---

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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 AND EXCHANGE ACT OF 1934
|------------------------------------------------ | -------------------------------------------------------------------------------------------
|For the quarterly period ended: February 3, 2002
|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) |  | 
| | ----------------------------------------------------------------------------------------- |  | 
| | (805) 553-1200(Registrant's telephone number, including area code)                        |  | 

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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.    Yes ý    No o

At
March 12, 2002, the total 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 3, 2002 and October 31, 2001                                      |  | 3   
|                             |  | (b)                                                                                   |  | Consolidated Statements of Operations: For the Three Months Ended February 3, 2002 and January 28, 2001 |  | 4   
|                             |  | (c)                                                                                   |  | Consolidated Statements of Cash Flows: For the Three Months Ended February 3, 2002 and January 28, 2001 |  | 5   
|                             |  | (d)                                                                                   |  | Notes to the Consolidated Financial Statements                                                          |  | 6   
|ITEM 2.                      |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 11                                                                                                     
|ITEM 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 14                                                                                                     
|PART IIOTHER INFORMATION    |  |                                                                                      
|ITEM 1.                      |  | Legal Proceedings                                                                     |  | 14                                                                                                     
|ITEM 6.                      |  | Exhibits and Reports on Form 8-K                                                      |  | 15                                                                                                     
|Signatures                   |  | 19                                                                                   

2

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

|                                                     |                                                                                                                                              | February 3, 2002                               |        | October 31, 2001 |        
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------ | ---------------- | -------
|ASSETS                                               |                                                                                                                                             
|Current assets:                                      |                                                                                                                                              |                                                |        |                  |        
|                                                     | Cash                                                                                                                                         |                                                | $      | 154              |        
|                                                     | Accounts receivable, net of allowances of $672 at February 3, 2002 and $642 at October 31, 2001                                              |                                                |        | 11,506           |        
|                                                     | Inventories                                                                                                                                  |                                                |        | 8,499            |        
|                                                     | Deferred tax assets                                                                                                                          |                                                |        | 2,562            |        
|                                                     | Prepaid expenses and other current assets                                                                                                    |                                                |        | 4,291            |        
|                                                     |                                                                                                                                              |                                                |        |                  |        
|                                                     |                                                                                                                                              | Total current assets                           |        |                  | 27,012 
|                                                     |                                                                                                                                              |                                                |        |                  |        
|Property, plant and equipment, at cost               |                                                                                                                                              |                                                |        |                  |        
|                                                     | Machinery and equipment                                                                                                                      |                                                |        | 80,781           |        
|                                                     | Construction in progress                                                                                                                     |                                                |        | 4,873            |        
|                                                     | Other                                                                                                                                        |                                                |        | 5,475            |        
|                                                     |                                                                                                                                              |                                                |        |                  |        
|                                                     |                                                                                                                                              | Gross property, plant and equipment            |        |                  | 91,129 
|                                                     |                                                                                                                                              | Less accumulated depreciation and amortization |        |                  | (56,300
|                                                     |                                                                                                                                              |                                                |        |                  |        
|                                                     |                                                                                                                                              | Net property, plant and equipment              |        |                  | 34,829 
|                                                     |                                                                                                                                              |                                                |        |                  |        
|Other assets, net of accumulated amortization        |                                                                                                                                              |                                                | 7,497  |                  |        
|Notes receivable                                     |                                                                                                                                              |                                                | 4,497  |                  |        
|                                                     |                                                                                                                                              |                                                |        |                  |        
|Total assets                                         |                                                                                                                                              | $                                              | 73,835 |                  | $      
|                                                     |                                                                                                                                              |                                                |        |                  |        
|LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)       |                                                                                                                                             
|Current liabilities:                                 |                                                                                                                                              |                                                |        |                  |        
|                                                     | Accounts payable                                                                                                                             |                                                | $      | 9,595            |        
|                                                     | Income taxes payable                                                                                                                         |                                                |        | 1,437            |        
|                                                     | Accrued interest                                                                                                                             |                                                |        | 1,108            |        
|                                                     | Accrued bonus                                                                                                                                |                                                |        | 282              |        
|                                                     | Other current liabilities                                                                                                                    |                                                |        | 7,174            |        
|                                                     | Revolving line of credit                                                                                                                     |                                                |        | 2,347            |        
|                                                     | Current portion of long-term debt                                                                                                            |                                                |        | 1,000            |        
|                                                     |                                                                                                                                              |                                                |        |                  |        
|                                                     |                                                                                                                                              | Total current liabilities                      |        |                  | 22,943 
|Deferred income taxes                                |                                                                                                                                              |                                                | 2,869  |                  |        
|Long-term debt, net of current portion               |                                                                                                                                              |                                                | 77,094 |                  |        
|                                                     |                                                                                                                                              |                                                |        |                  |        
|                                                     |                                                                                                                                              | Total liabilities                              |        |                  | 102,906
|                                                     |                                                                                                                                              |                                                |        |                  |        
|Commitments and contingencies (Note 7)               |                                                                                                                                              |                                                |        |                  |        
|Redeemable preferred stock                           |                                                                                                                                              |                                                | 4,000  |                  |        
|Redeemable common stock                              |                                                                                                                                              |                                                | 34,375 |                  |        
|Stockholders' equity (deficit):                      |                                                                                                                                              |                                                |        |                  |        
|                                                     | Preferred stock, $.01 par value; 2,000,000 shares authorized; 4,000 shares issued and outstanding at February 3, 2002 and October 31, 2001   |                                                |        |                 |        
|                                                     | Common stock, $.01 par value; 20,000,000 shares authorized; 3,712,764 shares issued and outstanding at February 3, 2002 and October 31, 2001 |                                                |        | 30               |        
|                                                     | Additional paid-in capital                                                                                                                   |                                                |        | 66,352           |        
|                                                     | Retained earnings (deficit)                                                                                                                  |                                                |        | (133,828         | )      
|                                                     |                                                                                                                                              |                                                |        |                  |        
|                                                     |                                                                                                                                              | Total stockholders' equity (deficit)           |        |                  | (67,446
|                                                     |                                                                                                                                              |                                                |        |                  |        
|Total liabilities and stockholders' equity (deficit) |                                                                                                                                              | $                                              | 73,835 |                  | $      
|                                                     |                                                                                                                                              |                                                |        |                  |        

