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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-QSB



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(Mark One)

|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------

For the quarterly period ended December 31, 2006



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
|- | ---------------------------------------------------------------

For the transition period from  to

Commission file number: 0-04036



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Kreisler Manufacturing Corporation

(Exact name of small business issuer as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 22-1047792                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

180 Van Riper Avenue, Elmwood Park, New Jersey 07407

(Address of principal executive offices)

(201) 791-0700

(Issuers telephone number)

Not Applicable

(Former name, former address and former fiscal year, if
changed since last report)



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

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

The number of shares outstanding of the issuers common stock, par value $.125 per share, as of February 14, 2007, was 1,833,281 shares.

Transitional Small Business Disclosure Format (Check one): ̈Yes    x  No



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##### Table of Contents

Table of Contents



|        |  |                                                             |  |            
|------- |  | ----------------------------------------------------------- |  | -----------
|        |  |                                                             |  | Page Number
|PART I  |  | Financial Information                                       |  |            
|        |  |                                                            
|Item 1  |  | Financial Statements                                        |  |            
|        |  | Consolidated Balance Sheets                                 |  | 4          
|        |  | Consolidated Statements of Operations                       |  | 5          
|        |  | Consolidated Statements of Cash Flows                       |  | 6          
|        |  | Notes to the Interim Consolidated Financial Statements      |  | 7          
|        |  |                                                            
|Item 2  |  | Managements Discussion and Analysis or Plan of Operation   |  | 12         
|        |  |                                                            
|Item 3  |  | Controls and Procedures                                     |  | 24         
|        |  |                                                            
|PART II |  | Other Information                                           |  |            
|        |  |                                                            
|Item 1  |  | Legal Proceedings                                           |  | 25         
|        |  |                                                            
|Item 2  |  | Unregistered Sales of Equity Securities and Use of Proceeds |  | 25         
|        |  |                                                            
|Item 3  |  | Defaults Upon Senior Securities                             |  | 25         
|        |  |                                                            
|Item 4  |  | Submission of Matters to a Vote of Security Holders         |  | 25         
|        |  |                                                            
|Item 5  |  | Other Information                                           |  | 26         
|        |  |                                                            
|Item 6  |  | Exhibits                                                    |  | 26         



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Forward-Looking Statements

Certain oral statements made by management of Kreisler Manufacturing Corporation (the Company) from time to time and certain statements contained herein or in other reports filed by the Company with the
Securities and Exchange Commission are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to
results of operations and the business of the Company. All such statements, other than statements of historical facts, including those regarding market trends, the Companys financial position and results of operations, business strategy,
projected costs, and plans and objectives of management for future operations, are forward-looking statements. In general, such statements are identified by the use of forward-looking words or phrases including, but not limited to,
estimates, intended, will, should, may, believes, expects, expected, anticipates, and anticipated or the negative thereof or
variations thereon or similar terminology. These forward-looking statements are based on the Companys current expectations. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, there
can be no assurance that such expectations will prove to be correct. These forward-looking statements represent the Companys current judgment. The Company disclaims any intent or obligation to update its forward-looking statements. Because
forward-looking statements involve risks and uncertainties, the Companys actual results could differ materially from those set forth in or underlying the forward-looking statements.



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##### Table of Contents

PART I FINANCIAL INFORMATION

Item 1 Financial Statements

Kreisler Manufacturing Corporation and Subsidiaries

Consolidated Balance Sheets



|                                                                                                                                                                                |  |             |            |           |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ---------- | --------- | - | ---------- | -
|                                                                                                                                                                                |  | (Unaudited) |            |           |  
|                                                                                                                                                                                |  | 12/31/2006  |            | 6/30/2006 |  
|Assets                                                                                                                                                                          |  |             |            |           |   |            |  
|Cash and cash equivalents                                                                                                                                                       |  | $           | 3,873,803  |           | $ | 3,295,947  |  
|Accounts receivable  trade, net ($20,000 and $40,000 allowance for uncollectible accounts at December 31, 2006 and June 30,
2006, respectively)                                |  |             | 4,072,975  |           |   | 4,480,295  |  
|Inventories                                                                                                                                                                     |  |             | 3,851,521  |           |   | 3,253,420  |  
|Deferred tax asset, current                                                                                                                                                     |  |             | 22,558     |           |   | 42,654     |  
|Other current assets                                                                                                                                                            |  |             | 89,586     |           |   | 109,814    |  
|                                                                                                                                                                                |  |             |            |           |   |            |  
|Total current assets                                                                                                                                                            |  |             | 11,910,443 |           |   | 11,182,130 |  
|                                                                                                                                                                                |  |             |            |           |   |            |  
|Property, plant and equipment, net of accumulated depreciation                                                                                                                  |  |             | 2,138,625  |           |   | 1,590,879  |  
|Deferred tax asset, non-current                                                                                                                                                 |  |             | 186,564    |           |   | 238,989    |  
|                                                                                                                                                                                |  |             |            |           |   |            |  
|Total non-current assets                                                                                                                                                        |  |             | 2,325,189  |           |   | 1,829,868  |  
|                                                                                                                                                                                |  |             |            |           |   |            |  
|                                                                                                                                                                                |  | $           | 14,235,632 |           | $ | 13,011,998 |  
|                                                                                                                                                                                |  |             |            |           |   |            |  
|Liabilities and Stockholders Equity                                                                                                                                            |  |             |            |           |   |            |  
|Liabilities                                                                                                                                                                     |  |             |            |           |   |            |  
|Accounts payable  trade                                                                                                                                                        |  | $           | 964,573    |           | $ | 819,974    |  
|Accrued expenses                                                                                                                                                                |  |             | 379,261    |           |   | 483,030    |  
|Income taxes payable                                                                                                                                                            |  |             | 238,336    |           |   | 59,820     |  
|Line of credit payable                                                                                                                                                          |  |             |           |           |   | 54,810     |  
|Obligation under capital leases, current portion                                                                                                                                |  |             | 113,471    |           |   | 103,643    |  
|                                                                                                                                                                                |  |             |            |           |   |            |  
|Total current liabilities                                                                                                                                                       |  |             | 1,695,641  |           |   | 1,521,277  |  
|                                                                                                                                                                                |  |             |            |           |   |            |  
|Obligation under capital leases, net of current portion                                                                                                                         |  |             | 360,214    |           |   | 358,193    |  
|Accrued environmental cost                                                                                                                                                      |  |             | 407,577    |           |   | 407,577    |  
|                                                                                                                                                                                |  |             |            |           |   |            |  
|Total long-term liabilities                                                                                                                                                     |  |             | 767,791    |           |   | 765,770    |  
|                                                                                                                                                                                |  |             |            |           |   |            |  
|Commitments and contingencies                                                                                                                                                   |  |             |            |           |   |            |  
|Stockholders Equity                                                                                                                                                            |  |             |            |           |   |            |  
|Common stock, $0.125 par value - 6,000,000 shares authorized; 1,833,281 shares and 1,830,447 shares issued and outstanding at
December 31, 2006 and June 30, 2006, respectively |  |             | 229,160    |           |   | 228,806    |  
|Additional paid-in capital                                                                                                                                                      |  |             | 561,932    |           |   | 544,716    |  
|Retained earnings                                                                                                                                                               |  |             | 10,968,125 |           |   | 9,968,591  |  
|Accumulated other comprehensive gain (loss)                                                                                                                                     |  |             | 12,983     |           |   | (17,162    | )
|                                                                                                                                                                                |  |             |            |           |   |            |  
|Total stockholders equity                                                                                                                                                      |  |             | 11,772,200 |           |   | 10,724,951 |  
|                                                                                                                                                                                |  |             |            |           |   |            |  
|                                                                                                                                                                                |  | $           | 14,235,632 |           | $ | 13,011,998 |  
|                                                                                                                                                                                |  |             |            |           |   |            |  

The accompanying notes are an integral part of these interim consolidated financial statements.



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##### Table of Contents

Kreisler Manufacturing Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)



|                                             |  |      |            |   |      |   |           |  
|-------------------------------------------- |  | ---- | ---------- | - | ---- | - | --------- | -
|Three Months Ended December 31,              |  | 2006 |            |   | 2005 |  
|Net sales                                    |  | $    | 6,015,331  |   |      | $ | 4,427,267 |  
|                                             |  |      |            |   |      |   |           |  
|Cost of goods sold                           |  |      | 4,512,828  |   |      |   | 3,653,883 |  
|Selling, general and administrative expenses |  |      | 481,661    |   |      |   | 301,864   |  
|                                             |  |      |            |   |      |   |           |  
|Total costs and expenses                     |  |      | 4,994,489  |   |      |   | 3,955,747 |  
|                                             |  |      |            |   |      |   |           |  
|Income from operations                       |  |      | 1,020,842  |   |      |   | 471,520   |  
|                                             |  |     
|Interest and other income                    |  |      | 37,314     |   |      |   | 29,607    |  
|Interest and other expenses                  |  |      | (17,926    | ) |      |   | (35,358   | )
|                                             |  |      |            |   |      |   |           |  
|Income before income taxes                   |  |      | 1,040,230  |   |      |   | 465,769   |  
|                                             |  |     
|Income taxes                                 |  |      | (433,000   | ) |      |   | (175,975  | )
|                                             |  |      |            |   |      |   |           |  
|Net income                                   |  | $    | 607,230    |   |      | $ | 289,794   |  
|                                             |  |      |            |   |      |   |           |  
|Net income per common share:                 |  |      |            |   |      |   |           |  
|Net income  basic                           |  | $    | 0.33       |   |      | $ | 0.16      |  
|Net income  diluted                         |  | $    | 0.33       |   |      | $ | 0.16      |  
|Weighted average common shares  basic       |  |      | 1,831,279  |   |      |   | 1,826,447 |  
|Weighted average common shares  diluted     |  |      | 1,854,337  |   |      |   | 1,846,445 |  
|                                             |  |     
|Six Months Ended December 31,                |  | 2006 |            |   | 2005 |  
|Net sales                                    |  | $    | 11,098,316 |   |      | $ | 8,556,507 |  
|                                             |  |      |            |   |      |   |           |  
|Cost of goods sold                           |  |      | 8,677,463  |   |      |   | 7,205,415 |  
|Selling, general and administrative expenses |  |      | 780,257    |   |      |   | 576,088   |  
|                                             |  |      |            |   |      |   |           |  
|Total costs and expenses                     |  |      | 9,457,720  |   |      |   | 7,781,503 |  
|                                             |  |      |            |   |      |   |           |  
|Income from operations                       |  |      | 1,640,596  |   |      |   | 775,004   |  
|                                             |  |     
|Interest and other income                    |  |      | 85,423     |   |      |   | 55,290    |  
|Interest and other expenses                  |  |      | (31,485    | ) |      |   | (44,299   | )
|                                             |  |      |            |   |      |   |           |  
|Income before income taxes                   |  |      | 1,694,534  |   |      |   | 785,995   |  
|                                             |  |     
|Income taxes                                 |  |      | (695,000   | ) |      |   | (305,575  | )
|                                             |  |      |            |   |      |   |           |  
|Net income                                   |  | $    | 999,534    |   |      | $ | 480,420   |  
|                                             |  |      |            |   |      |   |           |  
|Net income per common share:                 |  |      |            |   |      |   |           |  
|Net income  basic                           |  | $    | 0.55       |   |      | $ | 0.26      |  
|Net income  diluted                         |  | $    | 0.54       |   |      | $ | 0.26      |  
|Weighted average common shares  basic       |  |      | 1,830,863  |   |      |   | 1,826,447 |  
|Weighted average common shares  diluted     |  |      | 1,854,493  |   |      |   | 1,846,445 |  

The accompanying notes are an integral part of these interim consolidated financial statements.



