit above the $15 million level.
        Accordingly, this loan agreement with Fifth Third Bank was amended on December
        4, 2006.
 
 Under
        this amended loan facility, subject to certain borrowing conditions, the
        Company
        may incur revolving loans, credit card charges and letter of credit issuances
        in
        an amount up to $21.5 million from a borrowing base comprised of a percentage
        of
        eligible accounts receivable and inventories and $2 million for machinery
        and
        equipment.  Revolving loans include $1.5 million for borrowing under
        credit cards issued by the Lender, not subject to the borrowing base. The
        term
        was extended with revolving loans due and payable in full on January 5, 2009.
        As
        borrowers under this Loan and Security Agreement, the Company is required
        to
        meet certain covenants, including those that require minimum EBITDA levels,
        limit leverage and establish debt service requirements.  The interest
        rate on the line is at prime and there is a .25% unused line
        fee.  Substantially all of the assets of the borrowers are pledged as
        security for this financing.****At March 31, 2007 the Company
        had letters of credit of $770,000 for casualty insurance collateral and
        environmental assurance with an interest rate of 1.5%. The Company’s credit
        availability was $887,000****at March 31, 2007. Borrowing
        under the revolving line of credit is included as short-term
        borrowings.
  18
 *Index*
 
 The
        Company's high level of debt could have important consequences, including,
        among
        others, the following:
 
 -
        the
        inability of the Company's current cash generation level to support future
        interest and principal payments on the Company's existing
        indebtedness;
 
 -
        inadequate cash for other purposes, such as capital expenditures and the
        Company's other business activities, since the Company may need to use all
        or
        most of the operating cash flow to pay principal and interest on its outstanding
        debt;
 
 -
        making
        it more difficult for the Company to satisfy its contractual
        obligations;
 
 -
        increasing the Company's vulnerability to general adverse economic and industry
        conditions;
 
 -
        limiting the Company's ability to fund future working capital, capital
        expenditures or other general corporate requirements;
 
 -
        placing
        the Company at a competitive disadvantage compared to the Company's competitors
        that have less debt relative to their operating scale;
 
 -
        limiting the Company's flexibility in planning for, or reacting to, changes
        in
        the Company's business and its industry; and
 
 -
        limiting, along with the financial and other restrictive covenants in the
        Company's indebtedness, among other things, the Company's ability to borrow
        additional funds, make acquisitions, dispose of assets or pay cash
        dividends.
 
 In
        the
        longer term, the Company's ability to pay debt service and other contractual
        obligations will depend on improving the Company's future performance and
        cash
        flow generation, which in turn will be affected by prevailing economic and
        industry conditions and financial, business and other factors, many of which
        are
        beyond the Company's control.  If the Company has difficulty providing
        for debt service or other contractual obligations in the future, the Company
        may
        be forced to take actions such as reducing or delaying capital expenditures,
        reducing costs, selling assets, refinancing or reorganizing its debt or other
        obligations and seeking additional equity capital, or any combination of
        the
        above.  The Company may not be able to take any of these actions on
        satisfactory terms, or at all.
 
 The
        current loan facility provides for certain financial and other covenants
        including affirmative and negative covenants with respect to, among others,
        accounts receivable, inventory, equipment and real property, insurance,
        indebtedness or guarantees, liens or other encumbrances, declaration or payment
        of dividends, sales of capital stock, assets or indebtedness, mergers,
        liquidations or dissolutions, loans, investments, minimum EBITDA, changes
        in
        business, limitation of restrictions affecting subsidiaries of the Company,
        restrictions on activities of certain special purpose subsidiaries of the
        Company, maintenance of existence, payment of taxes and compliance with
        laws.  Payment on the debt outstanding under the facility may be
        accelerated following certain events of default including, among others,
        failure
        to make payments when due, noncompliance with covenants, breaches of
        representations and warranties, dissolution or insolvency, commencement of
        bankruptcy or insolvency proceedings, rendering of judgment against Fansteel
        Inc., Wellman or certain specified obligors in excess of $100,000 in any
        one
        case or in excess of $250,000 in the aggregate, certain types of non-compliance
        by banks at which deposit accounts of Fansteel Inc. or Wellman are maintained
        or
        by financial institutions in possession of investment property of Fansteel
        Inc.
        or Wellman, uncured defaults under specified agreements or notes with entities
        other than Fifth Third Bank, the unenforceability, or a party challenging
        the
        enforceability, of a material provision of the revolving loan facility with
        respect to Fansteel Inc. or Wellman, the occurrence of certain specified
        events
        relating to the Employee Retirement Income Security Act of 1974 which results
        in
        a material adverse effect on the assets, business or prospects of Fansteel
        Inc.
        and Wellman taken as a whole, certain specified criminal indictments or
        threatened criminal indictments or the commencement of certain specified
        criminal or civil proceedings against Fansteel Inc. or Wellman, certain
        specified changes of control of the Company,  and the occurrence of a
        material adverse change in the business or assets of Fansteel Inc., Wellman
        and
        certain specified obligors taken as a whole.  The Company may have
        difficulty satisfying the covenants in the revolving loan facility and could
        default on the facility, which, if not cured (if there is an applicable cure
        period) or waived, could have a material adverse effect on the
        Company.
  19
 *Index*
 
