**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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FORM 10-Q/A

**(Mark One)**

**x**                                 QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe quarterly period ended: August 1, 2004**

**OR**

**o**                                   TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from**______________to ______________

**CommissionFile Number: 333-75869**

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SPECIAL DEVICES, INCORPORATED

(Exact name of registrantas specified in its charter)
| **Delaware**                                                    | ** **                                                 | **95-3008754**                        |
|-----------------------------------------------------------------|------------------------------------------------------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |                                                       | (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 whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No o

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o  No x

Asof September 10, 2004, the number of outstanding shares of the registrant’scommon stock was 3,712,764.

 

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**EXPLANATORY NOTE**

Special Devices, Incorporated is amending itsQuarterly report on Form 10-Q for the quarterly period ended August 1, 2004 tofile as an exhibit an agreement with the former chief operating officer and torestate the consolidated financial statements to record the costs related tothis agreement asfurther discussed in Note 2 to the consolidated financial statements. The Audit Committee andmanagement of the Company determined that the Company should restate thefinancial statements for the interim three monthand nine monthperiods ended August 1, 2004 to reflect the appropriateaccounting treatment for a separation agreement with the Company’s former chiefoperating officer. The Company had been expensing the costs of the agreement overits term and had not accounted for the agreement as a deemed modification of the former chief operating officer’s vested andunexercised stockoptions. The Audit Committee and management of the Company, after furtherreview of the agreement in question, determined that the severance costs shouldhave been accrued and compensation cost for the deemed modification of thestock options should have been recorded when the agreement was signed in thequarter ended August 1, 2004 because the agreement did not require performanceof substantive services during its term. This restatement primarily involves an accrual for severance costs and acharge to compensation expense for the deemed modification of the stock options and resulted inan increase in operating expenses of $689,000, from$3,554,000 to $4,243,000 for the three month periodended August 1, 2004 andfrom $9,374,000 to $10,063,000 for the nine month period ended August 1, 2004,and an increase in netloss of $561,000, from $700,000 to$1,261,000 for the three month period ended August 1, 2004 and from $1,168,000to $1,729,000 for the nine month period ended August 1, 2004.  Except for Items 1, 2 and 4 of Part I, Item 6of Part II and, pursuantto Rule 12b-15, new certifications from the PrincipalExecutive Officer and Principal Financial Officer, no other information included inthe original report on Form 10-Q is amended by this Form 10-Q/A.

Items not being amended arepresented for the convenience of the reader only. This Report continues to bepresented as of the date of the original Quarterly Report on Form 10-Q and theCompany has not updated the disclosure in this report to a later date.

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**SPECIALDEVICES, INCORPORATEDINDEX TO QUARTERLY REPORT ON FORM 10-Q**/A
|                                         | ** ** | **PAGE**                                                                                                                        | ** ** |
|-----------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|
| PART I—FINANCIAL  INFORMATION |       |                                                                                                                            |
|                                    | Item 1.    | Financial Statements                                                                                                            |       |   |
|                                    | (a)        | Consolidated  Balance Sheets: August 1, 2004 and November 2, 2003                                                     | 3          |   |
|                                    | (b)        | Consolidated  Statements of Operations: For the Three Months and Nine Months Ended  August 1, 2004 and August 3, 2003 | 4          |   |
|                                    | (c)        | Consolidated  Statements of Cash Flows: For the Nine Months Ended August 1, 2004 and  August 3, 2003                  | 5          |   |
|                                    | (d)        | Notes to  Consolidated Financial Statements                                                                                     | 6          |   |
|                                    | Item 2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                | 15         |   |
|                                    | Item 3.    | Quantitative and Qualitative  Disclosures About Market Risk                                                                     | 20         |   |
|                                    | Item 4.    | Controls and Procedures                                                                                                         | 21         |   |
| PART II—OTHER INFORMATION     |       |                                                                                                                            |
|                                    | Item 1.    | Legal Proceedings                                                                                                               | 22         |   |
|                                    | Item 6.    | Exhibits                                                                                                                        | 22         |   |
| Signatures                              | 26         |                                                                                                                            |
| Certifications                          |       |                                                                                                                            |
|                                         |            |                                                                                                                                 |            |  |  |  |  |

 

2

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**SPECIAL DEVICES, INCORPORATED AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(Dollars in thousands)(Unaudited)**
|                                                                                                                                                        | ** ** | **August 1  2004** | ** ** | **November 2  2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                                                                                                                                             | ** ** | **(as restated)**  | ** ** | ** **                | ** ** |
| **ASSETS**                                                                                                                                             |       |
| Current assets:                                                                                                                                        |       |                    |       |                      |       |
| Cash and cash equivalents                                                                                                                              |       | $                       | 2,254      |                      | $          | 3,925 |   |
| Accounts receivable, net of allowances of $315 at  August 1, 2004 and $426 at November 2, 2003                                               |       | 14,204                  |       | 13,265                    |       |
| Inventories                                                                                                                                            |       | 5,848                   |       | 6,646                     |       |
| Prepaid expenses and other current assets                                                                                                              |       | 5,710                   |       | 6,110                     |       |
| Total current assets                                                                                                                                   |       | 28,016                  |       | 29,946                    |       |
| Property, plant and  equipment, at cost:                                                                                                               |       |                    |       |                      |       |
| Machinery and equipment                                                                                                                                |       | 94,003                  |       | 91,524                    |       |
| Furniture, fixtures and computer equipment                                                                                                             |       | 6,241                   |       | 6,080                     |       |
| Construction in progress and other                                                                                                                     |       | 3,892                   |       | 4,011                     |       |
| Gross property, plant and equipment                                                                                                                    |       | 104,136                 |       | 101,615                   |       |
| Less accumulated depreciation and  amortization                                                                                                        |       | (78,054                 | )          | (71,956                   | )          |
| Net property, plant and equipment                                                                                                                      |       | 26,082                  |       | 29,659                    |       |
| Other assets, net of accumulated  amortization                                                                                                         |       | 10,629                  |       | 10,773                    |       |
| Total assets                                                                                                                                           |       | $                       | 64,727     |                      | $          | 70,378 |   |
| **LIABILITIES, REDEEMABLE STOCK  AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                             |       |
| Current  liabilities:                                                                                                                                  |       |                    |       |                      |       |
| Accounts payable                                                                                                                                       |       | $                       | 6,979      |                      | $          | 7,573 |   |
| Accrued liabilities                                                                                                                                    |       | 7,044                   |       | 10,449                    |       |
| Current portion of long-term debt                                                                                                                      |       | 750                     |       | 750                       |       |
| Total current liabilities                                                                                                                              |       | 14,773                  |       | 18,772                    |       |
| Other liabilities                                                                                                                                      |       | 4,976                   |       | 4,476                     |       |
| Long-term debt, net of current portion                                                                                                                 |       | 74,795                  |       | 75,545                    |       |
| Total liabilities                                                                                                                                      |       | 94,544                  |       | 98,793                    |       |
| Commitments and  contingencies (Note 11)                                                                                                               |       |                    |       |                      |       |
| Redeemable stock:                                                                                                                                      |       |                    |       |                      |       |
| Redeemable preferred stock                                                                                                                             |       | 4,000                   |       | 4,000                     |       |
| Redeemable common stock                                                                                                                                |       | 41,500                  |       | 39,625                    |       |
| Total redeemable stock                                                                                                                                 |       | 45,500                  |       | 43,625                    |       |
| Stockholders' equity (deficit):                                                                                                                        |       |                    |       |                      |       |
| Preferred stock, $.01 par value, 2,000,000 shares  authorized; 4,000 shares issued and outstanding at August 1, 2004 and November 2,  2003   |       | —                  |       | —                    |       |
| Common stock, $.01 par value, 20,000,000  shares authorized; 3,712,764 shares issued and outstanding at August 1,  2004 and November 2, 2003 |       | 30                      |       | 30                        |       |
| Additional paid-in capital                                                                                                                             |       | 59,580                  |       | 61,102                    |       |
| Retained earnings (deficit)                                                                                                                            |       | (134,922                | )          | (133,193                  | )          |
| Accumulated foreign currency translation adjustment                                                                                                    |       | (5                      | )          | 21                        |       |
| Total stockholders’ equity (deficit)                                                                                                              |       | (75,317                 | )          | (72,040                   | )          |
| Total liabilities,  redeemable stock and stockholders’ equity (deficit)                                                                           |       | $                       | 64,727     |                      | $          | 70,378 |   |

 

See accompanying notes to consolidated financial statements.

