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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 September 30, 2006



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

For the transition period from  to

Commission file number: 0-04036



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Kreisler Manufacturing Corporation

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



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 22-1047792                          
|(State 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)

Not Applicable

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



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

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

The number of shares outstanding of the issuers common stock, par value $.125 per share, as of November 13, 2006 was 1,830,447 shares.

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



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Table of Contents



|        |  |                                                             |  |            
|------- |  | ----------------------------------------------------------- |  | -----------
|        |  |                                                             |  | Page Number
|PART I  |  | Financial Information                                       |  |            
|        |  |                                                            
|Item 1  |  | Financial Statements                                        |  |            
|        |  | Consolidated Balance Sheets                                 |  | 4          
|        |  | Consolidated Statements of Operations                       |  | 5          
|        |  | Consolidated Statements of Cash Flows                       |  | 6          
|        |  | Notes to the Interim Consolidated Financial Statements      |  | 7          
|        |  |                                                            
|Item 2  |  | Managements Discussion and Analysis or Plan of Operation   |  | 10         
|        |  |                                                            
|Item 3  |  | Controls and Procedures                                     |  | 18         
|        |  |                                                            
|PART II |  | Other Information                                           |  |            
|        |  |                                                            
|Item 1  |  | Legal Proceedings                                           |  | 19         
|        |  |                                                            
|Item 2  |  | Unregistered Sales of Equity Securities and Use of Proceeds |  | 19         
|        |  |                                                            
|Item 3  |  | Defaults Upon Senior Securities                             |  | 19         
|        |  |                                                            
|Item 4  |  | Submission of Matters to a Vote of Security Holders         |  | 19         
|        |  |                                                            
|Item 5  |  | Other Information                                           |  | 19         
|        |  |                                                            
|Item 6  |  | Exhibits                                                    |  | 19         



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Forward-Looking Statements

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



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PART I FINANCIAL INFORMATION

Item 1    Financial Statements

Kreisler Manufacturing Corporation and Subsidiaries

Consolidated Balance Sheets



|                                                                                                                                              |  |             |            |   |           |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ---------- | - | --------- | - | ---------- | -
|                                                                                                                                              |  | 9/30/2006   |            |   | 6/30/2006 |  
|                                                                                                                                              |  | (Unaudited) |            |   |           |  
|Assets                                                                                                                                        |  |             |            |   |           |   |            |  
|Cash and cash equivalents                                                                                                                     |  | $           | 3,509,233  |   |           | $ | 3,295,947  |  
|Accounts receivable  trade, net ($40,000 allowance for uncollectible accounts)                                                               |  |             | 4,308,826  |   |           |   | 4,480,295  |  
|Inventories                                                                                                                                   |  |             | 3,935,198  |   |           |   | 3,253,420  |  
|Deferred tax asset, current                                                                                                                   |  |             | 37,489     |   |           |   | 42,654     |  
|Other current assets                                                                                                                          |  |             | 136,357    |   |           |   | 109,814    |  
|                                                                                                                                              |  |             |            |   |           |   |            |  
|Total current assets                                                                                                                          |  |             | 11,927,103 |   |           |   | 11,182,130 |  
|                                                                                                                                              |  |             |            |   |           |   |            |  
|Property, plant and equipment, net of accumulated depreciation                                                                                |  |             | 1,830,155  |   |           |   | 1,590,879  |  
|Deferred tax asset, non-current                                                                                                               |  |             | 221,564    |   |           |   | 238,989    |  
|                                                                                                                                              |  |             |            |   |           |   |            |  
|Total non-current assets                                                                                                                      |  |             | 2,051,719  |   |           |   | 1,829,868  |  
|                                                                                                                                              |  |             |            |   |           |   |            |  
|                                                                                                                                              |  | $           | 13,978,822 |   |           | $ | 13,011,998 |  
|                                                                                                                                              |  |             |            |   |           |   |            |  
|Liabilities and Stockholders Equity                                                                                                          |  |             |            |   |           |   |            |  
|Liabilities                                                                                                                                   |  |             |            |   |           |   |            |  
|Accounts payable  trade                                                                                                                      |  | $           | 1,403,457  |   |           | $ | 819,974    |  
|Accrued expenses                                                                                                                              |  |             | 233,018    |   |           |   | 483,030    |  
|Income taxes payable                                                                                                                          |  |             | 306,971    |   |           |   | 59,820     |  
|Line of credit payable                                                                                                                        |  |             |           |   |           |   | 54,810     |  
|Obligation under capital leases, current portion                                                                                              |  |             | 119,996    |   |           |   | 103,643    |  
|                                                                                                                                              |  |             |            |   |           |   |            |  
|Total current liabilities                                                                                                                     |  |             | 2,063,442  |   |           |   | 1,521,277  |  
|                                                                                                                                              |  |             |            |   |           |   |            |  
|Obligation under capital leases, net of current portion                                                                                       |  |             | 382,799    |   |           |   | 358,193    |  
|Accrued environmental cost                                                                                                                    |  |             | 407,577    |   |           |   | 407,577    |  
|                                                                                                                                              |  |             |            |   |           |   |            |  
|Total long-term liabilities                                                                                                                   |  |             | 790,376    |   |           |   | 765,770    |  
|                                                                                                                                              |  |             |            |   |           |   |            |  
|Commitments and contingencies                                                                                                                 |  |             |            |   |           |   |            |  
|Stockholders Equity                                                                                                                          |  |             |            |   |           |   |            |  
|Common stock, $0.125 par value - 3,000,000 shares authorized; 1,830,447 shares issued and outstanding at September 30, 2006 and
June 30, 2006 |  |             | 228,806    |   |           |   | 228,806    |  
|Additional paid-in capital                                                                                                                    |  |             | 544,716    |   |           |   | 544,716    |  
|Retained earnings                                                                                                                             |  |             | 10,360,895 |   |           |   | 9,968,591  |  
|Accumulated other comprehensive loss                                                                                                          |  |             | (9,413     | ) |           |   | (17,162    | )
|                                                                                                                                              |  |             |            |   |           |   |            |  
|Total stockholders equity                                                                                                                    |  |             | 11,125,004 |   |           |   | 10,724,951 |  
|                                                                                                                                              |  |             |            |   |           |   |            |  
|                                                                                                                                              |  | $           | 13,978,822 |   |           | $ | 13,011,998 |  
|                                                                                                                                              |  |             |            |   |           |   |            |  

