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SPECIAL DEVICES, INCORPORATED

March 17, 2005

Mr. Rufus Decker

Accounting Branch Chief

United States Securities and Exchange Commission

450 Fifth Street, N.W., Stop 4-5

Washington, D.C. 20549

RE:          Special Devices,
Incorporated Form 10-K for the fiscal year
ended October 31, 2004 — File No. 333-75869

Dear Mr. Decker:

Enclosed are our responses to your letter dated February 18, 2005. In
order to facilitate your review, we have included the Staff’s comment followed
by our response below. It is our intention to include these revisions in future
filings.

Comments applicable to
your overall filing

1.               Where a comment below requests additional disclosures
or other revisions to be made, please show us in your supplemental response
what the revisions will look like.  These
revisions should be included in your future filings.

Response: The requested response or additional disclosure is
set forth under each of the Staff’s comments below.  These revisions will be included in future
filings.

Item 7 — Management’s Discussion and Analysis

Results of Operations,
page 16

2.               Please discuss in greater detail the business reasons
for the changes between periods in gross profit (loss) and your operating
expenses.  Please also discuss the
business reasons for the change between periods in the depreciation and
amortization line item.  In doing so,
please disclose the amount of each significant change in line items between
periods and the business reasons for it.
In circumstances where there is more than one business reason for the
change, attempt to quantify the incremental impact of each individual business
reason discussed on the overall change in the line item.  Please show us what your revised MD&A for
2004 as compared to 2003 will look like.
See Item 303(a)(3) of Regulation S-K and Financial Reporting
Codification 501.04.

Response: The
disclosure is revised as follows:

Cost of Sales

Consolidated cost of sales for 2004 was $86.4 million, or 81.9% of
sales, compared to consolidated cost of sales of $91.5 million or 81.1% of
sales for 2003. The decrease of $5.1 million was due to lower unit material
costs of 7% due to effective negotiations with suppliers and the benefit of
labor productivity programs in both the Mesa and Moorpark facilities that
reduced direct labor and factory costs by 6%. Depreciation expense included in
cost of sales for 2004 was $7.1 million, below 2003 depreciation by $0.5 million
due to reduced levels of capital expenditures for equipment. Cost of sales
includes all direct costs and manufacturing overhead. Direct costs and
manufacturing overhead includes material, labor, inbound freight charges,
purchasing, receiving, quality assurance, warehousing and internal transfer
costs and depreciation for manufacturing equipment and facilities.

Gross Profit

Consolidated
gross profit for 2004 was $19.0 million, or 18.1% of consolidated net sales,
compared to consolidated gross profit of $21.4 million or 18.9% of
consolidated net sales for 2003. Of the reduction in gross profit of $2.4
million, $1.5 million was due to the reduction in sales and $0.9 million was
due to the reduction in gross margin. The decline in gross margin of 0.8% was
primarily due to a shift in our mix of business towards lower priced standard
initiators that provide lower gross profit per unit. The lower average selling
prices per unit reduced gross profit by $8.0 million, which was mostly offset
by the improvements in unit cost of sales described above. In order to optimize
the gross profit on our products, we continue to make improvements in our
manufacturing process that allow us to produce more units with the same or less
labor. In addition, we investigate and implement innovations that may serve to
reduce the cost of production through improved equipment utilization rates and
supplier negotiations. 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 2004 were $12.7
million or 12% of consolidated net sales, compared with consolidated operating
expenses of $11.4 million or 10.1% of consolidated net sales for 2003. The
increase of $1.3 million was primarily due to increased legal expenses of $1.2
million including the settlement of the Qui Tam Suit during the third quarter
of 2004 (see Item 3. Legal Proceedings), and severance costs of $0.7 million.
During the third quarter, we reached a separation agreement with SDI’s former
chief operating officer.  Costs related
to a severance agreement with this individual of approximately $0.7 million
were expensed in the third quarter of 2004. These increases were partially
offset by a decrease of approximately $0.5 million in salary and other costs
related to a reduction in force in November 2003. Operating expenses consists
of marketing, research and development and general administrative expenses.

Contractual Obligations,
page 18

3.               Please revise your table of contractual cash
obligations to include the estimated interest payments on your debt.  Because the table is aimed at increasing
transparency of cash flow, we believe these payments should be included in the
table.  Please also disclose any
assumptions you made to derive these amounts.

