##### Table of Contents

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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 March 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.)



5960 Central Avenue,
Suite H., St. Petersburg, Florida 33707

(Address of principal executive offices)



(727) 347-1144

(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



The number of shares outstanding of issuers Common Stock, par value $.125 per share, as of March 31, 2004 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                                                                                                                       |  | 3          
|        |  |                                                                                                                                            
|Item 1  |  | Financial Statements                                                                                                                        |  | 3          
|        |  | 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 of Financial Condition and Results of Operations for Three Months and Nine Months Ended March 31, 2004 |  | 7          
|        |  |                                                                                                                                            
|PART II |  | Other Information                                                                                                                           |  | 13         
|        |  |                                                                                                                                            
|Item 1  |  | Legal Proceedings                                                                                                                           |  | 13         
|        |  |                                                                                                                                            
|Item 2  |  | Changes in Securities                                                                                                                       |  | 13         
|        |  |                                                                                                                                            
|Item 3  |  | Defaults Upon Senior Securities                                                                                                             |  | 13         
|        |  |                                                                                                                                            
|Item 4  |  | Submission of Matters to Vote of Security Holders                                                                                           |  | 13         
|        |  |                                                                                                                                            
|Item 5  |  | Other Information                                                                                                                           |  | 13         
|        |  |                                                                                                                                            
|Item 6  |  | Exhibits and Reports on Form 8-K                                                                                                            |  | 13         



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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)          
|                                                                                                                                         |  | AS OF March 31, 2004 |            | AS OF June 30, 2003
|Assets                                                                                                                                   |  |                      |            |                     |   |           
|Cash and cash equivalents                                                                                                                |  | $                    | 3,397,881  |                     | $ | 4,650,187 
|Accounts receivable  trade, net: (Allowance $10,000 on March 31, 2004 and June 30, 2003)                                                |  |                      | 1,942,231  |                     |   | 1,829,957 
|Inventories                                                                                                                              |  |                      |            |                     |   |           
|Raw Materials                                                                                                                            |  |                      | 1,705,687  |                     |   | 1,367,918 
|Work in Process                                                                                                                          |  |                      | 867,806    |                     |   | 724,893   
|Finished Goods                                                                                                                           |  |                      | 418,941    |                     |   | 362,697   
|                                                                                                                                         |  |                      |            |                     |   |           
|                                                                                                                                         |  |                      | 2,992,434  |                     |   | 2,455,508 
|                                                                                                                                         |  |                     
|Income tax receivable                                                                                                                    |  |                      | 700,599    |                     |   | 735,722   
|Deferred tax asset, current                                                                                                              |  |                      | 141,200    |                     |   | 297,500   
|Other current assets                                                                                                                     |  |                      | 182,966    |                     |   | 335,932   
|                                                                                                                                         |  |                      |            |                     |   |           
|Total current assets                                                                                                                     |  |                      | 9,357,311  |                     |   | 10,304,806
|                                                                                                                                         |  |                      |            |                     |   |           
|Split dollar life insurance receivable                                                                                                   |  |                      | 235,450    |                     |   | 235,450   
|Property, plant & equip., at cost, less accumulated depreciation of $4,266,768 for March 31, 2004 and $3,982,068 for June 30,
2003       |  |                      | 962,707    |                     |   | 1,053,417 
|Deferred tax asset, non-current                                                                                                          |  |                      | 285,600    |                     |   | 214,800   
|                                                                                                                                         |  |                      |            |                     |   |           
|Total Non-current Assets                                                                                                                 |  |                      | 1,483,757  |                     |   | 1,503,667 
|                                                                                                                                         |  |                      |            |                     |   |           
|Total Assets                                                                                                                             |  | $                    | 10,841,068 |                     | $ | 11,808,473
|                                                                                                                                         |  |                      |            |                     |   |           
|Liabilities and Stockholders Equity                                                                                                     |  |                      |            |                     |   |           
|Liabilities                                                                                                                              |  |                      |            |                     |   |           
|Accounts payable  trade                                                                                                                 |  | $                    | 570,799    |                     | $ | 519,788   
|Accrued expenses                                                                                                                         |  |                      | 479,290    |                     |   | 378,212   
|Accrued environmental cost                                                                                                               |  |                      | 161,041    |                     |   | 517,793   
|                                                                                                                                         |  |                      |            |                     |   |           
|Total current liabilities                                                                                                                |  |                      | 1,211,130  |                     |   | 1,415,793 
|                                                                                                                                         |  |                      |            |                     |   |           
|Accrued environmental cost                                                                                                               |  |                      | 482,295    |                     |   | 510,785   
|                                                                                                                                         |  |                      |            |                     |   |           
|Total Liabilities                                                                                                                        |  |                      | 1,693,425  |                     |   | 1,926,578 
|                                                                                                                                         |  |                      |            |                     |   |           
|Stockholders Equity                                                                                                                     |  |                      |            |                     |   |           
|Common Stock, $.125 par value - 3,000,000 shares authorized; 1,762,447 shares issued and outstanding on March 31, 2004 and June 30,
2003 |  |                      | 220,306    |                     |   | 220,306   
|Additional paid-in capital                                                                                                               |  |                      | 367,792    |                     |   | 367,792   
|Retained earnings                                                                                                                        |  |                      | 8,559,545  |                     |   | 9,293,797 
|                                                                                                                                         |  |                      |            |                     |   |           
|Total Stockholders Equity                                                                                                               |  |                      | 9,147,643  |                     |   | 9,881,895 
|                                                                                                                                         |  |                      |            |                     |   |           
|Total Liabilities and Stockholders Equity                                                                                               |  | $                    | 10,841,068 |                     | $ | 11,808,473
|                                                                                                                                         |  |                      |            |                     |   |           



