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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended: November 2, 2003

or

For the Transition Period from                               to

Commission File Number: 333-75869

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

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the Registrant: (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

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

The registrant's common stock is not listed or traded on any exchange or market.

As of January 23, 2004, the number of outstanding shares of the Registrant's common stock was 3,712,764.

SPECIAL DEVICES, INCORPORATED
INDEX TO ANNUAL REPORT ON FORM 10-K

NOTE CONCERNING FORWARD-LOOKING INFORMATION

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

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PART I

ITEM 1. BUSINESS

In this report, the "Company," "SDI", "we," "us" and "our" refer to Special Devices, Incorporated unless the context requires otherwise. We changed our fiscal year in 2002 from October 31 to the 52 or 53-week period ending the Sunday closest to the last day of October. Unless otherwise noted, all references to years, such as "during 2003", mean our fiscal year.

Overview

We are a leading designer and manufacturer of highly reliable precision engineered pyrotechnic devices. These devices are used predominantly in vehicle airbag and other automotive safety systems. Our primary products are initiators, which function like an "electrical match" to ignite the gas generating charge in an automotive airbag system.

We currently have one division, our Automotive Products Division, which we believe to be the world's largest independent supplier of initiators sold to leading domestic and foreign automotive airbag system manufacturers. Those manufacturers use our product in the assembly of integrated airbag safety systems, which they then sell to automobile original equipment manufacturers ("OEMs"). The divestiture of our Aerospace Division, which included our wholly owned subsidiary Scot, Incorporated ("Scot"), was completed in a series of transactions in 2000 and 2001.

Our principal executive offices are located at 14370 White Sage Road, Moorpark, California 93021 and our phone number is (805) 553-1200.

History

Special Devices, Incorporated was founded in the late 1950s in Pacoima, California to manufacture pyrotechnics for motion picture special effects applications. In 1960, we constructed a new facility in Newhall, California for the production of military pyrotechnic devices.

During the 1980s, increased defense spending and a broadening of our product lines allowed us to become a leading manufacturer of high-reliability initiators for weapons systems and safe-and-arm and arm-fire devices. By the end of the 1980s, the decline of the Cold War and rising budget deficits were placing downward pressure on defense spending. At the same time Congress passed legislation mandating the increased use of airbags in passenger cars, and automotive OEMs were beginning to market the superior safety of cars equipped with airbags. As a result, we decided to maintain our aerospace business and aggressively penetrate the automotive market. In 1989, we signed a five-year contract to supply initiators to TRW, Inc., one of the leading manufacturers of automotive airbags. Through the 1990s, we gained additional airbag customers and established our position as a leading supplier of initiators and pyrotechnic devices to the world automotive and aerospace markets.

To accommodate our growth, we constructed a new, state-of-the-art facility in Moorpark, California during 1998 and 1999. We vacated our Newhall facility and relocated to Moorpark in 1999.

In December 1998, we consummated a recapitalization (the "Recapitalization") in which all shares of our Common Stock, other than those retained by certain members of management and certain other stockholders (the "Continuing Stockholders"), were converted into the right to receive $34 per share in cash. In connection with the Recapitalization, we delisted our Common Stock from the NASDAQ Stock Market, and accordingly filed for deregistration with the Securities and Exchange Commission ("SEC").

In July 1999, we entered into a Contribution, License and Lease Agreement with McCormick Selph, Inc. ("MSI"), which at the time was an affiliate of our controlling stockholder, pursuant to which we received certain assets and licensed the intellectual property comprising the micro gas

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generator ("MGG") automotive product line. MGG units are used by the automotive industry in seat belt pretensioner applications. The Contribution, License and Lease Agreement was amended and restated in September 2000 to convey all of MSI's rights to the intellectual property to SDI. The MGG product line was moved to our Mesa, Arizona facility during the second half of 2000.

On May 11, 2001, we completed the sale of the net assets comprising the remaining operations of our Aerospace Division (the "Aerospace Sale"), which had designed and manufactured products for the aerospace industry for nearly 40 years. Its customers were primarily the U.S. Department of Defense and its prime contractors and subcontractors. The Aerospace Division's products included initiators and devices that incorporated these initiators such as explosive bolts, cutters, actuators, valves, pin pullers and safe-and-arm and arm-fire devices. Scot, which was sold on September 21, 2000, designed and manufactured devices for launch vehicles and aircraft egress applications as well as sophisticated test products such as parachute release and oxygen mask testers.

In June 2001, we completed the sale and leaseback of our facilities in Moorpark, California and Mesa, Arizona (the "Real Estate Transaction").

We formed a joint venture partnership, Special Devices-Molan GmbH & Co. KG ("SDI-Molan"), in Germany in June 2001. SDI-Molan's business is the development, production, marketing, distribution and sale of air bag initiators, micro gas generators and seat belt buckles and pyrotechnic pretensioners in Europe. SDI-Molan began operations in September 2002 and is currently ramping up production on its MGG and Global Standard Initiator ("GSI") lines.

In June 2002, we incorporated Special Devices Japan Kabushiki Kaisha ("SDI Japan") in Japan and SDI Japan began operations as a sales office in 2003. We previously distributed our products in Japan through an agent. In November 2002, we formed Special Devices (Thailand) Co., Ltd ("SD Thailand") in Thailand. SD Thailand is leasing a production ready facility in Thailand and shipped qualifying products in the second half of 2003. Commercial production is expected to scale up in 2004.

AUTOMOTIVE PRODUCTS DIVISION

General

Our Automotive Products Division was created in 1989 after the United States government adopted regulations requiring the installation of airbags and other crash protection systems in all new passenger automobiles. Since that time, demand for our initiators has grown rapidly. We attribute this growth in large part to the continuing evolution of automotive safety standards and increased customer preferences for airbag-related safety options. We expect continued growth in the demand for our products as the number of airbag-equipped vehicles increases, the number of airbags per vehicle grows, and our customers implement new technologies. These new technologies include seat belt pretensioners and "smart" airbag systems, both of which we expect will require new types of initiators and sometimes more than one initiator per product.

Industry Overview

One of the major reasons for the establishment of the Automotive Products Division was the adoption by the National Highway Traffic Safety Administration ("NHTSA") of regulations that initially required all passenger automobiles manufactured on or after 1989 for sale in the United States to have automatic frontal crash protection systems for the driver and front passenger. Beginning in 1994 similar requirements for light trucks and vans went into effect. Airbags and automatic seat belts were the two initial means of compliance with these regulations.

Automotive airbag systems consist of six basic components: sensors, a diagnostic and firing module, an initiator (the product we manufacture), a combustion chamber, a gas generator and a specially treated fabric bag. Once the sensors detect an impact of sufficient severity, the diagnostic and firing module

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transmits an electrical charge to the initiator. The initiator then fires, igniting the gas generator in the combustion chamber that burns very rapidly, producing a gas that inflates the bag. The entire process takes approximately 40 milliseconds. The diagnostic module also tests the initiator each time the automobile is started.

In 1994, the NHTSA regulations were amended to require that airbags be the automatic frontal crash protection system used for both the driver and front passenger in at least 95% of passenger automobiles manufactured from September 1996 to August 1997 for sale in the United States, and in 100% of passenger automobiles manufactured on or after September 1997 for sale in the United States. For light trucks and vans, the amended regulations required that airbags be the automatic frontal crash protection system used for at least the driver in no less than 80% of light trucks and vans manufactured from September 1997 to August 1998 for sale in the United States, and for both the driver and front passenger in 100% of light trucks and vans manufactured on or after September 1998 for sale in the United States. In addition to these requirements, automobile OEMs have recently introduced other safety restraint devices, including side airbags, head protection airbags and seat belt pretensioners. Research and development is currently in process for rear seat airbag systems.

In response to concerns over injuries caused by airbag deployment for out-of-position occupants (primarily children and infants), research is ongoing to develop advanced or "smart" airbag systems. The first generation of these systems, which deploys an airbag at lower forces, has been introduced. The next generation systems will have the ability to detect weight and position of the occupant. Most of these new systems have "dual chambers," each of which requires an initiator. The NHTSA Reauthorization Act of 1998 mandates the issuance of a final rule for advanced airbags. The advanced airbags are required in some new passenger cars and light trucks beginning in September 2002 and in all new cars and light trucks beginning in September 2005.

