Stanadyne 10-Q 2007 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission File Number	Exact name of registrant as specified in its charter, Principal Executive Office Address and Telephone Number	State of Incorporation	I.R.S. Employer Identification No.
333-124154	Stanadyne Holdings, Inc. 92 Deerfield Road Windsor, CT 06095 (860) 525-0821	Delaware	20-1398860
333-45823	Stanadyne Corporation 92 Deerfield Road Windsor, CT 06095 (860) 525-0821	Delaware	22-2940378

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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.

Stanadyne Holdings, Inc.     Yes  x     No  ¨

Stanadyne Corporation        Yes  x     No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Stanadyne Holdings, Inc.     Large Accelerated Filer  ¨     Accelerated Filer  ¨     Non-Accelerated Filer  x

Stanadyne Corporation        Large Accelerated Filer  ¨     Accelerated Filer  ¨     Non-Accelerated Filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Stanadyne Holdings, Inc.     Yes  ¨     No  x

Stanadyne Corporation        Yes  ¨     No  x

The number of shares of the registrant’s common stock (only one class for each registrant) outstanding as of July 31, 2007 was:

Stanadyne Holdings, Inc. 106,110,081 shares

Stanadyne Corporation 1,000 shares (100% owned by Stanadyne Automotive Holding Corp., a direct and wholly-owned subsidiary of Stanadyne Holdings, Inc.)

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

Part I Financial Information
Item 1 Financial Statements
Stanadyne Holdings, Inc.:
Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006 (unaudited)	4
Condensed Consolidated Statements of Operations for the three months ended June 30, 2007 and 2006 (unaudited)	5
Condensed Consolidated Statements of Operations for the six months ended June 30, 2007 and 2006 (unaudited)	6
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006 (unaudited)	7
Stanadyne Corporation
Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006 (unaudited)	8
Condensed Consolidated Statements of Operations for the three months ended June 30, 2007 and 2006 (unaudited)	9
Condensed Consolidated Statements of Operations for the six months ended June 30, 2007 and 2006 (unaudited)	10
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006 (unaudited)	11
Notes to Condensed Consolidated Financial Statements	12-26
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	27-35
Item 3 Quantitative and Qualitative Disclosures About Market Risk	36
Item 4 Controls and Procedures	37
Part II Other Information
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 6 Exhibits	38
Signatures	39

-2-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

Explanatory Note

This Form 10-Q is a combined quarterly report being filed separately by two registrants: Stanadyne Holdings, Inc. and Stanadyne Corporation. Unless the context indicates otherwise, any reference in this report to “Holdings” refers to Stanadyne Holdings, Inc., and any reference to “Stanadyne” refers to Stanadyne Corporation, the indirect wholly-owned subsidiary of Holdings. The “Company,” “we,” “us” and “our” refer to Stanadyne Holdings, Inc. together with its direct and indirect subsidiaries, including Stanadyne Corporation. Each Registrant hereto is filing on its own behalf all of the information contained in this quarterly report that relates to such Registrant. Each Registrant hereto is not filing any information that does not relate to such Registrant, and therefore makes no representation as to any such information.

-3-

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands)

	June 30, 2007			December 31, 2006
ASSETS
Current Assets:
Cash and cash equivalents	$	24,044		$	25,394
Restricted cash		1,105			975
Accounts receivable, net of allowance for uncollectible accounts of $290 as of June 30, 2007 and $288 at December 31, 2006		43,401			40,804
Inventories, net		33,397			34,575
Prepaid expenses and other assets		765			1,587
Deferred income taxes		6,176			5,078
Total current assets		108,888			108,413
Property, plant and equipment, net		93,861			98,117
Goodwill		144,575			144,575
Intangible and other assets, net		91,234			94,430
Total assets	$	438,558		$	445,535
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	20,282		$	22,406
Accrued liabilities		34,666			42,297
Current maturities of long-term debt		5,793			6,673
Current portion of capital lease obligations		282			299
Total current liabilities		61,023			71,675
Long-term debt, excluding current maturities		259,558			255,330
Deferred income taxes		28,712			27,965
Capital lease obligations, excluding current portion		334			454
Other non current liabilities		36,816			46,742
Total liabilities		386,443			402,166
Minority interest in consolidated subsidiary		178			—
Commitments and Contingencies		—			—
Stockholders’ equity:
Common stock		1,064			1,064
Additional paid-in capital		53,851			53,661
Other accumulated comprehensive income		948			589
Accumulated deficit		(3,779	)		(11,798	)
Treasury stock, at cost		(147	)		(147	)
Total stockholders’ equity		51,937			43,369
Total liabilities and stockholders’ equity	$	438,558		$	445,535

See notes to condensed consolidated financial statements

-4-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands)

	Three Months Ended June 30, 2007			Three Months Ended June 30, 2006
Net sales	$	72,648		$	79,623
Cost of goods sold		54,803			60,949
Gross profit		17,845			18,674
Selling, general and administrative expenses		8,047			8,403
Amortization of intangible assets		1,025			1,025
Management fees		187			187
Operating income		8,586			9,059
Other expenses:
Interest expense		(7,100	)		(7,150	)
Income from continuing operations before income taxes and minority interest		1,486			1,909
Income tax expense		336			761
Income from continuing operations before minority interest		1,150			1,148
Minority interest in (income) loss of consolidated subsidiary		(101	)		16
Income from continuing operations		1,049			1,164
Loss from discontinued operations, net of income tax benefit of $4,429 in 2006		—			(6,142	)
Net income (loss)	$	1,049		$	(4,978	)

See notes to condensed consolidated financial statements

-5-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands)

	Six Months Ended June 30, 2007			Six Months Ended June 30, 2006
Net sales	$	147,135		$	155,362
Cost of goods sold		111,350			119,445
Gross profit		35,785			35,917
Selling, general and administrative expenses		17,267			18,995
Amortization of intangible assets		2,049			2,049
Management fees		375			375
Pension plan curtailment gain		(10,015	)		—
Operating income		26,109			14,498
Other expenses:
Interest expense		(14,077	)		(14,298	)
Income from continuing operations before income taxes and minority interest		12,032			200
Income tax expense		4,461			129
Income from continuing operations before minority interest		7,571			71
Minority interest in (income) loss of consolidated subsidiary		(178	)		71
Income from continuing operations		7,393			142
Loss from discontinued operations, net of income tax benefit of $4,684 in 2006		—			(7,322	)
Net income (loss)	$	7,393		$	(7,180	)

See notes to condensed consolidated financial statements

-6-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

	Six Months Ended June 30, 2007			Six Months Ended June 30, 2006
Cash flows from operating activities:
Net income (loss)	$	7,393		$	(7,180	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		10,995			12,469
Amortization of debt discount and deferred financing fees		5,550			5,064
Stock-based compensation expense		189			494
Impairment of assets held for sale		—			10,281
Deferred income tax benefit		(555	)		(8,307	)
Income (loss) applicable to minority interest		178			(71	)
Loss on disposal of property, plant and equipment		1			432
Pension plan curtailment gain		(10,015	)		—
Changes in operating assets and liabilities		(9,905	)		851
Net cash provided by operating activities		3,831			14,033
Cash flows from investing activities:
Net proceeds from sale of discontinued operations		104			—
Increase in restricted cash		(130	)		—
Capital expenditures		(3,806	)		(8,003	)
Proceeds from disposal of property, plant and equipment		2			286
Net cash used in investing activities		(3,830	)		(7,717	)
Cash flows from financing activities:
Payments on foreign term loan		(210	)		(155	)
Net (payments) proceeds on foreign overdraft facilities		(1,018	)		1,895
Principal payments on long-term debt		—			(325	)
Payments of capital lease obligations		(147	)		(152	)
Proceeds from exercise of stock options		6			242
Purchase of treasury stock		—			(28	)
Proceeds from the sale of common stock		—			376
Net cash (used in) provided by financing activities		(1,369	)		1,853
Cash and cash equivalents:
Net (decrease) increase in cash and cash equivalents		(1,368	)		8,169
Effect of exchange rate changes on cash		18			198
Cash and cash equivalents at beginning of period		25,394			23,081
Cash and cash equivalents at end of period	$	24,044		$	31,448

See notes to condensed consolidated financial statements

-7-

STANADYNE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands)

	June 30, 2007		December 31, 2006
ASSETS
Current Assets:
Cash and cash equivalents	$	23,763	$	25,118
Restricted cash		1,105		975
Accounts receivable, net of allowance for uncollectible accounts of $290 as of June 30, 2007 and $288 December 31, 2006		43,401		40,804
Inventories, net		33,397		34,575
Prepaid expenses and other assets		765		1,576
Deferred income taxes		6,176		5,078
Total current assets		108,607		108,126
Property, plant and equipment, net		93,861		98,117
Goodwill		144,575		144,575
Intangible and other assets, net		89,464		92,545
Total assets	$	436,507	$	443,363
LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Accounts payable	$	20,282	$	22,406
Accrued liabilities		34,662		42,288
Current maturities of long-term debt		5,793		6,673
Current portion of capital lease obligations		282		299
Total current liabilities		61,019		71,666
Long-term debt, excluding current maturities		181,445		181,638
Deferred income taxes		34,712		32,744
Capital lease obligations, excluding current portion		334		454
Other noncurrent liabilities		36,816		46,742
Due to Stanadyne Holdings, Inc.		1,056		891
Total liabilities		315,382		334,135
Minority interest in consolidated subsidiary		178		—
Commitments and Contingencies		—		—
Stockholder’s equity:
Common stock		—		—
Additional paid-in capital		105,000		105,000
Other accumulated comprehensive income		947		589
Retained earnings		15,000		3,639
Total stockholder’s equity		120,947		109,228
Total liabilities and stockholder’s equity	$	436,507	$	443,363

See notes to condensed consolidated financial statements

-8-

STANADYNE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands)

