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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-QSB



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(Mark One)

|x | Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------



For the quarterly period ended December 31, 2005



| ̈ | 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                                                       |  | 22-1044792                          
|(State of other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



180 Van Riper
Avenue, Elmwood Park, New Jersey 07407

(Address of principal executive offices)



(201) 791-0700

(Issuers telephone number)



Not Applicable

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



---



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



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



The number of shares outstanding of the issuers Common Stock, par value $.125 per
share, as of February 14, 2006 was 1,826,447 shares.



|Transitional | Small Business Disclosure format (check one): ̈Yes    x  No
|------------ | ----------------------------------------------------------



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##### Table of Contents

Table of Contents



|        |  |                                                             |  |            
|------- |  | ----------------------------------------------------------- |  | -----------
|        |  |                                                             |  | Page Number
|PART I  |  | Financial Information                                       |  |            
|        |  |                                                            
|Item 1  |  | Financial Statements                                        |  |            
|        |  |                                                            
|        |  | Consolidated Balance Sheets                                 |  | 4          
|        |  |                                                            
|        |  | Consolidated Statements of Operations                       |  | 5          
|        |  |                                                            
|        |  | Consolidated Statements of Cash Flows                       |  | 6          
|        |  |                                                            
|        |  | Notes to the Consolidated Financial Statements              |  | 7          
|        |  |                                                            
|Item 2  |  | Managements Discussion and Analysis or Plan of Operation   |  | 11         
|        |  |                                                            
|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                             |  | 20         
|        |  |                                                            
|Item 4  |  | Submission of Matters to a Vote of Security Holders         |  | 20         
|        |  |                                                            
|Item 5  |  | Other Information                                           |  | 20         
|        |  |                                                            
|Item 6  |  | Exhibits                                                    |  | 20         



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##### Table of Contents

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



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##### Table of Contents

PART I FINANCIAL INFORMATION

Item 1 Financial Statements



Consolidated Balance Sheets



|                                                                                                     |  |                         |            |   |                     |   |            |  
|---------------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ------------------- | - | ---------- | -
|                                                                                                     |  | (Unaudited)             |            |   | (Audited)           |  
|                                                                                                     |  | Quarter Ended12/31/2005 |            |   | Year Ended6/30/2005 |  
|Assets                                                                                               |  |                         |            |   |                     |   |            |  
|Cash and cash equivalents                                                                            |  | $                       | 3,722,001  |   |                     | $ | 3,409,552  |  
|Accounts receivable  trade, net ($10,000 allowance for uncollectible accounts)                      |  |                         | 3,013,289  |   |                     |   | 3,201,376  |  
|Inventories                                                                                          |  |                         |            |   |                     |   |            |  
|Raw Materials                                                                                        |  |                         | 1,980,994  |   |                     |   | 1,606,347  |  
|Work in Process                                                                                      |  |                         | 1,020,099  |   |                     |   | 855,100    |  
|Finished Goods                                                                                       |  |                         | 313,453    |   |                     |   | 356,447    |  
|Deferred tax asset, current                                                                          |  |                         | 197,000    |   |                     |   | 166,000    |  
|Other current assets                                                                                 |  |                         | 122,856    |   |                     |   | 229,551    |  
|                                                                                                     |  |                         |            |   |                     |   |            |  
|Total Current Assets                                                                                 |  | $                       | 10,369,692 |   |                     | $ | 9,824,373  |  
|                                                                                                     |  |                        
|Property, plant and equipment, at cost                                                               |  |                         | 6,397,039  |   |                     |   | 6,150,326  |  
|less  accumulated depreciation                                                                      |  |                         | (4,906,562 | ) |                     |   | (4,659,160 | )
|                                                                                                     |  |                         |            |   |                     |   |            |  
|Property, Plant and Equipment, net                                                                   |  |                         | 1,490,477  |   |                     |   | 1,491,166  |  
|                                                                                                     |  |                        
|Deferred tax asset, non-current                                                                      |  |                         | 181,800    |   |                     |   | 261,800    |  
|                                                                                                     |  |                         |            |   |                     |   |            |  
|Total Non-Current Assets                                                                             |  |                         | 1,672,277  |   |                     |   | 1,752,966  |  
|                                                                                                     |  |                         |            |   |                     |   |            |  
|Total Assets                                                                                         |  | $                       | 12,041,969 |   |                     | $ | 11,577,339 |  
|                                                                                                     |  |                         |            |   |                     |   |            |  
|Liabilities and Stockholders Equity                                                                 |  |                         |            |   |                     |   |            |  
|Liabilities                                                                                          |  |                         |            |   |                     |   |            |  
|Accounts payable  trade                                                                             |  | $                       | 775,212    |   |                     | $ | 1,049,613  |  
|Accrued expenses                                                                                     |  |                         | 227,457    |   |                     |   | 112,837    |  
|Income taxes payable                                                                                 |  |                         | 256,575    |   |                     |   |           |  
|Obligation under capital leases                                                                      |  |                         | 79,912     |   |                     |   | 76,869     |  
|Accrued environmental cost                                                                           |  |                         |           |   |                     |   | 426,825    |  
|                                                                                                     |  |                         |            |   |                     |   |            |  
|Total Current Liabilities                                                                            |  | $                       | 1,339,156  |   |                     | $ | 1,666,144  |  
|                                                                                                     |  |                        
|Obligation under capital leases                                                                      |  |                         | 305,246    |   |                     |   | 345,978    |  
|Accrued environmental cost                                                                           |  |                         | 366,890    |   |                     |   | 16,541     |  
|                                                                                                     |  |                         |            |   |                     |   |            |  
|Total Long-Term Liabilities                                                                          |  |                         | 672,136    |   |                     |   | 362,519    |  
|                                                                                                     |  |                        
|Stockholders Equity                                                                                 |  |                         |            |   |                     |   |            |  
|Common Stock, $.125 par value - 3,000,000 shares authorized; 1,826,447 shares issued and outstanding |  |                         | 228,306    |   |                     |   | 228,306    |  
|Additional paid-in capital                                                                           |  |                         | 540,216    |   |                     |   | 540,216    |  
|Retained earnings                                                                                    |  |                         | 9,285,559  |   |                     |   | 8,805,139  |  
|Accumulated other comprehensive loss                                                                 |  |                         | (23,404    | ) |                     |   | (24,985    | )
|                                                                                                     |  |                         |            |   |                     |   |            |  
|Total Stockholders Equity                                                                           |  |                         | 10,030,677 |   |                     |   | 9,548,676  |  
|                                                                                                     |  |                         |            |   |                     |   |            |  
|Total Liabilities and Stockholders Equity                                                           |  | $                       | 12,041,969 |   |                     | $ | 11,577,339 |  
|                                                                                                     |  |                         |            |   |                     |   |            |  