 The
        Company's liquidity, including its ability to meet its ongoing operational
        obligations, is dependent upon, among other things, the Company's ability
        to (i)
        maintain adequate cash on hand, (ii) generate positive cash flow from
        operations, (iii) comply with the revolving loan facility, and (iv) achieve
        profitability.
 
 **Critical
        Accounting Policies**
  The
        Company's discussion and analysis of financial conditions and results of
        operations is based upon its consolidated financial statements, which have
        been
        prepared in accordance with generally accepted accounting principles in the
        United States. The preparation of the financial statements in conformity
        with
        generally accepted accounting principles requires management to make estimates
        and assumptions that affect the amounts reported in the financial statements
        and
        accompanying notes.  The Company bases its estimates on historical
        experience and assumptions that it believes to be reasonable under the
        circumstances.  Actual results could differ from those
        estimates.  The Company believes the accounting policies described
        below are the policies that most frequently require estimates and judgments
        and
        are therefore critical to the understanding of its results of
        operations.
 
 Trade
        accounts receivable are classified as current assets and are reported net
        of
        allowances for doubtful accounts.  The Company records such allowances
        based on a number of factors, including historical trends and specific customer
        liquidity.
 
 In
        accordance with Statement of Position 96-1, there are no future recoveries
        included as net amounts in the environmental liabilities or any insurance
        receivables included on the balance sheet. Insurance recoveries are not recorded
        until a settlement is received.
 
 Excess
        reorganization value, 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.
  20
 *Index*
 
 The
        Company periodically re-evaluates carrying values and estimated useful lives
        of
        long-lived assets to determine if adjustments are warranted.  The
        Company uses estimates of undiscounted cash flows from long-lived assets
        to
        determine whether the book value of such assets is recoverable over the assets'
        remaining useful lives.
 
 The
        Company recognizes sales when the risks and rewards of ownership have
        transferred to the customer, which is generally considered to have occurred
        as
        products are shipped.  Revenue is recognized from sales of tooling,
        patterns and dies upon customer acceptance.
 
 Statement
        of Position No. 96-1, Environmental Remediation Liabilities, provides
        authoritative guidance on the recognition, measurement, display and disclosure
        of environmental remediation liabilities. The Company is involved in numerous
        remediation actions to clean up hazardous wastes as required by federal and
        state laws. Environmental liabilities are estimated with the assistance of
        third-party environmental advisors and governmental agencies based upon an
        evaluation of currently available facts, including the results of environmental
        studies and testing, and considering existing technology, presently enacted
        laws
        and regulations, and prior experience in remediation of contaminated
        sites.  Future information and developments require the Company to
        continually reassess the expected impact of these environmental matters.
        Environmental remediation is recorded as a discounted liability in accordance
        with the principles of fresh start accounting, which was adopted with the
        confirmation of the Plan of Reorganization as of January 23, 2004 when the
        Company emerged from bankruptcy. The expected timing of estimated cash payments
        at that time were used to determine the discounted value of those
        payments.  Accretion of the discount is recorded each
        period.
 