	Three Months Ended June 30, 2007			Three Months Ended June 30, 2006
Net sales	$	72,648		$	79,623
Cost of goods sold		54,803			60,949
Gross profit		17,845			18,674
Selling, general and administrative expenses		8,035			8,384
Amortization of intangible assets		1,025			1,025
Management fees		187			187
Operating income		8,598			9,078
Other expenses:
Interest expense		(4,802	)		(5,103	)
Income from continuing operations before income taxes and minority interest		3,796			3,975
Income tax expense		955			1,311
Income from continuing operations before minority interest		2,841			2,664
Minority interest in (income) loss of consolidated subsidiary		(101	)		16
Income from continuing operations		2,740			2,680
Loss from discontinued operations, net of income tax benefit of $4,684 in 2006		—			(6,142	)
Net income (loss)	$	2,740		$	(3,462	)

See notes to condensed consolidated financial statements

-9-

STANADYNE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands)

	Six Months Ended June 30, 2007			Six Months Ended June 30, 2006
Net sales	$	147,135		$	155,362
Cost of goods sold		111,350			119,445
Gross profit		35,785			35,917
Selling, general and administrative expenses		17,235			18,931
Amortization of intangible assets		2,049			2,049
Management fees		375			375
Pension plan curtailment gain		(10,015	)		—
Operating income		26,141			14,562
Other expenses:
Interest expense		(9,546	)		(10,253	)
Income from continuing operations before income taxes and minority interest		16,595			4,309
Income tax expense		5,683			1,224
Income from continuing operations before minority interest		10,912			3,085
Minority interest in (income) loss of consolidated subsidiary		(178	)		71
Income from continuing operations		10,734			3,156
Loss from discontinued operations, net of income tax benefit of $(4,684) in 2006		—			(7,322	)
Net income (loss)	$	10,734		$	(4,166	)

See notes to condensed consolidated financial statements

-10-

STANADYNE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

	Six Months Ended June 30, 2007			Six Months Ended June 30, 2006
Cash flows from operating activities:
Net income (loss)	$	10,734		$	(4,166	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		10,995			12,469
Amortization of deferred financing fees		1,013			1,013
Stock-based compensation expense		189			—
Impairment of assets held for sale		—			10,281
Deferred income tax expense (benefit)		866			(7,012	)
Income (loss) applicable to minority interest		178			(71	)
Loss on disposal of property, plant and equipment		1			432
Pension plan curtailment gain		(10,015	)		—
Changes in operating assets and liabilities		(10,129	)		1,348
Net cash provided by operating activities		3,832			14,294
Cash flows from investing activities:
Net proceeds from sale of discontinued operations		104			—
Increase in restricted cash		(130	)		—
Capital expenditures		(3,806	)		(8,003	)
Proceeds from disposal of property, plant and equipment		2			286
Net cash used in investing activities		(3,830	)		(7,717	)
Cash flows from financing activities:
Payments on foreign term loan		(210	)		(155	)
Net (payments) proceeds on foreign overdraft facilities		(1,018	)		1,895
Principal payments on long-term debt		—			(325	)
Payments of capital lease obligations		(147	)		(152	)
Net cash (used in) provided by financing activities		(1,375	)		1,263
Cash and cash equivalents:
Net (decrease) increase in cash and cash equivalents		(1,373	)		7,840
Effect of exchange rate changes on cash		18			198
Cash and cash equivalents at beginning of period		25,118			23,081
Cash and cash equivalents at end of period	$	23,763		$	31,119

See notes to condensed consolidated financial statements

-11-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(1) Business, Organization and Significant Accounting Policies

Description of Business. Stanadyne Holdings, Inc. (“Holdings”) owns all of the outstanding common stock of Stanadyne Automotive Holdings Corp. (“SAHC”). SAHC owns all of the outstanding common stock of Stanadyne Corporation (together with its consolidated subsidiaries, “Stanadyne”). A majority of the outstanding common stock of Holdings is owned by funds managed by Kohlberg Management IV, L.L.C. Collectively, Holdings, SAHC and Stanadyne hereinafter are referred to as the “Company.” Holdings and Stanadyne are separate reporting companies. Holdings is a holding company with no operations beyond those of its indirectly, wholly-owned subsidiary, Stanadyne. Stanadyne is a leading designer and manufacturer of highly engineered, precision manufactured engine components, including fuel injection equipment for diesel engines. Stanadyne sells engine components to original equipment manufacturers in a variety of applications, including agricultural and construction vehicles and equipment, industrial products, automobiles, light duty trucks and marine equipment. The aftermarket is a core element of Stanadyne’s operations. Stanadyne’s previously wholly-owned subsidiary, Precision Engine Products Corp. (“PEPC”), was a supplier of roller-rocker arms, hydraulic valve lifters and lash adjusters to automotive engine manufacturers and the independent automotive aftermarket. On July 31, 2006, PEPC was sold to Defiance, Inc., a part of GenTek, Inc. (see Note 10).

Basis of Presentation. The financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America and, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals but subject to normal year end adjustments) necessary for a fair presentation for the periods presented. The Company’s quarterly results are subject to fluctuation; consequently, the results of operations and cash flows for any quarter are not necessarily indicative of the results and cash flows for any future period. These notes to condensed consolidated financial statements apply to Holdings and Stanadyne unless otherwise noted.

-12-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

Principles of Consolidation. The condensed consolidated financial statements of Holdings include the accounts of Holdings and all of Holdings’ wholly-owned subsidiaries: SAHC, Stanadyne, PEPC, Stanadyne, SpA (“SpA”), Stanadyne Changshu Corporation (“SCC”) and Precision Engine Products LTDA (“PEPL”). The condensed consolidated financial statements of Stanadyne include the accounts of Stanadyne and all of Stanadyne’s wholly-owned subsidiaries: PEPC, SpA, SCC and PEPL. A joint venture, Stanadyne Amalgamations Private Limited (“SAPL”), is fully consolidated with Holdings and Stanadyne based on the Company’s 51% controlling share, while the remaining 49% is recorded as a minority interest. Intercompany balances have been eliminated in consolidation. Results of operations related to PEPC, including PEPL, are presented as discontinued operations for all periods presented herein.

Stock Options. On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R “Share-Based Payment” (“SFAS 123R”), using the modified prospective method. The modified prospective method recognizes compensation costs for all stock option awards granted subsequent to January 1, 2006, as well as to the unvested portion of stock option awards outstanding as of January 1, 2006.

In 2004, Holdings established the 2004 Equity Incentive Plan to provide for the award of non-qualified stock options to attract and retain people who are in a position to make a significant contribution to the success of the Company and its subsidiaries. Awards granted under the 2004 Equity Incentive Plan vest over a period of three to four years contingent upon achievement of certain financial performance targets as defined by the 2004 Equity Incentive Plan and expire 10 years after the date of grant.

The Company uses a Black-Scholes option-pricing model to calculate the fair value of options. The key assumptions for this valuation method include the expected term of the option, stock price volatility, risk-free interest rate, dividend yield, exercise price, and forfeiture rate. Many of these assumptions are judgmental and highly sensitive in the determination of compensation expense.

-13-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

The following table summarizes information about our stock option plan for the three and six month periods ended June 30, 2007:

	Three Months Ended June 30, 2007
	Outstanding				Exercisable
	Stock Options Outstanding		Weighted Average Exercise Price*		Stock Options Outstanding		Weighted Average Exercise Price*
April 1, 2007	13,570,000		$	0.48	3,226,250		$	0.47
Exercised	(12,500	)		0.47	(12,500	)		0.47
Cancelled	(72,500	)		0.64	(12,500	)		0.47
Vested	—			—	—			—
Granted	630,000			0.89	—			—
June 30, 2007	14,115,000		$	0.50	3,201,250		$	0.47
	Six Months Ended June 30, 2007
	Outstanding				Exercisable
	Stock Options Outstanding		Weighted Average Exercise Price*		Stock Options Outstanding		Weighted Average Exercise Price*
January 1, 2007	13,865,000		$	0.48	3,226,250		$	0.47
Exercised	(12,500	)		0.47	(12,500	)		0.47
Cancelled	(367,500	)		0.64	(12,500	)		0.47
Vested	—			—	—			—
Granted	630,000			0.89	—			—
June 30, 2007	14,115,000		$	0.48	3,201,250		$	0.47

* Represents per share price.

During the second quarter of 2007, one retired employee exercised 12,500 vested stock options for proceeds of $6 and another retired employee chose not to exercise 12,500 vested options that subsequently expired. Also during the second quarter of 2007, one employee left the Company resulting in the cancellation of 60,000 unvested stock options. On April 16, 2007 one employee received 250,000 stock options with an exercise price of $0.95 per share, and on June 1, 2007 an additional 380,000 stock options with an exercise price of $0.85 per share were issued to a total of seven employees. During the first quarter of 2007, two employees left the Company resulting in the cancellation of 295,000 unvested stock options. No options were granted in the first quarter of 2007.

As of June 30, 2007, there was $409 of total unrecognized compensation cost related to non-vested share-based compensation awards granted under the 2004 Equity Incentive Plan. The total stock-based employee compensation expense for the year ending December 31, 2007 for the stock options awarded through June 30, 2007 is expected to be $393.

-14-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(2) Inventories

Components of inventories are as follows:

	As of June 30, 2007		As of December 31, 2006
Raw materials and purchased parts	$	16,008	$	15,543
Work-in-process		11,672		13,823
Finished goods		5,717		5,209
	$	33,397	$	34,575

(3) Intangible and Other Assets

Major components of intangible and other assets at June 30, 2007 and December 31, 2006 are listed below:

Holdings:	As of June 30, 2007				As of December 31, 2006
	Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization
Trademarks / trade names	$	51,100	$	—	$	51,100	$	—
Technology / patents		24,300		7,418		24,300		6,140
Customer contracts		15,252		4,428		15,252		3,665
Debt issuance costs		18,447		6,468		18,447		5,339
Other		498		49		516		41
	$	109,597	$	18,363	$	109,615	$	15,185

Stanadyne:	As of June 30, 2007				As of December 31, 2006
	Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization
Trademarks / trade names	$	51,100	$	—	$	51,100	$	—
Technology / patents		24,300		7,418		24,300		6,140
Customer contracts		15,252		4,428		15,252		3,665
Debt issuance costs		16,091		5,881		16,091		4,868
Other		497		49		516		41
	$	107,240	$	17,776	$	107,259	$	14,714

Amortization expense of intangible assets for the Company, exclusive of debt issuance costs, was $1,025 for the three months ended June 30, 2007 and 2006 and $2,049 for the six months ended June 30, 2007 and 2006. Estimated annual amortization expense for the Company’s intangible assets is expected to be $3,761 in 2007, $3,264 in 2008, $3,249 in 2009, $3,160 in 2010 and $2,944 in 2011.

