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

WASHINGTON, D.C. 20549

FORM 10-K

~~ý Annual report pursuant to Section 13 or 15~~(dMark one) ~~of the Securities Exchange Act of 1934~~

~~For~~x ANNUAL ~~the~~REPORT ~~fiscal~~PURSUANT ~~year~~TO ~~ended:~~SECTION 13 ~~November~~OR 15(D) 3,OF ~~2002~~ THE SECURITIES EXCHANGE ACT OF 1934

For the or fiscal year ended: October 31, 2004

~~o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934~~OR

~~For~~o TRANSITION ~~the~~REPORT ~~Transition~~PURSUANT ~~Period from to~~TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the ~~Commission~~transition period ~~File~~from ~~Number:~~_______________ ~~333-75869~~ to _______________

~~SPECIAL~~Commission file ~~DEVICES,~~number: ~~INCORPORATED (Exact name of Registrant as specified in its charter)~~ 333-75869

Delaware		95-3008754
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
14370 White Sage Road, Moorpark, California		93021
(Address of principal executive offices)		(Zip Code)

SPECIAL DEVICES, INCORPORATED

(~~805)~~Exact ~~553-1200~~name ~~(Registrant's~~of ~~telephone~~registrant ~~number,~~as ~~including~~specified ~~area~~in ~~code~~its charter)

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

Delaware		95-3008754
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
14370 White Sage Road, Moorpark, California		93021
(Address of principal executive offices)		(Zip Code)
	(805) 553-1200
(Registrant’s telephone number, including area code)

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~~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 ýx No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the ~~Registrant'~~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~~ this Form 10-K. ý x

~~As of~~Indicate ~~January 24,~~by ~~2003,~~check mark whether the ~~number~~registrant ofis ~~outstanding~~an ~~shares~~accelerated offiler ~~the~~(as ~~Registrant's~~defined ~~common~~in ~~stock~~Rule 12b-2 ~~was~~of ~~3,712,764.~~the Act) Yes o No x

As of the ~~SPECIAL~~last ~~DEVICES~~business day of the registrant’s most recently completed second fiscal quarter, ~~INCORPORATED INDEX~~none TOof ~~ANNUAL~~the ~~REPORT~~voting ONand ~~FORM~~non-voting 10common equity was held by non-K affiliates.

			PAGE
PART I
	Item 1.	Business	3
	Item 2.	Properties	9
	Item 3.	Legal Proceedings	10
	Item 4.	Submission of Matters to a Vote of Security Holders	11
PART II
	Item 5.	Market for the Registrant's Common Equity and Related Stockholder Matters	12
	Item 6.	Selected Consolidated Financial Data	12
	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
	Item 7A.	Quantitative and Qualitative Disclosures about Market Risks	18
	Item 8.	Financial Statements and Supplementary Data	18
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	18
PART III
	Item 10.	Directors and Executive Officers of the Registrant	19
	Item 11.	Executive Compensation	24
	Item 12.	Security Ownership of Certain Beneficial Owners and Management	27
	Item 13.	Certain Relationships and Related Transactions	29
	Item 14.	Controls and Procedures	30
	Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	30

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

As of January 21, 2005, 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

		PAGE
PART I
Item 1.	Business	3
Item 2.	Properties	12
Item 3.	Legal Proceedings	12
Item 4.	Submission of Matters to a Vote of Security Holders	13
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	14
Item 6.	Selected Financial Data	14
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 8.	Financial Statements and Supplementary Data	21
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	21
Item 9A.	Controls and Procedures	21
Item 9B.	Other Information	22
PART III
Item 10.	Directors and Executive Officers of the Registrant	23
Item 11.	Executive Compensation	28
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	31
Item 13.	Certain Relationships and Related Transactions	33
Item 14.	Principal Accountant Fees and Services	34
PART IV
Item 15.	Exhibits and Financial Statement Schedules	35

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~~ 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~~For example, 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.

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 ~~last~~52 ~~day~~or in53-week ~~October~~period toending the Sunday closest to the last day of October. Unless otherwise noted, all references to years, such as "“during ~~2002"~~2004”, mean ~~means~~ our fiscal year.

~~Overview~~ OVERVIEW

We believe that 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~~believe ~~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~~ 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~~Our ~~divestiture~~Automotive ofDivision ~~our~~accounted ~~Aerospace~~for ~~Division,~~virtually ~~which~~all ~~included~~of our ~~wholly~~consolidated ~~owned~~net ~~subsidiary~~sales and ~~Scot,~~assets ~~Incorporated~~as ~~("Scot"),~~of ~~was~~and ~~completed~~for inthe ayear ~~series~~ended ofOctober ~~transactions~~31, ~~in 2000 and 2001~~2004.

Following the expiration of certain noncompete agreements in select aerospace and military market segments, we have been developing internal capabilities for our emerging Aerospace Division to reenter these markets. During the third quarter of 2004 we began bidding on contracts in these markets and during the fourth quarter of 2004 shipped a small commercial order under $0.1 million to a customer in these markets. We expect to continue to pursue opportunities in this business.

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

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

~~History~~ 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 ’s 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

~~generator~~In ~~("MGG")~~December 1998, ~~automotive~~we consummated ~~product~~a ~~line.~~recapitalization ~~MGG~~(the ~~units~~“Recapitalization”) ~~are~~in ~~used~~which byall ~~the~~shares ~~automotive~~of our ~~industry~~Common inStock, ~~seat~~other ~~belt~~than ~~pretensioner~~those ~~applications.~~retained ~~The~~by ~~Contribution,~~certain ~~License~~members of management and ~~Lease~~certain ~~Agreement~~other ~~was~~stockholders ~~amended~~(the ~~and~~“Continuing ~~restated~~Stockholders”), were converted ininto ~~September 2000~~the right to ~~convey~~receive ~~all~~$34 ofper ~~MSI's~~share ~~rights~~in tocash. ~~the~~In ~~intellectual~~connection ~~property~~with tothe Recapitalization, ~~SDI.~~we ~~The~~delisted ~~MGG~~our ~~product~~Common ~~line~~Stock ~~was~~from ~~moved~~the toNASDAQ ~~our~~Stock ~~Mesa~~Market, and ~~Arizona~~accordingly ~~facility~~filed ~~during~~for deregistration with the ~~second~~Securities ~~half~~and ofExchange Commission ~~2000~~(“SEC”).

~~On May~~In July 111999, ~~2001,~~ we entered ~~completed~~into ~~the~~a ~~sale~~Contribution, ofLicense ~~the~~and ~~net~~Lease ~~assets~~Agreement ~~comprising~~with ~~the~~McCormick ~~remaining operations of our Aerospace Division~~ Selph, Inc. (~~the "Aerospace Sale"~~“MSI”), which ~~had~~at ~~designed and manufactured products for~~ the ~~aerospace~~time ~~industry~~was ~~for~~an ~~nearly~~affiliate ~~40 years.~~of ~~Its~~our ~~customers~~controlling ~~were~~stockholder, pursuant ~~primarily~~to ~~the~~which ~~U.S.~~we ~~Department~~received ofcertain ~~Defense~~assets and ~~its~~licensed ~~prime~~the ~~contractors~~intellectual property ~~and~~comprising ~~subcontractors.~~the ~~The~~micro ~~Aerospace~~gas ~~Division's~~generator ~~products~~(“MGG”) ~~included initiators~~automotive ~~and~~product line. ~~devices~~MGG ~~that~~units ~~incorporated~~are ~~these~~used ~~initiators~~by ~~such~~the asautomotive ~~explosive~~industry ~~bolts,~~in ~~cutters,~~seat ~~actuators,~~belt ~~valves,~~pretensioner applications. ~~pin~~The ~~pullers~~Contribution, ~~and~~License ~~safe-~~and~~-arm~~ ~~and~~Lease ~~arm-fire~~Agreement ~~devices.~~was ~~Scot,~~amended ~~which was~~and ~~sold~~restated onin September ~~21,~~ 2000, ~~designed~~to ~~and~~convey ~~manufactured~~all ~~devices~~of ~~for~~MSI’s ~~launch~~rights ~~vehicles~~to ~~and~~the ~~aircraft~~intellectual property ~~egress~~to ~~applications~~SDI. asThe ~~well~~MGG asproduct ~~sophisticated~~line ~~test~~was ~~products~~moved ~~such~~to asour ~~parachute~~Mesa, ~~release~~Arizona ~~and oxygen~~facility ~~mask~~during ~~testers.~~the second half of 2000.

~~In June~~On May 11, 2001, we completed the sale ~~and~~of ~~leaseback~~the net assets comprising the remaining operations of our Aerospace ~~facilities~~Division in(the ~~Moorpark~~“Aerospace Sale”), ~~California~~which had designed and ~~Mesa,~~manufactured products ~~Arizona~~for (the ~~"Real~~aerospace ~~Estate~~industry ~~Transaction")~~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. Our subsidiary Scot, Incorporated (“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.

~~We formed~~In ~~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,~~we ~~marketing,~~completed ~~distribution~~the sale and ~~sale~~leaseback of ~~air~~our ~~bag~~facilities ~~initiators~~in Moorpark, ~~micro~~California ~~gas generators~~ and Mesa, ~~seat~~Arizona ~~belt~~(the ~~buckles~~“Real ~~and~~Estate ~~pyrotechnic pretensioners in Europe~~Transaction”). ~~SDI-Molan began operations in September 2002.~~

~~In June 2002,~~We weformed ~~incorporated~~a ~~Special~~joint ~~Devices~~venture partnership, ~~Japan~~SDI-Molan ~~Kabushiki~~GmbH & Co. ~~Kaisha~~KG ("“SDI ~~Japan"~~-Molan”) in ~~Japan~~Germany ~~and~~ in ~~November~~June ~~2002~~2001. weOur ~~formed~~50% ~~Special~~interest ~~Devices~~in SDI-Molan is held by SDI Germany GmbH (~~Thailand~~“SDI Germany”), Coa wholly owned German subsidiary.~~, Ltd~~ ("SDI ~~Thailand")~~Germany was established in 2001 for the purpose of holding the ~~Thailand~~interest in the joint venture. ~~These~~SDI-Molan’s ~~subsidiaries~~business ~~were~~is ~~formed~~the todevelopment, production, ~~create~~marketing, adistribution ~~direct~~and ~~business~~sale ~~presence~~of inair ~~these~~bag ~~geographic~~initiators, ~~markets~~MGGs, and seat belt buckles and ~~are~~pyrotechnic ~~expected~~pretensioners toin ~~begin~~Europe. SDI-Molan began operations in ~~2003.~~2002 Wewith ~~previously~~its ~~distributed~~MGG ~~our~~production ~~products~~line. inCommercial ~~Japan~~production ~~through~~commenced anon ~~agent.~~its Global Standard Initiator (“GSI”) lines in 2004.

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. Commercial production is expected to scale up in 2005.

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 transmits an electrical charge to the initiator. The initiator then fires, igniting the gas generator in the

~~combustion~~Industry 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. Overview

~~In 1994,~~One of the ~~NHTSA~~major ~~regulations~~reasons for ~~were~~the ~~amended~~establishment toof ~~require that airbags be~~ the ~~automatic~~Automotive ~~frontal~~Products ~~crash~~Division ~~protection~~was ~~system~~the ~~used~~adoption ~~for both~~ by the ~~driver~~National ~~and~~Highway ~~front~~Traffic ~~passenger~~Safety inAdministration at(“NHTSA”) ~~least 95%~~ of ~~passenger~~regulations ~~automobiles~~that ~~manufactured~~initially ~~from~~required ~~September 1996~~all ~~to August 1997 for sale in the United States, and in 100% of~~ passenger automobiles manufactured on or after ~~September 1997~~ 1989 for sale in the United States. ~~For~~to ~~light~~have ~~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~~systems ~~and vans manufactured from September 1997 to August 1998~~ for ~~sale in~~ the ~~United States, and for both the~~ driver and front passenger. Beginning in ~~100%~~1994 ofsimilar requirements for light trucks and vans ~~manufactured on~~went orinto ~~after September 1998 for sale in the United States~~effect. InAirbags ~~addition to these requirements, automobile OEMs have recently introduced other safety restraint devices, including side airbags, head protection airbags~~ and automatic seat ~~belt~~belts ~~pretensioners.~~were ~~Research~~the ~~and~~two ~~development~~initial ismeans ~~currently~~of incompliance ~~process~~with ~~for~~these ~~rear seat airbag systems~~regulations.

~~In response~~Automotive ~~to concerns over injuries caused by~~ airbag ~~deployment~~systems consist ~~for out-~~of~~-position~~ ~~occupants~~six ~~(primarily~~basic ~~children~~components: ~~and infants)~~sensors, ~~research~~a isdiagnostic ~~ongoing~~and tofiring ~~develop~~module, ~~advanced or~~an ~~"smart"~~initiator ~~airbag~~(the ~~systems.~~product ~~The~~we ~~first~~manufacture), ~~generation~~a ofcombustion ~~these systems~~chamber, ~~which~~a ~~deploys~~gas angenerator and ~~airbag~~a atspecially ~~lower~~treated ~~forces,~~fabric ~~has been introduced~~bag. ~~The~~Once ~~next generation systems will have~~ the ~~ability~~sensors to detect ~~weight~~an ~~and position~~impact of sufficient severity, the ~~occupant.~~diagnostic ~~Most~~and offiring ~~these~~module ~~new~~transmits ~~systems~~an ~~have~~electrical charge ~~"dual~~to ~~chambers,"~~the ~~each of which requires an~~ initiator. The ~~NHTSA~~initiator ~~Reauthorization~~then ~~Act~~fires, ofigniting ~~1998 mandates~~ the ~~issuance~~gas ofgenerator in athe ~~final~~combustion ~~rule~~chamber ~~for~~that ~~advanced airbags.~~burns ~~The~~very ~~advanced~~rapidly, ~~airbags~~producing ~~are~~a ~~required~~gas inthat inflates ~~some~~the ~~new~~bag. ~~passenger~~The ~~cars~~entire ~~and~~process ~~light~~takes ~~trucks~~approximately ~~beginning~~40 inmilliseconds. ~~September 2002~~The diagnostic ~~and~~module inalso ~~all~~tests ~~new~~the ~~cars~~initiator ~~and~~each ~~light~~time ~~trucks~~the ~~beginning~~automobile ~~September 2005.~~is started.

~~Our business~~In ~~and earnings are sensitive to general business and economic conditions. These conditions include automotive vehicle sales~~1994, ~~short-term~~the ~~interest rates and consumer confidence~~NHTSA ~~levels~~regulations ~~about~~were ~~the~~amended ~~economy.~~to Ifrequire ~~any~~that ofairbags ~~these~~be ~~conditions~~the ~~worsen,~~automatic ~~our~~frontal ~~business~~crash protection ~~and~~system ~~earnings~~used ~~could~~for beboth ~~adversely~~the ~~affected.~~driver ~~For example, if consumer confidence erodes~~ and ~~short~~front ~~term~~passenger ~~interest~~in ~~rates~~100% ~~rise to a point where purchases~~ of passenger automobiles ~~are deferred~~, ~~our~~light ~~production~~trucks ofand ~~initiators,~~vans ~~our~~manufactured ~~principal~~on ~~revenue~~or ~~producing~~after ~~product,~~September 1998 ~~would~~for besale ~~adversely~~in ~~affected.~~the WeUnited ~~are subject to price pressure from our customers which reduces our revenues through lower standard unit pricing~~States. WeIn ~~also~~addition ~~are~~to ~~affected~~these byrequirements, ~~the trend towards increased~~automobile ~~unit~~OEMs have ~~sales~~recently ofintroduced ~~lower~~other ~~cost~~safety ~~standard~~restraint ~~products~~devices, ~~as replacements for higher cost prior generation lead wire products. See "Products" for a discussion of these products. The retail automotive market remains~~including ~~very~~side ~~competitive~~airbags, ashead ~~the~~protection ~~OEMs~~airbags ~~compete~~and ~~for~~seat ~~market~~belt ~~share~~pretensioners. ~~During~~Research ~~calendar year 2002~~ and development ~~early~~is ~~2003,~~currently ~~automobile manufacturers have offered an array of incentives~~ in anprocess ~~effort~~for torear ~~sustain~~seat ~~sales.~~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 were required in some new passenger cars and light trucks beginning in September 2002 and will be required in all new cars and light trucks beginning in September 2005. Additional published and proposed regulations over the last ten years have required more airbags.

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. In recent years, our automotive sales volume has been subject to the outcome of various make-or-buy decisions from a major customer who has the capability to manufacture select initiator products. We expect this trend to continue in the future. While we have been able to offset these decreases in volume with gains from other customers, there can be no assurance that we can continue to do so in the future.

Products

We believe we are the world'’s largest independent supplier of airbag initiators and ~~micro gas generators~~MGGs. Initiators and ~~micro~~MGGs ~~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 over 125 different standard and leadwire airbag initiators for domestic and foreign manufacturers of inflators. Leadwire product differs from standard product 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. We also began manufacturing micro gas generators in 1999 and 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~~that signal to ~~maintain~~a ~~our~~high-energy ~~leadership~~output ~~position~~by ina ~~the~~thermal reaction ~~industry,~~of wecompacted ~~are~~pyrotechnic inmaterials. In the ~~process~~event of ~~developing~~an ~~"smart"~~automobile accident, ~~initiator~~airbag ~~technologies~~initiators ~~that~~activate ~~will~~inflators, bewhich in turn inflate an airbag. MGGs are initiators used in ~~new~~seat belt pretensioning devices, ~~integrated~~which ~~occupant~~take ~~protection~~dangerous slack ~~systems.~~out of seat belts in the event of an accident.

~~The airbag~~We ~~manufacturers'~~currently ~~requirements~~produce three primary families of pyrotechnics for ~~our~~automotive ~~initiators~~safety ~~are~~systems ~~dependent~~delivered onto ~~the~~both ~~requirements~~domestic and foreign manufacturers of ~~automobile~~airbag ~~manufacturers~~inflators and seat belt pretensioners: standard (“squib”), leadwire and MGG type. WeWithin ~~believe~~these ~~that~~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 ~~airbag~~North ~~initiator~~American market, leadwire products are legacy programs in ~~the~~declining ~~United~~demand. ~~States~~Leadwire ~~has~~product ~~become,~~differs from standard product in ~~and~~that ~~will~~SDI ~~for~~adds ~~the~~a ~~foreseeable~~length ~~future~~of ~~remain~~electrical wire, ~~closely~~an ~~tied~~electrical ~~with~~harness ~~the~~connector ~~cyclical~~and, in ~~fluctuations~~some cases, a machined retainer. Any combination of these value added features, depending on the ~~automotive~~customer ~~market~~need, differentiates a leadwire or value added product from a standard product. ~~This~~We ~~trend~~have ~~may~~a bevariety ~~offset~~of ~~partially~~other asinitiator products ~~new~~that ~~applications~~are ~~for~~currently ~~airbags~~in ~~and~~the ~~initiators,~~qualification process including the Global ~~such~~Gas asGenerator ~~airbags~~(“G4”). In ~~for~~order ~~side-impact~~to ~~protection~~maintain ~~and~~our ~~seat~~leadership ~~belt~~position ~~pretensioners~~in the industry, we are ~~installed~~in bythe process ~~automobile~~of ~~manufacturers.~~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"”)), ~~Breed~~ 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~~and Takata have 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 3~~October 31, ~~2002~~2004 include Autoliv (26.1%), TRW (3522.57%), ~~Autoliv~~ISI (3619.65%) and ARC (1317.45%). 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~~the sales in our Automotive Division are achieved under ~~long-term~~blanket ~~agreements~~ orders specifying ~~minimum~~ customer requirements to be supplied by us ~~during the term of the agreements~~. All of our ~~long-term~~blanket ~~agreements~~orders 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"~~ “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 12-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.

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~~receipt of the order, ~~owned~~the amount byof ~~Nippon~~“firm” ~~Kayaku~~backlog at any given time is not indicative of ~~Japan,~~sales ~~opened~~levels expected ato ~~manufacturing~~be ~~facility~~achieved inover ~~northern~~the ~~California~~next intwelve-month ~~2002~~period.

Competitors

There are three suppliers of airbag initiators currently operating in the United States, SDI, Autoliv (formerly OEA, Inc. ) and LifeSparc (owned by Nippon Kayaku). Both Autoliv and LifeSparc compete with us based on price, delivery reliability and quality. 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.

Other companies may choose to enter the automotive initiator market in the future. There are significant barriers to entry into this market. 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.

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 other ~~"smart"~~emerging ~~airbag~~inflation ~~systems~~technologies.

~~For~~As a result of the close ~~new~~relationship ~~programs~~with our customers, we generally receive a request for quote ~~from~~for new ~~our customers~~programs. 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 ~~supplied~~customers ~~with~~ supply specific performance parameters, performance data are also supplied to customers.

AEROSPACE DIVISION

General

In 2001, we completed the sale of the net assets comprising the remaining operations of our Aerospace Division, which had designed and manufactured products for the aerospace industry for nearly 40 years. Following the expiration of certain noncompete agreements in select aerospace and military market segments, we have been developing internal capabilities to reenter these markets. During the third quarter of 2004 we began bidding on contracts in these markets and during the fourth quarter of 2004 shipped a small commercial order under $0.1 million to a customer in these markets.

Industry Overview

The aerospace market is comprised of a large number of companies that manufacture a wide variety of products and provide a diverse group of services. The new Aerospace Division is focusing its efforts primarily on the design, development and manufacture of highly reliable ordnance and pyrotechnic products incorporated in tactical missiles, weapons and launch vehicles.

Each of the devices manufactured by the new Aerospace Division is a component in a larger product of its customer. As a result, we and our competitors must respond to specification requirements by devoting significant engineering, development and testing resources.

Products

The new Aerospace Division’s products are expected to include initiators and devices that incorporate these initiators such as explosive bolts, cutters, actuators, valves, pin pullers and safe-and-arm and arm-fire devices.

Backlog and Customers

The new Aerospace Division had a total backlog of $1.2 million at October 31, 2004. Our current and prospective customers are primarily the U.S. Department of Defense and its prime contractors and subcontractors. All open contracts were firm fixed price contracts. Backlog includes the remaining contract amount for units yet to be shipped for signed contracts (excluding renewals or extensions that are at the discretion of the customer) or contract award notifications with firm delivery dates and prices. Backlog is calculated without regard to possible adjustments for scope change or potential cancellations until such changes or cancellations occur. Of the total new Aerospace Division backlog at October 31, 2004, we expect that all of it will be delivered in fiscal 2005.

Contract Risks

Some of our contracts contain pricing provisions that require the payment of a set fee by the customer for our services regardless of the costs we incur in performing these services, or provide for penalties in the event we fail to achieve certain contract standards. In such situations, we are exposed to the risk that we will incur significant unforeseen costs or such penalties in performing the contract.

Competitors

During the bid process for the initial contract for a program, the new Aerospace Division competes with several firms, some with greater financial resources than we have. Once the initial contract is awarded, contracts for additional quantities are generally entered into on a negotiated price basis and are not competitively bid.

In recent years, the number of our competitors has decreased through both attrition and acquisitions by the remaining companies. Not withstanding the foregoing, we have identified multiple competitors in the aerospace pyrotechnic market including Pacific Scientific, a division of Danaher Corporation, Goodrich Corporation and Hi-Shear Corporation.

Sales and Marketing

Marketing efforts for the new Aerospace Division are focused on identifying emerging new programs that have long-term production potential and the prime contractors or subcontractors who are likely to receive contracts for such programs. We have a marketing team whose duties include identifying and pursuing new program opportunities, customers, potential teaming arrangements and new business development strategies.

For new programs, the new Aerospace Division generally receives a request for quotation from its customer. We respond to customer inquiries with quotations and extensive cost, technical and management proposals. In some cases, we will provide prototype hardware for the customer’s evaluation prior to source selection. We believe that customers award contracts based upon the technical proposals submitted, which include design innovation, analysis and compliance with specifications, in addition to pricing.

Many contracts with respect to the U.S. Department of Defense programs involving amounts in excess of $500,000 are subject to audit by the United States government. Most of our contracts with respect to the U.S. Department of Defense programs are subject to termination at the government’s convenience.