3

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**SPECIAL DEVICES, INCORPORATED AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFOPERATIONS(Dollars in thousands)(Unaudited)**
| ** **                                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **August 1  2004**          | ** ** | **August 3  2003**         | ** ** | **August 1  2004** | ** ** | **August 3  2003** | ** ** |
| ** **                                                          | ** ** | **(as  restated)**               | ** ** | ** **                      | ** ** | **(as  restated)** | ** ** | ** ** | ** ** |
| Net sales                                                           |       | $                                | 25,323     |                            | $          | 26,962 |   | $ | 79,420 |   | $ | 82,772 |   |
| Cost of sales                                                       |       | 20,811                           |       | 21,805                          |       | 64,640 |   | 67,059 |   |
| Gross profit                                                        |       | 4,512                            |       | 5,157                           |       | 14,780 |   | 15,713 |   |
| Operating expenses                                                  |       | 4,243                            |       | 3,349                           |       | 10,063 |   | 8,504 |   |
| Income from operations                                              |       | 269                              |       | 1,808                           |       | 4,717 |   | 7,209 |   |
| Interest expense, net                                               |       | (2,176                           | )          | (2,164                          | )          | (6,582 | ) | (6,647 | ) |
| Income (loss) before income taxes                                   |       | (1,907                           | )          | (356                            | )          | (1,865 | ) | 562 |   |
| Income tax benefit                                                  |       | (560                             | )          | (153                            | )          | (591 | ) | (77 | ) |
| Income (loss) before equity in net earnings (losses)  of  SDI-Molan |       | (1,347                           | )          | (203                            | )          | (1,274 | ) | 639 |   |
| Equity in net earnings (losses) of SDI-Molan                        |       | 86                               |       | (355                            | )          | (455 | ) | (921 | ) |
| Net loss                                                            |       | $                                | (1,261     | )                               | $          | (558 | ) | $ | (1,729 | ) | $ | (282 | ) |

 

See accompanying notes to consolidated financial statements.

4

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**SPECIAL DEVICES, INCORPORATED AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFCASH FLOWS(Dollars in thousands)(Unaudited)**
| ** **                                                                       | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                       | ** ** | **August 1  2004**         | ** ** | **August 3  2003** | ** ** |
| ** **                                                                       | ** ** | **(as  restated)**              | ** ** | ** ** | ** ** |
| Cash Flows From  Operating Activities:                                           |       |                            |       |   |   |
| Net loss                                                                         |       | $                               | (1,729     | ) | $ | (282 | ) |
| Adjustments to reconcile  net loss to net cash provided by operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                    |       | 6,681                           |       | 6,965 |   |
| Equity in losses of SDI-Molan                                                    |       | 455                             |       | 921 |   |
| Compensation from stock  options                                                 |       | 353                             |       | — |   |
| Changes in assets  and liabilities:                                              |       |                            |       |   |   |
| Accounts receivable and other assets                                             |       | (506                            | )          | 1,045 |   |
| Inventories                                                                      |       | 798                             |       | (1,662 | ) |
| Net change in investment in and advances to SDI-Molan  and affiliates            |       | (703                            | )          | (1,129 | ) |
| Accounts payable and other liabilities                                           |       | (3,499                          | )          | (4,403 | ) |
| Other                                                                            |       | 23                              |       | 22 |   |
| Net cash provided by operating activities                                        |       | 1,873                           |       | 1,477 |   |
| Cash Flows From  Investing Activities:                                           |       |                            |       |   |   |
| Purchases of property, plant and equipment                                       |       | (2,879                          | )          | (4,831 | ) |
| Other                                                                            |       | 85                              |       | 25 |   |
| Net cash used in investing activities                                            |       | (2,794                          | )          | (4,806 | ) |
| Cash Flows From  Financing Activities:                                           |       |                            |       |   |   |
| Repayment of long-term debt                                                      |       | (750                            | )          | (1,024 | ) |
| Net cash used in financing activities                                            |       | (750                            | )          | (1,024 | ) |
| Net decrease in  cash and cash equivalents                                       |       | (1,671                          | )          | (4,353 | ) |
| Cash and cash  equivalents at beginning of year                                  |       | 3,925                           |       | 4,852 |   |
| Cash and cash  equivalents at end of period                                      |       | $                               | 2,254      |   | $ | 499 |   |
| Supplemental disclosure  of cash flow information:                               |       |                            |       |   |   |
| Cash paid during  the period for:                                                |       |                            |       |   |   |
| Interest                                                                         |       | $                               | 8,573      |   | $ | 8,683 |   |
| Income taxes                                                                     |       | 841                             |       | — |   |

 

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 highlyreliable precision engineered pyrotechnic devices. These devices are usedpredominantly in vehicle airbag and other automotive safety systems. TheCompany’s primary products are initiators, which function like an “electricalmatch” to ignite the gas generating charge in an automotive airbag system. TheCompany believes it is the world’s largest independent supplier of initiatorssold to leading domestic and foreign automotive airbag system manufacturers.Those manufacturers use SDI’s product in the assembly of integrated airbagsafety systems, which they then sell to automobile original equipmentmanufacturers.

The Company formed a joint venture partnership, SDI-MolanGmbH & Co. KG (“SDI-Molan”) in Germany in June 2001. The Company’s50% interest in SDI-Molan is held by SDI Germany GmbH (“SDI Germany”), a whollyowned German subsidiary. SDI Germany was established in 2001 for the purpose ofholding the interest in the joint venture. SDI-Molan’s business is thedevelopment, production, marketing, distribution and sale of air baginitiators, micro gas generators (“MGG”), and seat belt buckles and pyrotechnicpretensioners in Europe. SDI-Molan began operations in 2002 with its MGGproduction line. Commercial production commenced on its Global StandardInitiator (“GSI”) lines in 2004.

In June 2002, theCompany incorporated Special Devices Japan Kabushiki Kaisha (“SDI Japan”) inJapan and SDI Japan began operations as a sales office in 2003. The Companypreviously distributed its products in Japan through an agent. In November 2002,the Company formed Special Devices (Thailand) Co., Ltd (“SD Thailand”) inThailand. SD Thailand is leasing a production ready facility in Thailand andshipped qualifying products in the second half of 2003. Commercial productionis expected to scale up in 2005.

2. Restatement of Financial Statements

On May 10, 2004,  the Company entered into a separation  agreement with its former chief operatingofficer. The Company had been expensing the costs of the agreement over itsterm and had not accounted for the agreement as a deemed modification of the former chief operatingofficer’s vested and unexercised stock options. Under theterms of the separation agreement, the Company is obligated to pay the former chief operating officer a total of$392,000 through March 31, 2006. The former chief operating officer resigned as anexecutive officer of the Company as of May 10, 2004, but will remain on aleave of absence until March 31, 2005 and will serve as a consultant tothe Company from April 1, 2005 until March 31, 2006. In addition, the agreement provides that the Company willallow the former chief operatingofficer to extend the exercise period of his vested and unexercised stockoptions. After further review of theagreement in question, it was determined that the severance costs should havebeen accrued and compensation cost for a deemed modification of his stock options should have been recorded when theagreement was signed because the agreement did not require performance ofsubstantive services during its term.The adjustment to severance expense  of$336,000 and compensation expense related to the deemed modification of stock options of $353,000 have been reflected as an increase in Operatingexpense in the accompanying consolidated financial statements. The severanceaccrual has been included in current liabilities.