Amortization of debt discount and debt issuance costs is included as interest expense in the accompanying condensed consolidated statements of operations for Holdings of $2,806 and $2,559 for the three months ended June 30, 2007 and 2006, respectively, and $5,550 and $5,064 for the six months ended June 30, 2007 and 2006, respectively. Amortization of debt issuance costs is included as interest expense in the accompanying condensed consolidated statements of operations for Stanadyne of $507 for the three months ended June 30, 2007 and 2006, and $1,013 for the six months ended June 30, 2007 and 2006.

-15-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(4) Long-term Debt

Long-term debt consisted of:

	Holdings				Stanadyne
	June 30, 2007		December 31, 2006		June 30, 2007		December 31, 2006
Revolving credit lines	$	—	$	—	$	—	$	—
Term loan		21,200		21,200		21,200		21,200
Stanadyne Senior Subordinated Notes		160,000		160,000		160,000		160,000
Holdings Senior Discount Notes, net of unamortized discount		78,113		73,692		—		—
SAPL debt		1,090		1,186		1,090		1,186
SpA debt		4,948		5,925		4,948		5,925
Long-term debt		265,351		262,003		187,238		188,311
Less current maturities of long-term debt		5,793		6,673		5,793		6,673
Long-term debt, excluding current maturities	$	259,558	$	255,330	$	181,445	$	181,638

(5) Pension Plans, Defined Contribution Plan and Other Postretirement Health Care and Life Insurance

Pension Plans

The Company has a noncontributory defined benefit pension plan for eligible domestic employees and also has two nonqualified plans, which are designed to supplement the benefits payable to designated employees. The components of the net periodic pension cost (income) cost for the periods shown are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Service cost	$	314		$	762		$	1,090		$	1,552
Interest cost		1,520			1,338			2,799			2,558
Expected return on plan assets		(1,763	)		(1,309	)		(3,036	)		(2,547	)
Amortization of prior service costs		11			(14	)		(4	)		(29	)
Recognized net actuarial loss		(7	)		49			20			54
Curtailment gain		—			—			(10,015	)		—
Net periodic pension cost (income) cost	$	75		$	826		$	(9,146	)	$	1,588

It is the policy of the Company to fund the pension plan in an amount at least equal to the minimum required contribution as determined by the plan’s actuaries, but not in excess of the maximum tax-deductible amount under Section 404 of the Internal Revenue Code. The Company may make discretionary contributions of any amount within this range based on financial circumstances and strategic considerations, which typically vary from year to year.

Effective March 31, 2007, Stanadyne amended the Stanadyne Corporation Pension Plan (a defined benefit plan) (the “Pension Plan”) to freeze the Pension Plan with respect to all participants so that no future benefits will accrue after that date. As required by law, benefits already accrued as of such date will not be affected. With respect to such benefits, participants continue to vest and all other retirement options, including early retirement reduction factors, remain unchanged. The assets continue to be held in trust for participants until they retire. The accrual of benefits for certain executives participating in the Supplemental Retirement Benefit Plan is based on the accrual of benefits under the Pension Plan. Therefore, the freeze of the Pension Plan also resulted in the freeze of the Supplemental Retirement Benefit Plan.

The effect of the Pension Plan freeze resulted in curtailment gains of $9,996 for the Pension Plan and $19 for the Supplemental Retirement Benefit Plan. These one-time curtailment gains are equal to the reduction in the plans’ projected benefit obligations (“PBO”) due to the freeze of $9,382 and unrecognized prior service costs of $633.

-16-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

Defined Contribution Plan

Effective April 1, 2007, Stanadyne amended the Stanadyne Corporation Savings Plus Plan (a 401(k) plan) to: (i) increase Stanadyne’s matching contribution to 100% of employee pre-tax contributions on the first 1% of compensation and 50% of employee pre-tax contributions on the next 5% of compensation so that if an employee contributes 6% of compensation, the Stanadyne match would total 3.5% of that employee’s compensation; and (ii) provide for automatic enrollment at 3% of compensation for all new employees and all current employees who are not then contributing 3% or more of compensation.

Postretirement Health Care and Life Insurance

The Company’s domestic subsidiaries make available certain health care and life insurance benefits for eligible retired employees. The components of the net periodic benefit costs for the periods shown were as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Service cost	$	30		$	55		$	84		$	108
Interest cost		100			104			222			212
Recognized net actuarial income		(131	)		(9	)		(144	)		(9	)
Net periodic postretirement benefit (income) cost	$	(1	)	$	150		$	162		$	311

(6) Income Taxes

Holdings had an effective income tax rate of 37.1% for the six months ended June 30, 2007 compared to 64.5% for the six months ended June 30, 2006. Holdings’ tax rate is affected by a limitation on the deductibility of interest on the Discount Notes for U.S. federal income tax purposes. The yield-to-maturity for the interest expense on the Discount Notes exceeds the applicable federal rate by six percentage points, resulting in a reduction in the deductible interest expense (including original issue discount) accrued on the notes to the extent attributable to such excess.

Stanadyne had an effective income tax rate of 34.2% for the six months ended June 30, 2007, compared to 28.4% for the six months ended June 30, 2006.

The Company applies the estimated annual tax rate to the year to date earnings to provide consistent quarterly tax rates based on the estimated effective tax rate for the year. To the extent there are differences between components of planned and actual pre-tax income, the estimated annual tax rate for the year could change and, in turn, have an impact on future quarterly tax rates.

The effective tax rate on the pre-tax loss from discontinued operations was 39.0% for the six months ended June 30, 2006. The Company had no income or loss from discontinued operations for the first six months of 2007.

The Company adopted the provisions of FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”) on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a decrease in the liability for unrecognized tax benefits of approximately $627, which was accounted for as a decrease to income taxes payable and an increase to retained earnings for Holdings and Stanadyne, respectively, as of January 1, 2007. The Company had no federal, state, local or foreign unrecognized tax benefits as of January 1, 2007. The Company does not expect the annual effective tax rate to change due to any unrecognized tax benefits. The Company would recognize interest and penalties as income tax expense if any unrecognized tax benefits were reported.

The Company files income tax returns in the U.S. federal jurisdiction, various states, and foreign jurisdictions, and the Company is subject to routine audit by many different tax authorities. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior

-17-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

to 2002. It is possible that a state tax examination will be settled during the next twelve months; however, no unrecognized tax benefits have been accrued related to this state tax jurisdiction and any that may result from the examination are not expected to be material to the financial statements.

(7) Contingencies

The Company is involved in various legal and regulatory proceedings generally incidental to its business. While the results of any litigation or regulatory issue contain an element of uncertainty, management believes that the outcome of any known, pending or threatened legal proceeding, or all of them combined, will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

The Company presents restricted cash as a current asset on its condensed consolidated balance sheets and as an investing activity on its condensed consolidated statements of cash flows. This cash represents net proceeds from the sale of PEPC assets and its use is limited by the terms of the Company’s term loan agreement to sale-related costs and repayment of principal.

The Company is subject to potential environmental liabilities as a result of various claims and legal actions, which are pending or may be asserted against the Company. Reserves for such liabilities have been established and no insurance recoveries have been anticipated in the determination of the reserves. In management’s opinion, the aforementioned claims will be resolved without material adverse effect on the consolidated results of operations, financial position or cash flows of the Company. In conjunction with the acquisition of SAHC from Metromedia Company (“Metromedia”) on December 11, 1997, Metromedia agreed to partially indemnify Stanadyne and AIP for certain environmental matters. The effect of this indemnification is to limit the Company’s financial exposure for known environmental issues.

The Company estimates and records the liability associated with its manufactured products at the time they are sold. The changes in the Company’s warranty accrual are provided below:

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Warranty liability, beginning of period	$	5,565		$	5,504		$	5,667		$	4,935
Warranty expense based on products sold		157			366			431			1,051
Warranty claims paid		(1,273	)		(240	)		(1,652	)		(356	)
Warranty liability, end of period	$	4,449		$	5,630		$	4,446		$	5,630

The Company’s warranty accrual is included as a component of accrued liabilities on the condensed consolidated balance sheets.

-18-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(8) Comprehensive Income (Loss)

Comprehensive income (loss) is as follows:

	Holdings
	Three Months Ended June 30,					Six Months Ended June 30,
	2007		2006			2007		2006
Net income (loss)	$	1,049	$	(4,978	)	$	7,393	$	(7,180	)
Other comprehensive income, net of tax:
Foreign currency translation adjustments		303		720			359		963
Comprehensive income (loss)	$	1,352	$	(4,258	)	$	7,752	$	(6,217	)
	Stanadyne
	Three Months Ended June 30,					Six Months Ended June 30,
	2007		2006			2007		2006
Net income (loss)	$	2,740	$	(3,462	)	$	10,734	$	(4,166	)
Other comprehensive income, net of tax:
Foreign currency translation adjustments		303		720			359		963
Comprehensive income (loss)	$	3,043	$	(2,742	)	$	11,093	$	(3,203	)

(9) Segments

The Company had two reportable segments, Precision Products and Precision Engine, the latter classified as a discontinued operation as a result of the sale of that segment on July 31, 2006 to Defiance, Inc. Accordingly, the Company has one reportable segment. Precision Products manufactures its own proprietary products including fuel pumps for diesel and gasoline engines, injectors and filtration systems for diesel engines, and various non-proprietary products manufactured under contract for other companies. The Company’s proprietary products currently account for the majority of Precision Products’ sales.