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~~While both the Automotive Products Division and the wenew ~~must~~Aerospace Division manufacture similar pyrotechnic products, each division’s manufacturing process is unique. Because the Automotive Products Division 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. In contrast, the new Aerospace Division will manufacture primarily engineered-to-order products pursuant to custom specifications. Lead times are expected to typically range between six to nine months in order to satisfy the highly technical and intense product testing required prior to product shipment. As a result, the new Aerospace Division is expected to produce a wider variety of products at significantly lower volumes than the Automotive Products Division. 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~~product manufactured ofby ~~initiator~~the Automotive weProducts ~~manufacture~~Division 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 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.

7Products to be manufactured by the new Aerospace Division will be required to meet rigorous standards and specifications for workmanship, process, raw materials, procedures and testing. Customers, and in some cases the U.S. Department of Defense as the end user, may perform periodic quality audits of the

~~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.~~ 9

manufacturing process. Some customers and the U.S. Department of Defense may in the future place representatives at our facilities to monitor quality assurance.

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. See Note 17 to the Consolidated Financial Statements.

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 ~~preliminary~~ inquiry regarding compliance with laws pertaining to government ~~policies~~ 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 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.

810

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~~ multiple parties, although this cannot be guaranteed.

Employees

At ~~November~~October 331, ~~2002~~2004, we had approximately ~~398~~ 294 full-time employees in Moorpark, California and approximately ~~386~~276 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.

In October 2004, we reached a decision to reduce our workforce by approximately 10%. The reductions are expected to be completed by the end of the first quarter of 2005. The action is the result of improvements to SDI’s manufacturing productivity and is designed to reduce costs and improve our profitability during 2005.

Financial Information About Geographic Areas

See Note 15 to the Consolidated Financial Statements for financial information about the geographic areas in which we operate.

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~~See ~~holds~~“Item ~~patents~~1. ~~covering~~Business—History” for ~~key~~a ~~design~~discussion ~~and~~of ~~processing~~our ~~features~~intellectual ofproperty ~~its~~rights ~~existing~~in ~~and~~connection ~~future~~with ~~products.~~the MGG product line.

Patents

SDI holds patents covering key design and processing features of its existing and future products. In total, we have 9 U.S. patents granted.

Seven patents, five of which expire in 2020 and two of which expire in 2022, cover improvements in pyrotechnic initiators.

One patent, which expires in 2019, covers an effective pyrotechnic system.

One patent, which expires in 2023, covers an electronic blasting system.

Research and Development

Our research and development department'’s expense was $2.1.3 million, $1.51 million and $02.41 million in ~~2002~~2004, ~~2001~~ 2003 and ~~2000~~2002, 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. ~~and~~We ishave ~~used~~an byadditional ~~our~~facility ~~Automotive~~in ~~Products~~Mesa, ~~Division~~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.

~~We have~~In anJune 2001, ~~additional~~we ~~facility~~completed the sale and leaseback of our facilities in Moorpark, California and Mesa, Arizona. onThe ~~approximately~~lease 21provides for ~~acres~~an initial term of ~~land~~twenty ~~used~~years ~~for~~with ~~our~~options ~~Automotive~~to ~~Products~~extend ~~Division.~~for ~~The~~two ~~Mesa~~ten-year terms ~~facility~~and ~~consists~~initial ofannual ~~several~~rent ~~buildings~~of ~~aggregating~~$3.9 million ~~approximately 60,000~~with ~~square~~yearly ~~feet~~rent ~~and~~escalations beginning ~~two~~in ~~warehouses~~2003 ~~aggregating~~based ~~approximately~~on ~~12,000~~the ~~square~~Consumer ~~feet.~~Price Index.

9SD Thailand leases a manufacturing facility located in Saraburi Province, Thailand. The facility consists of approximately 5,000 square feet and has an initial lease term of 5 years beginning July 2003 and ending July 2008 with renewal options in 5 year increments.

InSDI Japan ~~June 2001,~~leases wea ~~completed~~sales ~~the~~office ~~sale and leaseback of our facilities~~ in ~~Moorpark~~Tokyo, ~~California~~Japan ~~and~~on ~~Mesa,~~a ~~Arizona.~~month ~~The lease provides for an initial term of twenty years with options~~ to ~~extend~~month ~~for two ten-year terms and annual rent of $3~~basis.~~9 million with yearly rent escalations beginning in 2003 based on the Consumer Price Index.~~

ITEM 3. LEGAL PROCEEDINGS

~~OSHA~~Defense Criminal ~~Investigations. On~~Investigative ~~September 1,~~Service ~~2000,~~Investigation. Our anformer ~~accidental~~Aerospace ~~initiation~~Division ~~incident~~remains ~~occurred~~the atsubject ~~our~~of an ~~Moorpark~~investigation ~~facility~~commenced ~~and~~in ~~two~~1999 ~~employees were~~by ~~injured.~~the ~~The~~Defense ~~State~~Criminal Investigative Service of the ~~California,~~Office ~~Department~~ of ~~Industrial~~the ~~Relations~~Inspector General, ~~Division~~U.S. Department of ~~Occupational~~Defense, ~~Safety~~into allegations ~~and~~that ~~Health~~SDI ~~("Cal-OSHA")~~deviated ~~conducted~~from acontractual ~~post-incident~~requirements ~~and~~relating ~~process~~to ~~safety~~the ~~management~~use ~~inspection,~~of ~~which~~organic ~~resulted~~sealants. inWe ~~the~~responded ~~issuance~~to a subpoena in ~~February 2001~~1999, ofand ~~citations~~have ~~for~~met ~~alleged~~with ~~safety~~the government ~~violations~~regarding ~~and~~the ~~proposed~~status ~~fines~~of ~~aggregating~~the ~~approximately~~investigation. ~~$168~~In addition,~~000.~~ Wewe ~~appealed~~have ~~the~~responded ~~citations,~~to and disputed the ~~appeal~~ ~~was~~Government’s ~~settled~~allegations that ~~pursuant~~SDI tomay ahave ~~Settlement~~deviated ~~Agreement~~from ~~under~~various ~~which~~contractual ~~the~~requirements. Although ~~aggregate~~one ~~amount~~potential consequence of ~~fines~~the ~~was~~Government instituting civil ~~reduced~~proceedings is tothat ~~approximately~~we ~~$85,000,~~could ~~payable~~be suspended infrom ~~quarterly~~future ~~installments~~military ~~commencing~~and onfederal ~~December 5,~~government ~~2002.~~sales ~~Because~~pending the conclusion of the ~~accident~~civil ~~resulted~~proceedings, inwe ado ~~serious~~not ~~injury,~~believe ~~Cal-OSHA's~~this ~~Bureau~~is oflikely to ~~Investigation~~occur. ~~("BOI")~~A ~~conducted~~suspension ~~its~~would ~~own~~not ~~investigation~~be expected to ~~determine~~materially ~~whether~~affect our financial tocondition, ~~refer~~results ~~the~~of operations ~~matter~~or toliquidity given the ~~District~~divestiture ~~Attorney's~~of ~~Office~~our ~~for~~Aerospace ~~Ventura~~Division, ~~County.~~which was Wecompleted ~~believe~~in ~~that~~2001. ~~this~~It ~~investigation~~would, ~~has~~however, ~~concluded and~~impact noour ~~referral~~reentry ~~has~~into ~~been~~the ~~made~~aerospace market. At this ~~stage~~point, it is not possible to predict or assess the ~~amount~~ likelihood of ~~potential~~an ~~liabilities~~unfavorable ~~associated~~outcome ~~with~~or predict the ~~BOI~~amount ~~investigation,~~of ~~which~~potential ~~could result in criminal~~ liabilities ~~and penalties~~.

~~Qui Tam~~ Selleck Suit. We are ~~the~~ a defendant in a civil action entitled ~~United~~Daniel ~~States ex rel~~F. ~~Charles~~Selleck ~~K. Holder~~ v. ~~Special~~ Special Devices, Incorporated pending in the ~~U.S.~~Superior ~~District~~ Court ~~for~~of the ~~Central~~State ~~District~~ of California. ~~The~~for ~~action,~~the ~~filed~~County ~~under~~of ~~seal~~Ventura. inA complaint ~~August 1999 and first~~ served ~~on SDI~~ in ~~December~~ September ~~2001,~~2002 isalleges abreach ~~qui tam lawsuit in which a former employee~~ of ~~SDI is seeking~~contract, onfraud ~~behalf~~and deceit and ~~of the United States~~negligent misrepresentation, anclaims injunctive ~~unspecified~~and ~~amount~~declaratory ofrelief, ~~money damages~~ and ~~civil~~seeks ~~penalties~~damages ~~under~~in ~~the~~excess ~~federal~~of ~~False~~$1.0 ~~Claims~~million ~~Act.~~relating ~~The~~to ~~complaint~~the Plaintiff’s ~~alleges~~purchase ~~that~~from SDI, ~~when~~of ~~submitting~~certain ~~invoices~~real ~~under~~estate ~~unspecified~~located ~~government~~in ~~contracts prior to August 1999~~Moorpark, ~~falsely~~ ~~certified~~California. ~~that~~An itamended ~~was~~complaint inserved ~~compliance~~January 2003 ~~with~~withdrew ~~environmental~~the allegations ~~laws.~~of Wefraud ~~are~~and ~~vigorously~~deceit ~~defending~~and the ~~action.~~claim Atfor ~~this~~injunctive ~~stage~~relief, itand isadded allegations ~~not~~of ~~possible~~negligent tointerference ~~evaluate~~with ~~the~~prospective ~~likelihood~~economic ofadvantage. ~~an unfavorable outcome or estimate~~We ~~the~~also ~~range~~successfully ofchallenged ~~potential loss, if any.~~

Defense Criminal Investigative Service Investigation. Our former Aerospace Division remains the subject of an investigation commenced in 1999 by the Defense Criminal Investigative Service ("DCIS") of the Office of the Inspector General, Department of Defense, into allegations that SDI deviated from contractual requirements relating to the use of organic sealants. We responded to a subpoena in 1999, and, since that time, have not been advised formally of any action against SDI arising out of the investigation. We dispute the government's interpretation of the contracts as precluding the use of such sealants in the manner in which they were used. One potential consequence of civil proceedings or criminal charges, if filed, is the possibility that we would be suspended from future military and federal government sales, and if convicted, debarred from such sales for a period of time. This would not be expected to materially affect our financial condition, results of operations or liquidity given the divestiture of our Aerospace Division, which was completed in 2001. At this point, it is not possible to predict or assess the likelihood of an unfavorable outcome or predict the amount of potential liabilities. 12

~~CharTech~~the ~~Suit.~~negligent ~~A lawsuit alleging that SDI willfully infringed two patents held by CharTech Engineering~~claim, ~~Inc.~~ ~~("CharTech")~~which was ~~filed~~withdrawn ~~on July 14, 2000,~~ in ~~the~~a ~~U.S.~~further amended ~~District Court for the Central District of California. We answered the~~ complaint, ~~asserted counterclaims against CharTech, and~~ filed ain ~~third party complaint against CharTech, its related company Iso Vac Engineering,~~July ~~Inc~~2003. ~~("IsoVac") and George Neff, a principal in both companies.~~ We ~~engaged~~are invigorously adefending ~~mediation with CharTech, IsoVac and George Neff that resulted~~the inaction. aAt ~~binding agreement setting forth key terms of the settlement of~~ this ~~dispute. Under these key terms~~stage, weit ~~will~~is ~~pay~~not ~~CharTech~~possible ato ~~fee~~evaluate ~~of $1,250,000 for a non-exclusive license under~~ the ~~CharTech~~ ~~patent~~likelihood ~~rights. The fee is payable in installments, with a total~~ of ~~$750,000~~an unfavorable ~~paid~~outcome ~~before~~or ~~December 31,~~estimate ~~2002 and~~ the ~~last~~range ~~installment~~of ~~payable~~potential ~~on December 31~~loss, ~~2007.~~if ~~The pending lawsuit is to be dismissed with prejudice as part of the terms~~any. ~~The parties are in the process of implementing~~

10Qui Tam Suit. On July 28, 2004, we entered into a Stipulation Re Dismissal in the civil action entitled Unites 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, was a qui tam lawsuit in which a former employee of SDI sought, on behalf of the United States, an unspecified amount of money damages and civil penalties under the federal False Claims Act. Pursuant to the Stipulation, on July 30, 2004 the lawsuit was dismissed with prejudice with respect to the relator and without prejudice with respect to the federal government. Concurrently, the parties entered into a Settlement Agreement pursuant to which the relator released all claims against SDI in exchange for payment by SDI in the amount of $412,500.

the settlement agreement. The settlement does not have a material impact on our results of operations, financial position or liquidity.

Hermetic Seal Suit. We are a defendant in a civil action entitled Hermetic Seal Corporation and HCC Industries, Inc. v. Special Devices, Inc. pending in the Superior Court of the State of California for the County of Los Angeles. The complaint, filed in August 2002 by a former supplier, claims damages in excess of $2.3 million for breach of contract. 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.

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 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.

1113

PART II

ITEM 5. MARKET FOR ~~THE~~ REGISTRANT'’S COMMON EQUITY ~~AND~~ , RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

As a result of the Recapitalization, our common equity is no longer publicly traded. There are five stockholders of our common equity as of January 21, 2005. No cash dividends have been declared on our common equity in 2004 or 2003.

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~~October 331, ~~2002~~2004. The financial data ~~for~~is ~~each of the four years in the period ended November 3, 2002 are~~ derived from our consolidated financial statements which have been audited by PricewaterhouseCoopers LLP, ~~independent~~Independent ~~accountants.~~Registered ~~The financial~~Public ~~data~~Accounting ~~for the year ended October 31, 1998 also is derived from our consolidated financial statements which have been audited by KPMG LLP, independent accountants~~Firm. The data set forth below should be read in conjunction with the ~~Consolidated~~consolidated ~~Financial~~financial ~~Statements~~statements and related notes ~~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~~aerospace operations on May 11, 2001. The results of operations, the gain on sale of Scot and the net assets of the ~~Aerospace~~former Aerospace Division have been reclassified to Discontinued Operations for all prior periods presented. Activity related to our reentry into this market was not significant in 2004.

	For The Years Ended
	For the Years Ended
	October 31			~~October~~November 312					November 3					October 31
	November 3 2002
	2004			2003					2002					2001			2000
				2001			2000			1999			1998
	(In thousands)
	(In thousands)
Statement of Operations Data:
Statement of Operations Data:
Net sales	$	105,452			$	112,908				$	120,254			$	122,917		$	131,970
Net sales	$	120,254		$	122,917		$	131,970		$	124,552		$	135,235
Gross profit	19,036				21,385					21,472				13,191			12,143
Gross profit(a)		21,472			13,191			12,143			13,998			24,951
Operating expenses	12,654				11,426					13,893				14,394			9,210
Operating expenses(a)		13,893			14,394			9,210			11,379			7,927
Environmental and other investigation costs	—				—					—				1,752			2,067
Environmental and other investigation costs		—			1,752			2,067			11,117			—
Interest expense, net	(8,615		)		(8,621		)			(8,886		)		(13,049		)	(17,144		)
Interest (expense) income, net		(8,886	)		(13,049	)		(17,144	)		(13,782	)		13
Gain on extinguishment of debt(a)	—				—					521				9,416			—
Gain (loss) on disposal of assets	—	—			~~(6,360~~—	)		58		—	4			~~229~~(6,360		)	58
Income (loss) from continuing operations before extraordinary gain		(1,161	)		(12,970	)		(9,472	)		(24,815	)		10,292
Equity in losses of SDI-Molan	(498		)		(1,394		)			(176		)		—			—
Income from discontinued operations, net of tax		—			1,062			3,495			4,549			5,155
Income (loss) from continuing operations	(1,685		)		516					(640		)		(3,554		)	(9,472		)
Gain (loss) on sale of discontinued operations, net of tax		(172	)		13,994			24,396			—			—
Income from discontinued operations, net of tax	—				—					—				1,062			3,495
Extraordinary gain on extinguishment of debt, net of tax		521			9,416			—			—			—
Gain (loss) on sale of discontinued operations, net of tax	—				247					(172		)		13,994			24,396
Net income (loss)	(1,685	~~(812~~	)		~~11,502~~763			~~18,419~~		(812	~~(20,266~~	)		1511,~~447~~502			18,419
Balance Sheet Data:
Total assets	$	7566,~~054~~939		$	~~80,265~~$	70,378	$	~~137,843~~		$	~~148~~75,~~128~~054		$	~~118,553~~$	80,265		$	137,843
Long-term debt, less current portion	74,545	~~76,569~~			7875,~~430~~545			~~125,618~~		76,569	~~168,600~~			—78,430			125,618
Redeemable preferred stock	4,000	~~4,000~~			4,000			—		4,000	—			—4,000			—

12(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. There was no impact on net income (loss) in any period.

~~ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~ 14

~~The~~ITEM 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 report7. WeMANAGEMENT’S ~~sold~~DISCUSSION ~~our~~AND ~~wholly~~ANALYSIS ~~owned subsidiary, Scot, on September 21, 2000 and the net assets comprising our remaining Aerospace operations on May 11,~~OF ~~2001.~~FINANCIAL ~~The~~CONDITION ~~results~~AND ofRESULTS ~~operations,~~OF 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. During 2002, we refined our allocation of overhead expenses to cost of sales. As a result of this change, cost of sales, gross profit and operating expenses have been reclassified for all prior periods presented. There was no impact on net income (loss) in any period. OPERATIONS

Overview

We believe that 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.

Following the expiration of certain noncompete agreements in select aerospace and military market segments, we have been developing internal capabilities to reenter these markets. The new Aerospace Division’s products are expected to include initiators and devices that incorporate these initiators such as explosive bolts, cutters, actuators, valves, pin pullers and safe-and-arm and arm-fire devices. During the third quarter of 2004 we began bidding on contracts in these markets and during the fourth quarter of 2004 shipped a small commercial order under $0.1 million to a customer in these markets. We expect to continue to pursue opportunities in this business. Some of our contracts contain pricing provisions that require the payment of a set fee by the customer for our services regardless of the costs we incur in performing these services, or provide for penalties in the event we fail to achieve certain contract standards. In such situations, we are exposed to the risk that we will incur significant unforeseen costs or such penalties in performing the contract.

We have been working on test units of a new product line called EIMs that will be sold to commercial mining and blasting customers worldwide. The initial shipments to customers are expected in 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 priced standard products as replacements for higher priced legacy leadwire 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. 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. In recent years, our automotive sales volume has been subject to the outcome of various make-or-buy decisions from a major customer who has the capability to manufacture select initiator products. We expect this trend to continue in the future. While we have been able to offset these decreases in volume with gains from other customers, there can be no assurance that we can continue to do so in the future.

The following discussion and analysis should be read in conjunction with “Selected Financial Data” and our consolidated financial statements and the related notes thereto included elsewhere in this report. On November 4, 2002, we adopted 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.

			October 31
	For The Years Ended
	October 31 2004				November 2 2003			November 3 2002
	November 3 2002
Net sales		100.0	%			100.0	%		100.0	%
			2001		2000
Cost of sales		81.9	%			81.1	%		82.1	%
Net sales	100.0	%	100.0	%	100.0	%
Gross profit		18.1	%			18.9	%		17.9	%
Cost of sales	82.1	%	89.3	%	90.8	%
Operating expenses		12.0	%			10.1	%		11.6	%
Gross profit	17.9	%	10.7	%	9.2	%
Income from operations		6.1	%			8.8	%		6.3	%
Operating expenses	11.6	%	11.7	%	7.0	%
Environmental and other investigation costs	—	%	1.4	%	1.6	%
Income (loss) from operations	6.3	%	(2.4	)%	0.6	%

~~2002~~2004 Compared to ~~2001~~ 2003

Net Sales

Consolidated net sales for 2004 ~~2002~~ were $~~120~~105.3 5 million, compared to consolidated net sales of $~~122~~112.9 million for ~~2001~~2003. The decrease of 6.6% in net sales was primarily due to lower unit sales and lower prices on high value-added ~~lead~~leadwire ~~wire~~ products ~~partially~~which was partly offset by ~~significantly~~overall ~~higher~~growth ~~unit~~in unit sales onof standard ~~products~~initiators. 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~~2004 was $2119.~~5 million~~0 million or 1718.91% of consolidated net sales, compared to consolidated gross profit of $1321.24 million or 1018.79% of consolidated net sales for ~~2001~~2003. The ~~improvement~~decline in gross margin iswas primarily due to a ~~manufacturing~~shift ~~gains~~in ~~and~~our ~~improved~~mix ~~margins~~of onbusiness towards lower priced standard initiators that provide lower gross profit per unit. In order to optimize our gross profit on our products, we ~~achieved~~continue ~~through~~to ~~product~~make ~~redesigns~~improvements in our manufacturing process that allow us to produce more units with the same or less labor. In addition, we investigate and ~~negotiated~~implement innovations that may serve to reduce the cost of production through improved equipment utilization rates and supplier ~~pricing~~negotiations. ~~agreements~~In October 2004, we began to implement a reduction in our workforce of 10%. The action is the result of improvements to our manufacturing productivity and is expected to reduce costs and improve the Company’s gross profit in 2005. One-time termination benefits of severance and health insurance of $0.3 million were accrued in the fourth quarter.

Operating Expenses

Consolidated operating expenses for ~~2002~~2004 were $1312.9 7 million or ~~11.6~~12% of consolidated net sales, compared with consolidated operating expenses of $1411.4 million or 11 10.71% of consolidated net sales for ~~2001~~2003. ~~(excluding~~The ~~expenses~~increase was primarily due to increased R&D spending for ~~environmental~~our ~~and~~re-entry ~~other~~into ~~investigation~~the ~~costs~~aerospace market, increased inlegal ~~both~~expenses ~~years).~~including ~~The~~the ~~decrease~~settlement ~~was~~of ~~primarily~~the ~~due~~Qui toTam ~~lower~~Suit ~~payroll~~during the third quarter of 2004 (see Item 3. Legal Proceedings) and severance ~~related~~costs. ~~expenses~~During the asthird quarter, we reached a separation agreement with SDI’s former chief operating ~~result~~officer. Agreement costs of ~~the~~approximately ~~reductions~~$0.7 inmillion were ~~force~~expensed in ~~October 2001.~~the third quarter of 2004.

13Equity in Net Earnings (Losses) of SDI-Molan

~~Expenses~~We ~~Related~~recorded $0.5 million in 2004 and $1.4 million in 2003 for our share of the losses of our joint venture in Germany, SDI-Molan. Our joint venture commenced commercial production of GSIs in 2004. Shipments to ~~Environmental~~customers are expected to increase in 2005 due to a full year of production for both MGG and ~~Government~~GSI ~~Investigations~~product lines. Increased customer shipment levels may be reduced depending on the Euro/U.S. dollar

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. 16

~~Other~~exchange ~~Expense~~ rate, automotive market conditions in Europe, and our ability to scale up production levels on each product line.

~~Net~~2003 ~~interest~~Compared ~~expense was $8.9 million for 2002, a $4.1 million decrease compared with net interest expense of $13.0 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 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").

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.

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 and we anticipate net losses from its operations during the next fiscal year.

2001 Compared to 2000

Net Sales

Consolidated net sales for 2003 ~~2001~~ were $~~122~~112.9 million, compared to consolidated net sales of $~~132~~120.03 million for ~~2000~~2002. ~~The~~While total units shipped increased by 9%, the decrease in net sales was primarily due to ~~unfavorable product~~lower ~~mix~~unit sales and lower ~~unit~~prices ~~pricing,~~on high ~~partially~~value-added ~~offset~~leadwire products. byThese leadwire ~~increased~~products ~~unit~~are ~~shipments.~~generally legacy programs that our customers may seek to replace with lower priced standard initiators.

Gross Profit

Consolidated gross profit for ~~2001~~2003 was $1321.24 million or 1018.79% of consolidated net sales, compared to consolidated gross profit of $1221.15 million or 917.~~2% of consolidated net sales for 2000. This was an increase of~~ 9.1% ~~despite the write-off~~ of ~~$2.5 million in obsolete inventory during the third quarter of 2001. Consolidated gross profit as a percentage of~~ consolidated net sales ~~was 12.8%~~ for ~~2001, excluding the inventory adjustment~~2002. The improvement in gross ~~profit~~margin iswas primarily due to ~~cost reductions in excess of unit price reductions~~productivity ~~and~~gains ~~increased~~achieved ~~unit shipments. We continued to improve productivity and reduce scrap~~ through ~~the~~operating ~~implementation of Six Sigma and Lean Manufacturing methodologies~~efficiencies.