 **Recent
        Accounting Pronouncements**
 
 In
        February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
        Financial Instruments – An Amendment of FASB Statements No. 133 and 140 and is
        effective for all financial instruments acquired or issued after the beginning
        of an entity’s first fiscal year that begins after September 15,
        2006.  SFAS No. 155 permits fair value remeasurement for any hybrid
        financial instrument that contains an embedded derivative that otherwise
        would
        require bifurcation, clarifies which interest-only strips and principal-only
        strips are not subject to the requirements of SFAS No. 133, establishes a
        requirement to evaluate interest in securitized financial assets to identify
        interest that are freestanding derivatives or that are hybrid financial
        instruments that contain an embedded derivative requiring bifurcation, clarifies
        that concentrations of credit risk in the form of subordination are not embedded
        derivatives and amends SFAS No. 140 to eliminate the prohibition on a qualifying
        special-purpose entity from holding a derivative financial instrument that
        pertains to a beneficial interest other than another derivative financial
        instrument.  The Company was required to adopt SFAS No. 155 beginning
        January 1, 2007, and such adoption did not have a material impact on its
        consolidated results of operations and financial condition.
 
 In
        March
        2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial
        Assets
– An Amendment of FASB Statement No. 140 and is effective for fiscal years
        beginning after September 15, 2006. SFAS No. 156 requires recognition of
        a
        servicing asset or servicing liability each time an obligation to service
        a
        measurement at fair value of all separately recognized servicing assets and
        servicing liabilities, permits the use of either the amortization method
        or the
        fair value measurement method for each class of separately recognized servicing
        assets and servicing liabilities, permits a one-time reclassification of
        available-for-sale securities to trading securities at initial adoption,
        and
        requires separate presentation of servicing assets and servicing liabilities
        subsequently measured at fair value in the statement of financial position
        and
        additional disclosures for all separately recognized servicing assets and
        servicing liabilities. The Company was required to adopt SFAS No. 156 effective
        January 1, 2007, and such adoption did not have a material impact on its
        consolidated results of operations and financial condition.
  21
 *Index*
 
 In
        June
        2006, the FASB issued Financial Interpretation (FIN) No. 48, Accounting for
        Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109 and is
        effective for fiscal years beginning after December 15, 2006. FIN No. 48
        clarifies the accounting for uncertainty in income taxes recognized in an
        enterprise’s financial statements in accordance with SFAS No. 109, Accounting
        for Income Taxes. FIN No. 48 outlines a recognition threshold and measurement
        attribute for the financial statement recognition and measurement of a tax
        position taken or expected to be taken in a tax return. FIN No. 48 also provides
        guidance on recognition, classification, interest and penalties, accounting
        in
        interim periods, disclosure, and transition. The Company was required to
        adopt
        FIN No. 48 effective January 1, 2007, and such adoption did not have a material
        impact on its consolidated results of operations and financial
        condition.
 
 In
        September 2006, the FASB issued SFAS NO. 157, Fair Value Measurements and
        is
        effective for fiscal years beginning after November 15, 2007. SFAS No. 157
        defines fair value, establishes a framework for measuring fair value in
        generally accepted accounting principles, and expands disclosures about fair
        value measurements. SFAS No. 157 applies under other accounting pronouncements
        that require or permit fair value measurements, the FASB having previously
        concluded in those accounting pronouncements that fair value is the relevant
        measurement attributed. Accordingly, FAS No. 157 does not require any new
        fair
        value measurements.  The Company is required to adopt SFAS No. 157
        effective January 1, 2008, but does not expect it to have a material impact
        on
        its consolidated results of operations and financial condition.
 