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Kreisler Manufacturing Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)



|                                                                                         |  |      |           |   |      |   |           |  
|---------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|Six Months Ended December 31,                                                            |  | 2006 |           |   | 2005 |  
|Cash Flows from Operating Activities:                                                    |  |      |           |   |      |   |           |  
|Net income                                                                               |  | $    | 999,534   |   |      | $ | 480,420   |  
|Adjustments to reconcile net income to cash provided by operating activities:            |  |      |           |   |      |   |           |  
|Depreciation and amortization                                                            |  |      | 297,800   |   |      |   | 247,403   |  
|Deferred tax asset                                                                       |  |      | 72,521    |   |      |   | 49,000    |  
|Stock-based compensation                                                                 |  |      | 14,027    |   |      |   |          |  
|Increase (decrease) in cash attributable to changes in operating assets and liabilities: |  |      |           |   |      |   |           |  
|Accounts receivable  trade, net                                                         |  |      | 407,320   |   |      |   | 189,668   |  
|Inventories                                                                              |  |      | (598,101  | ) |      |   | (496,652  | )
|Other current assets                                                                     |  |      | 20,228    |   |      |   | 106,695   |  
|Accounts payable  trade                                                                 |  |      | 144,599   |   |      |   | (274,402  | )
|Accrued expenses                                                                         |  |      | (103,769  | ) |      |   | 114,620   |  
|Income taxes payable                                                                     |  |      | 178,516   |   |      |   | 256,575   |  
|Accrued environmental costs                                                              |  |      |          |   |      |   | (76,476   | )
|                                                                                         |  |      |           |   |      |   |           |  
|Net Cash Provided by Operating Activities                                                |  |      | 1,432,675 |   |      |   | 596,851   |  
|                                                                                         |  |      |           |   |      |   |           |  
|Cash Flows from Investing Activities:                                                    |  |      |           |   |      |   |           |  
|Purchases of property and equipment                                                      |  |      | (778,305  | ) |      |   | (246,713  | )
|                                                                                         |  |      |           |   |      |   |           |  
|Net Cash (Used in) Investing Activities                                                  |  |      | (778,305  | ) |      |   | (246,713  | )
|                                                                                         |  |      |           |   |      |   |           |  
|Cash Flows from Financing Activities:                                                    |  |      |           |   |      |   |           |  
|Repayment of obligations under capital leases                                            |  |      | (55,392   | ) |      |   | (37,689   | )
|Repayment of line of credit                                                              |  |      | (54,810   | ) |      |   |          |  
|Proceeds from exercise of stock options                                                  |  |      | 3,543     |   |      |   |          |  
|                                                                                         |  |      |           |   |      |   |           |  
|Net Cash (Used in) Financing Activities                                                  |  |      | (106,659  | ) |      |   | (37,689   | )
|                                                                                         |  |      |           |   |      |   |           |  
|Effect of foreign currency translation                                                   |  |      | 30,145    |   |      |   |          |  
|                                                                                         |  |      |           |   |      |   |           |  
|Increase in cash and cash equivalents                                                    |  |      | 577,856   |   |      |   | 312,449   |  
|Cash and cash equivalents beginning of year                                              |  |      | 3,295,947 |   |      |   | 3,409,552 |  
|                                                                                         |  |      |           |   |      |   |           |  
|Cash and cash equivalents end of period                                                  |  | $    | 3,873,803 |   |      | $ | 3,722,001 |  
|                                                                                         |  |      |           |   |      |   |           |  
|Supplemental Disclosure of Cash Flow Information                                         |  |      |           |   |      |   |           |  
|Cash paid during the period for:                                                         |  |      |           |   |      |   |           |  
|Income taxes                                                                             |  | $    | 466,050   |   |      | $ |          |  
|Interest                                                                                 |  | $    | 44,299    |   |      | $ | 45,344    |  
|                                                                                         |  |     
|Supplemental Schedule of Non-cash Investing and Financing Activities:                    |  |      |           |   |      |   |           |  
|Equipment acquired under capital leases                                                  |  | $    | 67,241    |   |      | $ |          |  

The accompanying notes are an integral part of these interim consolidated financial statements.



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##### Table of Contents

Kreisler Manufacturing Corporation and Subsidiaries

Notes to the Interim Consolidated Financial Statements

(Unaudited)

1. Principles of Consolidation

The interim consolidated financial statements include the accounts of Kreisler Manufacturing Corporation (the Company) and its wholly-owned
subsidiaries, Kreisler Industrial Corporation (Kreisler Industrial) and Kreisler Polska Sp. z o.o (Kreisler Polska), after the elimination of inter-company transactions and accounts. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the interim consolidated financial statements and accompanying notes. Actual
results could differ from those estimates. In the opinion of management, all adjustments necessary for a fair presentation of such interim consolidated financial statements have been included. Interim results are not necessarily indicative of
results for a full year.

The interim consolidated financial statements and notes are presented as required by SEC Regulation S-B, and do
not contain certain information included in the Companys annual consolidated financial statements and notes. Accordingly, these statements should be read in conjunction with the consolidated financial statements and notes thereto appearing in
the Annual Report on Form 10-KSB of the Company for the fiscal year ended June 30, 2006.

2. Recently Issued Accounting Pronouncements

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes.
FIN 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 48 prescribes a recognition threshold and
measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact on its financial statements of FIN 48 upon adoption effective in fiscal year
2008.

3. Contingencies

Certain
federal and state laws authorize the United States Environmental Protection Agency (EPA) to issue orders and bring enforcement actions to compel responsible parties to take investigative and remedial actions at any site that is
determined to present an imminent and substantial danger to the public or the environment because of an actual or threatened release of one or more hazardous substances.

These statutory provisions impose joint and several responsibility without regard to fault on all responsible parties, including the generators of the hazardous substances, for certain investigative and remedial costs
at sites where substances that are classified as hazardous are or were produced or handled. The Company generally provides for the disposal or processing of such substances through licensed, independent contractors.

In July 1999, the Company became aware of historical releases of hazardous substances at its manufacturing facility located at 180 Van Riper Avenue,
Elmwood Park, New Jersey. The Company promptly notified the New Jersey Department of Environmental Protection (NJDEP) as required by the New Jersey Spill Compensation and Control Act (Spill Act), N.J.S.A. 58:10-23.11, and
retained the services of environmental remediation consultants to perform a full site characterization in accordance with the NJDEPs Technical Requirement for Site Remediation, N.J.A.C. 7:26E-1.1. In June 2001, the Company entered into a Fixed
Price Remediation Agreement (FPRA) with Resource Control Corporation (RCC). At December 31, 2006, the remaining cost estimated for remediation of the site under the FPRA with RCC was approximately $408,000 (the present
value at an interest rate of 6.16%, per annum), virtually all of which is expected to be paid by the Company in fiscal 2010, provided that RCC achieves specific regulatory requirements contained in the FPRA. On January 19, 2007, the
Company was informed by RCC that RCC anticipates that the overall project budget will be exceeded by approximately $517,000. The cost of remediation specified in the FPRA is $2,115,122. The



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Company purchased a Remediation Stop Loss insurance policy in 2001 in order to further protect the Company against remediation cost overruns.
The insurance policy provides coverage for cost overruns in excess of $3,002,654 incurred during the term of the insurance policy. The difference between remediation costs of $3,002,654, which are not covered by the insurance
policy, and $2,115,122 under the FPRA represents a self-insured retention amount which is the responsibility of RCC, and not the Company. The Remediation Stop Loss insurance policy expires on July 2, 2007 and it is unlikely that the Company
will continue the policy. However, even in the absence of the Remedial Stop Loss insurance policy and in accordance with the terms of the FPRA, RCC, not the Company, is responsible for any unexpected or unanticipated cost increases in the project.
The Company monitors the project status and is in the process of reviewing the financial and operational capability of RCC to meet RCCs contractual obligations under the FPRA.

In a letter dated February 23, 2006, the Company received a Notice of Assessment Related to Final Audit Determination from the New Jersey Division
of Taxation that Kreisler Industrials Business Tax Returns for the fiscal years ended June 30, 2002 and June 30, 2001 are subject to additional income tax. The amount of the final audit determination totaled $89,591 of which $59,493
is additional income tax expense, $5,503 is for penalties and $24,595 is for interest through March 15, 2006. In accordance with the appropriate New Jersey statutes, the Company protested the final audit determination and requested an informal
administrative conference with the Conference and Appeals Branch. As of February 13, 2007, no informal administrative conference has been scheduled by the Conference and Appeals Branch to meet with the Company. The amount of interest
potentially due is dependent on the final settlement date and is subject to increase.

On December 29, 2006, Kreisler Manufacturing
Corporation (the Company) received a Nasdaq Staff Deficiency Letter (Nasdaq Letter) indicating that, due to the notification by independent director Michael Goldberg that he would not stand for reelection at the Annual
Meeting of Stockholders, the Company no longer complied with Nasdaqs independent director and audit committee requirements for continued listing as set forth in Marketplace Rule 4350. The Nasdaq Letter further stated that consistent with
Marketplace Rules 4350(c)(1) and 4350(d)(4), the Company was provided a cure period until April 20, 2007, in order to regain compliance. In the event that the Company does not regain compliance by April 20, 2007, Nasdaq rules require
Nasdaq Staff to provide written notification to the Company that its securities will be delisted. At that time, the Company may appeal the delisting determination to a Listing Qualifications Panel. The Company is in the process of evaluating
qualified candidates that meet the applicable independence requirements to serve on its board of directors.

On December 1, 2006,
Kreisler Industrial entered into a Collective Bargaining Agreement Extension (First Extension Agreement) with the United Service Employees Union Local 377 RWSDU (Local 377), which represents approximately 87 out of 139
Kreisler Industrial employees, extending the expiration date of the Union Agreement with Local 377 from December 4, 2006 to January 19, 2007. On January 18, 2007, Kreisler Industrial entered into another Collective Bargaining
Agreement Extension (Second Extension Agreement) with Local 377. The Second Extension Agreement extends the expiration date of the Union Agreement to March 31, 2007. All terms and conditions of the Union Agreement remain in full
force and effect during the terms of the First and Second Extension Agreements. If a new collective bargaining agreement is agreed upon during the term of the Second Extension Agreement, any wage agreement shall be retroactive to December 5,
2006. The estimated cost of a retroactive wage agreement for the terms of the First and Second Extension Agreements is approximately $20,000. The Company cannot assure you that Kreisler Industrial and Local 377 will enter into a new collective
bargaining agreement during the term of the Second Extension Agreement. Past negotiations between Kreisler Industrial and Local 377 required three extension agreements prior to successful resolution.