See
the accompanying notes.



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##### Table of Contents

KREISLER MANUFACTURING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                             |  |      |            |   |      |   |            |  
|-------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|Three Months Ended March 31                  |  | 2004 |            |   | 2003 |  
|Sales                                        |  | $    | 3,098,326  |   |      | $ | 2,758,478  |  
|                                             |  |      |            |   |      |   |            |  
|Cost of goods sold                           |  |      | 3,334,891  |   |      |   | 2,986,126  |  
|Selling, general and administrative expenses |  |      | 143,920    |   |      |   | 215,932    |  
|                                             |  |      |            |   |      |   |            |  
|                                             |  |      | 3,478,811  |   |      |   | 3,202,058  |  
|                                             |  |      |            |   |      |   |            |  
|Loss from operations                         |  |      | (380,485   | ) |      |   | (443,580   | )
|                                             |  |     
|Interest income                              |  |      | 6,349      |   |      |   | 24,034     |  
|                                             |  |      |            |   |      |   |            |  
|Loss before income taxes                     |  |      | (374,136   | ) |      |   | (419,546   | )
|                                             |  |     
|Income tax benefit                           |  |      | 150,234    |   |      |   | 157,135    |  
|                                             |  |      |            |   |      |   |            |  
|Net loss                                     |  | $    | (223,902   | ) |      | $ | (262,411   | )
|                                             |  |      |            |   |      |   |            |  
|Loss per share:                              |  |      |            |   |      |   |            |  
|Net loss  basic shares                      |  | $    | (.13       | ) |      | $ | (.15       | )
|Net loss  diluted shares                    |  | $    | (.13       | ) |      | $ | (.15       | )
|                                             |  |      |            |   |      |   |            |  
|                                             |  |     
|Nine Months Ended March 31                   |  | 2004 |            |   | 2003 |  
|Sales                                        |  | $    | 8,750,821  |   |      | $ | 9,761,659  |  
|                                             |  |      |            |   |      |   |            |  
|Cost of goods sold                           |  |      | 9,429,682  |   |      |   | 9,490,146  |  
|Selling, general and administrative expenses |  |      | 537,368    |   |      |   | 628,889    |  
|                                             |  |      |            |   |      |   |            |  
|                                             |  |      | 9,967,050  |   |      |   | 10,119,035 |  
|                                             |  |      |            |   |      |   |            |  
|Loss from operations                         |  |      | (1,216,229 | ) |      |   | (357,376   | )
|                                             |  |     
|Interest income                              |  |      | 32,016     |   |      |   | 73,626     |  
|                                             |  |      |            |   |      |   |            |  
|Loss before income taxes                     |  |      | (1,184,213 | ) |      |   | (283,750   | )
|                                             |  |     
|Income tax benefit                           |  |      | 449,961    |   |      |   | 106,211    |  
|                                             |  |      |            |   |      |   |            |  
|Net loss                                     |  | $    | (734,252   | ) |      | $ | (177,539   | )
|                                             |  |      |            |   |      |   |            |  
|Loss per share:                              |  |      |            |   |      |   |            |  
|Net loss - basic shares                      |  | $    | (.42       | ) |      | $ | (.09       | )
|Net loss - diluted shares                    |  | $    | (.42       | ) |      | $ | (.09       | )
|                                             |  |      |            |   |      |   |            |  



See
the accompanying notes.



