SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended June 30, 2008

 

Safeguard Scientifics, Inc.

Pennsylvania (State or other jurisdiction of incorporation or organization)		23-1609753 (I.R.S. Employer ID No.)
435 Devon Park Drive Building 800 Wayne, PA (Address of principal executive offices)		19087 (Zip Code)

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and 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 þ     No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

     Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yes o     No þ

 

 

SAFEGUARD SCIENTIFICS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX

PART I — FINANCIAL INFORMATION

		Page
Item 1 — Financial Statements:
Consolidated Balance Sheets — June 30, 2008 (unaudited) and December 31, 2007		3
Consolidated Statements of Operations (unaudited) — Three and Six Months Ended June 30, 2008 and 2007		4
Consolidated Statements of Cash Flows (unaudited) — Six Months Ended June 30, 2008 and 2007		5
Notes to Consolidated Financial Statements		6
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3 — Quantitative and Qualitative Disclosures About Market Risk		47
Item 4 — Controls and Procedures		48
PART II — OTHER INFORMATION
Item 1A — Risk Factors		49
Item 5 — Other Information		49
Item 6 — Exhibits		50
Signatures		51
Stock option grant certificates issued to Stephen T. Zarrilli
Agreement by and between Safeguard Scientifics, Inc. and Kevin L. Kemmerer
Stock option grant certificate issued to Kevin L. Kemmerer
Stock option grant certificate issued to Kevin L. Kemmerer
Stock option grant certificate issued to Kevin L. Kemmerer
Compensation Summary Non-Employee Directors
Compensation Summary Julie A. Dobson
Amended and Restated Loan and Security Agreement
Certification of Peter J. Boni pursuant to Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934
Certification of Stephen T. Zarrilli pursuant to Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934
Certification of Peter J. Boni pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Stephen T. Zarrilli pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS

		June 30,				December 31,
		2008				2007
		(In thousands, except per
		share data)
		(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	152,585			$	96,201
Cash held in escrow — current			6,407				20,345
Marketable securities			2,191				590
Restricted marketable securities			3,933				3,904
Accounts receivable, less allowances ($3,947 — 2008; $3,370 — 2007)			16,443				12,702
Prepaid expenses and other current assets			1,684				1,755
Assets held for sale			—				1,465
Current assets of discontinued operations			—				32,867
Total current assets			183,243				169,829
Property and equipment, net			12,184				11,714
Ownership interests in and advances to partner companies			87,117				91,538
Long-term restricted marketable securities			—				1,949
Goodwill			12,729				12,729
Cash held in escrow — long-term			2,352				2,341
Other			1,773				2,342
Non-current assets of discontinued operations			—				99,420
Total Assets		$	299,398			$	391,862
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current portion of credit line borrowings		$	9,000			$	13,997
Current maturities of long-term debt			221				1,510
Accounts payable			2,734				3,134
Accrued compensation and benefits			6,042				6,934
Accrued expenses and other current liabilities			12,163				14,203
Current liabilities of discontinued operations			—				50,132
Total current liabilities			30,160				89,910
Long-term debt			400				906
Other long-term liabilities			9,391				9,111
Convertible senior debentures			129,000				129,000
Minority interest			743				2,296
Non-current liabilities of discontinued operations			—				5,916
Commitments and contingencies
Redeemable consolidated partner company stock-based compensation			—				84
Shareholders’ Equity:
Preferred stock, $0.10 par value; 1,000 shares authorized			—				—
Common stock, $0.10 par value; 500,000 shares authorized; 121,589 and 121,123 shares issued and outstanding in 2008 and 2007, respectively			12,159				12,112
Additional paid-in capital			760,739				758,515
Accumulated deficit			(642,971	)			(616,013	)
Accumulated other comprehensive income			(31	)			25
Treasury stock, at cost			(192	)			—
Total shareholders’ equity			129,704				154,639
Total Liabilities and Shareholders’ Equity		$	299,398			$	391,862

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
		(In thousands, except per share data)
		(unaudited)
Revenue		$	16,916			$	9,873			$	32,802			$	18,702
Operating Expenses:
Cost of sales			6,895				5,519				13,003				10,616
Selling, general and administrative			15,881				12,591				31,126				25,891
Total operating expenses			22,776				18,110				44,129				36,507
Operating loss			(5,860	)			(8,237	)			(11,327	)			(17,805	)
Other income (loss), net			2,263				(788	)			2,623				(689	)
Interest income			790				2,169				1,719				4,308
Recovery — related party			3				—				4				—
Interest expense			(1,191	)			(1,317	)			(2,565	)			(2,769	)
Equity loss			(5,177	)			(3,450	)			(11,464	)			(5,179	)
Minority interest			1,769				1,304				2,156				2,954
Net loss from continuing operations before income taxes			(7,403	)			(10,319	)			(18,854	)			(19,180	)
Income tax (expense) benefit			(4	)			710				(4	)			696
Net loss from continuing operations			(7,407	)			(9,609	)			(18,858	)			(18,484	)
Loss from discontinued operations, net of tax			(1,024	)			(4,232	)			(8,100	)			(7,039	)
Net loss		$	(8,431	)		$	(13,841	)		$	(26,958	)		$	(25,523	)
Basic and Diluted Loss Per Share:
Net loss from continuing operations		$	(0.06	)		$	(0.08	)		$	(0.15	)		$	(0.15	)
Net loss from discontinued operations			(0.01	)			(0.03	)			(0.07	)			(0.06	)
Net loss per share		$	(0.07	)		$	(0.11	)		$	(0.22	)		$	(0.21	)
Shares used in computing basic and diluted loss per share			123,111				122,338				123,054				122,227

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

		Six Months Ended March 31,
		2008				2007
		(In thousands)
		(unaudited)
Cash Flows from Operating Activities:
Cash flows from operating activities of continuing operations		$	(10,087	)		$	(15,704	)
Cash flows from operating activities of discontinued operations			(3,288	)			(8,434	)
Net cash used in operating activities			(13,375	)			(24,138	)
Cash Flows from Investing Activities:
Proceeds from sales of and distributions from companies and funds			3,496				2,304
Acquisitions of ownership interests in partner companies and funds, net of cash acquired			(7,168	)			(41,309	)
Advances to companies			(1,020	)			(191	)
Repayments of note receivable — related party			4				—
Increase in marketable securities			(3,455	)			(126,176	)
Decrease in marketable securities			1,854				166,523
Capital expenditures			(2,270	)			(1,936	)
Capitalized software costs			—				(120	)
Proceeds from sale of discontinued operations, net			83,798				29,967
Cash flows from investing activities of discontinued operations			(2,867	)			(5,603	)
Net cash provided by investing activities			72,372				23,459
Cash Flows from Financing Activities:
Borrowings on revolving credit facilities			10,543				11,825
Repayments on revolving credit facilities			(15,540	)			(9,455	)
Borrowings on term debt			672				—
Repayments on term debt			(2,467	)			(1,098	)
Issuance of Company common stock, net			64				539
Issuance of consolidated partner company common stock, net			603				268
Repurchase of Company common stock			(223	)			—
Cash flows from financing activities of discontinued operations			4,790				9,767
Net cash (used in) provided by financing activities			(1,558	)			11,846
Net Increase in Cash and Cash Equivalents			57,439				11,167
Changes in cash and cash equivalents from, and advances to Acsis, Alliance Consulting, Laureate Pharma and Pacific Title & Art Studio included in assets of discontinued operations			(1,055	)			3,023
Cash and Cash Equivalents at beginning of period			96,201				60,381
Cash and Cash Equivalents at end of period		$	152,585			$	74,571

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JUNE 30, 2008

1. GENERAL

     The accompanying unaudited interim Consolidated Financial Statements of Safeguard Scientifics, Inc. (the “Company”) were prepared in accordance with accounting principles generally accepted in the United States of America and the interim financial statements rules and regulations of the SEC. In the opinion of management, these statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Consolidated Financial Statements. The interim operating results are not necessarily indicative of the results for a full year or for any interim period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements. The Consolidated Financial Statements included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-Q and included together with the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s 2007 Annual Report on Form 10-K.