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



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##### Table of Contents

Kreisler Manufacturing Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)



|                                             |  |      |           |   |      |   |           |   
|-------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | --
|Three Months Ended December 31,              |  | 2005 |           |   | 2004 |  
|Revenues                                     |  | $    | 4,427,267 |   |      | $ | 3,237,765 |   
|                                             |  |      |           |   |      |   |           |   
|Cost of goods sold                           |  |      | 3,653,883 |   |      |   | 3,242,474 |   
|Selling, general and administrative expenses |  |      | 337,222   |   |      |   | 242,741   |   
|                                             |  |      |           |   |      |   |           |   
|Total Costs and Expenses                     |  |      | 3,991,105 |   |      |   | 3,485,215 |   
|                                             |  |      |           |   |      |   |           |   
|Income (loss) from operations                |  |      | 436,162   |   |      |   | (247,450  | ) 
|                                             |  |     
|Other income:                                |  |      |           |   |      |   |           |   
|Interest                                     |  |      | 29,607    |   |      |   | 21,737    |   
|                                             |  |      |           |   |      |   |           |   
|Income (loss) before income taxes            |  |      | 465,769   |   |      |   | (225,713  | ) 
|                                             |  |     
|Income tax (expense) benefit                 |  |      | (175,975  | ) |      |   | 84,000    |   
|                                             |  |      |           |   |      |   |           |   
|Net income (loss)                            |  | $    | 289,794   |   |      | $ | (141,713  | ) 
|                                             |  |      |           |   |      |   |           |   
|Income (loss) per share:                     |  |      |           |   |      |   |           |   
|Net income (loss)  basic shares             |  | $    | 0.16      |   |      | $ | (0.08     | ) 
|Net income (loss)  diluted shares           |  | $    | 0.16      |   |      | $ | (0.08     | ) 
|Average Common Shares  Basic                |  |      | 1,826,447 |   |      |   | 1,762,447 |   
|Average Common Shares  Diluted              |  |      | 1,846,445 |   |      |   | 1,835,434 |   
|                                             |  |     
|Six Months Ended December 31,                |  | 2005 |           |   | 2004 |  
|Revenues                                     |  | $    | 8,556,507 |   |      | $ | 6,351,688 |   
|                                             |  |      |           |   |      |   |           |   
|Cost of goods sold                           |  |      | 7,205,415 |   |      |   | 5,934,693 |   
|Selling, general and administrative expenses |  |      | 620,387   |   |      |   | 490,356   |   
|                                             |  |      |           |   |      |   |           |   
|Total Costs and Expenses                     |  |      | 7,825,802 |   |      |   | 6,425,049 |   
|                                             |  |      |           |   |      |   |           |   
|Income (loss) from operations                |  |      | 730,705   |   |      |   | (73,361   | ) 
|                                             |  |     
|Other income:                                |  |      |           |   |      |   |           |   
|Interest                                     |  |      | 55,290    |   |      |   | 32,844    |   
|                                             |  |      |           |   |      |   |           |   
|Income (loss) before income taxes            |  |      | 785,995   |   |      |   | (40,517   | ) 
|                                             |  |     
|Income tax (expense)benefit                  |  |      | (305,575  | ) |      |   | 14,000    |   
|                                             |  |      |           |   |      |   |           |   
|Net income (loss)                            |  | $    | 480,420   |   |      | $ | (26,517   | ) 
|                                             |  |      |           |   |      |   |           |   
|Income (loss) per share:                     |  |      |           |   |      |   |           |   
|Net income (loss)  basic shares             |  | $    | 0.26      |   |      | $ | (0.02     | ) 
|Net income (loss)  diluted shares           |  | $    | 0.26      |   |      | $ | (0.02     | )*
|Average Common Shares  Basic                |  |      | 1,826,447 |   |      |   | 1,762,447 |   
|Average Common Shares  Diluted              |  |      | 1,846,445 |   |      |   | 1,835,434 |   

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|* | Note: Basic earnings per share is computed as earnings divided by weighted average basic shares outstanding. When a loss occurs, Diluted (loss) per share and Basic (loss) per share
are the same.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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Kreisler Manufacturing Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)



|                                                                                     |  |      |           |   |      |   |           |  
|------------------------------------------------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | -
|Six Months Ended December 31,                                                        |  | 2005 |           |   | 2004 |  
|Cash Flows from Operating Activities:                                                |  |      |           |   |      |   |           |  
|Net income (loss)                                                                    |  | $    | 480,420   |   |      | $ | (26,517   | )
|Adjustments to reconcile net income (loss) to cash provided by operating activities: |  |      |           |   |      |   |           |  
|Depreciation and amortization                                                        |  |      | 247,403   |   |      |   | 142,151   |  
|Deferred tax asset                                                                   |  |      | 49,000    |   |      |   | (32,600   | )
|Decrease (increase) in operating assets:                                             |  |      |           |   |      |   |           |  
|Accounts receivable  trade                                                          |  |      | 189,668   |   |      |   | 471,422   |  
|Inventories                                                                          |  |      | (496,652  | ) |      |   | 234,921   |  
|Income tax receivable                                                                |  |      |          |   |      |   | 437,422   |  
|Split dollar life insurance receivable                                               |  |      |          |   |      |   | 235,450   |  
|Other current assets                                                                 |  |      | 106,695   |   |      |   | 39,340    |  
|(Decrease) increase in operating liabilities:                                        |  |      |           |   |      |   |           |  
|Accounts payable  trade                                                             |  |      | (274,402  | ) |      |   | 33,202    |  
|Accrued expenses                                                                     |  |      | 114,620   |   |      |   | (221,370  | )
|Income taxes payable                                                                 |  |      | 256,575   |   |      |   |          |  
|Accrued environmental costs                                                          |  |      | (76,476   | ) |      |   | (80,251   | )
|                                                                                     |  |      |           |   |      |   |           |  
|Net Cash Provided by Operating Activities                                            |  |      | 596,851   |   |      |   | 1,233,170 |  
|                                                                                     |  |     
|Cash Flows from Investing Activities:                                                |  |      |           |   |      |   |           |  
|Purchase of property and equipment                                                   |  |      | (246,713  | ) |      |   | (89,194   | )
|                                                                                     |  |      |           |   |      |   |           |  
|Net Cash Used by Investing Activities                                                |  |      | (246,713  | ) |      |   | (89,194   | )
|                                                                                     |  |     
|Cash Flows from Financing Activities:                                                |  |      |           |   |      |   |           |  
|Repayment of obligations under capital leases                                        |  |      | (37,689   | ) |      |   |          |  
|                                                                                     |  |      |           |   |      |   |           |  
|Net Cash Used by Financing Activities                                                |  |      | (37,689   | ) |      |   |          |  
|                                                                                     |  |     
|Increase in cash and cash equivalents                                                |  |      | 312,449   |   |      |   | 1,143,976 |  
|Cash and cash equivalents at beginning of year                                       |  |      | 3,409,552 |   |      |   | 3,367,494 |  
|                                                                                     |  |      |           |   |      |   |           |  
|                                                                                     |  |      |           |   |      |   |           |  
|Cash and cash equivalents at December 31                                             |  | $    | 3,722,001 |   |      | $ | 4,511,470 |  
|                                                                                     |  |      |           |   |      |   |           |  
|                                                                                     |  |     
|Supplemental Disclosure of Cash Flow Information                                     |  |      |           |   |      |   |           |  
|Interest paid                                                                        |  | $    | 45,344    |   |      | $ |          |  