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



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Kreisler Manufacturing Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)



|                                             |  |      |           |   |      |   |           |  
|-------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|Three Months Ended September 30,             |  | 2006 |           |   | 2005 |  
|Net sales                                    |  | $    | 5,082,985 |   |      | $ | 4,129,240 |  
|                                             |  |      |           |   |      |   |           |  
|Cost of goods sold                           |  |      | 4,164,635 |   |      |   | 3,551,532 |  
|Selling, general and administrative expenses |  |      | 298,596   |   |      |   | 274,224   |  
|                                             |  |      |           |   |      |   |           |  
|Total costs and expenses                     |  |      | 4,463,231 |   |      |   | 3,825,756 |  
|                                             |  |      |           |   |      |   |           |  
|Income from operations                       |  |      | 619,754   |   |      |   | 303,484   |  
|                                             |  |     
|Interest and other income                    |  |      | 48,109    |   |      |   | 25,683    |  
|Interest and other expenses                  |  |      | (13,559   | ) |      |   | (8,941    | )
|                                             |  |      |           |   |      |   |           |  
|Income before income taxes                   |  |      | 654,304   |   |      |   | 320,226   |  
|                                             |  |     
|Income taxes                                 |  |      | (262,000  | ) |      |   | (129,600  | )
|                                             |  |      |           |   |      |   |           |  
|Net income                                   |  | $    | 392,304   |   |      | $ | 190,626   |  
|                                             |  |      |           |   |      |   |           |  
|Net income per common share:                 |  |      |           |   |      |   |           |  
|Net income - basic                           |  | $    | 0.21      |   |      | $ | 0.10      |  
|Net income - diluted                         |  | $    | 0.21      |   |      | $ | 0.10      |  
|Weighted average common shares  basic       |  |      | 1,830,447 |   |      |   | 1,826,447 |  
|Weighted average common shares  diluted     |  |      | 1,857,103 |   |      |   | 1,846,326 |  

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



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Kreisler Manufacturing Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)



|                                                                                         |  |      |           |   |      |   |           |  
|---------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|Three Months Ended September 30,                                                         |  | 2006 |           |   | 2005 |  
|Cash Flows from Operating Activities:                                                    |  |      |           |   |      |   |           |  
|Net income                                                                               |  | $    | 392,304   |   |      | $ | 190,626   |  
|Adjustments to reconcile net income to cash provided by operating activities:            |  |      |           |   |      |   |           |  
|Depreciation and amortization                                                            |  |      | 135,932   |   |      |   | 95,836    |  
|Deferred tax asset                                                                       |  |      | 22,590    |   |      |   | 129,600   |  
|Increase (decrease) in cash attributable to changes in operating assets and liabilities: |  |      |           |   |      |   |           |  
|Accounts receivable  trade, net                                                         |  |      | 171,470   |   |      |   | 253,935   |  
|Inventories                                                                              |  |      | (681,778  | ) |      |   | (214,143  | )
|Other current assets                                                                     |  |      | (26,543   | ) |      |   | 104,647   |  
|Accounts payable  trade                                                                 |  |      | 583,483   |   |      |   | (162,670  | )
|Accrued expenses                                                                         |  |      | (250,012  | ) |      |   | 10,992    |  
|Income taxes payable                                                                     |  |      | 247,151   |   |      |   |          |  
|Accrued environmental costs                                                              |  |      |          |   |      |   | (38,462   | )
|                                                                                         |  |      |           |   |      |   |           |  
|Net Cash Provided by Operating Activities                                                |  |      | 594,597   |   |      |   | 370,361   |  
|                                                                                         |  |      |           |   |      |   |           |  
|Cash Flows from Investing Activities:                                                    |  |      |           |   |      |   |           |  
|Purchase of property and equipment                                                       |  |      | (307,971  | ) |      |   | (103,609  | )
|                                                                                         |  |      |           |   |      |   |           |  
|Net Cash (Used in) Investing Activities                                                  |  |      | (307,971  | ) |      |   | (103,609  | )
|                                                                                         |  |      |           |   |      |   |           |  
|Cash Flows from Financing Activities:                                                    |  |      |           |   |      |   |           |  
|Repayment of obligations under capital leases                                            |  |      | (26,282   | ) |      |   | (21,676   | )
|Repayment of line of credit                                                              |  |      | (54,810   | ) |      |   |          |  
|                                                                                         |  |      |           |   |      |   |           |  
|Net Cash (Used in) Financing Activities                                                  |  |      | (81,092   | ) |      |   | (21,676   | )
|                                                                                         |  |      |           |   |      |   |           |  
|Effect of foreign currency translation                                                   |  |      | 7,752     |   |      |   |          |  
|                                                                                         |  |      |           |   |      |   |           |  
|Increase in cash and cash equivalents                                                    |  |      | 213,286   |   |      |   | 245,076   |  
|Cash and cash equivalents beginning of period                                            |  |      | 3,295,947 |   |      |   | 3,409,552 |  
|                                                                                         |  |      |           |   |      |   |           |  
|Cash and cash equivalents end of period                                                  |  | $    | 3,509,233 |   |      | $ | 3,654,628 |  
|                                                                                         |  |      |           |   |      |   |           |  
|Supplemental Disclosure of Cash Flow Information                                         |  |      |           |   |      |   |           |  
|Cash paid during the period for:                                                         |  |      |           |   |      |   |           |  
|Income taxes                                                                             |  |      |          |   |      |   |          |  
|Interest                                                                                 |  | $    | 13,559    |   |      | $ | 8,941     |  
|                                                                                         |  |     
|Supplemental Schedule of Non-cash Investing and Financing Activities:                    |  |      |           |   |      |   |           |  
|Equipment acquired under capital leases                                                  |  | $    | 67,241    |   |      |   |          |  
|                                                                                         |  |      |           |   |      |   |           |  