 In
        September 2006, the FASB also issued SFAS No. 158, Employers’ Accounting for
        Defined Benefit Pension and Other Postretirement Plans – an Amendment of FASB
        Statements No. 87, 88, 106, and 132(R) and is effective for employers with
        publicly traded equity securities as of the end of the fiscal year ending
        after
        December 15, 2006, and for employers without publicly traded equity securities
        as of the end of the fiscal year ending after June 15, 2007. SFAS No. 158
        requires an employer to recognize the over funded or under funded status
        of a
        defined benefit postretirement plan (other than a multiemployer plan) as
        an
        asset or liability in its statement of financial position and to recognize
        changes in that funded status in the year in which the changes occur through
        comprehensive income of a business entity or changes in which the changes
        occur
        through comprehensive income of a business entity or changes in unrestricted
        net
        assets of a not-for-profit organization. SFAS No. 158 also requires an employer
        to measure the funded status of a plan as of the date of its year-end statement
        of financial position, with limited exceptions. The Company adopted SFAS
        No. 158
        effective December 31, 2006. The non-cash effect of the adoption resulted
        in an
        increase in total liabilities of $343,000 and a reduction in total shareholders’
equity of $343,000, net of tax.  The adoption of SFAS 158 did not
        affect our results of operations.
 
 In
        September 2006, the Securities and Exchange Commission issued Staff Accounting
        Bulletin No. 108, “Considering the Effects of Prior Year Misstatements When
        Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”),
        which provides interpretive guidance on how effects of carryovers or reversals
        of prior year misstatements should be considered in quantifying a current
        year
        misstatements. The guidance is applicable for 2006.  The effect of
        adopting SAB 108 did not have a material impact on consolidated results of
        operation or financial condition.
  22
 *Index*
 
 In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities.”  This standard permits
        companies to make a one-time election to carry eligible types of financial
        assets and liabilities at fair value (“FV”), even if FV measurement is not
        required under generally accepted accounting principles. SFAS No. 159 is
        effective for fiscal years beginning after November 15, 2007, and early adoption
        is permitted.  The Company does not plan on early adoption of SFAS No. 159
        and is in the process of determining its impact on the Company’s financial
        position and results of operations.
 
 **Inflation**
  Inflationary
        factors such as increases in the costs of raw materials, labor, and overhead
        affect the Company's operating profits.  Significant portions of raw
        materials consumed by the Company are various steel alloys.  Price
        increases were experienced beginning in 2004 and these price increases have
        continued into 2007.  To offset these price increases, the Company
        began adding material surcharges in March 2004 and in 2007 the Company continues
        to add material surcharges.  Material surcharges are a pass through of
        costs and do not include normal mark-up.  For the three months ended
        March 31, 2007, material surcharges accounted for 6.0% of net
        sales.****Surcharges were 96% higher in the first quarter
        2007 compared to the first quarter 2006.
 
 **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 March 31, 2007:
 
 ***(In
                  thousands)***
              
              Total
              
              
              2007
              
              
              2008
              
              
              2009
              
              
              2010
              
              
              2011
              
              
              After
                2012PBGC
                  Note
              
              $
              7,250
              
              
              $
              0
              
              
              $
              750
              
              
              $
              750
              
              
              $
              1,150
              
              
              $
              1,150
              
              
              $
              3,450PA
                  economic agencies notes
              
              
              387
              
              
              
              230
              
              
              
              143
              
              
              
              14
              
              
              
              -
              
              
              
              -
              
              
              
              -Operating
                  leases
              
              
              724
              
              
              
              185
              
              
              
              170
              
              
              
              101
              
              
              
              71
              
              
              
              197
              
              
              
              -Revolving
                  line
              
              
              13,690
              
              
              
              -
              
              
              
              -
              
              
              
              13,690
              
              
              
              -
              
              
              
              -
              
              
              
              -Letters
                  of credit
              
              
              770
              
              
              
              -
              
              
              
              770
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Environmental
                  liabilities
              
              
              35,505
              
              
              
              490
              
              
              
              2,634
              
              
              
              2,372
              
              
              
              2,586
              
              
              
              1,836
              
              
              
              25,587Total
              
              $
              58,326
              
              
              $
              905
              
              
              $
              4,467
              
              
              $
              16,927
              
              
              $
              3,807
              
              
              $
              3,183
              
              
              $
              29,037
 The
        above table excludes discounts of
        the long-term debt and environmental liabilities as well as any related
        interest.
 
 The
        payments for environmental
        liabilities are based on estimated timing of remediation activities and not
        mandatory payment schedules.  A minimum annual funding of $1.4 million
        is required for environmental liabilities related to FMRI through 2008 with
        an
        increase to $1,682,000 in 2009.
  23
 *Index*
 
 The
        revolving line of credit has a renewal date of January 5,
        2009.****The revolving line of credit requires immediate
        repayment from cash receipts.  Borrowings can be made as needed, based
        on availability.****The availability at March 31, 2007 was
        $887,000, compared with $1,360,000 at December 31, 2006.
 
