Stanadyne 10-Q 2007 Q3 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 September 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 October 31, 2007 was:

Stanadyne Holdings, Inc.	106,140,081 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 September 30, 2007 and December 31, 2006 (unaudited)	4
Condensed Consolidated Statements of Operations for the three months ended September 30, 2007 and 2006 (unaudited)	5
Condensed Consolidated Statements of Operations for the nine months ended September 30, 2007 and 2006 (unaudited)	6
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006 (unaudited)	7
Stanadyne Corporation
Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006 (unaudited)	8
Condensed Consolidated Statements of Operations for the three months ended September 30, 2007 and 2006 (unaudited)	9
Condensed Consolidated Statements of Operations for the nine months ended September 30, 2007 and 2006 (unaudited)	10
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006 (unaudited)	11
Notes to Condensed Consolidated Financial Statements	12-28
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	29-38
Item 3 Quantitative and Qualitative Disclosures About Market Risk	39
Item 4 Controls and Procedures	40
Part II Other Information
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 6 Exhibits	41
Signatures	42

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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.

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PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands)

	September 30, 2007			December 31, 2006
ASSETS
Current Assets:
Cash and cash equivalents	$	20,862		$	25,394
Restricted cash		—			975
Accounts receivable, net of allowance for uncollectible accounts of $291 as of September 30, 2007 and $288 at December 31, 2006		45,238			40,804
Inventories, net		30,900			34,575
Prepaid expenses and other assets		1,949			1,587
Deferred income taxes		7,763			5,078
Total current assets		106,712			108,413
Property, plant and equipment, net		91,459			98,117
Goodwill		144,575			144,575
Intangible and other assets, net		89,757			94,430
Total assets	$	432,503		$	445,535
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	21,074		$	22,406
Accrued liabilities		30,918			42,297
Current maturities of long-term debt		7,177			6,673
Current portion of capital lease obligations		272			299
Total current liabilities		59,441			71,675
Long-term debt, excluding current maturities		261,854			255,330
Deferred income taxes		28,955			27,965
Capital lease obligations, excluding current portion		274			454
Other non current liabilities		31,998			46,742
Total liabilities		382,522			402,166
Minority interest in consolidated subsidiary		128			—
Commitments and Contingencies
Stockholders’ equity:
Common stock		1,064			1,064
Additional paid-in capital		53,973			53,661
Other accumulated comprehensive income		1,154			589
Accumulated deficit		(6,191	)		(11,798	)
Treasury stock, at cost		(147	)		(147	)
Total stockholders’ equity		49,853			43,369
Total liabilities and stockholders’ equity	$	432,503		$	445,535

See notes to condensed consolidated financial statements

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STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands)

	Three Months Ended September 30, 2007			Three Months Ended September 30, 2006
Net sales	$	69,372		$	73,237
Cost of goods sold		54,778			58,394
Gross profit		14,594			14,843
Selling, general and administrative expenses		9,345			9,670
Amortization of intangible assets		890			1,024
Management fees		187			188
Operating income		4,172			3,961
Other expenses:
Interest expense		(7,192	)		(7,166	)
Loss from continuing operations before income taxes and minority interest		(3,020	)		(3,205	)
Income tax benefit		(558	)		(670	)
Loss from continuing operations before minority interest		(2,462	)		(2,535	)
Minority interest in loss of consolidated subsidiary		50			—
Loss from continuing operations		(2,412	)		(2,535	)
Income from discontinued operations, net of income tax expense of $261 in 2006		—			327
Net loss	$	(2,412	)	$	(2,208	)

See notes to condensed consolidated financial statements

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STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands)

	Nine Months Ended September 30, 2007			Nine Months Ended September 30, 2006
Net sales	$	216,507		$	228,599
Cost of goods sold		166,128			177,839
Gross profit		50,379			50,760
Selling, general and administrative expenses		26,612			28,665
Amortization of intangible assets		2,938			3,073
Management fees		563			563
Pension plan curtailment gain		(10,015	)		—
Operating income		30,281			18,459
Other expenses:
Interest expense		(21,269	)		(21,464	)
Income (loss) from continuing operations before income taxes and minority interest		9,012			(3,005	)
Income tax expense (benefit)		3,903			(541	)
Income (loss) from continuing operations before minority interest		5,109			(2,464	)
Minority interest in (income) loss of consolidated subsidiary		(128	)		71
Income (loss) from continuing operations		4,981			(2,393	)
Loss from discontinued operations, net of income tax benefit of $4,423 in 2006		—			(6,995	)
Net income (loss)	$	4,981		$	(9,388	)

See notes to condensed consolidated financial statements

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STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

	Nine Months Ended September 30, 2007			Nine Months Ended September 30, 2006
Cash flows from operating activities:
Net income (loss)	$	4,981		$	(9,388	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		16,363			17,979
Amortization of debt discount and deferred financing fees		8,425			7,685
Loss on sale of discontinued operations		—			8,681
Stock-based compensation expense		291			671
Deferred income tax benefit		(1,703	)		(8,770	)
Income (loss) applicable to minority interest		128			(71	)
Loss on disposal of property, plant and equipment		948			536
Pension plan curtailment gain		(10,015	)		—
Changes in operating assets and liabilities		(18,775	)		(2,191	)
Net cash provided by operating activities		643			15,132
Cash flows from investing activities:
Net proceeds from sale of discontinued operations		104			24,000
Decrease (increase) in restricted cash		975			(1,406	)
Capital expenditures		(6,201	)		(11,175	)
Proceeds from disposal of property, plant and equipment		27			289
Net cash (used in) provided by investing activities		(5,095	)		11,708
Cash flows from financing activities:
Payments on foreign term loan		(247	)		(29	)
Net proceeds on foreign overdraft facilities		338			2,561
Principal payments on long-term debt		—			(22,988	)
Payments of capital lease obligations		(225	)		(204	)
Proceeds from exercise of stock options		20			242
Purchase of treasury stock		—			(28	)
Proceeds from the sale of common stock		—			376
Net cash used in financing activities		(114	)		(20,070	)
Cash and cash equivalents:
Net (decrease) increase in cash and cash equivalents		(4,566	)		6,770
Effect of exchange rate changes on cash		34			59
Cash and cash equivalents at beginning of period		25,394			23,081
Cash and cash equivalents at end of period	$	20,862		$	29,910

See notes to condensed consolidated financial statements

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STANADYNE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands)