Operating Expenses

Consolidated operating expenses for ~~2001~~2003 were $1411.4 million or 1110.71% of consolidated net sales, compared with consolidated operating expenses of $913.29 million or 7 11.06% of consolidated net sales for ~~2000 (excluding expenses for environmental and other investigation costs in both years)~~2002. The ~~increase~~decrease was primarily due to ~~increased~~lower ~~spending for research and~~accrued ~~development~~incentive ~~for~~bonuses ~~new~~in ~~products,~~2003 ~~higher~~compared ~~legal~~to ~~and insurance expense and an accrued incentive bonus in 2001~~2002.

~~Expenses~~Equity ~~Related~~in toNet ~~Environmental~~Earnings ~~and~~(Losses) ~~Government~~of ~~Investigations~~ SDI-Molan

~~There~~We ~~were~~ recorded $1.84 million in ~~expenses~~2003 ~~related to environmental~~ and ~~government~~$0.2 million ~~investigations~~ in ~~2001,~~2002 ~~compared~~for ~~with~~our ~~$2.1 million~~share of ~~such~~the losses ~~expenses~~of inour ~~2000.~~joint ~~The expenses~~venture in ~~2001~~Germany, ~~included $1~~SDI-Molan.~~0 million~~ ~~related~~SDI-Molan tobegan ~~the~~operations in ~~settlement~~September 2002 ofand ~~the~~was ~~Cal-OSHA~~ramping ~~Hollister~~up ~~investigation~~production ~~and~~capabilities ~~$0.8 million~~on ~~related~~its toMGG ~~our~~and GSI lines in 2003.

former Newhall, California facility. There were $2.1 million in expenses related to the settlement of a California EPA investigation in January 2000.

Other Expense

Net interest expense was $13.0 million for 2001, a $4.1 million decrease compared with net interest expense of $17.1 million for 2000. The decrease was primarily due to a reduction in outstanding debt. Average debt outstanding was $120.4 million in 2001, compared with $155.2 million in 2000. We used the net proceeds from the Scot divestiture, the Aerospace Sale and the Real Estate Transaction to repay borrowings under our prior credit facility and to retire a portion of our Notes.

Loss on disposal of assets was $6.4 million for 2001, compared with $0.1 million for 2000. 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~~Revolver ~~Facility~~ requires lockbox arrangements ~~which~~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~~October 331, ~~2002~~2004, we had no borrowings outstanding ~~and~~under the Revolver. We had $31.5 8 million ofin letters of credit ~~("LC")~~ outstanding ~~under~~at ~~the~~October ~~Revolver. As of January 3~~31, ~~2003, the LC amount was reduced to $2~~2004.~~5 million.~~ The total amount available under the Revolver at ~~November~~October 331, ~~2002~~2004 was $910.01 million subject to compliance with certain financial and operating covenants which we must meet on a quarterly and annual basis. As of ~~November~~October 331, ~~2002~~ 2004, we were in compliance with all such covenants.

~~We have~~As ~~guaranteed~~part ~~bank loans made to SDI-Molan, our German joint venture, under agreements entered into in August 2002. Our guarantee is limited to fifty percent~~ of the ~~loans outstanding~~Recapitalization ~~and~~in is1999, ~~subject~~we ~~to a maximum of 3.2 million Euro or approximately~~ issued $3100.20 million atof ~~November 3,~~Senior ~~2002.~~Subordinated ~~SDI-Molan~~Notes ~~had bank loans outstanding in~~ (the ~~amount~~“Notes”). ofWe 4repurchased $0.38 million ~~Euro~~and or $425.36 million atface ~~November 3,~~value ~~2002.~~of ~~SDI-Molan~~the ~~started~~Notes ~~operations~~ in the ~~September 2002.~~open Wemarket ~~anticipate net losses from its operations~~ for ~~the next fiscal year.~~

Continuing operations provided cash of $11.4 million and $0.4 million in 2002 and 2001, respectively. The increase was primarily due to reduced interest expense and increased income from operations. Capital expenditures, primarily for manufacturing equipment, were $6.0 million in both years. We expect to spend approximately $5.0 to $6.0 million on capital expenditures, primarily for manufacturing equipment, during fiscal 2003. 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 2002 and paid bonuses of $2.9 million in January 2003. We made the aforementioned payments with cash from operations. 17

15$0.3 million and $13.4 million in 2002 and 2001, respectively. The repurchases resulted in gains of $0.5 million and $9.4 million in 2002 and 2001, respectively. The Notes are due in December 2008, and bear interest at 113/8% per annum. Interest is payable semi-annually in June and December. The Notes are noncollateralized obligations of SDI and are subordinate to our obligations under the Credit Facility.

~~Our working~~Continuing ~~capital~~operations ~~was~~provided cash of $97.98 million and $6.6 million in at2004 ~~November~~and 32003, ~~2002~~respectively. The increase was primarily due to a significant reduction in inventory levels in 2004, ~~compared~~and ~~with~~a significantly ~~working~~smaller ~~capital~~change in our equity investment in SDI-Molan in 2004. Continuing operations provided cash of $76.6 million and $9.8 million atin ~~October 31,~~2003 ~~2001~~and 2002, respectively. The decrease was primarily due to a significant increase ofin inventory levels in 2003. Capital expenditures, primarily for manufacturing equipment, were $23.17 million in 2004, $6.3 million ~~was~~in 2003 and $6.0 million in 2002. We expect to spend approximately $3.0 million to $4.0 million on capital expenditures, primarily ~~due~~for manufacturing equipment, during fiscal 2005. We expect to ~~larger~~fund these purchases with cash ~~balances~~from ~~because~~operations. ofWe ~~reduced~~made a semiannual interest ~~expense~~payment ~~and~~of $4.2 million ~~increased~~on ~~income~~our Notes in December 2004 with cash from operations. Net cash used in financing activities was $1.0 million, $1.3 million and $1.3 million in 2004, 2003 and 2002, respectively. The increase in 2003 was due to an extra payment on our Term Loan in 2003.

~~As of~~Our ~~November 3,~~working ~~2002,~~capital excluding wecash ~~had~~and ~~net~~cash ~~liabilities~~equivalents ofwas $295.2 8 million. ~~Our~~at ~~ability~~October 31, 2004, tocompared ~~pay~~with ~~the~~$7.2 million ~~interest~~at onNovember 2, 2003 and or$5.0 tomillion at ~~refinance~~November ~~our debt~~3, or2002. toThe decrease ~~fund~~of ~~planned~~$1.4 ~~capital~~million ~~expenditures,~~in ~~will~~2004 ~~depend~~was ~~on generating~~primarily ~~cash~~due ~~flow~~to ~~from~~the ~~future~~decrease ~~operations~~in inventory. WeThe ~~have~~increase ~~had~~of ~~positive~~$2.2 ~~cash~~million ~~flow~~in ~~from~~2003 ~~continuing~~was ~~operations~~primarily ~~during~~due ~~the~~to ~~past~~lower ~~two~~accrued ~~years~~incentive bonuses.

~~Contractual~~As ~~Obligations~~of ~~and~~October 31, ~~Commercial~~2004, ~~Commitments~~ we had net liabilities of $29.6 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.

~~The~~Contractual ~~following schedules summarize our contractual obligations and commercial commitments as of November 3, 2002 (amounts in millions):~~ Obligations

Contractual Obligations	Total		2003		2004		2005		2006		After 2006
Term loan	$	4.0	$	1.0	$	1.0	$	1.0	$	1.0	$	—
Notes		73.6		—		—		—		—		73.6
Operating leases		73.1		4.0		4.0		4.0		3.9		57.2
Total contractual cash obligations	$	150.7	$	5.0	$	5.0	$	5.0	$	4.9	$	130.8

The following schedules summarize our contractual obligations and commercial commitments as of October 31, 2004 (amounts in millions):

Other Commercial Commitments	Total			2003			2004		2005	2006			After 2006
			Payments due by period
Guarantees(1)	$	2.2		$	—		—		—	$	—		$	2.2
Contractual Obligations			Total			Less than 1 year				1-3 years					3-5 years			More than 5 years
Standby letters of credit(2)		3.5			1.5		—		—		2.0			—
Term loan			$	1.7			$	0.7			$	1.0				$	—		$	—
Total commercial commitments	$	5.7		$	1.5		—		—	$	2.0		$	2.2
Subordinated notes			73.6				—				—					73.6			—
Operating leases			65.6				4.1				8.1					7.9			45.5
Purchase obligations			4.1				1.1				1.9					1.1			—
Total			$	145.0			$	5.9			$	11.0				$	82.6		$	45.5

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 $4.4 million at October 31, 2004. Our guarantee is limited to fifty percent of the loans outstanding and is subject to a maximum of 3.2 million Euro or approximately $4.1 million at October 31, 2004. See Note 6 to the Consolidated Financial Statements.

We had $1.8 million in letters of credit outstanding at October 31, 2004 under our Credit Facility. These letters of credit were issued to support the lease agreement on our facilities in California and Arizona and our workers compensation policy in California and Arizona.

We have sufficient availability under our Revolver to cover both the guarantees and the letters of credit at October 31, 2004.

Critical Accounting Policies

WeThe ~~prepare~~preparation ~~our~~of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. ~~This~~(“GAAP”) requires usmanagement to make estimates and assumptions that affect amounts reported ~~amounts~~therein, including the financial information reported in Management’s Discussion and ~~related~~Analysis ~~disclosures~~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 ~~could~~reported in future periods may be based upon amounts that differ from those estimates. ~~From~~The following ~~time~~policies torepresent what ~~time,~~ we ~~may~~believe ~~have~~are the ~~following~~critical ~~allowances~~accounting ~~and/or~~policies most ~~accruals~~affected ~~among~~by significant ~~others:~~management estimates and judgments:

~~At November 3,~~Allowance ~~2002,~~for ~~these~~Doubtful ~~allowances and/or accruals were not material to our results of operations or our financial position.~~ Accounts

16We 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 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. We believe 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 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.

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. 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.

Accounting Developments

In December ~~2002~~ 2004, the ~~Financial Accounting Standards Board ("~~FASB") issued ~~Statement of Accounting Standards ("~~SFAS") No. ~~148~~ 123R, ~~"Accounting for Stock~~“Share-Based ~~Compensation—Transition~~Payment.” ~~and Disclosure—an amendment of~~ SFAS ~~123"~~ No. ~~This~~123R ~~statement~~revises ~~amends~~ SFAS No. 123, " “Accounting for Stock-Based Compensation",” and togenerally requires the ~~provide~~cost associated with employee services received ~~alternative~~in ~~methods~~exchange ~~of transition~~ for aan ~~voluntary~~award ~~change~~of ~~to the fair~~equity instruments ~~value~~be measured based ~~method~~on ofthe ~~accounting for stock~~grant-~~based~~date ~~employee~~fair ~~compensation.~~value Inof ~~addition, this statement amends~~ the ~~disclosure~~award ~~requirements of SFAS No. 123 to require prominent disclosures~~ and recognized in ~~both annual and interim~~ the financial statements over ~~about~~ the period ~~method~~during ofwhich employees are required ~~accounting for stock-based employee compensation and the effect of the method used on reported results. We have chosen~~ to ~~continue~~provide services toin ~~account~~exchange for ~~stock-based compensation using~~ the award. SFAS ~~intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion~~ No. ~~25,~~ 123R also provides guidance on ~~"Accounting~~how ~~for Stock Issued~~ to ~~Employees," and related~~ determine the ~~interpretations.~~grant-date fair ~~Accordingly,~~value ~~compensation expense~~ for ~~stock~~awards ~~options~~of isequity instruments as ~~measured~~ well as ~~the~~alternative ~~excess, if any,~~ methods of adopting its requirements. SFAS ~~the~~No. 123R ~~estimate~~is effective for of the beginning ~~market value~~ of ~~our stock at~~ the ~~date~~first ofinterim ~~the~~or ~~grant over the amount an~~annual reporting ~~employee~~period ~~must~~after ~~pay~~June to15, ~~acquire~~ 2005 (the quarter ~~stock.~~ended WeOctober ~~will~~30, ~~adopt~~2005 ~~the annual disclosure provisions of SFAS No. 148 in our financial reports~~ for ~~the~~us) and ~~year~~applies ~~ended~~to ~~November 2,~~all ~~2003~~outstanding and weunvested ~~will~~share-based ~~adopt~~payment ~~the interim~~awards ~~disclosure~~at ~~provisions~~a company’s ~~for~~adoption ~~financial~~date. ~~reports~~We ~~for~~are ~~the~~currently ~~quarter~~assessing ~~ended May 4, 2003. As~~ the impact ~~adoption~~ of this ~~standard~~statement ~~involves disclosures only, we do not expect a material impact~~ on our ~~results~~ ofconsolidated ~~operations,~~ financial ~~position or liquidity~~statements.

In ~~June~~ May ~~2002~~2003, the FASB issued SFAS No. ~~146~~150, "“Accounting for Certain ~~Costs~~Financial ~~Associated~~Instruments ~~with~~With ~~Exit~~Characteristics orof ~~Disposal~~both ~~Activities~~Liabilities and Equity”." The ~~This~~ statement ~~addresses~~changes ~~financial~~the accounting ~~and reporting~~ for ~~costs associated~~certain ~~with~~financial ~~exit~~instruments orthat, under ~~disposal~~previous ~~activities~~guidance, ~~and~~could ~~nullifies~~be ~~Emerging~~classified ~~Issues~~as ~~Task~~equity ~~Force~~or ~~(EITF)~~“mezzanine” ~~Issue No. 94-3~~equity, by ~~"Liability~~now ~~Recognition~~requiring ~~for~~those ~~Certain~~instruments ~~Employee~~to ~~Termination~~be ~~Benefits~~classified ~~and Other~~as ~~Costs~~liabilities to(or ~~Exit~~assets in ansome ~~Activity~~circumstances). ~~(including~~We ~~Certain~~were ~~Costs~~required ~~Incurred~~to inadopt athe ~~Restructuring)."~~provisions of SFAS No. ~~146 requires that a liability~~ 150 for afinancial ~~cost~~instruments ~~associated~~entered ~~with~~into anor ~~exit~~modified orafter ~~disposal~~May 31, ~~activity~~2003 beand ~~recognized~~otherwise ~~and~~as ~~measured~~of ~~initially~~July 7, at2003, ~~fair~~except ~~value~~for ~~only~~mandatorily ~~when~~redeemable ~~the~~financial instruments ~~liability~~for iswhich ~~incurred,~~the ~~not~~adoption ~~when~~date it is ~~"planned"~~February 1, 2004. WeOur ~~are~~“mezzanine” equity ~~required~~does tonot ~~adopt~~meet the ~~provisions~~requirements of ~~SFAS~~this ~~No. 146~~statement ~~for~~and, ~~exit~~therefore, ~~or disposal~~our ~~activities~~adoption ~~that~~of ~~are~~this ~~initiated~~standard ~~after~~did ~~December 31, 2002 and do~~ not ~~expect the adoption to~~ have a material impact on the our consolidated ~~results of operations,~~ financial ~~position or liquidity~~statements.

In ~~April~~ January ~~2002~~2003, the FASB issued ~~SFAS~~Interpretation No. ~~145~~46, ~~"Rescission~~“Consolidation of ~~FASB~~Variable ~~Statements~~Interest Entities” No(“FIN 46”). 4, 44This ~~and~~interpretation ~~64, Amendment~~ of ~~FASB~~Accounting ~~Statement~~Research Bulletin No. 1351, ~~and Technical Corrections." This statement~~ ~~rescinds~~“Consolidated ~~SFAS~~Financial ~~No. 4~~Statements,” ~~"Reporting~~addresses ~~Gains~~consolidation ~~and~~by ~~Losses~~business enterprises ~~from Extinguishment~~ of ~~Debt,"~~variable ~~and~~interest ~~an amendment of that statement, SFAS No~~entities. ~~64,~~ ~~"Extinguishments of Debt Made to Satisfy Sinking Fund Requirements".~~ Under ~~SFAS~~current ~~No. 4~~practice, ~~all~~two enterprises ~~gains~~generally ~~and~~have ~~losses~~been ~~from~~included ~~extinguishment~~in ofconsolidated ~~debt~~financial ~~were~~statements because ~~required~~one toenterprise becontrols ~~aggregated~~the ~~and,~~other ifthrough ~~material,~~voting ~~classified~~interests. asFIN ~~an extraordinary item, net of the related income~~46 ~~tax~~defines ~~effect. With~~ the ~~elimination~~concept of ~~SFAS~~“variable ~~No. 4,~~interests” ~~gains~~ and ~~losses~~requires ~~from~~existing unconsolidated ~~extinguishment~~variable ofinterest ~~debt~~entities ~~are~~ to be ~~classified~~consolidated asby ~~extraordinary~~their ~~items~~primary beneficiaries ~~only~~ if ~~they meet~~ the ~~criteria~~entities ~~for~~do ~~extraordinary~~not ~~items in~~effectively ~~APB~~disperse ~~Opinion~~risks ~~No. 30,~~among ~~"Reporting~~ the parties ~~Results~~involved. ofThe ~~Operations—Reporting~~interpretation ~~the~~may ~~Effects~~be ofapplied ~~Disposal~~prospectively ofwith a ~~Segment of Business, and Extraordinary, Unusual and Infrequently Occurring Events~~ ~~and~~cumulative-effect ~~Transactions."~~adjustment ~~Applying~~as ~~the provisions~~ of ~~APB~~the ~~Opinion~~date ~~No. 30~~on ~~will~~which ~~distinguish~~it ~~transactions~~is ~~that~~first ~~are~~applied or ~~part~~by ofrestating anpreviously ~~entity's~~issued ~~recurring~~financial ~~operations~~statements ~~from~~for ~~those~~one ~~that~~or ~~are~~more ~~unusual~~years with ora ~~infrequent~~cumulative-effect ~~or that~~adjustment ~~meet~~as of the ~~classification~~beginning of anthe ~~extraordinary~~first ~~item~~year restated. ~~SFAS~~In ~~No.~~December ~~145 also rescinds SFAS No. 44~~2003, ~~"Accounting~~the ~~for~~FASB ~~Intangible~~issued ~~Assets~~FIN ~~of Motor Carriers~~46R," ~~and~~which ~~amends~~among ~~SFAS No. 13,~~other ~~"Accounting for Leases~~things," torevised ~~eliminate~~the animplementation ~~inconsistency~~dates ~~between~~applicable ~~the~~to ~~required~~a ~~accounting~~nonpublic ~~for~~entity ~~sale-leaseback~~such as ~~transactions~~SDI. ~~and~~We ~~the~~are required ~~accounting~~to ~~for~~immediately ~~certain~~apply ~~lease~~FIN ~~modifications~~46 ~~that~~and ~~have economic~~FIN ~~effects~~46R ~~that~~(the ~~are~~“Interpretation”) ~~similar~~ to ~~sale-leaseback~~any ~~transactions.~~entity that ~~This~~is ~~statement~~subject ~~also~~to ~~amends~~the ~~other~~Interpretation ~~existing~~and ~~authoritative~~that ~~pronouncements~~is tocreated ~~make~~after ~~various technical corrections~~December 31, ~~clarify~~ ~~meanings~~2003. orSDI ~~describe~~is ~~their~~also ~~applicability~~required ~~under~~to ~~changed~~apply ~~conditions.~~the WeInterpretation ~~are~~to ~~required~~any toentity ~~adopt~~subject to the ~~provisions~~Interpretation ofthat ~~SFAS~~was ~~No. 145~~created onbefore ~~November~~December 431, ~~2002~~2003 ~~and~~by dothe beginning ~~not~~of ~~expect~~ the ~~adoption~~first toannual ~~have~~period ~~a material~~beginning ~~impact~~after ~~on our results of operations~~December 15, ~~financial~~2004. ~~position~~We are orcurrently ~~liquidity.~~evaluating the

~~In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS No. 121, "Accounting for the Impairment of~~ 20

17potential impact of the adoption of FIN 46 and FIN 46R on the financial reporting of our interest in SDI-Molan.

~~Long-Lived~~ITEM ~~Assets~~7A: ~~and~~QUANTITATIVE ~~for~~AND ~~Long-Lived~~QUALITATIVE ~~Assets to Be Disposed Of" issued in June 1995 and the accounting and reporting provisions of APB Opinion No. 30. SFAS~~DISCLOSURES ~~No. 144~~ABOUT ~~establishes~~MARKET accounting standards for the impairment of long-lived assets, excluding goodwill, and for long-lived assets to be disposed of. SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The statement retains the basic provisions of APB Opinion No. 30 for the presentation of discontinued operations in the statement of operations but broadens that presentation to include a component of an entity (rather than a segment of a business). We are required to adopt the provisions of SFAS No. 144 on November 4, 2002 and do not expect the adoption to have a material impact on our results of operations, financial position or liquidity. RISK

~~In June 2001,~~We ~~the~~have ~~FASB~~only ~~issued~~limited ~~SFAS~~involvement ~~No. 143,~~in ~~"Accounting~~derivative financial ~~for~~instruments ~~Asset~~and ~~Retirement~~do ~~Obligations."~~not ~~SFAS~~hold ~~No. 143~~or ~~requires~~issue ~~that~~them ~~the fair value of a liability~~ for antrading ~~asset~~purposes. ~~retirement~~We ~~obligation~~are beexposed ~~recognized~~to inmarket ~~the~~risk ~~period~~related into ~~which~~changes itin isforeign ~~incurred~~exchange ifrates aon transactions ~~reasonable~~denominated ~~estimate~~in offoreign ~~fair~~currencies ~~value~~and ~~can~~we beselectively ~~made,~~use ~~that~~foreign currency ~~the~~forward ~~associated~~exchange ~~asset~~contracts ~~retirement~~to ~~costs~~manage bethose ~~capitalized~~risks. asAt ~~part~~October 31, 2004, ofwe ~~the carrying~~had ~~amount~~no ofopen ~~the~~contracts. ~~asset~~Certain ~~and~~amounts ~~requires~~borrowed ~~certain~~under ~~disclosures~~our ~~providing~~Credit ~~descriptions~~Facility ofare ~~the~~at variable ~~asset~~rates ~~retirement obligations~~ and ~~reconciliations~~we ofare ~~changes~~thus insubject ~~components~~to ofmarket ~~those~~risk ~~obligations.~~resulting Wefrom ~~are required to~~interest ~~adopt~~rate ~~the provisions of SFAS No~~fluctuations. ~~143~~ onA ~~November 4,~~change ~~2002~~of ~~and~~1% doin ~~not~~the ~~expect~~interest ~~the~~rates ~~adoption~~on tothese borrowings would have ano material impact on our ~~results~~financial ~~of operations~~position, ~~financial~~results ~~position~~of operations or liquidity.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations, establishes specific criteria for recognizing intangible assets separately from goodwill and requires certain disclosures regarding reasons for a business combination and the allocation of the purchase price paid. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for using the purchase accounting method for which the date of acquisition is after June 30, 2001. SFAS No. 142 establishes that goodwill and certain intangible assets will no longer be amortized to earnings, but instead tested for impairment at least annually. Except for business combinations initiated after June 30, 2001, we are required to adopt the provisions of SFAS Nos. 141 and 142 on November 4, 2002. We do not expect the adoption of SFAS Nos. 141 or 142 to 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 3, 2002 we had no open contracts. Certain amounts borrowed under our Credit Facility are at variable rates and we are thus subject to market risk resulting from interest rate fluctuations. 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~~IV of this report.

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

None.

18ITEM 9A. CONTROLS AND PROCEDURES

SDI maintains disclosure controls and procedures. These disclosure controls and procedures are designed to enable management to ~~PART~~reach ~~III~~ a reasonable level of assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms.

