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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, 2004



| ̈ | Transition Report under Section 13 or 15 (d) of the Exchange Act
|- | ----------------------------------------------------------------



For the transition period from  to



Commission File Number: 0-4036



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Kreisler Manufacturing Corporation

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



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 22-1044792                          
|(State of 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)



(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



The number of shares outstanding of issuers Common Stock, par value $.125 per share, as
of February 5, 2005 was 1,762,447 shares.



Transitional small business
disclosure format (check one):    Yes ̈No  x



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##### Table of Contents

Kreisler Manufacturing Corporation and Subsidiaries

Table of Contents



|        |  |                                                                                                  |  |            
|------- |  | ------------------------------------------------------------------------------------------------ |  | -----------
|        |  |                                                                                                  |  | Page Number
|PART I  |  | Financial Information                                                                            |  |            
|        |  |                                                                                                 
|Item 1  |  | Financial Statements                                                                             |  |            
|        |  | Consolidated Balance Sheets                                                                      |  | 3          
|        |  | Consolidated Statements of Operations                                                            |  | 4          
|        |  | Consolidated Statements of Cash Flows                                                            |  | 5          
|        |  | Notes to Consolidated Financial Statements                                                       |  | 6          
|        |  |                                                                                                 
|Item 2  |  | Managements Discussion and Analysis for the Three Months and Six Months Ended December 31, 2004 |  | 7          
|        |  |                                                                                                 
|Item 3  |  | Controls and Procedures                                                                          |  | 12         
|        |  |                                                                                                 
|PART II |  | Other Information                                                                                |  |            
|        |  |                                                                                                 
|Item 1  |  | Legal Proceedings                                                                                |  | 13         
|        |  |                                                                                                 
|Item 2  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                      |  | 13         
|        |  |                                                                                                 
|Item 3  |  | Defaults Upon Senior Securities                                                                  |  | 13         
|        |  |                                                                                                 
|Item 4  |  | Submission of Matters to a Vote of Security Holders                                              |  | 13         
|        |  |                                                                                                 
|Item 5  |  | Other Information                                                                                |  | 13         
|        |  |                                                                                                 
|Item 6  |  | Exhibits                                                                                         |  | 14         