2. BASIS OF PRESENTATION

     The Consolidated Financial Statements include the accounts of the Company and all partner companies in which it directly or indirectly owns more than 50% of the outstanding voting securities during the periods presented.

     The Company’s Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007, Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007 and Consolidated Balance Sheets at June 30, 2008 and December 31, 2007 include Clarient, Inc. (“Clarient”) in continuing operations.

     On May 6, 2008 the Company consummated a transaction (the “Bundle Transaction’) pursuant to which it sold all of its equity and debt interests in Acsis, Inc. (“Acsis”), Alliance Consulting Group Associates, Inc. (“Alliance Consulting”), Laureate Pharma, Inc. (“Laureate Pharma”), ProModel Corporation (“Promodel”) and Neuronyx, Inc. (“Neuronyx”) (collectively, the “Bundle Companies”).

     During the first quarter of 2007, Pacific Title & Art Studio and Clarient’s technology group were sold.

     See Note 3 for discontinued operations treatment of Acsis, Alliance Consulting, Laureate Pharma, Pacific Title & Art Studio and Clarient’s technology group.

3. DISCONTINUED OPERATIONS

Acsis, Alliance Consulting and Laureate Pharma

     Of the companies included in the Bundle Transaction, Acsis, Alliance Consulting and Laureate Pharma were majority-owned partner companies; Neuronyx and ProModel were minority-owned partner companies. The Company has presented the results of operations of Acsis, Alliance Consulting and Laureate Pharma as discontinued operations for all periods presented. Goodwill of $48.9 million related to Alliance Consulting and $11.5 million related to Acsis was included in discontinued operations at December 31, 2007.

     In the first quarter of 2008, the Company recognized an impairment loss of $3.6 million to write down the aggregate carrying value of the Bundle Companies to the total anticipated proceeds, less estimated costs to complete the Bundle Transaction. In the second quarter of 2008, prior to the completion of the Bundle Transaction, the Company recorded a net loss of $1.6 million in discontinued operations related to the operations of Acsis, Alliance Consulting and Laureate Pharma. In the second quarter of 2008 the Company recorded a charge of $0.9 million in discontinued operations to accrue for severance payments due to the former CEO of Alliance Consulting in connection with the Bundle Transaction and recorded a pre-tax gain on disposal of $1.4 million which is also recorded in discontinued operations.

     The gross proceeds to the Company from the Bundle Transaction were $74.5 million, of which $6.4 million is to be held in escrow through April, 2009, plus amounts advanced to certain of the Bundle Companies during the time between the signing of the Bundle Transaction agreement and its consummation. Guarantees of partner company credit facilities by the Company of $31.5 million were eliminated upon the closing of the Bundle Transaction.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JUNE 30, 2008

Pacific Title & Art Studio

     In March 2007, the Company sold Pacific Title & Art Studio for net cash proceeds of approximately $21.9 million, including $2.3 million cash held in escrow. As a result of the sale, the Company recorded a pre-tax gain of $2.7 million in the first quarter of 2007. During the first quarter of 2008, the Company recorded a loss of $0.5 million, which is included within Loss from discontinued operations in the Consolidated Statements of Operations for the six months ended June 30, 2008, to accrue for additional amounts paid in April 2008 to the former CEO of Pacific Title & Art Studio in connection with the March 2007 sale (see Note 15). Pacific Title & Art Studio is reported in discontinued operations for all periods presented.

Clarient — Technology Group

     In March 2007, Clarient sold its technology group (which developed, manufactured and marketed the ACIS Automated Image Analysis System) and related intellectual property to Carl Zeiss MicroImaging, Inc. (the “ACIS Sale”) for net cash proceeds of $11.0 million (excluding $1.5 million in contingent purchase price). As a result of the sale, Clarient recorded a pre-tax gain of $3.6 million in the first quarter of 2007. The technology group is reported in discontinued operations for all periods presented. Goodwill of $2.1 million related to the technology group was included in discontinued operations at December 31, 2007.

     Results of all discontinued operations were as follows:

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
		(In thousands)
		(unaudited)
Revenue		$	12,015			$	33,396			$	45,712			$	71,374
Operating expenses			(13,466	)			(37,157	)			(49,668	)			(81,641	)
Impairment of carrying value			—				—				(3,634	)			—
Other			(1,054	)			(475	)			(1,547	)			(956	)
Net loss before income taxes and minority interest			(2,505	)			(4,236	)			(9,137	)			(11,223	)
Income tax benefit			—				—				—				8
Loss from operations			(2,505	)			(4,236	)			(9,137	)			(11,215	)
Gain (loss) on disposal, net of tax			1,478				(36	)			1,020				6,292
Minority interest			3				40				17				(2,116	)
Loss from discontinued operations, net of tax		$	(1,024	)		$	(4,232	)		$	(8,100	)		$	(7,039	)

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JUNE 30, 2008

     The assets and liabilities of discontinued operations were as follows:

		December 31,
		2007
Cash		$	3,764
Accounts receivable, less allowances			24,858
Inventory			3,333
Other current assets			912
Total current assets			32,867
Property and equipment, net			23,859
Intangibles			9,960
Goodwill			64,095
Other assets			1,506
Total Assets		$	132,287
Current portion of long-term debt		$	28,257
Accounts payable			4,520
Accrued expenses			10,774
Deferred revenue			6,100
Other current liabilities			481
Total current liabilities			50,132
Long-term debt			3,840
Minority interest			396
Deferred income taxes			1,026
Other long-term liabilities			654
Total Liabilities		$	56,048
Carrying value		$	76,239

4. MARKETABLE SECURITIES

     Marketable securities included the following:

		Current								Non-Current
		June 30,				December 31,				June 30,				December 31,
		2008				2007				2008				2007
		(In thousands)
		(unaudited)								(unaudited)
Held-to-maturity:
Commercial paper		$	1,891			$	590			$	—			$	—
Certificates of deposit			300				—				—				—
Restricted U.S. Treasury securities			3,933				3,904				—				1,949
		$	6,124			$	4,494			$	—			$	1,949

     As of June 30, 2008, the contractual maturities of all securities were less than one year.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JUNE 30, 2008

5. RECENT ACCOUNTING PRONOUNCEMENTS

     In June 2007, the AICPA issued Statement of Position 07-1, “Clarification of the Scope of the Audit and Accounting Guide: Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies” (“SOP 07-1”). SOP 07-1 provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide: Investment Companies (the “Guide”). SOP 07-1 amends the Guide to include criteria for determining whether an entity is an “investment company” for accounting purposes and is therefore within the Guide’s scope. Those criteria include a definition of an investment company and factors to consider in determining whether an entity meets that definition. Entities meeting the definition of an investment company, as well as entities regulated by the Investment Company Act of 1940 or similar requirements, are required to follow the Guide’s specialized accounting guidance. In October 2007, the Financial Accounting Standards Board (“FASB”) indefinitely delayed the effective date of SOP 07-01.