As ~~ITEM~~previously disclosed in our filing on Form 10 Q/A for the quarter ended August 1, 2004, we determined that a material weakness existed in our disclosure controls and procedures and our internal control over financial reporting (“Internal Control”) as defined in Exchange Act Rule 13a 15(f) because certain errors were made in accounting for the separation agreement we entered into during that quarter with our former chief operating officer. ~~DIRECTORS~~Those ~~AND~~errors, ~~EXECUTIVE~~which ~~OFFICERS~~resulted OFin ~~THE~~the ~~REGISTRANT~~ restatement of our financial statements for the quarter ended August 1, 2004, related to the timing of the recognition of severance expense and recognition of compensation expense for a deemed modification of stock options.

~~The~~In ~~following~~response ~~table~~to ~~sets forth~~ the ~~name~~identified weakness, ~~age~~we have taken steps to strengthen our disclosure controls and ~~position~~procedures ofand ~~each~~our Internal Controls to prevent the recurrence of the circumstances that resulted in our ~~directors~~determination ~~and~~to ~~executive~~restate ~~officers~~our financial statements for the quarter ended August 1, 2004. ~~All~~To ofcorrect the identified weakness in our ~~officers~~disclosure ~~are~~controls and ~~elected~~procedures byand our Internal Controls, we have instituted procedures requiring that separation agreements be reviewed and ~~serve~~a atformal ~~the~~assessment ~~discretion~~be prepared ofwith respect to the accounting treatment required under generally ~~Board~~accepted accounting principles and that such assessment be subject to an additional level of ~~Directors~~review.

Name	Age	Positions
Dr. John F. Lehman	60	Chairman of the Board of Directors
Thomas W. Cresante	55	Director, President and Chief Executive Officer
George A. Sawyer	71	Director and Secretary
Louis N. Mintz	38	Director and Assistant Secretary
M. Steven Alexander	46	Director
Oliver C. Boileau, Jr.	75	Director
Randy H. Brinkley	58	Director
Donald Glickman	69	Director
William Paul	66	Director
Thomas G. Pownall	81	Director
Joseph A. Stroud	47	Director
John J. Walsh	44	Executive Vice President and Chief Operating Officer
James L. Baglini	41	Vice President—Energetics
Andrew G. Bonas	42	Vice President—Engineering
Nicholas J. Bruge	39	Vice President—General Manager, Mesa
Patrick J. Carroll	59	Vice President—Advanced Product Development
Thomas R. Cessario	48	Vice President—Environmental, Health and Safety and Regulatory Affairs
James E. Reeder	45	Vice President—Finance and Assistant Secretary
Robert E. Sepulveda	49	Vice President—General Manager, Moorpark Automotive
Stephen S. Sperber	61	Vice President—Human Resources

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 Elgar Holdings, Inc. ("Elgar"), 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 became a director, President and Chief Executive Officer of the Company in October 1999. In early 1996, Mr. Cresante joined Allied Signal Aerospace as the Vice President of Operations and later that year was named President of Allied Signal Safety Restraints Systems. Mr. Cresante returned to Arizona in 1997 as the Executive Vice President and Chief Operating Officer for Safety Components International, Inc. Mr. Cresante joined TRW Inflatable Restraints Division in 1990 as the Vice President of Operations. 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 was general manager with ITT Hancock Hardware Division from 1984 through 1987, at which time he was named Vice President of Manufacturing for its Hardware and Seating Division.

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 May 1999 to October 1999. Mr. Sawyer is also a co-founder and Managing General Partner of J.F. Lehman & Company. 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 Elgar, 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.

M. Steven Alexander became a director of the Company in April 2000. Currently, Mr. Alexander is President of Paribas Principal Incorporated (a licensed small business investment company for U.S. investments owned by BNP Paribas) and the co-head of the Merchant Banking Group and the head of Equity Co-investments for North America for BNP Paribas. Prior to his current position at BNP Paribas, Mr. Alexander was head of the national Merchant Banking Group at BNP Paribas for the last five years.

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 promoted to 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 Elgar, United States Marine Repair and 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 and the National Security Advisory Panel of Sandia National Laboratories.

Randy H. Brinkley became a director of the Company in September 1999. Currently, Mr. Brinkley serves as a President of Boeing Satellite Systems Inc. ("BSS"), the world's largest manufacturer of commercial communication satellites. 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 Managing General Partner 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 Chairman of Elgar and 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, MassMutual Participation Investors and Wolf Trap Foundation for the Performing Arts.

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. Mr. Paul is also a director of Elgar.

Thomas G. Pownall, who became a director of the Company upon consummation of the Recapitalization, is a member of the investment advisory board of J.F. Lehman & Company. Mr. Pownall was Chairman of the Board of Directors from 1983 until 1992 and Chief Executive Officer of Martin Marietta Corporation ("Martin Marietta") from 1982 until 1988. Mr. Pownall joined Martin Marietta in 1963 as Vice President of its Aerospace Advanced Planning Unit, became President of Aerospace Operations and, in succession, Vice President, then President and Chief Operating Officer of Martin Marietta. Mr. Pownall is a director of The Titan Corporation and Elgar, Director Emeritus of Sundstrand Corporation, and serves on the advisory board of Ferris, Baker Watts Incorporated. He is also a director of the U.S. Naval Academy Foundation and the Naval Academy Endowment Trust and a trustee of Salem-Teikyo University.

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. 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 Elgar and Burke.

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

SDI, under the supervision ~~Bachelor~~and with the participation of ~~Science~~its ~~degree~~management, inincluding ~~Aeronautical~~its principal executive officer and ~~Astronautical~~principal ~~Engineering~~financial ~~from~~officer, ~~Purdue~~evaluated ~~University~~the effectiveness of the design and aoperation ~~Master~~of its disclosure controls and procedures as of ~~Business~~the ~~Administration~~end ~~from~~of the Stperiod covered by this report. ~~Joseph'~~Based on this evaluation and the material weakness described above, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective in reaching a reasonable level of assurance that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s ~~University.~~rules and forms.

~~James~~A L.control ~~Baglini~~system, ~~Vice~~no matter ~~President—Energetics,~~how iswell ~~responsible~~conceived ~~for~~and ~~the~~operated, ~~direction~~can ~~and~~provide ~~management~~only ofreasonable, ~~the~~not absolute, ~~Company's~~assurance ~~energetics~~that ~~operations. Mr. Baglini~~the ~~joined~~objectives of the ~~Company~~control insystem ~~September 1999~~are asmet. ~~Director~~Further, the design of ~~Energetic~~a ~~Materials~~control ~~and~~system ~~was~~must ~~promoted~~reflect tothe ~~his~~fact ~~current~~that ~~position~~there onare ~~May 7~~resources constraints, ~~2001.~~and ~~Prior~~the tobenefits ~~joining~~of ~~the~~controls ~~Company, Mr. Baglini~~must ~~was~~be ~~Manager,~~considered ~~Propellant~~relative ~~Actuated~~to ~~Devices~~their costs. atBecause ~~Pacific~~of ~~Scientific,~~the ainherent ~~unit~~limitations ofin ~~Danaher~~all ~~Corporation~~control systems, ~~from~~no evaluation ~~1997~~of tocontrols ~~1999.~~can ~~His~~provide ~~experience~~absolute ~~also~~assurance ~~includes~~that ~~positions~~all ascontrol ~~Manager, Propellant~~issues ~~Development~~and ~~for~~instances ~~OEA~~of fraud, ~~Inc.~~ inif ~~Denver~~any, ~~Colorado~~within ~~from~~SDI ~~1992~~have tobeen ~~1997~~detected. ~~and~~Because ~~Manager,~~of ~~Propellant,~~the ~~Pyrotechnic~~inherent ~~and~~limitations ~~Explosive~~in ~~Operations~~a ~~for~~cost-effective ~~Unidynamics~~control ~~in Phoenix~~system, ~~Arizona~~misstatements ~~from~~due ~~1985~~ to error ~~1992.~~or ~~Mr. Baglini~~fraud ~~holds~~may aoccur ~~Bachelor~~and ofnot ~~Science~~be ~~degree~~detected. inSDI ~~Pre-Professional~~conducts ~~Studies~~periodic ~~(chemistry and~~evaluations ~~biology)~~to ~~from~~enhance, ~~the~~where ~~University~~necessary, ofits ~~Notre~~procedures ~~Dame.~~and controls.

~~Andrew~~During G.the ~~Bonas,~~quarter ~~Vice~~ended ~~President—Engineering~~October 31, ~~is responsible for all product design engineering~~2004, ~~research and development and engineering~~there ~~services.~~has ~~Mr. Bonas~~not ~~joined~~occurred ~~the~~any ~~Company~~change in ~~April 1999~~our asInternal ~~Vice~~Controls ~~President—Aerospace~~that ~~Division~~has ~~and was promoted to his current position January 12, 2001. Prior to joining~~materially ~~the Company~~affected, ~~Mr. Bonas~~or ~~worked~~is inreasonably ~~product~~likely ~~design~~to ~~for~~materially ~~TRW's Vehicle Safety Systems. Starting with TRW in 1988~~affect, ~~Mr. Bonas~~our ~~worked~~Internal ~~as a New Product Team Leader, a Product Design and Development Engineering Manager and a Senior Engineer~~Controls. ~~From 1983 to 1988, Mr. Bonas worked in various engineering roles with two different manufacturing companies producing pyrotechnic devices.~~ ~~Mr. Bonas~~Certain ~~holds~~changes awhich ~~Bachelor~~occurred ofafter ~~Science~~the ~~degree~~end ~~in Mechanical Engineering from Pennsylvania State University and a Master~~ of ~~Business~~such ~~Administration~~quarter ~~from~~are ~~the University of Phoenix~~described above.

~~Nicholas~~ITEM J9B. ~~Bruge, Vice President—General Manager, Mesa, is responsible for the day-to-day facility operations and~~ ~~general~~OTHER management of the Company's Mesa, Arizona facility. Mr. Bruge joined the Company in October 2000 in his current position. 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. INFORMATION

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. None

Thomas R. Cessario, Vice President—Environment, Health and Safety and Regulatory Affairs, is responsible for all matters regarding environmental, health and safety 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 in a similar position with Rollins Environmental, Inc. Mr. Cessario worked as a Division Manager of Safety, Health and Environment 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.

~~James E. Reeder, Vice President—Finance and Assistant Secretary, is responsible for managing the day-to-day financial operations of the Company. Mr.~~PART 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. III

~~Robert~~ITEM E10. ~~Sepulveda,~~DIRECTORS ~~Vice~~AND ~~President—General~~EXECUTIVE ~~Manager,~~OFFICERS ~~Moorpark~~OF ~~Automotive, is responsible for the day-to-day facility~~THE operations and general management of the Company's Moorpark, California facility. Mr. Sepulveda joined the Company in May 2000 in his current position. Prior to joining the Company, Mr. Sepulveda worked as a self-employed manufacturing representative and consultant in the automotive and aerospace industries from 1998 to 2000. From 1989 to 1998, Mr. Sepulveda worked for TRW's Driverside Module Facility starting in materials management and ultimately serving as plant manager. Mr. Sepulveda worked as Materials Manager for Morton International, an airbag manufacturer, from 1987 to 1989 and as a Materials Supervisor for Williams International, an aerospace manufacturer, from 1980 to 1987. Mr. Sepulveda has a Bachelor of Science degree in Business Management from Weber State University. REGISTRANT

~~Stephen~~The following S.table ~~Sperber,~~sets ~~Vice~~forth ~~President—Human Resources, is responsible for managing~~ the ~~day-to-day Human Resources operations of the Company~~name, ~~including~~age ~~Compensation, Employee Relations, Staffing, Training, Benefits, Communications~~ and ~~Community Involvement Programs. Mr. Sperber joined the Company in February 2001 in his current~~ position. ~~Prior~~of toeach ~~joining~~of ~~the~~our ~~Company, Mr. Sperber was the Human Resources Director for Litton Industries, Guidance and Control Division, from 1969 to 2001~~directors and ~~the~~executive ~~Human Resources Manager for Singer-Librascope from 1966-1969~~officers. ~~Mr. Sperber~~All ~~has a Bachelor~~ of ~~Arts~~our ~~degree~~officers inare ~~Industrial~~appointed ~~Psychology~~by ~~from New York University~~ and aserve ~~Master~~at ofthe ~~Arts~~discretion ~~degree~~of ~~in Industrial Psychology from~~ the ~~University~~Board of ~~Southern California~~Directors.

Committees of the Board of Directors

Name	Age(1)	Positions
Dr. John F. Lehman	62	Chairman of the Board of Directors
Thomas W. Cresante	57	Director, President and Chief Executive Officer
George A. Sawyer	73	Director and Secretary
Louis N. Mintz	40	Director and Assistant Secretary
M. Steven Alexander	48	Director
Oliver C. Boileau, Jr.	77	Director
Randy H. Brinkley	60	Director
Donald Glickman	71	Director
Tig H. Krekel	51	Director
Sir Christopher Lewinton	73	Director
William Paul	68	Director
Joseph A. Stroud	49	Director
James L. Baglini	43	Vice President—Engineering
Nicholas J. Bruge	41	Vice President—Operations
Patrick J. Carroll	61	Vice President—Advanced Product Development
Thomas R. Cessario	50	Vice President—Regulatory Affairs and Human Resources
James E. Reeder	47	Vice President—Finance and Assistant Secretary
Marty E. Sheber	45	Vice President—New Business Development and Strategy

~~Executive~~(1) Age ~~Committee.~~as ~~The Executive Committee~~ of ~~the~~January ~~Board of Directors is comprised of Messrs. Lehman~~24, ~~Sawyer, Glickman, Paul and Cresante~~2005. ~~The Executive Committee's main function is to expedite the decision-making process on certain matters.~~

~~Audit~~Dr. ~~Committee~~John F. Lehman, ~~The~~who ~~Audit~~became ~~Committee~~a director of the ~~Board~~Company upon consummation of the ~~Directors~~Recapitalization in December 1998 and Chairman of the Company in June 1999, is ~~comprised~~a Managing General Partner of ~~Messrs~~J.F. Lehman & Company. Prior to founding J.F. Lehman ~~Paul,~~& ~~Glickman~~Company, ~~Alexander,~~Dr. Lehman ~~Boileau~~was an investment banker with PaineWebber Incorporated and ~~Mintz.~~served ~~The~~as ~~Audit~~a Managing Director in Corporate Finance. Dr. Lehman ~~Committee~~served ~~makes~~for ~~recommendations~~six ~~concerning~~years ~~the~~as ~~engagement~~Secretary of ~~independent~~the ~~public accountants~~Navy, ~~reviews~~was ~~with~~a member of the ~~independent~~National Security ~~public~~Council ~~accountants~~Staff, served as a delegate to the ~~scope~~Mutual Balanced Force Reductions negotiations and ~~results~~was the Deputy Director of the ~~audit~~Arms ~~engagement,~~Control ~~approves~~and ~~professional~~Disarmament ~~services~~Agency. ~~provided~~Dr. Lehman byis Chairman of the Board of Directors of ~~independent~~OAO ~~public~~Technology ~~accountants~~Solutions, Inc. ~~reviews~~(“OAOT”) ~~the~~and ~~independence~~Racal Acoustics Limited (“Racal”), and is a member of the ~~independent~~Board ~~public~~of ~~accountants~~Directors of Ball Corporation and ISO Inc. In addition, ~~considers~~Dr. Lehman is Chairman of the ~~range~~Princess Grace Foundation, a director of ~~audit~~OpSail Foundation and ~~non-audit~~a ~~fees~~Trustee ~~and~~of ~~reviews~~LaSalle ~~the~~College ~~adequacy~~High School. Dr. Lehman recently completed service as a member of ~~our~~the ~~internal~~National Commission on ~~accounting~~Terrorist ~~controls~~Attacks.

~~Compensation~~Thomas ~~Committee~~W. ~~The~~Cresante ~~Compensation~~joined the ~~Committee~~Company in October 1999 in his present role of ~~the~~Director, ~~Board~~President, and Chief Executive Officer. Mr. Cresante became a member of ~~Directors~~the issupervisory ~~comprised~~board of ~~Messrs. Lehman,~~our ~~Sawyer~~joint venture, ~~Glickman~~SDI-Molan, ~~Stroud~~in 2001. From 1997 to 1998, ~~Pownall~~Mr. Cresante was the Executive Vice President and ~~Cresante~~Chief Operating Officer for Safety Components International, Inc. ~~The~~Mr. Cresante ~~Compensation~~was ~~Committee~~employed ~~makes~~by ~~recommendations~~Allied Signal ~~concerning~~from ~~the~~1996 ~~salaries~~to 1997 and ~~incentive~~held ~~compensation~~the positions of ~~our~~Vice ~~employees~~President of Operations—Aerospace Division and ~~consultants~~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 ~~oversees~~the positions of General Manager and ~~administers~~Vice ~~certain~~President of ~~our~~Operations. ~~stock~~Before ~~option~~1984, ~~plans~~Mr. Cresante held various general manager roles for different manufacturing firms. Mr. Cresante holds a Bachelor of Science degree in Industrial Engineering and

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

~~Compensation~~Management ~~Committee~~from ~~Interlocks~~the University of Akron. He is on the Board of Directors for the Automotive Occupant Restraints Council and ~~Insider~~is ~~Participation~~ a member of the President’s Club for the Moorpark College Foundation.

~~Thomas W~~George A. ~~Cresante,~~Sawyer is currently a director and Secretary of the ~~Chief~~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 ~~the~~J.F. Lehman & Company, until December 2003. He is currently serving as executive advisor to J.F. Lehman & Company and 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 ~~Compensation~~President and ~~Committee~~Chief Executive Officer of Sperry Marine, Inc. InPrior ~~addition~~thereto, ~~other~~Mr. Sawyer held ~~members~~a number of prominent positions in private industry and in the ~~Compensation~~United States ~~Committee~~government, ~~are~~including ~~affiliated~~serving ~~with~~as ~~companies~~the ~~that~~President of John J. McMullen ~~are~~Associates, ~~parties~~the toPresident ~~certain~~and ~~transactions~~Chief Operating Officer of TRE Corporation, Executive Vice President and ~~agreements~~Director ~~involving~~of General Dynamics Corporation, the ~~Company~~Vice President of International Operations for Bechtel Corporation and the Assistant Secretary of the Navy for Shipbuilding and Logistics under Dr. Lehman. ~~See~~Mr. Sawyer is ~~Item~~currently ~~13—Certain~~a ~~Relationships~~director of OAOT and ~~Related~~American ~~Transactions~~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. ~~ITEM~~Mr. Mintz 11joined J.F. ~~EXECUTIVE~~Lehman ~~COMPENSATION~~ & Company in 1997 and became a partner in 2004. 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”).

~~The~~M. ~~table~~Steven ~~below~~Alexander ~~contains~~became a director of the ~~annual~~Company ~~and~~in ~~long-term~~April 2000. ~~compensation~~Currently, ~~for~~Mr. Alexander ~~services~~is President inof ~~all~~BNP ~~capacities~~Paribas toPrincipal ~~our~~Incorporated ~~company~~(“BNP PPI”), a licensed Small Business Investment Company for ~~2002,~~certain ~~2001~~U.S. ~~and~~investments ~~2000,~~owned ofby ~~those~~BNP ~~persons~~Paribas. He has been president of BNP PPI (~~collectively,~~formerly Paribas Principal Incorporated) since 1989. Mr. Alexander is also the ~~"Named~~head ~~Executive~~of ~~Officers")~~the ~~who~~Private ~~were,~~Capital ~~during~~Group since January 2002, ~~(i) the~~which ~~Chief~~is ~~Executive~~solely ~~Officer~~responsible for principal private equity and ~~(ii) the~~mezzanine ~~other~~investments ~~most~~for ~~highly~~BNP ~~compensated~~Paribas ~~executive~~in ~~officers~~North ~~receiving~~America. ~~compensation~~Prior to his ofcurrent ~~$100~~position,~~000~~ orMr. Alexander ~~more~~was co-head of the Merchant Banking Group at BNP Paribas from us2000 orto ~~one~~2001 and head of ~~our~~the ~~subsidiaries.~~Merchant Banking Group at Paribas from 1990 to 2000.

	Annual Compensation				Long-Term Compensation
Name and Principal Position	Year	Salary ($)	Bonus ($)		Securities Underlying Options		All Other Compensation ($)
Thomas W. Cresante President and Chief Executive Officer (October 1999 to date)	2002 2001 2000	379,862 353,974 335,927	361,006 313,750 —		140,100 — —	(1)	27,948 28,274 223,488	(2)(3)(2)(3)(2)(3)
John J. Walsh Executive Vice President and Chief Operating Officer (May 2000 to date) Vice President—Strategic Marketing and Programs (May 1999 to May 2000)	2002 2001 2000	229,044 212,076 183,750	240,000 275,000 —		70,500 — —	(1)	11,754 14,967 1,938	(2)(3)(2)(3)(2)
Andrew G. Bonas Vice President—Engineering (January 2001 to date) Vice President—Aerospace Division (April 1999 to January 2001)	2002 2001 2000	169,229 159,600 152,774	120,880 61,250 —		24,000 — —	(1)	2,533 2,675 1,945	(2)(2)(2)
Thomas R. Cessario Vice President—Environment, Health and Safety and Regulatory Affairs (November 1999 to date)	2002 2001 2000	172,674 162,150 147,561	104,212 5,000 15,000		21,000 — 8,000	(1)(5)(7)	208 24,224 —	(2)(3)
Robert E. Sepulveda Vice President—General Manager Moorpark Automotive (May 2000 to date)	2002 2001 2000	182,619 170,814 69,810	110,209 30,000 —		24,000 — 18,000	(1)(6)(7)	2,224 50,956 —	(2)(2)(3)
Donald C. Campion Executive Vice President and Chief Financial Officer (October 2000 to October 2001)	2002 2001 2000	295,027 291,667 27,886	210,014 125,000 —	(4)	— — —		139,791 2,625 —	(2)(3)(2)

Oliver C. Boileau, Jr. became a director of the Company upon consummation of the Recapitalization in December 1998. Mr. Boileau is a member of a limited partner of J.F. Lehman Equity Investors I, LP. 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.

~~Options~~Randy ~~Granted~~H. Brinkley became a director of the Company in ~~2002~~ September 1999. He is currently a Senior Executive Advisor to J.F. Lehman & Company and a member of a limited partner of J.F. Lehman Equity Investors I, LP. Mr. Brinkley served as President of Boeing Satellite Systems Inc. (“BSS”), the world’s largest manufacturer of commercial communication satellites, from 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.

~~The~~Donald ~~following~~Glickman, ~~table~~who became ~~summarizes~~a ~~options~~director ~~granted~~of the Company upon consummation of the Recapitalization in December ~~2002~~1998, is a co-founder of J.F. Lehman & Company. Prior to joining J.F. Lehman & Company, Mr. Glickman was a principal of the ~~Named~~Peter ~~Executive~~J. ~~Officers:~~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 and Monroe Muffler Brake, Inc. He is also a trustee of MassMutual Corporate Investors and MassMutual Participation Investors.

Name	Number of Securities Underlying Options Granted	% of Total Options Granted to Employees in 2002		Exercise Price Per Share		Expiration Date
Thomas W. Cresante	140,100	27.8	%	$	20.00	4/30/12
John J. Walsh	70,500	14.0	%	$	20.00	4/30/12
Andrew G. Bonas	24,000	4.8	%	$	20.00	4/30/12
Thomas R. Cessario	21,000	4.2	%	$	20.00	4/30/12
Robert E. Sepulveda	24,000	4.8	%	$	20.00	4/30/12
Donald C. Campion	—	—			—	—

Tig H. Krekel became a director of the Company in April 2004. Mr. Krekel became Vice Chairman of J.F. Lehman & Company in 2004 and has been a limited partner and senior advisor to J.F. Lehman Equity Investors I, LP since 2001. Prior to joining J.F. Lehman & Company, Mr. Krekel served as President and Chief Executive Officer of Hughes Space and Communications and President of BSS. Before joining Hughes in 1999, Mr. Krekel was the President and Chief Executive Officer of AlliedSignal’s (now Honeywell’s), $3.0 billion Aerospace Equipment Systems group, which served the commercial transport, regional airline, general aviation, military and space markets. Prior to joining AlliedSignal, Mr. Krekel served in senior executive positions at Decair Corporation, an aviation/aerospace holding company, Poloron Products, a diversified manufacturing concern and Jet America, a domestic and international air carrier. Mr. Krekel spent five years as a Naval Officer holding various assignments including nuclear engineering duty on the aircraft carrier USS Enterprise, and aide in the office of the Chief of Naval Operations at the Pentagon. Mr. Krekel is a director of Racal and Hudson Group. He is also a National Trustee of the Boys & Girls Clubs of America.