Response:
The disclosure is revised as follows:

Contractual
Obligations

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

  Payments due by period

  Contractual Obligations

  Total

  Less than

  1 year

  1-3 years

  3-5 years

  More than

  5 years

  Term loan

  $

  1.7

  $

  0.7

  $

  1.0

  $

  —

  $

  —

  Subordinated
  notes

  73.6

  —

  —

  73.6

  —

  Interest on debt
  (1)

  50.7

  8.6

  17.0

  25.1

  —

  Operating leases

  65.6

  4.1

  8.1

  7.9

  45.5

  Purchase
  obligations

  4.1

  1.1

  1.9

  1.1

  —

  Total

  $

  195.7

  $

  14.5

  $

  28.0

  $

  107.7

  $

  45.5

(1) Interest on
debt, including the Term Loan and Subordinated Notes, was calculated using
current rates and current principal maturities.

Financial Statements

Note 2 — Summary of Significant Accounting Policies,
page F-6

4.               Please disclose the types of expenses that you include
in the cost of sales line item and the types of expenses that you include in
the operating expenses line item.  Please
also disclose whether you include inbound freight charges, purchasing and
receiving costs, inspection costs, warehousing costs, internal transfer costs,
and the other costs of your distribution network in the cost of sales line
item.  With the exception of warehousing
costs, if you currently exclude a portion of these costs from cost of sales,
please disclose:

•                  in a footnote the line items that these excluded costs are included in
and the amounts included in each line item for each period presented, and

•                  in MD&A that your gross margins may
not be comparable to those of other entities, since some entities include all
of the costs related to their distribution network in cost of sales and others
like you exclude a portion of them from gross margin, including them instead in
a line item, such as operating expenses.

Response: Note 2 — Summary of Significant
Accounting Policies is revised as follows:

Cost
of Sales

Cost of sales includes all direct costs and
manufacturing overhead. Direct costs and manufacturing overhead includes
material, labor, inbound freight charges, purchasing, receiving, quality assurance,
warehousing and internal transfer costs and depreciation for manufacturing
equipment and facilities.

Operating
Expenses

Operating expenses consists of marketing, research and
development and general administrative expenses.

5.               Please disclose more information regarding your
revenue recognition policy.  In doing so,
please also disclose whether your stated shipping terms are FOB shipping point
or FOB destination pursuant to your sales agreements with customers.  In addition, please disclose whether your
sales agreements contain right of inspection or acceptance provisions and
whether you replace goods damaged or lost in transit.  Even if your sales agreements state that
title passes upon shipment, customer acceptance provisions or a history of your
replacing goods damaged or lost in transit may also make the recognition of
revenue upon delivery to and acceptance by the customer more appropriate.  See the Interpretive Response to Question 3
of SAB Topic 13:A.3.b.

Response: Note 2 — Summary of Significant
Accounting Policies and “Critical Accounting Policies” in MD&A are revised
as follows:

Revenue Recognition

The Automotive Products Division manufactures products to customer
specifications under standard purchase orders. Sales are recognized in accordance
with accounting principles generally accepted in the United States, including
the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104,
“Revenue Recognition in Financial Statements”, which requires that sales be
recognized when there is evidence of a sales agreement, the delivery of goods
has occurred, the sales price is fixed or determinable and collection of
related billings is reasonably assured. Sales are recorded upon the shipment of
product to customers and transfer of title under standard commercial terms
(typically F.O.B. shipping point). Goods are shipped by common carrier and the
customer bears the financial risk for product damaged or lost in transit based
on our typical terms of F.O.B. shipping point. In those limited instances where
other terms are negotiated and agreed, revenue is recorded when title is
transferred to the customer. Customer purchase orders/sales agreements contain
the right of inspection. The Company provides an allowance for returns based on
historical experience.

Note 6 — Investment in
SDI-Molan, page F-11

6.               You have a 50% ownership
interest in SDI-Molan.  Please provide us
with your significance tests under Rule 3-09 of Regulation S-X for each period
presented.  If in any period this
investment was significant in excess of the 20% level, SDI-Molan’s separate
financial statements are required to be included in your October 31, 2004 Form
10-K for all periods presented.  These
separate financial statements must be audited for periods that the 20% significance
level was exceeded and may be unaudited for each other period.

Response;

Investment in SDI-Molan

Please find below a summary of the significance tests under Rule
1-02(w) of Regulation S-X for each of the periods presented.