     In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Liabilities” (“SFAS No. 159”). SFAS No. 159 allows companies to choose, at specific election dates, to measure eligible financial assets and liabilities that are not otherwise required to be measured at fair value, at fair value. Under SFAS No. 159, companies would report unrealized gains and losses for which the fair value option has been elected in earnings at each subsequent reporting date, and recognize up-front costs and fees related to those items in earnings as incurred. SFAS No. 159 became effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 did not have a material impact on the Company’s consolidated financial statements due to its election to not measure partner company holdings at fair value.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value. The requirements of SFAS No. 157 became effective for fiscal years beginning after November 15, 2007. However, in February 2008, the FASB decided that an entity need not apply this standard to nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis until the subsequent year. The adoption of SFAS No. 157 did not have a material impact on the Company’s consolidated financial statements.

     In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS No. 141(R) significantly changes the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date at fair value with limited exceptions. SFAS No. 141(R) further changes the accounting treatment for certain specific items, including:

	§		Acquisition costs will be generally expensed as incurred;
	§		Noncontrolling interests (formerly known as “minority interests” — see SFAS No. 160 discussion below) will be valued at fair value at the acquisition date;
	§		Acquired contingent liabilities will be recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies;
	§		In-process research and development (IPR&D) will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date;
	§		Restructuring costs associated with a business combination will be generally expensed subsequent to the acquisition date; and
	§		Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense.

     SFAS No. 141(R) includes a substantial number of new disclosure requirements. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009.

     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JUNE 30, 2008

recognition of noncontrolling interests (minority interests) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to noncontrolling interests will be included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary that does not result in deconsolidation are treated as equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years beginning after November 15, 2008. The adoption of SFAS No. 160 will result in the reclassification of minority interests from long term liabilities to shareholders’ equity. Minority interest at June 30, 2008 was $0.7 million.

     In May 2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources for generally accepted accounting principles (“GAAP”) in the U.S. and lists the categories in descending order. An entity should follow the highest category of GAAP applicable for each of its accounting transactions. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The adoption of SFAS No. 162 will not have a material effect on the Company’s consolidated financial statements.

6. COMPREHENSIVE LOSS

     Comprehensive loss is the change in equity of a business enterprise from transactions and other events and circumstances from non-owner sources. Excluding net loss, the Company’s sources of comprehensive loss are from net unrealized appreciation (depreciation) on available-for-sale securities and foreign currency translation adjustments. Reclassification adjustments result from the recognition in net income (loss) of unrealized gains or losses that were included in comprehensive income (loss) in prior periods.

     The following summarizes the components of comprehensive loss:

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
		(In thousands)
		(unaudited)
Net loss from continuing operations		$	(7,407	)		$	(9,609	)		$	(18,858	)		$	(18,484	)
Other comprehensive loss:
Foreign currency translation adjustments			—				(60	)			(2	)			(61	)
Unrealized holding losses on available-for-sale securities			—				(65	)			—				(487	)
Other comprehensive loss from continuing operations			—				(125	)			(2	)			(548	)
Comprehensive loss from continuing operations			(7,407	)			(9,734	)			(18,860	)			(19,032	)
Net loss from discontinued operations			(1,024	)			(4,232	)			(8,100	)			(7,039	)
Other comprehensive income from discontinued operations			(29	)			15				(26	)			16
Comprehensive loss		$	(8,460	)		$	(13,951	)		$	(26,986	)		$	(26,055	)

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JUNE 30, 2008

7. LONG-TERM DEBT AND CREDIT ARRANGEMENTS

Consolidated long-term debt consisted of the following:

     Continuing Operations:

		June 30,				December 31,
		2008				2007
		(In thousands)
		(unaudited)
Consolidated partner company credit line borrowings (guaranteed by the Company)		$	9,000			$	9,000
Consolidated partner company credit line borrowings (not guaranteed by the Company)			—				4,997
			9,000				13,997
Capital lease obligations and other borrowings			621				2,416
			9,621				16,413
Less current maturities			(9,221	)			(15,507	)
Total long-term debt of continuing operations, less current portion		$	400			$	906

     Discontinued Operations:

		December 31,
		2007
		(In thousands)
Consolidated partner company credit line borrowings (guaranteed by the Company)		$	18,500
Consolidated partner company credit line borrowings (not guaranteed by the Company)			7,515
Consolidated partner company term loans and other borrowings (guaranteed by the Company)			6,019
			32,034
Capital lease obligations and other borrowings			63
			32,097
Less current maturities			(28,257	)
Total long-term debt of discontinued operations, less current portion		$	3,840

     In June 2008, the Company amended and restated its revolving credit facility that provides for borrowings and issuances of letters of credit and guarantees, reducing total availability from $75.0 million to $30.0 million. The amended and restated revolving credit facility expires on June 29, 2009. Borrowing availability under the facility is reduced by the amounts outstanding for the Company’s borrowings and letters of credit and amounts guaranteed under Clarient’s facility maintained with that same lender. This credit facility bears interest at the prime rate (5.0% at June 30, 2008) for outstanding borrowings. The credit facility is subject to an unused commitment fee of 0.125%, which is subject to reduction based on deposits maintained at the bank. The credit facility requires the Company to maintain an unrestricted cash collateral account at that same bank, equal to the Company’s borrowings and letters of credit and amounts borrowed by Clarient under its guaranteed facility maintained with that same bank. At June 30, 2008, the required cash collateral, pursuant to the Company’s credit facility agreement, was $18.6 million, which amount was included within Cash and cash equivalents on the Consolidated Balance Sheet as of June 30, 2008. Cash collateral requirements of $21.3 million were eliminated upon closing of the Bundle Transaction.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JUNE 30, 2008

     Availability under the Company’s revolving credit facility at June 30, 2008 was as follows:

		Total
		(In thousands)
Size of facility		$	30,000
Guaranty of Clarient’s facility at same bank			(12,300	)
Outstanding letter of credit (a)			(6,336	)
Amount available		$	11,364

     Clarient maintains a $12.0 million credit facility with the same lender as the Company. At Clarient’s option, borrowings bear interest at variable rates based on the prime rate minus 0.5% or a rate equal to 30-day London Interbank Offered Rate (“LIBOR”) plus 2.45%, provided however, that upon the achievement of certain financial performance metrics, the rate will decrease by 0.25%. This facility contains financial and non-financial covenants and matures February 26, 2009.

     Guarantees of partner company facilities by the Company of $31.5 million were eliminated upon the closing of the Bundle Transaction.

     In September 2006, Clarient entered into a $5.0 million senior secured revolving credit agreement. Borrowing availability under the agreement was based on the level of Clarient’s qualified accounts receivable, less certain reserves. The agreement bore interest at variable rates based on the lower of the 30-day LIBOR plus 3.25%, or the prime rate plus 0.5%. On March 17, 2008, Clarient borrowed $4.6 million from the Company under the subordinated revolving credit line provided by the Company to Clarient to repay and terminate this facility, and borrowed an additional $2.8 million from the Company to repay and terminate its equipment line of credit with the same lender.

     On July 31, 2008, Clarient entered into an $8.0 million secured credit facility with Gemino Healthcare Finance, LLC. Actual availability under the facility is limited by Clarient’s qualified accounts receivable and certain liquidity factors. See Note 17.

     Debt as of June 30, 2008 bore interest at a fixed rate of 13.1% and a variable rate of prime plus 0.5%, with a weighted average rate of 5.9%.