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

Products

We believe we are the world's largest independent supplier of airbag initiators and micro gas generators. Initiators and micro gas generators are devices that receive a low-energy electrical signal from an electronic firing module and convert that signal to a high-energy output by a thermal reaction of compacted pyrotechnic materials. In the event of an automobile accident, airbag initiators activate inflators, which in turn inflate an airbag. Micro gas generators are initiators used in seat belt pretensioning devices, which take dangerous slack out of seat belts in the event of an accident.

We currently produce three primary families of pyrotechnics for automotive safety systems delivered to both domestic and foreign manufacturers of airbag inflators and seat belt pretensioners; standard ("squib"), leadwire and MGG type. Within these families a wide variety of configurations are offered with more than thirty-six different propellant options with multiple physical configurations to meet specific customer requirements. In the North American market, leadwire products are legacy programs in declining demand. Leadwire product differs from standard product in that SDI adds a length of

5

electrical wire, an electrical harness connector and, in some cases, a machined retainer. Any combination of these value added features, depending on the customer need, differentiates a leadwire or value added product from a standard product. We have a variety of other initiator products that are currently in the qualification process including the Global Standard Initiator and the Global Gas Generator. In order to maintain our leadership position in the industry, we are in the process of developing "smart" initiator technologies that will be used in new, integrated occupant protection systems.

The airbag manufacturers' requirements for our initiators are dependent on the requirements of automobile manufacturers. We believe that the airbag initiator market in the United States has become, and will for the foreseeable future remain, closely tied with the cyclical fluctuations of the automotive market. This trend may be offset partially as new applications for airbags and initiators, such as airbags for side-impact protection and seat belt pretensioners, are installed by automobile manufacturers.

Customers

Currently, the major North American manufacturers of airbag inflators are Autoliv ASP Incorporated ("Autoliv"), TRW, BAICO (owned by Atlantic Research Corporation ("ARC")), Key Safety Systems (formerly Breed Technologies) and Inflation Systems Incorporated ("ISI") (owned by Takata), each of whom incorporates our initiators in certain of its airbag systems or sub-systems. Other companies have indicated that they may enter the North American automotive airbag market and reportedly are working on the development of airbag systems. None of the current manufacturers produces all of the components of an airbag system although Autoliv has pursued a vertical integration strategy. Most components of the system are purchased from suppliers like us, and the manufacturers concentrate on the design, assembly, testing and qualification of the airbag systems.

The major non-U.S. manufacturers of inflators to whom we sell our products to are TRW (Europe), Autoliv (Europe), Takata-Petri (Europe), Daicel Chemical Industries (Japan), Autoliv Nichiyu (Japan), NSK (Japan) (owned by Autoliv) and Takata (Japan).

Customers providing more than 10% of our net sales for the year ended November 2, 2003 include Autoliv (32.1%), TRW (28.0%) and ARC (16.7%). The loss of any of these customers would have a material adverse effect on our results of operations, financial position and liquidity.

Backlog

The majority of our sales are achieved under long-term agreements specifying minimum customer requirements to be supplied by us during the term of the agreements. All of our long-term agreements include a clause under which either party can request modifications due to market conditions. Purchase order releases are updated weekly by each customer and include "firm" shipping requirements for the next 8 to 16 weeks. We do not reflect an order in backlog until we have received a purchase order from a customer that specifies the quantity ordered and the delivery dates required. Since these orders are generally shipped within 12 to 16 weeks of receipt of the order, the amount of "firm" backlog at any given time is not indicative of sales levels expected to be achieved over the next twelve-month period.

Competitors

There are two major suppliers of airbag initiators in the United States, SDI and OEA, Inc. (purchased by Autoliv in 2000). We believe we hold the largest share of the North American airbag initiator market. In addition, we have identified four major suppliers of airbag initiators in Europe and one major supplier of initiators in Japan.

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Other companies may choose to enter the automotive initiator market in the future. New entrants would need to achieve high sales volumes of relatively low-priced units in order to recover significant startup costs, including those relating to equipment outlays. In addition, each automotive initiator platform must pass numerous tests established by automobile OEMs and airbag system manufacturers. These testing phases typically take approximately 12 to 18 months to complete and are very expensive. We believe a new entrant would require many years and significant up-front expenditures to replicate the qualification and testing required to successfully market the mix of products that we offer. Lifespark, owned by Nippon Kayaku of Japan, opened a manufacturing facility in northern California in 2002.

Sales and Marketing

Our management, engineers and personnel maintain close contact with each customer and monitor developments in the automotive industry and safety restraint markets. Recent efforts have focused on the status of products such as side and rear seat airbag systems, seat belt pretensioners and "smart" airbag systems.

For new programs, we generally receive a request for quote from our customers. Our program management handles high volume production quotes, spot buys and prototype production quotes. We respond to customer inquiries with price quotes, configuration confirmation and prospective shipping dates. Lot acceptance testing results are available upon request for confirmed orders. When customers supply specific performance parameters, performance data are also supplied to customers.

GENERAL BUSINESS MATTERS

Manufacturing

General.    Our production process consists of fabricating and assembling hardware components and separately preparing the pyrotechnic charge. Production of the electro-mechanical assemblies involves the purchase of machined components, seals and other materials, the mechanical assembly of the components and the testing of the completed units. Throughout the entire process, strict quality assurance controls are maintained in order to obtain the lowest possible theoretical failure rates. After assembly, the products are functionally tested on a sample basis as required by each customer or the applicable contract.

We manufacture the pyrotechnic charge from raw generic materials. These materials are readily available from a variety of suppliers, and we have handled and processed these fuels and oxidizers for nearly 40 years. Some of the pyrotechnic fuels are delivered to us in bulk in a wet and non-volatile form. We dry the pyrotechnic fuels before use. These fuels are then mixed with oxidizers and pressed in small quantities into the metal housings of the specific product being made. Handling and processing pyrotechnic materials requires extensive experience and expertise as well as the proper equipment and facilities.

Because we must produce large quantities of highly reliable products at high speeds, automation and process engineering are as important to us as product design. We have a staff of highly trained automation engineers, technicians and operators whose goal is to maximize yield and product quality. We have implemented Six Sigma and Lean Manufacturing methodologies to further these goals. Six Sigma is a methodology designed to improve the quality of our products, manufacturing processes and administration. Lean Manufacturing is a systematic approach to the identification and elimination of waste and non-value added activities through continuous improvement in all products and processes.

Quality Control.    Each type of initiator we manufacture must qualify for use by passing numerous tests established by the automobile OEM and airbag system manufacturers. The initial test phase is design validation, which is intended to demonstrate that the design of the initiator is capable of performing

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the required function within the stated specifications. The second test phase is product validation, which is intended to demonstrate that we have the management, personnel, equipment and facilities to manufacture the initiator in production quantities to design specifications. The design validation and product validation qualification phases must be repeated for each new initiator design. The product validation qualification phase must also be repeated for each facility at which initiators are produced. These initial qualification procedures are very costly and time consuming. The product validation qualification phase, for example, requires a supplier to have in place its management, personnel, equipment and facilities prior to the time they would otherwise be required for production.

Risk Management and Insurance

The drying, sifting, mixing and processing of pyrotechnic materials involves certain risks and potential liabilities. Our safety and health programs provide specialized training to employees working with pyrotechnic materials. Pyrotechnic materials generally are delivered to us and are stored in a non-volatile form. The pyrotechnic materials are then dried, sifted and blended in a separate building specially designed for these operations. Workstations are designed to shield employees from any accidental initiation incidents. Furthermore, our machines are designed so that an accidental initiation incident will be contained in a protective enclosure to minimize damage. Transportation of pyrotechnic materials also involves certain risks and potential liabilities.

We maintain a liability insurance program covering a number of risks. Our insurance program includes commercial general liability and products liability coverage for approximately $77 million. We also have casualty and fire insurance with various coverage limits for damage to personal property and buildings, business interruption, earthquakes, boilers and machinery and automobile liability. Pollution liability is excluded from our comprehensive general liability insurance policy.