  Rule
  1-02(w)(3)

  For the Years Ended

  SDI
  Consolidated Pre-Tax Loss From Continuing Operations

  SDI’s
  50% Share of SDI-Molan’s Pre-Tax Loss From Continuing Operations

  Level of
  Significance

  Dollars
  in Thousands

  October 31, 2004

  $

  (2,731)

  $

  (498)

  18.2%

  November 2, 2003

  ( 56)

  (1,394)

  2,489.3%

  November 3, 2002

  (962)

  (176)

  18.6%

Based on the above, our Investment in SDI-Molan met the definition of a
significant equity  investment for fiscal
years 2002, 2003 and 2004.  However,
since SDI-Molan only met the 20% significance level for fiscal year 2003, as
further discussed below, separate financial statements of SDI-Molan for all
other years presented will be unaudited.

The Company’s 50% interest in SDI-Molan is held by SDI
Germany GmbH (“SDI Germany”), a wholly owned German subsidiary. SDI Germany was
established in 2001 for the purpose of holding the interest in the joint
venture. SDI-Molan’s business is the development, production, marketing,
distribution and sale of air bag initiators, micro gas generators, and seat
belt buckles and pyrotechnic pretensioners in Europe. The operating assets of
the joint venture are located in Germany and the joint venture partnership is
organized under German Commercial Law. Consequently, the Investment in
SDI-Molan qualifies for the accommodations set forth in Securities Exchange
Commission Financial Reporting Release (“FRR 44”) “Financial Statements of
Significant Foreign Equity Investees and Acquired
Foreign Businesses of Domestic Issuers and Financial Schedules.”

Under the accommodations of FRR 44, the Company may
file the required financial statements as an amendment to the Form 10-K within
six months of the equity investee’s fiscal year end. Given that SDI-Molan’s
fiscal year end is December 31, the Company intends to file the required
statements by June 30, 2005, consistent with the Company’s 10K/A filing on June
30, 2004 for the investee’s 2003 fiscal year. The 10-K/A to be filed by June
30, 2005 will include the separate financial statements of SDI-Molan as of
December 31, 2004 and 2003 and for the three years ended December 31, 2004.
Only the separate financial statements of SDI-Molan for 2003 will be audited as
the 20% significance level was not reached in either 2002 or 2004.

7.               Please disclose how you are accounting for your
guarantee of the bank loans made to SDI-Molan, the amount that you recorded in
your financial statements and the line item it is included in.  If you have not recorded anything in your
financial statements related to the guarantee, please disclose why not.  See FIN 45.

Response: Note 6 — Investment in SDI-Molan and “Off-Balance
Sheet Arrangements” in MD&A are revised as follows:

On August 12, 2002, concurrent with the commencement
of operations, the Company and its joint venture partners entered into a credit
agreement with Nord LB Norddeutsche Landesbank Girozentrale (“Nord LB”) for
short and long term loans issued to SDI-Molan. Under the credit agreement, the
Company guaranteed bank loans made to SDI-Molan subject to a maximum of 50% of
the loans outstanding. The guarantee is subject to a maximum of
3.2 million Euro or approximately $4.1 million at October 31, 2004.
SDI-Molan had bank loans outstanding in the amount of 3.4 million Euro or
approximately $4.4 million at October 31, 2004. The term of the guarantee
is concurrent with the life of the credit agreement with Nord LB which expires
in June 2008. The Company would be required to perform under the guarantee if
SDI-Molan was unable to repay Nord LB any principal or interest amount as scheduled.
There are no recourse provisions that would enable the Company to recover any
amounts payable under the guarantee. A liability

for the
guarantee has not been recorded as the guarantee issued falls outside the scope
of FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others” which is applicable on
a prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor’s fiscal year-end. The Company has not made any
modifications to the guarantee since issued in August of 2002.

8.               Please disclose the approximate term of the guarantee,
the events or circumstances that would require performance under the guarantee,
and the nature of any recourse provisions that would enable you to recover any
of the amounts paid under the guarantee.

See our disclosure under comment number 7 above.

Note 11 — Redeemable
Common Stock, page F-17

9.               Please disclose the conditions in which stockholders
can require you to purchase all or a portion of the redeemable common stock.

Response:
The disclosure is revised as follows:

11.
Redeemable Common Stock

Some
of the outstanding shares of Common Stock held by certain stockholders, are
subject to certain redemption rights which require the Company to purchase all
or a portion of th