     The Company’s debt matures as follows:

		Total
		(In thousands)
Remainder of 2008		$	107
2009			9,234
2010			248
2011			32
2012 and thereafter			—
Total debt		$	9,621

8. CONVERTIBLE SENIOR DEBENTURES

     In February 2004, the Company completed the sale of $150.0 million of 2.625% convertible senior debentures with a stated maturity of March 15, 2024 (the “2024 Debentures”). Interest on the 2024 Debentures is payable semi-annually. At the

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JUNE 30, 2008

debenture holders’ option, the 2024 Debentures are convertible into the Company’s common stock through March 14, 2024, subject to certain conditions. The conversion rate of the debentures is $7.2174 of principal amount per share. The closing price of the Company’s common stock at June 30, 2008 was $1.24. The 2024 Debenture holders have the right to require the Company to repurchase the 2024 Debentures on March 21, 2011, March 20, 2014 or March 20, 2019 at a repurchase price equal to 100% of their face amount, plus accrued and unpaid interest. The 2024 Debenture holders also have the right to require repurchase of the 2024 Debentures upon certain events, including sale of all or substantially all of our common stock or assets, liquidation, dissolution or a change in control. Subject to certain conditions, the Company may redeem all or some of the 2024 Debentures commencing March 20, 2009. During 2006, the Company repurchased $21.0 million of face value of the 2024 Debentures for $16.4 million in cash, including accrued interest. At June 30, 2008, the market value of the outstanding $129.0 million 2024 Debentures was approximately $96.6 million, based on quoted market prices.

     As required by the terms of the 2024 Debentures, after completing the sale of CompuCom in October 2004, the Company escrowed $16.7 million for interest payments through March 15, 2009 on the 2024 Debentures. A total of $3.9 million is included in Restricted marketable securities on the Consolidated Balance Sheet at June 30, 2008, which is classified as a current asset.

9. STOCK-BASED COMPENSATION

     On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”) using the modified prospective method.

Classification of Stock-Based Compensation Expense

     Stock-based compensation expense from continuing operations was recognized in the Consolidated Statements of Operations as follows:

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
		(In thousands)
						(unaudited)
Cost of sales		$	9			$	6			$	21			$	18
Selling, general & administrative			846				1,312				1,631				2,894
		$	855			$	1,318			$	1,652			$	2,912

The Company

     The fair value of the Company’s stock-based awards to employees was estimated at the date of grant using the Black-Scholes option-pricing model. The risk-free rate was based on the U.S. Treasury yield curve in effect at the end of the quarter in which the grant occurred. The expected term of stock options granted was estimated using the historical exercise behavior of employees. Expected volatility was based on historical volatility measured using weekly price observations of the Company’s common stock for a period equal to the stock option’s expected term. The Company issued 1.5 million market-based awards and 0.5 million service-based awards to employees during the three months ended June 30, 2008.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JUNE 30, 2008

		Three Months Ended June 30,				Six Months Ended June 30,
		2008		2007		2008		2007
		(unaudited)
Service-Based Awards
Dividend yield		0%		0%		0%		0%
Expected volatility		53%		62%		53%		62%
Average expected option term		5 years		5 years		5 years		5 years
Risk-free interest rate		3.4 %		4.6%		3.4%		4.6%
Market-Based Awards
Dividend yield		0%		0%		0%		0%
Expected volatility		59%		55%		59%		56%
Average expected option term		6 years		6 years		6 years		6 years
Risk-free interest rate		3.6%		4.9%		3.6%		4.9%

     Market-based awards entitle participants to vest in a number of options determined by achievement of certain target market capitalization increases (measured by reference to stock price increases on a specified number of outstanding shares) over an eight-year period. The requisite service periods for the market-based awards are based on the Company’s estimate of the dates on which the market conditions will be met as determined using a Monte Carlo simulation model. Compensation expense is recognized over the requisite service periods using the straight-line method, but is accelerated if market capitalization targets are achieved earlier than estimated. During the three and six months ended June 30, 2008, 0 and 41 thousand options, respectively, vested based on achievement of market capitalization targets. The Company recorded a $0.2 million benefit and $0.0 million compensation expense related to these awards during the three and six months ended June 30, 2008. The benefit in the three months ended June 30, 2008 was due to the impact of forfeited awards. Depending on the Company’s stock performance, the maximum number of unvested shares at June 30, 2008 attainable under these grants was 7.9 million shares.

     All other outstanding options are service-based awards that generally vest over four years after the date of grant and expire eight years after the date of grant. Compensation expense is recognized over the requisite service period using the straight-line method. The requisite service period for service-based awards is the period over which the award vests. The Company recorded $0.1 million and $0.6 million of compensation expense related to these awards during the three months ended June 30, 2008 and 2007, respectively, and $0.4 million and $1.0 million during the six months ended June 30, 2008 and 2007, respectively. The decrease in 2008 was due to the impact of forfeited awards.

Majority-Owned Partner Companies

     Stock options granted by majority-owned partner companies generally are service-based awards that vest over four years after the date of grant and expire seven to 10 years after the date of grant. Compensation expense is recognized over the requisite service period using the straight-line method. The requisite service period is the period over which the award vests. The fair value of the Company’s majority-owned partner companies’ stock-based awards to employees were estimated at the date of grant using the Black-Scholes option-pricing model. The risk-free rate was based on the U.S. Treasury yield curve in effect at the end of the quarter in which the grant occurred. The expected term of stock options granted was estimated using the historical exercise behavior of employees. Expected volatility for Clarient, the Company’s publicly-held consolidated partner company, was based on historical price volatility measured using weekly price observations of Clarient’s common stock for a period equal to the stock option’s expected term. Expected volatility for the Company’s former majority-owned and privately-held partner companies — Acsis, Alliance Consulting and Laureate Pharma, which stock-based compensation was not included in continuing operations due to the Bundle Transaction that closed on May 6, 2008 (see Note 3), was based on the average historical volatility of comparable companies for a period equal to the stock option’s expected term. The fair value of the underlying stock of Acsis, Alliance Consulting and Laureate Pharma on the date of grant was determined based on a number of valuation methods, including discounted cash flows and public company and acquisition multiples for comparable companies.

     During the six months ended June 30, 2008, Clarient granted 2.1 million options and 0.2 million on restricted stock awards. The restricted stock awards vest over four years. The options generally have four-year vesting terms and a ten-year contractual term. The fair value of these options at the date of grant was based on the following assumptions: a risk-free rate of 2.5% — 3.4%, an expected stock option term of five years, a dividend yield of 0.0% and expected five year volatility of 78% — 88%. Clarient estimates forfeitures of stock options using historical

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JUNE 30, 2008

exercise behavior of its employees. For purposes of this estimate, Clarient identified two groups of employees and estimated the forfeiture rates for these groups to be 5% and 8% for the first and second quarter of 2008. Clarient recorded $0.9 million and $0.2 million of stock-based compensation expense during the three months ended June 30, 2008 and 2007, respectively, and $1.2 million and $0.8 million during the six months ended June 30, 2008 and 2007, respectively.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JUNE 30, 2008

10. INCOME TAXES

     The Company’s consolidated income tax (expense) benefit was $(4) thousand and $710 thousand for the three months ended June 30, 2008 and 2007, respectively, and $(4) thousand and $696 thousand for the six months ended June 30, 2008 and 2007, respectively. The net income tax benefit recognized in the three and six months ended June 30, 2007 resulted from the reversal of reserves that related to uncertain tax positions for which the statute of limitations expired during the period in the applicable tax jurisdictions and the Company’s share of net state tax expense recorded by its partner companies. The Company has recorded a valuation allowance to reduce its net deferred tax asset to an amount that is more likely than not to be realized in future years. Accordingly, the benefit of the net operating loss that would have been recognized in 2008 and 2007 was offset by a valuation allowance.

     On January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes— an Interpretation of FASB Statement No. 109” (“FIN 48”). During the first half of 2008, the Company had no material changes in uncertain tax positions.