We are engaged in a business that could expose us to possible claims for injury resulting from the failure of products sold by us, notably initiators for airbag systems. We maintain product liability insurance coverage as described above. However, there can be no assurance that claims will not arise in the future and that the proceeds of our insurance policies will be sufficient to pay future claims or that we will be able to maintain the same level of insurance.

Government Regulation

As a former contractor and subcontractor of the U.S. Government, we are subject to various laws and regulations more restrictive than those applicable to non-government contractors. We are subject to periodic audits to confirm compliance with these laws. Violations can result in civil and/or criminal liability as well as suspension or debarment from eligibility for awards of new government contracts or contract renewals. As of the date hereof, we know of one pending inquiry regarding compliance with laws pertaining to government contracts held by our former Aerospace Division. See "Item 3. Legal Proceedings."

Environmental Regulation

We use various hazardous materials in our manufacturing processes, including organic solvents and pyrotechnic materials. Our operations are subject to numerous federal, state and local laws, regulations and permit requirements relating to the handling, storage and disposal of those substances, including the Clean Water Act, the Clean Air Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), and the Occupational Safety and Health Act. We believe that we are in substantial compliance with applicable laws and regulations and that we have obtained all material permits. While compliance with such laws and regulations has the effect of increasing costs of operations, these costs must also be incurred by our competitors and, therefore, they do not materially adversely affect our competitive position. Under

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certain environmental laws, a current or previous owner, lessee or operator of real property and parties that generate or transport hazardous substances that are disposed of at real property, may be liable for the costs of investigating and remediating such substances on or under the property. CERCLA and similar state laws impose liability on a joint and several basis, regardless of whether the owner, lessee, operator or other responsible party was at fault for the presence of such hazardous substances.

In connection with our relocation of operations from Newhall to Moorpark and pursuant to a stipulation and order entered into with the California Department of Toxic Substances Control and other responsible parties, we have been and could in the future be required to conduct environmental investigations of the Newhall property. These investigations have disclosed the presence of some hazardous substances in soil that may require remediation, and that could have a potential impact on groundwater conditions. We cannot determine whether the remedial costs we may be required to incur at Newhall, if any, will be material. Any costs that may be incurred in connection with the Newhall cleanup may be shared with other responsible parties due to the site's history of industrial use by multiple parties, although this cannot be guaranteed.

Employees

At November 2, 2003, we had approximately 310 full-time employees in Moorpark, California and approximately 311 full-time employees in Mesa, Arizona. None of our employees are represented by a collective bargaining unit. We consider our relationship with our employees to be good.

Intellectual Property

In November 1990, we entered into the DBS License Agreement ("DBS Agreement") pursuant to which we granted Davey Bickford Smith ("DBS") a license to:

•

use all patented and non-patented technical information, know-how, data, systems, programs and specifications (collectively, "the Technology") used in the manufacture of initiators or incorporated in initiators (whether such Technology is owned by us or developed by us subsequently), and



•

distribute initiators using the Technology worldwide, provided that DBS may not sell such initiators to TRW or its affiliates in the United States.

Until December 31, 1998, DBS was required to pay royalties to us under the DBS Agreement. From and after January 1, 1999, DBS is no longer obligated to pay royalties to us, and DBS is entitled to continue using the Technology perpetually on a royalty-free basis. As DBS failed to meet certain distribution requirements by December 31, 1998, we have the right to license the Technology to third parties. To date, DBS has neither manufactured nor distributed any products under the DBS Agreement. Significant competition from DBS in Europe or the United States could have a material adverse effect on us.

SDI holds patents covering key design and processing features of its existing and future products.

Research and Development

Our research and development department's expense was $1.1 million, $2.1 million and $1.5 million in 2003, 2002 and 2001, respectively.

ITEM 2. PROPERTIES

Our corporate headquarters are located in the City of Moorpark, in Ventura County, north of Los Angeles. The Moorpark facility, which was completed during 1999, consists of six buildings that cover approximately 170,000 square feet. This facility is located on approximately 220 acres of land.

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We have an additional facility in Mesa, Arizona on approximately 21 acres of land. The Mesa facility consists of eight buildings aggregating approximately 60,000 square feet including two warehouses aggregating approximately 12,000 square feet.

In June 2001, we completed the sale and leaseback of our facilities in Moorpark, California and Mesa, Arizona. The lease provides for an initial term of twenty years with options to extend for two ten-year terms and initial annual rent of $3.9 million with yearly rent escalations beginning in 2003 based on the Consumer Price Index.

ITEM 3. LEGAL PROCEEDINGS

Defense Criminal Investigative Service Investigation.    Our former Aerospace Division remains the subject of an investigation commenced in 1999 by the Defense Criminal Investigative Service ("DCIS") of the Office of the Inspector General, U.S. Department of Defense, into allegations that SDI deviated from contractual requirements relating to the use of organic sealants. We responded to a subpoena in 1999, and have met recently with the government regarding the status of the investigation. The government initially indicated that it no longer was focusing on the organic sealant issue, but believed SDI may have deviated from contractual requirements regarding other organic epoxy. We disputed the government's interpretation of the contracts as precluding the use of the epoxy in question and submitted an expert report to that effect. The government responded by reasserting the sealant issue, this time asserting that the sealant may have inhibited the curing of the epoxy, an allegation not previously raised. We are responding to the latest allegation but have preliminarily concluded that certain assumptions underlying the allegation as presented are erroneous. One potential consequence of civil proceedings, if filed, is the possibility that we would be suspended from future military and federal government sales, and if found liable, debarred from such sales for a period of time. This would not be expected to materially affect our financial condition, results of operations or liquidity given the divestiture of our Aerospace Division, which was completed in 2001. It could, however, affect our ability to reenter the aerospace market when certain noncompete agreements expire in 2004. At this point, it is not possible to predict or assess the likelihood of an unfavorable outcome or predict the amount of potential liabilities.

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

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
               STOCKHOLDER MATTERS

As a result of the Recapitalization, our common equity is no longer publicly traded.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth our selected financial data as of and for each of the five years in the period ended November 2, 2003. The financial data is derived from our consolidated financial statements which have been audited by PricewaterhouseCoopers LLP, independent accountants. The data set forth below should be read in conjunction with the consolidated financial statements and related notes thereto appearing elsewhere herein and Item 7—"Management's Discussion and Analysis of Financial Condition and Results of Operations."

We sold our wholly owned subsidiary, Scot, on September 21, 2000 and the net assets comprising our remaining Aerospace operations on May 11, 2001. The results of operations, the gain on sale of Scot and the net assets of the Aerospace Division have been reclassified to Discontinued Operations for all prior periods presented.

(a)

On November 4, 2002, we adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of SFAS No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections." Accordingly, gains on extinguishment of debt have been reclassified to income from continuing operations for all prior periods presented.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
               RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with "Selected Consolidated Financial Data" and our consolidated financial statements and the related notes thereto included elsewhere in this report. We sold the net assets comprising our remaining Aerospace operations on May 11, 2001. The results of operations and the gain on sale of the net assets of the Aerospace Division have been reclassified to Discontinued Operations for all prior periods presented. On November 4, 2002, the Company adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of SFAS No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections." Accordingly, gains on extinguishment of debt have been reclassified to income from continuing operations for all prior periods presented. There was no impact on net income (loss) in any period.

Results of Operations

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

2003 Compared to 2002

Net Sales

Consolidated net sales for 2003 were $112.9 million, compared to consolidated net sales of $120.3 million for 2002. While total units shipped increased by 9%, the decrease in net sales was primarily due to lower unit sales and lower prices on high value-added lead wire products. Leadwire products differ from standard products in that SDI adds a length of electrical wire, an electrical harness connector and, in some cases, a machined retainer. Any combination of these value-added features, depending on the customer need, differentiates a leadwire or value-added product from a standard product. These leadwire products are generally legacy programs that our customers may seek to replace with lower priced standard initiators.