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##### Table of Contents

4. Net Income per Common Share

Basic net income per common share is computed by dividing net income by the weighted-average common shares outstanding. Diluted net income per common share is computed by dividing net income by the weighted-average
common shares outstanding plus shares issuable upon the exercise of employee stock options net of shares assumed purchased with option proceeds.



|                                                      |  |                                |           |                              |   |           |  |      |           |  |   |          
|----------------------------------------------------- |  | ------------------------------ | --------- | ---------------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|(Unaudited)                                           |  | Three Months EndedDecember 31, |           | Six Months EndedDecember 31,
|                                                      |  | 2006                           |           | 2005                         |   | 2006      |  | 2005
|Net income                                            |  | $                              | 607,230   |                              | $ | 289,794   |  | $    | 999,534   |  | $ | 480,420  
|                                                      |  |                                |           |                              |   |           |  |      |           |  |   |          
|Weighted-average shares outstanding                   |  |                                | 1,831,279 |                              |   | 1,826,447 |  |      | 1,830,863 |  |   | 1,826,447
|Dilutive impact of stock options                      |  |                                | 23,058    |                              |   | 19,998    |  |      | 23,630    |  |   | 19,998   
|                                                      |  |                                |           |                              |   |           |  |      |           |  |   |          
|Weighted-average shares outstanding assuming dilution |  |                                | 1,854,337 |                              |   | 1,846,445 |  |      | 1,854,493 |  |   | 1,846,445
|                                                      |  |                                |           |                              |   |           |  |      |           |  |   |          
|Net income per common share:                          |  |                                |           |                              |   |           |  |      |           |  |   |          
|Basic                                                 |  | $                              | 0.33      |                              | $ | 0.16      |  | $    | 0.55      |  | $ | 0.26     
|Diluted                                               |  | $                              | 0.33      |                              | $ | 0.16      |  | $    | 0.54      |  | $ | 0.26     

5. Reclassification

Beginning with the Companys Form 10-QSB for the three and nine months ended March 31, 2006, the Company separated the interest expense from selling, general and administrative expenses. Separating the
interest expense amounts reduces selling, general and administrative expenses for the three months and six months ended December 31, 2005 by a total of $35,358 and $44,299, respectively. This separation has no effect on the income before income
taxes of the Company.



|                                                    |  |                                 |           |                                  |   |         |                                               |  |   |           |  
|--------------------------------------------------- |  | ------------------------------- | --------- | -------------------------------- | - | ------- | --------------------------------------------- |  | - | --------- | -
|Three Months Ended December 31, 2005  (Unaudited)   |  | Three MonthsEnded Dec. 31, 2005 |           | Interest Expenseincluded in SG&A |   |         | Three MonthsEnded Dec. 31, 2005(Reclassified) | 
|Net sales                                           |  | $                               | 4,427,267 |                                  | $ |        |                                               |  | $ | 4,427,267 |  
|Cost of goods sold                                  |  |                                 | 3,653,883 |                                  |   |        |                                               |  |   | 3,653,883 |  
|Selling, general and administrative expenses (SG&A) |  |                                 | 337,222   |                                  |   | (35,358 | )                                             |  |   | 301,864   |  
|                                                    |  |                                 |           |                                  |   |         |                                               |  |   |           |  
|Total costs and expenses                            |  |                                 | 3,991,105 |                                  |   | (35,358 | )                                             |  |   | 3,955,747 |  
|                                                    |  |                                 |           |                                  |   |         |                                               |  |   |           |  
|Income from operations                              |  |                                 | 436,162   |                                  |   |        |                                               |  |   | 471,520   |  
|                                                    |  |                                 |          
|Interest and other income                           |  |                                 | 29,607    |                                  |   |        |                                               |  |   | 29,607    |  
|Interest and other expenses                         |  |                                 |          |                                  |   | (35,358 | )                                             |  |   | (35,358   | )
|                                                    |  |                                 |           |                                  |   |         |                                               |  |   |           |  
|Total interest and other income and expense         |  |                                 | 29,607    |                                  |   | (35,358 | )                                             |  |   | (5,751    | )
|                                                    |  |                                 |           |                                  |   |         |                                               |  |   |           |  
|Income before income taxes                          |  | $                               | 465,769   |                                  | $ |        |                                               |  | $ | 465,769   |  
|                                                    |  |                                 |           |                                  |   |         |                                               |  |   |           |  



|                                                    |  |                               |           |                                  |   |         |                                             |  |   |           |  
|--------------------------------------------------- |  | ----------------------------- | --------- | -------------------------------- | - | ------- | ------------------------------------------- |  | - | --------- | -
|Six Months Ended December 31, 2005  (Unaudited)     |  | Six MonthsEnded Dec. 31, 2005 |           | Interest Expenseincluded in SG&A |   |         | Six MonthsEnded Dec. 31, 2005(Reclassified) | 
|Net sales                                           |  | $                             | 8,556,507 |                                  | $ |        |                                             |  | $ | 8,556,507 |  
|                                                    |  |                               |          
|Cost of goods sold                                  |  |                               | 7,205,415 |                                  |   |        |                                             |  |   | 7,205,415 |  
|Selling, general and administrative expenses (SG&A) |  |                               | 620,387   |                                  |   | (44,299 | )                                           |  |   | 576,088   |  
|                                                    |  |                               |           |                                  |   |         |                                             |  |   |           |  
|Total costs and expenses                            |  |                               | 7,825,802 |                                  |   | (44,299 | )                                           |  |   | 7,781,503 |  
|                                                    |  |                               |           |                                  |   |         |                                             |  |   |           |  
|Income from operations                              |  |                               | 730,705   |                                  |   |        |                                             |  |   | 775,004   |  
|                                                    |  |                               |          
|Interest and other income                           |  |                               | 55,290    |                                  |   |        |                                             |  |   | 55,290    |  
|Interest and other expenses                         |  |                               |          |                                  |   | (44,299 | )                                           |  |   | (44,299   | )
|                                                    |  |                               |           |                                  |   |         |                                             |  |   |           |  
|Total interest and other income and expense         |  |                               | 55,290    |                                  |   | (44,299 | )                                           |  |   | 10,991    |  
|                                                    |  |                               |           |                                  |   |         |                                             |  |   |           |  
|Income before income taxes                          |  | $                             | 785,995   |                                  | $ |        |                                             |  | $ | 785,995   |  
|                                                    |  |                               |           |                                  |   |         |                                             |  |   |           |  



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##### Table of Contents

6. Segment Information

The Company manages its business based principally upon geographic areas. The Company evaluates performance and allocates resources based on revenues, operating income (loss) and net assets employed. Net sales are
attributed to geographic areas based on the location of the assets producing the revenues.

Geographic information regarding the
Companys net sales and long-lived assets for the three months ended December 31 2006 and 2005 is as follows:

Selected Financial Results by
Geographic Segment (unaudited)



|                                        |  |               |            |   |        |   |           |       |  |   |            |  
|--------------------------------------- |  | ------------- | ---------- | - | ------ | - | --------- | ----- |  | - | ---------- | -
|Three Months Ended December 31, 2006    |  | United States |            |   | Poland |   |           | Total | 
|Sales to unaffiliated customers         |  | $             | 6,004,472  |   |        | $ | 10,859    |       |  | $ | 6,015,331  |  
|                                        |  |               |           
|Income (loss) from operations           |  |               | 1,101,867  |   |        |   | (81,025   | )     |  |   | 1,020,842  |  
|Interest and other income               |  |               | 34,349     |   |        |   | 2,965     |       |  |   | 37,314     |  
|                                        |  |               |           
|Interest and other expense              |  |               | (6,082     | ) |        |   | (11,844   | )     |  |   | (17,926    | )
|                                        |  |               |            |   |        |   |           |       |  |   |            |  
|Income (loss) before income tax expense |  | $             | 1,130,134  |   |        | $ | (89,904   | )     |  | $ | 1,040,230  |  
|                                        |  |               |            |   |        |   |           |       |  |   |            |  
|Segment assets                          |  | $             | 13,073,969 |   |        | $ | 1,161,663 |       |  | $ | 14,235,632 |  
|Depreciation                            |  | $             | 104,839    |   |        | $ | 57,029    |       |  | $ | 161,868    |  



|                                        |  |               |            |   |        |   |         |       |  |   |            |  
|--------------------------------------- |  | ------------- | ---------- | - | ------ | - | ------- | ----- |  | - | ---------- | -
|Three Months Ended December 31, 2005    |  | United States |            |   | Poland |   |         | Total | 
|Sales to unaffiliated customers         |  | $             | 4,423,861  |   |        | $ | 3,406   |       |  | $ | 4,427,267  |  
|Income (loss) from operations           |  |               | 497,448    |   |        |   | (25,928 | )     |  |   | 471,520    |  
|Interest and other income               |  |               | 28,772     |   |        |   | 835     |       |  |   | 29,607     |  
|Interest and other expense              |  |               | (35,358    | ) |        |   | 0       |       |  |   | (35,358    | )
|                                        |  |               |            |   |        |   |         |       |  |   |            |  
|Income (loss) before income tax expense |  | $             | 490,862    |   |        | $ | (25,093 | )     |  | $ | 465,769    |  
|                                        |  |               |            |   |        |   |         |       |  |   |            |  
|Segment assets                          |  | $             | 11,632,562 |   |        | $ | 409,407 |       |  | $ | 12,041,969 |  
|Depreciation                            |  | $             | 100,026    |   |        | $ | 51,541  |       |  | $ | 151,567    |  



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##### Table of Contents

Geographic information regarding the Companys net sales and long-lived assets for the six months
ended December 31 2006 and 2005 is as follows:



|                                        |  |               |            |   |        |   |           |       |  |   |            |  
|--------------------------------------- |  | ------------- | ---------- | - | ------ | - | --------- | ----- |  | - | ---------- | -
|Six Months Ended December 31, 2006      |  | United States |            |   | Poland |   |           | Total | 
|Sales to unaffiliated customers         |  | $             | 11,082,259 |   |        | $ | 16,057    |       |  | $ | 11,098,316 |  
|                                        |  |               |           
|Income (loss) from operations           |  |               | 1,742,429  |   |        |   | (101,833  | )     |  |   | 1,640,596  |  
|Interest and other income               |  |               | 81,525     |   |        |   | 3,898     |       |  |   | 85,423     |  
|Interest and other expense              |  |               | (19,641    | ) |        |   | (11,844   | )     |  |   | (31,485    | )
|                                        |  |               |            |   |        |   |           |       |  |   |            |  
|Income (loss) before income tax expense |  | $             | 1,804,313  |   |        | $ | (109,779  | )     |  | $ | 1,694,534  |  
|                                        |  |               |            |   |        |   |           |       |  |   |            |  
|Segment assets                          |  | $             | 13,073,969 |   |        | $ | 1,161,663 |       |  | $ | 14,235,632 |  
|Depreciation                            |  | $             | 209,854    |   |        | $ | 87,946    |       |  | $ | 297,800    |  



|                                        |  |               |            |   |        |   |          |       |  |   |            |  
|--------------------------------------- |  | ------------- | ---------- | - | ------ | - | -------- | ----- |  | - | ---------- | -
|                                        |  |               |           
|Six Months Ended December 31, 2005      |  | United States |            |   | Poland |   |          | Total | 
|Sales to unaffiliated customers         |  | $             | 8,552,120  |   |        | $ | 4,387    |       |  | $ | 8,556,507  |  
|                                        |  |               |           
|Income (loss) from operations           |  |               | 877,009    |   |        |   | (102,005 | )     |  |   | 775,004    |  
|                                        |  |               |           
|Interest and other income               |  |               | 54,394     |   |        |   | 896      |       |  |   | 55,290     |  
|Interest and other expense              |  |               | (44,299    | ) |        |   | 0        |       |  |   | (44,299    | )
|                                        |  |               |            |   |        |   |          |       |  |   |            |  
|Income (loss) before income tax expense |  | $             | 887,104    |   |        | $ | (101,109 | )     |  | $ | 785,995    |  
|                                        |  |               |            |   |        |   |          |       |  |   |            |  
|Segment assets                          |  | $             | 11,632,562 |   |        | $ | 409,407  |       |  | $ | 12,041,969 |  
|Depreciation                            |  | $             | 190,767    |   |        | $ | 56,636   |       |  | $ | 247,403    |  

7. Facility Lease Agreement

Effective July 11, 2006, Kreisler Manufacturing Corporation and Kreisler Industrial Corporation (collectively, the Tenants) entered into the Extension to Lease Agreement (the Lease Extension
Agreement) with T & T Investment Company (the Landlord) with respect to the 52,000 sq. ft. facility located at 180 Van Riper Avenue, Elmwood Park, New Jersey from which the Tenants operate. The current Agreement of Lease (the
Lease Agreement) for this facility expired on September 30, 2006. The Lease Extension Agreement extended the Lease Agreement through September 30, 2012 with generally the same terms and conditions as set forth in the Lease
Agreement. Pursuant to the Lease Extension Agreement, the total rent due by the Tenants to the Landlord starting on October 1, 2006 was $1,872,000, which is payable as follows: years 1 and 2 - $286,000 per year, years 3 and 4 -
$312,000 per year and years 5 and 6 - $338,000 per year. The yearly rent amount is paid in equal monthly increments.