 
 **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
        2007.  To offset these price increases in raw materials, the Company
        began adding material surcharges in March 2004 and has continued to add material
        surcharges into 2007.
 
 
 **ITEM4
        - CONTROLS AND PROCEDURES**
 
 The
        Company’s Chief Executive Officer and its Chief Financial Officer, after
        evaluating the effectiveness of the Company’s  “disclosure controls
        and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under
        the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as
        of the
        end of the period covered by this Report on Form 10-Q, have concluded that
        the
        Company's “disclosure controls and procedures” were effective as of the end of
        the period covered by this Report.
 
 There
        were no changes during the most recent quarter in the Company’s internal
        controls or in other factors that could significantly affect the Company’s
        internal controls during the period covered by this Report.
  Disclosure
        controls and procedures are the Company’s controls and other procedures that are
        designed to ensure that information required to be disclosed by the Company
        in
        the reports that we file or submit under the Exchange Act is recorded,
        processed, summarized and reported, within the time periods specified in
        the
        Securities and Exchange Commission’s rules and forms. Disclosure controls and
        procedures include, without limitation, controls and procedures designed
        to
        ensure that information required to be disclosed by us in the reports that
        we
        file under the Exchange Act is accumulated and communicated to our management,
        including our principal executive officer and principal financial officer,
        as
        appropriate to allow timely decisions regarding required
        disclosure.
  24
 *Index*
 **PARTII.   OTHER
          INFORMATION**
 
 **ITEM1
          - LEGAL PROCEEDINGS**
 
 **FMRI**
 On
        November 3, 2003, an administrative law judge of the NRC granted a request
        of
        the State of Oklahoma for a hearing to challenge certain aspects of FMRI’s NRC
        License.  The State of Oklahoma challenged a number of aspects of the
        NRC License, including the adequacy of site characterization, the appropriate
        modeling of the site of remediation levels, cost estimates, and sufficiency
        of
        the NRC Staff's environmental review.  On May 26, 2004, the
        administrative law judge overseeing the proceeding issued his decision, finding
        in favor of FMRI and against the State of Oklahoma on all matters under
        consideration.  The State of Oklahoma's ability to appeal the ruling
        of the administrative law judge expired on September 15, 2004 such that the
        ruling of the administrative law judge became final and
        non-appealable.  Notwithstanding the victory by FMRI, the challenges
        by the State of Oklahoma, both to the NRC License and to confirmation of
        the
        Reorganization Plan, resulted in considerable additional expense and significant
        delays with respect to the implementation of the Decommissioning Plan,
        effectively precluding FMRI from undertaking to commence certain actions
        required by its NRC License.  Among other things, the NRC License sets
        forth the benchmarks and timeline for the decommissioning of the Muskogee
        Facility.  Specifically, the NRC License required FMRI (i) by
        September 1, 2004, to commence Phase 1 work of removing certain residue
        materials ("WIP") from the site and (ii) by March 31, 2006 to complete the
        removal of the WIP materials, taking into account preparation, scheduling,
        cost
        and weather.  Realizing its inability to satisfy certain of its NRC
        License conditions, FMRI timely notified the NRC and commenced discussions
        with
        the NRC and third parties with a view to, as soon as possible and subject
        to
        available funding, commence and complete Phase 1 remediation.  Such
        negotiations and discussions resulted in an April 13, 2005 amendment to the
        decommissioning trust that now permits an additional $2,500,000 to be drawn
        by
        FMRI to complete Phase 1 of the Decommissioning Plan.  The amounts of
        these additional draws are dependent upon the weight of material disposed
        of
        offsite at the approved disposal site. Notwithstanding FMRI access to additional
        funding, FMRI has been unable, to date, to reach consensus with the NRC on
        modifications necessary to eliminate the violation of not starting on time
        the
        Phase 1 of the Decommissioning Plan.  As a result, FMRI remains in
        technical violation of its NRC License but did commence Phase 1 decommissioning
        activities in September 2005.  Fansteel can provide no assurance that
        FMRI will be able to reach consensus with the NRC and eliminate the existing
        violations.  Notwithstanding FMRI’s violations, the obligations of
        Fansteel with respect to the Muskogee Facility are unchanged and remain limited
        to Fansteel’s obligations to FMRI under the FMRI Notes, as described in the
        Reorganization Plan.
 