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



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##### Table of Contents

Kreisler Manufacturing Corporation and Subsidiaries

Notes to the Consolidated Financial Statements

(Unaudited)



1. Principles of Consolidation



The 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 elimination of inter-company transactions. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In the opinion of management, all adjustments necessary for a fair presentation of such
financial statements have been included. Interim results are not necessarily indicative of results for a full year.



The consolidated financial statements and notes are presented as required by SEC Regulation S-B, and do not contain certain information included in the
Companys annual consolidated financial statements and notes. Accordingly, these statements should be read in conjunction with the consolidated financial statements and notes thereto appearing in the Annual Report on Form 10-KSB/A (Amendment
No. 1) of the Company for the fiscal year ended June 30, 2005.



2.
Inventories



Inventory valuation for the quarters ending
December 31 and June 30 is based on actual physical inventory counts. For the quarters ending September 30 and March 31 inventory valuation is based on internal perpetual inventory records. The Company compares the physical
inventory valuation for the periods ending December 31 and June 30 with the perpetual inventory record valuation. At December 31, 2005, the comparison resulted in a valuation difference of 4%, a difference which the Company believes
is primarily attributable to fluctuations of the material scrap rate percentage. Any substantial variance in the actual material scrap rate percentage could significantly increase or decrease profits due to changes in the costs of goods sold. For
the two quarters in which internal perpetual records are used to value the inventory, raw materials, work in process and finished goods inventories are allocated based on the same percentage of total inventory that existed at the time of the most
recent physical inventory valuation.



3. Contingencies



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



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



The Company maintains a sewer use permit issued by the Passaic Valley
Sewerage Commissioners (PVSC) authorizing the Company to discharge industrial effluent from its Kreisler Industrial manufacturing facility located at 180 Van Riper Avenue, Elmwood Park, New Jersey into the PVSC Waste Treatment facility.
Kreisler Industrial follows the requirements of Federal Regulation 40 CFR 413 and Section 313.1 of the PVSC Rules and Regulations. On July 1, 2005, the Company was notified by the PVSC that the Company was in violation of the daily maximum
limit for nickel and total metals and, as a result, had incurred a Serious Violation. These violations occurred during the fiscal year ended June 30, 2005. The Company was also notified that it was in Significant Non-Compliance and subject to
enforcement action. The Company retained the services of an environmental remediation consultant and immediately removed the suspected cause of these



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##### Table of Contents

violations from its industrial effluent discharge. The Company also retained legal counsel. With the assistance of the
environmental remediation consultant, the Company is evaluating alternatives to eliminate the potential for future violations. The Company has implemented procedures to prevent the re-occurrence of this type of violation. The Company approved and
executed a Settlement Agreement with the PVSC in January 2006. The Settlement Agreement has been submitted to the PVSC for approval and execution. Following receipt of a fully executed Settlement Agreement from the PVSC, the Company will pay a
settlement amount of $21,500. The Company expects to pay this amount by March 31, 2006. Based on the previously estimated range of penalties, the Company accrued a charge against earnings of $37,500 for the year ended June 30, 2005 and
this amount has not been adjusted to the actual settlement amount of $21,500.



In July 1999, the Company became aware of historical releases of hazardous substances at its leased manufacturing facility located at 180 Van Riper Avenue, Elmwood Park, New Jersey. The Company promptly notified the
New Jersey Department of Environmental Protection (NJDEP) as required by the New Jersey Spill Compensation and Control Act (Spill Act), N.J.S.A. 58:10-23.11, and retained the services of environmental remediation consultants to perform a full site
characterization in accordance with the NJDEPs Technical Requirements for Site Remediation, N.J.A.C. 7:26E-1.1. The site characterization has been completed and on June 15, 2001 the Company entered into an agreement with Resource Control
Corporation (RCC) for the site remediation. The remaining cost estimated for remediation of the site, less unamortized discount, is approximately $367,000. It is reasonably possible that the Companys recorded estimate of
remediation cost may change. With regard to environmental remediation, the assumption has been made that no new costs, above those identified in the original fixed price agreement, will be incurred as the project continues. The Company assumes that
there will be no future discoveries on the site that will require additional remediation. Based on a schedule provided by RCC in January 2006, the Company currently expects the submittal of the appropriate no further action documentation to NJDEP in
June 2009. As a result, all Accrued environmental costs on the balance sheet are long-term liabilities.



4. Earnings per Share



Basic net income per share is computed by dividing net income by the weighted-average common shares outstanding. Diluted net income per 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 Ended December 31, |           |      | Six Months Ended December 31, |          
|                                                      |  | 2005                            |           | 2004 |                               |           | 2005 |  | 2004 |          
|Net income (loss)                                     |  | $                               | 289,794   |      | $                             | (141,713  | )    |  | $    | 480,420   |  | $ | (26,517   | ) 
|                                                      |  |                                 |           |      |                               |           |      |  |      |           |  |   |           |   
|Weighted-average shares outstanding                   |  |                                 | 1,826,447 |      |                               | 1,762,447 |      |  |      | 1,826,447 |  |   | 1,762,447 |   
|Dilutive impact of stock options                      |  |                                 | 19,998    |      |                               | 72,987    |      |  |      | 19,998    |  |   | 72,987    |   
|                                                      |  |                                 |           |      |                               |           |      |  |      |           |  |   |           |   
|Weighted-average shares outstanding assuming dilution |  |                                 | 1,846,445 |      |                               | 1,835,434 |      |  |      | 1,846,445 |  |   | 1,835,434 |   
|                                                      |  |                                 |           |      |                               |           |      |  |      |           |  |   |           |   
|Net income (loss) per share:                          |  |                                 |           |      |                               |           |      |  |      |           |  |   |           |   
|Basic                                                 |  | $                               | 0.16      |      | $                             | (0.08     | )    |  | $    | 0.26      |  | $ | (0.02     | ) 
|Diluted                                               |  | $                               | 0.16      |      | $                             | (0.08     | )*   |  | $    | 0.26      |  | $ | (0.02     | )*