See accompanying notes to consolidated financial statements.

3

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

|                                                                 |                                                              | Three Months Ended                                                         |       
|---------------------------------------------------------------- | ------------------------------------------------------------ | -------------------------------------------------------------------------- | ------
|
|Net sales                                                        |                                                              | $                                                                          | 27,565
|Cost of sales                                                    |                                                              |                                                                            | 22,749
|                                                                 |                                                              |                                                                            |       
|                                                                 |                                                              | Gross profit                                                               |       
|Operating expenses                                               |                                                              |                                                                            | 4,675 
|                                                                 |                                                              |                                                                            |       
|                                                                 |                                                              | Income from operations                                                     |       
|Interest expense, net                                            |                                                              |                                                                            | (2,218
|                                                                 |                                                              |                                                                            |       
|                                                                 |                                                              | Loss from continuing operations before extraordinary gain and income taxes |       
|Income tax benefit                                               |                                                              |                                                                            | (831  
|                                                                 |                                                              |                                                                            |       
|                                                                 |                                                              | Loss from continuing operations before extraordinary gain                  |       
|Discontinued operations:                                         |                                                              |                                                                            |       
|                                                                 | Income from discontinued operations, net of taxes of $380    |                                                                            |       
|                                                                 | Gain on sale of discontinued operations, net of taxes of $28 |                                                                            |       
|                                                                 |                                                              |                                                                            |       
|                                                                 |                                                              | Loss before extraordinary gain                                             |       
|Extraordinary gain on extinguishment of debt, net of taxes of $0 |                                                              |                                                                            | 521   
|                                                                 |                                                              |                                                                            |       
|                                                                 | Net loss                                                     |                                                                            | $     
|                                                                 |                                                              |                                                                            |       

See
accompanying notes to consolidated financial statements.