 On
        September 29, 2006 A&M Engineering and Environmental Services Inc.
        (“A&M”) filed suit in the District Court for Tulsa County, State of Oklahoma
        against FMRI, a special purpose subsidiary of Fansteel, and Penn Environmental
        & Remediation Inc (“Penn”).  On April 27, 2005, A&M and FMRI
        entered into a contract to excavate, dry, bag, stage and transport residue
        material to an acceptable offsite depository.  Penn was designated as
        the engineer for purposes of the contract.  In May 2006, FMRI was
        notified by A&M that they were canceling the transportation portion of the
        contract, but continued to perform under the balance of the
        contract.  A&M submitted change orders totaling $1.2 million under
        the contract that required approval by the engineer.  The changes
        orders were not approved.  A&M subsequently filed
        suit.  The contract provisions require the use of mediation for
        resolution before filing suit.  In November 2006, FMRI participated in
        failed meetings with A&M to stay their suit and enter into
        mediation.  On December 1, 2006, FMRI notified A&M that the
        contract was being terminated for cause.  Since A&M took no
        actions to commence cure efforts, the contract was terminated effective December
        20, 2006 with FMRI expressly reserving its rights under the contract. On
        December 7, 2006, FMRI filed with the District Court for Tulsa County in
        response to the A&M complaint.  In these pleadings, FMRI objected
        to venue and requested transfer to Muskogee County and cited A&M for breach
        of contract, breach of change order, fraud, breach of implied duty of good
        faith
        and fair dealing, and sought damages including liquidation damages, project
        completion costs, and faulty work.  FMRI believes it has counter
        claims against A&M for amounts well in excess of the $1.2 million claimed by
        A&M.   Both sides have filed interrogatories and document
        requests for the suit.  A Scheduling Order was filed with the District
        Court of Tulsa County after a February 26, 2007 scheduling conference with
        the
        presiding judge.  The order includes a schedule for an evidentiary
        hearing with the judge from September 17 – 21, 2007 regarding A&M’s
        intentions to enjoin FMRI’s access to a portion of the Decommissioning Trust
        Fund (i.e., at least equal to A&M’s monetary claims against
        FMRI).  The briefs and responses for this hearing are to occur between
        June and August 2007.  Per this order, the actual jury trial for this
        suit is to be scheduled sometime after June 2008. 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.
  25
 *Index*
 
 **Environmental
        Claims and Insurance Recoveries**
 
 Certain
        environmental claims have been made against the Company by the EPA and various
        other regulatory agencies, entities and persons in connection with the
        investigation and cleanup of certain sites. Pursuant to the Reorganization
        Plan,
        all such claims were treated and resolved and as part of such treatment,
        the
        Company has sought recovery from certain of its insurers in respect of certain
        defense and cleanup costs relating to the claims.  The Department of
        Justice notified the Company on April 29, 2005 that the NRC and other interested
        federal agencies did consent to the following settlements: On May 26, 2005,
        the
        Company reached agreement with Zurich American Insurance Company and Zurich
        International (Bermuda) Ltd. (collectively, "Zurich") and on April 18, 2005
        with
        KWELM Management Services Limited on behalf of the Scheme Administrator for
        KWELM in an insolvency proceeding under the laws of Great Britain and the
        Joint
        Liquidators for The Bermuda Fire & Marine Insurance Company (collectively,
        "KWELM"). Zurich agreed to a settlement providing for a cash settlement payment
        to the Company of $1.4 million, which was received on June 9,
        2005.  KWELM agreed to a Notified Scheme Claim totaling $400,000. Cash
        distributions in respect of the claims were paid out to the Company in
        accordance with KWELM's approved Scheme of Arrangement.  Payments from
        KWELM during 2005 were $330,304 and during 2006 were $5,349 for a total of
        $335,653 or 84% of the claim. The proceeds of the settlements were used in
        accordance with the Reorganization Plan to pay certain professional fees
        and
        expenses related to such settlements.  The net proceeds from the
        settlements were allocated in accordance with the Reorganization Plan and,
        among
        other things, resulting in prepayments under the FMRI Notes of $831,000,
        the
        FLRI Primary Note of $111,000 and the ED Note of $147,000 and payments
        aggregating $66,000 on account of EPA CERCLA claims.
 