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##### Table of Contents

PART I FINANCIAL INFORMATION



Item 1 Financial Statements



Kreisler Manufacturing Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                     |  |                                |            |                    |   |           
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------ | ---------- | ------------------ | - | ----------
|                                                                                                                                     |  | (Unaudited)                    |            | (Audited)         
|                                                                                                                                     |  | Second Quarter Ended12/31/2004 |            | Year Ended 6/30/04
|Assets                                                                                                                               |  |                                |            |                    |   |           
|Cash and cash equivalents                                                                                                            |  | $                              | 4,511,470  |                    | $ | 3,367,494 
|Accounts receivable - trade, net: (Allowance $10,000 on December 31, 2004 and June 30, 2004)                                         |  |                                | 2,092,104  |                    |   | 2,563,526 
|Inventories                                                                                                                          |  |                                |            |                    |   |           
|Raw Materials                                                                                                                        |  |                                | 1,353,412  |                    |   | 1,393,224 
|Work in Process                                                                                                                      |  |                                | 616,039    |                    |   | 731,511   
|Finished Goods                                                                                                                       |  |                                | 287,341    |                    |   | 366,978   
|Income tax receivable                                                                                                                |  |                                |           |                    |   | 437,422   
|Deferred tax asset, current                                                                                                          |  |                                | 127,000    |                    |   | 173,500   
|Split dollar life insurance receivable                                                                                               |  |                                |           |                    |   | 235,450   
|Other current assets                                                                                                                 |  |                                | 141,509    |                    |   | 180,849   
|                                                                                                                                     |  |                                |            |                    |   |           
|Total Current Assets                                                                                                                 |  |                                | 9,128,875  |                    |   | 9,449,954 
|Property, plant & equip., at cost less accumulated depreciation of $4,439,804 for December 31, 2004 and $4,297,653 for June 30,
2004 |  |                                | 888,443    |                    |   | 941,400   
|Deferred tax asset, non-current                                                                                                      |  |                                | 344,000    |                    |   | 264,900   
|                                                                                                                                     |  |                                |            |                    |   |           
|Total Non-Current Assets                                                                                                             |  |                                | 1,232,443  |                    |   | 1,206,300 
|                                                                                                                                     |  |                                |            |                    |   |           
|                                                                                                                                     |  | $                              | 10,361,318 |                    | $ | 10,656,254
|                                                                                                                                     |  |                                |            |                    |   |           
|Liabilities and Stockholders Equity                                                                                                 |  |                                |            |                    |   |           
|Liabilities                                                                                                                          |  |                                |            |                    |   |           
|Accounts payable  trade                                                                                                             |  | $                              | 561,301    |                    | $ | 528,099   
|Accrued expenses                                                                                                                     |  |                                | 81,195     |                    |   | 302,565   
|Accrued environmental cost                                                                                                           |  |                                | 154,799    |                    |   | 158,574   
|                                                                                                                                     |  |                                |            |                    |   |           
|Total Current Liabilities                                                                                                            |  |                                | 797,295    |                    |   | 989,238   
|                                                                                                                                     |  |                               
|Accrued environmental cost                                                                                                           |  |                                | 366,893    |                    |   | 443,369   
|                                                                                                                                     |  |                                |            |                    |   |           
|Stockholders Equity                                                                                                                 |  |                                |            |                    |   |           
|Common Stock, $.125 par value - 3,000,000 shares authorized; 1,762,447 shares issued and outstanding                                 |  |                                | 220,306    |                    |   | 220,306   
|Additional paid-in capital                                                                                                           |  |                                | 367,792    |                    |   | 367,792   
|Retained earnings                                                                                                                    |  |                                | 8,609,032  |                    |   | 8,635,549 
|                                                                                                                                     |  |                                |            |                    |   |           
|Total Stockholders Equity                                                                                                           |  |                                | 9,197,130  |                    |   | 9,223,647 
|                                                                                                                                     |  |                                |            |                    |   |           
|                                                                                                                                     |  | $                              | 10,361,318 |                    | $ | 10,656,254
|                                                                                                                                     |  |                                |            |                    |   |           



See the accompanying notes.



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##### Table of Contents

Kreisler Manufacturing Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                             |  |      |           |   |      |   |           |  
|-------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|Three Months Ended December 31,              |  | 2004 |           |   | 2003 |  
|Revenues                                     |  | $    | 3,237,765 |   |      | $ | 2,815,241 |  
|                                             |  |      |           |   |      |   |           |  
|Cost of goods sold                           |  |      | 3,376,471 |   |      |   | 3,195,103 |  
|Selling, general and administrative expenses |  |      | 108,744   |   |      |   | 204,066   |  
|                                             |  |      |           |   |      |   |           |  
|                                             |  |      | 3,485,215 |   |      |   | 3,399,169 |  
|                                             |  |      |           |   |      |   |           |  
|Loss from operations                         |  |      | (247,450  | ) |      |   | (583,928  | )
|Other income:                                |  |      |           |   |      |   |           |  
|Interest                                     |  |      | 21,737    |   |      |   | 14,633    |  
|                                             |  |      |           |   |      |   |           |  
|Loss before income taxes                     |  |      | (225,713  | ) |      |   | (569,295  | )
|Income tax benefit                           |  |      | 84,000    |   |      |   | 210,639   |  
|                                             |  |      |           |   |      |   |           |  
|Net loss                                     |  | $    | (141,713  | ) |      | $ | (358,656  | )
|                                             |  |      |           |   |      |   |           |  
|Loss per share:                              |  |      |           |   |      |   |           |  
|Net loss - basic shares                      |  | $    | (0.08     | ) |      | $ | (.20      | )
|Net loss - diluted shares                    |  | $    | (0.08     | ) |      | $ | (.20      | )
|                                             |  |      |           |   |      |   |           |  
|                                             |  |     
|Six Months Ended December 31,                |  | 2004 |           |   | 2003 |  
|Revenues                                     |  | $    | 6,351,688 |   |      | $ | 5,652,497 |  
|                                             |  |      |           |   |      |   |           |  
|Cost of goods sold                           |  |      | 6,185,565 |   |      |   | 6,094,791 |  
|Selling, general and administrative expenses |  |      | 239,484   |   |      |   | 393,449   |  
|                                             |  |      |           |   |      |   |           |  
|                                             |  |      | 6,425,049 |   |      |   | 6,488,240 |  
|                                             |  |      |           |   |      |   |           |  
|Loss from operations                         |  |      | (73,361   | ) |      |   | (835,743  | )
|Other income:                                |  |      |           |   |      |   |           |  
|Interest                                     |  |      | 32,844    |   |      |   | 25,667    |  
|                                             |  |      |           |   |      |   |           |  
|Loss before income taxes                     |  |      | (40,517   | ) |      |   | (810,076  | )
|Income tax benefit                           |  |      | 14,000    |   |      |   | 299,728   |  
|                                             |  |      |           |   |      |   |           |  
|Net loss                                     |  | $    | (26,517   | ) |      | $ | (510,348  | )
|                                             |  |      |           |   |      |   |           |  
|Loss per share:                              |  |      |           |   |      |   |           |  
|Net loss - basic shares                      |  | $    | (0.02     | ) |      | $ | (.29      | )
|Net loss - diluted shares                    |  | $    | (0.02     | ) |      | $ | (.29      | )
|                                             |  |      |           |   |      |   |           |  