4

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

|                                                                                                   |                                              | Three Months Ended                                     |       
|-------------------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------------------ | ------
|
|Cash Flows From Operating Activities:                                                              |                                              |                                                        |       
|                                                                                                   | Net loss                                     |                                                        | $     
|                                                                                                   | Extraordinary gain on extinguishment of debt |                                                        |       
|                                                                                                   | Income from discontinued operations          |                                                        |       
|                                                                                                   | 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                          |       
|                                                                                                   |                                              | Deferred income taxes                                  |       
|                                                                                                   | Changes in assets and liabilities:           |                                                        |       
|                                                                                                   |                                              | Accounts receivable and other assets                   |       
|                                                                                                   |                                              | Inventories                                            |       
|                                                                                                   |                                              | Accounts payable and other liabilities                 |       
|                                                                                                   |                                              | Income taxes payable                                   |       
|                                                                                                   |                                              |                                                        |       
|                                                                                                   |                                              | Net cash used in continuing operations                 |       
|                                                                                                   |                                              | Net cash provided by (used in) discontinued operations |       
|                                                                                                   |                                              |                                                        |       
|                                                                                                   |                                              | Net cash used in operating activities                  |       
|                                                                                                   |                                              |                                                        |       
|Cash Flows From Investing Activities:                                                              |                                              |                                                        |       
|                                                                                                   |                                              | Purchases of property, plant and equipment             |       
|                                                                                                   |                                              | Proceeds on sale of discontinued operations            |       
|                                                                                                   |                                              | Other                                                  |       
|                                                                                                   |                                              |                                                        |       
|                                                                                                   |                                              | Net cash used in investing activities                  |       
|                                                                                                   |                                              |                                                        |       
|Cash Flows From Financing Activities:                                                              |                                              |                                                        |       
|                                                                                                   |                                              | Net borrowings under revolving line of credit          |       
|                                                                                                   |                                              | Repayment of long-term debt                            |       
|                                                                                                   |                                              | Repurchase of senior subordinated notes                |       
|                                                                                                   |                                              |                                                        |       
|                                                                                                   |                                              | Net cash provided by financing activities              |       
|                                                                                                   |                                              |                                                        |       
|Net increase (decrease) in cash                                                                    |                                              |                                                        | (1,187
|Cash at beginning of year                                                                          |                                              |                                                        | 1,341 
|                                                                                                   |                                              |                                                        |       
|Cash at end of period                                                                              |                                              | $                                                      | 154   
|                                                                                                   |                                              |                                                        |       
|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 SUBSIDIARY        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

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.

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 puruant to the terms governing the Senior Subordinated Notes.

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 3, 2002, the Continuing Stockholders own approximately 29.5% of the common equity of the
Company.

The
principal executive offices of the Company are located at 14370 White Sage Road, Moorpark, California 93021 and its telephone number is (805) 553-1200.

2. Interim Financial Statements

The accompanying unaudited 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 generally accepted accounting principles ("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 October 31, 2001. Operating results for the three-month
period ended February 3, 2002 are not necessarily indicative of the operating results for the full year. Certain prior year amounts have been reclassified to conform with the current year
presentation.

3. Discontinued Operations

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. As previously disclosed, Scot was divested on September 21, 2000 and the net assets of the remaining Aerospace operations were sold on May 11, 2001 (the "Aerospace Sale"). The
results of operations and the net assets of the Aerospace Segment have been reclassified to Discontinued Operations. Accounting for discontinued operations according to GAAP involves identifying
charges such as corporate allocations that were originally

6

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charged to Aerospace operations but that would be continuing. Those continuing charges are then reallocated back to the remaining operations of the Automotive Products Division. In addition, interest
expense was reallocated to the Aerospace Segment based on its total assets. This reallocation of corporate charges and interest has been done for all prior periods presented. As a result of the
reallocations and reclassifications to discontinued operations, certain amounts in the Consolidated Financial Statements and Notes thereto have been revised from the amounts presented in prior years.