Gross Profit

Consolidated gross profit for 2003 was $21.4 million or 18.9% of consolidated net sales, compared to consolidated gross profit of $21.5 million or 17.9% of consolidated net sales for 2002. The improvement in gross margin is primarily due to productivity gains achieved through operating efficiencies. We continue to make improvements in our manufacturing process that allow us to produce more units with the same or less labor required. In addition, we investigate and implement innovations that may serve to reduce the cost of production through improved equipment utilization rates and supplier negotiations.

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Operating Expenses

Consolidated operating expenses for 2003 were $11.4 million or 10.1% of consolidated net sales, compared with consolidated operating expenses of $13.9 million or 11.6% of consolidated net sales for 2002 (excluding expenses for environmental and other investigation costs in both years). The decrease was primarily due to lower accrued incentive bonuses in 2003 compared to 2002.

Other Expense

We recorded $1.4 million in 2003 and $0.2 million in 2002 for our share of the losses of our joint venture in Germany, SDI-Molan. SDI-Molan began operations in September 2002 and is currently ramping up production on its MGG and GSI lines. We expect to reduce the loss in 2004 as shipments to customers increase. However, increased customer shipments may be sensitive to the Euro/U.S. dollar exchange rate and production capacity (we are using new GSI technology).

2002 Compared to 2001

Net Sales

Consolidated net sales for 2002 were $120.3 million, compared to consolidated net sales of $122.9 million for 2001. While total units shipped increased by 11%, the decrease in net sales was primarily due to lower unit sales and lower prices on high value-added lead wire products. Leadwire products differ from standard products in that SDI adds a length of electrical wire, an electrical harness connector and, in some cases, a machined retainer. Any combination of these value-added features, depending on the customer need, differentiates a leadwire or value-added product from a standard product. These leadwire products are generally legacy programs that our customers may seek to replace with lower priced standard initiators.

Gross Profit

Consolidated gross profit for 2002 was $21.5 million or 17.9% of consolidated net sales, compared to consolidated gross profit of $13.2 million or 10.7% of consolidated net sales for 2001. The improvement in gross margin is primarily due to manufacturing gains and improved margins on standard products achieved through product redesigns and negotiated supplier pricing agreements.

Operating Expenses

Consolidated operating expenses for 2002 were $13.9 million or 11.6% of consolidated net sales, compared with consolidated operating expenses of $14.4 million or 11.7% of consolidated net sales for 2001 (excluding expenses for environmental and other investigation costs in both years). The decrease was primarily due to lower payroll and related expenses as a result of the reductions in force in October 2001.

Expenses and Other Investigation Costs

There were no expenses related to environmental and government investigations in 2002, compared with $1.8 million of such expenses in 2001. The expenses in 2001 included $1.0 million related to the settlement of the Cal-OSHA Hollister investigation and $0.8 million related to our former Newhall, California facility.

Other Expense

Interest expense was $9.5 million for 2002, a $4.5 million decrease compared with interest expense of $14.0 million for 2001. The decrease was primarily due to a reduction in outstanding debt. Average debt outstanding was $79.0 million in 2002, compared with $120.4 million in 2001. We used the net

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proceeds from the Aerospace Sale and the Real Estate Transaction to repay borrowings under our prior credit facility and to retire a portion of our Senior Subordinated Notes ("Notes").

We recorded gains on extinguishment of debt of $0.5 million and $9.4 million in 2002 and 2001, respectively. These gains were reclassified to income from continuing operations from extraordinary gains. See Item 6, Note (a). In 2002, we repurchased $0.8 million face value of Notes in the open market for $0.3 million resulting in a gain of $0.5 million. In 2001, we repurchased $25.6 million face value of Notes in the open market for $13.4 million resulting in a gain of $11.5 million, net of the write off of $0.7 million in related prepaid financing fees. This $11.5 million gain was partially offset by the write off of an additional $2.1 million in prepaid financing fees in connection with the termination of our prior credit facility.

We recorded $0.2 million in 2002 for our share of the losses of our joint venture in Germany, SDI-Molan. SDI-Molan started operations in September 2002.

There were no gains or losses on asset disposals in 2002, compared with losses of ($6.4) million for 2001. The loss in 2001 was primarily composed of a $4.8 million loss on the sale of our real estate assets and a $1.2 million loss on the disposition of assets related to our discontinued glass seal operations.

Liquidity and Capital Resources

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

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

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

As of November 2, 2003, we had no borrowings and $1.9 million of letters of credit outstanding under the Revolver. The total amount available under the Revolver at November 2, 2003 was $11.2 million subject to compliance with certain financial and operating covenants which we must meet on a quarterly and annual basis. As of November 2, 2003, we were in compliance with all such covenants.

Continuing operations provided cash of $8.7 million and $11.4 million in 2003 and 2002, respectively. The decrease was primarily due to a significant reduction in inventory levels in 2002. Capital expenditures, primarily for manufacturing equipment, were $6.3 million in 2003 and $6.0 million in 2002. We expect to spend approximately $4.0 million to $5.0 million on capital expenditures, primarily for manufacturing equipment, during fiscal 2004. We will fund these purchases with cash from operations and borrowings under the Revolver. We made a semiannual interest payment of $4.2 million on our Notes in December 2003 and paid bonuses of $0.5 million in January 2004. We made the aforementioned payments with cash from operations.

Our working capital was $11.2 million at November 2, 2003, compared with working capital of $9.9 million at November 3, 2002. The increase of $1.3 million was primarily due to lower accrued incentive bonuses.

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As of November 2, 2003, we had net liabilities of $28.4 million. Our ability to pay the interest on, or to refinance our debt, or to fund planned capital expenditures, will depend on generating cash flow from future operations. We have had positive cash flow from continuing operations during the past three years.

Contractual Obligations and Commercial Commitments

The following schedules summarize our contractual obligations and commercial commitments as of November 2, 2003 (amounts in millions):

(1)

Consists of our guarantee of 50% of the outstanding bank debt of SDI-Molan at November 2, 2003.

Off-Balance Sheet Arrangements

We have guaranteed bank loans made to SDI-Molan, our German joint venture, under agreements entered into in August 2002 concurrent with the commencement of operations. SDI-Molan had bank loans outstanding in the amount of 3.4 million Euro or $4.0 million at November 2, 2003. Our guarantee is limited to fifty percent of the loans outstanding and is subject to a maximum of 3.2 million Euro or approximately $3.7 million at November 2, 2003. See Note 5 to the Consolidated Financial Statements.

Critical Accounting Policies

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported therein, including the financial information reported in Management's Discussion and Analysis of Financial Condition and Results of Operations. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent form other sources. Actual results reported in future periods may be based upon amounts that differ from those estimates. The following represent what we believe are the critical accounting policies most affected by significant management estimates and judgments:

Allowance for Doubtful Accounts

We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues

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that have been identified. Accounts receivable are reported net of the allowance for amounts that may become uncollectible in the future. Such allowances can be either specific to a particular customer or general to all customers. The Company believes the level of the allowance for bad debts is reasonable based on past experience. However, the credit loss rate can be impacted by adverse changes in the automotive industry, or changes in the liquidity or financial position of our customers which would affect the collectability of our accounts receivable and our future operating results. If credit losses exceed established allowances, our results of operations and financial condition may be adversely affected.

Inventory Reserves

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

Contingencies

We account for contingencies in accordance with Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies." SFAS No. 5 requires that we record an estimated loss from a loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies such as legal matters requires significant judgment. Many of these legal matters can take years to resolve. Generally, as the time period increases over which the uncertainties are resolved, the likelihood of changes to the estimate of the ultimate outcome increases. Management believes that the accruals for loss contingencies are adequate.

Environmental Expenditures

Environmental expenditures that 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 are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be estimated. Environmental liabilities are not discounted to their present value and are recorded without consideration of potential recoveries from third parties. Subsequent adjustments to estimates, which may be significant, may be made as more information becomes available or as circumstances change.

Revenue Recognition

The Automotive Products Division manufactures products to customer specifications under standard purchase orders. Sales are primarily recognized when products are shipped. The Aerospace Division, the sale of which was completed in 2001, manufactured products under fixed price, long-term contracts directly for the U.S. Department of Defense, its prime contractors and subcontractors, and commercial companies. The contracts varied in length, but generally were completed within 12 to 24 months. Sales under production contracts were generally recognized as units were shipped or, in some cases, when accepted by the customer; sales under significant engineering contracts or long-term production contracts were recognized under the percentage of completion method.