~~Aggregate~~Sir ~~Option~~Christopher ~~Exercises~~Lewinton became a director of the Company in ~~2002~~October 2003 . Sir Christopher formally joined J F Lehman & Company in 2001 and ~~2002~~prior thereto ~~Year~~was ~~End~~a ~~Option~~member ~~Values~~ of a limited partner of J.F. Lehman Equity Investors I, LP. Prior to joining the firm, Sir Christopher served as Chairman and Chief Executive Officer of TI Group plc, a global specialized 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 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.

~~The~~William ~~following~~Paul ~~table~~became a ~~summarizes~~director ~~information~~of ~~with~~the ~~respect~~Company toupon ~~all~~consummation ~~options~~of ~~held~~the byRecapitalization ~~the~~in ~~Named~~December 1998. ~~Executive~~Mr. ~~Officers~~Paul ~~exercisable~~is a ~~within~~member ~~60 days~~of a limited partner of ~~November 3~~J.F. Lehman Equity Investors I, ~~2002:~~LP. 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,

Name	Value Realized	Number of Securities Underlying Unexercised Options at Fiscal Year End Exercisable/ Unexercisable	Value of Unexercised In-The-Money Options at Fiscal Year End Exercisable/ Unexercisable(1)
Thomas W. Cresante	$	46,700/93,400	$0/$0
John J. Walsh		23,500/47,000	0/0
Andrew G. Bonas		8,000/16,000	0/0
Thomas R. Cessario		7,000/14,000	0/0
Robert E. Sepulveda		8,000/16,000	0/0
Donald C. Campion		0/0	0/0

Bonus and Incentive 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.

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

including Vice President ~~qualified~~of orEngineering ~~nonqualified~~and ~~benefit~~Programs ~~plans~~and atExecutive ~~any~~Vice ~~time~~President and toChief ~~alter~~Operating Officer, ~~amend,~~and ~~add~~in to1983 was named President and~~/or~~ ~~restrict~~Chief ~~employee~~Executive ~~participation~~Officer toof Sikorsky Aircraft. In 1994, Mr. Paul was appointed the ~~extent~~Executive ~~permitted~~Vice President byof ~~applicable~~UTC, ~~federal~~Chairman orof ~~state~~UTC’s ~~law~~international oroperations ~~regulation~~and became a member of UTC’s Management Executive Committee. Mr. Paul retired from these positions in 1997.

~~Compensation~~Joseph A. Stroud became a director of ~~Directors~~ the Company as part of the Recapitalization in December 1998. Mr. Stroud became a member of the supervisory board of our joint venture, SDI-Molan, in September, 2004. 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.

~~Directors~~James ~~who~~L. ~~are~~Baglini, ~~our~~Vice President—Engineering, ~~employees~~is doresponsible ~~not~~for ~~receive~~the ~~any~~direction ~~compensation~~and ~~directly~~management ~~for~~of ~~their~~the Company’s ~~service~~engineering, onenergetics, R&D and MIS operations. He assumed this position effective January 1, 2004. Mr. Baglini joined the ~~Board~~Company in September 1999 as Director of ~~Directors~~Energetic Materials and was promoted to Vice President—Energetics in May, 2001. ~~All~~Prior ~~other~~to ~~directors~~joining ~~receive~~the $2Company,~~000~~ ~~per~~Mr. Baglini was ~~meeting~~Manager, ~~and~~Propellant ~~$20~~Actuated Devices at Pacific Scientific,~~000~~ a unit of ~~per~~Danaher ~~annum~~Corporation, from 1997 to 1999. His experience also includes positions as Manager, Propellant Development for ~~their~~OEA, Inc. ~~services~~in Denver, Colorado from 1992 to 1997 and Manager, Propellant, Pyrotechnic and Explosive Operations for Unidynamics/Phoenix in Goodyear, 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.

~~Employment~~Nicholas J. Bruge, Vice President—Operations, is responsible for the operations management of the Company’s manufacturing facilities in Moorpark, California, in Mesa, Arizona and ~~Consulting~~in ~~Agreements~~ Thailand. Mr. Bruge joined the Company in October 2000 as Vice President—General Manager, Mesa and was promoted to his current position in December 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 in North America and Mexico. Mr. Bruge has a Bachelor of Science degree in Industrial Technology specializing in Automotive Technology from Arizona State University.

~~Thomas~~Patrick WJ. ~~Cresante.~~Carroll, OnVice President—Advanced ~~October 1,~~Product ~~1999~~Development, weis ~~entered~~currently ~~into~~the anManaging ~~employment~~Director ~~agreement with Mr~~of SDI-Molan. ~~Cresante.~~ ~~The~~He ~~employment~~joined ~~agreement~~the ~~had~~Company anin ~~initial term~~1999 ofas ~~two~~Vice ~~years~~President—General ~~and~~Manager, Hollister ~~provided~~when ~~for an automatic one-year renewal at~~ the ~~end~~Company ofacquired the ~~initial~~MGG ~~term~~product ~~and each renewal term until terminated upon written notice~~line. ~~Mr. Cresante's~~Prior ~~current base salary is $380,224 per year and is subject~~ to ~~annual review by our Board of Directors. In addition~~the acquisition, Mr. ~~Cresante~~Carroll iswas ~~eligible~~a toCorporate ~~receive~~Vice atPresident ~~least~~for ~~60%~~Teledyne, ~~of his annual base salary~~ and in ~~bonus compensation~~1998 ~~based~~concurrently ~~upon~~served ~~set~~as ~~performance standards. Pursuant to~~ the ~~employment~~General ~~agreement,~~Manager inof ~~1999~~Commercial ~~Mr. Cresante~~Operations ~~received~~for McCormick ~~options~~Selph toOrdnance ~~purchase 111~~Products,~~200~~ ~~shares~~a ofbusiness ~~our~~unit ~~Common~~of ~~Stock~~Teledyne ~~at an exercise~~Ryan ~~price of $50~~Aeronautical.00 ~~per~~Prior ~~share. These options were cancelled in 2001. In 2002~~thereto, Mr. ~~Cresante~~Carroll ~~received~~worked ~~options~~for toFMC ~~purchase~~Corporation ~~140,100 shares at an exercise price of $20.00 per share. Mr. Cresante~~from ~~was~~1967 ~~also required by the employment agreement~~ to, ~~and he did~~1995, ~~purchase~~most ~~5,875~~recently ~~shares~~as ofGeneral ~~our~~Manager ~~Common Stock at a price~~ of ~~$34.00~~the ~~per~~corporate ~~share on January 31, 2000~~lab. ~~The employment agreement provides that we may terminate~~ Mr. ~~Cresante's~~Carroll has ~~employment~~a ~~for~~Bachelor ~~cause~~of ~~(as~~Science ~~defined~~degree in ~~the~~Mechanical ~~employment~~Engineering ~~agreement).~~and IfMaster weof Mechanical ~~terminate~~Engineering ~~Mr. Cresante's~~from ~~employment~~Pennsylvania ~~other~~State ~~than~~University ~~for~~and ~~cause~~an ~~or disability,~~Executive ~~Mr. Cresante~~Master ~~will be entitled to receive a severance~~ of ~~base~~Business ~~salary~~Administration ~~plus~~from ~~target~~Stanford ~~bonus for one year~~University.

~~Donald~~Thomas CR. ~~Campion~~Cessario, Vice President—Regulatory Affairs and Human Resources, is responsible for all matters regarding environmental, health, safety, export control and defense security regulations and Human Resources at the Company. Mr. ~~Campion's~~Cessario assumed ~~employment~~responsibility ~~was~~for ~~terminated~~Human ~~October~~Resources in November ~~31,~~2004. ~~2001~~Mr. Cessario joined Hethe ~~was~~Company ~~entitled~~in toNovember 1999 ~~receive~~as anVice ~~amount~~President—Environmental, Health, ~~equal~~Safety toand ~~twelve~~Regulatory ~~months salary~~Affairs. ~~under~~Prior ~~his~~to ~~employment~~joining ~~terms~~the Company, Mr. Cessario was the Corporate

Director of Environmental, Health and Safety from 1997 to 1999 for Irex Engineering Corporation. From 1992 ~~ITEM~~to 121997, Mr. Cessario ~~SECURITY~~worked ~~OWNERSHIP~~as OFNational ~~CERTAIN~~Director ~~BENEFICIAL~~of ~~OWNERS~~Environmental, ~~AND~~Health and ~~MANAGEMENT~~ Safety with Rollins Environmental, Inc. Mr. Cessario worked as Tactical Division Manager of Safety, Health and Environmental from 1981 to 1992 for Thiokol Aerospace Corporation. Mr. Cessario has a Bachelor of Science degree from West Virginia University as well as a Master of Science in Environmental Engineering and Occupational Safety from New York University and a Master of Business Administration in Operations Management from Wilmington College.

~~The~~James ~~following~~E. ~~table~~Reeder, ~~sets~~Vice President—Finance ~~forth~~and Assistant Secretary, asis responsible for managing the day-to-day financial operations of ~~November~~the Company. Mr. 3,Reeder joined the Company in January 2002 in his current position. From 1999 to 2001, ~~ownership~~Mr. Reeder was Chief Financial Officer of ~~our~~PowerLift ~~Common~~Corporation, a ~~Stock~~large bydistributor ~~(i) the~~of ~~stockholders~~Caterpillar ~~known~~equipment. toFrom us1985 to be1999, ~~the~~Mr. Reeder held ~~beneficial~~a ~~owners~~variety of ~~more~~financial ~~than five~~positions ~~percent~~at Avery Dennison, a manufacturer of commercial ~~the~~and ~~outstanding~~consumer ~~shares~~products. Mr. Reeder has a Bachelor of ~~Common~~Science degree ~~Stock~~in Economics, ~~(ii) each~~Summa ~~director~~cum Laude, ~~(iii) each~~from ~~Named~~California ~~Executive~~State ~~Officer~~Polytechnic University, Pomona and ~~(iv) all~~a ~~directors~~Master ~~and~~of ~~executive~~Business ~~officers~~Administration asfrom athe ~~group:~~Haas School, University of California, Berkeley.

Name and Address of Beneficial Owner(1)	Number of Shares Beneficially Owned(2)		Percent of Class Outstanding(3)
JFL Co-Invest Partners I, LP 2001 Jefferson Davis Highway, Suite 607 Arlington, Virginia 22202	1,415,640	(4)(5)	37.8%
J.F. Lehman Equity Investors I, LP 2001 Jefferson Davis Highway, Suite 607 Arlington, Virginia 22202	861,951	(4)(5)	23.1%
JFL Investors LLC 2001 Jefferson Davis Highway, Suite 607 Arlington, Virginia 22202	2,277,591	(4)(5)	60.5%
Neubauer Family Trust Ordnance Products, Inc. 16207 Carmenita Rd. Cerritos, CA 90703	1,096,522		29.5%
Paribas Principal Incorporated 787 Seventh Avenue New York, New York 10019	390,276	(5)	10.5%
M. Steven Alexander	390,276	(6)	10.5%
John F. Lehman	2,277,591	(4)(7)	60.5%
Donald Glickman	2,277,591	(4)(7)	60.5%
George A. Sawyer	2,277,591	(4)(7)	60.5%
Louis N. Mintz	2,277,591	(4)(7)	60.5%
Oliver C. Boileau, Jr.	—	(8)	—
Randy Brinkley	—	(9)	—
William Paul	—	(10)	—
Thomas G. Pownall	—	(11)	—
Joseph A. Stroud	—	(12)	—
Thomas W. Cresante	5,875		1.4%
John J. Walsh	—		—
James L. Baglini	—		—
Andrew G. Bonas	—		—
Nicholas J. Bruge	—		—
Patrick J. Carroll	—		—
Thomas R. Cessario	—		—
James E. Reeder	—		—
Robert E. Sepulveda	—		—
Stephen S. Sperber	—		—
Donald C. Campion	—		—
Directors and Executive Officers as a Group	3,900,464		71.9%

Marty Sheber, Vice President—New Business Development and Strategy, is responsible for all activities relating to Company growth processes including sales, marketing, acquisitions and strategic planning. Mr. Sheber joined the Company in November, 2004 in his current position. Prior to joining the Company, Mr. Sheber was Global Vice President of Sales and Marketing for the Advanced Integrated Technologies Group from 2001 to 2004. From 1985 to 2001 Mr. Sheber was with Allied Signal/Honeywell Aerospace Company (“Honeywell”) most recently as Director, Sales and Service Administration. During his employment with Honeywell his responsibilities included sales operations, service center administration, mergers and acquisitions, strategic planning, product line management and engineering. Mr. Sheber received his Masters of Business Administration from Arizona State University and his Bachelors of Mechanical Engineering from the University of Arizona.

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. Boileau, Alexander, Glickman, Mintz and Paul. 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 Board of Directors of SDI has determined that the Audit Committee does not include a financial expert as defined in Item 401 of Regulation S-K. The Board of Directors of SDI believes that the members of the audit committee 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 our Amended and Restated 1991 Stock Incentive Plan and our Deferred Bonus/Compensation Plan.

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 Amended and Restated 1999 Stock Option Plan.

Compensation Committee Interlocks and Insider Participation

Thomas W. Cresante, the Chief Executive Officer of the Company, George A. Sawyer, the Secretary and former interim Chief Executive Officer, and Joseph A. Stroud, former Chief Financial Officer of the Company, are members of the Compensation Committee. In addition, Messrs. Lehman, Sawyer, Glickman and Stroud are members of the Compensation Committee and 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 have a general code of ethics that applies to all of our employees, including the Chief Executive Officer and the Principal Financial Officer. In November 2004, we adopted a code of ethics that applies to our principal executive officer, principal financial officer, principle accounting officer or controller or persons performing similar functions, a copy of which is attached to this Form 10-K as Exhibit 14.1, 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.

ITEM 11. EXECUTIVE COMPENSATION

The table below contains the annual and long-term compensation for services in all capacities to our company for 2004, 2003 and 2002, of those persons (collectively, the “Named Executive Officers”) who were, during 2004, (i) the Chief Executive Officer and (ii) the other most highly compensated executive officers receiving compensation of more than $100,000 from us or one of our subsidiaries.

Summary Compensation Table

	Annual Compensation				Long-Term Compensation
		Salary	Bonus		Securities Underlying			All Other Compensation
Name and Principal Position	Year	($)	($)		Options			($)
Thomas W. Cresante	2004	399,110	70,000			—			48,757	(3)(4)(5)(8)(9)
President and Chief	2003	391,032	198,278	(1)		—			38,034	(3)(4)(5)(8)(9)
Executive Officer	2002	379,862	380,016			140,100	(2)		27,948	(3)(4)(5)(8)(9)
James L. Baglini	2004	151,129	40,000			—			2,450	(3)(4)
Vice President—Engineering	2003	140,433	48,084	(1)		—			1,812	(3)(4)
	2002	137,064	132,101			24,000	(2)		1,499	(3)(4)
Nicholas J. Bruge	2004	195,533	40,000			—			3,063	(3)(4)
Vice President—Operations	2003	159,697	57,264	(1)		—			1,633	(3)(4)
	2002	154,219	154,357			24,000	(2)		46,838	(3)(4)(6)
Patrick J. Carroll	2004	168,690	—			—			4,182	(3)(4)
Vice President,	2003	164,471	58,517			—			2,267	(3)(4)
Managing Director	2002	161,241	160,763			21,000	(2)		1,575	(3)(4)
of SDI-Molan
Thomas R. Cessario	2004	183,174	35,000			—			558	(3)
Vice President—Regulatory	2003	176,134	62,666	(1)		—			135	(3)
Affairs and Human Resources	2002	172,674	172,162			21,000	(2)		208	(3)
James E. Reeder	2004	157,113	35,000			—			1,901	(3)(4)
Vice President—Finance	2003	149,206	53,297	(1)		—			1,510	(3)(4)
	2002	117,130	145,018			21,000	(2)		20,611	(3)(4)(6)
John J. Walsh	2004	242,070	—			—			302,015	(3)(4)(5)(7)(10)
Executive Vice President	2003	236,966	100,217	(1)		—			11,977	(3)(4)(5)(7)
and Chief Operating Officer (May 2000 to May 2004)	2002	229,044	230,006			70,500	(2)		11,754	(3)(4)(5)(7)

(1) Includes amounts mandatorily deferred under the Deferred Bonus/Compensation Plan adopted in October 2003 of $114,544, $27,778, $33,081, $33,805, $36,201 $30,789 and $57,895 ~~ITEM~~for 13Messrs. ~~CERTAIN~~Cresante, Baglini, ~~RELATIONSHIPS~~Bruge, ~~AND~~Carroll, Cessario, ~~RELATED~~Reeder ~~TRANSACTIONS~~ and Walsh, respectively.

~~Stockholders~~(2) Options ~~Agreement~~ granted pursuant to the Amended and Restated 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.

Upon consummation of the Recapitalization, we entered into a Stockholders Agreement with JFL Equity Investors I, LP, JFL Co-Invest Partners I, LP, Paribas Principal Incorporated, the Treinen Family Trust and the Neubauer Family Trust (~~collectively, the "Stockholders"~~3) Consists ~~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 11value persons designated as directors by JFL Equity Investors I, LP and the one person designated as a director by Paribas Principal Incorporated. The Stockholders Agreement contains customary restrictions on transfer, rights of ~~first~~group ~~offer,~~term ~~preemptive rights, tag-along and drag-along rights~~insurance. ~~The Stockholders Agreement will terminate upon the earlier of:~~

~~The Stockholders~~(4) Consists 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~~matching ~~Additional~~contributions ~~Rollover Shares it had a right to acquire~~ under ~~the~~our ~~Rollover~~401(k) ~~Stockholders Agreement expired~~plan.

~~Rollover~~(5) Consists ~~Stockholders~~of ~~Agreement~~ the value of the use of a SDI-leased automobile.

Upon consummation of the Recapitalization, we entered into a Rollover Stockholders Agreement with J.F. Lehman & Company, and the Treinen and Neubauer Family Trusts. The Rollover Stockholders Agreement provides that the Neubauer and Treinen Family Trusts and their respective transferees will have the right under certain circumstances to require us to purchase all or any portion of the Additional Rollover Shares (~~as defined in the Rollover Stockholders Agreement~~6) Consists atof ~~the~~closing ~~Call~~costs ~~Price~~for ~~(as~~home defined in the Rollover Stockholders Agreement). In 2001, the Rollover Stockholders Agreement terminated as to the Treinen Family Trust when the shares held by this Stockholder were transferred to certain other Stockholders. The Rollover Stockholders Agreement terminated as to J.F. Lehman & Company in 2002 when J.F. Lehman & Company's right to purchase ~~Additional Rollover Shares held by the Neubauer and Treinen Family Trusts or their transferees at the Call Price expired~~.

~~Registration~~(7) Consists ~~Rights~~of ~~Agreement~~ loan interest.

~~Pursuant~~(8) Consists ~~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, Paribas Principal Incorporated and the Neubauer Family Trust and any of their direct or indirect transferees have certain ~~demand~~ ~~and~~life ~~piggyback~~insurance ~~registration~~premiums ~~rights, on customary terms, with respect to the Common Stock held by such entities and persons~~.

(9) Consists of country club dues.

(10) Consists of severance and consulting fees of $285,000 accrued in 2004.

Options Granted in 2004

There were no options granted in 2004 to the Named Executive Officers.

Aggregate Option Exercises in 2004 and 2004 Year End Option Values

The following table summarizes information with respect to all options held by the Named Executive Officers exercisable at October 31, 2004:

Name

Shares
Acquired on
Exercise

Value Realized

Number of Securities
Underlying
Unexercised Options
at Fiscal Year End
Exercisable/
Unexercisable

Value of Unexercised
In-the-Money
Options at Fiscal
Year End
Exercisable/
Unexercisable(1)

Thomas W. Cresante

140,100/0

700,500/0

James L. Baglini

24,000/0

120,000/0

Nicholas J. Bruge

24,000/0

120,000/0

Patrick J. Carroll

21,000/0

105,000/0

Thomas R. Cessario

21,000/0

105,000/0

James E. Reeder

21,000/0

105,000/0

John J. Walsh

70,500/0

352,500/0

(1) There is no public market for our Common Stock. The Company estimates that the market value for its common stock as of October 31, 2004 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 ~~Agreements~~ Plan are administered by the Compensation 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.

~~Pursuant~~Stock 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 2002. Plans

~~Neubauer~~We ~~Consulting~~have ~~Agreement~~ two stock option plans for certain members of management. The Company’s Amended and Restated 1991 Stock Incentive Plan (the “1991 Plan”) is administered by the Compensation Committee of the Board of Directors. The 1991 Plan was terminated in 2001 except as to 7,750 options outstanding. The Amended and Restated Special Devices, Incorporated 1999 Stock Option Plan (the “Amended 1999 Plan”) ”) is administered by the Stock Option Committee of the Board of Directors which determines the amount, terms and conditions of the awards made pursuant to the Amended 1999 Plan. The Amended 1999 Plan provides for grants of incentive and non-qualified stock options.

InBenefit 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 2002, we paid Mr. Neubauer $75,000 pursuant to this agreement. Plans

~~Component~~We ~~Purchases~~ also maintain various qualified and non-qualified benefit plans for our employees, including a 401(k) profit sharing plan. 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.

~~During~~Compensation ~~the year ended November 3, 2002, we purchased approximately $0.3 million~~ of ~~materials from a corporation owned by Walter Neubauer, one of our stockholders. At November 3, 2002, approximately $0.1 million was owed to this corporation.~~ Directors

Directors who are our employees do not receive any compensation directly for their service on the ~~ITEM~~Board 14of Directors. ~~CONTROLS~~All ~~AND~~other ~~PROCEDURES~~ directors receive $2,000 per meeting and $20,000 per annum for their services.

~~The~~Employment ~~Chief Executive Officer~~ and ~~the~~Consulting Vice President Finance of Special Devices, Incorporated (its principal executive officer and principal financial and accounting officer, respectively) have concluded, based on their evaluation as of a date within 90 days prior to the date of the filing of this report, that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the 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. Agreements

~~There~~Thomas ~~were~~W. noCresante. ~~significant~~On ~~changes~~October 1, in1999, 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 ~~internal~~Board ~~controls~~of orDirectors. In addition, Mr. Cresante is eligible to receive at least 60% of his annual base salary in ~~other~~bonus compensation ~~factors~~based upon set performance standards. The employment agreement provides that ~~could~~we ~~significantly~~may ~~affect~~terminate ~~these~~Mr. Cresante’s ~~controls~~employment ~~subsequent~~for tocause (as defined in the ~~date~~employment ofagreement). ~~such~~If ~~evaluation~~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.

John W. Walsh. In May, 2004, we entered into an agreement with Mr. Walsh, our former chief operating ~~ITEM~~officer, providing 15for a one year paid leave of absence followed by a one year consulting agreement. ~~EXHIBITS~~Mr. Walsh is entitled to receive approximately $392,000 in ~~FINANCIAL~~wages, ~~STATEMENT~~benefits ~~SCHEDULES~~and ~~AND~~consulting ~~REPORTS~~fees ONunder ~~FORM~~the 8agreement. The agreement allows Mr. Walsh to extend the exercise period of his vested and unexercised stock options. Stock-K based compensation of $353,000 related to the deemed modification of these stock options was recorded by us in 2004. In 1999, Mr. Walsh received a loan of $150,000 at an annual interest rate of 6% for relocation assistance. Under the terms of the agreement this loan will be forgiven on March 31, 2005.