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



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Kreisler Manufacturing Corporation and Subsidiaries

Notes to the Interim Consolidated Financial Statements

(Unaudited)

1. Principles of Consolidation

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

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

2. Contingencies

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

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

In July 1999, the Company became aware of historical releases
of hazardous substances at its manufacturing facility located at 180 Van Riper Avenue, Elmwood Park, New Jersey. The Company promptly notified the New Jersey Department of Environmental Protection (NJDEP) as required by the New Jersey
Spill Compensation and Control Act (Spill Act), N.J.S.A. 58:10-23.11, and retained the services of environmental remediation consultants to perform a full site characterization in accordance with the NJDEPs Technical Requirement
for Site Remediation, N.J.A.C. 7:26E-1.1. In June 2001, the Company entered into a fixed price remediation agreement with Resource Control Corporation (RCC). At September 30, 2006, the remaining cost estimated for remediation of the
site under the fixed price remediation agreement with RCC was approximately $408,000, virtually all of which is expected to be paid in fiscal 2010, provided that RCC achieves specific regulatory requirements contained in the fixed price remediation
agreement.

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



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3. Net Income per Common Share

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



|                                                      |  |                                 |           |      |   |          
|----------------------------------------------------- |  | ------------------------------- | --------- | ---- | - | ---------
|                                                      |  | Three Months EndedSeptember 30,
|                                                      |  | 2006                            |           | 2005
|Net income                                            |  | $                               | 392,304   |      | $ | 190,626  
|                                                      |  |                                 |           |      |   |          
|Weighted-average shares outstanding                   |  |                                 | 1,830,447 |      |   | 1,826,447
|Dilutive impact of stock options                      |  |                                 | 26,656    |      |   | 19,879   
|                                                      |  |                                 |           |      |   |          
|Weighted-average shares outstanding assuming dilution |  |                                 | 1,857,103 |      |   | 1,846,326
|                                                      |  |                                 |           |      |   |          
|Net income per common share:                          |  |                                 |           |      |   |          
|Basic                                                 |  | $                               | 0.21      |      | $ | 0.10     
|Diluted                                               |  | $                               | 0.21      |      | $ | 0.10     

4. Reclassification

Beginning with the Companys Form 10-QSB for the three and nine months ended March 31, 2006, the Company separated the interest expense from selling, general and administrative expenses. Separating the
interest expense amounts reduces selling, general and administrative expenses for the three months ended September 30, 2005 by a total of $8,941. This separation has no effect on the income before income taxes of the Company.

Three Months Ended September 30, 2005



|                                                    |  |                                  |           |                                 |   |        |                                                |  |   |           |  
|--------------------------------------------------- |  | -------------------------------- | --------- | ------------------------------- | - | ------ | ---------------------------------------------- |  | - | --------- | -
|                                                    |  | Three MonthsEnded Sept. 30, 2005 |           | Interest Expenseincluded inSG&A |   |        | Three MonthsEnded Sept. 30, 2005(Reclassified) | 
|Net Sales                                           |  | $                                | 4,129,240 |                                 | $ |       |                                                |  | $ | 4,129,240 |  
|                                                    |  |                                  |          
|Cost of goods sold                                  |  |                                  | 3,551,532 |                                 |   |       |                                                |  |   | 3,551,532 |  
|Selling, general and administrative expenses (SG&A) |  |                                  | 283,165   |                                 |   | (8,941 | )                                              |  |   | 274,224   |  
|                                                    |  |                                  |           |                                 |   |        |                                                |  |   |           |  
|Total costs and expenses                            |  |                                  | 3,834,697 |                                 |   | (8,941 | )                                              |  |   | 3,825,756 |  
|                                                    |  |                                  |           |                                 |   |        |                                                |  |   |           |  
|Income from operations                              |  |                                  | 294,543   |                                 |   |       |                                                |  |   | 303,484   |  
|                                                    |  |                                  |          
|Interest and other income                           |  |                                  | 25,683    |                                 |   |       |                                                |  |   | 25,683    |  
|Interest and other expenses                         |  |                                  |          |                                 |   | (8,941 | )                                              |  |   | (8,941    | )
|                                                    |  |                                  |           |                                 |   |        |                                                |  |   |           |  
|Total interest and other income and expense         |  |                                  | 25,683    |                                 |   | (8,941 | )                                              |  |   | 16,742    |  
|                                                    |  |                                  |           |                                 |   |        |                                                |  |   |           |  
|Income before income taxes                          |  | $                                | 320,226   |                                 | $ |       |                                                |  | $ | 320,226   |  
|                                                    |  |                                  |           |                                 |   |        |                                                |  |   |           |  

5. Segment Information

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



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Geographic information regarding the Companys net sales and long-lived assets is as follows:

Selected Financial Results by Geographic Segment



|                                        |  |               |            |   |        |   |         |       |  |   |            |  
|--------------------------------------- |  | ------------- | ---------- | - | ------ | - | ------- | ----- |  | - | ---------- | -
|Three Months Ended September 30, 2006   |  | United States |            |   | Poland |   |         | Total | 
|Sales to unaffiliated customers         |  | $             | 5,077,787  |   |        | $ | 5,198   |       |  | $ | 5,082,985  |  
|                                        |  |               |           
|Income (loss) from operations           |  |               | 640,562    |   |        |   | (20,808 | )     |  |   | 619,754    |  
|Interest and other income               |  |               | 47,176     |   |        |   | 933     |       |  |   | 48,109     |  
|Interest and other expense              |  |               | (13,559    | ) |        |   |        |       |  |   | (13,559    | )
|                                        |  |               |            |   |        |   |         |       |  |   |            |  
|Income (loss) before income tax expense |  | $             | 674,179    |   |        | $ | (19,875 | )     |  | $ | 654,304    |  
|                                        |  |               |            |   |        |   |         |       |  |   |            |  
|Segment assets                          |  | $             | 13,123,829 |   |        | $ | 854,993 |       |  | $ | 13,978,822 |  
|Depreciation                            |  | $             | 105,015    |   |        | $ | 30,917  |       |  | $ | 135,932    |  
|                                        |  |               |            |   |        |   |         |       |  |   |            |  
|                                        |  |               |           
|Three Months Ended September 30, 2005   |  | United States |            |   | Poland |   |         | Total | 
|Sales to unaffiliated customers         |  | $             | 4,128,259  |   |        | $ | 981     |       |  | $ | 4,129,240  |  
|                                        |  |               |           
|Income (loss) from operations           |  |               | 379,561    |   |        |   | (76,077 | )     |  |   | 303,484    |  
|Interest and other income               |  |               | 25,622     |   |        |   | 61      |       |  |   | 25,683     |  
|Interest and other expense              |  |               | (8,941     | ) |        |   |        |       |  |   | (8,941     | )
|                                        |  |               |            |   |        |   |         |       |  |   |            |  
|Income (loss) before income tax expense |  | $             | 396,242    |   |        | $ | (76,016 | )     |  | $ | 320,226    |  
|                                        |  |               |            |   |        |   |         |       |  |   |            |  
|Segment assets                          |  | $             | 11,048,208 |   |        | $ | 507,506 |       |  | $ | 11,555,714 |  
|Depreciation                            |  | $             | 90,741     |   |        | $ | 5,095   |       |  | $ | 95,836     |  
|                                        |  |               |            |   |        |   |         |       |  |   |            |  

6. Facility Lease Agreement

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



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

Overview

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

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

The Companys sales for the three months ended September 30, 2006 were $5,083,000 compared to our sales for the three months ended
September 30, 2005 of $4,129,000. This increase of $954,000, or 23%, is primarily due to increased market demand for components used in commercial aircraft engine and industrial gas turbine applications:



|                                        |  |   |         |  |   |          
|--------------------------------------- |  | - | ------- |  | - | ---------
|Sales  3 Months Ended Sept. 30, 2005   |  |   |         |  | $ | 4,129,000
|Sales Increase by Industry Market Area: |  |   |         |  |   |          
|Commercial                              |  | $ | 576,000 |  |   |          
|Military1                               |  |   | 7,000   |  |   |          
|Industrial Gas Turbine                  |  |   | 371,000 |  |   |          
|                                        |  |   |         |  |   |          
|Total Sales Increase                    |  |   |         |  |   | 954,000  
|                                        |  |   |         |  |   |          
|Sales  3 Months Ended Sept. 30, 2006   |  |   |         |  | $ | 5,083,000
|                                        |  |   |         |  |   |          

---

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

Our sales of components used in military aircraft engine application remained unchanged on a year over year basis. This is
primarily attributable to lower spare parts sales to the U.S. Government. We are seeking to increase these sales through our engagement of an independent government sales company in July 2006.

Military aircraft engine components for the F119 and F135 engines represented approximately 80% of our military aircraft engine component sales for the
three months ended September 30, 2006. The future for both of these programs relies on Congressional funding authorization, which may alter the amount or timing of available funding. According to Aviation Week & Space Technology
(October 2, 2006), Congress has approved an additional three year, 60-aircraft production agreement for the F-22A Raptor. We expect this Congressional approval will have a beneficial impact on us due to our sales of components used on the F119
engine used on the F-22A Raptor. However, there is an indeterminate risk that our primary customer for these components may seek to have these components manufactured at its own facilities located outside the United States.

We continue to make investments in Kreisler Polska. During the first three months of fiscal 2007 we provided $200,000 to Kreisler Polska as part of a
planned investment in capital equipment of approximately $1,000,000. We expect to recover approximately $382,000 of the cost of this investment under an Additional Project Funding Contract (APFC) between Kreisler Polska and the Polish
Enterprise Development Agency (PEDA). The APFC allows Kreisler Polska to receive additional funding from the PEDA based on anticipated capital expenditures. We expect the program to contribute 40% or a maximum of 1.2 million Polish
zloty (approximately $382,000 at the exchange rates as of September 30, 2006) of the total qualified capital expenditure cost of 3.0 million Polish zloty (approximately $956,000 at the exchange rates as of September 30, 2006). This



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##### Table of Contents

additional capital equipment will increase Kreisler Polskas product capability and available capacity. We also believe that this investment in Kreisler
Polska enhances our ability to compete globally by offering existing and potential customers access to a highly skilled, lower cost manufacturing operation.

Access to raw materials and machined components remains an important part of our ability to manufacture our components and support our customers. We have been able to minimize supply chain disruptions through the
development of Kreisler Polska as a reliable and growing source of supply as well as through the relationships we have developed with other suppliers. Unfortunately, some of the programs we support rely on proprietary machined components and
castings. While we are typically able to pass along any cost increases attributable to these proprietary machined components and castings, we are uncertain that these manufacturers have sufficient capacity to support future requirements. This could
have a negative impact on our ability to support our customers.