---

|* | Note: Basic earnings per share is computed as earnings divided by weighted average basic shares outstanding. When a loss occurs, Diluted (loss) per share and Basic (loss) per share
are the same.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



5. Reclassification



Beginning with the Companys Form 10-QSB for the three months ended
September 30, 2005 and Form 10-KSB/A (Amendment No. 1) for the year ended June 30, 2005 filed with the Securities and Exchange Commission (the SEC), the Company reclassified certain employee payroll and benefit expenses
from Cost of



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##### Table of Contents

goods sold to Selling, general and administrative expenses. This reclassification incorporated fiscal year 2005 changes
in management positional responsibilities as well as the transition of the duties and responsibilities of the former St. Petersburg, Florida corporate office to the Companys facility in Elmwood Park, New Jersey. Applying this reclassification
to the three and six months ended December 31, 2004 results in an increase in Selling, general and administrative expenses of $133,997 and $250,872, respectively, and a corresponding equal decrease in Cost of goods sold. This reclassification
has no effect on the Total Costs and Expenses or the Net Income of the Company for the three and six months ended December 31, 2004.



|                                             |  |                                 |           |                        |   |          |                                                           |  |   |          
|-------------------------------------------- |  | ------------------------------- | --------- | ---------------------- | - | -------- | --------------------------------------------------------- |  | - | ---------
|Three Months Ended December 31, 2004         |  | Three MonthsEnded Dec. 31, 2004 |           | ReclassificationAmount |   |          | Three Months Ended Dec. 31, 2004 (After Reclassification)
|Cost of goods sold                           |  | $                               | 3,376,471 |                        | $ | (133,997 | )                                                         |  | $ | 3,242,474
|Selling, general and administrative expenses |  |                                 | 108,744   |                        |   | 133,997  |                                                           |  |   | 242,741  
|                                             |  |                                 |           |                        |   |          |                                                           |  |   |          
|Total Costs and Expenses                     |  | $                               | 3,485,215 |                        | $ |         |                                                           |  | $ | 3,485,215
|                                             |  |                                 |           |                        |   |          |                                                           |  |   |          
|                                             |  |                                 |          
|Six Months Ended December 31, 2004           |  | Six MonthsEnded Dec. 31, 2004   |           | ReclassificationAmount |   |          | Six Months Ended Dec. 31, 2004(After Reclassification)   
|Cost of goods sold                           |  | $                               | 6,185,565 |                        | $ | (250,872 | )                                                         |  | $ | 5,934,693
|Selling, general and administrative expenses |  |                                 | 239,484   |                        |   | 250,872  |                                                           |  |   | 490,356  
|                                             |  |                                 |           |                        |   |          |                                                           |  |   |          
|Total Costs and Expenses                     |  | $                               | 6,425,049 |                        | $ |         |                                                           |  | $ | 6,425,049
|                                             |  |                                 |           |                        |   |          |                                                           |  |   |          



6. Subsequent Events



In a letter dated January 13, 2006 the Company was
notified by the State of New Jerseys Department of the Treasury, Division of Taxation (NJ Division of Taxation) that Kreisler Industrials Corporation Business Tax Returns for the fiscal years ended June 30, 2001 and
June 30, 2002 are subject to additional income tax. The proposed adjustments total $88,858 of which $59,493 is additional income tax expense, $5,504 is for penalties and $23,861 is for interest. The Company is responding to the NJ Division of
Taxation regarding the proposed adjustment. Pending final resolution of this matter, the Company has included a charge against earnings totaling $88,858 for the three months ended December 31, 2005.



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7. Segment Information



The Company has elected to organize its business based principally upon geographic areas. The Company evaluates performance and allocates resources
based on revenues, operating income (loss) and net assets employed. Net sales are attributed to geographic areas based on the location of the assets producing the revenues. Geographic information regarding the Companys net sales and long-lived
assets is as follows:



Selected Financial Results by
Geographic Segment



|                                        |  |               |            |        |   |          |       |  |   |           
|--------------------------------------- |  | ------------- | ---------- | ------ | - | -------- | ----- |  | - | ----------
|Three Months Ended December 31, 2005    |  | United States |            | Poland |   |          | Total
|Sales to unaffiliated customers         |  | $             | 4,423,861  |        | $ | 3,406    |       |  | $ | 4,427,267 
|                                        |  |               |           
|Income (loss) from operations           |  |               | 462,090    |        |   | (25,928  | )     |  |   | 436,162   
|Interest income                         |  |               | 28,772     |        |   | 835      |       |  |   | 29,607    
|                                        |  |               |            |        |   |          |       |  |   |           
|Income (loss) before income tax expense |  | $             | 490,862    |        | $ | (25,093  | )     |  | $ | 465,769   
|                                        |  |               |            |        |   |          |       |  |   |           
|Segment assets                          |  | $             | 11,632,562 |        | $ | 409,407  |       |  | $ | 12,041,969
|Depreciation                            |  | $             | 100,026    |        | $ | 51,541   |       |  | $ | 151,567   
|                                        |  |               |           
|Six Months Ended December 31, 2005      |  | United States |            | Poland |   |          | Total
|Sales to unaffiliated customers         |  | $             | 8,552,120  |        | $ | 4,387    |       |  | $ | 8,556,507 
|                                        |  |               |           
|Income (loss) from operations           |  |               | 832,710    |        |   | (102,005 | )     |  |   | 730,705   
|Interest income                         |  |               | 54,394     |        |   | 896      |       |  |   | 55,290    
|                                        |  |               |            |        |   |          |       |  |   |           
|Income (loss) before income tax expense |  | $             | 887,104    |        | $ | (101,109 | )     |  | $ | 785,995   
|                                        |  |               |            |        |   |          |       |  |   |           
|Segment assets                          |  | $             | 11,632,562 |        | $ | 409,407  |       |  | $ | 12,041,969
|Depreciation                            |  | $             | 190,767    |        | $ | 56,636   |       |  | $ | 247,403   



Starting from
inception through December 31, 2005, the Company provided Kreisler Polska with equity capital totaling approximately $559,000, a loan of approximately $34,000 and advances for goods and services totaling approximately $130,000.



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PART I

Item 2



Kreisler Manufacturing Corporation and
Subsidiaries



MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION



Overview



Kreisler Manufacturing Corporation (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 New Jersey in 1940, and which succeeded a New York corporation which was incorporated in 1930.
The Company and its 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, manufacture precision metal components and assemblies for use in military and commercial aircraft engines and industrial gas turbines. 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.