Net
sales of the Aerospace Division were $0 and $4.4 million for the three months ended February 3, 2002 and January 28, 2001, respectively.

4. Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", SFAS No. 142, "Goodwill and Intangible Assets", and SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations, establishes specific criteria for recognizing intangible assets separately from goodwill and requires certain disclosures regarding reasons for a
business combination and the allocation of the purchase price paid. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business
combinations accounted for using the purchase accounting method for which the date of acquisition is after June 30, 2001. SFAS No. 142 establishes that goodwill and certain intangible
assets will no longer be amortized to earnings, but instead tested for impairment at least annually. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made, that the associated asset retirement costs be capitalized as part of the carrying amount of the
asset and requires certain disclosures providing descriptions of the asset retirement obligations and reconciliations of changes in components of those obligations. Except for business combinations
initiated after June 30, 2001, we are required to adopt the provisions of SFAS No.s 141, 142 and 143 on November 1, 2002. We do not expect the adoption of these statements to have a
material impact on our results of operations or financial position.

In
August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" issued in June 1995 and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 144 establishes accounting standards for the impairment of long-lived assets, excluding goodwill, and for long-lived assets to be disposed of.
SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. The statement retains the basic provisions of APB Opinion No. 30 for the presentation of discontinued operations in the statement of operations
but broadens that presentation to include a component of an entity (rather than a segment of a business). The Company

7

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is required to adopt the provisions of SFAS No. 144 on November 1, 2002 and does not expect the adoption to have a material impact on the Company's results of operations or financial
position.

5. Inventories

Inventories consist of the following components:

February 3, 2002

October 31, 2001(In thousands)Raw materials and components

$
3,541

$
3,770Work in process


1,365


888Finished goods


3,593


5,942Total inventories

$
8,499

$
10,600


6. Debt

The Company entered into a new 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 of
eligible accounts receivable and inventory.

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 $4.5 million and an effective interest rate of 5.25% per
annum at February 3, 2002. At February 3, 2002, $2.3 million was outstanding under the Revolver with an effective interest rate of 5.00% per annum. Letters of credit outstanding
under the Revolver reduce the amount of borrowings available. The Company had $4.0 million in letters of credit outstanding at February 3, 2002. The total amount available under the
Revolver at February 3, 2002 was $6.4 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 3, 2002. Substantially all of the Company's assets are pledged as collateral under the Credit Facility.

In
November 2001, the Company purchased $0.8 million face value of its Senior Subordinated Notes (the "Notes") in the open market for $0.3 million resulting in an
extraordinary gain of $0.5 million. At February 3, 2002, the Company had $73.6 million of Notes outstanding. The Notes are due in December 2008, and bear interest at
113/8% per annum. Interest is payable semi-annually in June and December. The Notes are noncollateralized obligations of the Company and are subordinated to its obligations
under the Credit Facility.

The
fair value and carrying amount of long-term debt, including short-term borrowings, are as follows:

February 3, 2002

October 31, 2001(In thousands)Fair value

$
43,644

$
34,772Carrying amount

$
80,441

$
79,430


8

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The
Company's borrowings under the Term Loan and the Revolver have variable rates that reflect currently available terms and conditions for similar debt. The carrying amount of the Term
Loan and Revolver is a reasonable estimate of its fair value. The Notes are traded occasionally in public markets.

7. 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 has appealed the citations and the appeal is pending. Because the accident resulted in a serious injury, the 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 investigating the allegations and intends to vigorously defend the action.

CharTech Suit.A lawsuit alleging that the Company willfully infringes 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 suit seeks unspecified monetary damages and an injunction against the Company's alleged
practice of the technology claimed in these patents. The patents at issue relate to the use of a "getter" material in connection with leak-testing hermetically sealed devices. CharTech's
suit claims that initiators produced by the Company infringe these patents. The Company answered the complaint, asserted counterclaims against CharTech, and filed a third party complaint against
CharTech, its related company IsoVac Engineering, Inc. ("IsoVac") and George Neff, a principal in both companies. If the Company is found liable for patent infringement, it could be liable for
monetary damages, which could be increased up to three times if willful infringement is also found to exist. In addition, if the Company is found liable for patent infringement, the Company could be
enjoined from producing the subject initiators. The Company believes that it has meritorious defenses in this action that could serve to avoid liability or limit the damages that might be due if
liability were found. The Company believes that its counterclaims and third party claims are also meritorious and may lead to a monetary recovery by the Company. A trial date has not yet been set and
a previously scheduled pre-trial conference was taken off the calendar.