See the accompanying notes.



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Kreisler Manufacturing Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                      |  |      |           |   |      |   |           |  
|------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|Six Months Ended December 31                                                          |  | 2004 |           |   | 2003 |  
|Cash flows from Operating activities:                                                 |  |      |           |   |      |   |           |  
|Net loss                                                                              |  | $    | (26,517   | ) |      | $ | (510,348  | )
|Adjustments to reconcile net loss to cash provided by (used in) operating activities: |  |      |           |   |      |   |           |  
|Depreciation and amortization                                                         |  |      | 142,151   |   |      |   | 189,800   |  
|(Increase) decrease in operating assets:                                              |  |      |           |   |      |   |           |  
|Accounts receivable  trade                                                           |  |      | 471,422   |   |      |   | 364,032   |  
|Inventories                                                                           |  |      | 234,921   |   |      |   | (197,178  | )
|Income tax receivable                                                                 |  |      | 437,422   |   |      |   |          |  
|Deferred tax asset                                                                    |  |      | (32,600   | ) |      |   | (21,205   | )
|Split dollar life insurance receivable                                                |  |      | 235,450   |   |      |   |          |  
|Other current assets                                                                  |  |      | 39,340    |   |      |   | 381,993   |  
|Increase (decrease) in operating liabilities:                                         |  |      |           |   |      |   |           |  
|Accounts payable  trade                                                              |  |      | 33,202    |   |      |   | (237,827  | )
|Accrued expenses                                                                      |  |      | (221,370  | ) |      |   | 53,271    |  
|Accrued environmental costs                                                           |  |      | (80,251   | ) |      |   | (48,799   | )
|                                                                                      |  |      |           |   |      |   |           |  
|Net cash provided by (used in) operating activities                                   |  |      | 1,233,170 |   |      |   | (26,261   | )
|                                                                                      |  |     
|Cash Flows from Investing Activities:                                                 |  |      |           |   |      |   |           |  
|Purchase of property and equipment                                                    |  |      | (89,194   | ) |      |   | (143,906  | )
|                                                                                      |  |      |           |   |      |   |           |  
|Net cash used in investing activities                                                 |  |      | (89,194   | ) |      |   | (143,906  | )
|                                                                                      |  |      |           |   |      |   |           |  
|Increase (decrease) in cash and cash equivalents                                      |  |      | 1,143,976 |   |      |   | (170,167  | )
|Cash and cash equivalents at beginning of year                                        |  |      | 3,367,494 |   |      |   | 4,650,186 |  
|Cash and cash equivalents at December 31                                              |  | $    | 4,511,470 |   |      | $ | 4,480,019 |  
|                                                                                      |  |      |           |   |      |   |           |  



See the accompanying notes.



