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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-Q

|ý                                                | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|------------------------------------------------ | ----------------------------------------------------------------------------------------
|For the quarterly period ended: February 2, 2003
|OR                                              
|o                                                | 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: 333-75869

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SPECIAL DEVICES, INCORPORATED(Exact name of Registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

95-3008754(I.R.S. Employer Identification No.)


| | 14370 White Sage Road, Moorpark, California 93021(Address of principal executive offices) (Zip Code) |  | 
| | ---------------------------------------------------------------------------------------------------- |  | 
| | (805) 553-1200(Registrant's telephone number, including area code)                                   |  | 

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Indicate by check mark whether the Registrant: (l) 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.    Yes ý    No o

As
of March 14, 2003, the number of outstanding shares of the Registrant's common stock was 3,712,764.

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SPECIAL DEVICES, INCORPORATED  INDEX TO QUARTERLY REPORT ON FORM 10-Q

|                             |  |                                                                                       |  |                                                                                                         |  | PAGE
|---------------------------- |  | ------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------- |  | ----
|PART IFINANCIAL INFORMATION |  |                                                                                      
|ITEM 1.                      |  | Financial Statements                                                                  |  |                                                                                                        
|                             |  | (a)                                                                                   |  | Consolidated Balance Sheets: February 2, 2003 and November 3, 2002                                      |  | 3   
|                             |  | (b)                                                                                   |  | Consolidated Statements of Operations: For the Three Months Ended February 2, 2003 and February 3, 2002 |  | 4   
|                             |  | (c)                                                                                   |  | Consolidated Statements of Cash Flows: For the Three Months Ended February 2, 2003 and February 3, 2002 |  | 5   
|                             |  | (d)                                                                                   |  | Notes to Consolidated Financial Statements                                                              |  | 6   
|ITEM 2.                      |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 12                                                                                                     
|ITEM 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 15                                                                                                     
|ITEM 4.                      |  | Controls and Procedures                                                               |  | 15                                                                                                     
|PART IIOTHER INFORMATION    |  |                                                                                      
|ITEM 1.                      |  | Legal Proceedings                                                                     |  | 16                                                                                                     
|ITEM 6.                      |  | Exhibits and Reports on Form 8-K                                                      |  | 17                                                                                                     
|Signatures                   |  | 20                                                                                   
|Certifications               |  | 21                                                                                   

2

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SPECIAL DEVICES, INCORPORATED AND SUBSIDIARIES  CONSOLIDATED BALANCE SHEETS  (Dollars in thousands)  (Unaudited)

|                                                     |                                                                                                                                              | February 2,
2003                               |        | November 3,
2002 |        
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------ | ---------------- | -------
|ASSETS                                               |                                                                                                                                             
|Current assets:                                      |                                                                                                                                              |                                                |        |                  |        
|                                                     | Cash and cash equivalents                                                                                                                    |                                                | $      | 1,831            |        
|                                                     | Accounts receivable, net of allowances of $212 at February 2, 2003 and $339 at November 3, 2002                                              |                                                |        | 12,532           |        
|                                                     | Inventories                                                                                                                                  |                                                |        | 9,097            |        
|                                                     | Prepaid expenses and other current assets                                                                                                    |                                                |        | 4,939            |        
|                                                     | Deferred tax assets                                                                                                                          |                                                |        | 2,438            |        
|                                                     |                                                                                                                                              |                                                |        |                  |        
|                                                     |                                                                                                                                              | Total current assets                           |        |                  | 30,837 
|                                                     |                                                                                                                                              |                                                |        |                  |        
|Property, plant and equipment, at cost:              |                                                                                                                                              |                                                |        |                  |        
|                                                     | Machinery and equipment                                                                                                                      |                                                |        | 84,949           |        
|                                                     | Construction in progress                                                                                                                     |                                                |        | 6,050            |        
|                                                     | Other                                                                                                                                        |                                                |        | 6,024            |        
|                                                     |                                                                                                                                              |                                                |        |                  |        
|                                                     |                                                                                                                                              | Gross property, plant and equipment            |        |                  | 97,023 
|                                                     |                                                                                                                                              | Less accumulated depreciation and amortization |        |                  | (65,694
|                                                     |                                                                                                                                              |                                                |        |                  |        
|                                                     |                                                                                                                                              | Net property, plant and equipment              |        |                  | 31,329 
|Other assets, net of accumulated amortization        |                                                                                                                                              |                                                | 10,385 |                  |        
|                                                     |                                                                                                                                              |                                                |        |                  |        
|Total assets                                         |                                                                                                                                              | $                                              | 72,551 |                  | $      
|                                                     |                                                                                                                                              |                                                |        |                  |        
|LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)       |                                                                                                                                             
|Current liabilities:                                 |                                                                                                                                              |                                                |        |                  |        
|                                                     | Accounts payable                                                                                                                             |                                                | $      | 11,688           |        
|                                                     | Accrued liabilities                                                                                                                          |                                                |        | 6,309            |        
|                                                     | Accrued interest                                                                                                                             |                                                |        | 1,129            |        
|                                                     | Current portion of long-term debt                                                                                                            |                                                |        | 1,000            |        
|                                                     | Revolving line of credit                                                                                                                     |                                                |        | 1,058            |        
|                                                     |                                                                                                                                              |                                                |        |                  |        
|                                                     |                                                                                                                                              | Total current liabilities                      |        |                  | 21,184 
|Other liabilities                                    |                                                                                                                                              |                                                | 5,318  |                  |        
|Long-term debt, net of current portion               |                                                                                                                                              |                                                | 76,069 |                  |        
|                                                     |                                                                                                                                              |                                                |        |                  |        
|                                                     |                                                                                                                                              | Total liabilities                              |        |                  | 102,571
|                                                     |                                                                                                                                              |                                                |        |                  |        
|Commitments and contingencies (Note 10)              |                                                                                                                                              |                                                |        |                  |        
|Redeemable preferred stock                           |                                                                                                                                              |                                                | 4,000  |                  |        
|Redeemable common stock                              |                                                                                                                                              |                                                | 37,375 |                  |        
|Stockholders' equity (deficit):                      |                                                                                                                                              |                                                |        |                  |        
|                                                     | Preferred stock, $.01 par value, 2,000,000 shares authorized; 4,000 shares issued and outstanding at February 2, 2003 and November 3, 2002   |                                                |        |                 |        
|                                                     | Common stock, $.01 par value, 20,000,000 shares authorized; 3,712,764 shares issued and outstanding at February 2, 2003 and November 3, 2002 |                                                |        | 30               |        
|                                                     | Additional paid-in capital                                                                                                                   |                                                |        | 63,352           |        
|                                                     | Retained earnings (deficit)                                                                                                                  |                                                |        | (134,777         | )      
|                                                     |                                                                                                                                              |                                                |        |                  |        
|                                                     |                                                                                                                                              | Total stockholders' equity (deficit)           |        |                  | (71,395
|                                                     |                                                                                                                                              |                                                |        |                  |        
|Total liabilities and stockholders' equity (deficit) |                                                                                                                                              | $                                              | 72,551 |                  | $      
|                                                     |                                                                                                                                              |                                                |        |                  |        