Our working capital needs have grown as our sales have increased.
Specifically, our inventory increased approximately $682,000, or 21%, since June 30, 2006. Approximately 56% of the inventory increase is attributable to the detail components needed for the manufacture of F119 and F135 engine components in
addition to detail components and raw materials used to support a variety of programs. Our inventory levels are also affected by a limited ability to control the delivery of components provided by the manufacturers of proprietary machined components
and castings and, as a result, contribute to our increase in inventory.

Our total working capital at September 30, 2006 was
$9,864,000, an increase of $203,000, or 2%, compared to our working capital at June 30, 2006 of $9,661,000. This increase is attributable to higher cash on-hand and inventories as well as lower accrued expenses partially offset by increases in
accounts payable and income taxes payable. With the addition of capital equipment, our obligations under capital leases increased $41,000 ($16,000 current/$25,000 long-term) at September 30, 2006 as compared to June 30, 2006.

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

Results of Operations

Three Months Ended September 30, 2006 Compared to Three Months ended
September 30, 2005

Sales

Sales increased $954,000, or 23%, to $5,083,000 for the three months ended September 30, 2006 compared with sales of $4,129,000 for the three months ended September 30, 2005. Our sales and sales changes by industry market area are
as follows:



|                       |      |       |           |  |                  |           |          |   |         |      |     |   |      |     |   |  |     |  
|---------------------- | ---- | ----- | --------- |  | ---------------- | --------- | -------- | - | ------- | ---- | --- | - | ---- | --- | - |  | --- | -
|Industry Market Area   |      | Sales |           |  | Percent of Sales |          
|                       | 2006 |       | 2005      |  | $ Change         |           | % Change |   |         | 2006 |     |   | 2005 |    
|Commercial             |      | $     | 2,186,000 |  | $                | 1,610,000 |          | $ | 576,000 |      | 36  | % |      | 43  | % |  | 39  | %
|Military               |      |       | 2,237,000 |  |                  | 2,230,000 |          |   | 7,000   |      | 0   | % |      | 44  | % |  | 54  | %
|Industrial Gas Turbine |      |       | 660,000   |  |                  | 289,000   |          |   | 371,000 |      | 128 | % |      | 13  | % |  | 7   | %
|                       |      |       |           |  |                  |           |          |   |         |      |     |   |      |     |   |  |     |  
|Total                  |      | $     | 5,083,000 |  | $                | 4,129,000 |          | $ | 954,000 |      | 23  | % |      | 100 | % |  | 100 | %
|                       |      |       |           |  |                  |           |          |   |         |      |     |   |      |     |   |  |     |  

Our commercial aircraft engine sales of $2,186,000 for the three months ended September 30,
2006 increased $576,000, or 36%, compared to our sales for the three months ended September 30, 2005. Our sales growth is primarily attributable to an increased need for spare part components used in thrust reverser actuation systems and in the
PW4000 aircraft engine as well as increased customer requirements for CF34 aircraft engine components.

Our sales of components used in
military engine applications totaled $2,237,000 for the three months ended September 30, 2006 were unchanged compared to our sales of $2,230,000 for the three months ended



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September 30, 2005. While we continue to experience increased sales of components for the F119 aircraft engine (used on the F-22 Raptor), these
increased sales were offset by a decline in the sale of spare parts to the U.S Government.

For the three months ended September 30,
2006, our sale of products to the industrial gas turbine industry rose to $660,000 compared to sales of $289,000 for the three months ended September 30, 2005. This $371,000, or 128%, increase is primarily attributable to the demand for
after-market components used in the Siemens 501F turbine generator.

Cost of Goods Sold

Cost of goods sold for the three months ended September 30, 2006 was 82% of revenues, or $4,165,000, compared to 86% of revenues, or $3,552,000, for
three months ended September 30, 2005.

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



|                            |  |                |           |   |                |   |           |          |  |          |         |  |    |  
|--------------------------- |  | -------------- | --------- | - | -------------- | - | --------- | -------- |  | -------- | ------- |  | -- | -
|                            |  | Sept. 30, 2006 |           |   | Sept. 30, 2005 |   |           | $ Change |  | % Change |        
|Sales                       |  | $              | 5,083,000 |   |                | $ | 4,129,000 |          |  | $        | 954,000 |  | 23 | %
|                            |  |                |           |  
|Cost of goods sold (COGS) |  |                | 4,165,000 |   |                |   | 3,552,000 |          |  |          | 613,000 |  | 17 | %
|COGS percentage of sales    |  |                | 82        | % |                |   | 86        | %        |  |          |        |  |   |  
|                            |  |                |           |  
|Gross margin                |  |                | 918,000   |   |                |   | 577,000   |          |  |          | 341,000 |  | 59 | %
|Gross margin percent        |  |                | 18.0      | % |                |   | 14.0      | %        |  |          |        |  |   |  

Our increase in cost of goods sold is primarily attributable to increased purchased material usage
due to higher sales as well as an increase in employee-related costs and benefits due to an overall increase in the number of employees at Kreisler Industrial and Kreisler Polska. Our improvement in gross margin during fiscal 2006 is attributable to
a year-over-year sales increase of 23% compared to an increase in cost of goods sold of 17%.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended September 30, 2006 were 5.9% of sales, or $299,000,
compared to 6.6% of sales, or $274,000, for the three months ended September 30, 2005. Selling, general and administrative expenses for three months ended September 30, 2006 increased $25,000, or 9%, compared to the three months ended
September 30, 2005.



|                                                      |  |                |           |   |                |   |           |          |  |          |         |  |    |  
|----------------------------------------------------- |  | -------------- | --------- | - | -------------- | - | --------- | -------- |  | -------- | ------- |  | -- | -
|                                                      |  | Sept. 30, 2006 |           |   | Sept. 30, 2005 |   |           | $ Change |  | % Change |        
|Sales                                                 |  | $              | 5,083,000 |   |                | $ | 4,129,000 |          |  | $        | 954,000 |  | 23 | %
|                                                      |  |                |           |  
|Selling, general and administrative expenses (SG&A) |  |                | 299,000   |   |                |   | 274,000   |          |  |          | 25,000  |  | 9  | %
|SG&A percentage of sales                              |  |                | 5.9       | % |                |   | 6.6       | %        |  |          |        |  |   |  

Our increase in selling, general and administrative expenses is primarily the result of higher
employee-related costs and benefits offset by lower accounting-related fees. These items represented approximately 71% of the increase.