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##### Table of Contents

KREISLER MANUFACTURING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                          |  |      |            |   |      |   |            |  
|------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|Nine Months Ended March 31                                                |  | 2004 |            |   | 2003 |  
|Cash flows from operating activities:                                     |  |      |            |   |      |   |            |  
|Net loss                                                                  |  | $    | (734,252   | ) |      | $ | (177,539   | )
|Adjustments to reconcile net loss of cash (used) by operating activities: |  |      |            |   |      |   |            |  
|Depreciation and amortization                                             |  |      | 284,700    |   |      |   | 289,700    |  
|(Increase) decrease in operating assets:                                  |  |      |            |   |      |   |            |  
|Accounts receivable  trade                                               |  |      | (112,274   | ) |      |   | 746,210    |  
|Inventories                                                               |  |      | (536,926   | ) |      |   | 85,752     |  
|Income tax receivable                                                     |  |      | 35,123     |   |      |   |           |  
|Deferred tax asset                                                        |  |      | 85,500     |   |      |   | 47,700     |  
|Other current assets                                                      |  |      | 152,966    |   |      |   | (137,345   | )
|Insurance recoveries                                                      |  |      |           |   |      |   | 243,000    |  
|Increase (decrease) in operating liabilities:                             |  |      |            |   |      |   |            |  
|Accounts payable  trade                                                  |  |      | 51,012     |   |      |   | 93,633     |  
|Accrued expenses                                                          |  |      | 101,078    |   |      |   | (550,296   | )
|Accrued environmental costs                                               |  |      | (385,242   | ) |      |   | (273,268   | )
|                                                                          |  |      |            |   |      |   |            |  
|Net cash (used) provided by operating activities                          |  |      | (1,058,316 | ) |      |   | 367,547    |  
|                                                                          |  |     
|Cash flows from investing activities:                                     |  |      |            |   |      |   |            |  
|Purchase of property and equipment                                        |  |      | (193,990   | ) |      |   | (114,466   | )
|                                                                          |  |      |            |   |      |   |            |  
|Net cash used by investing activities                                     |  |      | (193,990   | ) |      |   | (114,466   | )
|                                                                          |  |     
|Cash flows from financing activities:                                     |  |      |            |   |      |   |            |  
|Purchase of treasury stock                                                |  |      |           |   |      |   | (1,312,150 | )
|                                                                          |  |      |            |   |      |   |            |  
|Net cash used by financing activities                                     |  |      |           |   |      |   | (1,312,150 | )
|                                                                          |  |      |            |   |      |   |            |  
|                                                                          |  |     
|Decrease in cash and cash equivalents                                     |  |      | (1,252,306 | ) |      |   | (1,059,069 | )
|Cash and cash equivalents at beginning of year                            |  |      | 4,650,187  |   |      |   | 6,365,222  |  
|                                                                          |  |      |            |   |      |   |            |  
|Cash and cash equivalents at March 31                                     |  | $    | 3,397,881  |   |      | $ | 5,306,153  |  
|                                                                          |  |      |            |   |      |   |            |  



See
the accompanying notes.



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##### Table of Contents

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 intercompany 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 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 Rule 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,
2003.



2. Inventories



Inventory valuations for the periods ending December 31 and June 30 are based on actual
physical counts. For the periods ending September 30 and March 31 inventory valuations are based on internal perpetual inventory records. By comparison, the physical inventory material valuation as of December 31, 2003 was $27,000 or less than 1%
lower than the internal perpetual inventory records. 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. The percentage of estimated scrap usage has been adjusted to reflect a higher amount.



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 increase or decrease profits because direct labor and overhead amounts are only adjusted when
physical inventories are taken on June 30 and December 31.



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 these substances are or were produced or handled which contain constituents classified hazardous. The Company generally provides for the disposal or processing of such
substances through licensed, independent contractors.



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In July 1999, the Company became aware of historical releases of hazardous substances at its leased facility located at
180 Van Riper Avenue, Elmwood Park, New Jersey (Facility). The Company promptly notified the New Jersey Department of Environmental Protection (Department) 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 Departments Technical Requirements for Site Remediation, N.J.A.C. 7:26E-1.1.