6

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**SPECIAL DEVICES, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

2.Restatement of Financial Statements(Continued)

The consolidated balance sheet at August 1, 2004 and the results of operations forthe three and nine months ended August 1, 2004 included in this quarterlyreport on Form 10-Q/A have been restated to reflect the transaction described above. Theimpact of the restatement was as follows:
| ** **                           | ** ** | **Three Months** | ** ** | **Nine Months** | ** ** |
|--------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                           | ** ** | **Ended**             | ** ** | **Ended**            | ** ** |
| ** **                           | ** ** | **August 1**     | ** ** | **August 1**    | ** ** |
| ** **                           | ** ** | **2004**              | ** ** | **2004**             | ** ** |
| ** **                           | ** ** | **(000 s)**      | ** ** | **(000 s)**     | ** ** |
| Operating expense:                   |       |                  |       |                 |       |   |   |   |   |
| As previously reported               |       |                  | $          | 3,554                |       |   |   | $ | 9,374 |   |   |
| Adjustment                           |       |                  | 689        |                 |       |   | 689 |   |   |
| As restated                          |       |                  | $          | 4,243                |       |   |   | $ | 10,063 |   |   |
| Income from operations:              |       |                  |       |                 |       |   |   |   |   |
| As previously reported               |       |                  | $          | 958                  |       |   |   | $ | 5,406 |   |   |
| Adjustment                           |       |                  | (689       | )                    |       |   | (689 | ) |   |
| As restated                          |       |                  | $          | 269                  |       |   |   | $ | 4,717 |   |   |
| Net loss:                            |       |                  |       |                 |       |   |   |   |   |
| As previously reported               |       |                  | $          | (700                 | )          |   |   | $ | (1,168 | ) |   |
| Adjustment                           |       |                  | (561       | )                    |       |   | (561 | ) |   |
| As restated                          |       |                  | $          | (1,261               | )          |   |   | $ | (1,729 | ) |   |
| Accrued liabilities:                 |       |                  |       |                 |       |   |   |   |   |
| As previously reported               |       |                  | $          | 6,836                |       |   |   |   |   |   |
| Adjustment                           |       |                  | 208        |                 |       |   |   |   |   |
| As restated                          |       |                  | $          | 7,044                |       |   |   |   |   |   |
| Additional paid in capital:          |       |                  |       |                 |       |   |   |   |   |
| As previously reported               |       |                  | $          | 59,227               |       |   |   |   |   |   |
| Adjustment                           |       |                  | 353        |                 |       |   |   |   |   |
| As restated                          |       |                  | $          | 59,580               |       |   |   |   |   |   |
| Retained earnings (deficit):         |       |                  |       |                 |       |   |   |   |   |
| As previously reported               |       |                  | $          | (134,361             | )          |   |   |   |   |   |
| Adjustment                           |       |                  | (561       | )                    |       |   |   |   |   |
| As restated                          |       |                  | $          | (134,922             | )          |   |   |   |   |   |
| Total stockholders equity (deficit): |       |                  |       |                 |       |   |   |   |   |
| As previously reported               |       |                  | $          | (75,109              | )          |   |   |   |   |   |
| Adjustment                           |       |                  | (208       | )                    |       |   |   |   |   |
| As restated                          |       |                  | $          | (75,317              | )          |   |   |   |   |   |

 

In addition, theconsolidated statement of cash flows for the nine months ended August 1,2004 has been restated to reflect the change in net loss and accruedliabilities as discussed above.

7

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**SPECIAL DEVICES, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

3.Interim Financial Statements

The accompanying unaudited interim consolidatedcondensed financial statements of the Company include all adjustments(consisting of normal recurring entries) which management believes arenecessary for a fair statement of the financial position and results ofoperations for the periods presented. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of America (“GAAP”)have been condensed or omitted. It is recommended that the accompanyingconsolidated condensed financial statements be read in conjunction with theCompany’s audited financial statements and footnotes as of and for the yearended November 2, 2003. Operating results for the three and nine monthperiods ended August 1, 2004 are not necessarily indicative of theoperating results for the full year.

The consolidated financial statements include theaccounts of the Company and its subsidiaries, SDI Germany, SDI Japan and SDThailand. All material intercompany accounts and transactions have beeneliminated. The Company accounts for its 50% ownership interest in SDI-Molanunder the equity method of accounting.

The Company followsFinancial Accounting Standards Board (“FASB”) Statement of Financial AccountingStandards (“SFAS”) No. 123, “Accounting for Stock-BasedCompensation,” which encourages, but does not require, companies to record ascompensation expense over the vesting period the fair value of all stock-basedawards on the date of grant. The Company adopted the disclosure requirements ofSFAS No. 148, “Accounting for Stock-Based Compensation—Transitionand Disclosure—an Amendment of SFAS No. 123” effective for the secondquarter of fiscal 2003.  At August 1,2004, the Company has two stock-based employee compensation plans. TheCompany accounts for those plans using the intrinsic value method prescribed inAccounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations. Accordingly, compensationexpense for stock options is measured as the excess, if any, of the estimate ofthe market value of the Company’s stock at the date of the grant over theamount an employee must pay to acquire the stock. Generally no stock-based employeecompensation cost is reflected in net income (loss), as all options grantedunder those plans had an exercise price equal to the estimated market value ofthe underlying common stock on the date of grant. The stock-based compensation expense for the threeand nine months ended August 4, 2004, relates to a deemed modification of stock options under the separationagreement with SDI’s formerchief operating officer as further discussed in Note 2.

Thefollowing table illustrates the effect on net loss if the Company had appliedthe fair value recognition provisions of SFAS No. 123 to stock-basedemployee compensation.
| ** **                                                                                                                                         | ** ** | **Three Months  Ended** | ** ** | **Nine Months  Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                         | ** ** | **August 1  2004**      | ** ** | **August 3  2003**     | ** ** | **August 1  2004** | ** ** | **August 3  2003** | ** ** |
| ** **                                                                                                                                         | ** ** | **(as  restated)**           | ** ** | ** **                  | ** ** | **(as  restated)** | ** ** | ** ** | ** ** |
| ** **                                                                                                                                         | ** ** | **(In thousands)**      | ** ** |
| Net loss, as  reported                                                                                                                             |       | $                            | (1,261     | )                           |       | $ | (558 | ) |   | $ | (1,729 | ) | $ | (282 | ) |
| Add: Stock-based  employee compensation expense included in net loss, net of related tax  effects                                             |       | 353                          |       |                        | —     |   |   | 353 |   | — |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value  based method for all awards, net of related tax effects |       | (700                         | )          |                        | (299       | ) |   | (1,362 | ) | (898 | ) |
| Pro forma net loss                                                                                                                                 |       | $                            | (1,608     | )                           |       | $ | (857 | ) |   | $ | (2,738 | ) | $ | (1,180 | ) |

 

8

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**SPECIAL DEVICES, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**4.Recent Accounting Pronouncements**

In May 2003, the FASB issued SFAS No. 150, “Accountingfor Certain Financial Instruments With Characteristics of both Liabilities andEquity”. The statement changes the accounting for certain financial instrumentsthat, under previous guidance, could be classified as equity or “mezzanine”equity, by now requiring those instruments to be classified as liabilities (orassets in some circumstances). The Company is required to adopt the provisionsof SFAS No. 150 for financial instruments entered into or modified after May 31,2003 and otherwise as of July 7, 2003, except for mandatorily redeemablefinancial instruments for which the adoption date is February 1, 2004. TheCompany’s “mezzanine” equity does not meet the requirements of this statementand, therefore, the Company’s adoption of this standard did not have a materialimpact on the Company’s consolidated financial statements.

In January 2003, theFASB issued Interpretation No. 46, “Consolidation of Variable InterestEntities” (“FIN 46”). This interpretation of Accounting Research Bulletin No. 51,“Consolidated Financial Statements,” addresses consolidation by business enterprisesof variable interest entities. Under current practice, two enterprisesgenerally have been included in consolidated financial statements because oneenterprise controls the other through voting interests. FIN 46 defines theconcept of “variable interests” and requires existing unconsolidated variableinterest entities to be consolidated by their primary beneficiaries if theentities do not effectively disperse risks among the parties involved. Theinterpretation may be applied prospectively with a cumulative-effectadjustment as of the date on which it is first applied or by restatingpreviously issued financial statements for one or more years with a cumulative-effectadjustment as of the beginning of the first year restated. In December 2003,the FASB issued FIN 46R, which among other things, revised the implementationdates applicable to a nonpublic entity such as SDI. The Company is required toimmediately apply FIN 46 and FIN 46R (“the Interpretation”) to any entity thatis subject to the Interpretation and that is created after December 31,2003. SDI is also required to apply the Interpretation to any entity subject tothe Interpretation that was created before December 31, 2003 by thebeginning of the first annual period beginning after December 15, 2004.The Company is currently evaluating the potential impact of the adoption of FIN46 and FIN 46R on the financial reporting of its interest in SDI-Molan.