See accompanying notes to consolidated financial statements.

3

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SPECIAL DEVICES, INCORPORATED AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF OPERATIONS  (Dollars in thousands)  (Unaudited)

|                                                                   |                                | Three Months Ended                                  |       
|------------------------------------------------------------------ | ------------------------------ | --------------------------------------------------- | ------
|
|Net sales                                                          |                                | $                                                   | 25,580
|Cost of sales                                                      |                                |                                                     | 21,584
|                                                                   |                                |                                                     |       
|                                                                   |                                | Gross profit                                        |       
|Operating expenses                                                 |                                |                                                     | 2,533 
|                                                                   |                                |                                                     |       
|                                                                   |                                | Income from operations                              |       
|                                                                   |                                |                                                     |       
|Other income (expense):                                            |                                |                                                     |       
|                                                                   | Interest expense, net          |                                                     |       
|                                                                   | Gain on extinguishment of debt |                                                     |       
|                                                                   | Equity in losses of SDI-Molan  |                                                     |       
|                                                                   |                                |                                                     |       
|                                                                   |                                | Total other income (expense)                        |       
|                                                                   |                                |                                                     |       
|                                                                   |                                | Loss from continuing operations before income taxes |       
|Income tax benefit                                                 |                                |                                                     | (221  
|                                                                   |                                |                                                     |       
|                                                                   |                                | Loss from continuing operations                     |       
|Gain on sale of discontinued operations, net of tax expense of $28 |                                |                                                     |      
|                                                                   |                                |                                                     |       
|                                                                   |                                | Net loss                                            |       
|                                                                   |                                |                                                     |       

See
accompanying notes to consolidated financial statements.

4

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SPECIAL DEVICES, INCORPORATED AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS  (Dollars in thousands)  (Unaudited)

|                                                                                                   |                                               | Three Months Ended                           |       
|-------------------------------------------------------------------------------------------------- | --------------------------------------------- | -------------------------------------------- | ------
|
|Cash Flows From Operating Activities:                                                              |                                               |                                              |       
|                                                                                                   | Net loss                                      |                                              | $     
|                                                                                                   | Gain on sale of discontinued operations       |                                              |       
|                                                                                                   |                                               |                                              |       
|                                                                                                   | Loss from continuing operations               |                                              |       
|Adjustments to reconcile loss from continuing operations to net cash used in operating activities: |                                               |                                              |       
|                                                                                                   |                                               | Depreciation and amortization                |       
|                                                                                                   |                                               | Gain on extinguishment of debt               |       
|                                                                                                   |                                               | Equity in losses of SDI-Molan                |       
|                                                                                                   | Changes in assets and liabilities:            |                                              |       
|                                                                                                   |                                               | Accounts receivable and other assets         |       
|                                                                                                   |                                               | Inventories                                  |       
|                                                                                                   |                                               | Accounts payable and other liabilities       |       
|                                                                                                   |                                               | Income taxes payable                         |       
|                                                                                                   |                                               | Other                                        |       
|                                                                                                   |                                               |                                              |       
|                                                                                                   |                                               | Net cash used in continuing operations       |       
|                                                                                                   |                                               | Net cash provided by discontinued operations |       
|                                                                                                   |                                               |                                              |       
|                                                                                                   |                                               | Net cash used in operating activities        |       
|                                                                                                   |                                               |                                              |       
|Cash Flows From Investing Activities:                                                              |                                               |                                              |       
|                                                                                                   | Purchases of property, plant and equipment    |                                              |       
|                                                                                                   | Other                                         |                                              |       
|                                                                                                   |                                               |                                              |       
|                                                                                                   | Net cash used in investing activities         |                                              |       
|                                                                                                   |                                               |                                              |       
|Cash Flows From Financing Activities:                                                              |                                               |                                              |       
|                                                                                                   | Repurchase of long-term debt                  |                                              |       
|                                                                                                   | Repayment of long-term debt                   |                                              |       
|                                                                                                   | Net borrowings under revolving line of credit |                                              |       
|                                                                                                   |                                               |                                              |       
|                                                                                                   | Net cash provided by financing activities     |                                              |       
|                                                                                                   |                                               |                                              |       
|Net decrease in cash and cash equivalents                                                          |                                               |                                              | (3,021
|Cash and cash equivalents at beginning of year                                                     |                                               |                                              | 4,852 
|                                                                                                   |                                               |                                              |       
|Cash and cash equivalents at end of period                                                         |                                               | $                                            | 1,831 
|                                                                                                   |                                               |                                              |       
|Supplemental disclosure of cash flow information:                                                  |                                               |                                              |       
|                                                                                                   | Cash paid during the period for:              |                                              |       
|                                                                                                   |                                               | Interest                                     |       
|                                                                                                   |                                               | Income taxes                                 |       

See
accompanying notes to consolidated financial statements.