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Kreisler Manufacturing Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



1. Principles of Consolidation



The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of inter-company transactions. The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the 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 financial statements have been included. Interim results are not necessarily indicative of results for a full
year.



The 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 of the Company for the fiscal year ended June 30, 2004.



2. Inventories



Inventory valuation for the quarters ending December 31 and June 30 is based on actual physical counts. For the quarters ending September 30 and March 31 inventory is based on internal perpetual inventory records. For
the two quarters for which an inventory is not taken, raw materials, work in process and finished goods are adjusted to the same percentage of total inventory as existed at the time of the most recent physical inventory. Any substantial variance in
the three components for the interim periods, as compared to the actual physical inventory at that time, could significantly increase or decrease profits because direct labor and overhead amounts are only adjusted when physical inventories are taken
on June 30 and December 31. For a historical perspective, the physical inventory material valuation as of December 31, 2004 was $34,500 lower than the perpetual inventory material valuation. The Company attributed a portion of this amount to the
difference between the estimated material scrap rate calculated for the perpetual inventory material valuation and the actual material scrap rate.



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 leased 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 Requirements for Site Remediation, N.J.A.C. 7:26E-1.1. The site characterization has been completed. The remaining cost estimated for remediation of the site is approximately $522,000
(present value using a discount rate of 6.16%), most of which is to be incurred by the Company over the next two years. It is reasonably possible that the Companys recorded estimate of remediation cost may change in the near term.



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PART I



Item 2 MANAGEMENTS DISCUSSION AND ANALYSIS FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 2004



Forward Looking Statements



Certain oral statements made by management of the Company from time to time and certain statements contained herein or in periodic 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 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,
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.



Description of Business



Kreisler Manufacturing Corporation (the Registrant) is a Delaware business corporation which was incorporated on December 13, 1968. The
Registrant succeeded a New Jersey business corporation, which was incorporated in New Jersey in 1940, and which succeeded a New York corporation which was incorporated in 1930. The Registrant and its wholly-owned subsidiary, Kreisler Industrial
Corporation, which was incorporated in New Jersey on July 3, 1956 (collectively the Company), manufactures precision metal components and assemblies in Elmwood Park, New Jersey for use in military and commercial aircraft engines and
industrial gas turbines. These products primarily include tube and manifold assemblies of multiple sizes and configurations.



The Company markets its products to the commercial aircraft engine, military aircraft engine and industrial gas turbine industries. The demand for
components for the F119 military engine program, the GP7000 engine designed for the Airbus A380 and the CF34 engine used on regional jet aircraft has enabled the Company to offset declines in sales for large commercial engines and industrial gas
turbines experienced during the last two years. The Companys growth opportunities are limited by its historical reliance on a single large aero-engine manufacturer. This has had a material and adverse effect on the Company and is exacerbated
by the highly price competitive nature of its markets. In addition, the industrial gas turbine market shows little sign of returning to the high growth period of the recent past. The Company will continue to seek profitable growth and cost reduction
opportunities while maintaining the resources needed to support its customers.



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Results of Operations



2004 Compared to 2003 - Three Months ended December 31



Sales increased $423,000 or 15% to $3,238,000 for the quarter ended December 31, 2004 compared with $2,815,000 for the quarter ended
December 31, 2003. The Companys sales and sales changes by industry segment are as follows:



|                       |      |                                        |           |  |                 |           |  |          |         |   |      |    |    |      |     |   |  |     |  
|---------------------- | ---- | -------------------------------------- | --------- |  | --------------- | --------- |  | -------- | ------- | - | ---- | -- | -- | ---- | --- | - |  | --- | -
|Industry Segment       |      | Sales  Three Months Ended December 31 |           |  | Percent ofSales |          
|                       | 2004 |                                        | 2003      |  | $ Change        |           |  | % Change |         |   | 2004 |    |    | 2003 |    
|Commercial             |      | $                                      | 1,295,000 |  | $               | 969,000   |  | $        | 326,000 |   |      | 34 | %  |      | 40  | % |  | 35  | %
|Military               |      |                                        | 1,590,000 |  |                 | 1,666,000 |  |          | (76,000 | ) |      | (5 | )% |      | 49  | % |  | 59  | %
|Industrial Gas Turbine |      |                                        | 353,000   |  |                 | 180,000   |  |          | 173,000 |   |      | 96 | %  |      | 11  | % |  | 6   | %
|Total                  |      | $                                      | 3,238,000 |  | $               | 2,815,000 |  | $        | 423,000 |   |      | 15 | %  |      | 100 | % |  | 100 | %