**5.Inventories**

Inventoriesconsist of the following components:
| ** **                    | ** ** | **August 1  2004** | ** ** | **November 2  2003** | ** ** |
|-------------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                    | ** ** | **(In thousands)** | ** ** |
| Raw materials and  components |       |                    | $          | 2,681                     |       |   |   | $ | 2,074 |   |   |
| Work in process               |       |                    | 1,423      |                      |       |   | 1,236 |   |   |
| Finished goods                |       |                    | 1,744      |                      |       |   | 3,336 |   |   |
| Total inventories             |       |                    | $          | 5,848                     |       |   |   | $ | 6,646 |   |   |

 

**6.Investment in SDI-Molan**

The Company accounts for its 50% ownership interest inSDI-Molan under the equity method of accounting.

9

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**SPECIAL DEVICES, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**6.Investment in SDI-Molan (Continued)**

The investment inSDI-Molan consists of the following:
| ** **                                    | ** ** | **August 1  2004** | ** ** | **November 2  2003** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                                    | ** ** | **(In thousands)** | ** ** |
| Investment in SDI-Molan                       |       | $                       | 1,442      |                      |       | $ | 1,431 |   |   |
| Advances and  notes receivable                |       | 3,645                   |       |                      | 2,765      |   |   |
|                                          |       | 5,087                   |       |                      | 4,196      |   |   |
| Less prior years  losses                      |       | (1,570                  | )          |                      | (176       | ) |   |
| Less current year  loss                       |       | (455                    | )          |                      | (1,394     | ) |   |
| Net investment in and  advances to affiliates |       | $                       | 3,062      |                      |       | $ | 2,626 |   |   |

 

Summarizedfinancial information for SDI-Molan is as follows:
| ** **                     | ** ** | **For The Three  Months Ended** | ** ** | **For The Nine  Months Ended** | ** ** |
|--------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                     | ** ** | **August 1  2004**                        | ** ** | **August 3  2003**                       | ** ** | **August 1  2004** | ** ** | **August 3  2003** | ** ** |
| ** **                     | ** ** | **(In thousands)**                        | ** ** |
| Statement of  Operations:      |       |                                           |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                      |       |                                           | $          | 3,663                                         |       |   |   | $ | 986 |   |   |   | $ | 7,688 |   |   | $ | 1,451 |   |
| Gross profit  (loss)           |       |                                           | 776        |                                          |       |   | 2 |   |   |   | 1,055 |   |   | (347 | ) |
| Income (loss)  from operations |       |                                           | 358        |                                          |       |   | (472 | ) |   |   | (496 | ) |   | (1,381 | ) |
| Net income (loss)              |       |                                           | 171        |                                          |       |   | (709 | ) |   |   | (911 | ) |   | (1,842 | ) |
|                                |            |                                                |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Company made two working capital loans toSDI-Molan each in the amount of 0.8 million Euro in October 2003 andin August 2002 or approximately $1.8 million in total at August 1,2004. The loans are denominated in Euros and carry an interest rate of primeplus 2.5% per annum with interest due monthly and principal due in 2006 and2008, respectively. The Company also made a short term loan of$0.3 million in June 2004 which was repayable in full by August 2004.At August 1, 2004, $0.1 million was outstanding. In addition, theCompany has a receivable for expenses from SDI-Molan in the amount of$0.8 million at August 1, 2004. In October 2003, the Companyalso made a loan to its partners in SDI-Molan in the amount of 0.8 millionEuro or approximately $0.9 million at August 1, 2004. The loancarries an interest rate of prime plus 2.5% per annum with principal andinterest due in Euros at maturity in 2006.

The Company has guaranteedbank loans made to SDI-Molan under agreements entered into in August 2002concurrent with the commencement of operations. SDI-Molan had bank loansoutstanding in the amount of 3.6 million Euro or approximately$4.3 million at August 1, 2004. The Company’s guarantee is limited tofifty percent of the loans outstanding and is subject to a maximum of3.2 million Euro or approximately $3.8 million at August 1,2004.

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**SPECIAL DEVICES, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**7.Accrued Liabilities**

Accruedliabilities consist of the following components:
| ** **                     | ** ** | **August 1  2004** | ** ** | **November 2  2003** | ** ** |
|--------------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                     | ** ** | **(as  restated)**      | ** ** | ** **                | ** ** |
| ** **                     | ** ** | **(In thousands)** | ** ** |
| Accrued interest               |       |                    | $          | 1,127                     |       |   |   | $ | 3,221 |   |   |
| Accrued  environmental expense |       |                    | 896        |                      |       |   | 852 |   |   |
| Accrued bonuses                |       |                    | 500        |                      |       |   | 1,175 |   |   |
| Other                          |       |                    | 4,521      |                      |       |   | 5,201 |   |   |
| Total accrued  liabilities     |       |                    | $          | 7,044                     |       |   |   | $ | 10,449 |   |   |

 

In May 2004, the Companyreached a separation agreement with its former chief operating officer as further discussed in Note 2 which resulted in an accrual for severance ofapproximately $0.4 million which was charged to operatingexpense for the three and nine months ended August 1, 2004.

**8.Long-Term Debt**

Long-termdebt consists of the following components:
| ** **                 | ** ** | **August 1  2004** | ** ** | **November 2  2003** | ** ** |
|----------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                 | ** ** | **(In thousands)** | ** ** |
| Term loan                  |       | $                       | 1,951      |                      |       | $ | 2,701 |   |   |
| Senior subordinated  notes |       | 73,594                  |       |                      | 73,594     |   |   |
|                       |       | 75,545                  |       |                      | 76,295     |   |   |
| Less current  portion      |       | (750                    | )          |                      | (750       | ) |   |
| Long-term debt             |       | $                       | 74,795     |                      |       | $ | 75,545 |   |   |

 

The Company entered into a credit facility (the “CreditFacility”) in June 2001 which consists of a $25.0 million five-yearRevolving Credit Facility (the “Revolver”) and a $5.0 million five-yearTerm Loan (the “Term Loan”). Available borrowings under the Revolver are basedon a formula comprised of eligible accounts receivable and inventory. The Revolver requires lockboxarrangements that provide for all receiptsto be swept daily to reduce borrowings outstanding. The agreement governing theCredit Facility contains customary covenants, including restrictions on theincurrence of debt, the sale of assets, mergers, acquisitions and otherbusiness combinations, voluntary prepayment of other debt, transactions withaffiliates, repurchase or redemption of equity securities, and financialcovenants on tangible net worth. The Revolver and the Term Loan bear interestat the Bank’s Base Rate or the LIBOR Rate plus applicable margins. The Companyhas the option of electing the LIBOR Rate on all or a portion of the amountoutstanding under the Credit Facility prior to the start of each quarterlyinterest period. On July 30, 2004, the Company elected the LIBOR Rateoption for $2.0 million of the Term Loan for a contract term and rate of3 months and 4.18% per annum, respectively. At August 1, 2004, therewere no borrowings outstanding under the Revolver. Letters of creditoutstanding and applied for under the Revolver reduce the amount of borrowingsavailable. The Company had $1.8 million in letters of credit outstandingat August 1, 2004. The total amount available under the Revolver atAugust 1, 2004 was $10.8 million subject to compliance with certainfinancial and operating covenants which the Company must meet on a quarterlybasis. The Company 

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**SPECIAL DEVICES, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**8.Long-Term Debt (Continued)**

wasin compliance with these covenants as of August 1, 2004. Substantially allof the Company’s assets are pledged as collateral under the Credit Facility.

Thefollowing are the fair value and carrying amounts of long-term debt, includingcurrent portion:
| ** **      | ** ** | **August 1  2004** | ** ** | **November 2  2003** | ** ** |
|-----------------|------------|-------------------------|------------|---------------------------|------------|
| ** **      | ** ** | **(In thousands)** | ** ** |
| Fair value      |       | $                       | 72,969     |                      |       | $ | 69,120 |   |   |
| Carrying amount |       | 75,545                  |       |                      | 76,295     |   |   |
|                 |            |                         |            |                           |            |  |  |  |  |

 

The Company’s borrowingsunder its Term Loan and Revolver have variable rates that reflect currentlyavailable terms and conditions for similar debt. The carrying amount of thisdebt is a reasonable estimate of its fair value. The Senior Subordinated Notes(the “Notes”) issued in 1999 bearing interest at 113¤8% per annumare traded occasionally in public markets.

**9.Income Taxes**

The effective tax benefitrate is lower than the statutory tax rate primarily as a result of thevaluation allowance provided against the deferred tax asset arising from theCompany’s share of losses, under the equity method of accounting, from itsinvestment in SDI-Molan.