Income Taxes

Deferred income taxes are determined using the liability method. A deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse.

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Deferred tax expense is the result of changes in the deferred tax asset or liability. If necessary, valuation allowances are established to reduce deferred tax assets to their expected realizable values.

General Business and Economic Conditions

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

Accounting Developments

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments With Characteristics of both Liabilities and Equity". The statement changes the accounting for certain financial instruments that, under previous guidance, could be classified as equity or "mezzanine" equity, by now requiring those instruments to be classified as liabilities (or assets in some circumstances). We are required to adopt the provisions of SFAS No. 150 for financial instruments entered into or modified after May 31, 2003 and otherwise as of July 7, 2003, except for mandatorily redeemable financial instruments for which the adoption date is February 1, 2004. Our "mezzanine" equity does not meet the requirements of this statement and, therefore, we do not expect that the adoption of this standard will have a material impact on our results of operations, financial position or liquidity.

In January 2003, the FASB issued Interpretation Number 46, "Consolidation of Variable Interest Entities" ("FIN 46"). This interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," addresses consolidation by business enterprises of variable interest entities. Under current practice, two enterprises generally have been included in consolidated financial statements because one enterprise controls the other through voting interests. FIN 46 defines the concept of "variable interests" and requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among the parties involved. This interpretation applies immediately to variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period ending after December 15, 2003, to variable interest entities considered to be a special purpose entity ("SPE") in which an enterprise holds a variable interest that it acquired before February 1, 2003. For non-SPE variable purpose entities acquired before February 1, 2003, the interpretation must be adopted no later than the first interim or annual reporting period ending after March 15, 2004. The interpretation may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. We are currently evaluating the potential impact of the adoption of FIN 46.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). This interpretation elaborates on disclosures to be made by a guarantor in its interim and annual financial statements with regard to its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are effective for interim and annual periods ending after December 15, 2002, and the Company has

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adopted those requirements beginning in the first quarter of fiscal year 2003. The initial recognition and initial measurement requirements of FIN 45 are effective prospectively for guarantees issued or modified after December 31, 2002. The adoption of the recognition and initial measurement requirements of FIN 45 did not have a material impact on our results of operations, financial position or liquidity.

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

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

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements required in response to this Item are listed under Item 15(a) of Part III of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
               FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

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

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

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth the name, age and position of each of our directors and executive officers. All of our officers are elected by and serve at the discretion of the Board of Directors.

Dr. John F. Lehman, who became a director of the Company upon consummation of the Recapitalization and Chairman of the Company in June 1999, is a Managing General Partner of J.F. Lehman and Company. Prior to founding J.F. Lehman & Company, Dr. Lehman was an investment banker with PaineWebber Incorporated and served as a Managing Director in Corporate Finance. Dr. Lehman served for six years as Secretary of the Navy, was a member of the National Security Council Staff, served as a delegate to the Mutual Balanced Force Reductions negotiations and was the Deputy Director of the Arms Control and Disarmament Agency. Dr. Lehman is Chairman of the Board of Directors of OAO Technology Solutions, Inc. ("OAOT") and Racal Instruments, Inc. ("Racal"), and is a member of the Board of Directors of Ball Corporation and ISO Inc. In addition, Dr. Lehman is Chairman of the Princess Grace Foundation, a director of OpSail Foundation and a Trustee of LaSalle College High School. Dr. Lehman is a member of the National Commission on Terrorist Attacks.

Thomas W. Cresante joined the Company in October 1999 in his present role of Director, President, and Chief Executive Officer. From 1997 to 1998, Mr. Cresante was the Executive Vice President and Chief Operating Officer for Safety Components International, Inc. Mr. Cresante was employed by Allied Signal from 1996 to 1997 and held the positions of Vice President of Operations—Aerospace Division and President, Automotive Safety Restraints Systems. From 1990 to 1995, Mr. Cresante was the Vice President of Operations for TRW Inflatable Restraints Division. During his tenure with TRW, two of his startup facilities were named as "10 Best Plants in the U.S." by Industry Week Magazine. Prior to joining TRW, Mr. Cresante worked for ITT Hancock from 1984 to 1989 and held the positions of General Manager and Vice President of Operations. Before 1984, Mr. Cresante held various general manager roles for different manufacturing firms. Mr. Cresante holds a Bachelor of Science degree in Industrial Engineering and Management from the University of Akron. He is on the Board of Directors

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for the Automotive Occupant Restraints Council and is a member of the President's Club for the Moorpark College Foundation.

George A. Sawyer is currently a director and Secretary of the Company and also served as Chairman of the Board from December 1998 to May 1999 and as interim Chief Executive Officer from June 1999 to October 1999. Mr. Sawyer was also a co-founder and Managing General Partner of J.F. Lehman & Company until December 2003. He is now a Managing Partner and member of General Management Partners, LLC ("GMP"), a consulting and investment firm. From 1993 to 1995, Mr. Sawyer served as the President and Chief Executive Officer of Sperry Marine, Inc. Prior thereto, Mr. Sawyer held a number of prominent positions in private industry and in the United States government, including serving as the President of John J. McMullen Associates, the President and Chief Operating Officer of TRE Corporation, Executive Vice President and Director of General Dynamics Corporation, the Vice President of International Operations for Bechtel Corporation and the Assistant Secretary of the Navy for Shipbuilding and Logistics under Dr. Lehman. Mr. Sawyer is currently a director of OAOT, Racal and American Automar, Inc. He also serves on the Board of Trustees of Webb Institute, on the Board of Managers of the American Bureau of Shipping and on the Board of the Mariner's Museum.

Louis N. Mintz became Assistant Secretary of the Company in January 2000 and a Director in January 2001. Mr. Mintz is a Principal of J.F. Lehman & Company. From 1996 to 1997, Mr. Mintz was a member of the Private Equity Investment Group at Odyssey Partners, LP, and from 1994 to 1996 served as Vice President at Rosecliff, Inc., where he was involved in all aspects of the acquisition and management of several portfolio companies. Prior to joining Rosecliff, Mr. Mintz spent five years with Nevasca Development Corporation, a leading real estate development firm in the resort community of Telluride, Colorado. He began his career at Drexel Burnham Lambert as a financial analyst in the corporate finance department. Mr. Mintz is currently a director of OAOT and Elgar Holdings, Inc. ("Elgar").

M. Steven Alexander became a director of the Company in April 2000. Currently, Mr. Alexander is President of BNP Paribas Principal Incorporated ("BNP PPI"), a licensed Small Business Investment Company for certain U.S. investments owned by BNP Paribas. He has been president of BNP PPI (formerly Paribas Principal Incorporated) since 1989. Mr. Alexander is also the head of the Private Capital Group since January 2002, which is solely responsible for principal private equity and mezzanine investments for BNP Paribas in North America. Prior to his current position, Mr. Alexander was co-head of the Merchant Banking Group at BNP Paribas from 2000 to 2001 and head of the Merchant Banking Group at Paribas from 1990 to 2000.

Oliver C. Boileau, Jr. became a director of the Company upon consummation of the Recapitalization. Mr. Boileau joined Northrop Grumman Corporation in December 1989 as President and General Manager of the B-2 Division. He also served as President and Chief Operating Officer of the Grumman Corporation, a subsidiary of Northrop Grumman, and as a member of the Board of Directors of Northrop Grumman. Mr. Boileau retired from Northrop Grumman in 1995. In 1980, he joined General Dynamics Corporation as President and was a member of the Board of Directors. In January 1988, Mr. Boileau was appointed Vice-Chairman. He retired from General Dynamics in May 1988. He joined The Boeing Company in 1953 as a research engineer and progressed through several technical and management positions and was named Vice President in 1968 and then President of Boeing Aerospace in 1973. Mr. Boileau is a director of Forever Enterprises. He is also an Honorary Fellow of the American Institute of Aeronautics and Astronautics, a member of the National Academy of Engineering, the Board of Trustees of St. Louis University, the University of Wyoming Foundation and the National Security Advisory Panel of Sandia National Laboratories.