(10) Discontinued Operations

On July 31, 2006, Stanadyne concluded the sale of certain assets and liabilities of PEPC to Defiance, Inc. (“Buyer”), according to the terms of the Purchase Agreement entered into on June 30, 2006. Gross proceeds from the sale totaled $25.3 million in cash, including $0.4 million due to a working capital adjustment based on the July 31, 2006 account balances. Gross proceeds were reduced by transaction costs of $0.8 million for net proceeds of $24.5 million of which $23.5 million was applied to a repayment of the Term Loans. The terms of the Purchase Agreement include a potential $10 million earn-out payment based on the achievement of certain performance levels in the twelve months following the sale. Any proceeds related to the earn-out will be recorded as income when earned.

For the six months ended June 30, 2006, loss from discontinued operations of $7.3 million represented the loss from the discontinued operations of the PEPC segment of $12.0 million and related income tax benefit of $4.7 million. The loss did not include any allocation of corporate costs that were previously allocated to the discontinued operations. Those costs are expected to continue in the future and are included in continuing operations. Revenues of the discontinued operations for the six months ended June 30, 2006 were $30.5 million. For the six months ended June 30, 2007, there were no activities related to the discontinued operations.

-19-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(11) Supplemental Consolidating Condensed Financial Statements

The Notes issued August 6, 2004 by Stanadyne are guaranteed jointly, fully, severally and unconditionally by PEPC (the “Subsidiary Guarantor”) on a subordinated basis and are not guaranteed by SpA, PEPL, SCC and SAPL (the “Non-Guarantor Subsidiaries”).

Supplemental consolidating condensed financial statements for Stanadyne (“Parent”), the Subsidiary Guarantor and the Non-Guarantor Subsidiaries are presented below. Separate complete financial statements of the Subsidiary Guarantor are not required.

-20-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(11) Supplemental Consolidating Condensed Financial Statements (continued)

	Stanadyne Corporation and Subsidiaries Consolidating Condensed Balance Sheet June 30, 2007
	Stanadyne Corporation Parent		Subsidiary Guarantor		Non- Guarantor Subsidiaries		Eliminations			Stanadyne Corporation & Subsidiaries
ASSETS
Current assets:
Cash and cash equivalents	$	22,899	$	—	$	410	$	454		$	23,763
Restricted cash		1,105		—		—		—			1,105
Accounts receivable, net		37,605		—		5,796		—			43,401
Inventories, net		27,034		—		7,156		(793	)(a)		33,397
Other current assets		5,315		—		1,618		8			6,941
Total current assets		93,958		—		14,980		(331	)		108,607
Property, plant and equipment, net		72,030		—		21,831		—			93,861
Intangible and other assets, net		228,112		—		5,927		—			234,039
Investment in subsidiaries		17,392		—		—		(17,392	)(b)		—
Total assets	$	411,492	$	—	$	42,738	$	(17,723	)	$	436,507
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	47,924	$	—	$	6,850	$	170		$	54,944
Current maturities of long-term debt and capital lease obligations		—		—		6,075		—			6,075
Total current liabilities		47,924		—		12,925		170			61,019
Long-term debt and capital lease obligations		181,200		—		579		—			181,779
Other non-current liabilities		62,702		—		8,826		—			71,528
Minority interest in consolidated subsidiary		—		—		—		178			178
Intercompany accounts		177		—		684		195			1,056	(c)
Stockholders’ equity		119,489		—		19,724		(18,266	)(b)		120,947
Total liabilities and stockholders’ equity	$	411,492	$	—	$	42,738	$	(17,723	)	$	436,507

(a) Amount represents the elimination of inventory for out of period transfers with subsidiaries.

(b) Elimination of investments in subsidiaries of the Parent and Subsidiary Guarantor.

(c) Amount due to Stanadyne Holdings, Inc.

-21-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(11) Supplemental Consolidating Condensed Financial Statements (continued)

	Stanadyne Corporation and Subsidiaries Consolidating Condensed Balance Sheet December 31, 2006
	Stanadyne Corporation Parent		Subsidiary Guarantor			Non- Guarantor Subsidiaries		Eliminations			Stanadyne Corporation & Subsidiaries
ASSETS
Cash and cash equivalents	$	24,463	$	9		$	107	$	539		$	25,118
Restricted cash		975		—			—		—			975
Accounts receivable, net		35,031		132			5,641		—			40,804
Inventories, net		27,934		—			8,004		(1,363	)(a)		34,575
Other current assets		5,526		618			510		—			6,654
Total current assets		93,929		759			14,262		(824	)		108,126
Property, plant and equipment, net		76,420		—			21,719		(22	)		98,117
Intangible and other assets, net		231,175		—			5,945		—			237,120
Deferred taxes		—		2,473			—		(2,473	)(b)		—
Investment in subsidiaries		14,579		—			—		(14,579	)(c)		—
Total assets	$	416,103	$	3,232		$	41,926	$	(17,898	)	$	443,363
LIABILITIES AND STOCKHOLDER’S EQUITY
Accounts payable and accrued liabilities	$	54,574	$	2,525		$	7,452	$	143		$	64,694
Current maturities of long-term debt and capital lease obligations		—		—			6,972		—			6,972
Total current liabilities		54,574		2,525			14,424		143			71,666
Long-term debt and capital lease obligations		181,200		—			892		—			182,092
Other non-current liabilities		68,148		5,135			8,676		(2,473	)(b)		79,486
Intercompany accounts		3,059		(3,265	)		1,410		(313	)		891	(d)
Stockholder’s equity		109,122		(1,163	)		16,524		(15,255	)(c)		109,228
Total liabilities and stockholder’s equity	$	416,103	$	3,232		$	41,926	$	(17,898	)	$	443,363

(a) Amount represents the elimination of inventory for out of period transfers with subsidiaries.

(b) Reclassification of deferred tax asset to consolidated net deferred tax liability.

(c) Elimination of investments in subsidiaries of the Parent and Subsidiary Guarantor.

(d) Amount due to Stanadyne Holdings, Inc.

-22-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(11) Supplemental Consolidating Condensed Financial Statements (continued)

	Stanadyne Corporation and Subsidiaries Consolidating Condensed Statement of Operations Three Months Ended June 30, 2007
	Stanadyne Corporation Parent			Subsidiary Guarantor		Non- Guarantor Subsidiaries			Eliminations			Stanadyne Corporation & Subsidiaries
Net sales	$	67,452		$	—	$	7,596		$	(2,400	)(a)	$	72,648
Cost of goods sold		49,493			—		7,804			(2,494	)(a)		54,803
Gross profit (loss)		17,959			—		(208	)		94			17,845
Selling, general, administrative and other operating expenses		8,618			—		629			—			9,247
Operating income (loss)		9,341			—		(837	)		94			8,598
Interest expense		(4,721	)		—		(81	)		—			(4,802	)
Income (loss) from operations before income tax expense (benefit) and minority interest		4,620			—		(918	)		94			3,796
Income tax expense (benefit)		1,344			—		(389	)		—			955
Income (loss) from operations before minority interest		3,276			—		(529	)		94			2,841
Minority interest in income of consolidated subsidiary		—			—		—			(101	)		(101	)
Net income (loss)	$	3,276		$	—	$	(529	)	$	(7	)	$	2,740

	Stanadyne Corporation and Subsidiaries Consolidating Condensed Statement of Operations Three Months Ended June 30, 2006
	Stanadyne Corporation Parent			Subsidiary Guarantor			Non- Guarantor Subsidiaries			Eliminations			Stanadyne Corporation & Subsidiaries
Net sales	$	74,907		$	—		$	7,093		$	(2,377	)(a)	$	79,623
Cost of goods sold		56,064			—			7,146			(2,261	)(a)		60,949
Gross profit (loss)		18,843			—			(53	)		(116	)		18,674
Selling, general, administrative and other operating expenses		9,036			—			560			—			9,596
Operating income (loss)		9,807			—			(613	)		(116	)		9,078
Interest expense		(5,056	)		—			(47	)		—			(5,103	)
Income (loss) from continuing operations before income tax expense (benefit) and minority interest		4,751			—			(660	)		(116	)		3,975
Income tax expense (benefit)		1,891			—			(560	)		(20	)		1,311
Income (loss) from continuing operations before minority interest		2,860			—			(100	)		(96	)		2,664
Minority interest in loss of consolidated subsidiary		—			—			—			16			16
Income (loss) from continuing operations		2,860			—			(100	)		(80	)		2,680
(Loss) income from discontinued operations		—			(6,409	)		147			120			(6,142	)
Net income (loss)	$	2,860		$	(6,409	)	$	47		$	40		$	(3,462	)

(a) Elimination of intercompany sales and cost of goods sold.