Recently,
the court granted a stay of most claims of the lawsuit pending the court's consideration of CharTech's motion to bifurcate the Company's indemnification claim, and to stay the
rest of the lawsuit

9

---

until the indemnification claim has been decided. A court-ordered settlement mediation conference is also scheduled for later in March 2002.

Other Litigation.The Company is a defendant in various other pending claims and lawsuits. In the opinion of the Company's
management, after consultation with counsel, disposition of such matters is not expected to have a material adverse effect upon the Company's results of operations, financial position or liquidity.

10

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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. We sold the net assets comprising our remaining Aerospace operations on May 11, 2001. The results of operations and the net assets of the Aerospace Segment have been reclassified
to Discontinued Operations. Accounting for discontinued operations according to GAAP involves identifying charges such as corporate allocations that were originally charged to Aerospace operations but
that would be continuing. Those continuing charges are then reallocated back to the remaining operations of the Automotive Products Division. In addition, interest expense was reallocated to the
Aerospace segment based on its total assets. This reallocation of corporate charges and interest has been done for all prior periods presented. As a result, the narrative that follows has been revised
from the narrative presented in the prior year.

Results of Operations

The following table sets forth, for the periods indicated, the percentage of net sales represented by certain items in the Company's Consolidated Statements of
Operations.

Three Months EndedFebruary 3, 2002

January 28, 2001Net sales

100.0
%
100.0
%Cost of sales

82.5
%
85.6
%Gross profit

17.5
%
14.4
%Operating expenses

17.0
%
11.2
%Income from operations

0.5
%
3.2
%


Comparison of the Three Months Ended February 3, 2002 to the Three Months Ended January 28, 2001

Net Sales

Consolidated net sales for the first quarter of 2002 were $27.6 million, compared to consolidated net sales of $30.2 million for the first quarter
of 2001. The decrease was primarily due to product mix and lower unit pricing.

Gross Profit

Consolidated gross profit for the first quarter of 2002 was $4.8 million or 17.5% of consolidated net sales, compared to consolidated gross profit of
$4.4 million or 14.4% of consolidated net sales for the first quarter of 2001. The improvement in gross margin is primarily due to cost reductions in excess of unit price reductions.

Operating Expenses

Consolidated operating expenses for the first quarter of 2002 were $4.7 million or 17.0% of consolidated net sales, compared with consolidated operating
expenses of $3.4 million or 11.2% of consolidated net sales for the first quarter of 2001. The increase is primarily due to higher legal expenses related to the CharTech litigation (see
Note 7 to the Consolidated Financial Statements in Part 1).

11

---

Other Expense

Net interest expense was $2.2 million for the first quarter of 2002 compared to net interest expense of $3.5 million for the first quarter of 2001.
The decrease was primarily due to a reduction in outstanding debt. Average debt outstanding was $80.3 million in the first quarter of 2002, compared with $140.8 million in the first
quarter of 2001. We used the net proceeds from the Aerospace Sale and the Real Estate Transaction to repay borrowings under our prior credit facility and to retire a portion of our Senior Subordinated
Notes ("Notes").

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 new 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 Term Loan (the "Term Loan"). Available borrowings under the Revolver are based on a formula comprised of our eligible accounts receivable and inventory.

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 of the Company, transactions with affiliates, repurchase or redemption of equity securities, and financial covenants on tangible net worth.

As
of February 3, 2002, we had $2.4 million in borrowings and $4.0 million of letters of credit outstanding under the Revolver. The total amount available under the
Revolver at February 3, 2002 was $6.4 million subject to compliance with certain financial covenants. As of February 3, 2002, we were in compliance with all such covenants.