The Company operates in competitive aerospace markets that are historically
cyclical and this cyclicality can have a material positive or negative effect on the Companys financial results. The market for aerospace components is currently in an expansion phase. According to Aviation Week & Space Technology(issued dated January 23, 2006), calendar year 2005 ended with Boeing and Airbus achieving record orders for over 2,000 commercial aircraft. Development programs for the F-135 aircraft engine used on the F-35 Joint Strike Fighter and the
Trent 1000 aircraft engine used on the Boeing 787 Dreamliner continue to progress at the Company. The Company has benefited from this current expansion as sales of military and commercial aircraft engine components as well as industrial gas turbine
components have increased beginning with the quarter ended March 31, 2005. As a result, the Companys sales for the three months and six months ended December 31, 2005 are at their highest level in four years. Backlog as of
December 31, 2005 has increased 4% to $17.5 million as compared to $16.8 million as of June 30, 2005.



During the three months ended December 31, 2005, Kreisler Industrial shipped, under a long-term agreement, the first set of fuel manifolds for the
Trent 1000 aircraft engine. As one of two engines offered for use on the Boeing 787 Dreamliner, the Trent 1000 has received a significant portion of the announced engine orders to date for this airframe. Though Kreisler Industrial is also providing
components used on the GEnx, the alternative engine offered for the Boeing 787 Dreamliner, the fuel manifolds manufactured for the Trent 1000 offers a significantly greater opportunity due to the fuel manifolds higher sales value.



Demand for components manufactured by the Company and used in industrial gas
turbines has also improved primarily due to increases in aftermarket demand for the Siemens 501F turbine generator. The sale of industrial gas turbine components for the six months ended December 31, 2004 totaled $630,000 of which $312,000
represented the financial settlement of terminated purchase orders from an industrial gas turbine customer. Excluding that amount from the sales for the six months ended December 31, 2004, sales of industrial gas turbine components for the six
months ended December 31, 2005 of $820,000 have increased $502,000.



Kreisler Industrial relies on both Kreisler Polska as well as unaffiliated suppliers for machined components. As market demand has increased the ability of these unaffiliated suppliers to support all of Kreisler
Industrials requirements decreases. As a result, Kreisler Industrial is increasing the number of components produced by Kreisler Polska while seeking to identify new domestic suppliers. The Companys proprietary supply chain management
software is a web-based system that is being used to assist in the process of identifying capable new suppliers. In addition, certain raw materials used for the manufacture of the Companys components continue to be in limited supply. While
price and availability of nickel-based alloys have stabilized, the price and lead-time of titanium raw material and proprietary machined components have continued to increase while availability has declined.



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During the six months ended December 31, 2005, the Company continued to increase the capability and
capacity of Kreisler Polska. As a result of this activity, Kreisler Polska has become an increasingly important supplier of machined components to Kreisler Industrial. The Company will invest in additional machining capacity at Kreisler Polska and
is developing the sales and marketing strategies necessary for Kreisler Polska to develop new customers.



The Companys growth opportunities are potentially limited by its historical reliance on a few significant customers. The Companys largest
customer has established manufacturing operations outside of the United States that provide production capabilities similar to those offered by the Company. In addition, this customer may seek to transfer some of the components presently produced by
the Company to these operations. There are presently governmental restrictions on the transfer of certain military programs for manufacture outside of the United States but there are no assurances that such restrictions will continue. This reliance
may have a material adverse effect on the Company and is further exacerbated by the highly competitive nature of its markets. While the aerospace markets are currently in an expansion phase, the Company may also be negatively affected by the
slowdown in U.S. economic growth in the fourth quarter of 2005 as reported by the U.S government (The New York Times, issue dated January 28, 2006).



Results of Operations



Three Months ended December 31, 2005 Compared to Three Months ended December 31, 2004



Sales



Sales increased $1,189,000, or 37%, to $4,427,000 for the three months ended December 31, 2005 compared with $3,238,000
for the three months ended December 31, 2004. The Companys sales and sales changes by industry segment are as follows:



|                       |      |                                         |           |  |                 |           |          |   |           |      |    |   |      |     |   |  |     |  
|---------------------- | ---- | --------------------------------------- | --------- |  | --------------- | --------- | -------- | - | --------- | ---- | -- | - | ---- | --- | - |  | --- | -
|Industry Segment       |      | Sales - Three Months Ended December 31, |           |  | Percent ofSales |          
|                       | 2005 |                                         | 2004      |  | $ Change        |           | % Change |   |           | 2005 |    |   | 2004 |    
|Commercial             |      | $                                       | 1,771,000 |  | $               | 1,295,000 |          | $ | 476,000   |      | 37 | % |      | 40  | % |  | 40  | %
|Military               |      |                                         | 2,125,000 |  |                 | 1,590,000 |          |   | 535,000   |      | 34 | % |      | 48  | % |  | 49  | %
|Industrial Gas Turbine |      |                                         | 531,000   |  |                 | 353,000   |          |   | 178,000   |      | 50 | % |      | 12  | % |  | 11  | %
|                       |      |                                         |           |  |                 |           |          |   |           |      |    |   |      |     |   |  |     |  
|Total                  |      | $                                       | 4,427,000 |  | $               | 3,238,000 |          | $ | 1,189,000 |      | 37 | % |      | 100 | % |  | 100 | %
|                       |      |                                         |           |  |                 |           |          |   |           |      |    |   |      |     |   |  |     |  



The Companys
commercial aero-engine sales increased $476,000, or 37%, compared to the three months ended December 31, 2004. The Company benefited from increased demand for virtually all engine programs of which it is a supplier including CF34, GP7000,
PW4000, PW6000 and V2500 engines. This increase was partially offset by a decline in the shipment of components used in thrust reverser actuation systems for the Airbus A330 and A340 aircraft.



The Companys sales of components used in military engine applications
during the three months ended December 31, 2005 increased $535,000, or 34%, compared to the three months ended December 31, 2004. The increase is primarily attributable to an increase in delivery of development engine components for the
F135 engine (used on the F-35 Joint Strike Fighter) as well as increased sales for the F100 (used on the F-15 and F-16 aircraft) and F119 aircraft engines. For the three months ended December 31, 2005, development programs resulted in
non-recurring engineering charges paid to the Company of $85,000, an increase of $43,000 compared to the three months ended December 31, 2004.



For the three months ended December 31, 2005, the Company experienced an increase of $178,000, or 50%, in the sale of products to the industrial gas
turbine industry as compared to the three months ended December 31, 2004. This increase is primarily the result of continued improvement in the demand for after-market components used in the Siemens 501F heavy industrial gas turbine.
Approximately $249,000, or 71%, of industrial gas turbine sales for the three months ended December 31, 2004 was attributable to the settlement of and payment receipt for terminated materials.



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Cost of Goods Sold



Cost of goods sold for the three months ended December 31, 2005 was 82.5% of sales, or $3,654,000, compared to 100.1%
of sales, or $3,242,000, for three months ended December 31, 2004. The net increase in Cost of goods sold for the three months ended December 31, 2005 compared to the three month period ended December 31, 2004 was $412,000, or 13%.
The 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.