5

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SPECIAL DEVICES, INCORPORATED AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Company Operations

Special Devices, Incorporated, a Delaware corporation (the "Company" or "SDI"), is a leading designer and manufacturer of highly reliable precision engineered
pyrotechnic devices. These devices are used predominantly in vehicle airbag and other automotive safety systems. The Company's primary products are initiators, which function like an "electrical
match" to ignite the gas generating charge in an automotive airbag system. We believe we are the world's largest independent supplier of initiators sold to leading domestic and foreign automotive
airbag system manufacturers. Those manufacturers use SDI's product in the assembly of integrated airbag safety systems, which they then sell to automobile original equipment manufacturers.

The
Company formed a joint venture partnership, Special Devices-Molan GmbH & Co. KG ("SDI-Molan") in Germany in June 2001. The Company's 50% interest in
SDI-Molan is held by SDI Germany GmbH ("SDI Germany"), a wholly owned German subsidiary. SDI Germany was established in 2001 for the purpose of holding the interest in the joint venture.
SDI-Molan's business is the development, production, marketing, distribution and sale of air bag initiators, micro gas generators, and seat belt buckles and pyrotechnic pretensioners in
Europe. SDI-Molan started operations in September 2002.

In
June 2002 the Company incorporated Special Devices Japan Kabushiki Kaisha ("SDI Japan") in Japan and in October 2002 the Company incorporated Special Devices (Thailand)
Co., Ltd. ("SDI Thailand"). SDI Japan and SDI Thailand are subsidiaries of SDI that were formed to create a direct business presence in these geographic markets. The Company previously
distributed its products in Japan through an agent.

The
divestiture of the Aerospace Division, which included the Company's subsidiary Scot, Incorporated ("Scot"), was completed in a series of transactions in 2000 and 2001. Scot was
divested on
September 21, 2000 and the net assets of the remaining Aerospace operations were sold on May 11, 2001.

As
of February 2, 2003, the Company had net liabilities of $30.0 million. The Company's ability to pay the interest on, or to refinance debt, or to fund planned capital
expenditures, will depend on generating cash flow from future operations. The Company had positive cash flow from continuing operations during the past two fiscal years.

2. Interim Financial Statements

The accompanying unaudited interim consolidated condensed financial statements of the Company include all adjustments (consisting of normal recurring entries)
which management believes are necessary for a fair statement of the financial position and results of operations for the periods presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted. It is recommended that
the accompanying consolidated condensed financial statements be read in conjunction with the Company's audited financial statements and footnotes as of and for the year ended November 3, 2002.
Operating results for the three month period ended February 2, 2003 are not necessarily indicative of the operating results for the full year.

During
2002, the Company refined its allocation of overhead expenses to cost of sales. As a result of this change, cost of sales, gross profit and operating expenses have been
reclassified for all prior periods presented. There was no impact on results of operations or financial position in any period. On November 4, 2002, the Company adopted Financial Accounting
Standards Board ("FASB") Statement

6

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of Financial Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Accordingly,
gains on extinguishment of debt have been reclassified to income from continuing operations.

Certain
other prior year amounts have been reclassified to conform to the current year's presentation.

3. Recent Accounting Pronouncements

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosurean
amendment of SFAS 123". This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has
chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Accordingly, compensation expense for
stock options is measured as the excess, if any, of the estimate of the market value of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. The
Company will adopt the annual disclosure provisions of SFAS No. 148 in its financial reports for the year ended November 2, 2003 and will adopt the interim disclosure provisions for its
financial reports for the quarter ended May 4, 2003. As the adoption of this standard involves disclosures only, the Company does not expect a material impact on its results of operations,
financial position or liquidity.

In
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value only when the liability is incurred, not when it is "planned". The Company is required to adopt the provisions of SFAS No. 146 for
exit or disposal activities that are initiated after December 31, 2002 and does not expect the adoption to have a material impact on the Company's results of operations or financial position.

4. Inventories

Inventories consist of the following components:

February 2, 2003

November 3, 2002(In thousands)Raw materials and components

$
3,253

$
2,867Work in process


1,154


995Finished goods


4,690


3,599Total inventories

$
9,097

$
7,461


5. Long-Term Debt

The Company entered into a credit facility (the "Credit Facility") in June 2001 which consists of a $25.0 million five-year Revolving
Credit Facility (the "Revolver") and a $5.0 million five-year Term Loan (the "Term Loan"). Available borrowings under the Revolver are based on a formula comprised