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##### Table of Contents

Item 2 Managements Discussion and Analysis or Plan of Operation

Overview

Kreisler Manufacturing Corporation (the Company; the use of we, us or our in this Form 10-QSB also refers
to the Company) is a Delaware business corporation which was incorporated on December 13, 1968. The Company succeeded a New Jersey business corporation, which was incorporated in 1940, which succeeded a New York corporation which was
incorporated in 1930. The Company operates two wholly-owned subsidiaries: Kreisler Industrial Corporation (Kreisler Industrial), which was incorporated in New Jersey on July 3, 1956, and Kreisler Polska Sp. z o.o (Kreisler
Polska), which was incorporated in Krakow, Poland in March 2005.

Kreisler Industrials products primarily include tube and
manifold assemblies of multiple sizes and configurations and are typically manufactured in accordance with customer designs and specifications. Kreisler Polska primarily provides machined components to Kreisler Industrial. We manufacture precision
metal components and assemblies primarily for use in military and commercial aircraft engines and in industrial gas turbines. Our products include tube assemblies of multiple sizes and configurations as well as machined components. Assemblies may be
made of various materials, including titanium, nickel and stainless steel. These high quality engineered tube assemblies transfer fuel, oil, water, air and hydraulic fluids.

The Companys sales for the three and six months ended December 31, 2006 were $6,015,000 and $11,098,000, respectively, compared to our sales
for the three and six months ended December 31, 2005 of $4,427,000 and $8,557,000, respectively. The sales increases of $1,588,000, or 36%, for the three months ended December 31, 2006 and $2,541,000, or 30%, for the six months ended
December 31, 2006 are attributable to increased market demand for components used in commercial and military aircraft engines and industrial gas turbine applications:



|                                            |  |              |           |            |   |           
|------------------------------------------- |  | ------------ | --------- | ---------- | - | ----------
|                                            |  | Three Months |           | Six Months
|Net Sales  Period Ended December 31, 2005  |  | $            | 4,427,000 |            | $ | 8,557,000 
|Net Sales Increase by Industry Market Area: |  |              |           |            |   |           
|Commercial                                  |  |              | 575,000   |            |   | 1,151,000 
|Military1                                   |  |              | 822,000   |            |   | 828,000   
|Industrial Gas Turbine                      |  |              | 191,000   |            |   | 562,000   
|                                            |  |              |           |            |   |           
|Total Sales Increase                        |  |              | 1,588,000 |            |   | 2,541,000 
|                                            |  |              |           |            |   |           
|Net Sales  Period Ended December 31, 2006  |  | $            | 6,015,000 |            | $ | 11,098,000
|                                            |  |              |           |            |   |           

---

|1 | The military market area includes the sale of components used in military applications to both the U.S
Government and to non-governmental defense contractors.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

Our increased sales of commercial aircraft engine components is
primarily due to higher demand for certain PW4000 after-market engine components as well as the requirements for the components we manufacture for the CF34-8 and CF34-10 aircraft engines which are typically used on 70 to 122 seat regional jet
aircraft.

Spare parts sales to the U.S. Government combined with the sales of components used on the F119 (used on the F-22 Raptor) and
F135 (used on the F-35 Lightening II also known as the Joint Strike Fighter) military aircraft engines represented 85% of our military market area sales for the six months ended December 31, 2006 compared to 81% of our military market area
sales for the six months ended December 31, 2005. Spare part sales to the U.S. Government are lower than the previous year but are expected to increase as we commence deliveries against new U.S. Government sales orders beginning in fiscal 2008.
Our sales of F135 military aircraft engine components will fluctuate due to the development status of this program. According to The Wall Street Journal (January 17, 2007), the outlook for military-related programs such as the F-22 and F-35
is positive for 2007 and this trend is expected to continue through 2008. All military programs are subject to Congressional funding authorizations which may alter the amount or timing of available funding.

Our sales increase of components used in industrial gas turbines is attributable to higher demand for components used in aero-derivative and large
industrial gas turbines.



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##### Table of Contents

In December 2006, Kreisler Polska received its initial significant sales orders from an unaffiliated
customer. These orders totaled approximately $500,000. As a result of this increased demand and our globalization strategy, we provided $583,000 to Kreisler Polska during the first six months of fiscal 2007 as part of a planned investment in capital
equipment of approximately $1,000,000. We expect to recover a portion of the cost of this investment under an Additional Project Funding Contract (APFC) between Kreisler Polska and the Polish Enterprise Development Agency
(PEDA). The APFC allows Kreisler Polska to receive additional funding from the PEDA based on anticipated capital expenditures. We expect the program to contribute 40% or a maximum of 1.2 million Polish zloty (approximately $412,000
at the exchange rate as of December 31, 2006) of the total qualified capital expenditure cost of 3.0 million Polish zloty (approximately $1,030,000 at the exchange rate as of December 31, 2006).

Kreisler Polskas operating loss and loss before income taxes for the six months ended December 31, 2006 totaled $102,000 and $110,000,
respectively. These losses are attributable to Kreisler Polskas current role as a cost center providing components to Kreisler Industrial. With the receipt of over $500,000 in direct orders during December 2006, the transition of Kreisler
Polska to an operations center providing components to unaffiliated customers as well has begun. We have also benefited from cost savings due to the lower cost of components provided by Kreisler Polska to Kreisler Industrial relative to those
typically procured from U.S. domestic suppliers.

We have experienced increased lead-times and costs for nickel and titanium-based raw
materials. We have been able to limit any supply chain disruptions through improved transparency in our quoted lead-times as well as increased forward planning for long lead-time raw materials. We have also been able to pass through to our customers
most cost increases attributable to specific raw materials and specialty components.

Our working capital needs have grown as our sales
have increased. Specifically, our inventory increased approximately $598,000, or 18%, since June 30, 2006. The majority of the inventory increase is attributable to the detail components needed for the manufacture of F119 and F135 engine
components in addition to detail components and raw materials used to support other programs. Our inventory levels are also affected by a limited ability to control the delivery of components provided by the manufacturers of proprietary machined
components and castings and, as a result, contribute to our increase in inventory.

Our total working capital at December 31, 2006 was
$10,215,000, an increase of $554,000, or 6%, compared to our working capital at June 30, 2006 of $9,661,000. This increase is attributable to higher cash on-hand and reduced receivables partially offset by increased inventories. With the
addition of $67,000 of capital equipment and payment of $55,000, our obligations under capital leases increased $12,000 ($10,000 current/$2,000 long-term) at December 31, 2006 as compared to June 30, 2006.

Our growth opportunities are potentially limited by our historical reliance on a few significant customers. Our largest customer has established
manufacturing operations outside the United States that provide similar and, in some cases, greater capabilities than we offer. We expect this customer to consider transferring components manufactured by us to these operations. We will seek to
accommodate our customers needs through our Kreisler Polska subsidiary or through lower costs achieved through cost reduction initiatives at Kreisler Industrial.



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##### Table of Contents

Results of Operations

Three Months Ended December 31, 2006 Compared to Three Months ended December 31, 2005

Sales

Sales increased $1,588,000, or 36%, to $6,015,000 for the three months ended December 31, 2006 compared with sales of $4,427,000 for the three months
ended December 31, 2005. Our sales and sales changes by industry market area are as follows:



|                       |  |       |           |      |                  |           |  |          |           |  |      |   |  |      |   |  |     |  
|---------------------- |  | ----- | --------- | ---- | ---------------- | --------- |  | -------- | --------- |  | ---- | - |  | ---- | - |  | --- | -
|Industry Market Area   |  | Sales |           |      | Percent of Sales |          
|                       |  | 2006  |           | 2005 |                  | $ Change  |  | % Change |           |  | 2006 |   |  | 2005 |  
|Commercial             |  | $     | 2,346,000 |      | $                | 1,771,000 |  | $        | 575,000   |  | 32   | % |  | 39   | % |  | 40  | %
|Military               |  |       | 2,947,000 |      |                  | 2,125,000 |  |          | 822,000   |  | 39   | % |  | 49   | % |  | 48  | %
|Industrial Gas Turbine |  |       | 722,000   |      |                  | 531,000   |  |          | 191,000   |  | 36   | % |  | 12   | % |  | 12  | %
|                       |  |       |           |      |                  |           |  |          |           |  |      |   |  |      |   |  |     |  
|Total                  |  | $     | 6,015,000 |      | $                | 4,427,000 |  | $        | 1,588,000 |  | 36   | % |  | 100  | % |  | 100 | %
|                       |  |       |           |      |                  |           |  |          |           |  |      |   |  |      |   |  |     |  

Our commercial aircraft engine sales of $2,346,000 for the three months ended December 31,
2006 increased $575,000, or 32%, compared to our sales for the three months ended December 31, 2005. Our sales growth continues to be primarily attributable to an increased need for spare part components used in thrust reverser actuation
systems and in the PW4000 aircraft engine as well as increased customer requirements for CF34 aircraft engine components. These increases were partially offset by reduced requirements for the GP7000 engine which is used on the Airbus A380 aircraft.

Our sales of components used in military engine applications totaled $2,947,000 for the three months ended December 31, 2006 were
$822,000 higher, or 39%, compared to our sales of $2,125,000 for the three months ended December 31, 2005. We experienced increased sales of components for the F119 and F135 aircraft engines as well as sales of spare parts to the U.S
Government.

For the three months ended December 31, 2006, our sale of products to the industrial gas turbine industry rose to
$722,000 compared to sales of $531,000 for the three months ended December 31, 2005. This $191,000, or 36%, increase is primarily attributable to the demand for components used in the aero-derivative and large industrial gas turbines.

Cost of Goods Sold

Cost of
goods sold for the three months ended December 31, 2006 was 75% of revenues, or $4,513,000, compared to 83% of revenues, or $3,654,000, for three months ended December 31, 2005.