**10.Recapitalization Transaction**

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

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**SPECIAL DEVICES, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**10.Recapitalization Transaction (Continued)**

In connection with theRecapitalization all shares of the Company’s Common Stock, other than thoseretained by certain members of management and certain other stockholders (the “ContinuingStockholders”), were converted into the right to receive $34 per share in cash.At the time of the Recapitalization, the Continuing Stockholders retainedapproximately 41.3% of the common equity of the Company while new investorsacquired the balance of the equity interests in the Company. At August 1,2004, the Continuing Stockholders owned approximately 29.5% of the commonequity of the Company. The following table shows the effect theRecapitalization had on stockholders’ equity (deficit) in 1999 (dollars inthousands):
| ** **                                       | ** ** | **Common Stock** | ** ** | ** Additional   Paid-in** | ** ** | **Retained  Earnings** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|-------------------------------------|------------|------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **Shares**            | ** ** | **Amount**                          | ** ** | **Capital**            | ** ** | **(Deficit)**                         | ** ** | **(Deficit)** | ** ** |
| Balances, October  31, 1998                      |       | 7,809,801             |       |                                | $          | 78                     |       |                                  |       | $ | 51,364 |   |   | $ | 45,838 |   |   | $ | 97,280 |   |   |
| Record  recapitalization transaction             |       | (3,367,618            | )          |                                | (41        | )                      |       |                                  | 22,562     |   |   | (163,727 | ) |   | (141,206 | ) |   |
| Record redeemable  common stock                  |       | (735,294              | )          |                                | (7         | )                      |       |                                  | —     |   |   | (24,993 | ) |   | (25,000 | ) |   |
| Contributed  assets                              |       | —                |       |                                | —     |                   |       |                                  | 3,286      |   |   | — |   |   | 3,286 |   |   |
| Accreted put  premium on redeemable common stock |       | —                |       |                                | —     |                   |       |                                  | (2,625     | ) |   | — |   |   | (2,625 | ) |   |
| Net loss                                         |       | —                |       |                                | —     |                   |       |                                  | —     |   |   | (20,266 | ) |   | (20,266 | ) |   |
| Balances, October 31,  1999                      |       | 3,706,889             |       |                                | $          | 30                     |       |                                  |       | $ | 74,587 |   |   | $ | (163,148 | ) |   | $ | (88,531 | ) |   |

 

**11.Commitments and Contingencies**

*DefenseCriminal Investigative Service Investigation.**  *The Company’s former AerospaceDivision remains the subject of an investigation commenced in 1999 by theDefense Criminal Investigative Serviceof the Office of the Inspector General, U.S. Department of Defense, intoallegations that SDI deviated from contractual requirements relating to the useof organic sealants. The Company responded to a subpoena in 1999, and has metwith the government regarding the status of the investigation. The governmentinitially indicated that it no longer was focusing on the organic sealantissue, but believed SDI may have deviated from contractual requirementsregarding other organic epoxy. The Company disputed the government’sinterpretation of the contracts as precluding the use of the epoxy in questionand submitted an expert report to that effect. The government responded byreasserting the sealant issue, this time asserting that the sealant may haveinhibited the curing of the epoxy, an allegation not previously raised. TheCompany is responding to the latest allegation but has preliminarily concludedthat certain assumptions underlying the allegation as presented are erroneous.One potential consequence of civil proceedings, if filed, is the possibilitythat the Company would be suspended from future military and federal governmentsales, and if found liable, debarred from such sales for a period of time. Thiswould not be expected to materially affect the Company’s financial condition,results of operations or liquidity given the divestiture of the AerospaceDivision, which was completed in 2001. It could, however, affect the Company’sability to reenter the aerospace market. At this point, it is not possible topredict or assess the likelihood of an unfavorable outcome or predict theamount of potential liabilities.

*QuiTam Suit.**  *OnJuly 28, 2004, the Company entered into a Stipulation Re Dismissal in thecivil action entitled *United States ex rel.Charles K. Holder v. Special Devices, Incorporated* pending in theU.S. District Court for the Central District of California. The action, filedunder seal in August 1999 and first served on 

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**SPECIAL DEVICES, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**11.Commitments and Contingencies (Continued)**

SDI in December 2001, was a *qui tam* lawsuit in which a former employeeof SDI sought, on behalf of the United States, an unspecified amount of moneydamages and civil penalties under the federal False Claims Act. Pursuant to theStipulation, on July 30, 2004 the lawsuit was dismissed with prejudicewith respect to the relator and without prejudice with respect to the federalgovernment. Concurrently, the parties entered  intoa Settlement Agreement pursuant to which the relator released all claims againstSDI in exchange for payment by SDI in the amount of $412,500. The settlementwas recognized as an operating expense in the quarter ended August 1,2004.

*SelleckSuit.**  *TheCompany is a defendant in a civil action entitled *Daniel F. Selleck v. Special Devices, Incorporated* pendingin the Superior Court of the State of California for the County of Ventura. Acomplaint, served in September 2002, alleged breach of contract, fraud anddeceit, negligent misrepresentation, and injunctive and declaratory relief, andseeks damages in excess of $1 million relating to the Plaintiff’s purchasefrom the Company of certain real estate located in Moorpark, California. Anamended complaint served in January 2003 withdrew the allegations of fraudand deceit and the claim for injunctive relief, and added allegations ofnegligent interference with prospective economic advantage. SDI alsosuccessfully challenged the negligent interference claim, which was withdrawnin a further amended complaint filed in July 2003. The Company isvigorously defending the action. At this stage, it is not possible to evaluatethe likelihood of an unfavorable outcome or estimate the range of potential loss,if any.

*Newhall Property.**  *The Company learned inMay 2003 that it held record title to approximately 156 acres in Newhall,California, including the property on which it conducted its operations priorto relocating to Moorpark in 1999. It had been management’s understanding thattitle to the property was held by an entity affiliated with the Company’sformer owner, from which the Company leased the property from 1978 until 1999.The Company investigated the status of ownership of the property and thepotential effects, if any, of such status on the Company and its financialstatements. As a result of its investigation, the Company has transferred titleto the property to its former landlord, in exchange for its agreement to paycertain expenses related to the investigation, and has concluded that thetransaction will not have a material adverse impact on the Company and itsfinancial statements.

**12.Subsequent Event**

In late August 2004, the Company reached a decision toreduce its U.S. workforce by approximately 20%. The reductions are expected tobe completed by the end of the first quarter of 2005. The action is the resultof improvements to SDI’s manufacturing productivity and is designed to reducecosts and improve the Company’s profitability during 2005. One-timetermination benefits of severance and health insurance of approximately$0.4 million are expected to be accrued in the fourth quarter of fiscal2004 and paid during the first quarter of fiscal 2005.

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**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

Our business and earnings are sensitive to generalbusiness and economic conditions. These conditions include automotive vehiclesales, short-term interest rates and consumer confidence levels about theeconomy. If any of these conditions worsen, our business and earnings could beadversely affected. For example, if consumer confidence erodes and short terminterest rates rise to a point where purchases of automobiles are deferred, ourproduction of initiators, our principal revenue producing product, would beadversely affected. We are subject to price pressure from our customers whichreduces our revenues through lower standard unit pricing. We also are affectedby the trend towards increased unit sales of lower priced standard products asreplacements for higher priced legacy leadwireproducts. Leadwire products differ from standard products in that SDI adds alength 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-addedproduct from a standard product. The retail automotive market remains verycompetitive as the OEMs compete for market share. Automobile manufacturerscontinue to offer an array of incentives in an effort to sustain sales. Inrecent years, our automotive sales volume has been subject to the outcome ofvarious make-or-buy decisions from a major customer who has thecapability to manufacture select initiator products. We expect this trend tocontinue in the future. While we have been able to offset these decreases involume with gains from other customers, there can be no assurance that we can continueto do so in the future.

Following the expiration of certain noncompeteagreements in select aerospace and military market segments, we have beendeveloping internal capabilities to reenter these markets. During the thirdquarter we began bidding on contracts in these markets. We expect to continueto pursue opportunities in this business.

We have been working on test units of a new productline called electronic ignition modules (“EIMs”)that will be sold to commercial mining and blasting customers worldwide. Theinitial shipments to customers are expected in 2005.

The following discussionand analysis should be read in conjunction with our consolidated financialstatements and the related notes thereto included elsewhere in this report.