7

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of eligible accounts receivable and inventory. The Credit Facility requires lockbox arrangements which provide for all receipts to be swept daily to reduce borrowings outstanding. The agreement
governing the Credit Facility contains customary covenants, including restrictions on the incurrence of debt, the sale of assets, mergers, acquisitions and other business combinations, voluntary
prepayment of other debt, transactions with affiliates, repurchase or redemption of equity securities, and financial covenants on tangible net worth. The Revolver and the Term Loan bear interest at
the Bank's Base Rate or the LIBOR Rate plus applicable margins. The Company has the option of electing the LIBOR Rate on all or a portion of the amount outstanding under the Credit Facility prior to
the start of each quarterly interest period. The Term Loan had a balance of $3.5 million and an effective interest rate of 4.75% per annum at February 2, 2003. At February 2,
2003, there were $1.1 million in borrowings outstanding under the Revolver with an effective interest rate of 4.50% per annum. Letters of credit outstanding and applied for under the Revolver
reduce the amount of borrowings available. The Company had $2.5 million in letters of credit outstanding at February 2, 2003. The total amount available under the Revolver at
February 2, 2003 was $8.9 million subject to compliance with certain financial and operating covenants which the Company must meet on a quarterly basis. The Company was in compliance
with these covenants as of February 2, 2003. Substantially all of the Company's assets are pledged as collateral under the Credit Facility.

The
Company has guaranteed bank loans made to SDI-Molan under agreements entered into in August 2002. The Company's guarantee is limited to fifty percent of the loans
outstanding and is subject to a maximum of 3.2 million Euro or approximately $3.4 million at February 2, 2003. SDI-Molan had bank loans outstanding in the amount of
5.0 million Euro or approximately $5.4 million at February 2, 2003.

The
following are the fair value and carrying amounts of long-term debt, including short-term borrowings:

February 2,
2003

November 3,
2002(In thousands)Fair value

$
54,025

$
45,188Carrying amount


78,127


77,569


The
Company's borrowings under its Term Loan and Revolver have variable rates that reflect currently available terms and conditions for similar debt. The carrying amount of this debt is
a reasonable estimate of its fair value. The Senior Subordinated Notes (the "Notes") issued in 1999 bearing interest at 113/8% per annum are traded occasionally in public markets.

6. Income Taxes

For the quarters ended February 2, 2003 and February 3, 2002, the Company had effective tax rates of 21% and 53%, respectively. The difference from
the expected statutory rate results primarily from a valuation allowance provided against SDI Germany's losses in fiscal 2003 and a nontaxable gain on

8

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extinguishment of debt in fiscal 2002. A reconciliation between the statutory federal income tax benefit and the Company's effective income tax benefit on losses from continuing operations is as
follows:

Three
Months EndedFebruary 2, 2003

February 3, 2002(In thousands)Income tax benefit at federal statutory rates

$
(366
)
$
(545
)State income taxes, net of federal income tax effect


(82
)

(135
)Foreign source income taxed at other effective rates


24


Change in valuation allowance


163


Nontaxable gain on extinguishment of debt





(182
)Other


40


31$
(221
)
$
(831
)


7. The Recapitalization

On December 15, 1998, the Company consummated a series of transactions accounted for as a recapitalization (the "Recapitalization") whereby affiliates of
J.F. Lehman and Company ("J.F. Lehman") obtained a controlling interest in the Company. As a result of the Recapitalization, the Company delisted its Common Stock from the NASDAQ Stock Market, and
accordingly filed for deregistration with the Securities and Exchange Commission (the "SEC"). The Company continues to file reports with the SEC pursuant to the terms governing the Notes, which were
issued as part of the Recapitalization.

In
connection with the Recapitalization all shares of the Company's Common Stock, other than those retained by certain members of management and certain other stockholders (the
"Continuing Stockholders"), were converted into the right to receive $34 per share in cash. At the time of the Recapitalization, the Continuing Stockholders retained approximately 41.3% of the common
equity of the Company while new investors acquired the balance of the equity interests in the Company. At February 2, 2003, the Continuing Stockholders own approximately 29.5% of the common
equity of the Company.

The
Recapitalization had the following effect on stockholders' equity (deficit) (dollars in thousands):

|                                                |  | Common Stock |   |   |     |   |   |        |  
|----------------------------------------------- |  | ------------ | - | - | --- | - | - | ------ | -
|
|
|Balances, October 31, 1998                      |  | 7,809,801    |   | $ | 78  |   | $ | 51,364 |  
|Record recapitalization transaction             |  | (3,367,618   | ) |   | (41 | ) |   | 22,562 |  
|Record redeemable common stock                  |  | (735,294     | ) |   | (7  | ) |   |       |  
|Contributed assets                              |  |             |   |   |    |   |   | 3,286  |  
|Accreted put premium on redeemable common stock |  |             |   |   |    |   |   | (2,625 | )
|Net loss                                        |  |             |   |   |    |   |   |       |  
|                                                |  |              |   |   |     |   |   |        |  
|Balances, October 31, 1999                      |  | 3,706,889    |   | $ | 30  |   | $ | 74,587 |  
|                                                |  |              |   |   |     |   |   |        |  

9

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8. Related Party Transactions

The Company made a working capital loan to SDI-Molan in August 2002 for $0.7 million. The balance outstanding at February 2, 2003
was $0.7 million. In addition, the Company has a receivable from SDI-Molan for expenses in the amount of $0.5 million at February 2, 2003.

9. Gain on Extinguishment of Debt

In November 2001, the Company repurchased $0.8 million face value of Notes in the open market for $0.3 million resulting in a gain of
$0.5 million.