The Companys cost of goods sold and gross margins are as follows:



|                            |  |               |           |   |               |   |           |          |  |          |           |  |    |  
|--------------------------- |  | ------------- | --------- | - | ------------- | - | --------- | -------- |  | -------- | --------- |  | -- | -
|                            |  | Dec. 31, 2006 |           |   | Dec. 31, 2005 |   |           | $ Change |  | % Change |          
|Sales                       |  | $             | 6,015,000 |   |               | $ | 4,427,000 |          |  | $        | 1,588,000 |  | 36 | %
|                            |  |               |           |  
|Cost of goods sold (COGS) |  |               | 4,513,000 |   |               |   | 3,654,000 |          |  |          | 859,000   |  | 24 | %
|COGS percentage of sales    |  |               | 75        | % |               |   | 83        | %        |  |          |          |  |   |  
|                            |  |               |           |  
|Gross margin                |  | $             | 1,502,000 |   |               | $ | 773,000   |          |  | $        | 729,000   |  | 94 | %
|Gross margin percent        |  |               | 25        | % |               |   | 17        | %        |  |          |          |  |   |  

Our increase in cost of goods sold is primarily attributable to increased purchased material usage
due to higher sales as well as an increase in employee-related costs and benefits due to an overall increase in the number of employees at Kreisler Industrial and Kreisler Polska. Our improvement in gross margin during fiscal 2006 is attributable to
a year-over-year sales increase of 36% compared to an increase in cost of goods sold of 24%.



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##### Table of Contents

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended December 31, 2006 were 8.0% of sales, or $482,000, compared to 6.8% of sales,
or $302,000, for the three months ended December 31, 2005. Selling, general and administrative expenses for three months ended December 31, 2006 increased $180,000, or 60%, compared to the three months ended December 31, 2005.



|                                                      |  |               |           |   |               |   |           |          |  |          |           |  |    |  
|----------------------------------------------------- |  | ------------- | --------- | - | ------------- | - | --------- | -------- |  | -------- | --------- |  | -- | -
|                                                      |  | Dec. 31, 2006 |           |   | Dec. 31, 2005 |   |           | $ Change |  | % Change |          
|Sales                                                 |  | $             | 6,015,000 |   |               | $ | 4,427,000 |          |  | $        | 1,588,000 |  | 36 | %
|                                                      |  |               |           |  
|Selling, general and administrative expenses (SG&A) |  |               | 482,000   |   |               |   | 302,000   |          |  |          | 180,000   |  | 60 | %
|SG&A percentage of sales                              |  |               | 8.0       | % |               |   | 6.8       | %        |  |          |          |  |   |  

Our increase in selling, general and administrative expenses is primarily the result of higher
employee-related costs and benefits at Kreisler Industrial and Kreisler Polska, legal fees, compensation costs of $14,000 due to the expensing of stock options in accordance with the requirements of SFAS 123(R) and higher sales and marketing costs
due to the Companys upcoming participation in the Paris Air Show in June 2007. These cost increases were partially offset by lower accounting-related fees.

Income, Interest Expense and Taxes



|                           |  |              |           |   |               |   |           |          |  |   |           |   |  |     |  
|-------------------------- |  | ------------ | --------- | - | ------------- | - | --------- | -------- |  | - | --------- | - |  | --- | -
|                           |  | Dec 31, 2006 |           |   | Dec. 31, 2005 |   |           | $ Change |  |   | % Change  |  
|Sales                      |  | $            | 6,015,000 |   |               | $ | 4,427,000 |          |  | $ | 1,588,000 |   |  | 36  | %
|Total costs and expenses   |  |              | 4,994,000 |   |               |   | 3,956,000 |          |  |   | 1,038,000 |   |  | 26  | %
|                           |  |              |           |   |               |   |           |          |  |   |           |   |  |     |  
|Income from operations     |  |              | 1,021,000 |   |               |   | 471,000   |          |  |   | 550,000   |   |  | 117 | %
|                           |  |              |           |  
|Interest & other income    |  |              | 37,000    |   |               |   | 30,000    |          |  |   | 7,000     |   |  | 23  | %
|Interest & other expense   |  |              | (18,000   | ) |               |   | (35,000   | )        |  |   | 17,000    |   |  | -49 | %
|                           |  |              |           |   |               |   |           |          |  |   |           |   |  |     |  
|Income before income taxes |  |              | 1,040,000 |   |               |   | 466,000   |          |  |   | 574,000   |   |  | 123 | %
|                           |  |              |           |  
|Income tax expense         |  |              | (433,000  | ) |               |   | (176,000  | )        |  |   | (257,000  | ) |  | 146 | %
|                           |  |              |           |   |               |   |           |          |  |   |           |   |  |     |  
|Net income                 |  | $            | 607,000   |   |               | $ | 290,000   |          |  | $ | 317,000   |   |  | 109 | %
|                           |  |              |           |   |               |   |           |          |  |   |           |   |  |     |  

Net income for the three months ended December 31, 2006 was $607,000, an increase of
$317,000, or 109%, compared to net income for the three months ended December 31, 2005 of $290,000.

The income from operations for
the three months ended December 31, 2006 was $1,021,000, an increase of $550,000, or 117%, compared to $471,000 for the three months ended December 31, 2005.

Interest and other income of $37,000 for the three months ended December 31, 2006 was $7,000 higher, or 23%, compared to the three months ended December 31, 2005 and was primarily attributable to higher
interest rates. Interest and other expense of $18,000 for the three months ended December 31, 2006 was $17,000 lower, or 49%, compared to the three months ended December 31, 2005 and was primarily attributable to accrued interest expense
attributable to the Notice of Assessment Related to Final Audit Determination from the New Jersey Division of Taxation.

Income before
income taxes for the three months ended December 31, 2006 of $1,040,000 was $574,000 higher, or 123%, compared to income before income taxes for the three months ended December 31, 2005 of $466,000.



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##### Table of Contents

Income tax expense for the three months ended December 31, 2006 of $433,000 was $257,000 higher, or
146%, compared to income tax expense for the three months ended December 31, 2005 of $176,000.

Six Months Ended December 31, 2006 Compared
to Six Months ended December 31, 2005

Sales

Sales increased $2,541,000, or 30%, to $11,098,000 for the six months ended December 31, 2006 compared with sales of $8,557,000 for the six months ended December 31, 2005. Our sales and sales changes by
industry market area are as follows:



|                       |      |       |            |  |                  |           |          |   |           |      |    |   |      |     |   |  |     |  
|---------------------- | ---- | ----- | ---------- |  | ---------------- | --------- | -------- | - | --------- | ---- | -- | - | ---- | --- | - |  | --- | -
|Industry Market Area   |      | Sales |            |  | Percent of Sales |          
|                       | 2006 |       | 2005       |  | $ Change         |           | % Change |   |           | 2006 |    |   | 2005 |    
|Commercial             |      | $     | 4,532,000  |  | $                | 3,381,000 |          | $ | 1,151,000 |      | 34 | % |      | 41  | % |  | 39  | %
|Military               |      |       | 5,184,000  |  |                  | 4,356,000 |          |   | 828,000   |      | 19 | % |      | 47  | % |  | 51  | %
|Industrial Gas Turbine |      |       | 1,382,000  |  |                  | 820,000   |          |   | 562,000   |      | 69 | % |      | 12  | % |  | 10  | %
|                       |      |       |            |  |                  |           |          |   |           |      |    |   |      |     |   |  |     |  
|Total                  |      | $     | 11,098,000 |  | $                | 8,557,000 |          | $ | 2,541,000 |      | 30 | % |      | 100 | % |  | 100 | %
|                       |      |       |            |  |                  |           |          |   |           |      |    |   |      |     |   |  |     |  

Our commercial aircraft engine sales of $4,532,000 for the six months ended December 31, 2006
increased $1,151,000, or 34%, compared to our sales for the six months ended December 31, 2005. Our sales growth is primarily attributable to an increased need for spare part components used in thrust reverser actuation systems and in the
PW4000 aircraft engine as well as increased customer requirements for CF34 aircraft engine components.

Our sales of components used in
military engine applications totaled $5,184,000 for the six months ended December 31, 2006 compared to our sales of $4,356,000 for the six months ended December 31, 2005, an increase of $828,000 or 19%. We experienced increased sales of
components for the F119 and F135 aircraft engines which were partially offset by a decline in the sale of spare parts to the U.S Government.

For the six months ended December 31, 2006, our sale of products to the industrial gas turbine industry rose to $1,382,000 compared to sales of $820,000 for the six months ended December 31, 2005. This $562,000, or 69%, increase
is primarily attributable to the demand for after-market components used in the Siemens 501F turbine generator as well as increased demand for GG-8 industrial gas turbine components.

Cost of Goods Sold

Cost of goods sold for the six months ended December 31, 2006 was
78.2% of revenues, or $8,677,000, compared to 84.2% of revenues, or $7,205,000, for six months ended December 31, 2005.

The
Companys cost of goods sold and gross margin are as follows:



|                            |  |               |            |   |               |   |           |          |  |          |           |  |    |  
|--------------------------- |  | ------------- | ---------- | - | ------------- | - | --------- | -------- |  | -------- | --------- |  | -- | -
|                            |  | Dec. 31, 2006 |            |   | Dec. 31, 2005 |   |           | $ Change |  | % Change |          
|Sales                       |  | $             | 11,098,000 |   |               | $ | 8,557,000 |          |  | $        | 2,541,000 |  | 30 | %
|                            |  |               |            |  
|Cost of goods sold (COGS) |  |               | 8,677,000  |   |               |   | 7,205,000 |          |  |          | 1,472,000 |  | 20 | %
|COGS percentage of sales    |  |               | 78.2       | % |               |   | 84.2      | %        |  |          |          |  |   |  
|                            |  |               |            |  
|Gross margin                |  | $             | 2,421,000  |   |               | $ | 1,352,000 |          |  | $        | 1,069,000 |  | 79 | %
|Gross margin percent        |  |               | 21.8       | % |               |   | 15.8      | %        |  |          |          |  |   |  

Our increase in cost of goods sold is primarily attributable to increased purchased material usage
due to higher sales as well as an increase in employee-related costs and benefits due to an overall increase in the number of employees at Kreisler Industrial and Kreisler Polska. Our improvement in gross margin during fiscal 2007 is attributable to
a year-over-year sales increase of 30% partially offset by an increase of 20% in cost of goods sold.



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Selling, General and Administrative Expenses

Selling, general and administrative expenses for the six months ended December 31, 2006 were $780,000, or 7.0% of sales, compared to $576,000, or
6.7% of sales, for the six months ended December 31, 2005 resulting is an increase of $204,000 or 35%.



|                                                      |  |               |            |   |               |   |           |          |  |          |           |  |    |  
|----------------------------------------------------- |  | ------------- | ---------- | - | ------------- | - | --------- | -------- |  | -------- | --------- |  | -- | -
|                                                      |  | Dec. 31, 2006 |            |   | Dec. 31, 2005 |   |           | $ Change |  | % Change |          
|Sales                                                 |  | $             | 11,098,000 |   |               | $ | 8,557,000 |          |  | $        | 2,541,000 |  | 30 | %
|                                                      |  |               |            |  
|Selling, general and administrative expenses (SG&A) |  |               | 780,000    |   |               |   | 576,000   |          |  |          | 204,000   |  | 35 | %
|SG&A percentage of sales                              |  |               | 7.0        | % |               |   | 6.7       | %        |  |          |          |  |   |  

Our increase in selling, general and administrative expenses is primarily the result of higher
legal, marketing and employee-related costs and benefits at Kreisler Industrial and Kreisler Polska partially offset by lower accounting-related fees.