-23-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(11) Supplemental Consolidating Condensed Financial Statements (continued)

	Stanadyne Corporation and Subsidiaries Consolidating Condensed Statement of Operations Six Months Ended June 30, 2007
	Stanadyne Corporation Parent			Subsidiary Guarantor		Non- Guarantor Subsidiaries			Eliminations			Stanadyne Corporation & Subsidiaries
Net sales	$	137,838		$	—	$	14,564		$	(5,267	)(a)	$	147,135
Cost of goods sold		101,009			—		15,622			(5,281	)(a)		111,350
Gross profit (loss)		36,829			—		(1,058	)		14			35,785
Selling, general, administrative and other operating expenses		8,507			—		1,137			—			9,644
Operating income (loss)		28,322			—		(2,195	)		14			26,141
Interest expense		(9,396	)		—		(150	)		—			(9,546	)
Income (loss) from operations before income tax expense (benefit) and minority interest		18,926			—		(2,345	)		14			16,595
Income tax expense (benefit)		6,702			—		(1,019	)		—			5,683
Income (loss) from operations before minority interest		12,224			—		(1,326	)		14			10,912
Minority interest in income of consolidated subsidiary		—			—		—			(178	)		(178	)
Net income (loss)	$	12,224		$	—	$	(1,326	)	$	(164	)	$	10,734

	Stanadyne Corporation and Subsidiaries Consolidating Condensed Statement of Operations Six Months Ended June 30, 2006
	Stanadyne Corporation Parent			Subsidiary Guarantor			Non- Guarantor Subsidiaries			Eliminations			Stanadyne Corporation & Subsidiaries
Net sales	$	146,370		$	—		$	13,190		$	(4,198	)(a)	$	155,362
Cost of goods sold		109,688			—			13,770			(4,013	)(a)		119,445
Gross profit (loss)		36,682			—			(580	)		(185	)		35,917
Selling, general, administrative and other operating expenses		20,318			—			1,037			—			21,355
Operating income (loss)		16,364			—			(1,617	)		(185	)		14,562
Interest expense		(10,161	)		—			(92	)		—			(10,253	)
Income (loss) from continuing operations before income tax expense (benefit) and minority interest		6,203			—			(1,709	)		(185	)		4,309
Income tax expense (benefit)		1,487			—			(243	)		(20	)		1,224
Income (loss) from continuing operations before minority interest		4,716			—			(1,466	)		(165	)		3,085
Minority interest in loss of consolidated subsidiary		—			—			—			71			71
Income (loss) from continuing operations		4,716			—			(1,466	)		(94	)		3,156
(Loss) income from discontinued operations		—			(7,677	)		289			66			(7,322	)
Net income (loss)	$	4,716		$	(7,677	)	$	(1,177	)	$	(28	)	$	(4,166	)

(a) Elimination of intercompany sales and cost of goods sold.

-24-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(11) Supplemental Consolidating Condensed Financial Statements (continued)

	Stanadyne Corporation and Subsidiaries Consolidating Condensed Statement of Cash Flows Six Months Ended June 30, 2007
	Stanadyne Corporation Parent			Subsidiary Guarantor		Non- Guarantor Subsidiaries			Eliminations			Stanadyne Corporation & Subsidiaries
Cash flows from operating activities:
Net income (loss)	$	12,224		$	—	$	(1,326	)	$	(164	)	$	10,734
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		9,187			—		1,808			—			10,995
Amortization of deferred financing fees		1,013			—		—			—			1,013
Stock-based compensation expense		189			—		—			—			189
Other adjustments		2,034			—		(1,168	)		—			866
Increase applicable to minority interest		—			—		—			178			178
Loss on disposal of property, plant and equpment		—			—		1			—			1
Pension plan curtailment gain		(10,015	)										(10,015	)
Changes in operating assets and liabilities		(9,662	)		—		(489	)		22			(10,129	)
Net cash provided by (used in) operating activities		4,970			—		(1,174	)		36			3,832
Cash flows from investing activities:
Increase in restricted cash		(130	)		—		—			—			(130	)
Net proceeds from sale of discontinued operations		104			—		—			—			104
Capital expenditures		(2,382	)		—		(1,401	)		(23	)		(3,806	)
Proceeds from disposal of property, plant and equipment		—			—		2			—			2
Investment in subsidiary		(4,159	)		—		—			4,159			—
Net cash used in investing activities		(6,567	)		—		(1,399	)		4,136			(3,830	)
Cash flows from financing activities:
Net payments on debt		—			—		(1,375	)		—			(1,375	)
Net proceeds from equity		—			—		4,194			(4,194	)—		—
Net cash provided by (used in) financing activities		—			—		2,819			(4,194	)		(1,375	)
Net (decrease) increase in cash and cash equivalents		(1,597	)		—		246			(22	)		(1,373	)
Effect of exchange rate changes on cash		24			—		57			(63	)		18
Cash and cash equivalents at beginning of period		24,472			—		107			539			25,118
Cash and cash equivalents at end of period	$	22,899		$	—	$	410		$	454		$	23,763

-25-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(11) Supplemental Consolidating Condensed Financial Statements (concluded)

	Stanadyne Corporation and Subsidiaries Consolidating Condensed Statement of Cash Flows Six Months Ended June 30, 2006
	Stanadyne Corporation Parent			Subsidiary Guarantor			Non- Guarantor Subsidiaries			Eliminations			Stanadyne Corporation & Subsidiaries
Cash flows from operating activities:
Net income (loss)	$	5,222		$	(8,183	)	$	(1,177	)	$	(28	)	$	(4,166	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		9,494			1,248			1,727			—			12,469
Amortization of deferred financing fees		1,013			—			—			—			1,013
Impairment of assets held for sale		—			10,281			—			—			10,281
Other adjustments		(856	)		(5,279	)		(481	)		36			(6,580	)
Loss applicable to minority interest		—			—			—			(71	)		(71	)
Changes in operating assets and liabilities		(1,404	)		3,136			(445	)		61			1,348
Net cash provided by (used in) operating activities		13,469			1,203			(376	)		(2	)		14,294
Cash flows from investing activities:
Capital expenditures		(5,382	)		(1,654	)		(1,073	)		106			(8,003	)
Proceeds from disposal of property, plant and equipment		9			451			—			(174	)		286
Net cash used in investing activities		(5,373	)		(1,203	)		(1,073	)		(68	)		(7,717	)
Cash flows from financing activities:
Net (payments on) proceeds from debt		(325	)		—			1,588			—			1,263
Net cash (used in) provided by financing activities		(325	)		—			1,588			—			1,263
Net increase in cash and cash equivalents		7,771			—			139			(70	)		7,840
Effect of exchange rate changes on cash		11			—			(20	)		207			198
Cash and cash equivalents at beginning of period		22,376			14			460			231			23,081
Cash and cash equivalents at end of period	$	30,158		$	14		$	579		$	368		$	31,119

-26-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(1) Overview

This Management Discussion and Analysis of Financial Condition and Results of Operations reflects the results of operations and financial condition of Holdings and its subsidiaries, which are materially the same as the results of operations and financial condition of Stanadyne and its subsidiaries. Therefore, the discussions provided are applicable to both Holdings and Stanadyne except where otherwise noted.

We are a leading designer and manufacturer of highly-engineered, precision manufactured engine components, primarily for the off-highway markets. We manufacture our own proprietary products including fuel pumps for diesel and gasoline engines, injectors and filtration systems for diesel engines, and various non-proprietary products manufactured under contract for other companies.

On July 31, 2006, Stanadyne concluded the sale of certain assets and liabilities of Precision Engine Products Corp. (“PEPC” or “Precision Engine”) to Defiance, Inc., a part of GenTek, Inc. The sale included the U.S.-based assets of PEPC, certain acquired liabilities as defined in the Purchase Agreement, and all of the stock in PEPC’s wholly-owned subsidiary in Brazil, Precision Engine Products, Ltda. We no longer report segment information since, subsequent to the sale of Precision Engine, we operate only the Precision Products business. The results of operations for Precision Engine are classified as discontinued operations for all periods herein.

During the second quarter of 2007, we concluded discussions with Deere & Company (“Deere”) and finalized a multi-year supply agreement.

Sales for the first six months of 2007 totaled $147.1 and were $8.2 million and 5.3% less than the $155.4 million reported for the same period of 2006. Following a strong first quarter of demand from our end markets for off-highway equipment used in agricultural, industrial and construction activities as well as the select on-highway applications, second quarter sales were down to both the Original Equipment Manufacturers (“OEMs”) and the service markets. While sales of fuel injection equipment to Deere and Daimler-Benz (“Daimler”) were relatively unchanged from the first half of 2006, lower sales of fuel pumps to General Engine Products (“GEP”) and General Motors (“GM”) were $2.1 million and $10.9 million less, respectively, in the first six months of 2007. Continued strength in demand for our fuel filtration products helped push sales of these products in the first half of 2007 $7.9 million higher than for the first half of 2006.

Operating income for the first six months of 2007 totaled $26.1 million, reflecting an increase of $11.6 million from the first six months of 2006. This $11.6 million increase in first half operating profit resulted primarily from the $10.0 million pension liability curtailment gain recorded in the first quarter. The additional $1.6 million of improvements in operating income were due primarily to lower SG&A costs in our U.S. operations. Although second quarter earnings in our Brescia, Italy location improved from the first quarter of 2007, further reorganization of this location will require additional restructuring activities in the third quarter of 2007.

Stanadyne’s liquidity remained strong in the second quarter of 2007, with cash on hand as of June 30, 2007 totaling $24.0 million, $1.1 million of restricted cash and $26.2 million of availability under the U.S.-based Revolving Credit Facility.

Basis of Presentation

The following table displays unaudited information for the periods shown. The three month and six month periods ended June 30, 2007 and 2006 include the results of Holdings and Stanadyne. Amounts are presented in thousands of dollars and as a percentage of net sales. Historical results and percentage relationships are not necessarily indicative of the results that may be expected for any future period.