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Income, Interest Expense and Taxes



|                           |  |                |           |   |                |   |           |          |  |   |          |   |  |     |  
|-------------------------- |  | -------------- | --------- | - | -------------- | - | --------- | -------- |  | - | -------- | - |  | --- | -
|                           |  | Sept. 30, 2006 |           |   | Sept. 30, 2005 |   |           | $ Change |  |   | % Change |  
|Sales                      |  | $              | 5,083,000 |   |                | $ | 4,129,000 |          |  | $ | 954,000  |   |  | 23  | %
|Total costs and expenses   |  |                | 4,463,000 |   |                |   | 3,826,000 |          |  |   | 637,000  |   |  | 17  | %
|                           |  |                |           |   |                |   |           |          |  |   |          |   |  |     |  
|Income from operations     |  |                | 620,000   |   |                |   | 303,000   |          |  |   | 317,000  |   |  | 105 | %
|                           |  |                |           |  
|Interest & other income    |  |                | 48,000    |   |                |   | 26,000    |          |  |   | 22,000   |   |  | 85  | %
|Interest & other expense   |  |                | (14,000   | ) |                |   | (9,000    | )        |  |   | (5,000   | ) |  | 56  | %
|                           |  |                |           |   |                |   |           |          |  |   |          |   |  |     |  
|Income before income taxes |  |                | 654,000   |   |                |   | 320,000   |          |  |   | 334,000  |   |  | 104 | %
|                           |  |                |           |  
|Income tax expense         |  |                | 262,000   |   |                |   | 129,000   |          |  |   | 133,000  |   |  | 103 | %
|                           |  |                |           |   |                |   |           |          |  |   |          |   |  |     |  
|Net income                 |  | $              | 392,000   |   |                | $ | 191,000   |          |  | $ | 201,000  |   |  | 105 | %
|                           |  |                |           |   |                |   |           |          |  |   |          |   |  |     |  

Net Income for the three months ended September 30, 2006 was $392,000 compared to net income
for the three months ended September 30, 2005 of $191,000.

The income from operations for the three months ended September 30,
2006 was $620,000, an increase of $317,000, or 105%, compared to the three months ended September 30, 2005 total of $303,000.

Interest and other income of $48,000 for the three months ended September 30, 2006 was $22,000 higher compared to the three months ended September 30, 2005 and was primarily attributable to higher interest rates. Interest and
other expense of $14,000 for the three months ended September 30, 2006 was $5,000 higher compared to the three months ended September 30, 2005 and was primarily attributable to additional equipment acquired under capital leases.

Income before income taxes for the three months ended September 30, 2006 was $654,000 compared to income before income taxes for the
three months ended September 30, 2005 of $320,000.

Income tax expense for the three months ended September 30, 2006 was $262,000
compared to income tax expense for the three months ended September 30, 2005 of $129,000.

Backlog

Our backlog as of September 30, 2006 was $23,800,000 compared to $16,800,000 at September 30, 2005. The backlog increased $7,000,000 or 42%.
Backlog as of June 30, 2006 was $20,800,000. Backlog is subject to change with reduced purchase order duration and terminations. Orders that have already been terminated by a customer are excluded from the backlog even if the amount owed by a
customer to us for the termination has not been paid.

Liquidity and Capital Resources

During the three months ended September 30, 2006, we relied on our operating cash flow and cash on-hand to fund most capital expenditures and working
capital requirements. We also used capital leases to fund the acquisition of a piece of capital equipment. We anticipate using operating cash flow, cash on-hand and external financing sources such as bank debt and lines of credit for future capital
expenditures and working capital requirements.

Our cash and cash equivalents at September 30, 2006 of $3,509,000 increased $213,000,
or 6%, compared to cash and cash equivalents of $3,296,000 at June 30, 2006.

Cash provided by operating activities for the three
months ended September 30, 2006 was $595,000 compared to $370,000 for the three months ended September 30, 2005. This increase was primarily attributable to



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increases in our net income, depreciation and amortization, accounts payable and income taxes payable. These inflows were partially offset by increases in
inventories and a decrease in accrued expenses.

Cash used in investing activities for the three months ended September 30, 2006 was
$308,000 and was primarily attributable to the purchase of capital equipment. We believe that sufficient liquidity is available from operating cash flow as well as cash on-hand to cover anticipated capital expenditures of $1,200,000 for the year
ending June 30, 2007. Of this $1,200,000, we expect to provide Kreisler Polska with approximately $1,000,000 during fiscal year 2007 for the purchase of capital equipment. As of September 30, 2006, $200,000 has already been provided to
Kreisler Polska. The Additional Project Funding Contract (APFC) between Kreisler Polska and the Polish Enterprise Development Agency (PEDA) allows Kreisler Polska to receive additional funding from the PEDA based on
anticipated capital expenditures. We expect the program to contribute 40% or a maximum of 1.2 million Polish zloty (approximately $382,000 at the exchange rates as of September 30, 2006) of the total qualified capital expenditure cost of
3.0 million Polish zloty (approximately $956,000 at the exchange rates as of September 30, 2006). Under the APFC, Kreisler Polska expects to receive approximately $382,000 in additional funding from the PEDA approximately six months after
we have completely funded the qualified capital expenditures of approximately $956,000. As a result, we anticipate that approximately $382,000 of our capital expenditure cost will be received by Kreisler Polska from the PEDA during calendar year
2007 and this amount will be used by Kreisler Polska to fund either its working capital requirements or to purchase additional capital equipment.