11. NET LOSS PER SHARE

     The calculations of net loss per share were:

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
		(In thousands except per share data)
						(unaudited)
Basic and diluted:
Net loss from continuing operations		$	(7,407	)		$	(9,609	)		$	(18,858	)		$	(18,484	)
Net loss from discontinued operations			(1,024	)			(4,232	)			(8,100	)			(7,039	)
Net loss		$	(8,431	)		$	(13,841	)		$	(26,958	)		$	(25,523	)
Average common shares outstanding			123,111				122,338				123,054				122,227
Net loss from continuing operations		$	(0.06	)		$	(0.08	)		$	(0.15	)		$	(0.15	)
Net loss from discontinued operations			(0.01	)			(0.03	)			(0.07	)			(0.06	)
Net loss per share		$	(0.07	)		$	(0.11	)		$	(0.22	)		$	(0.21	)

     Basic and diluted average common shares outstanding for purposes of computing net loss per share includes outstanding common shares and vested deferred stock units (DSUs).

     If a consolidated or equity method partner company has dilutive stock options, unvested restricted stock, DSUs, warrants or securities outstanding, diluted net loss per share is computed by first deducting from net loss, the income attributable to the potential exercise of the dilutive securities of the company. This impact is shown as an adjustment to net loss for purposes of calculating diluted net loss per share.

     The following potential shares of common stock and their effects on income were excluded from the diluted net loss per share calculation because their effect would be anti-dilutive:

	§		At June 30, 2008 and 2007 options to purchase 20.1 million and 20.6 million shares of common stock, respectively, at prices ranging from $1.03 to $30.47 per share, were excluded from the calculations.
	§		At June 30, 2008 and 2007, unvested restricted stock units and DSUs convertible into 0.1 million shares were excluded from the calculations.
	§		At June 30, 2008 and 2007, a total of 17.9 million shares related to the Company’s 2024 Debentures (see Note 8) representing the weighted average effect of assumed conversion of the 2024 Debentures were excluded from the calculations.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JUNE 30, 2008

12. PARENT COMPANY FINANCIAL INFORMATION

     Parent company financial information is provided to present the financial position and results of operations of the Company as if its consolidated partner company, Clarient, (see Note 2) was accounted for under the equity method of accounting for all periods presented during which the Company owned its interest in Clarient.

     Parent Company Balance Sheets

		June 30, 2008				December 31, 2007
		(In thousands)
		(unaudited)
Assets:
Cash and cash equivalents		$	150,533			$	94,685
Cash held in escrow — current			6,407				20,345
Marketable securities			2,191				590
Restricted marketable securities			3,933				3,904
Other current assets			2,242				691
Assets held for sale			—				77,704
Total current assets			165,306				197,919
Ownership interests in and advances to companies			106,341				99,455
Long-term restricted marketable securities			—				1,949
Cash held in escrow — long-term			2,352				2,341
Other			2,176				2,565
Total Assets		$	276,175			$	304,229
Liabilities and Shareholders’ Equity:
Current liabilities		$	12,128			$	15,494
Long-term liabilities			5,343				5,012
Convertible senior debentures			129,000				129,000
Shareholders’ equity			129,704				154,723
Total Liabilities and Shareholders’ Equity		$	276,175			$	304,229

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JUNE 30, 2008

     Parent Company Statements of Operations

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
		(In thousands)
		(unaudited)
Operating expenses		$	(4,117	)		$	(5,465	)		$	(9,414	)		$	(11,739	)
Other income (loss), net			2,263				(744	)			2,623				(689	)
Recovery — related party			3				—				4				—
Interest income			782				2,142				1,707				4,260
Interest expense			(1,052	)			(1,053	)			(2,107	)			(2,110	)
Equity loss			(5,286	)			(5,199	)			(11,671	)			(8,916	)
Net loss from continuing operations before income taxes			(7,407	)			(10,319	)			(18,858	)			(19,194	)
Income tax benefit			—				710				—				710
Equity loss attributable to discontinued operations			(1,024	)			(4,232	)			(8,100	)			(7,039	)
Net loss		$	(8,431	)		$	(13,841	)		$	(26,958	)		$	(25,523)

Parent Company Statements of Cash Flows

		Six Months Ended June 30,
		2008				2007
		(In thousands)
		(unaudited)
Net cash used in operating activities		$	(8,553	)		$	(9,350	)
Cash Flows from Investing Activities:
Proceeds from sales of and distributions from companies and funds			3,496				2,304
Advances to companies			(13,941	)			(191	)
Acquisitions of ownership interests in partner companies and funds, net of cash acquired			(7,168	)			(41,309	)
Repayments of note receivable — related party			4				—
Increase in marketable securities			(3,455	)			(126,176	)
Decrease in marketable securities			1,854				166,523
Capital expenditures			(28	)			—
Proceeds from sale of discontinued operations			83,798				19,655
Net cash provided by investing activities			64,560				20,806
Cash Flows from Financing Activities:
Issuance of Company common stock, net			64				539
Repurchase of Company common stock			(223	)			—
Net cash (used in) provided by financing activities			(159	)			539
Net Increase in Cash and Cash Equivalents			55,848				11,995
Cash and Cash Equivalents at beginning of period			94,685				59,933
Cash and Cash Equivalents at end of period		$	150,533			$	71,928

     Parent Company cash and cash equivalents excludes marketable securities, which consist of longer-term securities, including commercial paper and certificates of deposit.

13. OPERATING SEGMENTS

     As of June 30, 2008 the Company held an interest in one majority-owned partner company, Clarient, and 13 minority-owned partner companies. During the first quarter of 2008, the Company re-evaluated its reportable operating segments in accordance with SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information”. As a result of the re-evaluation, the Company’s reportable operating segments are now as follows: i) Clarient, its publicly-traded consolidated partner company, ii) Life Sciences and iii) Technology.

     The Life Sciences segment includes the following partner companies as of June 30, 2008: Advanced BioHealing, Inc., Alverix, Inc., Avid Radiopharmaceuticals, Inc., Cellumen, Inc., NuPathe, Inc. and Rubicor Medical, Inc.

     The Technology segment includes the following partner companies as of June 30, 2008: Advantedge Healthcare Solutions, Inc., Authentium, Inc., Beyond.com, Inc., Bridgevine, Inc., NextPoint Networks, Inc., Portico Systems, Inc. and a yet-to-be publicly launched web-based software company (“Stealth Company”).

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JUNE 30, 2008

     Results of the Life Sciences and Technology segments reflect the equity income (loss) of their respective equity method partner companies, other income (loss) associated with cost method partner companies and the gains or losses on the sale of their respective partner companies.

     The Company’s reportable operating segments for the year ended December 31, 2007 were: i) Acsis, ii) Alliance Consulting, iii) Clarient, iv) Laureate Pharma and v) Other Companies. Acsis, Alliance Consulting and Laureate Pharma were majority-owned partner companies reported within discontinued operations due to the Bundle Transaction. The Other Companies segment consisted of the operations of non-consolidated partner companies (currently separate segments — Life Sciences and Technology) and the Company’s ownership in private equity funds (currently included within Other Items). The Other Companies segment also included the gain or loss on the sale of companies (currently included within the respective Life Sciences and Technology segments) and private equity funds (currently included within Other Items), except for gains and losses included in discontinued operations.

     Management evaluates its Clarient segment performance based on revenue, operating income (loss) and income (loss) before income taxes, which reflects the portion of income (loss) allocated to minority shareholders. Management evaluates its Life Sciences and Technology segments’ performance based on equity income (loss) which is based on the number of respective partner companies accounted for under the equity method, the Company’s voting ownership percentage in these partner companies and the net results of operations of these partner companies.

     Other Items include certain expenses which are not identifiable to the operations of the Company’s operating business segments. Other Items primarily consist of general and administrative expenses related to corporate operations, including employee compensation, insurance and professional fees, including legal and finance, interest income, interest expense, other income (loss) and equity income (loss) related to private equity fund holdings. Other Items also include income taxes, which are reviewed by management independent of segment results.