Continuing
operations used cash of $(0.9) million and $(3.7) million in the three months ended February 3, 2002 and January 28, 2001, respectively. Capital expenditures,
primarily for manufacturing equipment, were $2.0 million in the three months ended February 3, 2002 and $0.8 million in the three months ended January 28, 2001. We expect
to spend approximately $5.0 to $6.0 million on capital expenditures, primarily for manufacturing equipment, during fiscal 2002. We anticipate making a capital contribution of approximately
$0.9 million during the next six months to SDI Molan, the German joint venture formed in June 2001. We expect to make the aforementioned payments with cash from operations and borrowings
under the Revolver.

Our
working capital was $4.1 million at February 3, 2002, a decrease of $1.9 million from our working capital of $6.0 million at October 31, 2001. The
decrease was due to capital expenditures and the repurchase of our Notes.

Our
ability to pay the interest on, or to refinance our debt, or to fund planned capital expenditures, will depend on our future performance which, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. While management believes that we will be able to meet our liquidity needs, there can
be no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available under the Revolver in an amount sufficient to enable us to service our
debt, or to fund our other liquidity needs.

Accounting Developments

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", SFAS No. 142, "Goodwill and

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Intangible Assets", and SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations,
establishes specific criteria for recognizing intangible assets separately from goodwill and requires certain disclosures regarding reasons for a business combination and the allocation of the
purchase price paid. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for using the purchase accounting
method for which the date of acquisition is after June 30, 2001. SFAS No. 142 establishes that goodwill and certain intangible assets will no longer be amortized to earnings, but instead
tested for impairment at least annually. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made, that the associated asset retirement costs be capitalized as part of the carrying amount of the asset and requires certain disclosures providing
descriptions of the asset retirement obligations and reconciliations of changes in components of those obligations. Except for business combinations initiated after June 30, 2001, we are
required to adopt the provisions of SFAS No.s 141, 142 and 143 on November 1, 2002. We do not expect the adoption of these statements to have a material impact on our results of operations or
financial position.

In
August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" issued in June 1995 and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 144 establishes accounting standards for the impairment of long-lived assets, excluding goodwill, and for long-lived assets to be disposed of.
SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. The statement retains the basic provisions of APB Opinion No. 30 for the presentation of discontinued operations in the statement of operations
but broadens that presentation to include a component of an entity (rather than a segment of a business). The Company is required to adopt the provisions of SFAS No. 144 on November 1,
2002 and does not expect the adoption to have a material impact on the Company's results of operations or financial position.

Forward-Looking Information

This report on Form 10-Q contains certain forward-looking statements and information relating to our business that 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.

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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 3,
2002, 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.

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.

PART IIOTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

CharTech Suit.A lawsuit alleging that the Company willfully infringes 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 suit seeks unspecified monetary damages and an
injunction against the Company's alleged practice of the technology claimed in these patents. The patents at issue relate to the use of a "getter" material in connection with leak-testing
hermetically sealed devices. CharTech's suit claims that initiators produced by the Company infringe these patents. The Company answered the complaint, asserted counterclaims against CharTech, and
filed a third party complaint against CharTech, its related company IsoVac Engineering, Inc. ("IsoVac") and George Neff, a principal in both companies. If the Company is found liable for patent
infringement, it could be liable for monetary damages, which could be increased up to three times if willful infringement is also found to exist. In addition, if the Company is found liable for patent
infringement, the Company could be enjoined from producing the subject initiators. The Company believes that it has meritorious defenses in this action that could serve to avoid liability or limit the
damages that might be due if liability were found. The Company believes that its counterclaims and third party claims are also meritorious and may lead to a monetary recovery by the Company. A trial
date has not yet been set and a previously scheduled pre-trial conference was taken off the calendar. Recently, the court granted a stay of most claims of the lawsuit pending the court's
consideration of CharTech's motion to bifurcate the Company's indemnification claim, and to stay the rest of the lawsuit until the indemnification claim has been decided. A court-ordered settlement
mediation conference is also scheduled for later in March 2002.