Selling, General and Administrative
Expenses



Selling, general and administrative expenses
for the three months ended December 31, 2005 were 7.6% of sales or $337,000 compared to 7.5% of sales or $243,000 for the three months ended December 31, 2004. The increase of $94,000, or 39%, is primarily the result of increases in
administrative employee-related costs and benefits and accounting fees.



Income and Taxes



The income from
operations for the three months ended December 31, 2005 of $436,000 was $683,000 higher than the loss from operations for the three months ended December 31, 2004 of $(247,000).



Interest income of $30,000 for the three months ended December 31, 2005 was $8,000 higher compared to the three months
ended December 31, 2004 primarily attributable to higher interest rates.



Income before income taxes for the three months ended December 31, 2005 was $466,000 compared to the loss before income taxes for the three months ended December 31, 2004 of $(226,000).



Income tax expense for the three months ended December 31, 2005 totaled
$176,000 compared to an income tax benefit of $84,000 for the three months ended December 31, 2004.



Six Months ended December 31, 2005 Compared to Six Months ended December 31, 2004



Sales



Sales increased $2,205,000, or 35%, to $8,557,000 for the six months ended December 31, 2005 compared with $6,352,000 for the six months ended
December 31, 2004. The Companys sales and sales changes by industry segment are as follows:



|                       |      |                                       |           |  |                 |           |          |   |           |      |    |   |      |     |   |  |     |  
|---------------------- | ---- | ------------------------------------- | --------- |  | --------------- | --------- | -------- | - | --------- | ---- | -- | - | ---- | --- | - |  | --- | -
|Industry Segment       |      | Sales - Six Months Ended December 31, |           |  | Percent ofSales |          
|                       | 2005 |                                       | 2004      |  | $ Change        |           | % Change |   |           | 2005 |    |   | 2004 |    
|Commercial             |      | $                                     | 3,381,000 |  | $               | 2,643,000 |          | $ | 738,000   |      | 28 | % |      | 39  | % |  | 42  | %
|Military               |      |                                       | 4,356,000 |  |                 | 3,079,000 |          |   | 1,277,000 |      | 41 | % |      | 51  | % |  | 48  | %
|Industrial Gas Turbine |      |                                       | 820,000   |  |                 | 630,000   |          |   | 190,000   |      | 30 | % |      | 10  | % |  | 10  | %
|                       |      |                                       |           |  |                 |           |          |   |           |      |    |   |      |     |   |  |     |  
|Total                  |      | $                                     | 8,557,000 |  | $               | 6,352,000 |          | $ | 2,205,000 |      | 35 | % |      | 100 | % |  | 100 | %
|                       |      |                                       |           |  |                 |           |          |   |           |      |    |   |      |     |   |  |     |  



The Companys
commercial aero-engine sales increased $738,000, or 28%, compared to the six months ended December 31, 2004. Increased demand for CF34, PW4000, PW6000 and V2500 engine components was partially offset by declines in the shipment of components
used in the GP7000 aircraft engine and in thrust reverser actuation systems for the Airbus A330 and A340 aircraft.



The Companys sales of components used in military engine applications during the six months ended December 31, 2005 totaled $4,356,000 compared
to $3,079,000 for the six months ended December 31, 2004. The



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increase of $1,277,000, or 41%, is primarily attributable to an increase in delivery of development engine components for
the F135 and F100 engines as well as an increase in spare parts sales to the U.S. Government. For the six months ended December 31, 2005, development programs resulted in non-recurring engineering charges paid to the Company of $199,000, an
increase of $120,000 compared to the six months ended December 31, 2004.



For the six months ended December 31, 2005, the Company had an increase of $190,000, or 30%, in the sale of products to the industrial gas turbine industry as compared to the six months ended December 31,
2004. This increase is primarily the result of continued improvement in the demand for after-market components used in the Siemens 501F heavy industrial gas turbine and for aero-derivative industrial gas turbine components. Approximately $312,000,
or 50%, of industrial gas turbine sales for the six months ended December 31, 2004 was attributable to the settlement of and payment receipt for terminated materials.



Cost of Goods Sold



Cost of goods sold for the six months ended December 31, 2005 was 84.2% of sales, or $7,205,000 compared to 93.4% of sales, or $5,935,000, for six
months ended December 31, 2004. Cost of goods sold for the six months ended December 31, 2005 increased $1,270,000, or 21%, compared to the six month period ended December 31, 2004. The increase in the gross profit is partially
attributable to the increase in sales and lower purchased material content. The increase in Cost of goods sold is primarily attributable to increased purchase 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.



Selling, General and Administrative Expenses



Selling, general and administrative expenses for the six months ended December 31, 2005 were 7.3% of sales, or $620,000, compared to 7.7% of sales, or $490,000, for the six months ended December 31, 2004.
The increase of $130,000, or 27%, is primarily the result of increases in administrative employee-related costs and benefits and accounting fees, offset by decreases in legal fees.



Income and Taxes



The income from operations for the six months ended December 31, 2005 of $731,000 was $804,000 higher than the loss from operations as of
December 31, 2004 of $(73,000).



Interest income of
$55,000 for the six months ended December 31, 2005 was $22,000 higher compared to the six months ended December 31, 2004 primarily attributable to higher interest rates.



Income before income taxes for the six months ended December 31, 2005 was $786,000 compared to the loss before income
taxes for the same period in 2004 of $(41,000).



Income tax
expense for the six months ended December 31, 2005 totaled $306,000 compared to an income tax benefit of $14,000 for the same period in 2004.



Backlog



Backlog as of December 31, 2005 was approximately $17.5 million compared to $14.2 million for the same period in the prior year. The backlog
increased $3.3 million or 23%. Backlog as of June 30, 2005 was $16.8 million. Backlog is subject to change with reduced purchase order duration and terminations. An additional $1.1 million in PW4000 commercial aircraft engine orders remains
under discussion with a customer for possible termination due to declines in market demand for the components. Orders that have already been terminated by a customer are excluded from the backlog even if the amount owed by a customer to the Company
for the termination has not been paid.



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Liquidity and Capital Resources



The Company has historically been able to use operating cash flow and cash on-hand to cover most capital expenditure and
working capital requirements. The Company has also used capital leases to acquire capital equipment. The Company anticipates using operating cash flow, cash on-hand and external financial sources for future capital expenditures.



Cash and cash equivalents at December 31, 2005 increased $312,000, or
9%, to $3,722,000 compared to cash and cash equivalents of $3,410,000 at June 30, 2005.