     The following tables reflect the Company’s consolidated operating data by reportable segment. Segment results include the results of Clarient, its consolidated partner company, impairment charges, gains or losses related to the disposition of partner companies (except those reported in discontinued operations) the Company’s share of income or losses for entities accounted for under the equity method and the mark-to-market of trading securities. All significant intersegment activity has been eliminated in consolidation. Accordingly, segment results reported by the Company exclude the effect of transactions between the Company and its consolidated partner company.

     Revenue is attributed to geographic areas based on where the services are performed or the customer’s shipped to location. A majority of the Company’s revenue is generated in the United States.

     As of June 30, 2008 and December 31, 2007, the Company’s assets were primarily located in the United States.

     The following represents segment data from continuing operations:

		Three Months Ended June 30, 2008
		(In thousands)
		(unaudited)
																						Total
						Life								Total				Other				Continuing
		Clarient				Sciences				Technology				Segments				Items				Operations
Revenue		$	16,916			$	—			$	—			$	16,916			$	—			$	16,916
Operating loss			(1,743	)			—				—				(1,743	)			(4,117	)			(5,860	)
Net loss			(105	)			(3,563	)			(1,664	)			(5,332	)			(2,075	)			(7,407	)
Segment Assets
June 30, 2008		$	42,447			$	32,435			$	46,337			$	121,219			$	178,179			$	299,398
December 31, 2007			39,502				40,829				43,797				124,128				135,447				259,575

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JUNE 30, 2008

		Three Months Ended June 30, 2007
		(In thousands)
		(unaudited)
																						Total
						Life								Total				Other				Continuing
		Clarient				Sciences				Technology				Segments				Items				Operations
Revenue		$	9,873			$	—			$	—			$	9,873			$	—			$	9,873
Operating loss			(2,772	)			—				—				(2,772	)			(5,465	)			(8,237	)
Net loss			(1,749	)			(2,944	)			(1,255	)			(5,948	)			(3,661	)			(9,609	)

		Six Months Ended June 30, 2008
		(In thousands)
		(unaudited)
																						Total
						Life								Total				Other				Continuing
		Clarient				Sciences				Technology				Segments				Items				Operations
Revenue		$	32,802			$	—			$	—			$	32,802			$	—			$	32,802
Operating loss			(1,913	)			—				—				(1,913	)			(9,414	)			(11,327	)
Net loss			(203	)			(7,949	)			(3,451	)			(11,603	)			(7,255	)			(18,858	)

		Six Months Ended June 30, 2007
		(In thousands)
		(unaudited)
																						Total
						Life								Total				Other				Continuing
		Clarient				Sciences				Technology				Segments				Items				Operations
Revenue		$	18,702			$	—			$	—			$	18,702			$	—			$	18,702
Operating loss			(6,066	)			—				—				(6,066	)			(11,739	)			(17,805	)
Net loss			(3,723	)			(4,120	)			(1,841	)			(9,684	)			(8,800	)			(18,484	)

Other Items

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
		(In thousands)
						(unaudited)
Corporate operations		$	(2,071	)		$	(4,371	)		$	(7,251	)		$	(9,496	)
Income tax (expense) benefit			(4	)			710				(4	)			696
		$	(2,075	)		$	(3,661	)		$	(7,255	)		$	(8,800	)

14. BUSINESS COMBINATIONS

Acquisitions by the Company — 2008

     In May 2008, the Company increased its ownership interest in Advantedge Healthcare Solutions (“AHS”) from 35.1% to 37.9% for $3.2 million in cash. AHS is a New Jersey-based technology-enabled service provider that delivers medical billing services to physician groups. The Company accounts for its holdings in AHS under the equity method.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JUNE 30, 2008

     In April 2008, the Company increased its ownership interest in NuPathe, Inc. (“NuPathe”) from 26.2% to 27.8% for $1.0 million in cash. The Company previously deployed $5.0 million in NuPathe in 2007 and 2006. NuPathe develops therapeutics in conjunction with novel delivery technologies. The Company accounts for its holdings in NuPathe under the equity method.

     In February 2008, the Company deployed $2.8 million of cash in Portico Systems, Inc (“Portico”), maintaining a 46.8% ownership interest. The Company previously had acquired an interest in Portico in August 2006 for $6.0 million in cash. Portico is a software solutions provider for regional and national health plans looking to optimize provider network operations and streamline business processes. The Company accounts for its holdings in Portico under the equity method.

Acquisitions by the Company — 2007

     In September 2007, the Company funded NexTone Communications, Inc. (“NexTone”) $2.2 million in cash. In December 2007, the Company funded NexTone an additional $2.1 million in cash, which was held in an escrow account until January 2008, at which time NexTone, Inc. merged with Reef Point Systems, Inc. to form NextPoint Networks, Inc. The January 2008 merger and related financing resulted in the Company holding 12.2% of NextPoint Networks. The Company accounts for its holdings in NextPoint Networks under the cost method.

     In October 2007, the Company acquired 50.0% of Alverix, Inc. (“Alverix”) for $2.4 million in cash. Alverix has developed a next-generation platform for quantifying and analyzing assays in the point-of-care diagnostics market. The technology utilizes optical sensors, image processing software and signal enhancement algorithms to achieve more accurate measurements in an inexpensive, miniaturized meter. The Company accounts for its holdings in Alverix under the equity method. The difference between the Company’s cost and its interest in the underlying net assets of Alverix was allocated to intangible assets and goodwill as reflected in the carrying value in Ownership interests and advances to companies on the Consolidated Balance Sheets. The Company has committed to fund Alverix an additional $1.5 million, conditional upon the achievement of certain milestones.

     In October 2007, the Company increased its ownership interest in NuPathe from 21.3% to 26.2% for $2.0 million in cash. The Company previously had acquired an interest in NuPathe in September 2006 for $3.0 million in cash. NuPathe develops therapeutics in conjunction with novel delivery technologies. The Company accounts for its holdings in NuPathe under the equity method. The difference between the Company’s cost and its interest in the underlying net assets of NuPathe has been allocated to in-process research and development, resulting in charges of $0.2 million and $1.0 million in 2007 and 2006, respectively, which are reflected in Equity loss in the Consolidated Statement of Operations and goodwill as reflected in the carrying value in Ownership interests in and advances to companies on the Consolidated Balance Sheets.

     In August 2007, the Company acquired 21.1% of Bridgevine, Inc. (“Bridgevine”), formerly known as Broadband National, Inc., for $8.0 million in cash. Bridgevine is an internet media company that operates a network of shopping websites focused on digital services and products such as high speed internet, digital phone, VoIP, TV and music. The Company accounts for its holdings in Bridgevine under the equity method. The difference between the Company’s cost and its interest in the underlying net assets of Bridgevine was allocated to intangible assets and goodwill as reflected in the carrying value in Ownership interests in and advances to companies on the Consolidated Balance Sheets.

     In August 2007, the Company acquired 14.0% of a Stealth Company for $2.2 million in cash, which acquisition is accounted for under the cost method.

     In June 2007, the Company acquired 40.3% of Cellumen, Inc. (“Cellumen”) for $6.0 million in cash. Cellumen is a cellular systems biology company whose technology optimizes the drug discovery process. The Company accounts for its holdings in Cellumen under the equity method. The difference between the Company’s cost and its interest in the underlying net assets of Cellumen was allocated to in-process research and development, resulting in a $0.2 million charge in the second quarter of 2007, and to intangible assets and goodwill as reflected in the carrying value in Ownership interests in and advances to companies on the Consolidated Balance Sheets.