	September 30, 2007		December 31, 2006
ASSETS
Current Assets:
Cash and cash equivalents	$	20,555	$	25,118
Restricted cash		—		975
Accounts receivable, net of allowance for uncollectible accounts of $291 as of September 30, 2007 and $288 December 31, 2006		45,238		40,804
Inventories, net		30,900		34,575
Prepaid expenses and other assets		1,949		1,576
Deferred income taxes		7,763		5,078
Total current assets		106,405		108,126
Property, plant and equipment, net		91,459		98,117
Goodwill		144,575		144,575
Intangible and other assets, net		88,046		92,545
Total assets	$	430,485	$	443,363
LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Accounts payable	$	21,074	$	22,406
Accrued liabilities		30,912		42,288
Current maturities of long-term debt		7,177		6,673
Current portion of capital lease obligations		272		299
Total current liabilities		59,435		71,666
Long-term debt, excluding current maturities		181,430		181,638
Deferred income taxes		35,592		32,744
Capital lease obligations, excluding current portion		274		454
Other noncurrent liabilities		31,998		46,742
Due to Stanadyne Holdings, Inc.		1,148		891
Total liabilities		309,877		334,135
Minority interest in consolidated subsidiary		128		—
Commitments and Contingencies
Stockholder’s equity:
Common stock		—		—
Additional paid-in capital		105,000		105,000
Other accumulated comprehensive income		1,154		589
Retained earnings		14,326		3,639
Total stockholder’s equity		120,480		109,228
Total liabilities and stockholder’s equity	$	430,485	$	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 September 30, 2007			Three Months Ended September 30, 2006
Net sales	$	69,372		$	73,237
Cost of goods sold		54,778			58,394
Gross profit		14,594			14,843
Selling, general and administrative expenses		9,335			9,651
Amortization of intangible assets		890			1,024
Management fees		187			188
Operating income		4,182			3,980
Other expenses:
Interest expense Interest, net		(4,828	)		(5,054	)
Loss from continuing operations before income taxes and minority interest		(646	)		(1,074	)
Income tax expense (benefit)		78			(346	)
Loss from continuing operations before minority interest		(724	)		(728	)
Minority interest in loss of consolidated subsidiary		50			—
Loss from continuing operations		(674	)		(728	)
Income from discontinued operations, net of income tax benefit of $261 in 2006		—			327
Net loss	$	(674	)	$	(401	)

See notes to condensed consolidated financial statements

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STANADYNE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands)

	Nine Months Ended September 30, 2007			Nine Months Ended September 30, 2006
Net sales	$	216,507		$	228,599
Cost of goods sold		166,128			177,839
Gross profit		50,379			50,760
Selling, general and administrative expenses		26,570			28,582
Amortization of intangible assets		2,938			3,073
Management fees		563			563
Pension plan curtailment gain		(10,015	)		—
Operating income		30,323			18,542
Other expenses:
Interest expense		(14,374	)		(15,307	)
Income from continuing operations before income taxes and minority interest		15,949			3,235
Income tax expense		5,761			878
Income from continuing operations before minority interest		10,188			2,357
Minority interest in (income) loss of consolidated subsidiary		(128	)		71
Income from continuing operations		10,060			2,428
Loss from discontinued operations, net of income tax benefit of $4,423 in 2006		—			(6,995	)
Net income (loss)	$	10,060		$	(4,567	)

See notes to condensed consolidated financial statements

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STANADYNE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

	Nine Months Ended September 30, 2007			Nine Months Ended September 30, 2006
Cash flows from operating activities:
Net income (loss)	$	10,060		$	(4,567	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		16,363			17,979
Amortization of deferred financing fees		1,519			1,519
Loss on sale of discontinued operations		—			8,681
Stock-based compensation expense		291			671
Deferred income tax expense (benefit)		155			(7,147	)
Income (loss) applicable to minority interest		128			(71	)
Loss on disposal of property, plant and equipment		948			536
Pension plan curtailment gain		(10,015	)		—
Changes in operating assets and liabilities		(18,817	)		(2,204	)
Net cash provided by operating activities		632			15,397
Cash flows from investing activities:
Net proceeds from sale of discontinued operations		104			24,000
Decrease (increase) in restricted cash		975			(1,406	)
Capital expenditures		(6,201	)		(11,175	)
Proceeds from disposal of property, plant and equipment		27			289
Net cash (used in) provided by investing activities		(5,095	)		11,708
Cash flows from financing activities:
Payments on foreign term loan		(247	)		(29	)
Net proceeds on foreign overdraft facilities		338			2,561
Principal payments on long-term debt		—			(22,988	)
Payments of capital lease obligations		(225	)		(204	)
Net cash used in financing activities		(134	)		(20,660	)
Cash and cash equivalents:
Net (decrease) increase in cash and cash equivalents		(4,597	)		6,445
Effect of exchange rate changes on cash		34			59
Cash and cash equivalents at beginning of period		25,118			23,081
Cash and cash equivalents at end of period	$	20,555		$	29,585

See notes to condensed consolidated financial statements

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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.

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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’ direct and indirect 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.

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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 nine month periods ended September 30, 2007:

	Three Months Ended September 30, 2007
	Outstanding				Exercisable
	Stock Options		Weighted Average Exercise Price *		Stock Options		Weighted Average Exercise Price *
July 1, 2007	14,115,000		$	0.50	3,201,250		$	0.47
Exercised	(30,000	)		0.47	(30,000	)		0.47
Cancelled	(325,000	)		0.62	—			—
September 30, 2007	13,760,000		$	0.50	3,171,250		$	0.47
	Nine Months Ended September 30, 2007
	Outstanding				Exercisable
	Stock Options		Weighted Average Exercise Price *		Stock Options		Weighted Average Exercise Price *
January 1, 2007	13,865,000		$	0.48	3,226,250		$	0.47
Exercised	(42,500	)		0.47	(42,500	)		0.47
Cancelled	(692,500	)		0.63	(12,500	)		0.47
Granted	630,000			0.89	—			—
September 30, 2007	13,760,000		$	0.50	3,171,250		$	0.47

* Represents per share price.

During the third quarter of 2007, two retired employees exercised 30,000 vested stock options resulting in proceeds to the Company of $14. Also during the third quarter of 2007, three employees left the Company resulting in the cancellation of 325,000 unvested stock options. No options were granted in the third quarter of 2007.