Income, Interest Expense and Taxes



|                           |  |              |            |   |               |   |           |          |  |   |           |   |  |     |  
|-------------------------- |  | ------------ | ---------- | - | ------------- | - | --------- | -------- |  | - | --------- | - |  | --- | -
|                           |  | Dec 31, 2006 |            |   | Dec. 31, 2005 |   |           | $ Change |  |   | % Change  |  
|Sales                      |  | $            | 11,098,000 |   |               | $ | 8,557,000 |          |  | $ | 2,541,000 |   |  | 30  | %
|Total costs and expenses   |  |              | 9,457,000  |   |               |   | 7,782,000 |          |  |   | 1,675,000 |   |  | 22  | %
|                           |  |              |            |   |               |   |           |          |  |   |           |   |  |     |  
|Income from operations     |  |              | 1,641,000  |   |               |   | 775,000   |          |  |   | 866,000   |   |  | 112 | %
|                           |  |              |            |  
|Interest & other income    |  |              | 85,000     |   |               |   | 55,000    |          |  |   | 30,000    |   |  | 55  | %
|Interest & other expense   |  |              | (31,000    | ) |               |   | (44,000   | )        |  |   | 13,000    |   |  | 30  | %
|                           |  |              |            |   |               |   |           |          |  |   |           |   |  |     |  
|Income before income taxes |  |              | 1,695,000  |   |               |   | 786,000   |          |  |   | 909,000   |   |  | 116 | %
|                           |  |              |            |  
|Income tax expense         |  |              | (695,000   | ) |               |   | (306,000  | )        |  |   | (389,000  | ) |  | 127 | %
|                           |  |              |            |   |               |   |           |          |  |   |           |   |  |     |  
|Net income                 |  | $            | 1,000,000  |   |               | $ | 480,000   |          |  | $ | 520,000   |   |  | 108 | %
|                           |  |              |            |   |               |   |           |          |  |   |           |   |  |     |  

Net income for the six months ended December 31, 2006 of $1,000,000 was $520,000 higher, or
108%, compared to net income for the six months ended December 31, 2005 of $480,000.

The income from operations for the six months
ended December 31, 2006 was $1,641,000, an increase of $866,000, or 112%, compared to the six months ended December 31, 2005 total of $775,000.

Interest and other income of $85,000 for the six months ended December 31, 2006 was $30,000 higher, or 55%, compared to the six months ended December 31, 2005 and was primarily attributable to higher
interest rates. Interest and other expense of $31,000 for the six months ended December 31, 2006 was $13,000 lower, or 30%, compared to the six months ended December 31, 2005 and was primarily attributable to accrued interest expense
attributable to the Notice of Assessment Related to Final Audit Determination from the New Jersey Division of Taxation.

Income before
income taxes for the six months ended December 31, 2006 of $1,695,000 was $909,000 higher, or 116%, compared to income before income taxes for the six months ended December 31, 2005 of $786,000.



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Income tax expense for the six months ended December 31, 2006 of $695,000 was $389,000 higher, or
127%, compared to income tax expense for the six months ended December 31, 2005 of $306,000.

Backlog

Prior to the three months ended December 31, 2006, our customer orders were received primarily by Kreisler Industrial. Kreisler Polska received its
initial unaffiliated customer orders during the three months ended December 31, 2006 and, as a result, our backlog now includes orders received by Kreisler Polska. Our total backlog as of December 31, 2006 was $23,300,000 compared to
$17,500,000 at December 31, 2005. The backlog increased $5,800,000 or 33%. Backlog as of June 30, 2006 was $20,800,000. Backlog is subject to change with reduced purchase order duration and terminations. Orders that have already been
terminated by a customer are excluded from the backlog even if the amount owed by a customer to us for the termination has not been paid.



|                    |  |              |            |              |   |            |  |          |           |  |    |  
|------------------- |  | ------------ | ---------- | ------------ | - | ---------- |  | -------- | --------- |  | -- | -
|                    |  | Dec 31, 2006 |            | Dec 31, 2005 |   | $ Change   |  | % Change |          
|Kreisler Industrial |  | $            | 22,800,000 |              | $ | 17,500,000 |  | $        | 5,300,000 |  | 30 | %
|Kreisler Polska     |  |              | 500,000    |              |   |           |  |          | 500,000   |  | NA |  
|                    |  |              |            |              |   |            |  |          |           |  |    |  
|Total Backlog       |  | $            | 23,300,000 |              | $ | 17,500,000 |  | $        | 5,800,000 |  | 33 | %
|                    |  |              |            |              |   |            |  |          |           |  |    |  

Liquidity and Capital Resources

During the six months ended December 31, 2006, we relied on our operating cash flow and cash on-hand to fund most capital expenditures and working
capital requirements. We anticipate using operating cash flow, cash on-hand and external financing sources such as bank debt and lines of credit for future capital expenditures and working capital requirements. We also assumed a capital lease to
acquire a piece of capital equipment.

Our cash and cash equivalents at December 31, 2006 of $3,874,000 increased $578,000, or 18%,
compared to cash and cash equivalents of $3,296,000 at June 30, 2006.

Cash provided by operating activities for the six months ended
December 31, 2006 was $1,433,000 compared to $597,000 for the six months ended December 31, 2005. This increase was primarily attributable to increases in our net income, depreciation and amortization, decrease in receivables and an
increase in accounts payable and income taxes payable. These inflows were partially offset by increases in inventories and a decrease in accrued expenses.

Cash used in investing activities for the six months ended December 31, 2006 was $778,000 and was primarily attributable to the purchase of capital equipment. We believe that sufficient liquidity is available
from operating cash flow as well as cash on-hand to cover anticipated capital expenditures of $1,200,000 for the period ending June 30, 2007. Of this $1,200,000, we expect to provide Kreisler Polska with approximately $1,000,000 during fiscal
year 2007 for the purchase of capital equipment. As of December 31, 2006, $583,000 has already been provided to Kreisler Polska. The Additional Project Funding Contract (APFC) between Kreisler Polska and the Polish Enterprise
Development Agency (PEDA) allows Kreisler Polska to receive additional funding from the PEDA based on anticipated capital expenditures. We expect the program to contribute 40% or a maximum of 1.2 million Polish zloty (approximately
$412,000 at the exchange rate as of December 31, 2006) of the total qualified capital expenditure cost of 3.0 million Polish zloty (approximately $1,030,000 at the exchange rate as of December 31, 2006). Under the APFC, Kreisler
Polska expects to receive approximately $412,000 in additional funding from the PEDA approximately six months after we have completely funded the qualified capital expenditures of approximately $1,030,000. As a result, we anticipate that
approximately $412,000 of our capital expenditure cost will be received by Kreisler Polska from the PEDA during calendar year 2007 and this amount will be used by Kreisler Polska to fund either its working capital requirements or to purchase
additional capital equipment. As of December 31, 2006, approximately $441,000 of the $583,000 provided to Kreisler Polska was for qualified capital expenditure in accordance with the APFC.



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Kreisler Polska entered into a Declaration of Blank Bill Issuer (also known as a Bill of Exchange) as
part of the APFC between Kreisler Polska and the PEDA. The Declaration of a Blank Bill Issuer is provided as security for the execution of the APFC and authorizes the PEDA to reclaim its funding portion should Kreisler Polska violate the terms of
the APFC. The primary ongoing contractual requirements under the APFC, include, but are not limited to: (i) providing information on Kreisler Polskas investment program status to various Polish governmental entities and
(ii) maintaining the investment in capital equipment for a period of 5 years from the date Kreisler Polska submits a project completion report to the appropriate Polish government entity. If the total amount of Kreisler Polskas qualified
capital expenditures should be less than 3.0 million Polish zloty (approximately $1,030,000 at the exchange rate as of December 31, 2006), the additional funding from the PEDA would be 40% of the lower qualified capital expenditure amount.
Under certain circumstances, as specified in the APFC, such APFC may be terminated by the PEDA and Kreisler Polska would be obligated to repay any additional funding received from the PEDA and/or will not be eligible to receive additional funding
from the PEDA for a period of 3 years after the termination of the contract.

Should Kreisler Polska be unable to meet the requirements of
the APFC, Kreisler Polska will be obligated to repay the PEDA the total amount of the funding of 1.2 million Polish zloty (approximately $412,000 at exchange rate as of December 31, 2006) plus interest. If Kreisler Polska meets all
requirements set forth in the APFC, the PEDA will return, without interest, the Declaration of a Blank Bill Issuer to Kreisler Polska after a period of 5 years has elapsed from the completion of the Project.

The creation of Kreisler Polska exposes the Company to gains and losses due to fluctuations of a foreign currency. As of December 31, 2006, the
translation adjustment amounted to $22,000. The net effect after adjusting for a tax expense of $9,000 results in an increase in stockholders equity of $13,000.

Cash flows used in financing activities totaled $106,500 for the six months ended December 31, 2006 and consisted of $55,000 for the repayment of obligations under capital leases and $55,000 for the repayment of
a line of credit established by Kreisler Polska as part of the application requirements for the APFC. These items were partially offset by the proceeds from the exercise of stock options totaling $3,500.

Working capital at December 31, 2006 totaled $10,215,000. We believe this level is sufficient to support our working capital needs during the next
12 months. Our long-term liabilities are comprised of obligations under capital leases and accrued environmental expenses totaling $360,000 and $408,000, respectively.

Effective July 11, 2006, we entered into the Extension to Lease Agreement (the Lease Extension Agreement) with T & T Investment Company (the Landlord) with respect to the 52,000 sq.
ft. facility located at 180 Van Riper Avenue, Elmwood Park, New Jersey from which we operate in the United States. Our current Agreement of Lease (the Lease Agreement) for this facility expired on September 30, 2006. The Lease
Extension Agreement extends the Lease Agreement through September 30, 2012 on generally the same terms and conditions as set forth in the Lease Agreement. Pursuant to the Lease Extension Agreement, the total rent due by us to the Landlord
starting on October 1, 2006 is $1,872,000, which is payable as follows: years 1 and 2 - $286,000 per year, years 3 and 4 - $312,000 per year and years 5 and 6 - $338,000 per year. The yearly rent amount is paid in equal monthly
increments.

Recent Developments

On
February 8, 2007, Kreisler Industrial entered into an agreement applicable to a significant customer to participate in a Citibank Payment and Receivable Purchase Service that will reduce payment receipt from 60 days to 10 days at a discount
calculated using the 60 day LIBOR rate plus a spread of 1.25%. As of February 12, 2007, the calculated discount was 0.9167%. For additional information regarding this program, see Part II, Item 5 Other Information of this Form 10-QSB and
Exhibit 10.4 attached to this Form 10-QSB.