The Companys sales for the
quarter ended December 31, 2004 continued to demonstrate significant improvement in market demand for commercial aero-engines components. The Companys commercial aero-engine sales increased $326,000 or 34% compared to the quarter ended
December 31, 2003. Increased demand for CF34 and PW4000 engine components and G5000 business jet airframe components along with the shipment of development components for the GP7000 engine offset declines in component demand for the AE3007 and V2500
engines.



The Companys sales of components used in military engine
applications during the quarter ended December 31, 2004 decreased $76,000 or 5% compared to the quarter ended December 31, 2003. The decrease is primarily attributable to declines in components required for the development of the F135 engine (used
on the F-35 Joint Strike Fighter), in spare part sales to the U.S. Government and in demand for F100 engine components (used on the F-15 and F-16 fighter aircraft). These declines were partially offset by increased requirements of components used on
the F119 engine program (used on the F/A-22 Raptor). For the quarter ended December 31, 2004, development programs resulted in non-recurring engineering and tooling charges paid to the Company of $42,000, a decline of $47,000 compared to the $89,000
paid during the quarter ended December 31, 2003.



For the quarter ended
December 31, 2004, the Company experienced an increase of $173,000 or 96% in sales of products to the industrial gas turbine industry as compared to the same period in 2003. This increase is predominantly the result of the financial settlement of
terminated purchase orders from an industrial gas turbine customer totaling $249,000. After adjusting for this termination settlement, the Companys sales to the industrial gas turbine industry are $104,000 as that market remains weak.



Cost of Goods Sold



Cost of goods sold was $3,376,000 for the quarter ended December 31, 2004 compared to
$3,195,000 for the quarter ended December 31, 2003, an increase of $181,000 or 6%. Increases in factory supplies, information technology outsourcing fees, shipping charges and travel-related expenses were offset by decreases in employee-related
costs and benefits, tooling costs, utilities and miscellaneous taxes and insurance. The net $79,000 decrease in the cost of goods sold for these items was offset by higher material usage. Material usage increased $423,000 for the period due to
higher sales and increased purchased material content. Depreciation expenses declined $20,000. Revenue sharing expenses attributable to the Roll-Royce AE3007 program declined $36,000 due to the completion of the Companys involvement in that
program.



Miscellaneous accruals for the quarter ended December 31, 2004
decreased $89,000 compared to the quarter ended December 31, 2003. Of this reduction, $50,000 was attributable to a Supplemental Compensation Agreement with Wallace N. Kelly, a consultant to the Company and Chairman of the Companys Board of
Directors. Payment under the Supplemental Compensation Agreement totaled $110,000 and was paid in February 2004. The remaining $39,000 reduction in miscellaneous accruals was for forecasted accruals.



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##### Table of Contents

Selling, General and Administrative



Selling, general and administrative expenses decreased $95,000 or 47%, primarily as a result of decreased sales commissions, salaries, and
interest expense associated with the environmental remediation agreement, offset by an increase in legal fees.



The loss from operations for the quarter ended December 31, 2004 of $247,000 was $337,000 or 58% lower than the loss from operations as of December 31, 2003 of $584,000.



Interest income of $22,000 for the quarter ended December 31, 2004 was $7,000 higher or 47%
compared to interest income of $15,000 for the quarter ended December 31, 2003.



The loss before income taxes for the quarter ended December 31, 2004 was $226,000 compared to the loss before income taxes for the same period in 2003 of $569,000.