During the second quarter of 2007, one retired employee exercised 12,500 vested stock options resulting in proceeds to the Company 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 September 30, 2007, there was $308 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 September 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)

New Accounting Pronouncements.In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets and liabilities. It also requires expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and is required to be adopted by the Company in the first quarter of 2008. The Company does not believe SFAS 157 will have a material impact on its consolidated results.

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 that the adoption of SFAS 158 will have on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to provide entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company does not believe SFAS 159 will have a material impact on its consolidated results.

-15-

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 September 30, 2007		As of December 31, 2006
Raw materials and purchased parts	$	15,680	$	15,543
Work-in-process		10,267		13,823
Finished goods		4,953		5,209
	$	30,900	$	34,575

(3) Intangible and Other Assets

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

Holdings:	As of September 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		7,922		24,300		6,140
Customer contracts		15,252		4,809		15,252		3,665
Debt issuance costs		18,447		7,033		18,447		5,339
Other		475		53		516		41
	$	109,574	$	19,817	$	109,615	$	15,185

Stanadyne:	As of September 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		7,922		24,300		6,140
Customer contracts		15,252		4,809		15,252		3,665
Debt issuance costs		16,091		6,388		16,091		4,868
Other		475		53		516		41
	$	107,218	$	19,172	$	107,259	$	14,714

Amortization expense of intangible assets for the Company, exclusive of debt issuance costs, was $890 for the three months ended September 30, 2007 and $1,024 for the three months ended September 30, 2006. Amortization expense of intangibles for the Company, exclusive of debt issuance costs, was $2,938 for the nine months ended September 30, 2007 and $3,073 for the nine months ended September 30, 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 for Holdings of $2,875 and $2,621 for the three months ended September 30, 2007 and 2006, respectively, and $8,426 and $7,685 for the nine months ended September 30, 2007 and 2006, respectively, is included as interest expense in the accompanying condensed consolidated statements of operations of Holdings. Amortization of debt issuance costs for Stanadyne of $506 for the three months ended September 30, 2007 and 2006, and $1,520 for the nine months ended September 30, 2007 and 2006 is included as interest expense in the accompanying condensed consolidated statements of operations of Stanadyne.

-16-

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
	September 30, 2007		December 31, 2006		September 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		80,424		73,692		—		—
SAPL debt		1,260		1,186		1,260		1,186
SpA debt		6,147		5,925		6,147		5,925
Long-term debt		269,031		262,003		188,607		188,311
Less current maturities of long-term debt		7,177		6,673		7,177		6,673
Long-term debt, excluding current maturities	$	261,854	$	255,330	$	181,430	$	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 September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Service cost	$	—		$	777		$	722		$	2,329
Interest cost		1,399			1,279			4,195			3,837
Expected return on plan assets		(1,518	)		(1,273	)		(4,559	)		(3,820	)
Amortization of prior service costs		(1	)		(15	)		(28	)		(44	)
Recognized net actuarial loss		10			27			30			81
Curtailment gain		—			—			(10,015	)		—
Net periodic pension cost (income) cost	$	(110	)	$	795		$	(9,655	)	$	2,383

The Company funds 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.

-17-

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.

The 401(k) plan expense representing the Company’s cost for matching contributions totaled $0.4 million and less than $0.1 million for the three months ended September 30, 2007 and 2006 respectively and $1.0 million and $0.3 million for the nine months ended September 30, 2007 and 2006, respectively.

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 September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Service cost	$	44		$	54		$	128		$	162
Interest cost		103			105			325			317
Recognized net actuarial income		(66	)		(5	)		(210	)		(14	)
Net periodic postretirement benefit (income) cost	$	81		$	154		$	243		$	465

(6) Income Taxes

Holdings had effective income tax rates of 18.5% and 43.3% for the three and nine months ended September 30, 2007 compared to 20.9% and 18.0% for the three and nine months ended September 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 effective income tax rates of (12.1%) and 36.1% for the three and nine months ended September 30, 2007, compared to 32.2% and 27.1% for the three and nine months ended September 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 38.7% for the nine months ended September 30, 2006. The Company had no income or loss from discontinued operations for the first nine 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.

-18-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

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 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 presented 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 represented net proceeds from the sale of PEPC assets, and its use was limited by the terms of the Company’s term loan agreement. Restricted cash was used to pay expenses directly related to the sale and related income taxes.

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 American Industrial Partners Capital Fund II, L.P. 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 September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Warranty liability, beginning of period	$	4,446		$	5,385		$	5,667		$	4,935
Warranty expense based on products sold		279			276			710			1,082
Warranty claims paid		(1,195	)		(226	)		(2,847	)		(582	)
Warranty liability, end of period	$	3,530		$	5,435		$	3,530		$	5,435

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

-19-

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 (Loss) Income

Comprehensive (loss) income is as follows:

	Holdings
	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007		2006
Net (loss) income	$	(2,412	)	$	(2,208	)	$	4,981	$	(9,388	)
Other comprehensive income, net of tax:
Foreign currency translation adjustments		206			(70	)		565		893
Comprehensive (loss) income	$	(2,206	)	$	(2,278	)	$	5,546	$	(8,495	)
	Stanadyne
	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007		2006
Net (loss) income	$	(674	)	$	(401	)	$	10,060	$	(4,567	)
Other comprehensive income, net of tax:
Foreign currency translation adjustments		206			(70	)		565		893
Comprehensive (loss) income	$	(468	)	$	(471	)	$	10,625	$	(3,674	)

(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., 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 nine months ended September 30, 2006, loss from discontinued operations of $7.0 million represented the loss from the discontinued operations of PEPC of $2.7 million and the loss on disposal related to the sale of discontinued operations of $8.7 million, net of related income tax benefit of $4.4 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 nine months ended September 30, 2006 were $34.2 million. For the nine months ended September 30, 2007, there were no activities related to the discontinued operations.

(11) Reorganization

In the third quarter of 2007, Precision Products reorganized the U.S. salaried workforce to improve efficiencies. This reorganization resulted in the elimination of 31 salaried positions. In connection with the reorganization, the Company recorded a charge to selling, general and administrative expenses of $0.7 million related to termination benefits. As of September 30, 2007, $0.1 million was paid with the remainder to be paid by March 31, 2008.

-20-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

As part of the third quarter 2007 reorganization activities, we recognized $0.9 million of additional depreciation expense related to a change in the estimated useful lives of machinery and equipment in our U.S. and Italy-based operations. This amount was included as a component of cost of sales.