Kreisler Polska entered into a Declaration of Blank Bill Issuer (also known as a Bill of Exchange) as part of the APFC between Kreisler Polska and the PEDA. The Declaration of a Blank Bill Issuer is provided as security for the execution of
the APFC and authorizes the PEDA to reclaim its funding portion should Kreisler Polska violate the terms of the APFC. The primary ongoing contractual requirements under the APFC, include, but are not limited to: (i) providing information on Kreisler
Polskas investment program status to various Polish governmental entities and (ii) maintaining the investment in capital equipment for a period of 5 years from the date Kreisler Polska submits a project completion report to the appropriate
Polish government entity. If the total amount of Kreisler Polskas qualified capital expenditures should be less than 3.0 million Polish zloty (approximately $956,000 at the exchange rates as of September 30, 2006), the additional funding from
the PEDA would be 40% of the lower qualified capital expenditure amount. Under certain circumstances, as specified in the APFC, such APFC may be terminated by the PEDA and Kreisler Polska would be obligated to repay any additional funding received
from the PEDA and/or will not be eligible to receive additional funding from the PEDA for a period of 3 years after the termination of the contract.

Should Kreisler Polska be unable to meet the requirements of the APFC, Kreisler Polska will be obligated to repay the PEDA the total amount of the funding of 1.2 million Polish zloty (approximately $382,000 at
exchange rates as of September 30, 2006) plus interest. If Kreisler Polska meets all requirements set forth in the APFC, the PEDA will return, without interest, the Declaration of a Blank Bill Issuer to Kreisler Polska after a period of 5 years has
elapsed from the completion of the Project.

Cash flows used in financing activities for the three months ended September 30, 2006
consisted of $26,000 for the repayment of obligations under capital leases and $55,000 for the repayment of a line of credit established by Kreisler Polska as part of the application requirements for the APFC.

The creation of Kreisler Polska exposes the Company to gains and losses due to fluctuations of a foreign currency. As of September 30, 2006 the
translation adjustment amounted to $15,700. The net effect after adjusting for a tax benefit of $6,300 is a reduction in stockholders equity of $9,400.

Working capital at September 30, 2006 totaled $9,864,000. We believe this level is sufficient to support our working capital needs during the next 12 months. Our long-term liabilities are comprised of obligations
under capital leases and accrued environmental expenses totaling $383,000 and $408,000, respectively.

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



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Reclassification

Beginning with the Companys Form 10-QSB for the three and nine months ended March 31, 2006, the Company separated the interest expense from Selling, general and administrative expenses. Separating the
interest expense amounts reduces Selling, general and administrative expenses for the three months ended September 30, 2005 a total of $8,941. This separation has no effect on the Income before income taxes of the Company.



|                                                    |  |                                  |           |                                 |   |        |                                                |  |   |           |  
|--------------------------------------------------- |  | -------------------------------- | --------- | ------------------------------- | - | ------ | ---------------------------------------------- |  | - | --------- | -
|Three Months Ended September 30, 2005               |  | Three MonthsEnded Sept. 30, 2005 |           | Interest Expenseincluded inSG&A |   |        | Three MonthsEnded Sept. 30, 2005(Reclassified) | 
|Net Sales                                           |  | $                                | 4,129,240 |                                 | $ |       |                                                |  | $ | 4,129,240 |  
|                                                    |  |                                  |          
|Cost of goods sold                                  |  |                                  | 3,551,532 |                                 |   |       |                                                |  |   | 3,551,532 |  
|Selling, general and administrative expenses (SG&A) |  |                                  | 283,165   |                                 |   | (8,941 | )                                              |  |   | 274,224   |  
|                                                    |  |                                  |           |                                 |   |        |                                                |  |   |           |  
|Total costs and expenses                            |  |                                  | 3,834,697 |                                 |   | (8,941 | )                                              |  |   | 3,825,756 |  
|                                                    |  |                                  |           |                                 |   |        |                                                |  |   |           |  
|Income from operations                              |  |                                  | 294,543   |                                 |   |       |                                                |  |   | 303,484   |  
|                                                    |  |                                  |          
|Interest and other income                           |  |                                  | 25,683    |                                 |   |       |                                                |  |   | 25,683    |  
|Interest and other expenses                         |  |                                  |          |                                 |   | (8,941 | )                                              |  |   | (8,941    | )
|                                                    |  |                                  |           |                                 |   |        |                                                |  |   |           |  
|Total interest and other income and expense         |  |                                  | 25,683    |                                 |   | (8,941 | )                                              |  |   | 16,742    |  
|                                                    |  |                                  |           |                                 |   |        |                                                |  |   |           |  
|Income before income taxes                          |  | $                                | 320,226   |                                 | $ |       |                                                |  | $ | 320,226   |  
|                                                    |  |                                  |           |                                 |   |        |                                                |  |   |           |  

Contingencies

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

In July 1999, the Company became aware of historical releases of hazardous substances at its manufacturing facility
located at 180 Van Riper Avenue, Elmwood Park, New Jersey. The Company promptly notified the New Jersey Department of Environmental Protection (NJDEP) as required by the New Jersey Spill Compensation and Control Act (Spill
Act), N.J.S.A. 58:10-23.11, and retained the services of environmental remediation consultants to perform a full site characterization in accordance with the NJDEPs Technical Requirement for Site Remediation, N.J.A.C. 7:26E-1.1. In June
2001, the Company entered into a fixed price remediation agreement with Resource Control Corporation (RCC). At September 30, 2006, the remaining cost estimated for remediation of the site under the fixed price remediation agreement
with RCC was approximately $408,000, virtually all of which is expected to be paid in fiscal 2010, provided that RCC achieves specific regulatory requirements contained in the fixed price remediation agreement.