The following documents are filed as part of this report:

		Page
(a)(1)	FINANCIAL STATEMENTS
	Report of Independent Accountants	F-1
	Consolidated Balance Sheets at November 3, 2002 and October 31, 2001	F-2
	Consolidated Statements of Operations for each of the three years in the period ended November 3, 2002	F-4
	Consolidated Statements of Stockholders' Equity (Deficit) for each of the three years in the period ended November 3, 2002	F-5
	Consolidated Statements of Cash Flows for each of the three years in the period ended November 3, 2002	F-6
	Notes to Consolidated Financial Statements	F-7
(a)(2)	FINANCIAL STATEMENT SCHEDULES
	All other financial statement schedules have been omitted as they are not applicable, not material or the required information is included in the Consolidated Financial Statement or related Notes thereto.
(a)(3)	EXHIBITS

Exhibit No.		Description
1.1(g)		Purchase Agreement, dated as of December 11, 1998, among SDI Acquisition Corp. and BT Alex. Brown Incorporated and Paribas Corporation.
2.1(a)		Amended and Restated Agreement and Plan of Merger, dated as of June 19, 1998, between the Company and SDI Acquisition Corp.
2.2(b)		Amendment No. 1, dated as of October 27, 1998, to the Amended and Restated Agreement and Plan of Merger between the Company and SDI Acquisition Corp.
2.3(c)		Guaranty Agreement, dated as of June 19, 1998, between J.F. Lehman Equity Investors I, LP and the Company.
3.1(g)		Certificate of Incorporation of the Company.
3.2(g)		Bylaws of the Company.
4.1(g)		Indenture, dated as of December 15, 1998, among SDI Acquisition Corp., the Guarantors named therein and United States Trust Company of New York, as Trustee.
4.2(g)		First Supplemental Indenture, dated as of December 15, 1998, among the Company, the Guarantors named therein and the United States Trust Company of New York, as Trustee.
4.3(g)		Form of 113/8% Senior Subordinated Note due 2008, Series A (see Exhibit A of the First Supplemental Indenture in Exhibit 4.2).
4.4(g)		Form of 113/8% Senior Subordinated Note due 2008, Series B (see Exhibit B of the First Supplemental Indenture in Exhibit 4.2).
4.5(g)		Registration Rights Agreement, dated as of December 15, 1998, among SDI Acquisition Corp., as Issuer and BT Alex. Brown Incorporated and Paribas Corporation as Initial Purchasers.
4.6(k)		Certificate of Designation of Preferences and Relative Participating, Optional and Other Special Rights of Series A 6% Cumulative Convertible Preferred Stock of Special Devices, Incorporated dated as of February 28, 2001.
10.6(g)		Management Agreement, dated as of December 15, 1998, between the Company and J.F. Lehman & Company.
10.7(g)		Management Services Agreement, dated as of December 15, 1998, between the Company and J.F. Lehman & Company.
10.8(g)		Subscription Agreement, dated as of September 7, 1998, among the Company, Paribas Principal Incorporated, J.F. Lehman Equity Investors I, LP and JFL Co-Invest Partners I, LP.
10.9(g)		Amendment No. 1 to Subscription Agreement, dated as of December 3, 1998, among the Company, Paribas Principal Incorporated, J.F. Lehman Equity Investors I, LP and JFL Co-Invest Partners I, LP.
10.10(g)		Amendment No. 2 to Subscription Agreement, dated as of December 15, 1998, among the Company, Paribas Principal Incorporated, J.F. Lehman Equity Investors I, LP and JFL Co-Invest Partners I, LP.
10.11(g)		Stockholders Agreement, dated as of December 15, 1998, among the Company, J.F. Lehman & Co., J.F. Lehman Equity Investors I, LP, JFL Co-Invest Partners I, LP, the Neubauer Family Trust, by Walter Neubauer trustee, and the Treinen Family Trust, by Thomas F. Treinen trustee.
10.12(g)		Pledge Agreement, dated as of December 15, 1998, between the Neubauer Family Trust, by Walter Neubauer, trustee and J.F. Lehman & Company.
10.13(g)		Rollover Stockholders Agreement, dated as of December 15, 1998, among the Company, J.F. Lehman & Co., the Neubauer Family Trust, by Walter Neubauer trustee, and the Treinen Family Trust, by Thomas F. Treinen trustee.
10.15(g)		Registration Rights Agreement, dated as of December 15, 1998, among the Company, J.F. Lehman Equity Investors I, LP, JFL Co-Invest Partners I, LP, Paribas Principal Incorporated, the Neubauer Family Trust, by Walter Neubauer trustee, and the Treinen Family Trust, by Thomas F. Treinen trustee.
10.19(d)		Technology License Agreement dated November 7, 1990 between the Company and Davey Bickford Smith.
10.20(e)		Amended and Restated 1991 Stock Incentive Plan of the Company.
10.27(f)		Development Agreement, dated August 28, 1996, between Company and the City of Moorpark.
10.29(h)		Employment Agreement dated October 1, 1999 between the Company and Thomas W. Cresante.
10.31(h)		1999 Stock Option Plan dated June 23, 1999.
10.41(l)		Partnership Agreement, dated as of June 26, 2001, among SDI Germany GmbH, Klaus-Jurgen Dittrich and Frank Dittrich.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth, as of January 21, 2005, 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:

Name and address of beneficial owner(1)	Amount and nature of beneficial ownership(2)			Percent of class(3)
JFL Co-Invest Partners I, LP 2001 Jefferson Davis Highway, Suite 607 Arlington, Virginia 22202		1,415,640	(4)(5)		37.8	%
J.F. Lehman Equity Investors I, LP 2001 Jefferson Davis Highway, Suite 607 Arlington, Virginia 22202		861,951	(4)(5)		23.1	%
JFL Investors LLC 2001 Jefferson Davis Highway, Suite 607 Arlington, Virginia 22202		2,277,591	(4)(5)		60.5	%
Neubauer Family Trust Ordnance Products, Inc. 16207 Carmenita Rd. Cerritos, CA 90703		1,096,522			29.5	%
BNP Paribas Principal Incorporated 787 Seventh Avenue New York, New York 10019		390,276	(5)		10.5	%
M. Steven Alexander		390,276	(6)		10.5	%
John F. Lehman		2,277,591	(4)(7)		60.5	%
Donald Glickman		2,277,591	(4)(7)		60.5	%
George A. Sawyer		2,277,591	(4)(7)		60.5	%
Louis N. Mintz		2,277,591	(4)(7)		60.5	%
Tig H. Krekel		—	(8)		—
Oliver C. Boileau, Jr.		—	(9)		—
Randy Brinkley		—	(10)		—
Sir Christopher Lewinton		—	(11)		—
William Paul		—	(12)		—
Joseph A. Stroud		—	(13)		—
Thomas W. Cresante		145,975	(14)		3.8	%
James L. Baglini		24,000	(14)		*
Nicholas J. Bruge		24,000	(14)		*
Patrick J. Carroll		21,000	(14)		*
Thomas R. Cessario		21,000	(14)		*
James E. Reeder		21,000	(14)		*
Marty E. Sheber		—			*
John J. Walsh		70,500	(14)		1.9
Directors and Executive Officers as a Group		2,995,342			73.2	%

* Indicates beneficial ownership of less than one percent of outstanding shares.

10.42(l)		Side Agreement, dated as of June 26, 2001, among the Company, Anhaltinische Chemische Fabriken ACF GmbH, Molan-Werk Dittrich Gessellschaft mit beschrankter Haftung & Co. Komman-ditgesellschaft, SDI Germany GmbH, Klaus-Jurgen Dittrich and Frank Dittrich.
10.43(l)		Loan and Security Agreement, dated as of June 27, 2001, among the Company and Foothill Capital Corporation.
10.44(n)		Amended and Restated 1999 Stock Option Plan of the Company.
12.1(g)		Statement of Computation of Ratios of Earnings to Fixed Charges.
21.1		Subsidiaries of the Company.
25.1(g)		Form T-1 Statement of Eligibility of United States Trust Company of New York to act as trustee under the Indenture.
99.1(i)		Special Devices, Incorporated Press Release dated September 22, 2000.
99.2(i)		Agreement and Plan of Merger between the Company and Wind Point Partners IV, LP dated August 18, 2000.
99.3(j)		Special Devices, Incorporated Press Release dated May 14, 2001.
99.4(j)		Asset Purchase Agreement, dated as of March 27, 2001, among the Company, PS/EMC West LLC and Pacific Scientific Company (solely with respect to Section 7.2 thereof).
99.5(j)		Amendment No. 1 to Asset Purchase Agreement dated as of May 11, 2001.
99.6(k)		Lease Agreement, dated as of June 4, 2001, among the Company, Autosafe Airbag 14 (CA) LP and Autosafe Airbag 12 (CA) LP.
99.79(m)		Amendment No. 2 to Asset Purchase Agreement dated as of July 30, 2001.

(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.

(b2) As ~~REPORTS~~used ONin ~~FORM~~this ~~8-K~~ 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 to direct the disposition of, a 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.

~~None~~(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 14, 2005. In accordance with Rule 13(d)-3 of the Exchange Act, any Common Stock that will not be outstanding within 60 days of January 14, 2005 that is subject to options or warrants exercisable within 60 days of January 14, 2005 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 14, 2005, 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 14, 2005 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 the 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. Krekel is a member of a limited partner of J.F. Lehman Equity Investors I, LP. The address for Mr. Krekel is 237 Rocky Point Road, Palos Verdes, CA 90274.

(9) 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.

(10) 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.

(11) 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.

(12) 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.

(13) 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.

(14) Includes options exercisable within 60 days of January 14, 2005 of 140,100, 24,000, ~~REPORT~~24,000, OF21,000, ~~INDEPENDENT~~21,000, ~~ACCOUNTANTS~~ 21,000 and 70,500 shares for Messrs. Cresante, Baglini, Bruge, Carroll, Cessario, Reeder and Walsh, respectively.

The ~~Board~~following oftable ~~Directors~~details ~~and~~information ~~Stockholders~~regarding our existing equity compensation ~~Special~~plans ~~Devices,~~as ~~Incorporated:~~of October 31, 2004.

InEquity ~~our~~Compensation ~~opinion,~~Plan 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 at November 3, 2002 and October 31, 2001, and the results of their operations and their cash flows for each of the three years in the period ended November 3, 2002 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. Information

PricewaterhouseCoopers LLP Los Angeles, California January 15, 2003

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)		(b)			(c)
Equity compensation plans approved by security holders		498,150		$	19.68		212,100
Equity compensation plans not approved by security holders		—		—			—
Total		498,150		$	19.68		212,100

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

			November 3 2002			October 31 2001
ASSETS
Current assets:
	Cash and cash equivalents		$	4,852		$	1,341
	Accounts receivable, net of allowances of $339 and $642 in 2002 and 2001, respectively			12,700			12,745
	Inventories			7,461			10,600
	Prepaid expenses and other current assets			4,773			6,151
	Deferred tax assets			2,438			2,562
		Total current assets		32,224			33,399
Property, plant and equipment, at cost:
	Machinery and equipment			84,626			80,770
	Furniture, fixtures and computer equipment			5,706			5,197
	Construction in progress			5,030			3,418
	Other			296			277
		Gross property, plant, and equipment		95,658			89,662
		Less accumulated depreciation and amortization		(63,502	)		(53,945	)
		Net property, plant and equipment		32,156			35,717
Other assets, net of accumulated amortization				4,676			6,586
Notes receivable				5,201			4,505
Investment in SDI-Molan				797			58
Total assets			$	75,054		$	80,265

Upon consummation of the Recapitalization, we entered into a Stockholders Agreement with J.F. Lehman 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 J.F. Lehman 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:

~~See~~· the ~~accompanying~~tenth ~~notes~~anniversary toof ~~consolidated~~the ~~financial~~Stockholders ~~statements.~~ Agreement,

~~F-2~~· 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 ~~SPECIAL~~distributed ~~DEVICES,~~to ~~INCORPORATED~~the ~~AND~~public ~~SUBSIDIARIES CONSOLIDATED~~pursuant ~~BALANCE~~to ~~SHEETS~~ Rule 144 under the Securities Act of 1933, as amended (~~Dollars~~the in“Securities ~~thousands~~Act”) or

			November 3 2002			October 31 2001
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
	Accounts payable		$	7,756		$	9,172
	Accrued liabilities			7,260			8,482
	Accrued interest			3,255			4,309
	Accrued bonus			2,970			2,074
	Income taxes payable			125			558
	Current portion of long-term debt			1,000			1,000
		Total current liabilities		22,366			25,595
Deferred tax liabilities				3,677			2,869
Other liabilities				1,641			1,758
Long-term debt, net of current portion				76,569			78,430
		Total liabilities		104,253			108,652
Commitments and contingencies (Note 18)
Redeemable preferred stock				4,000			4,000
Redeemable common stock				36,625			33,625
Stockholders' equity (deficit):
	Preferred stock, $.01 par value, 2,000,000 shares authorized; 4,000 shares issued and outstanding in 2002 and 2001			—			—
	Common stock, $.01 par value, 20,000,000 shares authorized; 3,712,764 shares issued and outstanding in 2002 and 2001			30			30
	Additional paid-in capital			64,102			67,102
	Retained earnings (deficit)			(133,956	)		(133,144	)
		Total stockholders' equity (deficit)		(69,824	)		(66,012	)
Total liabilities and stockholders' equity (deficit)			$	75,054		$	80,265

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

~~See~~The Stockholders Agreement ~~accompanying~~will ~~notes~~terminate with respect to ~~consolidated~~any ~~financial~~Stockholder ~~statements~~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. 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. 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.

~~F-3~~33

Registration Rights ~~SPECIAL DEVICES, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands)~~ Agreement

			For The Years Ended
						October 31
			November 3 2002
						2001			2000
Net sales			$	120,254		$	122,917		$	131,970
Cost of sales				98,782			109,726			119,827
		Gross profit		21,472			13,191			12,143
Operating expenses				13,893			14,394			9,210
Environmental and other investigation costs				—			1,752			2,067
		Total operating expenses		13,893			16,146			11,277
		Income (loss) from operations		7,579			(2,955	)		866
Other income (expense):
	Interest expense, net			(8,886	)		(13,049	)		(17,144	)
	Equity in losses of SDI-Molan			(176	)		—			—
	Gain (loss) on disposal of assets			—			(6,360	)		58
	Recapitalization costs			—			—			(65	)
		Total other expense		(9,062	)		(19,409	)		(17,151	)
		Loss from continuing operations before extraordinary gain and income taxes		(1,483	)		(22,364	)		(16,285	)
Income tax benefit				(322	)		(9,394	)		(6,813	)
		Loss from continuing operations before extraordinary gain		(1,161	)		(12,970	)		(9,472	)
Discontinued operations:
	Income from discontinued operations, net of taxes of $0, $801 and $2,514, respectively			—			1,062			3,495
	Gain (loss) on sale of discontinued operations, net of tax expense (benefit) of $(72), $10,557 and $18,280, respectively			(172	)		13,994			24,396
		Income (loss) before extraordinary gain		(1,333	)		2,086			18,419
Extraordinary gain on extinguishment of debt, net of taxes of $0				521			9,416			—
		Net income (loss)	$	(812	)	$	11,502		$	18,419

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.

~~See accompanying~~Management ~~notes to consolidated financial statements.~~ Agreements

FPursuant to the terms of a ten-4year 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 2004.

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

	Preferred Stock		Common Stock									Total Stockholders' Equity (Deficit)
						Additional Paid-in Capital			Retained Earnings (Deficit)
	Shares	Amount	Shares	Amount
Balance, October 31, 1999	—	—	3,706,889	$	30	$	74,587		$	(163,148	)	$	(88,531	)
Record adjustment to contributed assets	—	—	—		—		(1,694	)		83			(1,611	)
Purchase of common stock	—	—	5,875		—		199			—			199
Accreted put premium on redeemable common stock	—	—	—		—		(3,000	)		—			(3,000	)
Issuance of warrants	—	—	—		—		10			—			10
Net income	—	—	—		—		—			18,419			18,419
Balance, October 31, 2000	—	—	3,712,764		30		70,102			(144,646	)		(74,514	)
Issuance of redeemable preferred stock	4,000	—	—		—		—			—			—
Accreted put premium on redeemable common stock	—	—	—		—		(3,000	)		—			(3,000	)
Net income	—	—	—		—		—			11,502			11,502
Balance, October 31, 2001	4,000	—	3,712,764		30		67,102			(133,144	)		(66,012	)
Accreted put premium on redeemable common stock	—	—	—		—		(3,000	)		—			(3,000	)
Net loss	—	—	—		—		—			(812	)		(812	)
Balance, November 3, 2002	4,000	—	3,712,764	$	30	$	64,102		$	(133,956	)	$	(69,824	)

In 2002, we entered into a Consulting Agreement with Walter Neubauer, an affiliate of the Neubauer Family Trust, a stockholder of the Company, pursuant to which we agreed to pay Mr. Neubauer an annual fee of $0.1 million for consulting services related to the design, manufacture and marketing of precision engineered pyrotechnic devices. During 2004, we paid Mr. Neubauer $0.1 million pursuant to this agreement.

~~See~~Component ~~accompanying notes to consolidated financial statements.~~ Purchases

~~F-5~~During the year ended October 31, 2004, we purchased approximately $0.8 million of materials from a corporation owned by Walter Neubauer, an affiliate of the Neubauer Family Trust, a stockholder of the Company. At October 31, 2004, approximately $0.1 million was owed to this corporation.

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

			For The Years Ended
						October 31
			November 3 2002
						2001			2000
Cash Flows From Operating Activities:
	Net income (loss)		$	(812	)	$	11,502		$	18,419
	Extraordinary gain on extinguishment of debt			(521	)		(9,416	)		—
	Income from discontinued operations			—			(1,062	)		(3,495	)
	Loss (gain) on sale of discontinued operations			172			(13,994	)		(24,396	)
	Loss from continuing operations			(1,161	)		(12,970	)		(9,472	)
Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities:
		Depreciation and amortization		10,293			12,383			14,319
		Equity in losses of SDI-Molan		176			—			—
		Loss on asset retirements and disposals		—			6,360			58
		Deferred income taxes		932			(2,514	)		5,373
		Increase (decrease) in inventory reserve		(263	)		181			(1,488	)
		Increase (decrease) in accounts receivable allowances		(303	)		249			71
	Changes in assets and liabilities:
		Accounts receivable		279			4,352			(114	)
		Inventories		3,402			949			(3,994	)
		Prepaid expenses and other current assets		1,374			(731	)		1,457
		Other assets		264			(1,502	)		261
		Accounts payable and accrued liabilities		(3,109	)		(7,176	)		(1,603	)
		Income taxes payable		(361	)		80			(9,360	)
		Other		(117	)		749			(78	)
		Net cash provided by (used in) continuing operations		11,406			410			(4,570	)
		Net cash provided by (used in) discontinued operations		69			(21,901	)		3,402
		Net cash provided by (used in) operating activities		11,475			(21,491	)		(1,168	)
Cash Flows From Investing Activities:
	Purchases of property, plant and equipment			(6,021	)		(5,975	)		(10,218	)
	Proceeds from sale of discontinued operations			69			41,986			51,370
	Proceeds from real estate transaction			—			27,022			—
	Capital contributions to SDI-Molan			(915	)		(58	)		—
	Increase in notes receivable			(692	)		—			—
	Other			913			(554	)		(103	)
	Net cash provided by (used in) investing activities			(6,646	)		62,421			41,049
Cash Flows From Financing Activities:
	Proceeds from issuance of preferred stock			—			4,000			—
	Proceeds from issuance of common stock			—			—			199
	Proceeds from issuance of long-term debt			—			5,000			—
	Repurchase of long-term debt			(293	)		(13,401	)		—
	Repayment of long-term debt			(1,025	)		(30,775	)		(38,525	)
	Payment of deferred financing fees			—			(609	)		—
	Net repayments under revolving line of credit			—			(4.400	)		(1,500	)
	Other			—			—			93
	Net cash used in financing activities			(1,318	)		(40,185	)		(39,733	)
Net increase in cash and cash equivalents				3,511			745			148
Cash and cash equivalents at beginning of year				1,341			596			448
Cash and cash equivalents at end of year			$	4,852		$	1,341		$	596
Supplemental disclosure of cash flow information:
	Cash paid during the year for:
		Interest	$	8,935		$	14,917		$	18,639
		Income taxes		78			13,595			2
	Non-cash financing activities:
		Notes receivable from disposal of assets		—			4,550			—

During the year ended October 31, 2004, we paid Joseph Stroud, one of our Directors, approximately $0.1 million in consulting fees for various projects.

~~See~~ITEM ~~accompanying~~14. PRINCIPAL ~~notes~~ACCOUNTANT toFEES ~~consolidated~~AND ~~financial statements.~~ SERVICES

~~F-6~~The following table is a summary of the fees billed to SDI by PricewaterhouseCoopers LLP for professional services rendered for the years ended October 31, 2004 and November 2, 2003:

SPECIAL DEVICES, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fee Category	2004		2003
Audit fees	$	177,000	$	160,000
Tax fees	70,305		138,366
All other fees	—		17,081
Total fees	$	247,305	$	315,447

1Audit Fees. Fees ~~Company~~billed ~~Operations~~ for the audit of SDI’s annual consolidated financial statements and review of interim consolidated financial statements included in quarterly reports on Form 10-Q.

~~Special~~Tax ~~Devices,~~Fees. Fees ~~Incorporated,~~billed afor ~~Delaware~~professional ~~corporation~~services ~~(the~~for tax ~~"Company" or "SDI")~~compliance, istax aadvice ~~leading designer~~ and ~~manufacturer~~tax ~~of highly reliable precision engineered pyrotechnic devices~~planning. These ~~devices~~services ~~are~~include ~~used~~tax ~~predominantly in vehicle airbag and other automotive safety systems. The Company's primary products are initiators, which function like an "electrical~~return ~~match"~~preparation ~~to ignite the gas generating charge in an automotive airbag system. We believe we are the world's largest independent supplier of initiators sold to leading domestic~~ and ~~foreign~~assistance ~~automotive airbag~~with ~~system~~income ~~manufacturers.~~tax ~~Those manufacturers use SDI's product in the assembly of integrated airbag safety systems, which they then sell to automobile original equipment manufacturers~~audits.

~~The Company~~All ~~formed~~Other ~~a joint venture partnership, Special Devices-Molan GmbH & Co~~Fees. Fees KGbilled ~~("SDI-Molan")~~for inproducts ~~Germany~~and inservices ~~June 2001.~~other ~~The Company's 50% interest in SDI-Molan~~than isthe ~~held~~services byreported ~~SDI Germany GmbH ("SDI Germany"), a wholly owned German subsidiary~~above. ~~SDI~~These ~~Germany~~services ~~was~~include ~~established~~audit ~~in 2001 for the purpose~~ of ~~holding~~ the ~~interest in the joint venture. SDI-Molan's~~financial ~~business~~statements ~~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~~’s ~~started~~401(k) ~~operations~~plan in ~~September 2002~~ 2003.