In the third quarter of 2006, Precision Products reorganized the U.S. salaried workforce to improve efficiencies resulting in the elimination of 61 salaried positions. In connection with the reorganization, the Company recorded a charge of $1.4 million related to termination benefits which was reflected as a component of selling, general and administrative expenses for the three and nine months ended September 30, 2006. As of March 31, 2007, all of these amounts had been paid. In October 2006, Precision Products extended the reorganization to its foreign operations resulting in the termination of two management employees in its Italian subsidiary, Stanadyne, SpA. The termination costs were approximately $1.2 million and were recorded as selling, general and administrative expenses and paid in the fourth quarter of 2006.

-21-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(12) 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.

-22-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(12) Supplemental Consolidating Condensed Financial Statements (continued)

	Stanadyne Corporation and Subsidiaries Consolidating Condensed Balance Sheet September 30, 2007
	Stanadyne Corporation Parent			Subsidiary Guarantor			Non- Guarantor Subsidiaries		Eliminations			Stanadyne Corporation & Subsidiaries
ASSETS
Current assets:
Cash and cash equivalents	$	19,284		$	—		$	518	$	753		$	20,555
Accounts receivable, net		39,102			—			6,136		—			45,238
Inventories, net		25,770			—			5,344		(214	) (a)		30,900
Other current assets		6,324			—			3,334		54			9,712
Total current assets		90,480			—			15,332		593			106,405
Property, plant and equipment, net		69,286			—			22,173		—			91,459
Intangible and other assets, net		226,711			—			5,910		—			232,621
Investment in subsidiaries		16,714			—			—		(16,714	) (b)		—
Total assets	$	403,191		$	—		$	43,415	$	(16,121	)	$	430,485
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	44,926		$	—	(d)	$	7,240	$	(180	)	$	51,986
Current maturities of long-term debt and capital lease obligations		—			—			7,449		—			7,449
Total current liabilities		44,926			—			14,689		(180	)		59,435
Long-term debt and capital lease obligations		181,200			—			504		—			181,704
Other non-current liabilities		58,823			—	(d)		8,767		—			67,590
Minority interest in consolidated subsidiary		—			—			—		128			128
Intercompany accounts		(261	)		—			232		1,177			1,148	(c)
Stockholders’ equity		118,503			—			19,223		(17,246	) (b)		120,480
Total liabilities and stockholders’ equity	$	403,191		$	—		$	43,415	$	(16,121	)	$	430,485

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

(b) Elimination of investments in subsidiaries of the Parent.

(c) Amount due to Stanadyne Holdings, Inc.

(d) Certain liabilities retained by the Subsidiary Guarantor, following the sale of that business, are included with the accounts reflected for Stanadyne Corporation Parent.

-23-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(12) 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.

-24-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(12) Supplemental Consolidating Condensed Financial Statements (continued)

	Stanadyne Corporation and Subsidiaries Consolidating Condensed Statement of Operations Three Months Ended September 30, 2007
	Stanadyne Corporation Parent			Subsidiary Guarantor		Non- Guarantor Subsidiaries			Eliminations			Stanadyne Corporation & Subsidiaries
Net sales	$	64,605		$	—	$	6,804		$	(2,037	) (a)	$	69,372
Cost of goods sold		47,508			—		9,581			(2,311	) (a)		54,778
Gross profit (loss)		17,097			—		(2,777	)		274			14,594
Selling, general, administrative and other operating expenses		9,708			—		704			—			10,412
Operating income (loss)		7,389			—		(3,481	)		274			4,182
Interest expense		(4,727	)		—		(101	)		—			(4,828	)
Income (loss) from operations before income tax expense (benefit) and minority interest		2,662			—		(3,582	)		274			(646	)
Income tax expense (benefit)		1,600			—		(1,522	)		—			78
Income (loss) from operations before minority interest		1,062			—		(2,060	)		274			(724	)
Minority interest in loss of consolidated subsidiary		—			—		—			50			50
Net income (loss)	$	1,062		$	—	$	(2,060	)	$	324		$	(674	)

	Stanadyne Corporation and Subsidiaries Consolidating Condensed Statement of Operations Three Months Ended September 30, 2006
	Stanadyne Corporation Parent			Subsidiary Guarantor		Non- Guarantor Subsidiaries			Eliminations			Stanadyne Corporation & Subsidiaries
Net sales	$	68,866		$	—	$	7,094		$	(2,723	) (a)	$	73,237
Cost of goods sold		53,618			—		7,591			(2,815	) (a)		58,394
Gross profit (loss)		15,248			—		(497	)		92			14,843
Selling, general, administrative and other operating expenses		10,310			—		553			—			10,863
Operating income (loss)		4,938			—		(1,050	)		92			3,980
Interest expense		(4,986	)		—		(68	)		—			(5,054	)
Income (loss) from continuing operations before income tax expense (benefit) and minority interest		(48	)		—		(1,118	)		92			(1,074	)
Income tax expense (benefit)		(155	)		—		(211	)		20			(346	)
Income (loss) from continuing operations		107			—		(907	)		72			(728	)
Income (loss) from discontinued operations		—			52		343			(68	)		327
Net income (loss)	$	107		$	52	$	(564	)	$	4		$	(401	)

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

-25-

STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(12) Supplemental Consolidating Condensed Financial Statements (continued)

	Stanadyne Corporation and Subsidiaries Consolidating Condensed Statement of Operations Nine Months Ended September 30, 2007
	Stanadyne Corporation Parent			Subsidiary Guarantor		Non- Guarantor Subsidiaries			Eliminations			Stanadyne Corporation & Subsidiaries
Net sales	$	202,443		$	—	$	21,368		$	(7,304	) (a)	$	216,507
Cost of goods sold		148,514			—		25,206			(7,592	) (a)		166,128
Gross profit (loss)		53,926			—		(3,838	)		288			50,379
Selling, general, administrative and other operating expenses		18,215			—		1,841			—			20,056
Operating income (loss)		35,714			—		(5,676	)		288			30,323
Interest expense		(14,123	)		—		(251	)		—			(14,374	)
Income (loss) from operations before income tax expense (benefit) and minority interest		21,591			—		(5,927	)		288			15,949
Income tax expense (benefit)		8,302			—		(2,541	)		—			5,761
Income (loss) from operations before minority interest		13,289			—		(3,386	)		288			10,188
Minority interest in income of consolidated subsidiary		—			—		—			(128	)		(128	)
Net income (loss)	$	13,289		$	—	$	(3,386	)	$	160		$	10,060