 **Other
        Legal Actions**
 
 In
        May
        2005, a complaint for toxic injuries was filed by Garfield and Susan Perry
        against numerous defendants, including Wellman Dynamics, a wholly owned
        subsidiary of Fansteel Inc., claiming injuries related to exposure to products
        containing beryllium. The Company’s insurance carriers have been notified and at
        least one carrier has agreed to pay for defending the Company.
 
 During
        the third quarter 2006, Fansteel filed to close its bankruptcy case, as it
        believed all bankruptcy issues had been substantially resolved.  On
        September 23, 2006, the Company received notice that the Department of Justice
        ("DOJ") objected to the case closure, stating that the Company had not responded
        to a letter requesting information regarding the status of various environmental
        remediation sites.  The Company did not receive the DOJ letter until 2
        days after the DOJ notice of objection was filed.  The Company through
        legal counsel is in discussion with the DOJ to resolve their
        objection.
 
 In
        October 2006 the Company filed a suit in the United States District Court
        for
        the Northern District of Illinois, Eastern Division, to recover monies owed
        from
        a customer for non-payment of $594,000 on a trade accounts
        receivable.  The customer claims $157,000 of the amount owed is not
        due, but has refused to pay any amount owed.  Settlement discussions
        are continuing.
  26
 *Index*
 
 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 1, Item 2 of
        this report and other information included in this report, before purchasing
        the
        Company’s securities. Besides the risks listed below, the Company faces risks
        that are currently unknown or that are currently consider to be immaterial,
        but
        may also impact business or adversely affect the Company’s financial condition
        or results of operations.
 
 **Emergence
        From Bankruptcy**
 
 On
        January 15, 2002 (the "Petition Date"), Fansteel Inc. and eight of its then
        subsidiaries (collectively, the "Debtors") filed voluntary petitions for
        reorganization relief under Chapter 11 of the U.S. Bankruptcy Code. After
        the
        Petition Date, the Predecessor Company (referring to the Company prior to
        the
        Effective Date) continued to operate its business and manage its affairs
        as
        debtor-in-possession ("DIP") with court approval for transactions outside
        the
        ordinary course of business. By order dated December 23, 2003, the U.S.
        Bankruptcy Court for the District of Delaware (the "Court") confirmed the
        Second
        Amended Joint Reorganization Plan (the "Reorganization Plan").  All
        the Debtors emerged from Chapter 11 of the U.S. Bankruptcy Code on January
        23,
        2004 (the "Effective Date").
 
 The
        Reorganization Plan left the Company with significant environmental liabilities
        going forward that must be funded from continuing operations.
 
 **Environmental
        Issues**
 
 The
        Company has significant
        environmental issues primarily related to special purposes entities included
        in
        discontinued operations, particularly in Muskogee, OK, that could have a
        material impact on the Company’s results. The ability of the Company to fund the
        clean up of this site could have a material adverse impact on the Company.
        For
        further details, see Note 3 - Discontinued Operations including Certain
        Environmental Remediation.
 
 **High
        Level Of Debt**
 
 The
        Company's high level of debt could have important consequences.  The
        Company's ability to pay debt service and other contractual obligations will
        depend on the Company's future performance and cash flow generation, which
        in
        turn will be affected by prevailing economic and industry conditions and
        financial, business and other factors, many of which are beyond the Company's
        control.  If the Company has difficulty providing for debt service or
        other contractual obligations in the future, the Company may be forced to
        take
        actions such as reducing or delaying capital expenditures, reducing costs,
        selling assets, refinancing or reorganizing its debt or other obligations
        and
        seeking additional equity capital, or any combination of the
        above.  The Company may not be able to take any of these actions on
        satisfactory terms, or at all.
  27
 *Index*
 
 **The
        Company Has A Few Large Customers**
 
 The
        companies controlled by United Technologies Corporation (“UTC”) and
        International Truck and Engine Corporation (“International Engine”) are
        significant customers of the Company.
 