-27-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

	Holdings
	Three Months Ended June 30, 2007		Three Months Ended June 30, 2006				Six Months Ended June 30, 2007				Six Months Ended June 30, 2006
	$	%	$		%		$		%		$		%
Net sales	72,648	100.0	79,623		100.0		147,135		100.0		155,362		100.0
Cost of goods sold	54,803	75.4	60,949		76.5		111,350		75.7		119,445		76.9
Gross profit	17,845	24.6	18,674		23.5		35,785		24.3		35,917		23.1
SG&A	8,047	11.1	8,403		10.6		17,267		11.7		18,995		12.2
Amortization of intangibles	1,025	1.4	1,025		1.3		2,049		1.4		2,049		1.3
Management fees	187	0.3	187		0.2		375		0.2		375		0.2
Pension liability curtailment gain	—	—	—		—		(10,015	)	(6.8	)	—		—
Operating income	8,586	11.8	9,059		11.4		26,109		17.8		14,498		9.3
Income from continuing operations	1,049	1.4	1,164		1.5		7,393		5.0		142		0.1
Loss from discontinued operations	—	—	(6,142	)	(7.7	)	—		—		(7,322	)	(4.7	)
Net income (loss)	1,049	1.4	(4,978	)	(6.3	)	7,393		5.0		(7,180	)	(4.6	)

	Stanadyne
	Three Months Ended June 30, 2007		Three Months Ended June 30, 2006				Six Months Ended June 30, 2007				Six Months Ended June 30, 2006
	$	%	$		%		$		%		$		%
Net sales	72,648	100.0	79,623		100.0		147,135		100.0		155,362		100.0
Cost of goods sold	54,803	75.4	60,949		76.5		111,350		75.7		119,445		76.9
Gross profit	17,845	24.6	18,674		23.5		35,785		24.3		35,917		23.1
SG&A	8,035	11.1	8,384		10.5		17,235		11.7		18,931		12.2
Amortization of intangibles	1,025	1.4	1,025		1.3		2,049		1.4		2,049		1.3
Management fees	187	0.3	187		0.2		375		0.2		375		0.2
Pension liability curtailment gain	—	—	—		—		(10,015	)	(6.8	)	—		—
Operating income	8,598	11.8	9,078		11.4		26,141		17.8		14,562		9.4
Income from continuing operations	2,740	3.8	2,680		3.4		10,734		7.3		3,156		2.0
Loss from discontinued operations	—	—	(6,142	)	(7.7	)	—		—		(7,322	)	(4.7	)
Net income (loss)	2,740	3.8	(3,462	)	(4.3	)	10,734		7.3		(4,166	)	(2.7	)

-28-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

Comparison of Results of Operations:

The Three Months Ended June 30, 2007 for Holdings and Stanadyne

Compared to

The Three Months Ended June 30, 2006 for Holdings and Stanadyne

Net Sales. Net sales for the second quarter of 2007 totaled $72.6 million compared to $79.6 million in the second quarter of 2006, representing a decrease of $7.0 million or 8.8%. Sales were lower in both the OEM and service markets in the second quarter of 2007 when compared to the same period in 2006.

Sales to our OEM customers represented 59% of our second quarter 2007 revenues as compared to 61% of second quarter 2006 revenues, reflecting a decrease of $5.7 million or 11.8%. Lower OEM revenues were primarily due to less demand for our fuel injection equipment from Deere and Daimler. Sales to Deere in the second quarter of 2007 decreased by $3.0 million or 9.3% and included the impact of higher prices resulting from the renewal of the supply agreement. Demand for agriculture equipment remained strong, while demand for construction equipment was affected by declines in the housing market. Daimler reduced second quarter demand for our high pressure gasoline injection pumps by $1.0 million when compared to the second quarter of 2006. While demand for the direct injection gasoline engine option has been less than originally anticipated, Daimler has indicated plans to offer this fuel system in a broader range of vehicles. Second quarter OEM sales were also $0.9 million lower to GEP for fuel pumps used in the military HMMWV. The military shifted their purchases from higher quantities of the standard HMMWV to fewer of the more expensive, up-armored versions.

Sales to the service markets in the second quarter of 2007 decreased $1.3 million or 4.1% compared to the second quarter of 2006. As noted in the first quarter results, service demand in 2007 from GM for diesel fuel pumps continued to decline as expected as vehicles age and go out of service. GM also reduced its inventory of our service pumps during the first and second quarters of 2007, further reducing service sales. As a result, our second quarter 2007 sales to GM were approximately $5.6 million less than in the same period in 2006. Strength in the parts aftermarket in the second quarter of 2007 provided $2.3 million in higher sales as compared to the same period in 2006.

Sales by major product line in the second quarter of 2007 when compared to the same period a year ago reflected decreases in our fuel pump, fuel injector and Precision Components and Assembly (“PCA”) sales, partially offset by a $4.9 million increase in our fuel filtration business.

Gross Profit.Our gross profit totaled $17.8 million and 24.6% of net sales in the second quarter of 2007, as compared to $18.7 million and 23.5% of net sales in the second quarter of 2006. The 2007 second quarter gross profit decreased by $0.8 million due primarily to the impact of lower sales volumes noted above, partially offset by higher prices. Although negative gross profits in the Brescia, Italy plant were still $0.4 million less in the second quarter of 2007 as compared to the second quarter of 2006, considerable improvement was noted from the first quarter of 2007. Further progress in the reorganization of this location will require additional restructuring activities in the third quarter of 2007. Finally, depreciation expense in the second quarter of 2007 decreased by $0.1 million versus the second quarter of 2006.

Selling, General and Administrative Expenses (“SG&A”) in the second quarter of 2007 totaled $8.0 million or 11.1% of net sales as compared to $8.4 million or 10.6% of net sales for the same period of 2006. This $0.4 million reduction was due primarily to $0.3 million of lower labor and related fringe benefit costs and $0.1 million less of stock-based compensation expense recorded in the second quarter of 2007. An additional $0.1 million of R&D costs in the second quarter of 2007 and $0.1 million of start-up costs in China were offset by $0.2 million lower retiree health benefit costs.

-29-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

Amortization of Intangible Assets.Amortization of intangible assets totaled $1.0 million in the second quarter of 2007 and was unchanged from the same period in 2006.

Operating Income. Our operating income in the second quarter of 2007 totaled $8.6 million and 11.8% of net sales as compared to the $9.0 million and 11.4% of net sales in the second quarter of 2006. This $0.4 million decrease in second quarter operating profit resulted from the $0.8 million lower gross profit partially offset by a $0.4 million reduction in SG&A costs.

Income from Continuing Operations. Income from continuing operations for Stanadyne in the second quarter of 2007 totaled $2.7 million and 3.8% of net sales versus income from continuing operations of $2.7 million and 3.4% of net sales reported for the same period in 2006. Lower operating income of $0.4 million in the second quarter of 2007 was offset by a $0.3 million lower interest expense on reduced debt levels and a $0.1 million reduction in income taxes.

Income from continuing operations for Holdings in the second quarter of 2007 totaled $1.0 million and was $1.7 million less than the net income reported for Stanadyne due to $2.3 million of additional interest expense on the Discount Notes, partially offset by $0.6 million of additional income tax benefits. Income from continuing operations for Holdings in the second quarter of 2006 totaled $1.2 million and was $1.5 million less than the income from continuing operations reported for Stanadyne due to $2.0 million of additional interest expense on the Discount Notes, partially offset by $0.5 million of income tax benefits.

Loss from Discontinued Operations. Loss from discontinued operations in the second quarter of 2006, represented the loss from operations of the former Precision Engine segment, and totaled $6.1 million and included impairments of $10.3 million, consisting of a write-down of property, plant and equipment of $5.7 million, goodwill of $1.9 million and other identifiable intangibles of $2.7 million and a loss from discontinued operations of $0.3 million offset by an income tax benefit of $4.4 million.

The Six Months Ended June 30, 2007 for Holdings and Stanadyne

Compared to

The Six Months Ended June 30, 2006 for Holdings and Stanadyne

Net Sales. Net sales for the first six months of 2007 totaled $147.1 and were $8.2 million and 5.3% less than the $155.4 million reported for the first six months of 2006. Sales were lower in both the OEM and service markets.

Following a stronger first quarter, lower sales to OEM customers in the second quarter of 2007 resulted in a reduction of $3.3 million or 3.6% in first half OEM revenues when compared to the first half of 2006. Sales to our OEM customers represented 61% of our first half 2007 revenues as compared to 60% of first half 2006 revenues. Lower OEM revenues for the first six months of 2007 were primarily due to $2.1 million lower sales to GEP for our fuel injection equipment used in military HMMWV’s. First half sales to Deere and Daimler were relatively unchanged from the first half results in 2006.

Sales to the service markets for the first six months of 2007 decreased $4.9 million or 7.9% compared to the first six months of 2006. Service demand in 2007 from GM for diesel fuel pumps continued to decline as expected as vehicles age and go out of service. GM also reduced its inventory of our service pumps during the first and second quarters of 2007, further reducing service sales. As a result, our sales to GM in the first half of 2007 were $10.9 million less than for the same period in 2006. Higher demand from the service parts aftermarket added $3.9 million to the first six months sales in 2007 and helped offset the lower sales to GM.

-30-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

Sales by major product line for the first six months of 2007 when compared to the same period a year ago reflected a $14.3 million reduction in sales of fuel pumps, primarily due to the lower service sales to GM, as well as decreases in our fuel injector and PCA sales. These reductions were partially offset by a $7.1 million increase in our fuel filtration business.

Gross Profit.Our gross profit totaled $35.8 million and 24.3% of net sales in the first six months of 2007, reflecting little change from the $35.9 million and 23.1% of net sales for the first six month of 2006. Although the 2007 gross profit was negatively impacted by lower sales volume, this was largely offset by improved pricing. Gross profit in our Stanadyne, SpA plant was $1.0 million less in the first half of 2007 when compared to the first half of 2006, with most of the difference traceable to the first quarter. Further progress in the reorganization of this location will require additional restructuring activities in the third quarter of 2007. Factory overhead costs in the U.S. operations were reduced to match lower sales volumes and helped to offset the lower earnings in the Italian operations. Finally, depreciation expense for the first six months of 2007 decreased by $0.2 million versus the same period of 2006.

Selling, General and Administrative Expenses (“SG&A”) in the first six months of 2007 for Stanadyne totaled $17.2 million and 11.7% of net sales, reflecting a decrease of $1.7 million from the $19.0 million and 12.2% of net sales reported for the same period of 2006. This $1.7 million decrease was due primarily to $1.8 million of severance benefits for the former CEO, $0.2 million of restructuring costs at our Windsor, Connecticut facility and $0.3 million higher stock-based compensation expense, all recorded in the first half of 2006, offset by $0.7 million of higher research and development costs and $0.1 million of start-up costs for our operation in China recorded in the first half of 2007. SG&A in the first six months of 2007 for Holdings was $0.1 million higher due to additional administrative costs associated with the holding company.

Pension Curtailment Gain. Changes to the U.S.-based defined benefit pension plans in the first quarter of 2007 resulted in a curtailment of the liability associated with future benefits. Effective March 31, 2007, Stanadyne amended the Stanadyne Corporation Pension Plan (a defined benefit plan) to freeze the benefits for all participants so that no future benefits will accrue after that date. The effect of the Pension Plan freeze resulted in curtailment gain of $10.0 million. This one-time curtailment gain is equal to the reduction in the projected benefit obligations (PBO) due to the freeze, offset by any unrecognized losses immediately prior to the freeze, plus any remaining unrecognized prior service costs.