The site characterization was completed and a $2.1 million fixed price remediation agreement
was signed. A total of $1.4 million has already been paid under the contract, with the remaining cost for remediation of $0.7 million to be paid over the next four years. Environmental remediation is slightly behind schedule, as approvals have taken
longer than anticipated. No additional contingencies have been identified that would negatively impact the estimated cost of remediation. Since the remediation project began in 1999, the Company has received a total of $2.9 million from its
insurance carriers with respect to the remediation.



PART I



Item 2



KREISLER MANUFACTURING CORPORATION AND
SUBSIDIARIES



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THREE MONTHS AND NINE MONTHS ENDED MARCH 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.



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Description of Business



Kreisler Manufacturing Corporation (the Registrant) is a Delaware business corporation which was incorporated on December 13,
1968 which succeeded a New Jersey business corporation which was incorporated in New Jersey in 1940, which succeeded a New York corporation which was incorporated in 1930. The Registrant and its wholly-owned subsidiary, Kreisler Industrial
Corporation (collectively the Company) that was incorporated in New Jersey on July 3, 1956, manufactures precision metal components and assemblies in Elmwood Park, New Jersey for use in military and commercial aircraft engines and
industrial gas turbines. The Company manufactures products to customer requirements for the commercial and military aero-engine as well as the industrial gas turbine markets. These products include tube assemblies of multiple sizes and
configurations, vane inserts, fuel rings and baffles.



The Companys sales
and profitability have been materially and adversely impacted by the economic downturn in the commercial aviation and industrial gas turbine markets. During this period of economic uncertainty, Kreislers sales to a primary customer were
negatively impacted by the reduction in market demand for commercial aero-engines and industrial gas turbines of which the Company is a supplier of components. In addition, sales declined due to the completion of a replacement program of certain
aero-engine components provided by the Company. The decline of 40% from this primary customer will be offset through the addition of new military programs. Kreisler is pursuing new programs to further offset the sales decline. The Company is taking
actions to lower costs. During the period ended March 31, 2004, the Company reduced expenses with an annualized savings of $400,000 by reducing headcount and eliminating certain non essential expenses. The impact of this reduction will begin to take
affect in the fourth quarter. The Company will continue to identify other cost reduction opportunities.



It is impossible to predict when the commercial and industrial gas turbine industries will recover. A continued downturn in these markets could have a material adverse effect on the Companys sales and net income
for future reporting periods. It is anticipated that the quarter ending June 30, 2004 will continue to be weak.



Results of Operations



2004 Compared to 2003



Three Months ended March 31, 2004



Sales increased
$340,000 or 12% to $3,098,000 for the quarter ended march 31, 2004 compared with $2,758,000 for the quarter ended March 31, 2003. Sales to the military increased $818,000 or 135% compared to military sales for the same period in the prior year.
Sales for commercial aircraft engine parts declined $164,000 or 10% and industrial gas turbine parts sales declined $149,000 or 49%, compared to sales for the third quarter of 2003. The remaining $165,000 decline was in other miscellaneous accounts.
For the quarter ended March 31, 2004, sales from products for commercial aircraft engines, military aircraft engines and industrial gas turbine engines accounted for 49%, 46% and 5% of sales, respectively.



Cost of goods sold increased $349,000 or 12%, to $3,335,000 for the quarter ended March 31,
2004 compared with $2,986,000 for the quarter ended March 31, 2003. The increase was primarily due to higher materials usage of $114,000 as a result of increased sales, costs for a supplemental employment agreement, tooling costs for new programs,
utility costs and factory supplies. An additional increase of $158,000 is attributable to higher direct labor costs due to lump sum payments under Kreislers new Labor Contract and increased overtime costs. These increases were partially offset
by a $126,000 decrease in vacation and general accruals, lower environmental remediation program expenses of $40,000 and a decrease in medical insurance and travel expenses. The negative gross margin resulted from increased costs that were not
offset by increased sales.



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##### Table of Contents

For the quarter ended March 31, 2004, selling, general and administrative expenses were $144,000, which was $72,000 less
than the $216,000 reported in the same quarter of the prior year, a decrease of 33%. Decreased professional and legal fees, general administrative costs and sales commissions account for most of the decrease.



The loss from operations, for the quarter ended March 31, 2004 was $380,000 compared to a
loss from operations of $444,000 for the quarter ended March 31, 2003, a decrease of $64,000 or 14%.