Income tax benefit for the quarter ended December 31, 2004 of $84,000 was $127,000 or 60% lower compared to the income tax benefit of
$211,000 for the same period in 2003.



2004 Compared to 2003  Six
Months ended December 31



Sales increased $700,000 or 12% to
$6,352,000 for the six months ended December 31, 2004 compared with $5,652,000 for the six months ended December 31, 2003. The Companys sales and sales changes by industry segment are as follows:



|                       |      |                                      |           |  |                 |           |         |   |         |      |    |   |      |     |   |  |     |  
|---------------------- | ---- | ------------------------------------ | --------- |  | --------------- | --------- | ------- | - | ------- | ---- | -- | - | ---- | --- | - |  | --- | -
|Industry Segment       |      | Sales  Six Months Ended December 31 |           |  | Percent ofSales |          
|                       | 2004 |                                      | 2003      |  | $ Change        |           | %Change |   |         | 2004 |    |   | 2003 |    
|Commercial             |      | $                                    | 2,643,000 |  | $               | 2,197,000 |         | $ | 446,000 |      | 20 | % |      | 42  | % |  | 39  | %
|Military               |      |                                      | 3,079,000 |  |                 | 2,895,000 |         |   | 184,000 |      | 6  | % |      | 48  | % |  | 51  | %
|Industrial Gas Turbine |      |                                      | 630,000   |  |                 | 560,000   |         |   | 70,000  |      | 13 | % |      | 10  | % |  | 10  | %
|Total                  |      | $                                    | 6,352,000 |  | $               | 5,652,000 |         | $ | 700,000 |      | 12 | % |      | 100 | % |  | 100 | %



The Companys sales for the six
months ended December 31, 2004 showed improvement in market demand for commercial aero-engines components. The Companys commercial aero-engine sales increased $446,000 or 20% compared to the six months ended December 31, 2003. Increased demand
for CF34 and PW4000 engine components and G5000 business jet components along with the shipment of development components for the GP7000 engine offset declines in component demand for the AE3007 and V2500 engines.



The Companys sales of components used in military engine applications during the six
months ended December 31, 2004 increased $184,000 or 6% compared to the six months ended December 31, 2003. The increase is primarily attributable to the increased production of components used on the F119 engine program. The F119 programs
growth offsets the decline in components required for the development of the F135 and F100 engines and in spare part sales to the U.S. Government. Future F119 engine requirements are uncertain given the objective of its manufacturer to move
components currently produced by the Company to manufacturing sites outside the United States as well as Congressional concerns regarding the overall cost of the F/A-22 aircraft. The F/A-22 is the most expensive fighter aircraft ever developed for
the U.S. military. As a result of this high cost, forecast production of the F/A-22 aircraft decreased from over 700 aircraft to the current forecast level of 277 aircraft. Consequently, the program remains at risk for further reductions.



For the six months ended December 31, 2004, the Company experienced an
increase of $70,000 or 13% in sales of products to the industrial gas turbine industry as compared to the same period in 2003. This increase is the result of the financial settlement of terminated purchase orders from an industrial gas turbine
customer totaling $312,000 ($63,000 received in the first quarter of FY2005 and $249,000 received in the second quarter of FY2005). Sales after adjusting for this termination settlement are $318,000 as the market for industrial gas turbine
components remains weak.



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Cost of Goods Sold



Cost of goods sold was $6,186,000 for the six months ended December 31, 2004 compared to $6,095,000 for the six months ended December 31,
2003, an increase of $91,000 or 1%. Increases in factory supplies, information technology outsourcing fees, shipping charges, and travel-related expenses were offset by decreases in employee-related costs and benefits and tooling costs. The
decreases in employee-related costs and benefits is due to a reduction in the total number of employees as well as the elimination of run-out costs associated with a change in the Companys medical insurance plans. The lower tooling costs are
attributable to the transition of development programs to ongoing production. Material usage increased $741,000 for the period due to higher sales and increases in purchased material content. Depreciation expenses declined $48,000. Revenue sharing
expenses attributable to the Roll-Royce AE3007 program declined $88,000 due to the completion of the Companys involvement in that program.