	Stanadyne Corporation and Subsidiaries Consolidating Condensed Statement of Operations Nine Months Ended September 30, 2006
	Stanadyne Corporation Parent			Subsidiary Guarantor			Non- Guarantor Subsidiaries			Eliminations			Stanadyne Corporation & Subsidiaries
Net sales	$	215,236		$	—		$	20,284		$	(6,921	) (a)	$	228,599
Cost of goods sold		163,306			—			21,361			(6,828	) (a)		177,839
Gross profit (loss)		51,930			—			(1,077	)		(93	)		50,760
Selling, general, administrative and other operating expenses		30,628			—			1,590			—			32,218
Operating income (loss)		21,302			—			(2,667	)		(93	)		18,542
Interest expense		(15,147	)		—			(160	)		—			(15,307	)
Income (loss) from continuing operations before income tax expense (benefit) and minority interest		6,155			—			(2,827	)		(93	)		3,235
Income tax expense (benefit)		1,332			—			(454	)		—			878
Income (loss) from continuing operations before minority interest		4,823			—			(2,373	)		(93	)		2,357
Minority interest in loss of consolidated subsidiary		—			—			—			71			71
Income (loss) from continuing operations		4,823			—			(2,373	)		(22	)		2,428
(Loss) income from discontinued operations		—			(7,625	)		632			(2	)		(6,995	)
Net income (loss)	$	4,823		$	(7,625	)	$	(1,741	)	$	(24	)	$	(4,567	)

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

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STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(12) Supplemental Consolidating Condensed Financial Statements (continued)

	Stanadyne Corporation and Subsidiaries Consolidating Condensed Statement of Cash Flows Nine Months Ended September 30, 2007
	Stanadyne Corporation Parent			Subsidiary Guarantor		Non- Guarantor Subsidiaries			Eliminations			Stanadyne Corporation & Subsidiaries
Cash flows from operating activities:
Net income (loss)	$	13,286		$	—	$	(3,386	)	$	160		$	10,060
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		13,633			—		2,730			—			16,363
Amortization of debt discount and deferred financing fees		1,519			—		—			—			1,519
Loss on disposal of property, plant and equipment		700			—		248			—			948
Stock-based compensation expense		291			—		—			—			291
Pension plan curtailment gain		(10,015	)		—		—			—			(10,015	)
Deferred tax expense (benefit)		2,892			—		(2,737	)		—			155
Income applicable to minority interest		—			—		—			128			128
Changes in operating assets and liabilities		(19,594	)		—		733			44			(18,817	)
Net cash provided by (used in) operating activities		2,712			—		(2,412	)		332			632
Cash flows from investing activities:
Capital expenditures		(3,472	)		—		(2,706	)		(23	)		(6,201	)
Change in restricted cash		975			—		—			—			975
Net proceeds from disposal of property, plant and equipment		—			—		27			—			27
Proceeds from sale of net assets		104			—		—			—			104
Investment in subsidiary		(5,541	)		—		5,575			(34	)		—
Net cash (used in) provided by investing activities		(7,934	)		—		2,896			(57	)		(5,095	)
Cash flows from financing activities:
Net payments in debt		—			—		(134	)		—			(134	)
Net cash used in financing activities		—			—		(134	)		—			(134	)
Net (decrease) increase in cash and cash equivalents		(5,222	)		—		350			275			(4,597	)
Effect of exchange rate changes on cash		35			—		61			(62	)		34
Cash and cash equivalents at beginning of period		24,471			—		107			540			25,118
Cash and cash equivalents at end of period	$	19,284		$	—	$	518		$	753		$	20,555

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STANADYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except where noted otherwise)

(12) Supplemental Consolidating Condensed Financial Statements (concluded)

	Stanadyne Corporation and Subsidiaries Consolidating Condensed Statement of Cash Flows Nine Months Ended September 30, 2006
	Stanadyne Corporation Parent			Subsidiary Guarantor			Non- Guarantor Subsidiaries			Eliminations			Stanadyne Corporation & Subsidiaries
Cash flows from operating activities:
Net income (loss)	$	5,384		$	(8,186	)	$	(1,741	)	$	(24	)	$	(4,567	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		14,112			1,249			2,618			—			17,979
Amortization of deferred financing fees		1,519			—			—			—			1,519
Loss on sale of discontinued operations		—			8,681			—			—			8,681
Stock-based compensation expense		623			48			—			—			671
Other adjustments		20,927			(26,670	)		(859	)		(9	)		(6,611	)
Loss applicable to minority interest		—			—			—			(71	)		(71	)
Changes in operating assets and liabilities		(6,101	)		4,232			(997	)		662			(2,204	)
Net cash provided by (used in) operating activities		36,464			(20,646	)		(979	)		558			15,397
Cash flows from investing activities:
Net proceeds from sale of discontinued operations		—			24,000			—			—			24,000
Increase in restricted cash		—			(1,406	)		—			—			(1,406	)
Capital expenditures		(7,405	)		(2,214	)		(1,730	)		174			(11,175	)
Proceeds from disposal of property, plant and equipment		12			451			—			(174	)		289
Investment in subsidiary		(1,022	)		—			—			1,022			—
Net cash (used in) provided by investing activities		(8,415	)		20,831			(1,730	)		1,022			11,708
Cash flows from financing activities:
Net (payments on) proceeds from debt		(22,988	)		—			2,328			—			(20,660	)
Net cash (used in) provided by financing activities		(22,988	)		—			2,328			—			(20,660	)
Net increase (decrease) in cash and cash equivalents		5,061			185			(381	)		1,580			6,445
Effect of exchange rate changes on cash		9			—			(4	)		54			59
Cash and cash equivalents at beginning of period		22,376			14			460			231			23,081
Cash and cash equivalents at end of period	$	27,446		$	199		$	75		$	1,865		$	29,585

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STANADYNE HOLDINGS, INC. AND SUBSIDIARIES

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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 three and nine months ending September 30, 2006.

Sales for the first nine months of 2007 totaled $216.5 and were $12.1 million and 5.3% less than the $228.6 million reported for the first nine months of 2006. As was the case in the second quarter of 2007, third quarter sales were down to both the Original Equipment Manufacturers (“OEMs”) and the service markets. OEM demand from Deere and Company (“Deere”), Daimler-Benz (“Daimler”) and General Engine Products (“GEP”) was $5.9 million less through the first nine months of this year when compared to the same period in 2006. Service sales in 2007 were also $6.2 million less for the first nine months of 2007, but $15.9 million of lower demand from General Motors (“GM”) was partially offset by strength in our fuel filtration business.