~~In June 2002~~The ~~the~~Audit ~~Company~~Committee ~~incorporated~~pre-approves ~~Special~~all ~~Devices~~audit engagements ~~Japan Kabushiki Kaisha ("SDI Japan") in Japan~~ and infees ~~October 2002~~as ~~the~~well ~~Company~~as ~~incorporated~~all ~~Special~~permissible ~~Devices~~non-audit ~~(Thailand) Co., Ltd.~~engagements ~~("SDI Thailand"). SDI Japan and SDI Thailand are subsidiaries~~ of ~~SDI~~the ~~that~~independent ~~were formed to create a direct business presence in these geographic markets~~auditor. ~~The Company previously distributed its products in Japan through an agent.~~

On December 15, 1998, the Company consummated a series of transactions accounted for as a recapitalization (the "Recapitalization") whereby affiliates of J.F. Lehman and Company ("J.F. Lehman") obtained a controlling interest in the Company. As a result of the Recapitalization, the Company delisted its Common Stock from the NASDAQ Stock Market, and accordingly filed for deregistration with the Securities and Exchange Commission (the "SEC"). The Company continues to file reports with the SEC pursuant to the terms governing the Senior Subordinated Notes. 34

In connection with the Recapitalization all shares of the Company's Common Stock, other than those retained by certain members of management and certain other stockholders (the "Continuing Stockholders"), were converted into the right to receive $34 per share in cash. At the time of the Recapitalization, the Continuing Stockholders retained approximately 41.3% of the common equity of the Company while new investors acquired the balance of the equity interests in the Company. At NovemberPART ~~3, 2002, the Continuing Stockholders own approximately 29.5% of the common equity of the Company.~~ IV

~~As of~~ITEM ~~November 3, 2002, the Company had net liabilities of $29~~15.~~2 million.~~ ~~The~~EXHIBITS ~~Company's~~AND ~~ability~~FINANCIAL toSTATEMENT pay the interest on, or to refinance debt, or to fund planned capital expenditures, will depend on generating cash flow from future operations. The Company had positive cash flow from continuing operations during the past two years. SCHEDULES

2.The following ~~Summary~~documents ofare ~~Significant~~filed ~~Accounting~~as ~~Policies~~ part of this report:

Basis of Consolidation

		Page
(a)(1)	FINANCIAL STATEMENTS
	Report of Independent Registered Public Accounting Firm	F-1
	Consolidated Balance Sheets at October 31, 2004 and November 2, 2003	F-2
	Consolidated Statements of Operations for each of the three years in the period ended October 31, 2004	F-3
	Consolidated Statements of Stockholders’ Equity (Deficit) for each of the three years in the period ended October 31, 2004	F-4
	Consolidated Statements of Cash Flows for each of the three years in the period ended October 31, 2004	F-5
	Notes to Consolidated Financial Statements	F-6
(a)(2)	FINANCIAL STATEMENT SCHEDULES
	All other financial statement schedules have been omitted as they are not applicable, not material or the required information is included in the Consolidated Financial Statements or related Notes thereto.
(a)(3)	EXHIBITS

The consolidated financial statements include the accounts of the Company and its subsidiaries, SDI Germany, SDI Japan, SDI Thailand and Scot, Incorporated ("Scot"), through the date of the sale of

Exhibit No.		Description
2.1(a)		Amended and Restated Agreement and Plan of Merger, dated as of June 19, 1998, between the Company and SDI Acquisition Corp.
2.2(b)		Amendment No. 1, dated as of October 27, 1998, to the Amended and Restated Agreement and Plan of Merger between the Company and SDI Acquisition Corp.
2.3(c)		Guaranty Agreement, dated as of June 19, 1998, between J.F. Lehman Equity Investors I, LP and the Company.
3.1(g)		Certificate of Incorporation of the Company.
3.2(g)		Bylaws of the Company.
4.1(g)		Indenture, dated as of December 15, 1998, among SDI Acquisition Corp., the Guarantors named therein and United States Trust Company of New York, as Trustee.
4.2(g)		First Supplemental Indenture, dated as of December 15, 1998, among the Company, the Guarantors named therein and the United States Trust Company of New York, as Trustee.
4.3(g)		Form of 113¤8% Senior Subordinated Note due 2008, Series A (see Exhibit A of the First Supplemental Indenture in Exhibit 4.2).
4.4(g)		Form of 113¤8% Senior Subordinated Note due 2008, Series B (see Exhibit B of the First Supplemental Indenture in Exhibit 4.2).
4.5(k)		Certificate of Designation of Preferences and Relative Participating, Optional and Other Special Rights of Series A 6% Cumulative Convertible Preferred Stock of Special Devices, Incorporated dated as of February 28, 2001.
4.6		Second Supplemental Indenture, dated as of September 21, 2000, among the Company, Scot, Incorporated as Guarantor and United States Trust Company of New York, as Trustee.
10.1(g)		Management Agreement, dated as of December 15, 1998, between the Company and J.F. Lehman & Company.

~~F-7~~35

Scot on September 21, 2000. All material intercompany accounts and transactions have been eliminated. The Company accounts for its 50% ownership interest in SDI-Molan under the equity method of accounting. The carrying balance of the Company's investment in the joint venture at November 3, 2002 was $0.8 million. Condensed financial information for SDI-Molan was not presented as amounts were not material.

10.2(g)		Management Services Agreement, dated as of December 15, 1998, between the Company and J.F. Lehman & Company.
10.3(g)		Subscription Agreement, dated as of September 7, 1998, among the Company, Paribas Principal Incorporated (now known as BNP Paribas Principal Incorporated), J.F. Lehman Equity Investors I, LP and JFL Co-Invest Partners I, LP.
10.4(g)		Amendment No. 1 to Subscription Agreement, dated as of December 3, 1998, among the Company, BNP Paribas Principal Incorporated, J.F. Lehman Equity Investors I, LP and JFL Co-Invest Partners I, LP.
10.5(g)		Amendment No. 2 to Subscription Agreement, dated as of December 15, 1998, among the Company, BNP Paribas Principal Incorporated, J.F. Lehman Equity Investors I, LP and JFL Co-Invest Partners I, LP.
10.6(g)		Stockholders Agreement, dated as of December 15, 1998, among the Company, J.F. Lehman & Co., J.F. Lehman Equity Investors I, LP, JFL Co-Invest Partners I, LP, the Neubauer Family Trust, by Walter Neubauer trustee, and the Treinen Family Trust, by Thomas F. Treinen trustee.
10.7(g)		Pledge Agreement, dated as of December 15, 1998, between the Neubauer Family Trust, by Walter Neubauer, trustee and J.F. Lehman & Company.
10.8(g)		Rollover Stockholders Agreement, dated as of December 15, 1998, among the Company, J.F. Lehman & Co., the Neubauer Family Trust, by Walter Neubauer trustee, and the Treinen Family Trust, by Thomas F. Treinen trustee.
10.9(g)		Registration Rights Agreement, dated as of December 15, 1998, among the Company, J.F. Lehman Equity Investors I, LP, JFL Co-Invest Partners I, LP, BNP Paribas Principal Incorporated, the Neubauer Family Trust, by Walter Neubauer trustee, and the Treinen Family Trust, by Thomas F. Treinen trustee.
10.10(d)		Technology License Agreement dated November 7, 1990 between the Company and Davey Bickford Smith.
10.11(e)		Amended and Restated 1991 Stock Incentive Plan of the Company.*
10.12(f)		Development Agreement, dated August 28, 1996, between the Company and the City of Moorpark.
10.13(h)		Employment Agreement dated October 1, 1999 between the Company and Thomas W. Cresante.*
10.14(g)		Registration Rights Agreement, dated as of December 15, 1998, among SDI Acquisition Corp., as Issuer and BT Alex. Brown Incorporated and Paribas Corporation as Initial Purchasers.
10.15(i)		Agreement and Plan of Merger between the Company and Wind Point Partners IV, LP dated August 18, 2000.
10.16(j)		Asset Purchase Agreement, dated as of March 27, 2001, among the Company, PS/EMC West LLC and Pacific Scientific Company (solely with respect to Section 7.2 thereof).
10.17(j)		Amendment No. 1 to Asset Purchase Agreement dated as of May 11, 2001.
10.18(k)		Lease Agreement, dated as of June 4, 2001, among the Company, Autosafe Airbag 14 (CA) LP and Autosafe Airbag 12 (CA) LP.
10.19(l)		Partnership Agreement, dated as of June 26, 2001, among SDI Germany GmbH, Klaus-Jurgen Dittrich and Frank Dittrich.
10.20(l)		Side Agreement, dated as of June 26, 2001, among the Company, Anhaltinische Chemische Fabriken ACF GmbH, Molan-Werk Dittrich Gessellschaft mit beschrankter Haftung & Co. Komman-ditgesellschaft, SDI Germany GmbH, Klaus-Jurgen Dittrich and Frank Dittrich.
10.21(l)		Loan and Security Agreement, dated as of June 27, 2001, among the Company and Foothill Capital Corporation (now known as Wells Fargo Foothill, Inc.).
10.22(m)		Amendment No. 2 to Asset Purchase Agreement dated as of July 30, 2001.

~~Discontinued Operations~~ 36

The divestiture of the Aerospace Division, which included Scot, was completed in a series of transactions in 2000 and 2001. As previously disclosed, Scot was divested on September 21, 2000 and the net assets of the remaining Aerospace operations were sold on May 11, 2001 (the "Aerospace Sale"). See Note 15. The results of operations, the gain on sale of Scot and the net assets of the Aerospace Segment have been reclassified to Discontinued Operations. Accounting for discontinued operations according to accounting principles generally accepted in the United States of America ("GAAP") involves identifying charges such as corporate allocations that were originally charged to Aerospace operations but that would be continuing. Those continuing charges are then reallocated back to the remaining operations of the Automotive Products Division. In addition, interest expense was reallocated to the Aerospace Segment based on its total assets. This reallocation of corporate charges and interest has been done for all prior periods presented. As a result of the reallocations and reclassifications to discontinued operations, certain amounts in the Consolidated Financial Statements and Notes thereto have been revised from the amounts presented in prior years.

10.23(p)		Letter Agreement between the Company and Wells Fargo Foothill, Inc. dated July 17, 2002.
10.24(p)		Letter Agreement between the Company and Wells Fargo Foothill, Inc. dated October 23, 2002.
10.25(p)		Letter Agreement between the Company and Wells Fargo Foothill, Inc. dated March 28, 2003.
10.26(p)		Consent and First Amendment to Loan Documents between the Company and Wells Fargo Foothill, Inc. dated April 16, 2003.
10.27(p)		Letter Agreement between the Company and Wells Fargo Foothill, Inc. dated June 13, 2003.
10.28(q)		Letter Agreement between the Company and Wells Fargo Foothill, Inc. dated June 24, 2003.
10.29(q)		Letter Agreement between the Company and Wells Fargo Foothill, Inc. dated July 29, 2003.
10.30(r)		Letter Agreement between the Company and Wells Fargo Foothill, Inc. dated August 29, 2003.
10.31(s)		Letter Agreement between the Company and John J. Walsh dated May 10, 2004.*
10.32		Amended and Restated 1999 Stock Option Plan of the Company.*
10.33		Deferred Bonus/Compensation Plan dated November 3, 2003.*
10.34		Letter Agreement between the Company and Wells Fargo Foothill, Inc. dated August 10, 2004.
12.1(g)		Statement re Computation of Ratios.
14.1		Code of Ethics for Senior Financial Officers.
21.1(o)		Subsidiaries of the Company.
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Use of Estimates

*		Indicates management contract or compensatory plan or arrangement.
(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.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. 37

~~Cash~~(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 ~~Cash~~incorporated ~~Equivalents~~ herein by reference. (k) Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended April 29, 2001 and incorporated herein by reference. (l) Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 29, 2001 and incorporated herein by reference. (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. (r) Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended November 2, 2003 and incorporated herein by reference. (s) Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q/A for the quarterly period ended August 1, 2004 and incorporated herein by reference.

~~Cash and cash equivalents include all cash balances and highly liquid investments with a maturity of three months or less when purchased.~~ 38

~~Fair~~REPORT ~~Value~~OF ofINDEPENDENT ~~Financial~~REGISTERED ~~Instruments~~ PUBLIC ACCOUNTING FIRM

The ~~carrying~~Board ~~amounts~~ of ~~the~~Directors ~~Company's cash, trade accounts receivable~~ and ~~all current liabilities (excluding short-term borrowings) approximate the fair values due~~Stockholders toSpecial ~~the~~Devices, ~~relatively short maturities of these instruments.~~ Incorporated:

~~The~~In our opinion, the accompanying consolidated balance ~~following~~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 October 31, 2004 and November 2, 2003, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the ~~fair~~responsibility ~~value~~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 the standards of the Public Company Oversight Board (United States). These standards require that we plan and ~~carrying~~perform ~~amounts~~the audit to obtain reasonable assurance about whether the financial statements are free of material ~~long-term~~misstatement. ~~debt~~An audit includes examining, ~~including~~on ~~short-term~~a ~~borrowings:~~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.

	November 3 2002		October 31 2001
	(In thousands)
Fair value	$	45,188	$	34,772
Carrying amount		77,569		79,430

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.

~~F-8~~/s/ PricewaterhouseCoopers LLP Los Angeles, California January 17, 2005

The Company's borrowings under its term loans and revolving lines of credit have variable rates that reflect currently available terms and conditions for similar debt. The carrying amount of this debt is a reasonable estimate of its fair value. The Senior Subordinated Notes are traded occasionally in public markets. F-1

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

Inventories are stated at the lower of cost (principally first-in, first-out) or market.

	October 31 2004			November 2 2003
ASSETS
Current assets:
Cash and cash equivalents	$	7,304		$	3,925
Accounts receivable, net of allowances of $270 and $426 in 2004 and 2003, respectively	13,492			13,265
Inventories	5,165			6,646
Prepaid expenses and other current assets	3,809			4,127
Deferred tax assets	2,018			1,983
Total current assets	31,788			29,946
Property, plant and equipment, net	24,705			29,659
Other assets, net of accumulated amortization	2,983			3,712
Notes receivable	4,395			4,435
Investment in and advances to SDI-Molan and affiliates	3,068			2,626
Total assets	$	66,939		$	70,378
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	7,770		$	7,573
Accrued liabilities	9,706			10,313
Income taxes payable	442			136
Current portion of long-term debt	750			750
Total current liabilities	18,668			18,772
Deferred tax liabilities	2,848			3,552
Other liabilities	500			924
Long-term debt, net of current portion	74,545			75,545
Total liabilities	96,561			98,793
Commitments and contingencies (Note 17)
Redeemable preferred stock, 4,000 shares issued and outstanding in 2004 and 2003	4,000			4,000
Redeemable common stock, 735,294 shares issued and outstanding in 2004 and 2003	42,625			39,625
Total redeemable stock	46,625			43,625
Stockholders’ equity (deficit):
Preferred stock, $.01 par value, 2,000,000 shares authorized; no shares issued and outstanding in 2004 and 2003	—			—
Common stock, $.01 par value, 20,000,000 shares authorized; 2,977,470 shares issued and outstanding in 2004 and 2003	30			30
Additional paid-in capital	58,455			61,102
Retained earnings (deficit)	(134,878		)	(133,193		)
Accumulated other comprehensive income	146			21
Total stockholders’ equity (deficit)	(76,247		)	(72,040		)
Total liabilities, redeemable stock and stockholders’ equity (deficit)	$	66,939		$	70,378

~~Property~~See ~~and~~accompanying ~~Equipment~~ notes to consolidated financial statements.

Property and equipment are recorded at cost. The cost of maintenance and repairs is charged against results of operations as incurred. Depreciation is charged against results of operations using the straightF-~~line method over the estimated service lives of the related assets. The following are the lives used in determining depreciation rates of various assets:~~ 2

Buildings and improvements		25-39 years
Machinery and equipment		8 years
Furniture, fixtures and computer equipment		3-5 years
Transportation equipment		3-5 years

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

Leasehold improvements are amortized over the lesser of 10 years or the remaining life of the lease. Upon sale or retirement of the depreciable property, the related cost and accumulated depreciation are eliminated from the accounts and gains or losses are reflected in the consolidated statement of operations.

	For The Years Ended
	October 31 2004			November 2 2003				November 3 2002
Net sales	$	105,452			$	112,908			$	120,254
Cost of sales	86,416				91,523				98,782
Gross profit	19,036				21,385				21,472
Operating expenses	12,654				11,426				13,893
Income from operations	6,382				9,959				7,579
Other income (expense):
Interest expense	(9,327		)		(9,213		)		(9,507		)
Interest and other income	712				592				621
Gain on extinguishment of debt	—				—				521
Total other income (expense)	(8,615		)		(8,621		)		(8,365		)
Income (loss) from continuing operations before income taxes and equity loss	(2,233		)		1,338				(786		)
Income tax benefit	(1,046		)		(572		)		(322		)
Equity in losses of SDI-Molan	(498		)		(1,394		)		(176		)
Income (loss) from continuing operations	(1,685		)		516				(640		)
Discontinued operations:
Gain (loss) on sale of discontinued operations, net of tax expense (benefit) of $84 and $(72), respectively	—				247				(172		)
Net income (loss)	$	(1,685	)		$	763			$	(812	)

~~Revenue~~See ~~Recognition~~ accompanying notes to consolidated financial statements.

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, longF-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. Sales relating to the Aerospace Division have been reclassified to "Income from discontinued operations" in the consolidated statements of operations for all prior periods presented. 3

~~Income~~SPECIAL ~~Taxes~~ DEVICES, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Dollars in thousands)

The Company accounts for income taxes under the liability method whereby deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

	Preferred Stock					Common Stock				Additional Paid-in				Retained Earnings			Accumulated Other Comprehensive			Total Stockholders’ Equity
	Shares		Amount			Shares	Amount			Capital				(Deficit)			Income			(Deficit)
Balance, October 31, 2001		—		$	—	3,712,764		$	30		$	67,102		$	(133,144	)		$	—		$	(66,012	)
Accreted put premium on redeemable common stock		—		—		—		—			(3,000		)	—				—			(3,000		)
Net loss		—		—		—		—			—			(812		)		—			(812		)
Balance, November 3, 2002		—		—		3,712,764		30			64,102			(133,956		)		—			(69,824		)
Accreted put premium on redeemable common stock		—		—		—		—			(3,000		)	—				—			(3,000		)
Comprehensive income
Foreign currency translation adjustments		—		—		—		—			—			—				21			21
Net income		—		—		—		—			—			763				—			763
Total comprehensive income (loss)																					784
Balance, November 2, 2003		—		—		3,712,764		30			61,102			(133,193		)		21			(72,040		)
Accreted put premium on redeemable common stock		—		—		—		—			(3,000		)	—				—			(3,000		)
Stock-based compensation		—		—		—		—			353			—				—			353
Comprehensive income
Foreign currency translation adjustments		—		—		—		—			—			—				125			125
Net loss		—		—		—		—			—			(1,685		)		—			(1,685		)
Total comprehensive income (loss)																					(1,560		)
Balance, October 31, 2004		—		$	—	3,712,764		$	30		$	58,455		$	(134,878	)		$	146		$	(76,247	)

~~F-9~~See accompanying notes to consolidated financial statements.

~~Stock~~F-~~Based Compensation~~ 4

OnSPECIAL ~~November 1~~DEVICES, ~~1997,~~INCORPORATED ~~the~~AND ~~Company adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting~~SUBSIDIARIES ~~for~~CONSOLIDATED ~~Stock-Based~~STATEMENTS ~~Compensation,"~~OF ~~which~~CASH ~~encourages, but does not require, companies to record as compensation expense over the vesting period the fair value of all stock-based awards on the date of~~FLOWS ~~grant.~~(Dollars ~~The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed~~ in ~~Accounting Principles Board ("APB"~~thousands) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the estimate of the market value of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock.

Recent Accounting Pronouncements

	For The Years Ended
	October 31 2004				November 2 2003				November 3 2002
Cash Flows From Operating Activities:
Net income (loss)		$	(1,685	)		$	763			$	(812	)
Loss (gain) on sale of discontinued operations		—				(247		)		172
Income (loss) from continuing operations		(1,685		)		516				(640		)
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:
Depreciation and amortization		8,930				9,356				10,293
Equity in losses of SDI-Molan		498				1,394				176
Gain on extinguishment of debt		—				—				(521		)
Deferred income taxes		(739		)		330				932
Stock-based compensation		353				—				—
Increase (decrease) in inventory reserve		(128		)		753				(263		)
Increase (decrease) in accounts receivable allowances		(156		)		87				(303		)
Changes in assets and liabilities:
Accounts receivable		(71		)		(652		)		279
Inventories		1,609				62				3,402
Prepaid expenses and other current assets		322				649				1,374
Net change in investment in and advances to SDI-Molan		(897		)		(2,157		)		(1,981		)
Other assets		35				(66		)		600
Accounts payable and accrued liabilities		90				(3,024		)		(3,109		)
Income taxes payable		(618		)		(790		)		(361		)
Other		283				125				(117		)
Net cash provided by continuing operations		7,826				6,583				9,761
Net cash provided by discontinued operations		—				—				69
Net cash provided by operating activities		7,826				6,583				9,830
Cash Flows From Investing Activities:
Purchases of property, plant and equipment		(3,685		)		(6,269		)		(6,021		)
Proceeds from sale of discontinued operations		—				—				69
Decrease in notes receivable		36				33				38
Other		202				—				913
Net cash used in investing activities		(3,447		)		(6,236		)		(5,001		)
Cash Flows From Financing Activities:
Repurchase of long-term debt		—				—				(293		)
Repayment of long-term debt		(1,000		)		(1,274		)		(1,025		)
Net cash used in financing activities		(1,000		)		(1,274		)		(1,318		)
Net increase (decrease) in cash and cash equivalents		3,379				(927		)		3,511
Cash and cash equivalents at beginning of year		3,925				4,852				1,341
Cash and cash equivalents at end of year		$	7,304			$	3,925			$	4,852
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest		$	8,623			$	8,756			$	8,935
Income taxes		860				170				78
Non-cash financing activities:
Accretion of redeemable common stock		$	3,000			$	3,000			$	3,000

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

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94F-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred, not when it is "planned". The Company is required to adopt the provisions of SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002 and does not expect the adoption to have a material impact on the Company's results of operations or financial position. 5

~~In April 2002,~~SPECIAL ~~the FASB issued SFAS No. 145~~DEVICES, ~~"Rescission~~INCORPORATED ofAND ~~FASB~~SUBSIDIARIES ~~Statements~~NOTES ~~No. 4,~~TO 44CONSOLIDATED ~~and~~FINANCIAL 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking Fund Requirements". Under SFAS No. 4, all gains and losses from extinguishment of debt were required to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. With the elimination of SFAS No. 4, gains and losses from extinguishment of debt are to be classified as STATEMENTS

~~F-10~~1. Company Operations

~~extraordinary~~Special ~~items~~Devices, ~~only~~Incorporated, ifa ~~they~~Delaware ~~meet~~ corporation (the ~~criteria~~“Company” ~~for~~or ~~extraordinary items in APB Opinion No. 30~~“SDI”), ~~"Reporting~~is ~~the~~a ~~Results~~leading ofdesigner ~~Operations—Reporting~~and ~~the~~manufacturer ~~Effects~~ of ~~Disposal~~highly reliable ofprecision ~~a Segment~~engineered ofpyrotechnic ~~Business,~~devices. ~~and~~These ~~Extraordinary,~~devices ~~Unusual~~are ~~and~~used predominantly ~~Infrequently~~in ~~Occurring~~vehicle ~~Events~~airbag and ~~Transactions."~~other ~~Applying~~automotive ~~the~~safety ~~provisions of APB Opinion No~~systems. 30 ~~will distinguish transactions that are part of~~The ~~an entity'~~Company’s ~~recurring~~primary ~~operations~~products ~~from~~are ~~those~~initiators, ~~that~~which ~~are~~function ~~unusual~~like oran ~~infrequent~~“electrical match” orto ~~that~~ignite ~~meet~~ the ~~classification~~gas ofgenerating ancharge ~~extraordinary~~in ~~item.~~an ~~SFAS~~automotive ~~No. 145~~airbag ~~also rescinds SFAS No~~system. ~~44,~~ ~~"Accounting~~We ~~for~~believe ~~Intangible~~we ~~Assets~~are ofthe ~~Motor~~world’s ~~Carriers,"~~largest ~~and~~independent ~~amends~~supplier ~~SFAS~~of ~~No. 13,~~initiators ~~"Accounting~~sold ~~for Leases,"~~ to leading ~~eliminate~~domestic anand ~~inconsistency~~foreign ~~between~~automotive ~~the~~airbag ~~required~~system ~~accounting~~manufacturers. ~~for sale-leaseback~~Those ~~transactions~~manufacturers ~~and~~use ~~the~~SDI’s ~~required~~product ~~accounting~~in ~~for~~the ~~certain~~assembly ~~lease~~of ~~modifications~~integrated ~~that~~airbag ~~have~~safety systems, ~~economic~~which ~~effects~~they ~~that~~then ~~are~~sell ~~similar~~ to ~~sale-leaseback~~automobile ~~transactions.~~original ~~This~~equipment ~~statement~~manufacturers. ~~also~~As ~~amends~~of ~~other existing~~October ~~authoritative~~31, ~~pronouncements~~2004 towe ~~make~~only ~~various~~have ~~technical~~one ~~corrections~~operating segment, ~~clarify~~the ~~meanings~~Automotive orDivision. ~~describe~~Although ~~their~~we ~~applicability~~are developing ~~under~~products ~~changed~~and ~~conditions.~~capabilities ~~The~~in ~~Company~~the isnew ~~required~~Aerospace toDivision ~~adopt~~and ~~the provisions~~in ofcommercial ~~SFAS~~mining ~~No. 145~~and ~~on November 4~~blasting, ~~2002~~neither ~~and~~of ~~does~~these ~~not~~areas ~~expect~~is ~~the~~significant ~~adoption~~ to ~~have~~total aconsolidated assets ~~material~~or ~~impact~~to ontotal ~~the~~consolidated ~~Company's~~revenues ~~results~~at ofor ~~operations~~for orthe ~~financial~~year ~~position.~~ended October 31, 2004.