     In June 2007, the Company increased its ownership interest in Authentium, Inc. (“Authentium”) to 19.9%, for an additional $3.0 million in cash. The Company previously had acquired a 12.4% interest in Authentium in April 2006 for $5.5

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JUNE 30, 2008

million in cash. Authentium is a provider of security software to internet service providers. The Company accounts for its holdings in Authentium under the cost method.

     In May 2007, the Company acquired 14.2% of Avid Radiopharmaceuticals, Inc. (“Avid”) for $7.3 million in cash. Avid develops molecular imaging products for neurodegenerative diseases and diabetes. The Company accounts for its holdings in Avid under the cost method.

     In May 2007, the Company increased its ownership interest in Advanced BioHealing, Inc. (“ABH”) to 28.3% for $2.8 million in cash. The Company previously had acquired a 23.9% interest in ABH in February 2007 for $8.0 million in cash. ABH is a specialty biotechnology company focused on the development and marketing of cell-based and tissue engineered products. The Company accounts for its holdings in ABH under the equity method. The difference between the Company’s cost and its interest in the underlying net assets of ABH was allocated to intangible assets and goodwill as reflected in the carrying value in Ownership interests in and advances to companies on the Consolidated Balance Sheets.

     In March 2007, the Company acquired 37.1% of Beyond.com, Inc. (“Beyond.com”) for $13.5 million in cash. Beyond.com is a provider of online technology and career services to job seekers and corporations. The Company accounts for its holdings in Beyond.com under the equity method. The difference between the Company’s cost and its interest in the underlying net assets of Beyond.com was allocated to intangible assets and goodwill as reflected in the carrying value in Ownership interests in and advances to companies on the Consolidated Balance Sheets.

15. COMMITMENTS AND CONTINGENCIES

     The Company and its partner companies are involved in various claims and legal actions arising in the ordinary course of business. While in the current opinion of the Company the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position or results of operations, no assurance can be given as to the outcome of these actions, and one or more adverse rulings could have a material adverse effect on the Company’s consolidated financial position and results of operations or that of its partner companies.

     The Company had the following outstanding guarantees at June 30, 2008:

						Debt Included on
						Consolidated
		Amount				Balance Sheet
		(In thousands)
		(unaudited)
Clarient — credit facility		$	12,300			$	9,000
Other guarantees			3,750				—
Total		$	16,050			$	9,000

     The Company has committed capital of approximately $3.1 million, including conditional commitments to provide non-consolidated partner companies with additional funding and commitments made to various private equity funds in prior years. These commitments will be funded over the next several years, including approximately $2.4 million which is expected to be funded during the next 12 months.

     Under certain circumstances, the Company may be required to return a portion or all the distributions it received as a general partner of certain private equity funds (the “clawback”). Assuming the private equity funds in which the Company was a general partner were liquidated or dissolved on June 30, 2008 and assuming for these purposes the only distributions from the funds were equal to the carrying value of the funds on the June 30, 2008 financial statements, the maximum clawback the Company would be required to return due to our general partner interest is approximately $6.9 million. The Company estimates its liability to be approximately $6.5 million, of which $4.1 million was reflected in Accrued expenses and other current liabilities and $2.4 million was reflected in Other long-term liabilities on the Consolidated Balance Sheet at June 30, 2008. The Company paid $3.0 million of its estimated clawback liabilities in July 2008.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JUNE 30, 2008

     The Company’s ownership in the funds which have potential clawback liabilities ranges from 19-30%. The clawback liability is joint and several, such that the Company may be required to fund the clawback for other general partners should they default. The funds have taken several steps to reduce the potential liabilities should other general partners default, including withholding all general partner distributions in escrow and adding rights of set-off among certain funds. The Company believes its liability due to the default of other general partners is remote.

     Notwithstanding the closing of the Bundle Transaction, the Company remains a guarantor of Laureate Pharma’s Princeton, New Jersey office facility lease through its expiration in 2016. However, the Company is entitled to indemnification and certain payments in connection with the continuation of such guaranty. As of June 30, 2008, scheduled lease payments to be made by Laureate Pharma over the remaining lease term equal $9.7 million.

     In anticipation of the sale of Pacific Title & Art Studio in the first quarter of 2007, the Company permitted the employment agreement of the Pacific Title & Art Studio CEO to expire without renewal, and thereby his employment ceased. Following the sale, the former CEO demanded payment of severance benefits under his employment agreement, as well as payment of his deferred stock units and other amounts substantially in excess of the maximum amounts the Company believed were arguably due. The former CEO and the Company thereafter engaged in negotiations, but were ultimately unable to settle on the appropriate amounts due. On or about August 13, 2007, the former CEO filed a complaint in the Superior Court of the State of California, County of Los Angeles, Central District, against the Company and Pacific Title & Art Studio, alleging, among other things: wrongful termination, conversion, unfair competition, violation of the labor code, breach of contract and negligence. On or about March 28, 2008, Plaintiff amended his complaint to add as a defendant the party which purchased Pacific Title & Art Studio from the Company and to add several further causes of action. In his amended complaint, the former CEO made claims for compensatory damages in excess of $24.6 million, plus exemplary and punitive damages and interest. The Company has engaged counsel to represent the Company and Pacific Title & Art Studio in this matter and has also put the Company’s insurance carriers on notice of the claims. The Company has denied the relief sought and has filed a cross complaint alleging breach of fiduciary duty and breach of contract. On April 23, 2008, the Company made a payment to the former CEO in the amount of approximately $2.4 million, net of applicable withholdings, representing amounts the Company believes were owed to the plaintiff under his employment agreement and deferred stock units. The case continues to proceed through the discovery/pre-trial phase.

     In October 2001, the Company entered into an agreement with Mr. Musser, its former Chairman and Chief Executive Officer, to provide for annual payments of $0.7 million per year and certain health care and other benefits for life. The related current liability of $0.8 million was included in Accrued expenses and the long-term portion of $1.7 million was included in Other long-term liabilities on the Consolidated Balance Sheet at June 30, 2008.

     The Company has agreements with certain employees that provide for severance payments to the employee in the event the employee is terminated without cause or an employee terminates his employment for “good reason.” The maximum aggregate exposure under the agreements was approximately $8.0 million at June 30, 2008.

16. CORRECTION OF AN IMMATERIAL ERROR IN PRIOR PERIODS

     During the fourth quarter of 2007, an accounting error at Clarient was identified. The error related to Clarient’s accounting for customer refunds which affected the Company’s previously reported quarterly results in 2007 and 2006, totaling $0.8 million.

     In accordance with Staff Accounting Bulletin No. 108, the Company’s management evaluated the materiality of the error from qualitative and quantitative perspectives, and evaluated the quantified error under both the iron curtain and the roll-over methods. Management concluded that the error was immaterial to prior periods, but to remain consistent with revisions made to Clarient’s June 30, 2008 Form 10-Q, the Company made such revisions to its Consolidated Financial Statements contained herein, as summarized below.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JUNE 30, 2008

     The following table summarizes the effect of the revision on continuing operations for the quarter and six months ended June 30, 2007:

		Quarter Ended								Six Months Ended
		June 30, 2007								June 30, 2007
		(In thousands)								(In thousands)
		Previously				As				Previously				As
		Reported (1)				Revised				Reported (1)				Revised
Statement of Operations:
Revenue		$	10,336			$	9,873			$	19,193			$	18,702
Operating loss			(7,774	)			(8,237	)			(17,314	)			(17,805	)
Minority interest			1,492				1,304				3,153				2,954
Net loss from continuing operations before income taxes			(10,044	)			(10,319	)			(18,889	)			(19,180	)
Net loss from continuing operations			(9,334	)			(9,609	)			(18,193	)			(18,484	)
Basic and diluted loss per share from continuing operations		$	(0.08	)		$	(0.08	)		$	(0.15	)		$	(0.15	)