Critical Accounting Policies and Estimates

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



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Principles of Consolidation

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

Revenue Recognition

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

Cash and Cash Equivalents

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

Accounts Receivable-Trade

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

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

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

Property, Plant, and Equipment

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

Property,
plant and equipment as of September 30, 2006 is as follows:



|                                       |  |   |            |  
|-------------------------------------- |  | - | ---------- | -
|Property, plant and equipment, at cost |  | $ | 7,096,712  |  
|Less  accumulated depreciation        |  |   | (5,266,557 | )
|                                       |  |   |            |  
|Property, Plant and Equipment, net     |  | $ | 1,830,155  |  
|                                       |  |   |            |  

Foreign Currency Translation

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



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Income Taxes

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

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

Net Income Per Common Share

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

Inventories

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

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



|                |  |                |           |               |   |          
|--------------- |  | -------------- | --------- | ------------- | - | ---------
|                |  | Sept. 30, 2006 |           | June 30, 2006
|Raw materials   |  | $              | 2,648,080 |               | $ | 1,968,963
|Work in process |  |                | 1,124,922 |               |   | 1,122,269
|Finished goods  |  |                | 162,196   |               |   | 162,188  
|                |  |                |           |               |   |          
|                |  | $              | 3,935,198 |               | $ | 3,253,420
|                |  |                |           |               |   |          

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

Certain Relationships and Related-Party Transactions

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

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



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The Company will also reimburse Mr. Kelly for all reasonable out-of-pocket expenses incurred during
the term of the Consulting Agreement, including, but not limited to, Mr. Kellys commute to or from his home residence, living expenses while on site in New Jersey and certain business travel and entertainment expenses. The Consulting
Agreement became effective on July 1, 2005 and continues until thirty days following a written termination notice by either party to the Consulting Agreement.

For the three months ended September 30, 2006, the Company paid to Mr. Kelly $38,500 for technical advisory services and reimbursed Mr. Kelly $6,500 for his out-of-pocket expenses.

Change of Independent Registered Public Accounting Firm

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

Item 3    Controls and Procedures

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

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

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

An evaluation was carried out under the supervision and with the participation of the Companys management, including the CEO and CFO, of the
effectiveness of the Companys disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the CEO and CFO have concluded that as of the end of the period covered by this report, the
Companys disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in reports that are filed or submitted under the Securities Exchange Act of 1934, as amended, is
(i) recorded, processed, summarized and reported, within the time periods specified in the Commissions rules and forms and (ii) accumulated and communicated to the Companys management, including its CEO (i.e., the principal
executive officer) and CFO (i.e., the principal financial officer), or persons performing similar functions, as appropriate to allow timely decisions regarding the required disclosure. There have been no changes in the Companys internal
control over financial reporting during the Companys last fiscal quarter (or the Companys fourth fiscal quarter in the case of an annual report) that have materially affected, or are reasonably likely to materially affect, its internal
control over financial reporting.



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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        
|       | 
|       |  | None                                                       
|       | 
|Item 5 |  | Other Information                                          
|       | 
|       |  | None                                                       
|       | 
|Item 6 |  | Exhibits                                                   
|       |  |                                                            
|       |  | (a)                                                         |  | Exhibits
|       |  |                                                             | 
|       |  |                                                             |  | 10.1     |  | Extension to Lease Agreement between Kreisler Manufacturing Corporation, Kreisler Industrial Corporation and T & T Investments dated July 11, 2006 incorporated by reference to
Exhibit 10.1 to the current report on Form 8-K filed on July 12, 2006                                  
|       |  |                                                             | 
|       |  |                                                             |  | 10.2     |  | Additional Project Funding Contract dated May 30, 2006 (English translation from the Polish language) between Kreisler Polska Sp. z o.o and the Polish Enterprise Development Agency
incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed on July 28, 2006
|       |  |                                                             | 
|       |  |                                                             |  | 10.3     |  | Declaration of a Blank Bill Issuer dated July 24, 2006 (English translation from the Polish language) between Kreisler Polska Sp. z o.o and the Polish Enterprise Development Agency
incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed on July 28, 2006
|       |  |                                                             | 
|       |  |                                                             |  | 11       |  | Statement regarding computation of per share earnings incorporated by reference to Note 3 to Interim Consolidated Financial Statements included in this Quarterly Report on Form
10-QSB                                                                                                
|       |  |                                                             | 
|       |  |                                                             |  | 31.1     |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934                                                                                                                                                                          
|       |  |                                                             | 
|       |  |                                                             |  | 31.2     |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934                                                                                                                                                                          
|       |  |                                                             | 
|       |  |                                                             |  | 32.1     |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350                                                                                                                                                                                



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##### Table of Contents

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: November 13, 2006



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EXHIBIT INDEX



|     |  |                                                                                                                                                                                                                                                                                        
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Extension to Lease Agreement between Kreisler Manufacturing Corporation, Kreisler Industrial Corporation and T & T Investments dated July 11, 2006 incorporated by reference to
Exhibit 10.8 of the current report on Form 8-K filed on July 12, 2006                                  
|     | 
|10.2 |  | Additional Project Funding Contract dated May 30, 2006 (English translation from the Polish language) between Kreisler Polska Sp. z o.o and the Polish Enterprise Development Agency
incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed on July 28, 2006
|     | 
|10.3 |  | Declaration of a Blank Bill Issuer dated July 24, 2006 (English translation from the Polish language) between Kreisler Polska Sp. z o.o and the Polish Enterprise Development Agency
incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed on July 28, 2006
|     | 
|11   |  | Statement regarding computation of per share earnings incorporated by reference to Note 3 to Interim Consolidated Financial Statements included in this Quarterly Report on Form
10-QSB                                                                                                
|     | 
|31.1 |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934                                                                                                                                                                          
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934                                                                                                                                                                          
|     | 
|32.1 |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350                                                                                                                                                                                



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