Despite the downward earnings pressure from lower sales volumes, our operating income for the first nine months of 2007 totaled $30.3 million, reflecting an increase of $11.8 million from the first nine months of 2006. This increase in operating profit resulted primarily from the $10.0 million pension liability curtailment gain recorded in the first quarter. An additional $1.8 million of improvements in 2007 operating income was due primarily to a more profitable sales mix as well as cost reduction measures taken in all of our locations including:

• Reorganization of our U.S. factory overhead resulting in a reduction of 92 salaried positions since September, 2006;

• Outsourcing of our in-house aluminum die casting operation targeted to improve quality, reduce cost and avoid future capital investment;

• Consolidation of our Windsor, Connecticut operations from three buildings to two;

• Consolidation of our European based operations.

Gross profit in our Stanadyne, SpA business was $3.4 million less in the first nine months of 2007 when compared to the same period in 2006. These results included a non-cash charge of $2.1 million taken in the third quarter of 2007 to recognize excess inventory and additional depreciation expense on surplus equipment resulting from the redesign of factory operations. Further progress in the reorganization of this location will require additional changes targeted to further reduce workforce in the fourth quarter of 2007.

Cash flows from operations in 2007 have included additional amounts for cash pension contributions, income taxes and product warranty costs while overall liquidity remains strong, with cash on hand as of September 30, 2007 totaling $20.9 million and availability under the U.S.-based Revolving Credit Facility totaling $26.2 million.

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Basis of Presentation

The following table displays unaudited information for the periods shown. The three month and nine month periods ended September 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.

	Holdings
	Three Months Ended September 30, 2007				Three Months Ended September 30, 2006				Nine Months Ended September 30, 2007				Nine Months Ended September 30, 2006
	$		%		$		%		$		%		$		%
Net sales	69,372		100.0		73,237		100.0		216,507		100.0		228,599		100.0
Cost of goods sold	54,778		78.9		58,394		79.7		166,128		76.7		177,839		77.8
Gross profit	14,594		21.1		14,843		20.3		50,379		23.3		50,760		22.2
SG&A	9,345		13.5		9,670		13.2		26,612		12.3		28,665		12.5
Amortization of intangibles	890		1.3		1,024		1.4		2,938		1.3		3,073		1.3
Management fees	187		0.3		188		0.3		563		0.3		563		0.3
Pension plan curtailment gain	—		—		—		—		(10,015	)	(4.6	)	—		—
Operating income	4,172		6.0		3,961		5.4		30,281		14.0		18,459		8.1
(Loss) income from continuing operations	(2,412	)	(3.5	)	(2,535	)	(3.5	)	4,981		2.3		(2,393	)	(1.1	)
Income (loss) from discontinued operations	—		—		327		0.4		—		—		(6,995	)	(3.0	)
Net (loss) income	(2,412	)	(3.5	)	(2,208	)	(3.0	)	4,981		2.3		(9,388	)	(4.1	)
	Stanadyne
	Three Months Ended September 30, 2007				Three Months Ended September 30, 2006				Nine Months Ended September 30, 2007				Nine Months Ended September 30, 2006
	$		%		$		%		$		%		$		%
Net sales	69,372		100.0		73,237		100.0		216,507		100.0		228,599		100.0
Cost of goods sold	54,778		78.9		58,394		79.7		166,128		76.7		177,839		77.8
Gross profit	14,594		21.1		14,843		20.3		50,379		23.3		50,760		22.2
SG&A	9,335		13.5		9,651		13.2		26,570		12.3		28,582		12.5
Amortization of intangibles	890		1.3		1,024		1.4		2,938		1.3		3,073		1.3
Management fees	187		0.3		188		0.3		563		0.3		563		0.2
Pension plan curtailment gain	—		—		—		—		(10,015	)	(4.6	)	—		—
Operating income	4,182		6.0		3,980		5.4		30,323		14.0		18,542		8.1
(Loss) income from continuing operations	(674	)	(1.0	)	(728	)	(1.0	)	10,060		4.7		2,428		1.1
Income (loss) from discontinued operations	—		—		327		0.4		—		—		(6,995	)	(3.1	)
Net (loss) income	(674	)	(1.0	)	(401	)	(0.5	)	10,060		4.7		(4,567	)	(2.0	)

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Comparison of Results of Operations:

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

Compared to

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

Net Sales. Net sales for the third quarter of 2007 totaled $69.4 million and were $3.9 million or 5.3% less than sales of $73.2 million in the third quarter of 2006. Sales were lower in both the OEM and service markets in the third quarter of 2007 when compared to the same period in 2006.

Sales to our OEM customers were $2.6 million less in the third quarter of 2007 when compared to the same period of 2006. OEM sales represented approximately 58% of total third quarter sales in both 2007 and 2006. Lower OEM revenues were primarily due to less demand for our fuel injection equipment from Deere and Daimler. Sales of certain fuel injection equipment to Deere decreased by $2.0 million in the third quarter of 2007. Deere reduced orders for these components during the third quarter of 2007. Demand from Daimler for our high pressure gasoline injection pump was $1.1 million less in the third quarter of 2007 when compared to the third 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 at some point in the future.

Sales to the service markets in the third quarter of 2007 decreased $1.3 million or 4.1% compared to the third quarter of 2006. Demand in 2007 from GM for diesel fuel pumps continued to decline as vehicles age and go out of service. GM also reduced its inventory of our service pumps during the first nine months of 2007, further reducing service sales. As a result, our third quarter 2007 sales to GM were approximately $5.0 million less than in the same period in 2006. Added demand in the third quarter of 2007 for diesel fuel filters and additives provided $4.2 million in higher sales as compared to the same period in 2006.

Sales by major product line in the third quarter of 2007 showed decreases in our fuel pump and fuel injector business, partially offset by a $4.1 million increase in our fuel filtration and Precision Components and Assembly (“PCA”) business.