Randy H. Brinkley became a director of the Company in September 1999. He is currently a Senior Executive Advisor to J.F. Lehman & Company. Mr. Brinkley served as President of Boeing Satellite Systems Inc. ("BSS"), the world's largest manufacturer of commercial communication satellites, from

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2001 to 2003. Mr. Brinkley was Senior Vice President of Programs for BSS until March 2001. Before joining Hughes Space and Communications Company (acquired by Boeing in October 2000) in 1999, Mr. Brinkley spent seven years as a senior executive at the National Aeronautics and Space Administration, including positions as Program Manager for the International Space Station and Mission Director of the Hubble Space Telescope repair mission. From 1990 to 1992, Mr. Brinkley managed research and development activities for advanced aircraft systems and technologies at the McDonnell Douglas Corporation. Prior thereto, Mr. Brinkley served in the U.S. Marine Corps for 25 years before retiring as a Colonel.

Donald Glickman, who became a director of the Company upon consummation of the Recapitalization, is a co-founder of J.F. Lehman & Company. Prior to joining J.F. Lehman & Company, Mr. Glickman was a principal of the Peter J. Solomon Company, a Managing Director of Shearson Lehman Brothers Merchant Banking Group and Senior Vice President and Regional Head of The First National Bank of Chicago. Mr. Glickman served as an armored cavalry officer in the Seventh U.S. Army. Mr. Glickman is currently a director of Racal, OAOT, the MacNeal-Schwendler Corporation, General Aluminum Corporation and Monroe Muffler Brake, Inc. He is also a trustee of MassMutual Corporate Investors and MassMutual Participation Investors.

Sir Christopher Lewinton became a director of the Company in October 2003. Sir Christopher formally joined J F Lehman & Co in 2001 and prior thereto was a member of a limited partner of the J.F. Lehman Equity Investors I, L.P. Prior to joining the firm, Sir Christopher served as Chairman and Chief Executive Officer of TI Group plc, a global specialised engineering group, which he joined in 1986. In the 14 years under Sir Christopher's strategic direction, TI Group was transformed into a world-leading company that merged with Smiths Industries in a £4.5 billion transaction in December 2000. From 1970 to 1985 Sir Christopher was Chief Executive of the Wilkinson Sword Group. In 1978, when Wilkinson was acquired by Allegheny International, a multi-billion dollar U.S. public company, he joined the main board of Allegheny and was the London-based Chairman of their International Operations. He is currently a member of the Advisory Board of Morgan Stanley Capital Partners and an Adviser to Booz Allen & Hamilton Inc. He is also a director of Racal. Sir Christopher was made a Fellow of the Royal Aeronautical Society in July 1993 and an Honorary Doctor of Technology by Brunel University in July 1997.

William Paul became a director of the Company upon consummation of the Recapitalization. Mr. Paul began his career with United Technologies Corporation ("UTC") at its Sikorsky Aircraft division in 1955. Mr. Paul progressed through a succession of several technical and managerial positions while at Sikorsky Aircraft, including Vice President of Engineering and Programs and Executive Vice President and Chief Operating Officer, and in 1983 was named President and Chief Executive Officer of Sikorsky Aircraft. In 1994, Mr. Paul was appointed the Executive Vice President of UTC, Chairman of UTC's international operations and became a member of UTC's Management Executive Committee. Mr. Paul retired from these positions in 1997.

Joseph A. Stroud is currently a director of the Company. He also served as Assistant Secretary from January 2000 to April 2002 and interim Chief Financial Officer from June 1999 to October 2000. He is now a Managing Partner and member of GMP. In 2002, Mr. Stroud served as interim Chief Financial Officer of Elgar. From 2001 to 2002, Mr. Stroud served as Chief Financial Officer and Chief Operating Officer of Burke Industries, Inc. ("Burke"). Mr. Stroud is a member of a limited partner of J.F. Lehman Equity Investors I, LP and was employed by J.F. Lehman & Company from 1996 to 2001. Prior to joining J.F. Lehman & Company, Mr. Stroud was the Chief Financial Officer of Sperry Marine, Inc. from 1993 until Litton Industries, Inc. purchased the company in 1996. From 1989 to 1993, Mr. Stroud was Chief Financial Officer of the Accudyne and Kilgore Corporations. Mr. Stroud is currently a director of Burke.

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John J. Walsh, Executive Vice President and Chief Operating Officer, is responsible for developing and implementing the Company's business strategy and is the corporate champion for the Company's Six Sigma and Lean Manufacturing programs. Mr. Walsh joined the Company in May 1999 as Vice President of Strategic Marketing and Programs and was promoted to his current position in 2000. Prior to joining the Company, Mr. Walsh was the Director of Sales and Marketing, Aerospace from 1996 to 1999 and the Director of Aerospace, Defense and Specialty Products from 1994 to 1996 for The Ensign-Bickford Company. Mr. Walsh worked as a Product Section Manager and a Business Development Manager from 1986 to 1993 for Thiokol Corporation. From 1977 to 1986, Mr. Walsh worked in various engineering roles for two different aerospace manufacturing firms. Mr. Walsh has a Bachelor of Science degree in Aeronautical and Astronautical Engineering from Purdue University and a Master of Business Administration from St. Joseph's University.

James L. Baglini, Vice President—Engineering, is responsible for the direction and management of the Company's engineering, energetics, R&D and MIS operations. He assumed this position effective January 1, 2004. Mr. Baglini joined the Company in September 1999 as Director of Energetic Materials and was promoted to Vice President—Energetics on May 7, 2001. Prior to joining the Company, Mr. Baglini was Manager, Propellant Actuated Devices at Pacific Scientific, a unit of Danaher Corporation, from 1997 to 1999. His experience also includes positions as Manager, Propellant Development for OEA, Inc. in Denver, Colorado from 1992 to 1997 and Manager, Propellant, Pyrotechnic and Explosive Operations for Unidynamics in Phoenix, Arizona from 1985 to 1992. Mr. Baglini holds a Bachelor of Science degree in Pre-Professional Studies (chemistry and biology) from the University of Notre Dame.

Nicholas J. Bruge, Vice President—Operations, is responsible for the day-to-day facility operations and general management of the Company's manufacturing facilities in Moorpark, California and in Mesa, Arizona and the startup of the Thailand facility. Mr. Bruge joined the Company in October 2000 as Vice President—General Manager, Mesa and was promoted to his current position on December 12, 2003. Mr. Bruge has fifteen years of automotive airbag and manufacturing start-ups and turnaround experience, including eight years with TRW Vehicle Safety Systems in various capacities. Mr. Bruge also has international experience including three years as Vice President of Operations, Satellite Facility for RSI Home Products. Mr. Bruge has a Bachelor of Science degree in Industrial Technology specializing in Automotive Technology from Arizona State University.

Patrick J. Carroll, Vice President—Advanced Product Development, is currently the Managing Director of SDI-Molan. He joined the Company in 1999 as Vice President—General Manager, Hollister when the Company acquired the Micro Gas Generator product line. Prior to the acquisition, Mr. Carroll was a Corporate Vice President for Teledyne, and in 1998 concurrently served as the General Manager of Commercial Operations for McCormick Selph Ordnance Products, a business unit of Teledyne Ryan Aeronautical. Prior thereto, Mr. Carroll worked for FMC Corporation from 1967 to 1995, most recently as General Manager of the corporate lab. Mr. Carroll has a Bachelor of Science degree in Mechanical Engineering and Master of Mechanical Engineering from Pennsylvania State University and an Executive Master of Business Administration from Stanford University.

Thomas R. Cessario, Vice President—Environmental, Health, Safety and Regulatory Affairs, is responsible for all matters regarding environmental regulations, health, safety and import/export issues at the Company. Mr. Cessario joined the Company in November 1999 in his current position. Prior to joining the Company, Mr. Cessario was the Corporate Director of Safety, Health and Environment from 1997 to 1999 for Irex Construction Engineering Corporation. From 1992 to 1997, Mr. Cessario worked as National Director of Environmental, Health and Safety with Rollins Environmental, Inc. Mr. Cessario worked as Tactical Division Manager of Safety, Health and Environmental from 1983 to 1992 for Thiokol Corporation. Mr. Cessario has a Bachelor of Science degree from West Virginia University as well as a Master of Science in Safety and Industrial Hygiene from New York University and a Master of Business Administration in Operations Management from Wilmington College.