**Results of Operations**

On May 10, 2004, we entered into a separationagreement with our former chief operating officer. We had been expensing thecosts of the agreement over its term and had not accounted for the agreement as adeemed modification of the former chief operating officer’s vested andunexercised stock options. Underthe terms of the separation agreement, we are obligated to pay the former chief operating officer a total of$392,000 through March 31, 2006. The former chief operating officer resigned as anexecutive officer of SDI as of May 10, 2004, but will remain on leave ofabsence until March 31, 2005 and will serve as a consultant to SDI fromApril 1, 2005 until March 31, 2006. In addition, theagreement provides that we will allow the former chief operating officer to extend the exerciseperiod of his vested and unexercised stock options. After further review of theagreement in question, it was determined that the severance costs should havebeen accrued and the compensation cost for a deemed modification of his stockoptions should have been recorded when the agreement was signed because theagreement did not require performance of substantive services during its term. See further discussion in Note 2 to theconsolidated financial statements. The results of operations for the three andnine months ended August 1, 2004 discussed herein have been updated to reflectthis restatement.

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Thefollowing table is derived from our Consolidated Statements of Operations andsets forth, for the periods indicated, certain statement of operations data asa percentage of net sales.
| ** **             | ** ** | **Three Months  Ended** | ** ** | **Nine Months  Ended** | ** ** |
|------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **             | ** ** | **August 1  2004**      | ** ** | **August 3  2003**     | ** ** | **August 1  2004** | ** ** | **August 3  2003** | ** ** |
| ** **             | ** ** | **(as  restated)**           | ** ** | ** **                  | ** ** | **(as  restated)** | ** ** | ** ** | ** ** |
| Net sales              |       |                         | 100.0      | %                           |       |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| Cost of sales          |       |                         | 82.2       | %                           |       |   | 80.9 | % |   |   | 81.4 | % |   |   | 81.0 | % |   |
| Gross profit           |       |                         | 17.8       | %                           |       |   | 19.1 | % |   |   | 18.6 | % |   |   | 19.0 | % |   |
| Operating  expenses    |       |                         | 16.8       | %                           |       |   | 12.4 | % |   |   | 12.7 | % |   |   | 10.3 | % |   |
| Income from operations |       |                         | 1.0        | %                           |       |   | 6.7 | % |   |   | 5.9 | % |   |   | 8.7 | % |   |

 

**Comparisonof the Three Months Ended August 1, 2004 to the Three Months Ended August 3,2003**

***Net Sales***

Consolidated net sales forthe third quarter of 2004 were $25.3 million, compared to consolidated netsales of $27.0 million for the third quarter of 2003. The decrease in netsales was primarily due to lower unit prices and a decrease in shipments ofhigh value-added leadwire products. Also, one of our European customerssubstituted an SDI-Molan product for a product manufactured by SDI in theU.S., which reduced SDI’s consolidated net sales during the third quarter of2004. SDI-Molan is accounted for on the equity method of accounting andtherefore its sales of $3.7 million and $1.0 million in the thirdquarter of 2004 and 2003, respectively, are not included in consolidated netsales.

***Gross Profit***

Consolidated gross profitfor the third quarter of 2004 was $4.5 million or 17.8% of consolidatednet sales, compared to consolidated gross profit of $5.2 million or 19.1%of consolidated net sales for the third quarter of 2003. The decrease in grossprofit was due to lower unit prices for standard products as well as reducedshipment levels of high value-added leadwireproducts.

***Operating Expenses***

Consolidated operatingexpenses for the third quarter of 2004 were $4.2 million or 16.8% of consolidated net sales,compared with consolidated operating expenses of $3.3 million or 12.4% ofconsolidated net sales for the third quarter of 2003. The increase in 2004 wasprimarily due to the settlement of the Qui Tam suit and severance and  compensation expenses for the former chief operatingofficer duringthe third quarter of 2004.

***Equity in Net Earnings (Losses) of SDI-Molan***

Our share of the income ofSDI-Molan was $0.1 million for the third quarter of 2004 compared with aloss of $0.4 million for the third quarter of 2003. SDI-Molan, our jointventure in Germany, commenced commercial production of Global StandardInitiators (“GSI”) in 2004. During the third quarter of 2004, SDI-Molanshipped GSI to one of our European customers in substitution for a U.S.manufactured product. The increase in shipments led to a profit for the thirdquarter of 2004.

**Comparisonof the Nine Months Ended August 1, 2004 to the Nine Months Ended August 3,2003**

***Net Sales***

Consolidated net sales forthe first nine months of 2004 were $79.4 million, compared to consolidatednet sales of $82.8 million for the first nine months of 2003. The decreasein net sales was primarily due to lower 

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unit prices and a decreasein shipments of high value-added leadwire products. Also, one of ourEuropean customers substituted an SDI-Molan product for a productmanufactured by SDI in the U.S., which reduced SDI’s consolidated net sales in2004. SDI-Molan is accounted for on the equity method of accounting andtherefore its sales of $7.7 million and $1.5 million for the ninemonths ended August 1, 2004 and August 3, 2003, respectively, are notincluded in consolidated net sales.

***Gross Profit***

Consolidated gross profitfor the first nine months of 2004 was $14.8 million or 18.6% ofconsolidated net sales, compared to consolidated gross profit of$15.7 million or 19.0% of consolidated net sales for the first nine monthsof 2003. The decrease in gross profit was due to lower unit prices and adecrease in shipments of high value-added leadwire products.

***Operating Expenses***

Consolidated operatingexpenses for the first nine months of 2004 were $10.1 millionor 12.7% of consolidated net sales,compared with consolidated operating expenses of $8.5 million or 10.3% ofconsolidated net sales for the first nine months of 2003. The increase in 2004was due to increased legal expenses and the settlement of the Qui Tam suit and severance and  compensation expenses for the former chief operatingofficer duringthe third quarter of 2004.

***Equity in Net Earnings (Losses) of SDI-Molan***

Our share of the losses ofSDI-Molan was $0.5 million for the first nine months of 2004 compared with$0.9 million for the first nine months of 2003. SDI-Molan, our jointventure in Germany, commenced commercial production of GSI in 2004. During thethird quarter of 2004, SDI-Molan shipped GSI to one of our Europeancustomers in substitution for a U.S. manufactured product. We expect to reducethe loss in 2004 as shipments to customers increase. However, increasedcustomer shipments may be sensitive to the Euro/U.S. dollar exchange rate andproduction start-up issues.

**Liquidity and Capital Resources**

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

We entered into a credit facility (the “CreditFacility”) in June 2001 which consists of a $25.0 million RevolvingCredit Facility (the “Revolver”) and a $5.0 million five-year Term Loan (the“Term Loan”). Available borrowings under the Revolver are based on a formulacomprised of our eligible accounts receivable and inventory. The Revolver requires lockboxarrangements that provide for all receipts to be swept daily to reduceborrowings outstanding.

The agreement governing the Credit Facility containscustomary covenants, including restrictions on the incurrence of debt, the saleof assets, mergers, acquisitions and other business combinations, voluntaryprepayment of other debt, transactions with affiliates, repurchase orredemption of equity securities, and financial covenants on tangible net worth.Substantially all of our assets are pledged as collateral under the CreditFacility.

On July 30, 2004, we elected the LIBOR Rateoption on $2.0 million of the Term Loan for a contract term and rate of3 months and 4.187% per annum, respectively. As of August 1, 2004, wehad no borrowings and had $1.8 million in letters of credit outstandingunder the Revolver. The total amount available under the Revolver at August 1,2004 was $10.8 million subject to compliance with certain financial andoperating covenants which we must meet on a quarterly basis. As of August 1,2004, we were in compliance with all such covenants.

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Operating activities provided cash of$1.9 million and $1.5 million in the nine months ended August 1,2004 and August 3, 2003, respectively. Capital expenditures, primarily formanufacturing equipment, were $2.9 million in the nine months ended August 1,2004 compared to $4.8 million in the nine months ended August 3,2003. We expect to spend a total of approximately $4.0 to $5.0 million oncapital expenditures, primarily for manufacturing equipment, during 2004. Wewill make the next semi-annual interest payment of $4.2 million on ourNotes in December 2004. We have made or expect to make the aforementionedpayments with cash from operations and borrowings under the Revolver.

As of August 1, 2004,we had net liabilities of $29.8 million. Our ability to pay the intereston, or to refinance our debt, or to fund planned capital expenditures, willdepend on generating cash flow from future operations. We have had positivecash flow from continuing operations during the past two years ended November 2,2003.