Interest income declined from $24,000 for the quarter ended March 31, 2003 to $6,000 for the quarter ended March 31, 2004. The $18,000 or 75% decline is the result of lower interest rates and lower balances in
investment accounts.



The loss before taxes, for the quarter ended March 31,
2004 was $374,000 compared to loss before taxes of $420,000 for the quarter ending March 31, 2003, a decrease of $46,000 or 11%.



Income tax benefit for the quarter ended March 31, 2004 was $150,000 as compared to an income tax benefit of $157,000 for the quarter ended March 31, 2003, decrease of
$7,000.



Higher expenses were the primary cause of the March 31, 2004 net loss
of $224,000 compared to a net loss of $262,000 for the quarter ended March 31, 2003, a decrease of $38,000 or 15%.



Third quarter basic and diluted loss per share at March 31, 2004 was ($0.13) compared to basic and diluted loss per share of ($0.15) for the third quarter of the prior
year.



Nine Months ended March 31, 2004



Sales for the nine months ended March 31, 2004 were $8,751,000 compared to $9,762,000 for
the period ended March 31, 2003. Sales for the nine months ended March 31, 2004 declined $1,011,000 or 10% compared to the same period in 2003. Sales of commercial engine parts increased $598,000 or 12%, while sales of military engines declined 12%
or $307,000 and sales of industrial gas turbine engines declined 57% or $1,039,000 compared to the same period in the prior year. The remaining $263,00 decline was in other miscellaneous accounts. For the nine months ended March 31, 2004 sales of
commercial aircraft engines, military aircraft engines and industrial gas turbine engines accounted for 55%, 38% and 7% of sales respectively.



Cost of goods sold were $9,490,000 for the nine months ended March 31, 2003 compared to $9,430,000 for the nine months ended March 31, 2004, a decrease of $60,000 or 1%.
Increases in tooling for new programs, utility costs, costs for a supplemental employment agreement, and information technology outsourcing fees, offset by decreases in environmental legal fees, supplies, travel costs and shipping were $320,000.
Material usage declined $640,000 for the period due to lower sales. For the nine months ended March 31, 2003, environmental management expenses were reduced by $160,000 upon receipt of an environmental insurance payment. The negative gross margin
resulted from comparable year-over-year costs with decreased shipments.



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##### Table of Contents

For the nine months ended March 31, 2004, selling, general and administrative expenses were $537,000, which was $92,000
less than the $629,000 reported in the nine months of the prior year, a decrease of 15%. Decreased professional fees, along with decreased general administrative costs and sales commissions, partially offset by increases in audit and legal fees,
account for most of the decrease.



The loss from operations, for the nine
months ended March 31, 2004 was $1,216,000 compared to a loss from operations of $357,000 for the nine months ended March 31, 2003, an increase of $859,000.



Interest income declined from $74,000 for the nine months ended March 31, 2003 to $32,000 for the nine months ended March 31, 2004. The $42,000 or 57% decline is the
result of lower interest rates and lower balances in investment accounts.



The
loss before taxes, for the nine months ended March 31, 2004 was $1,184,000 compared to a loss before taxes of $284,000 for the nine months ending March 31, 2003, an increase of $900,000.



Income tax benefit for the nine months ended March 31, 2004 was $450,000 as compared to income tax benefit of $106,000 for the nine months
ended March 31, 2003, a increase of $344,000.



Lower sales were the primary
cause of the March 31, 2004 net loss of $734,000 compared to a net loss of $178,000 for the nine months ended March 31, 2003, an increase of $556,000.



Nine month basic and diluted loss per share at March 31, 2004 was ($0.42) compared to basic and diluted loss per share of ($0.09) for the same nine months of the prior
year.



Kreislers backlog as of March 31, 2004 is $13.2 million as
compared to $14.4 million at June 30, 2003. Commercial aircraft, military aircraft and industrial gas turbine products represent 21%, 75% and 4%, respectively, of Kreislers backlog as of March 31, 2004. Kreislers backlog is affected by
reduced purchase order duration, changing schedules and order terminations. Kreisler has pending customer purchase order terminations of approximately $400,000 related to industrial gas turbine programs. $1.1 million in commercial aircraft engine
orders are under discussion with a customer for possible termination. These terminated orders are due to declines in market demand. Terminated orders are excluded from the backlog. An estimated $300,000 in costs from terminated orders is expected to
be received from a customer in the fourth quarter. The remaining terminated purchase orders are expected to be resolved by the first quarter of 2005 fiscal year.