10. Commitments and Contingencies

OSHA Investigations.On September 1, 2000, an accidental initiation incident occurred at the Company's Moorpark
facility and two employees were injured. The State of California, Department of Industrial Relations, Division of Occupational Safety and Health ("Cal-OSHA") conducted a
post-incident and process safety management inspection, which resulted in the issuance in February 2001 of citations for alleged safety violations and proposed fines aggregating
approximately $168,000. The Company appealed the citations, and the appeal was settled pursuant to a Settlement Agreement under which the aggregate amount of fines was reduced to approximately
$85,000, payable in quarterly installments commencing on December 5, 2002. Because the accident resulted in a serious injury, Cal-OSHA's Bureau of Investigation ("BOI") conducted
its own investigation to determine whether to refer the matter to the District Attorney's Office for Ventura County. The Company believes that this investigation has concluded and no referral has been
made. At this stage, it is not possible to predict or assess the amount of potential liabilities associated with the BOI investigation, which could result in criminal liabilities and penalties.

Qui Tam Suit.The Company is a defendant in a civil action entitledUnited States ex rel. Charles K.
Holder v. Special Devices, Incorporatedpending in the U.S. District Court for the Central District of California. The action, filed under seal in August 1999 and first
served on the Company in December 2001, is aqui tamlawsuit in which a former employee of the Company is seeking, on behalf of the United
States, an unspecified amount of money damages and civil penalties under the federal False Claims Act. The complaint alleges that the Company, when submitting invoices under unspecified government
contracts prior to August 1999, falsely certified that it was in compliance with environmental laws. The Company is vigorously defending the action. At this stage, it is not possible to
evaluate the likelihood of an unfavorable outcome or estimate the range of potential loss, if any.

CharTech Suit.A lawsuit alleging that the Company willfully infringed two patents held by CharTech Engineering, Inc.
("CharTech") was filed on July 14, 2000, in the U.S. District Court for the Central District of California. The Company answered the complaint, asserted counterclaims against CharTech, and
filed a third party complaint against CharTech, its related company Iso Vac Engineering, Inc. ("IsoVac") and George Neff, a principal in both companies. The Company engaged in a mediation with
CharTech, IsoVac and George Neff that resulted in a binding agreement setting forth key terms of the settlement of this dispute. Under these key terms, the Company will pay CharTech a fee of
$1,250,000 for a non-exclusive license under the CharTech patent rights. The fee is payable in installments, with the last installment payable on December 31, 2007. The pending
lawsuit is to be dismissed with prejudice as part of the terms. The parties are in the process of implementing the settlement agreement. The settlement does not have a material impact on the Company's
results of operations, financial position or liquidity.

Hermetic Seal Suit.The Company is a defendant in a civil action entitledHermetic Seal Corporation
and HCC Industries, Inc. v. Special Devices, Inc.pending in the Superior Court of the State of

10

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California for the County of Los Angeles. The complaint, filed in August 2002 by a former supplier, claims damages in excess of $2.3 million for breach of contract. The Company is
vigorously defending the action. At this stage, it is not possible to evaluate the likelihood of an unfavorable outcome or estimate the range of potential loss, if any.

Selleck Suit.The Company is a defendant in a civil action entitledDaniel F. Selleck v. Special
Devices, Incorporatedpending in the Superior Court of the State of California for the County of Ventura. A complaint, served in September 2002, alleged breach of
contract, fraud and deceit, negligent misrepresentation, and injunctive and declaratory relief, and seeks damages in excess of $1 million relating to the Plaintiff's purchase from the Company
of certain real estate located in Moorpark, California. An amended complaint served in January 2003 withdrew the allegations of fraud and deceit and the claim for injunctive relief, and added
allegations of negligent interference with prospective economic advantage. The Company is vigorously defending the action. At this stage, it is not possible to evaluate the likelihood of an
unfavorable outcome or estimate the range of potential loss, if any.

11

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the related Notes thereto included elsewhere in
this report. During 2002, we refined our allocation of overhead expenses to cost of sales. As a result of this change, cost of sales, gross profit and operating expenses have been reclassified for all
prior periods presented. There was no impact on net income (loss) in any period.

Results of Operations

The following table is derived from our Consolidated Statements of Operations and sets forth, for the periods indicated, certain statement of operations data as a
percentage of net sales.

Three
Months EndedFebruary 2,
2003

February 3,
2002Net sales

100.0
%
100.0
%Cost of sales

84.4
%
86.3
%Gross profit

15.6
%
13.7
%Operating expenses

9.9
%
13.2
%Income from operations

5.7
%
0.5
%


Comparison of the Three Months Ended February 2, 2003 to the Three Months Ended February 3, 2002

Net Sales

Consolidated net sales for the first quarter of 2003 were $25.6 million, compared to consolidated net sales of $27.6 million for the first quarter
of 2002. While total units shipped increased by 11%, the decrease in net sales was primarily due to lower unit sales and prices on high value-added lead wire products. Leadwire products differ from
standard products in that SDI adds a length of electrical wire, an electrical harness connector and, in some cases, a machined retainer. Any combination of these value-added features, depending on the
customer need, differentiates a leadwire or value-added product from a standard product.

Gross Profit

Consolidated gross profit for the first quarter of 2003 was $4.0 million or 15.6% of consolidated net sales, compared to consolidated gross profit of
$3.8 million or 13.7% of consolidated net sales for the first quarter of 2002. The improvement in gross margin is primarily due to productivity gains achieved through operating efficiencies.

Operating Expenses

Consolidated operating expenses for the first quarter of 2003 were $2.5 million or 9.9% of consolidated net sales, compared with consolidated operating
expenses of $3.6 million or 13.2% of consolidated net sales for the first quarter of 2002. The decrease was primarily due to reduced legal expenses related to the CharTech Litigation (see
Note 10 to the Consolidated Financial Statements in Part 1).