**Off-Balance Sheet Arrangements**

We have guaranteed bankloans made to SDI-Molan, our German joint venture, under agreements enteredinto in August 2002 concurrent with the commencement of operations.SDI-Molan had bank loans outstanding in the amount of 3.6 million Euro or$4.3 million at August 1, 2004. Our guarantee is limited to fiftypercent of the loans outstanding and is subject to a maximum of3.2 million Euro or approximately $3.8 million at August 1,2004. See Note 5 to the Consolidated Financial Statements.

**Critical Accounting Policies**

The preparation of theconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect amounts reported therein, including thefinancial information reported in Management’s Discussion and Analysis ofFinancial Condition and Results of Operations. Estimates are based onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent form other sources. Actual results reported in futureperiods may be based upon amounts that differ from those estimates. Thefollowing represent what we believe are the critical accounting policies mostaffected by significant management estimates and judgments:

***Allowance for Doubtful Accounts***

We continuously monitorcollections and payments from our customers and maintain a provision forestimated credit losses based upon our historical experience and any specificcustomer collection issues that have been identified. Accounts receivable arereported net of the allowance for amounts that may become uncollectible in thefuture. Such allowances can be either specific to a particular customer orgeneral to all customers. The Company believes the level of the allowance forbad debts is reasonable based on past experience. However, the credit loss ratecan be impacted by adverse changes in the automotive industry, or changes inthe liquidity or financial position of our customers which would affect thecollectability of our accounts receivable and our future operating results. Ifcredit losses exceed established allowances, our results of operations andfinancial condition may be adversely affected.

***Inventory Reserves***

We review our inventoryfor specific usage and future utility. Estimates for impairment of inventoryare recorded as reserves to reduce the items to the lower of cost or market.

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***Contingencies***

We account forcontingencies in accordance with Statement of Financial Accounting Standards (“SFAS”)No. 5, “Accounting for Contingencies.” SFAS No. 5 requires that werecord an estimated loss from a loss contingency when information availableprior to issuance of our financial statements indicates that it is probablethat an asset has been impaired or a liability has been incurred at the date ofthe financial statements and the amount of the loss can be reasonablyestimated. Accounting for contingencies such as legal matters requiressignificant judgment. Many of these legal matters can take years to resolve.Generally, as the time period increases over which the uncertainties areresolved, the likelihood of changes to the estimate of the ultimate outcomeincreases. Management believes that the accruals for loss contingencies areadequate.

***Environmental Expenditures***

Environmental expendituresthat relate to current operations are expensed or capitalized as appropriate.Expenditures that relate to an existing condition caused by past operations,and which do not contribute to current or future revenue generation areexpensed. Liabilities are recorded when environmental assessments and/orremedial efforts are probable and the costs can be estimated. Environmentalliabilities are not discounted to their present value and are recorded withoutconsideration of potential recoveries from third parties. Subsequentadjustments to estimates, which may be significant, may be made as moreinformation becomes available or as circumstances change.

***Revenue Recognition***

We manufacture products tocustomer specifications under standard purchase orders. Sales are primarilyrecognized when products are shipped.

***Income Taxes***

Deferred income taxes aredetermined using the liability method. A deferred tax asset or liability isdetermined based on the difference between the financial statement and taxbasis of assets and liabilities as measured by the enacted tax rates that willbe in effect when these differences reverse. Deferred tax expense is the resultof changes in the deferred tax asset or liability. If necessary, valuationallowances are established to reduce deferred tax assets to their expectedrealizable values.

**Accounting Developments**

In May 2003, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) No. 150, “Accounting for CertainFinancial Instruments With Characteristics of both Liabilities and Equity”. Thestatement changes the accounting for certain financial instruments that, underprevious guidance, could be classified as equity or “mezzanine” equity, by nowrequiring those instruments to be classified as liabilities (or assets in somecircumstances). We were required to adopt the provisions of SFAS No. 150for financial instruments entered into or modified after May 31, 2003 andotherwise as of July 7, 2003, except for mandatorily redeemable financialinstruments for which the adoption date is February 1, 2004. Our “mezzanine”equity does not meet the requirements of this statement and, therefore, ouradoption of this standard did not have a material impact on the ourconsolidated financial statements.

In January 2003, theFASB issued Interpretation No. 46, “Consolidation of Variable InterestEntities” (“FIN 46”). This interpretation of Accounting Research BulletinNo. 51, “Consolidated Financial Statements,” addresses consolidation bybusiness enterprises of variable interest entities. Under current practice, twoenterprises generally have been included in consolidated financial statementsbecause one enterprise controls the other through voting interests. FIN 46defines the concept of “variable interests” and requires existingunconsolidated variable interest entities to be consolidated by their primary 

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beneficiaries if theentities do not effectively disperse risks among the parties involved. Theinterpretation may be applied prospectively with a cumulative-effectadjustment as of the date on which it is first applied or by restatingpreviously issued financial statements for one or more years with a cumulative-effectadjustment as of the beginning of the first year restated. InDecember 2003, the FASB issued FIN 46R, which among other things, revisedthe implementation dates applicable to a nonpublic entity such as SDI. We arerequired to immediately apply FIN 46 and FIN 46R (“the Interpretation”) to anyentity that is subject to the Interpretation and that is created afterDecember 31, 2003. SDI is also required to apply the Interpretation to anyentity subject to the Interpretation that was created before December 31,2003 by the beginning of the first annual period beginning afterDecember 15, 2004. We are currently evaluating the potential impact of theadoption of FIN 46 and FIN 46R on the financial reporting of our interest inSDI-Molan.

**Subsequent Event**

In late August 2004, wereached a decision to reduce our U.S. workforce by approximately 20%. Thereductions are expected to be completed by the end of the first quarter of2005. The action is the result of improvements to our manufacturingproductivity and is designed to reduce costs and improve our profitabilityduring 2005. One-time termination benefits of severance and healthinsurance of approximately $0.4 million are expected to be accrued in the fourthquarter of fiscal 2004 and paid during the first quarter of fiscal 2005.

**Forward-Looking Information**

The Management’sDiscussion and Analysis of Financial Condition and Results of Operationssection in this report on Form 10-Q contains certain forward-lookingstatements and information within the meaning of the Private Litigation ReformAct of 1995. These forward-looking statements and the informationrelating to our business are based on the beliefs of management as well asassumptions made by and information currently available to management. Thewords “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,”and similar expressions, as they relate to our operations, are intended toidentify forward-looking statements. Such statements reflect our currentviews with respect to future events and are subject to certain risks,uncertainties and assumptions that could cause actual results to differmaterially from those expressed in any forward-looking statement. Shouldone or more of these risks or uncertainties materialize, or should underlyingassumptions prove incorrect, actual results may vary materially from thosedescribed herein as anticipated, believed, estimated or expected. We do notintend to update these forward-looking statements.

**ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

We have only limited involvement in derivativefinancial instruments and do not hold or issue them for trading purposes. Weare exposed to market risk related to changes in foreign exchange rates ontransactions denominated in foreign currencies and we selectively use foreigncurrency forward exchange contracts to manage those risks. At August 1,2004 we had no open contracts. Certain amounts borrowed under our CreditFacility are at variable rates and we are thus subject to market risk resultingfrom interest rate fluctuations. A change of 1% in the interest rates on theseborrowings would have no material impact on our financial position, results ofoperations or liquidity.

We also are exposed tomarket risks related to fluctuations in interest rates on the Notes we issuedin December 1998. For fixed rate debt such as the Notes, changes ininterest 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.

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****

ITEM 4.CONTROLS AND PROCEDURES

SDI maintains disclosure controls and procedures. Thesedisclosure controls and procedures are designed to enable management to reach areasonable level of assurance that information required to be disclosed by usin the reports that we file or submit under the Securities Exchange Act of 1934is recorded, processed, summarized and reported within the time periodspecified in the Securities and Exchange Commission’s rules and forms.

At the time of the preparation and filing of ourQuarterly Report on Form 10-Q for the quarter ended August 1,2004, an evaluation was carried out under the supervision and with theparticipation of our management, including our principal executive officer andprincipal financial officer, to determine the effectiveness of our disclosurecontrols and procedures. Based on that evaluation, the principal executiveofficer and principal financial officer concluded as of August 1, 2004that our disclosure controls and procedures were effective in reaching areasonable level of assurance that information required to be disclosed by usin the reports that we file or submit under the Securities Exchange Act of 1934was recorded, processed, summarized and reported within the time periodspecified in the Securities and Exchange Commission’s rules and forms.