Cash provided by operating activities for the period ended December 31, 2005 was $597,000 which was primarily attributable to the Companys net income of $480,000, decreases in accounts receivable and other
current assets and increases in accrued expenses and income taxes payable. These items were partially offset by increased inventory costs and a reduction in accounts payable.



Cash used in investing activities for the period ended December 31, 2005 amounted to $247,000 and is attributable to
the purchase of capital equipment by the Company. Cash used by financing activities totaled $38,000 and is attributable to capital lease payments for machining equipment. The Company believes that operating cash flow, cash on-hand and external
financial sources will be sufficient to cover anticipated capital expenditures of approximately $500,000 for the 12 months ending December 31, 2006.



The creation of Kreisler Polska exposes the Company to gains and losses due to fluctuations of a foreign currency. As of December 31, 2005 the
foreign currency translation adjustment amounted to $38,800. The net effect after adjusting for a tax benefit of $15,400 is a reduction in stockholders equity of $23,400. Current period realized foreign currency gains and losses are included
as part of selling, general and administrative expenses. As of December 31, 2005, this loss amounted to $3,650.



Reclassification



Beginning with the Companys Form 10-QSB for the three months ended September 30, 2005 and Form 10-KSB/A (Amendment No. 1) for the year
ended June 30, 2005 filed with the Securities and Exchange Commission (the SEC), the Company reclassified certain employee payroll and benefit expenses from Cost of goods sold to Selling, general and administrative expenses. This
reclassification incorporated fiscal year 2005 changes in management positional responsibilities as well as the transition of the duties and responsibilities of the former St. Petersburg, Florida corporate office to the Companys facility in
Elmwood Park, New Jersey. Applying this reclassification to the three and six months ended December 31, 2004 results in an increase in Selling, general and administrative expenses of $133,997 and $250,872, respectively, and a corresponding
equal decrease in Cost of goods sold. This reclassification has no effect on the Total Costs and Expenses or the Net Income of the Company for the three and six months ended December 31, 2004.



|                                             |  |                                 |           |                        |   |          |                                                          |  |   |          
|-------------------------------------------- |  | ------------------------------- | --------- | ---------------------- | - | -------- | -------------------------------------------------------- |  | - | ---------
|Three Months Ended December 31, 2004         |  | Three MonthsEnded Dec. 31, 2004 |           | ReclassificationAmount |   |          | Three Months Ended Dec. 31, 2004(After Reclassification)
|Cost of goods sold                           |  | $                               | 3,376,471 |                        | $ | (133,997 | )                                                        |  | $ | 3,242,474
|Selling, general and administrative expenses |  |                                 | 108,744   |                        |   | 133,997  |                                                          |  |   | 242,741  
|                                             |  |                                 |           |                        |   |          |                                                          |  |   |          
|Total Costs and Expenses                     |  | $                               | 3,485,215 |                        | $ |         |                                                          |  | $ | 3,485,215
|                                             |  |                                 |           |                        |   |          |                                                          |  |   |          



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|                                             |  |                               |           |                        |   |          |                                                        |  |   |          
|-------------------------------------------- |  | ----------------------------- | --------- | ---------------------- | - | -------- | ------------------------------------------------------ |  | - | ---------
|Six Months Ended December 31, 2004           |  | Six MonthsEnded Dec. 31, 2004 |           | ReclassificationAmount |   |          | Six Months Ended Dec. 31, 2004(After Reclassification)
|Cost of goods sold                           |  | $                             | 6,185,565 |                        | $ | (250,872 | )                                                      |  | $ | 5,934,693
|Selling, general and administrative expenses |  |                               | 239,484   |                        |   | 250,872  |                                                        |  |   | 490,356  
|                                             |  |                               |           |                        |   |          |                                                        |  |   |          
|Total Costs and Expenses                     |  | $                             | 6,425,049 |                        | $ |         |                                                        |  | $ | 6,425,049
|                                             |  |                               |           |                        |   |          |                                                        |  |   |          



Recent Developments



In a letter dated January 13, 2006 the Company was notified by the
State of New Jerseys Department of the Treasury, Division of Taxation (NJ Division of Taxation) that Kreisler Industrials Corporation Business Tax Returns for the fiscal years ended June 30, 2001 and June 30, 2002
are subject to additional income tax. The proposed adjustments total $88,858 of which $59,493 is additional income tax expense, $5,504 is for penalties and $23,861 is for interest. The Company is responding to the NJ Division of Taxation regarding
the proposed adjustment. Pending final resolution of this matter, the Company has included a charge against earnings totaling $88,858 for the three months ended December 31, 2005.



The Company maintains a sewer use permit issued by the Passaic Valley Sewerage Commissioners (PVSC) authorizing
the Company to discharge industrial effluent from its Kreisler Industrial manufacturing facility located at 180 Van Riper Avenue, Elmwood Park, New Jersey into the PVSC Waste Treatment facility. Kreisler Industrial follows the requirements of
Federal Regulation 40 CFR 413 and Section 313.1 of the PVSC Rules and Regulations. On July 1, 2005, the Company was notified by the PVSC that the Company was in violation of the daily maximum limit for nickel and total metals and, as a
result, had incurred a Serious Violation. These violations occurred during the fiscal year ended June 30, 2005. The Company was also notified that it was in Significant Non-Compliance and subject to enforcement action. The Company retained the
services of an environmental remediation consultant and immediately removed the suspected cause of these violations from its industrial effluent discharge. The Company also retained legal counsel. With the assistance of the environmental remediation
consultant, the Company is evaluating alternatives to eliminate the potential for future violations. The Company has implemented procedures to prevent the re-occurrence of this type of violation. The Company approved and executed a Settlement
Agreement with the PVSC in January 2006. The Settlement Agreement has been submitted to the PVSC for approval and execution. Following receipt of a fully executed Settlement Agreement from the PVSC, the Company will pay a settlement amount of
$21,500. The Company expects to pay this amount by March 31, 2006. Based on the previously estimated range of penalties, the Company accrued a charge against earnings of $37,500 for the year ended June 30, 2005 and this amount has not been
adjusted to the actual settlement amount of $21,500.



Critical Accounting
Policies



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/A (Amendment No. 1) for fiscal year
ended June 30, 2005 filed with the SEC provides additional details regarding all of the Companys critical and significant accounting policies.



Principles of Consolidation



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



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Revenue Recognition



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



Cash and Cash Equivalents



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



Accounts Receivable-Trade and Allowance for Uncollectible Accounts



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



Accounts receivable-trade is net of an allowance for estimated uncollectible accounts of $10,000 as of December 31, 2005 and June 30, 2005.