Other Income (Expense)

There were no gains on extinguishment of debt in the first quarter of 2003 compared to a gain of $0.5 million in the first quarter of 2002 when we
repurchased $0.8 million face value of Senior

12

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Subordinated Notes (the "Notes") issued in 1999 bearing interest of 113/8% per annum in the open market for $0.3 million.

We
recorded $0.3 million in the first quarter of 2003 for our share of the losses of our joint venture in Germany, SDI-Molan. SDI-Molan started operations
in September 2002 and we anticipate net losses from its operations during the current fiscal year.

Liquidity and Capital Resources

Our principal sources of liquidity are cash flow from operations and borrowings under our credit facilities. Our principal uses of cash are debt service
requirements, capital expenditures and working capital.

We
entered into a five-year credit facility (the "Credit Facility") in June 2001 which consists of a $25.0 million Revolving Credit Facility (the "Revolver")
and a $5.0 million five-year Term Loan (the "Term Loan"). Available borrowings under the Revolver are based on a formula comprised of our eligible accounts receivable and inventory.
The Credit Facility requires lockbox arrangements which provide for all receipts to be swept daily to reduce borrowings outstanding.

The
agreement governing the Credit Facility contains customary covenants, including restrictions on the incurrence of debt, the sale of assets, mergers, acquisitions and other business
combinations, voluntary prepayment of other debt, transactions with affiliates, repurchase or redemption of equity securities, and financial covenants on tangible net worth. Substantially all of our
assets are pledged as collateral under the Credit Facility.

As
of February 2, 2003, we had $1.1 million in borrowings and $2.5 million in letters of credit outstanding under the Revolver. The total amount available under the
Revolver at February 2, 2003 was $8.9 million subject to compliance with certain financial and operating covenants which we must meet on a quarterly basis. As of February 2, 2003,
we were in compliance with all such covenants.

We
have guaranteed bank loans made to SDI-Molan under agreements entered into in August 2002. Our guarantee is limited to fifty percent of the loans outstanding and is
subject to a maximum of 3.2 million Euro or approximately $3.4 million at February 2, 2003. SDI-Molan had bank loans outstanding in the amount of 5.0 million
Euro or $5.4 million at February 2, 2003. SDI-Molan started operations in September 2002. We anticipate net losses from its operations for the current year.

Continuing
operations used cash of $(1.8) million and $(0.9) million in the three months ended February 2, 2003 and February 3, 2002, respectively. The decrease in cash
flow was primarily due to higher incentive bonus payments. Capital expenditures, primarily for manufacturing equipment, were $1.4 million in the first quarter of 2003 compared to
$2.0 million in the first quarter of 2002. We expect to spend approximately $5.0 to $6.0 million on capital expenditures, primarily for manufacturing equipment, during 2003, comparable
to the $6.0 million spent in 2002. We will make the next semi-annual interest payment of $4.2 million on our Notes in June 2003. We expect to make the aforementioned
payments with cash from operations and borrowings under the Revolver.

As
of February 2, 2003, we had net liabilities of $30.0 million. Our ability to pay the interest on, or to refinance our debt, or to fund planned capital expenditures, will
depend on generating cash flow from future operations. We have had positive cash flow from continuing operations during the past two fiscal years.

Critical Accounting Policies

We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. This requires us to make
estimates and assumptions that affect reported

13

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amounts and related disclosures. Actual results could differ from those estimates. From time to time, we may have the following allowances and/or accruals among others:



At
February 2, 2003, these allowances and/or accruals were not material to our results of operations or our financial position.

General Business and Economic Conditions

Our business and earnings are sensitive to general business and economic conditions. These conditions include automotive vehicle sales, short-term
interest rates and consumer confidence levels about the economy. If any of these conditions worsen, our business and earnings could be adversely affected. For example, if consumer confidence erodes
and short term interest rates rise to a point where purchases of automobiles are deferred, our production of initiators, our principal revenue producing product, would be adversely affected. We are
subject to price pressure from our customers which reduces our revenues through lower standard unit pricing. We also are affected by the trend towards increased unit sales of lower cost standard
products as replacements for higher cost prior generation lead wire products. The retail automotive market remains very competitive as the OEMs compete for market share. During calendar year
2002 and early 2003, automobile manufacturers have offered an array of incentives in an effort to sustain sales.

Accounting Developments

In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based CompensationTransition and Disclosurean amendment of SFAS 123". This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect
of the method used on reported results. We have chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the estimate of the
market value of our stock at the date of the grant over the amount an employee must pay to acquire the stock. We will adopt the annual disclosure provisions of SFAS No. 148 in our financial
reports for the year ended November 2, 2003 and we will adopt the interim disclosure provisions for financial reports for the quarter ended May 4, 2003. As the adoption of this standard
involves disclosures only, we do not expect a material impact on our results of operations, financial position or liquidity.

In
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated

14

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with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred, not when it is "planned". We are required to adopt the provisions of SFAS
No. 146 for exit or disposal activities that are initiated after December 31, 2002 and do not expect the adoption to have a material impact on our results of operations, financial
position or liquidity.

Forward-Looking Information

The Management's Discussion and Analysis of Financial Condition and Results of Operations section in this report on Form 10-Q contains certain
forward-looking statements and information within the meaning of the Private Litigation Reform Act of 1995. These forward-looking statements and information relating to our business are based on the
beliefs of management as well as assumptions made by and information currently available to management. The words "anticipates," "believes," "estimates," "expects," "plans," "intends," and similar
expressions, as they relate to our operations, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain
risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed in any forward-looking statement. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. We do not intend to
update these forward-looking statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

We have only limited involvement in derivative financial instruments and do not hold or issue them for trading purposes. We are exposed to market risk related to
changes in foreign exchange rates on transactions denominated in foreign currencies and we selectively use foreign currency forward exchange contracts to manage those risks. At February 2, 2003
we had no open contracts. Certain amounts borrowed under our Credit Facility are at variable rates and we are thus subject to market risk resulting from interest rate fluctuations. A change of 1% in
the interest rates on these borrowings would have no material impact on our financial position, results of operations or liquidity.