 In
        addition to UTC and International Engine, the Company sells to several other
        customers that make up a significant portion of the Company’s total sales. While
        none of these other customers individually represent more than 10% of sales,
        as
        a group they make up a considerable portion of the Company’s total sales.
        Although it is not anticipated, the loss of UTC, International Engine or
        one or
        more of these other significant customers would have a substantial impact
        on the
        Company’s operations and profitability. While the Company has long-term
        relationships with these companies, there is no guarantee that these
        relationships will continue.  In addition, these customers are in the
        aerospace and automotive industries, which tend to be volatile. In particular,
        the United States automotive industry has been unstable in recent years,
        with
        several large automotive companies struggling financially and some filing
        Chapter 11 bankruptcy.
 
 **Competition**
 
 Each
        of
        the Company’s businesses participates in markets that are highly competitive.
        Many of these competitors are much larger than the Company’s businesses, have
        greater name recognition, have more financial resources and can sell their
        products at prices lower than ours, giving them a greater competitive edge.
        The
        Company competes primarily on the basis of product quality, product performance,
        value, and long-term customer relationships. The competition that the Company
        faces in these markets may prevent the Company from achieving sales and profit
        goals, which could affect the Company’s financial condition and results of
        operations.
 
 In
        addition the Company faces increased
        competition, primarily in the Industrial Metal Components business segment,
        from
        offshore sources, such as China and India, 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 2007.   The
        Industrial Metal Components segment has been impacted particularly hard with
        some material prices nearly doubling from 2005 levels. To offset these price
        increases, the Company began adding material surcharges in March 2004 and
        in
        2007 the Company continues to add material surcharges where possible. There
        is
        no guarantee that the Company will be able to continue to pass on these material
        surcharges to its customers, and in fact, some customers have refused to
        accept
        these surcharges.
 
 **Manufacturing
        in Foreign Countries**
 
 The
        Company has a manufacturing
        facility in Mexico that is subject to currency exchange rate fluctuations.
        While
        foreign currency exchange rates have not had a significant impact on the
        Company’s financial condition in the past, there can be no certainty that
        exchange rates will not have a financial impact in the future.
  28
 *Index*
 
 **Liquidity
        of the Company Stock**
 
 The
        Company has a limited number of
        shareholders and its stock is thinly traded.
 
 **Information
        Unknown or Not Available**
 
 A
        committee of the independent members
        of the Company’s Board of Directors has been assembled to evaluate two
        inter-company transactions. Correspondence has been issued to the Committee
        of
        board members by Fansteel's CEO requesting prompt transmittal of the results
        of
        the evaluation. The precise information being evaluated and the status of
        the
        evaluation is unknown and not available. This disclosure is being made pursuant
        17 CFR 240.12b-21.
 
  **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**
  No
        matters were submitted to a vote of
        security holders during the first quarter of 2007.
 
 **ITEM5
–
OTHER
        INFORMATION**
  None.
 
 **ITEM6
–
EXHIBITS**
  Exhibit
                  #
              
              Description
                  of Exhibit31.1
              
              Certification
                  by Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a)
                  under
                  the Securities Exchange Act of 1934, as adopted pursuant to Section
                  203 of
                  the Sarbanes-Oxley Act of 200231.2
              
              Certification
                  by Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a)
                  under
                  the Securities Exchange Act of 1934, as adopted pursuant to Section
                  203 of
                  the Sarbanes-Oxley Act of 200232.1
              
              Certifications
                  by Chief Executive Officer and Chief Financial Officer pursuant
                  to 18
                  U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002
 29
 *Index*
  **SIGNATURES**
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
 
 FANSTEEL
                  INC.(Registrant)/s/
                  Gary L. TessitoreGary
                  L. TessitoreChairman
                  of the Board, PresidentMay
                  14, 2007
              and
                  Chief Executive Officer/s/
                  R. Michael McEnteeR.
                  Michael McEnteeVice
                  President andMay
                  14, 2007
              Chief
                  Financial Officer


30