Amortization of Intangible Assets.Amortization of intangible assets totaled $2.0 million through the first six months of 2007 and was unchanged from the same period in 2006.

Operating Income. Our operating income for the first six months of 2007 totaled $26.1 million and 17.8% of net sales, reflecting an increase of $11.6 million from the $14.5 million and 9.3% for the same period in 2006. This $11.6 million increase in first half operating profit resulted primarily from the $10.0 million pension liability curtailment gain and $1.7 million lower SG&A costs.

Income from Continuing Operations. Income from continuing operations for Stanadyne in the first six months of 2007 totaled $10.7 million or 7.3% of net sales, reflecting an increase of $7.5 million from the $3.2 million or 2.0% of net sales reported for the same period in 2006. This $7.5 million increase reflected the combined results of $11.5 million of higher operating income, which included the $10.0 million pension curtailment gain described previously, and $0.7 million lower interest expense on reduced debt levels, offset by $0.2 million increase in the minority interest in the income in our SAPL joint venture and $4.5 million in additional income taxes on higher earnings.

Income from continuing operations for Holdings in the first six months of 2007 totaled $7.4 million and was $3.3 million less than the amount reported for Stanadyne due to $4.5 million of additional interest expense on the Discount Notes, partially offset by $1.2 million of lower income taxes.

Loss from Discontinued Operations. Loss from discontinued operations for the first six months of 2006 as reflected in the accompanying condensed consolidated statements of operations, represented the loss from operations of the

-31-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

former Precision Engine segment. Losses totaled $7.3 million and included impairments of $10.3 million, consisting of a write-down of property, plant and equipment of $5.7 million, goodwill of $1.9 million and other identifiable intangibles of $2.7 million and a loss from discontinued operations of $1.7 million offset by an income tax benefit of $4.7 million.

Liquidity and Capital Resources

Stanadyne’s principal sources of liquidity are cash on hand and cash flows from operations, supplemented by a U.S.-based revolving credit facility under which $26.2 million was available for borrowing as of June 30, 2007. Stanadyne occasionally utilizes capital leasing and, for its foreign operations in Italy and India, maintains a combination of overdraft, working capital and term loan facilities with local financial institutions on an as-needed basis.

As of June 30, 2007, there were borrowings of $21.2 million under the Term Loans, no borrowings under the Revolving Credit Line, $5.3 million in foreign overdraft facilities and $0.7 million in foreign term loans. Unless the availability of funds under the Revolving Credit Line is less than $5.0 million, the U.S.-based Senior Credit Facilities are not subject to financial covenants. Cash on hand totaled $25.1 million on June 30, 2007 and included $1.1 million of restricted cash from the sale of the former Precision Engine segment.

Holdings has no independent financial resources of its own. The Senior Bank Facility and the indenture governing the Notes limit the ability of Stanadyne and its subsidiaries to pay dividends or make other distributions to Holdings.

Cash Flows From Operating Activities. Stanadyne’s net cash flows from operating activities for the six months ended June 30, 2007 were $3.8 million as compared to $14.4 million for the first six months of 2006. Cash flows from operating activities before changes in asset and liability accounts reflected $1.0 million more cash in the first six months of 2007 than in the same period in 2006. Lower SG&A and interest costs in 2007 were partially offset by higher income taxes.

Changes in asset and liability accounts, primarily working capital accounts, required $11.5 million more cash in the first six months of 2007 versus the comparable period in 2006. Increases in accounts receivable in both years required $5.0 million less cash in the first six months of 2007 than the first six months of 2006. Lower sales in the first half of 2007 were partially offset by the accrued but unpaid Deere price increases that resulted from the finalization of the supply agreement. These amounts will be paid in the second half of 2007. Inventory reductions in the first six months of 2007 contrasted against the inventory build in the first half of 2006 resulted in a year over year cash savings of $4.2 million. These improvements in 2007 cash flows were offset by $1.9 million less cash from an income tax refund received in the first quarter of 2006 and $16.2 million additional cash for reductions in accounts payable and accrued liability balances. Lower accounts payable balances in the first half of 2007 compared to increasing accounts payable balances in the first half of 2007 resulting in $5.1 million year-over-year change in cash flows. Cash requirements for federal income taxes and pension plan contributions consumed $6.2 million more cash in the first six months of 2007 than the comparable period in 2006.

Cash flows from operating activities for Holdings for the six months ended June 30, 2007 were the same as the amounts reported for Stanadyne.

Cash Flows From Investing Activities. Cash flows from investing activities for the six months ended June 30, 2007 consumed $3.8 million in cash. Capital expenditures for the first half of 2007 totaled $3.8 million compared to $8.0 million for the same period in 2006. Capital expenditures in 2007 reflected amounts applied to increased capacity, cost reduction, quality enhancements, safety and ergonomics improvements and general maintenance projects, as well as approximately $0.7 million for manufacturing equipment in the new Changshu, China location. Capital expenditures in 2006 included $2.0 million expended in the former Precision Engine segment.

Cash Flows From Financing Activities. Cash flows from financing activities for the Company in the first half of 2007 consumed cash of $1.4 million compared to an increase in cash of $1.9 million for the Company and an increase in cash of $1.3 million for Stanadyne for the same period of 2006. The difference in cash flows for 2006 between the Company and Stanadyne of $0.6 million was due the proceeds from exercised employee stock options and the sale of common stock.

-32-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

There were no cash flows from financing activities in our U.S.-based operations during the first six months of 2007. Remaining balances under the Term Loan are not due until 2010. There were no borrowings under the U.S.-based Revolving Credit Line as of June 30, 2007 and 2006, which after reductions for outstanding letters of credit, provided available liquidity of $26.2 million and $27.5 million at each date, respectively.

Cash flows from financing activities in our foreign operations in the first six months of 2007 included a reduction in overdraft borrowings of $1.0 million at SpA as well as payments of capital lease obligations totaling $0.1 million this year. Cash flows from financing activities in SAPL reflected a net reduction of $0.2 million in outstanding indebtedness, reflecting a scheduled installment against the term loan facility.

Pension Plans. We maintain a qualified defined benefit pension plan (the “Qualified Plan”), which covers substantially all domestic hourly and salary employees and an unfunded nonqualified plan to provide benefits in excess of amounts permitted to be paid under the provisions of the tax law to participants in the Qualified Plan.

The value of the Qualified Plan assets increased to $72.9 million at December 31, 2006 from $66.8 million at December 31, 2005. Solid investment performance in 2006 coupled with a 25 basis point increase in the discount rate were not sufficient to offset the growth in the unfunded pension obligation due to period interest and service costs. The Qualified Plan unfunded benefit obligation increased to $30.0 million at December 31, 2006 from $26.9 million at December 31, 2005. The Company’s minimum required contribution in 2007 is $6.5 million. The first installment of $1.7 million was made in the second quarter of 2007, with the balance expected to be paid in September 2007. This amount is subject to change as a result of amendments to the pension plan described below.

Effective March 31, 2007, Stanadyne amended the Stanadyne Corporation Pension Plan (a defined benefit plan) (the “Pension Plan”) to freeze the Pension Plan with respect to all participants so that no future benefits will accrue after that date. As required by law, benefits already accrued as of such date will not be affected. With respect to such benefits, participants continue to vest and all other retirement options, including early retirement reduction factors, continue unchanged. The assets continue to be held in trust for participants until they retire. The accrual of benefits for certain executives participating in the Supplemental Retirement Benefit Plan is based on the accrual of benefits under the Pension Plan. Therefore, the freeze of the Pension Plan also resulted in the freeze of the Supplemental Retirement Benefit Plan.

The effect of the Pension Plan freeze resulted in curtailment gain of $10.0 million for the Pension Plan. This one-time curtailment gain resulted from the reduction in the plans’ projected benefit obligations (“PBO”) due to the freeze of $9.4 million and unrecognized prior service costs of $0.6 million.

(2) New Accounting Pronouncements

In July 2006, FASB issued Financial Interpretation 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of Statement of Financial Accounting Standards No. 109” (“FIN 48”). FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on accounting for derecognition, classification, interest and penalties in interim periods, disclosures and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48, effective January 1, 2007, resulted in a reduction of recorded tax contingencies and an increase to retained earnings of approximately $627.

In September 2006, FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension Plan and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”). SFAS 158 requires an employer to: (a) recognize in its statement of financial position an asset for a plan’s over-funded status or a liability for a plan’s under-funded status; (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions); (c) recognize changes in the funded status of its defined benefit postretirement plan in which the changes occur as a component of accumulated other comprehensive income (loss). SFAS 158 is effective for the Company as of December 31, 2007. The Company is currently evaluating the impact the adoption of SFAS 158 will have on its consolidated financial statements.

-33-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

(3) Critical Accounting Policies

We prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include: product warranty reserves, inventory reserves for excess or obsolescence, pension and postretirement benefit liabilities, self-insurance reserves and stock-based compensation.

Product Warranty Reserves. We provide a limited warranty for specific products and recognize the projected cost for this warranty in the period the products are sold. Liability reserves are determined by applying historical warranty experience rates to current period product sales. Warranty accruals are adjusted for known or anticipated warranty claims as new information becomes available.

Inventory Reserves. We maintain our inventories at the lower of cost or market value. Cost is determined on a last-in, first-out (“LIFO”) basis for all domestic inventory and on a first-in, first-out (“FIFO”) basis for all foreign inventory. When conditions warrant (usually highlighted by slow-moving product or products with pricing constraints), reserves are established to reduce the value of inventory to net realizable values. Annually, we review and identify all inventories in excess of three years sales requirements. We reserve for this “slow moving” inventory as it has no realizable value. If business conditions change during the year, this evaluation is conducted more frequently.