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##### Table of Contents

Reclassification

Beginning with the Companys Form 10-QSB for the three and nine months ended March 31, 2006, the Company separated the interest expense from selling, general and administrative expenses. Separating the
interest expense amounts reduces selling, general and administrative expenses for the three months and six months ended December 31, 2005 by a total of $35,358 and $44,299, respectively. This separation has no effect on the income before income
taxes of the Company.



|                                                    |  |                                 |           |                                   |   |         |                                               |  |   |           |  
|--------------------------------------------------- |  | ------------------------------- | --------- | --------------------------------- | - | ------- | --------------------------------------------- |  | - | --------- | -
|Three Months Ended December 31, 2005                |  | Three MonthsEnded Dec. 31, 2005 |           | Interest Expense included in SG&A |   |         | Three MonthsEnded Dec. 31, 2005(Reclassified) | 
|Net Sales                                           |  | $                               | 4,427,267 |                                   | $ |        |                                               |  | $ | 4,427,267 |  
|                                                    |  |                                 |          
|Cost of goods sold                                  |  |                                 | 3,653,883 |                                   |   |        |                                               |  |   | 3,653,883 |  
|Selling, general and administrative expenses (SG&A) |  |                                 | 337,222   |                                   |   | (35,358 | )                                             |  |   | 301,864   |  
|                                                    |  |                                 |           |                                   |   |         |                                               |  |   |           |  
|Total costs and expenses                            |  |                                 | 3,991,105 |                                   |   | (35,358 | )                                             |  |   | 3,955,747 |  
|                                                    |  |                                 |           |                                   |   |         |                                               |  |   |           |  
|Income from operations                              |  |                                 | 436,162   |                                   |   |        |                                               |  |   | 471,520   |  
|                                                    |  |                                 |          
|Interest and other income                           |  |                                 | 29,607    |                                   |   |        |                                               |  |   | 29,607    |  
|Interest and other expenses                         |  |                                 |          |                                   |   | (35,358 | )                                             |  |   | (35,358   | )
|                                                    |  |                                 |           |                                   |   |         |                                               |  |   |           |  
|Total interest and other income and expense         |  |                                 | 29,607    |                                   |   | (35,358 | )                                             |  |   | (5,751    | )
|                                                    |  |                                 |           |                                   |   |         |                                               |  |   |           |  
|Income before income taxes                          |  | $                               | 465,769   |                                   | $ |        |                                               |  | $ | 465,769   |  
|                                                    |  |                                 |           |                                   |   |         |                                               |  |   |           |  
|                                                    |  |                                 |          
|Six Months Ended December 31, 2005                  |  | Six MonthsEnded Dec. 31, 2005   |           | Interest Expenseincluded in SG&A  |   |         | Six Months Ended Dec. 31,
2005(Reclassified)  | 
|Net Sales                                           |  | $                               | 8,556,507 |                                   | $ |        |                                               |  | $ | 8,556,507 |  
|                                                    |  |                                 |          
|Cost of goods sold                                  |  |                                 | 7,205,415 |                                   |   |        |                                               |  |   | 7,205,415 |  
|Selling, general and administrative expenses (SG&A) |  |                                 | 620,387   |                                   |   | (44,299 | )                                             |  |   | 576,088   |  
|                                                    |  |                                 |           |                                   |   |         |                                               |  |   |           |  
|Total costs and expenses                            |  |                                 | 7,825,802 |                                   |   | (44,299 | )                                             |  |   | 7,781,503 |  
|                                                    |  |                                 |           |                                   |   |         |                                               |  |   |           |  
|Income from operations                              |  |                                 | 730,705   |                                   |   |        |                                               |  |   | 775,004   |  
|                                                    |  |                                 |          
|Interest and other income                           |  |                                 | 55,290    |                                   |   |        |                                               |  |   | 55,290    |  
|Interest and other expenses                         |  |                                 |          |                                   |   | (44,299 | )                                             |  |   | (44,299   | )
|                                                    |  |                                 |           |                                   |   |         |                                               |  |   |           |  
|Total interest and other income and expense         |  |                                 | 55,290    |                                   |   | (44,299 | )                                             |  |   | 10,991    |  
|                                                    |  |                                 |           |                                   |   |         |                                               |  |   |           |  
|Income before income taxes                          |  | $                               | 785,995   |                                   | $ |        |                                               |  | $ | 785,995   |  
|                                                    |  |                                 |           |                                   |   |         |                                               |  |   |           |  



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##### Table of Contents

Contingencies

In a letter dated February 23, 2006, the Company received a Notice of Assessment Related to Final Audit Determination from the New Jersey Division of Taxation that Kreisler Industrials Business Tax Returns for the fiscal years
ended June 30, 2002 and June 30, 2001 are subject to additional income tax. The amount of the final audit determination totaled $89,591 of which $59,493 is additional income tax expense, $5,503 is for penalties and $24,595 is for interest
through March 15, 2006. In accordance with the appropriate New Jersey statutes, the Company protested the final audit determination and requested an informal administrative conference with the Conference and Appeals Branch. As of
February 13, 2007, no informal administrative conference has been scheduled by the Conference and Appeals Branch to meet with the Company. The amount of interest potentially due is dependent on the final settlement date and is subject to
increase.

In July 1999, the Company became aware of historical releases of hazardous substances at its manufacturing facility
located at 180 Van Riper Avenue, Elmwood Park, New Jersey. The Company promptly notified the New Jersey Department of Environmental Protection (NJDEP) as required by the New Jersey Spill Compensation and Control Act (Spill
Act), N.J.S.A. 58:10-23.11, and retained the services of environmental remediation consultants to perform a full site characterization in accordance with the NJDEPs Technical Requirement for Site Remediation, N.J.A.C. 7:26E-1.1. In June
2001, the Company entered into a Fixed Price Remediation Agreement (FPRA) with Resource Control Corporation (RCC). At December 31, 2006, the remaining cost estimated for remediation of the site under the FPRA with RCC
was approximately $408,000 (the present value at an interest rate of 6.16%, per annum), virtually all of which is expected to be paid by the Company in fiscal 2010, provided that RCC achieves specific regulatory requirements contained in the
FPRA. On January 19, 2007, the Company was informed by RCC that RCC anticipates that the overall project budget will be exceeded by approximately $517,000. The cost of remediation specified in the FPRA is $2,115,122. The Company
purchased a Remediation Stop Loss insurance policy in 2001 in order to further protect the Company against remediation cost overruns. The insurance policy provides coverage for cost overruns in excess of $3,002,654
incurred during the term of the insurance policy. The difference between remediation costs of $3,002,654, which are not covered by the insurance policy, and $2,115,122 under the FPRA represents a self-insured retention amount which is
the responsibility of RCC, and not the Company. The Remediation Stop Loss insurance policy expires on July 2, 2007 and it is unlikely that the Company will continue the policy. However, even in the absence of the Remedial Stop Loss insurance
policy and in accordance with the terms of the FPRA, RCC, not the Company, is responsible for any unexpected or unanticipated cost increases in the project. The Company monitors the project status and is in the process of reviewing the financial and
operational capability of RCC to meet RCCs contractual obligations under the FPRA.

On December 29, 2006, Kreisler
Manufacturing Corporation (the Company) received a Nasdaq Staff Deficiency Letter (Nasdaq Letter) indicating that, due to the notification by independent director Michael Goldberg that he would not stand for reelection at the
Annual Meeting of Stockholders, the Company no longer complied with Nasdaqs independent director and audit committee requirements for continued listing as set forth in Marketplace Rule 4350. The Nasdaq Letter further stated that consistent
with Marketplace Rules 4350(c)(1) and 4350(d)(4), the Company was provided a cure period until April 20, 2007, in order to regain compliance. In the event that the Company does not regain compliance by April 20, 2007, Nasdaq rules require
Nasdaq Staff to provide written notification to the Company that its securities will be delisted. At that time, the Company may appeal the delisting determination to a Listing Qualifications Panel. The Company is in the process of evaluating
qualified candidates that meet the applicable independence requirements to serve on its board of directors.

On December 1, 2006,
Kreisler Industrial entered into a Collective Bargaining Agreement Extension (First Extension Agreement) with the United Service Employees Union Local 377 RWSDU (Local 377), which represents approximately 87 out of 139
Kreisler Industrial employees, extending the expiration date of the Union Agreement with Local 377 from December 4, 2006 to January 19, 2007. On January 18, 2007, Kreisler Industrial entered into another Collective Bargaining
Agreement Extension (Second Extension Agreement) with Local 377. The Second Extension Agreement extends the expiration date of the Union Agreement to March 31, 2007. All terms and conditions of the Union Agreement remain in full
force and effect during the terms of the First and



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Second Extension Agreements. If a new collective bargaining agreement is agreed upon during the term of the Second Extension Agreement, any wage agreement
shall be retroactive to December 5, 2006. The estimated cost of a retroactive wage agreement for the terms of the First and Second Extension Agreements is approximately $20,000. The Company cannot assure you that Kreisler Industrial and
Local 377 will enter into a new collective bargaining agreement during the term of the Second Extension Agreement. Past negotiations between Kreisler Industrial and Local 377 required three extension agreements prior to successful resolution.

Critical Accounting Policies and Estimates

The Companys critical accounting policies and estimates require significant accounting judgments to be made by management. Note A in the Notes to the Consolidated Financial Statements in the Companys Annual Report on
Form 10-KSB for fiscal year ended June 30, 2006 filed with the SEC provides additional details regarding all of the Companys critical and significant accounting policies.

Principles of Consolidation

The interim consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly-owned. All inter-company transactions and accounts have been eliminated.

Revenue Recognition

Revenue from the sale of products is recognized at the time title and the risks and rewards of
ownership pass. This is typically when the products are shipped per the customers instructions, the sales price is fixed and determinable, and collections are reasonably assured. In those instances in which customer quality and product
acceptance are performed at the customers location, the Company has a high degree of certainty, based on historical performance, that the product will be accepted by the customer. The Companys manufacturing cycle time is typically less
than two weeks.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less at the date of acquisition to be cash equivalents.

Accounts Receivable-Trade

Accounts receivable-trade represents uncollateralized customer obligations due under normal trade
terms generally requiring payment within 30-90 days from the invoice date. Follow-up correspondence is made if unpaid accounts receivable go beyond the invoice due date. Payments of accounts receivable are allocated to the specific invoices
identified on the customers remittance advice.

Accounts receivable-trade are stated at the amount management expects to collect from
outstanding balances. The carrying amounts of accounts receivable is reduced by a valuation allowance that reflects managements best estimate of the amounts that will not be collected. Management individually reviews all accounts receivable
balances that exceed the due date and estimates the portion, if any, of the balance that will not be collected. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its
assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge against sales and a credit to accounts receivable- trade.

Accounts receivable-trade is presented net of an allowance for estimated uncollectible accounts of $20,000 and $10,000 as of
December 31, 2006 and 2005, respectively. The increase of $10,000 is to record charges for approximately $10,000 in accounts receivable that are unlikely to be collected by the Company. The allowance for estimated uncollectible accounts was
$40,000 as of June 30, 2006. A final determination of the status of these uncollectible accounts receivable will be made during fiscal 2007. The Company may adjust the allowance, either up or down, as necessary to adjust for estimated
uncollectible accounts.



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Property, Plant, and Equipment

Property, plant, and equipment are recorded at cost less accumulated depreciation and amortization. Maintenance and repairs are charged to operations as incurred. Asset and related accumulated depreciation amounts are
relieved from the accounts for retirements or dispositions. Depreciation on machinery and equipment is computed using the double-declining method. Estimated useful lives of three to ten years is used for machinery and equipment, while leasehold
improvements are amortized, using the straight line method, over the shorter of either their economic useful lives or the term of the leases.

Property, plant and equipment as of December 31, 2006 are as follows:



|                                       |  |   |            |  
|-------------------------------------- |  | - | ---------- | -
|Property, plant and equipment, at cost |  | $ | 7,567,045  |  
|Less  accumulated depreciation        |  |   | (5,428,420 | )
|                                       |  |   |            |  
|Property, Plant and Equipment, net     |  | $ | 2,138,625  |  
|                                       |  |   |            |  

Foreign Currency Translation

Balance sheet accounts are translated at the exchange rate in effect at each balance sheet date; income accounts are translated at the average rates of exchange prevailing during the period. Gains and losses on
foreign currency translations are reflected in the cumulative translation adjustments component of shareholders equity. The national currency of the foreign company is the functional currency.

Income Taxes

Income tax expense is recognized at
applicable U.S. or international tax rates. Certain revenue and expense items may be recognized in one period for financial statement purposes and in a different period for income tax reporting. The tax effects of such differences are reported as
deferred income taxes.