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James E. Reeder, Vice President—Finance and Assistant Secretary, is responsible for managing the day-to-day financial operations of the Company. Mr. Reeder joined the Company in January 2002 in his current position. From 1999 to 2001, Mr. Reeder was Chief Financial Officer of PowerLift Corporation ("PowerLift"), a large distributor of Caterpillar equipment. PowerLift filed for Chapter 11 bankruptcy protection in June 2002. From 1985 to 1999, Mr. Reeder held a variety of financial positions at Avery Dennison, a manufacturer of commercial and consumer products. Mr. Reeder has a Bachelor of Science degree in Economics, Summa cum Laude, from California State Polytechnic University, Pomona and a Master of Business Administration from the Haas School, University of California, Berkeley.

Stephen S. Sperber, Vice President—Human Resources, is responsible for managing the day-to-day Human Resources operations of the Company, including Compensation, Employee Relations, Staffing, Training, Benefits, Communications and Community Involvement Programs. Mr. Sperber joined the Company in February 2001 in his current position. Prior to joining the Company, Mr. Sperber was the Human Resources Director for Litton Industries, Guidance and Control Division, from 1969 to 2001 and the Human Resources Manager for Singer-Librascope from 1966-1969. Mr. Sperber has a Bachelor of Arts degree in Industrial Psychology from New York University and a Master of Arts degree in Industrial Psychology from the University of Southern California.

Committees of the Board of Directors

Executive Committee. The Executive Committee of the Board of Directors is comprised of Messrs. Lehman, Sawyer, Glickman, Paul and Cresante. The Executive Committee's main function is to expedite the decision-making process on certain matters.

Audit Committee. The Audit Committee of the Board of Directors is comprised of Messrs. Paul, Glickman, Alexander, Boileau and Mintz. The Audit Committee makes recommendations concerning the engagement of independent public accountants, reviews with the independent public accountants the scope and results of the audit engagement, approves professional services provided by the independent public accountants, reviews the independence of the independent public accountants, considers the range of audit and non-audit fees and reviews the adequacy of our internal accounting controls. The Company has determined that the Audit Committee does not include a financial expert as defined in Item 401 of Regulation S-K. The Audit Committee members were appointed prior to the effective date of the financial expert disclosure requirement, and the Company believes that they are sufficiently sophisticated in financial matters to adequately carry out their responsibilities as members of the Audit Committee.

Compensation Committee. The Compensation Committee of the Board of Directors is comprised of Messrs. Lehman, Sawyer, Glickman, Stroud and Cresante. The Compensation Committee makes recommendations concerning the salaries and incentive compensation of our employees and consultants, and oversees and administers certain of our stock option plans.

Stock Option Committee. The Stock Option Committee of the Board of Directors is comprised of Messrs. Lehman, Sawyer, Glickman and Stroud. The Stock Option Committee is responsible for the administration of our 1991 and 1999 Stock Option Plans.

Compensation Committee Interlocks and Insider Participation

Thomas W. Cresante, the Chief Executive Officer of the Company, is a member of the Compensation Committee. In addition, other members of the Compensation Committee are affiliated with companies that are parties to certain transactions and agreements involving the Company. See Item 13—Certain Relationships and Related Transactions.

Code of Ethics

We currently have a general code of ethics that applies to all of our employees including the Chief Executive Officer and the Principal Financial Officer. We expect to amend our code of ethics in 2004 to address the elements of financial reporting and disclosure as defined in Item 406 of Regulation S-K under the Securities Exchange Act of 1934.

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ITEM 11. EXECUTIVE COMPENSATION

The table below contains the annual and long-term compensation for services in all capacities to our company for 2003, 2002 and 2001, of those persons (collectively, the "Named Executive Officers") who were, during 2003, (i) the Chief Executive Officer and (ii) the other most highly compensated executive officers receiving compensation of $100,000 or more from us or one of our subsidiaries.

(1)

Options granted pursuant to the 1999 Stock Option Plan adopted by the Board of Directors on June 3, 1999, as authorized by the Stock Option Committee of the Board of Directors on May 1, 2002.

(2)

Consists of matching contributions under our 401(k) plan and certain life insurance premiums.

(3)

Consists of fringe benefits such as closing costs on home purchase, loan interest, automobile and country club dues.

(4)

Mr. Sepulveda's employment ended December 12, 2003.

Options Granted in 2003

There were no options granted in 2003 to the Named Executive Officers.

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Aggregate Option Exercises in 2003 and 2003 Year End Option Values

The following table summarizes information with respect to all options held by the Named Executive Officers exercisable within 60 days of November 2, 2003:

(1)

There is no public market for our Common Stock. The Company estimates the market value for its common stock as of November 2, 2003 was approximately $25.00 per share.

Bonus, Incentive and Deferred Compensation Plans

Since March 1998, we have maintained short-term incentive plans for the benefit of all regular, full time employees of the Automotive Products Division and, through 2001, the former Aerospace Division, respectively (collectively, the "Bonus Plans"), and a Management Incentive Plan for certain members of management from both divisions (the "Management Plan"). The Bonus Plans permit us to pay employees quarterly bonuses based on employment level, the attainment of certain pre-established financial performance criteria, and the attainment of certain pre-established individual goals. The Management Plan bonuses are paid annually, based upon the attainment of certain pre-established consolidated and division financial performance criteria. The Bonus Plans and the Management Plan are administered by a committee of the Board of Directors, which has full power and authority to determine the terms and conditions of awards under the Bonus Plans and the Management Plan. A Deferred Bonus/Compensation Plan (the "Deferred Plan") was adopted for managers in October 2003. The Deferred Plan requires that a target percentage of cash bonuses earned under the Management Plan be deferred. Eligible managers are credited with "phantom" shares equivalent in value to shares of SDI's common equity. Account values are adjusted annually based upon the value of SDI's common equity and account balances are payable to participants upon the occurrence of a Change of Control, as defined in the Deferred Plan.

Benefit Plans

We also maintain various qualified and non-qualified benefit plans for our employees, including a 401(k) profit sharing plan. An insured deferred compensation plan for certain highly compensated employees, which was adopted in 1995, was terminated and all assets were distributed to participants in November 2000. We reserve the right to add, amend, change, tie off and /or terminate any or all qualified or nonqualified benefit plans at any time and to alter, amend, add to and/or restrict employee participation to the extent permitted by applicable federal or state law or regulation.

Compensation of Directors

Directors who are our employees do not receive any compensation directly for their service on the Board of Directors. All other directors receive $2,000 per meeting and $20,000 per annum for their services.

25

Employment and Consulting Agreements

Thomas W. Cresante. On October 1, 1999, we entered into an employment agreement with Mr. Cresante. The employment agreement had an initial term of two years and provided for an automatic one-year renewal at the end of the initial term and each renewal term until terminated upon written notice. Mr. Cresante's current base salary is $399,110 per year and is subject to annual review by our Board of Directors. In addition, Mr. Cresante is eligible to receive at least 60% of his annual base salary in bonus compensation based upon set performance standards. Pursuant to the employment agreement, in 1999 Mr. Cresante received options to purchase 111,200 shares of our Common Stock at an exercise price of $50.00 per share. These options were cancelled in 2001. In 2002, Mr. Cresante received options to purchase 140,100 shares at an exercise price of $20.00 per share. Mr. Cresante was also required by the employment agreement to, and he did, purchase 5,875 shares of our Common Stock at a price of $34.00 per share on January 31, 2000. The employment agreement provides that we may terminate Mr. Cresante's employment for cause (as defined in the employment agreement). If we terminate Mr. Cresante's employment other than for cause or disability, Mr. Cresante will be entitled to receive a severance of base salary plus target bonus for one year.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of January 15, 2004, ownership of our Common Stock by (i) the stockholders known to us to be the beneficial owners of more than five percent of the outstanding shares of Common Stock, (ii) each director, (iii) each Named Executive Officer and (iv) all directors and executive officers as a group:

*

Indicates ownership of less than one percent of outstanding shares.