Property, Plant, and Equipment



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



Foreign Currency Translation



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



Income Taxes



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



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



Earnings Per Share



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



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Inventory Valuation



Inventory valuation for the three months ending December 31 and June 30 is based on actual physical inventory counts. For the three months
ending September 30 and March 31 inventory valuation is based on internal perpetual inventory records. The Company compares the physical inventory valuation for the periods ending December 31 and June 30 with the perpetual
inventory record valuation. At December 31, 2005, the comparison resulted in a valuation difference of 4%, a difference which the Company believes is primarily attributable to fluctuations of the material scrap rate percentage. Any substantial
variance in the actual material scrap rate percentage could significantly increase or decrease profits due to changes in the costs of goods sold. For the two quarters in which internal perpetual records are used to value the inventory, raw
materials, work in process and finished goods inventories are allocated based on the same percentage of total inventory that existed at the time of the most recent physical inventory valuation.



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.



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 and six months ended December 31, 2005, the Company paid
to Mr. Kelly $38,800 and $76,500, respectively, for technical advisory services and reimbursed Mr. Kelly for his reasonable out-of-pocket expenses totaling $7,400 and $16,500, respectively.



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 error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because
of simple error or mistake.



Additionally, controls can be
circumvented by the individual acts of some persons 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.



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An evaluation was carried out under the supervision and with the participation of the Companys
management, including the CEO and CFO, of the effectiveness of the Companys disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that as of the end of the period covered by this report, the
Companys disclosure controls and procedures are effective to provide reasonable assurance that material information required to be disclosed in reports that are filed or submitted under the Securities Exchange Act of 1934, as amended, is
accumulated, recorded, processed, summarized and communicated to the Companys management, including the CEO and CFO, to allow timely decisions regarding the required disclosure, and reported on a timely basis as provided in the SEC rules and
forms. 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.



The Companys principal executive officer and principal financial officer note that, due to human performance error, not a process deficiency, the
Company did not disclose in the Form 10-KSB/A (Amendment No. 1) for the year ended June 30, 2005 nor the Form 10-QSB for the three months ended September 30, 2005 the exercise of 64,000 options by Anne Stern, the spouse of Edward L.
Stern. Mr. Stern was the Chairman of the Board and Chief Executive Officer of the Company until his death on June 15, 2004. Mrs. Stern was issued 64,000 shares of the Companys common stock on June 28, 2005.



PART II OTHER INFORMATION



Item 1 Legal Proceedings



The
Company is subject to legal proceedings related to an environmental matter. The Company maintains a sewer use permit issued by the PVSC authorizing the Company to discharge industrial effluent from its location at 180 Van Riper Avenue, Elmwood Park,
New Jersey into the PVSC Waste Treatment facility. On July 1, 2005, the Company was notified by the PVSC that the Company was in violation of the daily maximum limit for nickel and total metals and, as a result, had incurred a Serious
Violation. These violations occurred during the fiscal year ended June 30, 2005. The Company was also notified that it is in Significant Non-Compliance and subject to enforcement action. The Company retained the services of an environmental
remediation consultant and immediately removed the suspected cause of these violations from its industrial effluent discharge. The Company has implemented procedures to prevent the re-occurrence of this type of violation. The Company approved and
executed a Settlement Agreement with the PVSC in January 2006. The Settlement Agreement has been submitted to the PVSC for approval and execution. Following receipt of a fully executed Settlement Agreement from the PVSC, the Company will pay a
settlement amount of $21,500. The Company expects to pay this amount by March 31, 2006.



In a letter dated January 13, 2006 the Company was notified by the NJ Division of Taxation that Kreisler Industrials Corporation Business Tax Returns for the fiscal years ended June 30, 2001 and
June 30, 2002 are subject to additional income tax. The proposed adjustments total $88,858 of which $59,493 is additional income tax expense, $5,504 is for penalties and $23,861 is for interest. The Company is responding to the NJ Division of
Taxation regarding the proposed adjustment. Pending final resolution of this matter, the Company has included a charge against earnings totaling $88,858 for the three months ended December 31, 2005.



Item 2 Unregistered Sales of Equity Securities and Use of Proceeds



Edward L. Stern, the Companys former Chairman of the Board and Chief Executive Officer of the Company, died on June 15, 2004.
Mr. Sterns spouse, Anne Stern, exercised all of Mr. Sterns outstanding options granted under the Companys 1997 stock option plan and was issued a total of 64,000 shares of Company common stock on June 28, 2005. The
Company received cash proceeds for the exercise of the stock options totaling $80,000 and a tax benefit from the exercise of the stock options totaling $100,424. This issuance was exempt from registration under Section 4(2) of the Securities
Act of 1933, as amended, referred to as the Securities Act, based upon a determination that the investor was sophisticated, had access to, and was provided with, information that would otherwise be contained in a registration statement and there was
no general solicitation.



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Item 3 Defaults Upon Senior Securities



None



Item 4 Submission of Matters to a Vote of Security Holders



On December 6, 2005, the Company held its 2005 Annual Meeting of Stockholders. There were a total of 1,826,447 votes entitled to be cast at the meeting. Of this total, 1,745,330 votes, or approximately 95.6%,
were represented either in person or by proxy. At the meeting, the stockholders elected five (5) directors to the Companys Board of Directors. Set forth below are (i) the names of the persons elected to serve on the Companys
Board of Directors for one year or until the directors earlier resignation or removal until their respective successors are duly elected and qualified and (ii) the results of the voting for the nominees.



|                      |  |           |  |         |  |         
|--------------------- |  | --------- |  | ------- |  | --------
|Nominee               |  | For       |  | Against |  | Withheld
|Wallace N. Kelly      |  | 1,732,087 |  | 0       |  | 13,243  
|Michael L. Goldberg   |  | 1,729,762 |  | 0       |  | 15,568  
|Ronald L. Nussle, Jr. |  | 1,729,587 |  | 0       |  | 15,743  
|John W. Poling        |  | 1,729,887 |  | 0       |  | 15,443  
|Michael D. Stern      |  | 1,734,987 |  | 0       |  | 10,343  



Item 5 Other Information



None



Item 6 Exhibits



(a) Part I
 Exhibits



|     |  |                                                                                                                                                                               
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|11   |  | Statement regarding computation of per share earnings incorporated by reference to Note 4 to Consolidated Financial Statements included in this Quarterly Report on Form-10QSB
|     | 
|31.1 |  | Certification of Chief Executive Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934                                                                    
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934                                                                    
|     | 
|32.1 |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350                                                                       



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SIGNATURES



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



KREISLER MANUFACTURING CORPORATIONBy:

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




Date: February 14, 2006



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EXHIBIT INDEX



|     |  |                                                                                                                                                                               
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|11   |  | Statement regarding computation of per share earnings incorporated by reference to Note 4 to Consolidated Financial Statements included in this Quarterly Report on Form-10QSB
|     | 
|31.1 |  | Certification of Chief Executive Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934                                                                    
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934                                                                    
|     | 
|32.1 |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350                                                                       



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