Pension and Other Postretirement Benefits. We provide for pension and other postretirement benefits and make assumptions with the assistance of independent actuaries about discount rates, expected long-term rates of return on plan assets and health care cost trends to determine the net periodic pension and postretirement health care cost. These estimates are based on our best judgment, including consideration of both current and future market conditions. We consider both internal and external evidence to determine the appropriate assumptions. In the event a change in any of the assumptions is warranted, future pension cost as determined under Statement of Financial Accounting Standards No. 87 “Employers’ Accounting for Pensions” could increase or decrease.

Self-Insurance Reserves. We are self-insured for a substantial portion of our health care and workers’ compensation insurance programs. With advice and assistance from outside experts, reserves are established using estimates based on, among other factors, reported claims to date, prior claims history, and projections of claims incurred but not reported. Future medical cost trends are incorporated in the projected costs to settle existing claims. If actual results in any of these areas change from prior periods, adjustments to recorded reserves may be required.

Stock-Based Compensation. We adopted SFAS 123R effective January 1, 2006 using the modified prospective method in which compensation cost is recognized over the service period for all awards granted subsequent to our adoption of SFAS 123R as well as for the unvested portions of awards outstanding on the date of our adoption of SFAS 123R. SFAS 123R establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees, except for equity instruments held by employee share ownership plans.

(4) Cautionary Statement

This quarterly report contains “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, including, without limitation, statements with respect to the financial condition, results of operations and business of the Company and management’s discussion and analysis of financial condition and results of operations. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,”

-34-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

“estimate,” “anticipate,” “believe,” “project,” or “continue” or the negative thereof or other similar words. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. Actual results may vary materially.

Investors are cautioned not to place undue reliance on any forward-looking statements. Investors should also understand that it is not possible to predict or identify all the risks and uncertainties that could affect future events and should not consider the following list to be a complete statement of all potential risks and uncertainties.

Any change in the following factors may materially adversely affect our business and our financial results:

• changes in technology, manufacturing techniques or customer demands;

• loss or adverse change in our relationship with our material customers;

• changes in the performance or growth of our customers;

• increased competition and pricing pressures in our existing and future markets;

• changes in the price and availability of raw materials, particularly steel and aluminum;

• risks associated with international operations;

• the loss of key members of management;

• risk that our intellectual property may be misappropriated;

• loss of any of our key manufacturing facilities;

• adverse state or federal legislative or regulatory developments or litigation or other disputes;

• changes in the business, market trends, projected growth rates and general economic conditions related to the markets in which we operate, including agricultural and construction equipment, industrial machinery, trucks, marine equipment and automobiles;

• our ability to satisfy our debt obligations, including related covenants; and

• increases in our cost of borrowing or inability or unavailability of additional debt or equity capital.

The forgoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that could impact our business. Except to the extent required by law, we undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

-35-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risks which include changes in interest rates and changes in foreign currency exchange rates as measured against the U.S. dollar.

Interest Rate Risk. The carrying values of Stanadyne’s revolving credit lines and term loans approximate fair value. The term loans are primarily LIBOR-based borrowings and are re-priced every one to three months. A 10% change in the interest rate on the term loans would have changed the recorded interest expense for the first six months of 2007 by $0.09 million. The Notes and Discount Notes bear interest at a fixed rate and, therefore, are not sensitive to interest rate fluctuation. The fair value of Stanadyne’s $160.0 million in Notes based on bid prices on June 29, 2007 was approximately $168.6 million. The fair value of Holdings’ Discount Notes based on bid prices at June 29, 2007 was $82.6 million.

Foreign Currency Risk. The Company has subsidiaries in China and Italy, a joint venture in India and a branch office in France, and therefore is exposed to changes in foreign currency exchange rates. Changes in exchange rates may positively or negatively affect the Company’s sales, gross margins, and retained earnings. However, historically, these locations have contributed less than 15% of the Company’s net sales and retained earnings, with most of these sales attributable to the Italian subsidiary. The Company also sells its products from the United States to foreign customers for payment in foreign currencies as well as U.S. dollars. The impact of foreign currency exchange was immaterial to continuing operations for the six months ended June 30, 2007 and 2006. The Company does not hedge against foreign currency risk.

-36-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

ITEM 4: CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

As of the end of the period covered by this quarterly report, an evaluation of the effectiveness of the design and operation of Holdings’ disclosure controls and procedures was conducted under the supervision and with the participation of the President and Chief Financial Officer of Holdings. Based on this evaluation, the President and Chief Financial Officer of Holdings have concluded that Holdings’ disclosure controls and procedures were adequate and designed to ensure that information required to be disclosed by Holdings in this report is recorded, processed, summarized and reported in a timely manner, including that such information is accumulated and communicated to management, including the President and Chief Financial Officer of Holdings, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this quarterly report, an evaluation of the effectiveness of the design and operation of Stanadyne’s disclosure controls and procedures was conducted under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of Stanadyne. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer of Stanadyne have concluded that Stanadyne’s disclosure controls and procedures were adequate and designed to ensure that information required to be disclosed by Stanadyne in this report is recorded, processed, summarized and reported in a timely manner, including that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer of Stanadyne, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in internal controls

There was no change in internal control over financial reporting that materially affected or is reasonably likely to materially affect Holdings’ internal control over financial reporting, including any corrective actions with regard to significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, subsequent to the evaluation described above.

Reference is made to the Certifications of the President and Chief Financial Officer of Holdings about these and other matters filed as exhibits to this report.

There was no change in internal control over financial reporting that materially affected or is reasonably likely to materially affect Stanadyne’s internal control over financial reporting, including any corrective actions with regard to significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, subsequent to the evaluation described above.

Reference is made to the Certifications of the Chief Executive Officer and Chief Financial Officer of Stanadyne about these and other matters filed as exhibits to this report.

-37-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

PART II: OTHER INFORMATION

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On June 15, 2007, Holdings issued 12,500 shares of Holdings Common Stock for $0.47 per share to a retired employee upon exercise of options. On April 16, 2007, Holdings granted one employee options to purchase 250,000 shares of Holdings Common Stock at an exercise price of $0.95 per share. On June 1, 2007, Holdings granted seven employees options to purchase 380,000 shares of Holdings Common Stock at an exercise price of $0.85 per share. The options granted vest ratably annually over a four-year period from the date of grant are subject to the achievement of various performance benchmarks and expire ten years from the date of grant. Holdings issued such shares and granted such options in reliance upon the exemption from the registration requirements of the Securities Act of 1933 as amended, under Section 4(2) of the Securities Act.

In claiming the exemption under Section 4(2), Holdings relied in part on the following facts: (1) the offers and sales involved a limited number of employees; (2) the employees have access to information regarding Holdings and Stanadyne; (3) the employees represented that they (a) had the requisite knowledge and experience in financial and business matters to evaluate the merits and risk of an investment in Holdings; (b) were able to bear the economic risk of an investment in Holdings; (c) acquired the shares for their own account in a transaction not involving any general solicitation or general advertising, and not with a view to the distribution thereof; and (4) a restrictive legend was placed on each certificate or other instrument evidencing the shares and options.

ITEM 6: EXHIBITS

10.11	Long Term Agreement between Deere & Company and Stanadyne Corporation effective November 1, 2001, as amended by First Amendment to Deere & Company/Stanadyne Corporation Long Term Agreement effective as of October 26, 2006 and by Second Amendment to Deere & Company/Stanadyne Corporation Long Term Agreement entered into as of May 15, 2007 (Pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, the registrants have requested confidential treatment of portions of this exhibit deleted from the filed copy.)
31.1	Certification of President of Stanadyne Holdings, Inc. Pursuant to Rule 15d-14(a) of the Securities Exchange Act as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer of Stanadyne Holdings, Inc. Pursuant to Rule 15d-14(a) of the Securities Exchange Act as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.3	Certification of Chief Executive Officer of Stanadyne Corporation Pursuant to Rule 15d-14(a) of the Securities Exchange Act as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.4	Certification of Chief Financial Officer of Stanadyne Corporation Pursuant to Rule 15d-14(a) of the Securities Exchange Act as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of President and Chief Financial Officer of Stanadyne Holdings, Inc. Pursuant to Rule 15d-14(b) of the Securities Exchange Act and 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Executive Officer and Chief Financial Officer of Stanadyne Corporation Pursuant to Rule 15d-14(b) of the Securities Exchange Act and 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

-38-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

Signature

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

	Stanadyne Holdings, Inc.
	(Registrant)
Date: August 14, 2007	/s/ Stephen S. Langin
	Stephen S. Langin
	Chief Financial Officer

Signature

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

	Stanadyne Corporation
	(Registrant)
Date: August 14, 2007	/s/ Stephen S. Langin
	Stephen S. Langin
	Vice President and Chief Financial Officer

-39-

EXHIBIT INDEX:

10.11	Long Term Agreement between Deere & Company and Stanadyne Corporation effective November 1, 2001, as amended by First Amendment to Deere & Company/Stanadyne Corporation Long Term Agreement effective as of October 26, 2006 and by Second Amendment to Deere & Company/Stanadyne Corporation Long Term Agreement entered into as of May 15, 2007 (Pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, the registrants have requested confidential treatment of portions of this exhibit deleted from the filed copy.)
31.1	Certification of President of Stanadyne Holdings, Inc. Pursuant to Rule 15d-14(a) of the Securities Exchange Act as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer of Stanadyne Holdings, Inc. Pursuant to Rule 15d-14(a) of the Securities Exchange Act as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.3	Certification of Chief Executive Officer of Stanadyne Corporation Pursuant to Rule 15d-14(a) of the Securities Exchange Act as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.4	Certification of Chief Financial Officer of Stanadyne Corporation Pursuant to Rule 15d-14(a) of the Securities Exchange Act as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of President and Chief Financial Officer of Stanadyne Holdings, Inc. Pursuant to Rule 15d-14(b) of the Securities Exchange Act and 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Executive Officer and Chief Financial Officer of Stanadyne Corporation Pursuant to Rule 15d-14(b) of the Securities Exchange Act and 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002