(1)

Unless indicated otherwise, the address of the beneficial owner listed above is c/o Special Devices, Incorporated, 14370 White Sage Road, Moorpark, California 93021.

(2)

As used in this table, beneficial ownership means the sole or shared power to vote, or to direct the voting of a security, or the sole or shared power to dispose, or direct the disposition of, a

27

security. However, under California law, personal property owned by a married person may be community property that either spouse may manage and control. We have no information as to whether any shares shown in this table are subject to California community property law.

(3)

Computed based upon the total number of shares of Common Stock outstanding and the number of shares of Common Stock underlying options or warrants held by that person exercisable within 60 days of January 15, 2004. In accordance with Rule 13(d)-3 of the Exchange Act, any Common Stock that will not be outstanding within 60 days of January 15, 2004 that is subject to options or warrants exercisable within 60 days of January 15, 2004 is deemed to be outstanding for the purpose of computing the percentage of outstanding shares of the Common Stock owned by the person holding such options or warrants, but is not deemed to be outstanding for the purpose of computing the percentage of outstanding shares of the Common Stock owned by any other person.

(4)

JFL Co-Invest Partners I, LP and J.F. Lehman Equity Investors I, LP are Delaware limited partnerships that are stockholders of the Company. JFL Investors LLC is a Delaware limited liability company that is the general partner of each of these limited partnerships. As of January 15, 2004, Messrs. Lehman, Glickman, Sawyer and Mintz are members of the general partner, and, as such may be deemed to control the voting and disposition, and be the beneficial owners, of the shares of the Common Stock owned by the limited partnerships.

(5)

Includes options exercisable within 60 days of January 15, 2004 for 28,334, 21,355, 49,689 and 7,811 shares for JFL Co-Invest Partners I, LP, J.F. Lehman Equity Investors I, LP, JFL Investors LLC and BNP Paribas Principal Incorporated, respectively.

(6)

As an officer of BNP Paribas Principal Incorporated ("BNP PPI"), Mr. Alexander may be deemed to control the shares of Common Stock owned by BNP PPI. Accordingly, Mr. Alexander may be deemed to be beneficial owner of the shares of Common Stock owned by BNP PPI reflected above. The address for Mr. Alexander is c/o BNP Paribas Principal Incorporated, 787 Seventh Avenue, New York, New York 10019.

(7)

The address of Messrs. Lehman, Glickman, Sawyer and Mintz is 2001 Jefferson Davis Highway, Suite 607, Arlington, Virginia 22202.

(8)

Mr. Boileau is a member of a limited partner of J.F. Lehman Equity Investors I, LP. The address for Mr. Boileau is 114 Arapahoe Drive, PO Box 663, Saratoga, Wyoming 82331.

(9)

Mr. Brinkley is a member of a limited partner of J.F. Lehman Equity Investors I, LP. Mr. Brinkley's address is 32 Village Circle, Manhattan Beach, California 90266.

(10)

Sir Lewinton is a member of a limited partner of J.F. Lehman Equity Investors I, LP and is on the investment advisory board of J.F. Lehman & Company. The address for Sir Lewinton is 63 Curzon Street, London W1J 8PD, United Kingdom.

(11)

Mr. Paul is a member of a limited partner of J.F. Lehman Equity Investors I, LP. The address for Mr. Paul is 21 Springwood Drive, Trumbull, Connecticut 06611.

(12)

Mr. Stroud is a member of a limited partner of J.F. Lehman Equity Investors I, LP. The address for Mr. Stroud is c/o General Management Partners, LLC, 2001 Jefferson Davis Highway, Suite 607, Arlington, Virginia 22202.

(13)

Includes options exercisable within 60 days of January 15, 2004 of 93,400, 47,000, 16,000, 16,000, 14,000, 14,000, 14,000 and 14,000 shares for Messrs. Cresante, Walsh, Baglini, Bruge, Carroll, Cessario, Reeder and Sperber, respectively.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Stockholders Agreement

Upon consummation of the Recapitalization, we entered into a Stockholders Agreement with JFL Equity Investors I, LP, JFL Co-Invest Partners I, LP, BNP Paribas Principal Incorporated, the Treinen Family Trust and the Neubauer Family Trust (collectively, the "Stockholders") and J.F. Lehman & Company. Among other things, the Stockholders Agreement provides that each Stockholder will vote all of its Common Stock to elect as directors the 11 persons designated as directors by JFL Equity Investors I, LP and the one person designated as a director by BNP Paribas Principal Incorporated. The Stockholders Agreement contains customary restrictions on transfer, rights of first offer, preemptive rights, tag-along and drag-along rights. The Stockholders Agreement will terminate upon the earlier of:

•

the tenth anniversary of the Stockholders Agreement,



•

the date when all Stockholders and their transferees cease to hold any Securities (as defined under the Stockholders Agreement),



•

the date when all Securities have been sold in a registered public offering or distributed to the public pursuant to Rule 144 under the Securities Act, or



•

the date when Securities at an aggregate offering price of at least $20,000,000 are sold in a registered public offering.

The Stockholders Agreement will terminate with respect to any Stockholder once that Stockholder ceases to hold any Securities. In 2001, the Stockholders Agreement terminated as to the Treinen Family Trust when the shares held by this Stockholder were transferred to certain other Stockholders. The Stockholders Agreement will terminate with respect to any Securities once those Securities have been sold in a registered public offering or distributed to the public pursuant to Rule 144 under the Securities Act. In 2002, the Stockholders Agreement terminated as to J.F. Lehman & Company when J.F. Lehman & Company's proxy to vote all of the Additional Rollover Shares it had a right to acquire under the Rollover Stockholders Agreement expired.

Registration Rights Agreement

Pursuant to the Registration Rights Agreement entered into upon consummation of the Recapitalization, J.F. Lehman Equity Investors I, LP, JFL Co-Invest Partners I, LP, BNP Paribas Principal Incorporated and the Neubauer Family Trust and any of their direct or indirect transferees have certain demand and piggyback registration rights, on customary terms, with respect to the Common Stock held by such entities and persons.

Management Agreements

Pursuant to the terms of a ten-year Management Agreement and a ten-year Management Services Agreement (together, the "Management Agreements") we entered into with J.F. Lehman & Company upon consummation of the Recapitalization, we agreed to pay J.F. Lehman & Company an annual management fee equal to $0.9 million, payable in advance on a quarterly basis. We paid $0.9 million in management fees to J.F. Lehman & Company in 2003.

Neubauer Consulting Agreement

In 2002, we entered into a Consulting Agreement with Walter Neubauer, a stockholder of the Company, pursuant to which we agreed to pay Mr. Neubauer an annual fee of $100,000 for consulting services related to the design, manufacture and marketing of precision engineered pyrotechnic devices. During 2003, we paid Mr. Neubauer $100,000 pursuant to this agreement.

Component Purchases

During the year ended November 2, 2003, we purchased approximately $0.7 million of materials from a corporation owned by Walter Neubauer, one of our stockholders. At November 2, 2003, approximately $0.1 million was owed to this corporation.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

The following documents are filed as part of this report:

30

31

(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 the 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 the 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.

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(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.



(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.



(o)

Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended November 3, 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 May 4, 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.

(b)   REPORTS ON FORM 8-K

        None.

33

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Special Devices, Incorporated:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows present fairly, in all material respects, the financial position of Special Devices, Incorporated and its subsidiaries (the "Company") at November 2, 2003 and November 3, 2002, and the results of their operations and their cash flows for each of the three years in the period ended November 2, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, effective November 4, 2002, the Company adopted Statement of Financial Accounting Standards No. 145, "Rescission of SFAS No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections." Accordingly, gains on extinguishment of debt have been reclassified to income from continuing operations.

PricewaterhouseCoopers LLP
Los Angeles, California
January 12, 2004

F-1

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

See accompanying notes to consolidated financial statements.

F-2

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

See accompanying notes to consolidated financial statements.

F-3

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

See accompanying notes to consolidated financial statements.

F-4

SPECIAL DEVICES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands)

See accompanying notes to consolidated financial statements.

F-5

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