Miscellaneous accruals for the six months ended December 31, 2004 decreased $178,000 compared to the six months ended December 31, 2003. Of this reduction, $100,000 was
attributable to a Supplemental Compensation Agreement with Wallace N. Kelly, a consultant to the Company and Chairman of the Companys Board of Directors. Payment under the Supplemental Compensation Agreement totaled $110,000 and was paid in
February 2004. The remaining $78,000 reduction in miscellaneous accruals was for forecasted accruals.



Selling, General and Administrative



Selling, general and administrative expenses decreased $154,000 or 39%, primarily as a result of decreased sales commissions, salaries, and interest expense associated with the environmental remediation agreement, offset by increases in
legal and audit fees.



The loss from operations for the six months ended
December 31, 2004 of $73,000 was $763,000 less than the loss from operations as of December 31, 2003 of $836,000.



Interest income of $33,000 for the six months ended December 31, 2004 was $7,000 higher or 27% compared to interest income of $26,000 for the six months ended December
31, 2003.



The loss before income tax benefit for the six months ended December
31, 2004 was $41,000 compared to the loss before income taxes for the same period in 2003 of $810,000.



Income tax benefit for the six months ended December 31, 2004 totaled approximately $14,000 compared to an income tax benefit of $300,000 for the same period in 2003.



Current backlog as of December 31, 2004 is approximately $14.2 million compared to $13.9
million for the same period in the prior year. The backlog increased $300,000 or 2%. The Companys backlog has increased $1.9 million or 15% compared to the June 30, 2004 backlog of $12.3 million. Backlogs are subject to change with reduced
purchase order duration and terminations. An additional $1.1 million in PW4000 commercial aircraft engine orders are under discussion with a customer for possible termination due to declines in market demand for the components. Orders that have
already been terminated by a customer are excluded from the backlog even if the amount owed by a customer to the Company for the termination has not been paid.



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Capital Resources and Liquidity



Cash and cash equivalents increased from $3,367,000 at June 30, 2004 to $4,511,000 at December 31, 2004. The increase of $1,144,000 or 34%
is primarily the result of lower accounts receivable of $471,000, receipt of a federal income tax refund of $437,000 and receipt of split-dollar life insurance premiums paid on behalf of a deceased executive of the Company totaling $235,000. Working
capital was approximately $8,331,000 at December 31, 2004. The Company believes it has sufficient resources to meet operating requirements through the next twelve months. Adequate liquidity is available to cover anticipated capital expenditures of
$200,000 for the period ending June 30, 2005. Capital expenditures during the six months ended December 31, 2004 were $89,000.



Stockholders equity on basic shares was $5.22 per share as of December 31, 2004 compared to $5.23 as of June 30, 2004. This change represents a decrease of $0.01 or
less than 1% in book value.



Critical Accounting Policies



The Companys critical accounting and reporting policies include the
Companys accounting for environmental remediation and inventory valuation. In particular, the accounting for these areas requires significant judgments to be made by management. Specifically, with regard to environmental remediation, the
assumption has been made that no new costs, above those identified in the original fixed price agreement, will be incurred as the project continues. The Company assumes that there will be no future discoveries on the site that will require
additional remediation. With respect to assumptions made in valuing inventory on interim statements, management believes estimating material usage, work in process and finished goods could result in significant variances in both inventory and
operating results when physical inventories are performed on June 30 and December 31. Different assumptions in the application of these policies could result in material changes in the Companys consolidated financial position or consolidated
results of operations. Refer to Note A in the Notes to Consolidated Financial Statements in the Companys Annual Report on Form 10-KSB on file with the Securities and Exchange Commission for details regarding all of the
Companys critical and significant accounting policies.



Revenue
Recognition



Revenue from sales of products is recognized at the time
title and the risks and rewards of ownership pass. This is when the products are shipped per customers instructions, the sales price is fixed and determinable, and collections are reasonably assured.



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 are 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 is stated at the amount management expects to collect from outstanding balances. The carrying amount 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 to the valuation allowance and a credit to accounts receivable- trade.



Accounts receivable  trade is net of an allowance for estimated uncollectible accounts of $10,000 for 2004 and 2003.