Gross Profit.Gross profit totaled $14.6 million and 21.1% of net sales in the third quarter of 2007, compared to the $14.8 million and 20.3% of net sales in the third quarter of 2006. Despite lower sales volumes, a more profitable mix of products sold provided an additional $1.3 million of added gross profit in the third quarter of 2007 when compared to the same period of 2006. Factory overhead costs in the U.S. operations were $1.6 million lower in the third quarter of 2007 reflecting the savings from ongoing organizational restructuring and staff reductions begun last year targeted to improve efficiencies and reduce cost. We completed the transition to independent suppliers and closed our in-house aluminum die casting operation in September of this year. This resulted in additional depreciation expense of $0.7 million in the quarter. We believe that this outsourcing will improve the quality of our product, reduce cost and avoid significant future capital investment. Gross profit in the Brescia, Italy plant was $2.3 million less in the third quarter of 2007 when compared to the third quarter of 2006. Most of this difference resulted from a $1.8 million write down of inventory to recognize a change in management assessment of market demand for excess inventory. An additional $0.2 million inventory write-down in the third quarter of 2007 resulted from differences detected during the wall-to-wall inventory completed at the end of the quarter. Also, $0.2 million of additional depreciation expense related to idle equipment at this facility was recorded in the third quarter of 2007. Further progress in the reorganization of this location will require additional restructuring activities in the fourth quarter of 2007.

Selling, General and Administrative Expenses (“SG&A”) totaled $9.3 million or 13.5% of net sales in the third quarter of 2007, as compared to $9.7 million or 13.2% of net sales for the same period of 2006. The 2007 quarter includes one-time costs incurred in the Brescia, Italy plant of $0.1 million for employee severance costs. SG&A costs in the third quarter of 2007 in our U.S. operations included $0.7 million of severance benefits related to the elimination of 31 salaried positions.

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When compared to the same period last year, third quarter SG&A costs also included $1.4 million of severance benefits, $0.3 million of additional R&D costs associated with several new product programs, $0.1 million of start up costs for the Changshu, China facility and $0.1 million of consulting costs to assist in the documentation and testing of the Company’s systems for internal control over financial reporting.

Amortization of Intangible Assets.Amortization of intangible assets totaled $0.9 million in the third quarter of 2007 and was $0.1 million less than the amount in the third quarter of 2006 due to the expiration of certain product design patents at mid-year 2007.

Operating Income. Operating income in the third quarter of 2007 totaled $4.2 million and 6.0% of net sales as compared to $4.0 million and 5.4% of net sales in the third quarter of 2006. This $0.2 million increase in third quarter operating profit resulted from the $0.2 million lower gross profit, $0.1 million lower amortization expense, and a $0.3 million decrease in SG&A costs.

Loss from Continuing Operations. Loss from continuing operations for Stanadyne totaled $0.7 million in the third quarters of both 2007 and 2006. Higher operating income of $0.2 million in the third quarter of 2007, as well as $0.2 million lower interest expense on lower debt levels was offset by a $0.4 million increase in income taxes.

Loss from continuing operations for Holdings in the third quarter of 2007 totaled $2.4 million and was $1.7 million greater than the amount 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. Loss from continuing operations for Holdings in the third quarter of 2006 totaled $2.5 million, representing an additional loss of $1.8 million compared to Stanadyne due to $2.1 million of additional interest expense on the Discount Notes, partially offset by $0.3 million of income tax benefits.

Income from Discontinued Operations. For the third quarter of 2006, discontinued operations of $0.3 million represented a benefit of $1.6 million relating to the change in the estimate of the carrying values of the assets held for sale, a loss from operations of the Precision Engine segment of $1.0 million, and related income taxes of $0.3 million.

The Nine Months Ended September 30, 2007 for Holdings and Stanadyne

Compared to

The Nine Months Ended September 30, 2006 for Holdings and Stanadyne

Net Sales. Net sales for the first nine months of 2007 totaled $216.5 million and were $12.1 million and 5.3% less than the $228.6 million reported for the first nine months of 2006. Sales were lower in both the OEM and service markets.

Sales to OEM customers were $5.9 million or 4.4% less in the first nine months of 2007 when compared to the same period of 2006 but continued to represent 60% of our total revenues in both periods. Lower OEM revenues for the first nine months of 2007 were primarily due to $2.6 million lower sales to GEP for our fuel injection equipment used in military HMMWV’s, $0.8 million lower sales to Daimler for the high pressure gasoline pump, and lower demand from Deere and Caterpillar for our fuel injection equipment.

Sales to the service markets for the first nine months of 2007 decreased $6.2 million or 6.7% compared to the first nine months of 2006. Service demand in 2007 from GM for diesel fuel pumps continued to decline as vehicles age and go out of service. GM also reduced its inventory of our service pumps during 2007, further reducing service sales. As a result, our sales to GM in the first nine months of 2007 were $15.9 million less than for the same period in 2006. Higher demand in the first nine months of 2007 for diesel fuel filters and additives provided $9.4 million in higher sales as compared to the same period in 2006 and helped offset the lower sales to GM.

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Sales by major product line for the first nine months of 2007 when compared to the same period a year ago reflected a $20.4 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 $10.9 million increase in our fuel filtration business.

Gross Profit.Our gross profit totaled $50.4 million and 23.3% of net sales in the first nine months of 2007, reflecting a decrease of $0.4 million from the $50.8 million and 22.2% of net sales in the first nine months of 2006. The impact on gross profit due to lower sales volume in 2007 was offset by a more profitable mix of products sold, resulting in an additional $1.0 million increase in gross profits when compared to the first nine months of 2006. Factory overhead costs in the U.S. operations were reduced by $2.7 million in the first nine months of 2007, reflecting the benefits of organizational restructuring as well as actions taken to align overhead with lower sales volumes. The closure of our in-house aluminum die cast operation during the third quarter of 2007 resulted in $0.7 million additional depreciation expense. Gross profit in SpA was $3.4 million less in the first nine months of 2007 when compared to the same period in 2006 and was adversely impacted by the third quarter $1.8 million write down of inventory to recognize a change in management assessment of market demand for excess inventory. An additional $0.2 million inventory write down in the third quarter of 2007 resulted from differences detected during the wall-to-wall inventory completed during the quarter. Also, $0.2 million of additional depreciation expense related to idle equipment. Further progress in the reorganization of this location will require additional restructuring activities targeted to further reduce workforce in the fourth quarter of 2007.