We
also are exposed to market risks related to fluctuations in interest rates on the Notes we issued in December 1998. For fixed rate debt such as the Notes, changes in interest
rates generally affect the fair value of the debt instrument. However, we do not have an obligation to repay the Notes prior to maturity in December 2008.

ITEM 4. CONTROLS AND PROCEDURES

The Chief Executive Officer and the Vice President Finance of Special Devices, Incorporated (its principal executive officer and principal financial and
accounting officer, respectively) have concluded, based on their evaluation as of a date within 90 days prior to the date of the filing of this report, that our disclosure controls and
procedures are effective to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and include controls and procedures designed to ensure that information required to be
disclosed by us in such reports is accumulated and communicated to our management, including the Chief Executive Officer and Vice President Finance, as appropriate to allow timely decisions regarding
required disclosure.

There
were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation.

15

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PART IIOTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Defense Criminal Investigative Service Investigation.Our former Aerospace Division remains the subject of an investigation
commenced in 1999 by the Defense Criminal Investigative Service ("DCIS") of the Office of the Inspector General, Department of Defense, into allegations that SDI deviated from contractual requirements
relating to the use of organic sealants. We responded to a subpoena in 1999, and, since that time, we have not been advised formally of any action against SDI arising out of the investigation.
However, the government recently has requested a meeting in connection with the investigation. We dispute the government's interpretation of the contracts as precluding the use of such sealants in the
manner in which they were used. One potential consequence of civil proceedings or criminal charges, if filed, is the possibility that we would be suspended from future military and federal government
sales, and if convicted, debarred from such sales for a period of time. This would not be expected to materially affect our financial condition, results of operations or liquidity given the
divestiture of our Aerospace Division, which was completed in 2001. At this point, it is not possible to predict or assess the likelihood of an unfavorable outcome or predict the amount of potential
liabilities.

For
other legal proceedings, see our Annual Report on Form 10-K for the year ended November 3, 2002.

ITEM 2 THROUGH 5.

Omitted as not applicable.

16

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

|Exhibit No. |  | Description                                                                                                                                                                                                                                                                      
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1(g)      |  | Purchase Agreement, dated as of December 11, 1998, among SDI Acquisition Corp. and BT Alex. Brown Incorporated and Paribas Corporation.                                                                                                                                          
|2.1(a)      |  | Amended and Restated Agreement and Plan of Merger, dated as of June 19, 1998, between the Company and SDI Acquisition Corp.                                                                                                                                                      
|2.2(b)      |  | Amendment No. 1, dated as of October 27, 1998, to the Amended and Restated Agreement and Plan of Merger between the Company and SDI Acquisition Corp.                                                                                                                            
|2.3(c)      |  | Guaranty Agreement, dated as of June 19, 1998, between J.F. Lehman Equity Investors I, LP and the Company.                                                                                                                                                                       
|3.1(g)      |  | Certificate of Incorporation of the Company.                                                                                                                                                                                                                                     
|3.2(g)      |  | Bylaws of the Company.                                                                                                                                                                                                                                                           
|4.1(g)      |  | Indenture, dated as of December 15, 1998, among SDI Acquisition Corp., the Guarantors named therein and United States Trust Company of New York, as Trustee.                                                                                                                     
|4.2(g)      |  | First Supplemental Indenture, dated as of December 15, 1998, among the Company, the Guarantors named therein and the United States Trust Company of New York, as Trustee.                                                                                                        
|4.3(g)      |  | Form of 113/8% Senior Subordinated Note due 2008, Series A (see Exhibit A of the First Supplemental Indenture in Exhibit 4.2).                                                                                                                                                   
|4.4(g)      |  | Form of 113/8% Senior Subordinated Note due 2008, Series B (see Exhibit B of the First Supplemental Indenture in Exhibit 4.2).                                                                                                                                                   
|4.5(g)      |  | Registration Rights Agreement, dated as of December 15, 1998, among SDI Acquisition Corp., as Issuer and BT Alex. Brown Incorporated and Paribas Corporation as Initial Purchasers.                                                                                              
|4.6(k)      |  | Certificate of Designation of Preferences and Relative Participating, Optional and Other Special Rights of Series A 6% Cumulative Convertible Preferred Stock of Special Devices, Incorporated dated as of February 28, 2001.                                                    
|10.6(g)     |  | Management Agreement, dated as of December 15, 1998, between the Company and J.F. Lehman & Company.                                                                                                                                                                              
|10.7(g)     |  | Management Services Agreement, dated as of December 15, 1998, between the Company and J.F. Lehman & Company.                                                                                                                                                                     
|10.8(g)     |  | Subscription Agreement, dated as of September 7, 1998, among the Company, Paribas Principal Incorporated, J.F. Lehman Equity Investors I, LP and JFL Co-Invest Partners I, LP.                                                                                                   
|10.9(g)     |  | Amendment No. 1 to Subscription Agreement, dated as of December 3, 1998, among the Company, Paribas Principal Incorporated, J.F. Lehman Equity Investors I, LP and JFL Co-Invest Partners I, LP.                                                                                 
|10.10(g)    |  | Amendment No. 2 to Subscription Agreement, dated as of December 15, 1998, among the Company, Paribas Principal Incorporated, J.F. Lehman Equity Investors I, LP and JFL Co-Invest Partners I, LP.                                                                                
|10.11(g)    |  | Stockholders Agreement, dated as of December 15, 1998, among the Company, J.F. Lehman & Co., J.F. Lehman Equity Investors I, LP, JFL Co-Invest Partners I, LP, the Neubauer Family Trust, by Walter Neubauer trustee, and the Treinen Family Trust, by
Thomas F. Treinen trustee.
|10.12(g)    |  | Pledge Agreement, dated as of December 15, 1998, between the Neubauer Family Trust, by Walter Neubauer, trustee and J.F. Lehman & Company.                                                                                                                                       
|10.13(g)    |  | Rollover Stockholders Agreement, dated as of December 15, 1998, among the Company, J.F. Lehman & Co., the Neubauer Family Trust, by Walter Neubauer trustee, and the Treinen Family Trust, by Thomas F. Treinen trustee.                                                         
|            |  |                                                                                                                                                                                                                                                                                  