Capital Resources



Cash and cash equivalents decreased from $4,650,000 at June 30, 2003 to $3,398,000 at March 31, 2004. The decrease of $1,252,000 or 27% is primarily the result of cash
being used to fund operating activities, offset by the receipt of a Federal Income Tax refund of $521,000. Accounts receivable increased $112,000 since June 30, 2003 due to higher revenue for the quarter ended March 31, 2004. Stockholder equity on
basic shares at March 31, 2004 was $5.19 per share in book value compared to $5.61 on June 30, 2003, a decrease of $0.42 or 7%.



Liquidity



At March 31, 2004, the Company had working capital of $8.1 million. The Company believes it has sufficient resources to meet operating requirements through the next twelve months. A significant use of cash has been
for inventory. Kreisler is currently in the process of modifying production systems in order to reduce inventories.



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Critical Accounting Policies



The Companys critical and significant 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 variances in both inventory and operating results when physical inventories are performed
at 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 1 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.



Controls and Procedures



Quarterly evaluation of the Companys Disclosure Controls and
Internal Controls. As of the end of the period covered by this Quarterly Report on Form 10-QSB, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures (Disclosure
Controls). This evaluation (Controls Evaluation) was done under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer (CEO/CFO).



Attached as an exhibit to this Quarterly Report is a certification of the
CEO/CFO, which is required in accordance with Rule 13a-14 of the Exchange Act. This Controls and Procedures section includes the information concerning the controls evaluation referred to in the certification, and it should be read in
conjunction with the certification for a more complete understanding of the topics presented.



Definition of Disclosure Controls.Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in the Companys reports filed under the Exchange
Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure Controls are also designed to reasonably assure that
such information is accumulated and communicated to our management, including the CEO/CFO, as appropriate to allow timely decisions regarding required disclosure. The Disclosure Controls include components of the Companys internal control over
financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of the Companys financial reporting and the preparation of financial statements in accordance with generally accepted
accounting principles in the U.S. To the extent that components of the internal control over financial reporting are included within the Disclosure Controls, they are included in the scope of the quarterly controls evaluation.



Limitations on the Effectiveness of Controls. The Companys
management, including the CEO/CFO, does not expect that its Disclosure Controls or its internal controls and procedures for financial reporting (Internal Controls) 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



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of the control system are met. Further, the design of a control system must reflect the fact that there are constraints
on financial resources, 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; and 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.



Conclusions. Based upon the Controls Evaluation, the CEO/CFO has
concluded that, subject to the limitations noted above, the Disclosure Controls were effective to provide reasonable assurance that material information relating to the Company is made known to management, including CEO/CFO, particularly during the
period when its periodic reports are being prepared.



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PART II OTHER INFORMATION



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



None



|Item 2 |  | Changes in Securities
|------ |  | ---------------------



None



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



None



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



None



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



Memorandum of Agreement  United Service Employees Union Local 377, RWSDU



Kreislers collective bargaining agreement with United Service Employees Union Local 377, RWSDU expired on December 4,
2003. Prior to the collective bargaining agreement expiration date, the Company and the Union agreed to extend the contract. As of December 31, 2003, the collective bargaining agreement was extended to January 16, 2004 with subsequent extensions to
February 20, 2004 and March 9, 2004. The Company and United Services Employees Union Local 377 reached a Memorandum of Agreement for a new collective bargaining agreement on March 3, 2004. The modifications contained in the Memorandum of Agreement
are incorporated into the new collective bargaining agreement. The estimated three year cost of the new agreement is $180,000.



|Item 6 |  | Exhibits and Reports on Form 8K
|------ |  | -------------------------------



(a) Part I  Exhibits

|     |  |                                                                                                                                                                                 
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|10.7 |  | Union Agreement between Kreisler Industrial Corporation, a Division of Kreisler Manufacturing Corporation, and Local 377, RWDSU, Affiliated with AFL-CIO dated December 5,
2003.
|     | 
|11   |  | Statement regarding computation of per share earnings.                                                                                                                          
|     | 
|31   |  | Certification pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.                                                                                                
|     | 
|32   |  | Certification pursuant to 18 U.S.C. Section 1350 as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                          



(b) Reports on 8K



No reports on Form 8K were filed during the
last period covered by this report.



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SIGNATURES



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



KREISLER MANUFACTURING CORPORATIONBy:

/s/ Edward L. SternEdward L. Stern, President, Chief Executive Officer and Chief Financial Officer




Date: May 13, 2004



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