Selling, General and Administrative Expenses (“SG&A”) in the first nine months of 2007 for Stanadyne totaled $26.6 million and 12.3% of net sales, reflecting a decrease of $2.0 million from the $28.6 million and 12.5% of net sales reported in the same period of 2006. SG&A was higher in 2006 due to $1.8 million in severance benefits for the former CEO, $0.7 million in severance benefits for organization restructuring in the U.S., $0.3 million of restructuring costs at our Windsor, Connecticut facility and $0.3 million higher stock-based compensation expense, all recorded in the first nine months of 2006. Partially offsetting the lower costs in 2007 were increases in the first nine months of 2007 including; $1.0 million of additional R&D costs associated with several new product programs; $0.2 million of start up costs for the Changshu, China facility; and $0.1 million of consulting costs to assist in the documentation and testing of the Company’s systems for internal control over financial reporting. SG&A in the first nine months of 2007 for Holdings was less than $0.1 million higher than SG&A for Stanadyne 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 $2.9 million through the first nine months of 2007 and was $0.2 million less than the amount reported for the same period in 2006 due to the expiration of certain product design patents at mid-year 2007.

Operating Income. Our operating income for the first nine months of 2007 totaled $30.3 million and 14.0% of net sales, reflecting an increase of $11.8 million from the $18.5 million and 8.1% for the same period in 2006. This $11.8 million increase resulted from the $0.4 million lower gross profit, $0.2 million lower amortization expense, the $10.0 million pension liability curtailment gain, and a $2.0 million decrease in SG&A costs.

Income from Continuing Operations. Income from continuing operations for Stanadyne in the first nine months of 2007 totaled $10.1 million or 4.7% of net sales, reflecting an increase of $7.7 million from the $2.4 million or 1.1% of net sales reported for the same period in 2006. This $7.7 million increase reflected the combined results of $11.8

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million of higher operating income, which included the $10.0 million pension curtailment gain described previously, and $0.9 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 $4.9 million in additional income taxes on higher earnings.

Income from continuing operations for Holdings in the first nine months of 2007 totaled $5.0 million and was $5.1 million less than the amount reported for Stanadyne due to $7.0 million of additional interest expense on the Discount Notes, partially offset by $1.9 million of lower income taxes.

Loss from Discontinued Operations. Loss from discontinued operations for the first nine months of 2006 represented the loss from operations of the former Precision Engine segment. Losses totaled $7.0 million and the loss on the disposal of the discontinued operation of $8.7 million and a loss from discontinued operations of $2.7 million offset by an income tax benefit of $4.4 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 September 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 September 30, 2007, there were borrowings of $21.2 million under the Term Loans, no borrowings under the Revolving Credit Line, $6.7 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 $20.9 million on September 30, 2007.

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. There were no dividends paid to Holdings by any of its direct or indirect subsidiaries in the nine months ended September 30, 2007.

Cash Flows From Operating Activities. Stanadyne’s net cash flows from operating activities for the nine months ended September 30, 2007 were $0.6 million as compared to $15.4 million for the same period of 2006. Cash flows from operating activities before changes in asset and liability accounts reflected $1.8 million more cash in the first nine months of 2007 than in the same period in 2006. Higher gross profit and lower interest costs in 2007 were partially offset by higher income taxes.

Changes in asset and liability accounts, primarily working capital accounts, required $18.8 million more cash in the first nine months of 2007 versus the comparable period in 2006. Increases in accounts receivable in both years required $1.0 million less cash in 2007. Lower sales in the first nine months of 2007 were partially offset by some remaining accrued but unpaid Deere price increases that resulted from the finalization of the supply agreement. These amounts will be paid in the fourth quarter of 2007. Inventory reductions in the first nine months of 2007 contrasted against the inventory build up in the same period of 2006, resulted in a year-over-year cash savings of $5.9 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 $23.8 million additional cash for reductions in accounts payable and accrued liability balances. Lower accounts payable balances in the first nine months of 2007, due primarily to lower levels of business, compared to increasing accounts payable balances in the same period of 2006, result in a $4.9 million year-over-year negative change in cash flows. Significant changes in liability accounts that resulted in a reduction in cash flows from operations in 2007 included: $9.6 million for federal income taxes and pension plan contributions; $2.0 million for product warranty claims; and $0.8 million for employee health and workers compensation benefits.

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

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Cash Flows From Investing Activities. Cash flows from investing activities for the nine months ended September 30, 2007 consumed $5.1 million of cash. Capital expenditures in 2007 totaled $6.2 million compared to $11.2 million in 2006. Capital expenditures in 2007 reflected investments in equipment to increase capacity, reduce costs, improve quality, safety and ergonomics, as well as approximately $1.8 million for manufacturing equipment in the new Changshu, China location. Capital expenditures in 2006 included $2.6 million expended in the former Precision Engine segment. Cash flows from investing activities in the first nine months of 2006 included $24.0 million in net proceeds from the sale of discontinued operations.

Cash Flows From Financing Activities. Cash flows from financing activities for the Company in the first nine months of 2007 consumed cash of $0.1 million compared to a reduction in cash of $20.1 million for the Company and a reduction in cash of $20.7 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.

There were no cash flows from financing activities in our U.S.-based operations during the first nine 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 September 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 nine months of 2007 included a $0.1 million increase in overdraft borrowings at SpA as well as payments of capital lease obligations totaling $0.2 million this year. Cash flows from financing activities in SAPL reflect a $0.2 million increase in the revolving credit facility and an offsetting reduction in 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. Investment performance in 2006, and the 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.

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.

Subsequent to the Pension Plan freeze, the Company’s minimum required contributions in 2007 were reduced to $5.9 million. The first installment of $1.7 million was made in the second quarter of 2007 and the $4.2 million balance was paid in the third quarter of 2007.

(2) New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets and liabilities. It also requires expanded information about the extent to which companies measure assets and liabilities at fair value,

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the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and is required to be adopted by the Company in the first quarter of 2008. The Company does not believe SFAS 157 will have a material impact on its consolidated results.

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 that the adoption of SFAS 158 will have on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to provide entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company does not believe SFAS 159 will have a material impact on its consolidated results.

(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.

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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.

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(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,” “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.

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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 nine months of 2007 by $0.1 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 September 28, 2007 was approximately $160.2 million. The fair value of Holdings’ Discount Notes based on bid prices at September 28, 2007 was $80.5 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 three and nine months ended September 30, 2007 and 2006. The Company does not hedge against foreign currency risk.

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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 effective 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 effective 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.

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PART II: OTHER INFORMATION

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

On July 17, 2007, Holdings issued 30,000 shares of Holdings Common Stock for $0.47 per share to two retired employees upon exercise of options. Holdings issued such shares 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 had 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

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

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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: November 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: November 14, 2007	/s/ Stephen S. Langin
	Stephen S. Langin
	Vice President and Chief Financial Officer

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EXHIBIT INDEX:

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