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##### Table of Contents

Property, Plant, and Equipment



Property, plant, and equipment are recorded at cost less accumulated depreciation. Maintenance and repairs, which do not improve efficiency
or extend the useful life, are charged to operations as incurred. Asset and related accumulated depreciation amounts are relieved from the accounts for retirements or dispositions. Resulting gains or losses are reflected in earnings. Depreciation is
computed using accelerated methods over the estimated useful lives of three to ten years for machinery and equipment, while the straight line method is used over the term of leases for building improvements.



Income Taxes



The Company accounts for its income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes, which requires the establishment of a deferred tax asset or liability for the recognition of the tax effect of future deductible or taxable amounts, operating loss, or tax credit carryforwards. Deferred tax expense or benefit is
recognized as a result of the changes in the deferred assets and liabilities during the year. Future tax benefits, such as net operating loss carryforwards, are recognized and reduced by a valuation allowance if it is more likely than not that some
or all of a deferred tax asset will not be realized.



Earnings Per
Share



During 1998, the Company adopted SFAS No. 128,
Earnings Per Share which requires disclosure of basic and diluted earnings per share. Under SFAS No. 128, basic earnings per share is computed as earnings divided by weighted average shares outstanding. Diluted earnings per share includes the
dilutive effects of stock options and other potentially dilutive securities.



PART I



Item 3 CONTROLS AND PROCEDURES



The Company
periodically reviews the design and effectiveness of its disclosure controls and internal controls, and their associated procedures, over financial reporting. The Company makes modifications to improve the design and effectiveness of its disclosure
controls and internal control structure, 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 controls and procedures for financial reporting will prevent all error 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.



Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. 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. 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 are effective to provide reasonable assurance that material information required to be disclosed in reports that are filed or submitted under the Securities Exchange Act of 1934 are
recorded, processed, summarized and reported on a timely basis as provided in the Securities and Exchange Commission rules and forms. There have been no changes in the Companys internal controls and procedures over financial reporting that
have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.



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##### Table of Contents

PART II OTHER INFORMATION



Item 1 Legal Proceedings



None



Item 2 Unregistered Sales of Equity Securities and Use of Proceeds



None



Item 3 Defaults Upon Senior Securities



None



Item 4 Submission of Matters to a Vote of Security Holders



On December 14, 2004, the Company held its 2004 Annual Meeting of Stockholders. There were a total of 1,762,447 votes entitled to be cast at the meeting. Of this total, 1,537,524 votes, or approximately 87.2%, were
represented either in person or by proxy. At the meeting, the stockholders elected five (5) directors to the Companys Board of Directors. Set forth below are (i) the names of the persons elected to serve on the Companys Board of
Directors until the next Annual Meeting of Stockholders or until their successors are duly elected and qualified and (ii) the results of the voting for the nominees.



|                      |  |                   |  |          |  |              
|--------------------- |  | ----------------- |  | -------- |  | -------------
|Nominee               |  | For               |  | Against  |  | Withheld     
|Wallace N. Kelly      |  | 1,506,396 (98.0)% |  | 0 (0.0)% |  | 31,128 (2.0)%
|Michael L. Goldberg   |  | 1,506,396 (98.0)% |  | 0 (0.0)% |  | 31,128 (2.0)%
|Ronald L. Nussle, Jr. |  | 1,506,396 (98.0)% |  | 0 (0.0)% |  | 31,128 (2.0)%
|John W. Poling        |  | 1,506,396 (98.0)% |  | 0 (0.0)% |  | 31,128 (2.0)%
|Michael D. Stern      |  | 1,506,496 (98.0)% |  | 0 (0.0)% |  | 31,028 (2.0)%



Item 5 Other Information



None



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##### Table of Contents

Item 6 Exhibits



(a) Part I
 Exhibits



|     |  |                                                                                                                                                 
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|11   |  | Statement regarding computation of per share earnings                                                                                           
|     | 
|31.1 |  | Certification of Chief Executive Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934                                      
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934                                      
|     | 
|32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|     | 
|32.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



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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 9, 2005



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