For
other legal proceedings, see our Annual Report on Form 10-K405 for the year ended October 31, 2001.

ITEM 3 THROUGH 5.

Omitted as not applicable.

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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(l)      |  | 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.
|10.2(g)     |  | Credit Agreement, dated as of December 15, 1998, among the Company, various banks and Bankers Trust Company, as Lead Arranger and Administrative Agent.                                                                      
|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 Inc., 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 Inc., 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 Inc., J.F. Lehman Equity Investors I, LP and JFL Co-Invest Partners I, LP.                                    

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|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.                                                                     
|10.14(g) |  | Pledge Agreement, dated as of December 15, 1998, between Thomas Treinen Family Trust, by Thomas F. Treinen, trustee and J.F. Lehman & Company.                                                                                                                                               
|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 Inc., 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.                                                                                                                                                                                                                               
|10.21(d) |  | Special Devices, Incorporated 401(k) Plan.                                                                                                                                                                                                                                                   
|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.                                                                                                                                                                                                                                                  
|10.33(h) |  | Capital Call Agreement dated January 26, 2000 among the Company, various banks, and Bankers Trust Company as Administrative Agent.                                                                                                                                                           
|10.34(h) |  | Second Amendment to Credit Agreement, dated January 26, 2000 among the Company, various banks, and Bankers Trust Company, as Lead Arranger or Administrative Agent.                                                                                                                          
|10.35(k) |  | Third Amendment to Credit Agreement, dated June 7, 2000 among the Company, various banks, and Bankers Trust Company, as Lead Arranger or Administrative Agent.                                                                                                                               
|10.36(k) |  | Fourth Amendment to Credit Agreement, dated September 18, 2000 among the Company, various banks, and Bankers Trust Company, as Lead Arranger or Administrative Agent.                                                                                                                        
|10.37(j) |  | Fifth Amendment to Credit Agreement, dated January 12, 2001 among the Company, various banks, and Bankers Trust Company, as Lead Arranger or Administrative Agent.                                                                                                                           
|10.38(k) |  | Capital Call Agreement dated September 18, 2000 among the Company, various banks, and Bankers Trust Company as Administrative Agent.                                                                                                                                                         
|10.39(l) |  | First Amendment to Credit Agreement, dated July 14, 1999 among the Company, various banks, and Bankers Trust Company, as Lead Arranger or Administrative Agent.                                                                                                                              
|10.40(l) |  | Sixth Amendment to Credit Agreement, dated April 25, 2001 among the Company, various banks, and Bankers Trust Company, as Lead Arranger or Administrative Agent.                                                                                                                             
|10.41(m) |  | Partnership Agreement, dated as of June 26, 2001, among SDI Germany GmbH, Klaus-Jurgen Dittrich and Frank Dittrich.                                                                                                                                                                          

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|10.42(m) |  | 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(m) |  | Loan and Security Agreement, dated as of June 27, 2001, among the Company and Foothill Capital Corporation.                                                                                                                                                  
|12.1(g)  |  | Statement of Computation of Ratios of Earnings to Fixed Charges.                                                                                                                                                                                             
|21.1(g)  |  | 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(k)  |  | Special Devices, Incorporated Press Release dated May 14, 2000.                                                                                                                                                                                              
|99.4(k)  |  | 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(k)  |  | Amendment No. 1 to Asset Purchase Agreement dated as of May 11, 2001.                                                                                                                                                                                        
|99.6(l)  |  | Lease Agreement, dated as of June 4, 2001, among the Company, Autosafe Airbag 14 (CA) LP and Autosafe Airbag 12 (CA) LP.                                                                                                                                     
|99.7(n)  |  | Amendment No. 2 to Asset Purchase Agreement dated as of July 30, 2001.                                                                                                                                                                                       

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None

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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 15, 2002 |  | /s/THOMAS W. CRESANTEDirector, President and Chief Executive Officer
(Principal Executive Officer)
|Dated: March 15, 2002 |  | /s/JAMES E. REEDERVice President Finance
(Principal Financial and Accounting Officer)             

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