~~In August 2001,~~The ~~the~~Company ~~FASB~~formed ~~issued~~a ~~SFAS~~joint ~~No. 144,~~venture ~~"Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS No. 121~~partnership, ~~"Accounting for the Impairment of Long~~SDI-~~Lived~~Molan ~~Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and reporting provisions of APB Opinion No.~~GmbH ~~30.~~& ~~SFAS No~~Co. ~~144 establishes~~ ~~accounting~~KG ~~standards for the impairment of long~~(“SDI-~~lived assets, excluding goodwill, and for long-lived assets to be disposed of. SFAS No. 144 requires that~~Molan”) ~~long-lived~~in ~~assets~~Germany ~~be reviewed for impairment whenever events or changes~~ in ~~circumstances indicate that the carrying amount of an asset may not be recoverable~~June 2001. ~~Recoverability~~The ofCompany’s ~~assets~~50% ~~to be~~interest ~~held~~in ~~and~~SDI-Molan ~~used~~ is ~~measured~~ held by aSDI ~~comparison~~Germany ofGmbH ~~the~~(“SDI ~~carrying~~Germany”), ~~amount~~a ofwholly anowned ~~asset~~German ~~to future net cash flows expected to be generated by the asset~~subsidiary. ~~If such assets are considered to be impaired, the~~SDI ~~impairment~~Germany towas beestablished ~~recognized~~in is2001 ~~measured~~for by the ~~amount~~purpose ~~by which the carrying amount~~ of ~~the~~holding ~~assets exceeds~~ the ~~fair~~interest ~~value~~in of the joint ~~assets~~venture. ~~Assets~~SDI-Molan’s tobusiness beis ~~disposed of are reported at~~ the ~~lower~~development, ofproduction, ~~the~~marketing, ~~carrying~~distribution ~~amount~~and orsale ~~fair~~of ~~value~~air ~~less~~bag ~~costs~~initiators, tomicro ~~sell.~~gas ~~The~~generators, ~~statement~~and ~~retains~~seat belt ~~the~~buckles ~~basic~~and ~~provisions~~pyrotechnic ofpretensioners ~~APB~~in ~~Opinion No~~Europe. 30 ~~for~~SDI-Molan ~~the presentation of discontinued~~ began operations in ~~the statement of operations~~2002 ~~but~~with ~~broadens~~its ~~that~~micro ~~presentation~~gas togenerator ~~include~~production ~~a component of an entity (rather than a segment of a business)~~line. ~~The~~Commercial ~~Company~~production ~~is required to adopt the provisions of SFAS No. 144 on November 4,~~commenced ~~2002 and does not expect the adoption to have a material impact~~ on ~~the~~its ~~Company's~~Global ~~results~~Standard ofInitiator lines ~~operations~~in ~~or financial position~~2004.

In June ~~2001~~2002, the ~~FASB issued SFAS No. 141, "Business Combinations", SFAS No. 142, "Goodwill and Other Intangible Assets", and SFAS No. 143, "Accounting for Asset~~ ~~Retirement~~Company ~~Obligations."~~incorporated ~~SFAS~~Special ~~No. 141~~Devices ~~requires~~Japan ~~that~~Kabushiki ~~the~~Kaisha ~~purchase~~(“SDI ~~method~~Japan”) ~~of accounting be used for all business combinations, establishes specific criteria for recognizing intangible assets~~in ~~separately~~Japan ~~from goodwill~~ and ~~requires~~SDI ~~certain~~Japan ~~disclosures~~began ~~regarding~~operations ~~reasons~~as ~~for~~ a ~~business~~sales ~~combination~~office ~~and~~in ~~the allocation of the purchase price paid~~2003. ~~SFAS~~The ~~No. 141 is effective for all business~~Company ~~combinations~~previously ~~initiated~~distributed ~~after~~its ~~June 30,~~products ~~2001~~in ~~and~~Japan ~~for~~through ~~all~~an ~~business~~agent. ~~combinations~~In ~~accounted for using the purchase accounting method for which the date of acquisition is July~~November 12002, ~~2001 or~~ ~~later.~~the ~~SFAS~~Company ~~No. 142~~formed ~~establishes~~Special ~~that~~Devices ~~goodwill~~(Thailand) ~~and certain intangible assets will no longer be amortized to earnings, but instead tested for impairment at least annually~~Co. ~~SFAS No.~~, ~~143 requires~~Ltd ~~that~~(“SD ~~the~~Thailand”) ~~fair value of a liability for an asset retirement obligation be recognized~~ in Thailand. ~~the~~SD ~~period~~Thailand ~~in which it~~ is ~~incurred~~leasing if a ~~reasonable~~production ~~estimate~~ready offacility fair value can be made, that the associated asset retirement costs be capitalized as part of the carrying amount of the asset and requires certain disclosures providing descriptions of the asset retirement obligations and reconciliations of changes in ~~components of those obligations~~Thailand. ~~Except~~Commercial ~~for~~production ~~business combinations initiated after June 30, 2001, the Company~~ is ~~required~~expected to ~~adopt~~scale ~~the~~up ~~provisions~~in ~~of SFAS No~~2005.~~'s 141, 142 and 143 on November 4, 2002.~~

~~F-11~~2. Summary of Significant Accounting Policies

~~The~~Basis ~~Company does not expect the adoption~~ of ~~these statements to have a material impact on the Company's results of operations or financial position.~~ Consolidation

~~Reclassifications~~ The consolidated financial statements include the accounts of the Company and its subsidiaries, SDI Germany, SDI Japan and SD Thailand. All material intercompany accounts and transactions have been eliminated. The Company accounts for its 50% ownership interest in SDI-Molan under the equity method of accounting.

~~During~~Foreign ~~2002, the Company refined its allocation of overhead expenses to cost of sales. As a result of this change, cost of sales, gross profit and operating expenses have been~~Currency ~~reclassified for all prior periods presented. There was no impact on results of operations or financial position in any period.~~ Translation

~~Certain~~The functional currency ~~other~~for ~~prior~~all ~~year~~foreign ~~amounts~~operations ~~have~~is ~~been~~the ~~reclassified~~local tocurrency. ~~conform~~Foreign-currency-denominated assets toand liabilities are translated into U.S. dollars at exchange rates existing at the ~~current~~respective balance sheet dates. Results of operations are translated into U.S. dollars at the average exchange rate for the year's. Translation ~~presentation~~adjustments are recorded in Accumulated Other Comprehensive Income, a separate component of Stockholders’ Equity. Gains and losses from foreign currency transactions, the amounts of which are not material, are included in net income.

~~3. Accounts Receivable~~ Discontinued Operations

The ~~activity~~divestiture ~~relating~~of tothe Aerospace ~~allowances~~Division ~~for~~was ~~accounts~~completed ~~receivable~~in is2001. asAs ~~follows:~~previously disclosed, the net assets of the remaining Aerospace operations were sold on May 11, 2001.

				October 31
	November 3 2002
				2001			2000
	(In thousands)
Balance at beginning of year	$	642		$	393		$	322
Additions charged to expense		787			440			361
Write-offs		(1,090	)		(191	)		(290	)
Balance at end of year	$	339		$	642		$	393

F-6

4.SPECIAL ~~Inventories~~ DEVICES, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~Inventories~~2. ~~consist~~ Summary of ~~the~~Significant ~~following~~Accounting ~~components:~~Policies (Continued)

	November 3 2002		October 31 2001
	(In thousands)
Raw materials and components	$	2,867	$	3,770
Work in process		995		888
Finished goods		3,599		5,942
Total inventories	$	7,461	$	10,600

Risks and Uncertainties

5The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. ~~Accrued~~Actual ~~Liabilities~~ results could differ from those estimates.

~~In October 2001, the Company accrued $0.7 million for severance and related employee costs associated with a company-wide reduction in force of approximately 115 employees.~~ As of October 31, ~~2001~~ 2004, ~~approximately~~the ~~$0.2 million~~Company had ~~been~~net ~~charged~~liabilities ~~against~~of ~~the accrued severance liability. Of the~~ $029.~~7 million~~6 ~~charged to expense, approximately $0.3~~ million. ~~was~~The ~~charged~~Company’s ability to ~~"Cost~~pay ofthe ~~sales"~~interest ~~and~~on, ~~$0.4 million~~or ~~was~~to ~~charged~~refinance todebt, ~~"Operating~~or ~~expenses"~~to infund ~~the~~planned ~~Company's~~capital expenditures, ~~consolidated~~will ~~statement~~depend ofon ~~operations~~generating ~~for~~cash ~~the~~flow ~~year ended~~from ~~October 31,~~future ~~2001~~operations. The Company ~~accrued~~had ~~severance~~positive ~~liability~~cash ~~was~~flow $0from ~~and~~continuing ~~$0.5 million~~operations atduring ~~November 3,~~each ~~2002~~of ~~and~~the ~~October 31,~~past ~~2001,~~three ~~respectively~~years.

~~Accrued liabilities~~Cash ~~includes accrued paid time off of $1.1~~ and ~~1.2 million~~Cash ~~at November 3, 2002 and October 31, 2001, respectively.~~ Equivalents

~~F-12~~Cash and cash equivalents include all cash balances and highly liquid investments with a maturity of three months or less when purchased.

6.Fair ~~Long-Term~~Value ~~Debt~~ of Financial Instruments

~~Long~~The carrying amounts of the Company’s cash, trade accounts receivable and all current liabilities (excluding short-term borrowings) ~~debt~~approximate ~~consists~~the offair values due to the ~~following~~relatively ~~components:~~short maturities of these instruments.

	November 3 2002			October 31 2001
	(In thousands)
Term loan	$	3,975		$	5,000
Senior subordinated notes		73,594			74,430
		77,569			79,430
Less current portion		(1,000	)		(1,000	)
Long-term debt	$	76,569		$	78,430

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

As part of the Recapitalization in 1999, the Company issued $100.0 million of Senior Subordinated Notes (the "Notes"). The Company repurchased $0.8 and $25.6 million face value of the Notes in the open market for $0.3 and $13.4 million in 2002 and 2001, respectively The Notes are due in December 2008, and bear interest at 113/8% per annum. Interest is payable semi-annually in June and December. The Notes are noncollateralized obligations of the Company and are subordinate to its obligations under its credit facilities.

	October 31 2004			November 2 2003
	(In thousands)
Fair value		$	74,559		$	69,120
Carrying amount		75,295			76,295

The Company’s entered into a credit facility (the "Credit Facility") in June 2001 which consists of a $25.0 million five-year Revolving Credit Facility (the "Revolver") and a $5.0 million five-year Term Loan (the "Term Loan"). Available borrowings under ~~the~~its ~~Revolver~~term ~~are~~loans ~~based~~and onrevolving alines ~~formula comprised~~ of ~~eligible~~credit ~~accounts~~have ~~receivable~~variable ~~and~~rates ~~inventory. The Credit Facility requires lockbox arrangements which~~that ~~provide~~reflect ~~for~~currently ~~all~~available ~~receipts~~terms 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~~conditions ~~business~~for ~~combinations,~~similar ~~voluntary prepayment of other~~ debt~~, transactions with affiliates, repurchase or redemption of equity securities, and financial covenants on tangible net worth~~. The ~~Revolver and the Term Loan bear interest at the Bank's Base Rate or the LIBOR Rate plus applicable margins. The Company has the option of electing the~~carrying ~~LIBOR Rate on all or a portion of the~~ amount ~~outstanding under the Credit Facility prior to the start~~ of ~~each~~this ~~quarterly~~debt ~~interest~~is ~~period. The Term Loan had~~ a ~~balance~~reasonable ofestimate ~~$4.0 million and an effective interest rate~~ of ~~5.25%~~its ~~per~~fair ~~annum at November 3, 2002~~value. ~~At November 3, 2002, there were no borrowings outstanding under the Revolver. Letters of credit outstanding and applied for under the Revolver reduce the amount of borrowings available.~~ The ~~Company had $3.5 million in letters of credit outstanding at November 3, 2002. On January 3, 2003, this~~Senior ~~amount~~Subordinated ~~was~~Notes ~~reduced~~are totraded ~~$2.5 million.~~occasionally The total amount available under the Revolver at November 3, 2002 was $9.0 million subject to compliance with certain financial and operating covenants which the Company must meet on a quarterly basis. The Company was in ~~compliance~~public ~~with these covenants as of November 3, 2002~~markets. ~~Substantially all of the Company's assets are pledged as collateral under the Credit Facility.~~

The Company has guaranteed bank loans made to SDI-Molan under agreements entered into in August 2002. The Company's guarantee is limited to fifty percent of the loans outstanding and is subject to a maximum of 3.2 million Euro or approximately $3.2 million at November 3, 2002. SDI-Molan had bank loans outstanding in the amount of 4.3 million Euro or approximately $4.3 million at November 3, 2002. Inventories

FInventories are stated at the lower of cost or market using standard costs, which approximates the first-13in, first-out method. The Company’s policy is to review its 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.

~~The remaining principal payments under the Term Loan are as follows (in thousands):~~ F-7

For Fiscal Years
2003	$	1,000
2004		1,000
2005		1,000
2006		975
	$	3,975

SPECIAL DEVICES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

72. Summary ~~Income~~of ~~Taxes~~ Significant Accounting Policies (Continued)

~~The~~Property ~~income~~and ~~tax provision (benefit) attributable to continuing operations consists of the following components:~~ Equipment

		For The Years Ended
					October 31
		November 3 2002
					2001			2000
		(In thousands)
Current:
	Federal	$	(829	)	$	(5,325	)	$	(8,610	)
	State		(425	)		(1,555	)		(3,576	)
			(1,254	)		(6,880	)		(12,186	)
Deferred:
	Federal		275			(1,672	)		3,779
	State		657			(842	)		1,594
			932			(2,514	)		5,373
Total:
	Federal		(554	)		(6,997	)		(4,831	)
	State		232			(2,397	)		(1,982	)
		$	(322	)	$	(9,394	)	$	(6,813	)

Property and equipment are recorded at cost. The cost of maintenance and repairs is charged against results of operations as incurred. Depreciation is charged against results of operations using the straight-line method over the estimated service lives of the related assets. The following are the lives used in determining depreciation rates of various assets:

F-14

Buildings and improvements		25-39 years
Machinery and equipment		8 years
Furniture, fixtures and computer equipment		3-5 years
Transportation equipment		3-5 years

~~Temporary~~Leasehold improvements are ~~differences~~amortized ~~which~~over ~~give~~the ~~rise~~life toof ~~deferred~~the ~~tax~~lease ~~assets~~or ~~(liabilities)~~the useful lives of the improvements, whichever is shorter. Upon sale or retirement of the depreciable property, the related cost and accumulated depreciation are aseliminated ~~follows:~~from the accounts and gains or losses are reflected in the consolidated statement of operations.

			November 3 2002			October 31 2001
			(In thousands)
Current deferred taxes:
	Allowance for doubtful accounts		$	144		$	273
	Inventories			209			210
	Vacation			282			366
	Other accruals			1,803			1,713
		Total current deferred taxes		2,438			2,562
Noncurrent deferred taxes:
	Depreciation			(3,948	)		(3,763	)
	Net operating losses			166			—
	Other			271			—
	State tax credits			—			894
	Valuation allowance			(166	)		—
		Total noncurrent deferred taxes		(3,677	)		(2,869	)
Net deferred tax liabilities			$	(1,239	)	$	(307	)

Environmental Expenditures

InEnvironmental expenditures ~~accordance~~that ~~with~~relate ~~SFAS~~to ~~No. 109~~current ~~"Accounting~~operations ~~for~~are ~~Income~~expensed ~~Taxes",~~or ~~management~~capitalized ~~establishes~~as ~~valuation~~appropriate. Expenditures ~~allowances~~that ~~against~~relate ~~deferred~~to ~~tax~~an ~~assets~~existing ifcondition itcaused ~~believes~~by ~~that~~past itoperations, and iswhich ~~more~~do ~~likely~~not ~~than~~contribute ~~not~~to ~~that~~current ~~some~~ or ~~all~~future ofrevenue ~~the~~generation ~~deferred tax assets will not be realized~~are expensed. ~~The~~Liabilities ~~Company~~are ~~has~~recorded ~~established~~when ~~valuation~~environmental ~~allowances~~assessments ~~pertaining~~and/or remedial toefforts ~~its~~are ~~state~~probable and ~~foreign~~the ~~net~~costs ~~operating~~can ~~losses~~be estimated. ~~At November 3, 2002 the~~Environmental ~~Company~~liabilities ~~has~~are ~~foreign~~not ~~net~~discounted ~~operating~~to ~~loss~~their ~~carryforwards~~present ofvalue ~~approximately $77 thousand, of which $5 thousand will begin expiring in 2007~~ and ~~$72 thousand~~are ~~will~~recorded ~~never~~without ~~expire. The~~consideration ~~Company also has state net operating loss carryforwards~~ of ~~approximately~~potential ~~$1,057 thousand,~~recoveries ~~which~~from ~~will~~third ~~begin expiring in 2006~~parties. ~~Deferred~~Subsequent ~~tax~~adjustments ~~assets also include state tax credits of~~to ~~$184 thousand~~estimates, ~~that~~which ~~will~~may ~~begin~~be ~~expiring in 2010 and $149 thousand that will never expire. In 2002~~significant, ~~the~~may ~~loss~~be ~~from~~made ~~continuing~~as ~~operations~~more ~~before~~information ~~income tax benefit includes~~becomes ~~($176) thousand~~available ofor ~~losses~~as ~~from~~circumstances ~~foreign operations~~change.

~~A reconciliation~~Revenue ~~between the statutory federal income tax benefit and the Company's effective income tax benefit on losses from continuing operations before extraordinary gains is as follows:~~ Recognition

	For The Years Ended
				October 31
	November 3 2002
				2001			2000
	(In thousands)
Income tax benefit at federal statutory rates	$	(514	)	$	(8,701	)	$	(6,201	)
State income taxes, net of federal income tax effect		79			(1,558	)		(1,288	)
Non-deductible penalties		32			1,082			723
Other		81			(217	)		(47	)
	$	(322	)	$	(9,394	)	$	(6,813	)

The Automotive Products Division manufactures products, to customer specifications, under standard purchase orders. Sales are primarily recognized when products are shipped.

~~F-15~~Research and Development

8Research and development costs are expensed as incurred. The ~~Redeemable~~Company’s ~~Preferred~~research ~~Stock~~and development department’s expense was $1.3 million, $1.1 million and $2.1 million in 2004, 2003 and 2002, respectively.

~~The~~Income ~~Company issued 4,000 shares of Series A Cumulative Convertible Preferred Stock ("Preferred Stock") to participating stockholders on February 28, 2001 for a total consideration of $4.0 million.~~ Taxes

The ~~Preferred~~ ~~Stock~~Company isaccounts ~~redeemable~~for income attaxes under the ~~option~~liability ofmethod ~~the~~whereby ~~Company~~deferred atincome ~~any~~taxes ~~time~~are recognized atfor athe ~~stated~~future ~~liquidation~~tax ~~value~~consequences ofattributable ~~one~~to ~~thousand~~differences ~~dollars~~between the ~~per~~financial ~~share~~statement ~~(the~~carrying ~~"Stated~~amounts ~~Liquidation~~of ~~Value")~~existing ~~plus~~assets ~~accrued~~and ~~dividends~~liabilities ~~(the~~and ~~"Liquidation~~their ~~Preference")~~respective tax bases. ~~Holders~~Deferred oftax ~~the~~assets ~~Preferred~~and ~~Stock~~liabilities ~~have~~are ~~the~~measured using ~~option~~enacted tax rates expected to ~~require~~apply to taxable income in the ~~Company~~years in which those temporary differences are expected to ~~redeem~~be ~~their~~recovered ~~shares~~or atsettled. ~~the~~The effect ~~Liquidation~~on ~~Preference~~deferred ~~upon~~taxes of a change in ~~control~~tax asrates ~~defined.~~is ~~The~~recognized ~~Preferred Stock~~in ~~has~~income ~~therefore~~in the ~~been~~period ~~recorded~~that asincludes ~~Redeemable~~the ~~Preferred~~enactment ~~Stock~~date.

The Preferred Stock is convertible into the Company's Common Stock upon the occurrence of certain triggering events as defined, which includes the fifth anniversary of the issuance of the Preferred Stock. Each share of Preferred Stock is convertible into the number of shares of Common Stock which results from dividing the Stated Liquidation Value by the conversion price (the "Conversion Price"). The Conversion Price is $5.00 per share and is subject to antidilutive adjustments. F-8

9.SPECIAL ~~Redeemable~~DEVICES, ~~Common~~INCORPORATED ~~Stock~~ AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~Some of the outstanding shares of Common Stock held by certain stockholders, are subject to the right, under certain conditions, to require the Company to~~2. ~~purchase~~Summary ~~all or a portion~~ of ~~these~~Significant ~~shares~~Accounting atPolicies ~~a price per share based on a formula. Accordingly, these 735,294 shares have been recorded as redeemable common stock. Annual accretion on the redeemable common stock is $3.0 million.~~ (Continued)

~~10.~~Stock-Based ~~Stockholders' Equity~~ Compensation

~~Preferred~~The Company follows Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” which encourages, but does not require, companies to record as compensation expense over the vesting period the fair value of all stock-based awards on the date of grant. The Company adopted the disclosure requirements of SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an Amendment of SFAS No. 123” effective for the second quarter of fiscal 2003. At October 31, 2004, the Company has two stock-based employee compensation plans. The Company accounts for those plans using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the estimate of the market value of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock. Generally no stock-based employee compensation cost is reflected in net income (loss), as all options granted under those plans had an exercise price equal to the estimated market value of the underlying common stock on the date of grant. The stock-based compensation expense for the year ended October 31, 2004 relates to a deemed modification of stock options under the separation agreement with SDI’s former chief operating officer.

The following ~~Company~~table isillustrates ~~authorized to issue 2,000,000 shares of Preferred Stock, $.01 par value. Shares of Preferred Stock may be issued from time to time in one or more series and~~ the ~~Board~~ ofeffect ~~Directors,~~on ~~without~~net ~~further~~income ~~stockholder~~(loss) ~~approval,~~if ~~is authorized to fix~~ the ~~rights~~Company ~~and terms, including dividends and liquidation preferences and any other rights to each such series of~~had ~~Preferred~~applied ~~Stock.~~the Atfair ~~November~~value 3,recognition ~~2002~~provisions ~~and October 31, 2001, 4,000 shares~~ of ~~Preferred~~SFAS ~~Stock were outstanding~~No. 123 ~~See~~to stock-based ~~Note~~employee 8compensation.

Warrants

	For The Years Ended
	October 31 2004				November 2 2003				November 3 2002
	(In thousands)
Net income (loss), as reported		$(1,685		)		$	763			$	(812	)
Add: Stock-based employee compensation expense included in net income (loss), net of related tax effects		353				—				—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,688		)		(1,451		)		(1,540		)
Pro forma net loss		$	(3,020	)		$	(688	)		$	(2,352	)

The ~~Company~~fair ~~issued~~value afor ~~warrant~~these options ~~certificate~~was inestimated ~~April~~at ~~2000~~the ~~for~~date ~~10,000~~of ~~warrants~~grant ~~for~~using a ~~total~~Black-Scholes ~~consideration~~option ofpricing model ~~$10,000.~~with ~~The~~the ~~warrant~~following ~~certificate~~weighted ~~expires~~average ~~April~~assumptions ~~2010~~for ~~and~~2004, ~~entitles~~2003 ~~the~~and 2002, ~~holder~~respectively: torisk-free ~~purchase~~interest ~~one~~rates ~~share~~ of ~~Common Stock~~4.57%, ~~par~~4.15%

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