17

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|10.15(g) |  | Registration Rights Agreement, dated as of December 15, 1998, among the Company, J.F. Lehman Equity Investors I, LP, JFL Co-Invest Partners I, LP, Paribas Principal Incorporated, the Neubauer Family Trust, by Walter Neubauer trustee, and the Treinen
Family Trust, by Thomas F. Treinen trustee.
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.19(d) |  | Technology License Agreement dated November 7, 1990 between the Company and Davey Bickford Smith.                                                                                                                                                                                                    
|10.20(e) |  | Amended and Restated 1991 Stock Incentive Plan of the Company.                                                                                                                                                                                                                                       
|10.27(f) |  | Development Agreement, dated August 28, 1996, between Company and the City of Moorpark.                                                                                                                                                                                                              
|10.29(h) |  | Employment Agreement dated October 1, 1999 between the Company and Thomas W. Cresante.                                                                                                                                                                                                               
|10.31(h) |  | 1999 Stock Option Plan dated June 23, 1999.                                                                                                                                                                                                                                                          
|10.41(l) |  | Partnership Agreement, dated as of June 26, 2001, among SDI Germany GmbH, Klaus-Jurgen Dittrich and Frank Dittrich.                                                                                                                                                                                  
|10.42(l) |  | Side Agreement, dated as of June 26, 2001, among the Company, Anhaltinische Chemische Fabriken ACF GmbH, Molan-Werk Dittrich Gessellschaft mit beschrankter Haftung & Co. Komman-ditgesellschaft, SDI Germany GmbH, Klaus-Jurgen Dittrich and Frank
Dittrich.                                        
|10.43(l) |  | Loan and Security Agreement, dated as of June 27, 2001, among the Company and Foothill Capital Corporation.                                                                                                                                                                                          
|10.44(n) |  | Amended and Restated 1999 Stock Option Plan of the Company.                                                                                                                                                                                                                                          
|12.1(g)  |  | Statement of Computation of Ratios of Earnings to Fixed Charges.                                                                                                                                                                                                                                     
|21.1(o)  |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                                         
|25.1(g)  |  | Form T-1 Statement of Eligibility of United States Trust Company of New York to act as trustee under the Indenture.                                                                                                                                                                                  
|99.1(i)  |  | Special Devices, Incorporated Press Release dated September 22, 2000.                                                                                                                                                                                                                                
|99.2(i)  |  | Agreement and Plan of Merger between the Company and Wind Point Partners IV, LP dated August 18, 2000.                                                                                                                                                                                               
|99.3(j)  |  | Special Devices, Incorporated Press Release dated May 14, 2001.                                                                                                                                                                                                                                      
|99.4(j)  |  | Asset Purchase Agreement, dated as of March 27, 2001, among the Company, PS/EMC West LLC and Pacific Scientific Company (solely with respect to Section 7.2 thereof).                                                                                                                                
|99.5(j)  |  | Amendment No. 1 to Asset Purchase Agreement dated as of May 11, 2001.                                                                                                                                                                                                                                
|99.6(k)  |  | Lease Agreement, dated as of June 4, 2001, among the Company, Autosafe Airbag 14 (CA) LP and Autosafe Airbag 12 (CA) LP.                                                                                                                                                                             
|99.79(m) |  | Amendment No. 2 to Asset Purchase Agreement dated as of July 30, 2001.                                                                                                                                                                                                                               

---

18

---

None.

19

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SIGNATURES

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.

|                      |  | SPECIAL DEVICES, INCORPORATED                                                                     
|--------------------- |  | --------------------------------------------------------------------------------------------------
|Dated: March 18, 2003 |  | /s/THOMAS W. CRESANTEDirector, President and Chief Executive Officer
(Principal Executive Officer)
|Dated: March 18, 2003 |  | /s/JAMES E. REEDERVice President Finance
(Principal Financial and Accounting Officer)             

20

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CERTIFICATIONS

I, Thomas W. Cresante, certify that:





|Dated:    March 18, 2003 |  | /s/THOMAS W. CRESANTEDirector, President and Chief Executive Officer
(Principal Executive Officer)
|------------------------ |  | --------------------------------------------------------------------------------------------------
|                         |  |                                                                                                   
|                         |  |                                                                                                   

21

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CERTIFICATIONS

I, James E. Reeder, certify that:





|Dated:    March 18, 2003 |  | /s/JAMES E. REEDERVice President Finance
(Principal Financial and Accounting Officer)
|------------------------ |  | -------------------------------------------------------------------------------------
|                         |  |                                                                                      
|                         |  |                                                                                      

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