Essentially all earnings of the Companys foreign subsidiary  Kreisler Polska - are expected to be
reinvested in overseas expansion. Since no foreign earnings currently exist, an incremental U.S. or foreign tax on repatriation of such earnings cannot be estimated.

Net Income Per Common Share

The Company complies with SFAS No. 128, Earnings Per
Share. SFAS No. 128 requires dual presentation of basic and diluted income per common share for all periods presented. Basic income per common share excludes dilution and is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period. Diluted income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then share in the income of the Company. The difference between the number of shares used to compute basic income per common share and diluted income per common share relates to additional
shares to be issued upon the assumed exercise of stock options and warrants, net of shares hypothetically repurchased at the average market price with the proceeds of exercise.

Inventories

Inventories are stated at the lower of cost or market. Raw materials cost is determined
on a first-in, first-out basis. Work in process and finished goods are determined on an average cost basis which is not materially different from the first-in, first-out basis.

At December 31, 2006 and June 30, 2006, inventory consisted of the following:



|                |  |               |           |               |   |          
|--------------- |  | ------------- | --------- | ------------- | - | ---------
|                |  | Dec. 31, 2006 |           | June 30, 2006
|Raw materials   |  | $             | 2,393,100 |               | $ | 1,968,963
|Work in process |  |               | 1,183,659 |               |   | 1,122,269
|Finished goods  |  |               | 274,762   |               |   | 162,188  
|                |  |               |           |               |   |          
|                |  | $             | 3,851,521 |               | $ | 3,253,420
|                |  |               |           |               |   |          



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The Company periodically evaluates inventory to determine the likely future usage of those items in
inventory. As a result, the Company will typically record a charge against inventory that has historical limited usage. The Company also makes judgments as to future demand requirements based upon customer orders in backlog or the propensity of a
customer to order a component from the Company. If such future demand requirements are unlikely, the Company will record a charge against inventory.

Certain Relationships and Related-Party Transactions

On July 1, 2005, the Company and Wallace N. Kelly, Chairman of
the Board of the Company, entered into a letter agreement (the Consulting Agreement) setting forth the terms of the Companys engagement of Mr. Kelly to render technical advisory services to the Company in the areas of process
engineering, product development, strategic planning, customer and marketing support, as directed by the Chief Executive Officer of the Company.

The Company agreed to pay Mr. Kelly $1,000 for each full (eight hours or greater) day that he performs such services during the term of the Consulting Agreement. For days that Mr. Kelly performs services of less than eight hours,
the fee will be based on the fraction of actual hours during which the services were performed to eight hours.

The Company will also
reimburse Mr. Kelly for all reasonable out-of-pocket expenses incurred during the term of the Consulting Agreement, including, but not limited to, Mr. Kellys commute to or from his home residence, living expenses while on site in New
Jersey and certain business travel and entertainment expenses.

The Consulting Agreement became effective on July 1, 2005 and
continues until thirty days following a written termination notice by either party to the Consulting Agreement.

For the six months ended
December 31, 2006, the Company paid Mr. Kelly $79,000 for technical advisory services and reimbursed Mr. Kelly $13,641 for his out-of-pocket expenses.

Change of Independent Registered Public Accounting Firm

On March 20, 2006, the Companys
Audit Committee of the Board of Directors engaged Rothstein, Kass & Company, P.C. to serve as the Companys independent registered public accounting firm for the fiscal year ending June 30, 2006, following the dismissal of
Gregory, Sharer & Stuart, P.A., the Companys prior independent registered public accounting firm. In accordance with SEC regulations, the Company filed Amendment No. 1 to Form 8-K with the SEC.

Item 3 Controls and Procedures

The Company periodically reviews the design and effectiveness of its
disclosure controls and procedures. The Company makes modifications to improve the design and effectiveness of its disclosure controls and procedures and may take corrective action if its reviews identify a need for such modifications or actions.

The Companys management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), does
not expect that its disclosure controls and procedures or its internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.



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Additionally, controls can be circumvented by the individual acts of some persons or by collusion of two
or more people. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.

An evaluation was carried out under the supervision and with the
participation of the Companys management, including the CEO and CFO, of the effectiveness of the Companys disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the CEO and CFO
have concluded that as of the end of the period covered by this report, the Companys disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in reports that are filed or
submitted under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported, within the time periods specified in the Commissions rules and forms and (ii) accumulated and communicated to the
Companys management, including its CEO (i.e., the principal executive officer) and CFO (i.e., the principal financial officer), or persons performing similar functions, as appropriate to allow timely decisions regarding the required
disclosure.

There have been no changes in the Companys internal control over financial reporting during the Companys last
fiscal quarter (or the Companys fourth fiscal quarter in the case of an annual report) that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

PART II OTHER INFORMATION



|Item 1 | Legal Proceedings
|------ | -----------------

None



|Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds
|------ | -----------------------------------------------------------

An employee of Kreisler Industrial exercised all of his outstanding incentive stock options granted under the Companys 1997 stock option plan and was issued a total of 2,834 shares of Company common stock on
December 1, 2006. The Company received cash proceeds for the exercise of the stock options totaling $3,542.50. This issuance was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, based upon a
determination that the investor was sophisticated, had access to, and was provided with, information that would otherwise be contained in a registration statement and there was no general solicitation.



|Item 3 | Defaults Upon Senior Securities
|------ | -------------------------------

None



|Item 4 | Submission of Matters to a Vote of Security Holders
|------ | ---------------------------------------------------

On December 5, 2006, the Company held its 2006 Annual Meeting of Stockholders. There were a total of 1,830,447 votes entitled to be cast at the meeting. At the meeting, the stockholders (i) elected four
(4) directors to serve on the Companys Board of Directors (Proposal 1), (ii) approved an amendment to the Companys Certificate of Incorporation to increase the number of authorized shares of common stock from
3,000,000 to 6,000,000 (Proposal 2) and (iii) did not approve an amendment to the Companys Certificate of Incorporation to authorize the issuance of 2,000,000 shares of blank check preferred stock (Proposal
3).



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Set forth below are (i) the names of the persons elected under Proposal 1 to serve on the
Companys Board of Directors for one year until their respective successors are duly elected and qualified or until the directors earlier resignation or removal and (ii) the results of the voting for the nominees.



|                      |  |           |  |         |  |         
|--------------------- |  | --------- |  | ------- |  | --------
|Nominee               |  | For       |  | Against |  | Withheld
|Wallace N. Kelly      |  | 1,693,798 |  | 0       |  | 86,340  
|Ronald L. Nussle, Jr. |  | 1,741,698 |  | 0       |  | 38,440  
|John W. Poling        |  | 1,724,398 |  | 0       |  | 55,740  
|Michael D. Stern      |  | 1,711,700 |  | 0       |  | 68,438  

Set forth below are the results of voting for Proposals 2 and 3.



|           |  |         |  |         |  |         |  |                
|---------- |  | ------- |  | ------- |  | ------- |  | ---------------
|Proposal   |  | For     |  | Against |  | Abstain |  | Broker Non-Vote
|Proposal 2 |  | 871,084 |  | 151,339 |  | 450     |  | 757,265        
|Proposal 3 |  | 862,510 |  | 159,453 |  | 910     |  | N/A            



|Item 5 | Other Information
|------ | -----------------

On
February 8, 2007, Kreisler Industrial entered into a Supplier Agreement (Supplier Agreement) with Citibank, N.A. (Citibank). Pursuant to the Supplier Agreement, Citibank will provide payment to Kreisler Industrial for
accounts receivable owed Kreisler Industrial from customers which are subsidiaries of United Technologies Corporation (UTC). The sale of the accounts receivable by Kreisler Industrial to Citibank is made without recourse to Kreisler
Industrial. The primary effect of the Supplier Agreement is to accelerate the payment of outstanding accounts receivable from approximately 60 days to approximately 10 days. All payments from Citibank to Kreisler Industrial will be subject to a
discount charge. The discount rate used to calculate the discount charge is the 60 day LIBOR rate plus 1.25%. As of February 12, 2007 the discount charge was approximately 0.9167%.

The Supplier Agreement can be terminated at any time and with immediate effect upon 30 days prior written notice by either party to the
other party. Either Kreisler Industrial or Citibank may terminate the Supplier Agreement with immediate effect upon 5 days prior written notice if the other party is in breach or fails to perform any of its material obligations under the Supplier
Agreement.



|Item 6 | Exhibits
|------ | --------

(a) Exhibits



| | 3.1 | Amendment to the Certificate of Incorporation of the Company dated December 5, 2006
| | --- | -----------------------------------------------------------------------------------



| | 10.1 | Extension to Lease Agreement between Kreisler Manufacturing Corporation, Kreisler Industrial Corporation and T & T Investments dated July 11, 2006 including a lease rate
change that went into effect on October 1, 2006 incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed on July 12, 2006
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10.2 | Collective Bargaining Agreement Extension between Kreisler Industrial Corporation and Local 377 RWSDU incorporated by reference to Exhibit 10.1 to the current report on Form 8-K
filed on December 4, 2006
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | 10.3 | Collective Bargaining Agreement Extension between Kreisler Industrial Corporation and Local 377 RWSDU incorporated by reference to Exhibit 10.1 to the current report on Form 8-K
filed on January 18, 2007
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10.4 | Supplier Agreement between Kreisler Industrial Corporation and Citibank, N.A. dated February 8, 2007
| | ---- | ----------------------------------------------------------------------------------------------------



| | 11 | Statement regarding computation of per share earnings incorporated by reference to Note 4 to Interim Consolidated Financial Statements included in this Quarterly Report on Form
10-QSB
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
| | ---- | -------------------------------------------------------------------------------------------------------------



| | 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
| | ---- | -------------------------------------------------------------------------------------------------------------



| | 32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
| | ---- | -------------------------------------------------------------------------------------------------------



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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



KREISLER MANUFACTURING CORPORATIONBy:

/s/ Michael D. SternMichael D. Stern, Co-President & Chief Executive
Officer/s/ Edward A. SternEdward A. Stern, Co-President & Chief Financial
Officer


Date: February 14, 2007



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EXHIBIT INDEX



|3.1 | Amendment to the Certificate of Incorporation of the Company dated December 5, 2006
|--- | -----------------------------------------------------------------------------------



|10.1 | Extension to Lease Agreement between Kreisler Manufacturing Corporation, Kreisler Industrial Corporation and T & T Investments dated July 11, 2006 including a lease rate
change that went into effect on October 1, 2006 incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed on July 12, 2006
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.2 | Collective Bargaining Agreement Extension between Kreisler Industrial Corporation and Local 377 RWSDU incorporated by reference to Exhibit 10.1 to the current report on Form 8-K
filed on December 4, 2006
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.3 | Collective Bargaining Agreement Extension between Kreisler Industrial Corporation and Local 377 RWSDU incorporated by reference to Exhibit 10.1 to the current report on Form 8-K
filed on January 18, 2007
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.4 | Supplier Agreement between Kreisler Industrial Corporation and Citibank, N.A. dated February 8, 2007
|---- | ----------------------------------------------------------------------------------------------------



|11 | Statement regarding computation of per share earnings incorporated by reference to Note 4 to Interim Consolidated Financial Statements included in this Quarterly Report on Form
10-QSB
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
|---- | -------------------------------------------------------------------------------------------------------------



|31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
|---- | -------------------------------------------------------------------------------------------------------------



|32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
|---- | -------------------------------------------------------------------------------------------------------



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