During the quarter ended August 1, 2004, therehas not occurred any change in our internal control over financial reporting (“InternalControl”) as defined in Exchange Act Rule 13a-15(f), that hasmaterially affected, or is reasonably likely to materially affect, our InternalControl, except as discussed below.

Since the filing of the Form 10-Q on September 15,2004,  we determined that a materialweakness existed in our disclosure controls and procedures and Internal Controlbecause certain errors were made in accounting for the separationagreement we entered into during that quarter with our former chief operatingofficer. Those errors, which resulted in the restatement of our financialstatements for the quarter ended August 1, 2004, related to the timing ofthe recognition of severance expense and recognition of compensation expensefor a deemed modification of stock options as further discussed in Note 2 tothe Consolidated Financial Statements included in this Form 10-Q/A. Accordingly,the principal executive officer and principal financial officer have concludedthat our disclosure controls and procedures were not effective as of August 1,2004.

In response to the identified weakness, we havetaken steps to strengthen our disclosure controls and procedures and ourInternal Control to prevent the recurrence of the circumstances that resultedin our determination to restate our financial statements. To correct theidentified weakness in our disclosure controls and procedures and our InternalControl, we have instituted procedures requiring that separation agreements bereviewed and a formal assessment be prepared with respect to the accountingtreatment required under generally accepted accounting principles and that suchassessment be subject to an additional level of review.

A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within SDI have been detected. Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.

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**PART II—OTHER INFORMATION**

**ITEM 1. LEGAL PROCEEDINGS**

*QuiTam Suit.**  *OnJuly 28, 2004, we entered into a Stipulation Re Dismissal in the civilaction entitled *United States ex rel.Charles K. Holder v. Special Devices, Incorporated* pending in theU.S. District Court for the Central District of California. The action, filedunder seal in August 1999 and first served on SDI in December 2001,was a *qui tam* lawsuit in which aformer employee of SDI sought, on behalf of the United States, an unspecifiedamount of money damages and civil penalties under the federal False Claims Act.Pursuant to the Stipulation, on July 30, 2004 the lawsuit was dismissedwith prejudice with respect to the relator and without prejudice with respectto the federal government. Concurrently, the parties entered into a SettlementAgreement pursuant to which the relator released all claims against SDI inexchange for payment by SDI in the amount of $412,500.

For other legalproceedings, see Note 11 to the Consolidated FinancialStatements and our Annual Report on Form 10-K for the year ended November 2,2003.

**ITEM 2 THROUGH** 5

Omitted as not applicable.

**ITEM 6. EXHIBITS**

****
| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                 | ** ** | **Description** | ** ** | ** ** |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|
| 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.                                                                                                          |

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| 10.8(g)  |   | Subscription Agreement, dated as of  September 7, 1998, among the Company, Paribas Principal Incorporated  (now known as BNP 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.                                                                                     |
| 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 (now  known as Wells Fargo Foothill, Inc.).                                                                                                                                                                       |
| 10.44(n) |   | Amended and Restated 1999 Stock Option Plan of the  Company.                                                                                                                                                                                                                                                                            |
| 10.45(p) |   | Letter Agreement between the Company and Wells Fargo  Foothill, Inc. dated July 17, 2002.                                                                                                                                                                                                                                     |
| 10.46(p) |   | Letter Agreement between the Company and Wells Fargo  Foothill, Inc. dated October 23, 2002.                                                                                                                                                                                                                                  |
| 10.47(p) |   | Letter Agreement between the Company and Wells Fargo  Foothill, Inc. dated March 28, 2003.                                                                                                                                                                                                                                    |
| 10.48(p) |   | Consent and First Amendment to Loan Documents  between the Company and Wells Fargo Foothill, Inc. dated April 16,  2003.                                                                                                                                                                                                      |
| 10.49(p) |   | Letter Agreement between the Company and Wells Fargo  Foothill, Inc. dated June 13, 2003.                                                                                                                                                                                                                                     |
| 10.50(q) |   | Letter Agreement between the Company and Wells Fargo  Foothill, Inc. dated June 24, 2003.                                                                                                                                                                                                                                     |
| 10.51(q) |   | Letter Agreement between the Company and Wells Fargo  Foothill, Inc. dated July 29, 2003.                                                                                                                                                                                                                                     |

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| 10.52(r) |   | Letter Agreement between the Company and Wells Fargo  Foothill, Inc. dated August 29, 2003.                                                                             |
|----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.53    |   | Letter Agreement between the Company and John J.  Walsh dated May 10, 2004.                                                                                                       |
| 31.1     |   | Certification of Principal Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                     |
| 31.2     |   | Certification of Principal Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                     |
| 32.1     |   | Certification pursuant to  18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                     |
| 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.                                         |
| 99.7(m)  |   | Amendment No. 2 to Asset Purchase Agreement  dated as of July 30, 2001.                                                                                                 |
| 99.8(s)  |   | Financial statements of SDI-Molan GmbH &  Co. KG for the year ended December 31, 2003.                                                                              |

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|        | (a) |   | Previously filed as Appendix A to the Company’s  Proxy Statement on Schedule 14A filed with the Commission on  August 18, 1998 and incorporated herein by reference. |
|--------|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (b) |   | Previously filed as  Appendix B to the Company’s Proxy Statement on Schedule 14A filed with  the Commission on December 10, 1998 and incorporated herein by reference.    |
|   | (c) |   | Previously filed as  Exhibit 2.3 to the Company’s Current Report on Form 8-K filed  with the Commission on July 10, 1998 and incorporated herein by  reference.      |
|   | (d) |   | Previously filed as an  exhibit to Registration Statement on Form S-1 (File No. 33-40903)  and incorporated herein by reference.                                               |
|   | (e) |   | Previously filed as an  exhibit to the Company’s Annual Report on Form 10-K for the fiscal  year ended October 31, 1994 and incorporated herein by reference.             |
|   | (f) |   | Previously filed as an  exhibit to the Company’s Annual Report on Form 10-K for the fiscal  year ended October 31, 1996 and incorporated herein by reference.             |
|   | (g) |   | Previously filed as an  exhibit to Registration Statement on Form S-4 (File No. 333-75869)  and incorporated herein by reference.                                              |
|   | (h) |   | Previously filed as an  exhibit to the Company’s Annual Report on Form 10-K405 for the  fiscal year ended October 31, 1999 and incorporated herein by reference.          |
|   | (i) |   | Previously filed as an  exhibit to the Company’s Current Report on Form 8-K filed with the  Commission on October 6, 2000 and incorporated herein by reference.           |
|   | (j) |   | Previously filed as an  exhibit to the Company’s Current Report on Form 8-K filed with the  Commission on May 25, 2001 and incorporated herein by reference.              |
|   | (k) |   | Previously filed as an  exhibit to the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended April 29, 2001 and incorporated herein by  reference.      |
|   | (l) |   | Previously filed as an  exhibit to the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended July 29, 2001 and incorporated herein by  reference.       |

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|        | (m) |   | Previously filed as an exhibit to the Company’s  Annual Report on Form 10-K405 for the fiscal year ended  October 31, 2001 and incorporated herein by reference.     |
|--------|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (n) |   | Previously filed as an  exhibit to the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended May 5, 2002 and incorporated herein by reference.     |
|        | (p) |   | Previously filed as an  exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly  period ended August 3, 2003 and incorporated herein by reference.  |
|   | (q) |   | Previously filed as an  exhibit to the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended August 3, 2003 and incorporated herein by  reference. |
|   | (r) |   | Previously filed as an  exhibit to the Company’s Annual Report on Form 10-K for the fiscal  year ended November 2, 2003 and incorporated herein by reference.        |
|   | (s) |   | Previously filed as an  exhibit to the Company’s Annual Report on Form 10-K/A for the  fiscal year ended November 2, 2003 and incorporated herein by reference.      |

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                         | SPECIAL DEVICES, INCORPORATED |
|-------------------------|-------------------------------|
| Dated: February 2, 2005 |                          | /s/  THOMAS W. CRESANTE |
|                    |                          | Thomas W.  Cresante |
|                    | * *                      | *Director,  President and Chief Executive Officer  (Principal Executive Officer)* |
| Dated: February 2, 2005 |                          | /s/  JAMES E. REEDER |
|                    |                          | James E. Reeder |
| * *                | * *                      | *Vice  President Finance  (Principal Financial Officer)* |

 

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