17. SUBSEQUENT EVENTS

     On July 31, 2008, Clarient entered into a secured credit agreement (the “Gemino Facility”) with Gemino Healthcare Finance, LLC (“Gemino”). The Gemino Facility is a revolving facility under which Clarient may borrow up to $8.0 million which is secured by Clarient’s accounts receivable and related assets. The amount which Clarient is entitled to borrow under the Gemino Facility at a particular time (approximately $5.0 million as of July 31, 2008) is based on the amount of Clarient’s qualified accounts receivable and certain liquidity factors. Borrowings under the Gemino Facility, which may be repaid and re-borrowed, bear interest at a rate per annum equal to 30-day LIBOR (subject to a minimum annual rate of 2.50% at all times) plus an applicable margin of 5.25%. If Clarient meets certain financial benchmarks for its 2008 fiscal year, the applicable margin may be reduced to 4.75%. Clarient pays an unused commitment fee of 0.75%, and the facility is subject to a prepayment fee of $0.2 million. The Gemino Facility’s current maturity date is January 31, 2009. The maturity date may be extended for two additional 12-month periods upon the satisfaction of certain conditions. Clarient repaid the Company $4.9 million of indebtedness under the Mezzanine Facility with proceeds borrowed under the Gemino Facility. The Company has entered into a subordination agreement with Gemino relating to the Gemino Facility.

     On July 23, 2008, the Company held its 2008 annual meeting of shareholders, during which the Company’s shareholders voted to authorize a reverse split of the Company’s common stock at an exchange ratio of not less than 1-for-4 and not more than 1-for-8, at the discretion of the Company’s Board of Director. The Board of Directors may effect the reverse stock split at any time prior to the Company’s 2009 annual meeting of shareholders or may choose not to implement the reverse stock split at all.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note concerning Forward-Looking Statements

     This Quarterly Report on Form 10-Q contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about Safeguard Scientifics, Inc. (“Safeguard” or “we”), the industries in which we operate and other matters, as well as management’s beliefs and assumptions and other statements regarding matters that are not historical facts. These statements include, in particular, statements about our plans, strategies and prospects. For example, when we use words such as “projects,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “should,” “would,” “could,” “will,” “opportunity,” “potential” or “may,” variations of such words or other words that convey uncertainty of future events or outcomes, we are making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our forward-looking statements are subject to risks and uncertainties. Factors that could cause actual results to differ materially, include, among others, managing rapidly changing technologies, limited access to capital, competition, the ability to attract and retain qualified employees, the ability to execute our strategy, the uncertainty of the future performance of our partner companies, acquisitions and dispositions of companies, the inability to manage growth, compliance with government regulation and legal liabilities, additional financing requirements, labor disputes and the effect of economic conditions in the business sectors in which our partner companies operate, all of which are discussed in Item 1A. “Risk Factors” in Safeguard’s Annual Report on Form 10-K and updated, as applicable, in Item 1A. “Risk Factors” below. Many of these factors are beyond our ability to predict or control. In addition, as a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. All forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by this cautionary statement. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report might not occur.

Business Overview

     Safeguard’s charter is to build value in growth-stage technology and life sciences businesses. We provide capital as well as a range of strategic, operational and management resources to our partner companies. Safeguard participates in expansion financings, corporate spin-outs, management buy-outs, recapitalizations, industry consolidations and early-stage financings. Our vision is to be the preferred catalyst for creating great technology and life sciences companies.

     We strive to create long-term value for our shareholders by building value in our partner companies. We help our partner companies to increase market penetration, grow revenue and improve cash flow in order to create long-term value. We concentrate on companies that operate in two categories:

     Technology — including companies focused on providing software as a service (SaaS), technology-enabled services and vertical software solutions for the financial services sector, internet-based businesses and healthcare information technology; and

     Life Sciences — including companies focused on molecular and point-of-care diagnostics, medical devices and specialty pharmaceuticals.

Principles of Accounting for Ownership Interests in Partner Companies

     We account for our interests in our partner companies and private equity funds using three methods: consolidation, equity or cost. The accounting method applied is generally determined by the degree of our influence over the entity, primarily determined by our voting interest in the entity.

     Consolidation Method. We account for our partner companies in which we directly or indirectly own more than 50% of the outstanding voting securities using the consolidation method of accounting. We reflect the participation of other partner company stockholders in the income or losses of our consolidated partner companies as Minority Interest in the Consolidated Statements of Operations. Minority interest adjusts our consolidated operating results to reflect only our share of the earnings or losses of the consolidated partner companies. If there is no minority interest balance remaining on the Consolidated Balance Sheets related to the respective partner company, we record 100% of the consolidated partner company’s losses; we record 100% of subsequent earnings of the partner company to the extent of such previously recognized losses in excess of our proportionate share.

     Equity Method. We account for partner companies whose results are not consolidated, but over whom we exercise significant influence, using the equity method of accounting. We also account for our interests in some private equity funds

under the equity method of accounting, depending on our respective general and limited partner interests. Under the equity method of accounting, our share of the income or loss of the company is reflected in Equity Loss in the Consolidated Statements of Operations. We report our share of the income or loss of the equity method partner companies on a one quarter lag.

     When the carrying value of our holding in an equity method partner company is reduced to zero, no further losses are recorded in our Consolidated Statements of Operations unless we have outstanding guarantee obligations or have committed additional funding to the equity method partner company. When the equity method partner company subsequently reports income, we will not record our share of such income until it equals the amount of our share of losses not previously recognized.

     Cost Method. We account for partner companies which are not consolidated or accounted for under the equity method using the cost method of accounting. Under the cost method, our share of the income or losses of such partner companies is not included in our Consolidated Statements of Operations. However, the effect of the change in market value of cost method partner company holdings classified as trading securities is reflected in Other income (loss), net in the Consolidated Statements of Operations.

Critical Accounting Policies and Estimates

     Accounting policies, methods and estimates are an integral part of the Consolidated Financial Statements prepared by management and are based upon management’s current judgments. These judgments are normally based on knowledge and experience with regard to past and current events and assumptions about future events. Certain accounting policies, methods and estimates are particularly important because of their significance to the financial statements and because of the possibility that future events affecting them may differ from management’s current judgments. While there are a number of accounting policies, methods and estimates affecting our financial statements, areas that are particularly significant include the following:

	§		Revenue recognition;
	§		Impairment of long-lived assets;
	§		Goodwill impairment;
	§		Impairment of ownership interests in and advances to companies;
	§		Income taxes;
	§		Commitments and contingencies; and
	§		Stock-based compensation.

Revenue Recognition

     During the first three and six months of 2008 and 2007, our revenue from continuing operations was attributable to Clarient.

     Clarient generates revenue from diagnostic services and recognizes such revenue at the time of completion of services at amounts equal to the contractual rates allowed from third parties including Medicare, insurance companies and, to a small degree, private-pay patients. These expected amounts are based both on Medicare allowable rates and Clarient’s collection experience with other third-party payors.

Impairment of Long-Lived Assets

     We test long-lived assets, including property and equipment and amortizable intangible assets, for recoverability whenever events or changes in circumstances indicate that we may not be able to recover the asset’s carrying amount. We evaluate the recoverability of an asset by comparing its carrying amount to the undiscounted cash flows expected to result from the use and eventual disposition of that asset. If the undiscounted cash flows are not sufficient to recover the carrying amount, we measure any impairment loss as the excess of the carrying amount of the asset over its fair value.

     The carrying value of net property and equipment at June 30, 2008 was $12.2 million.

Impairment of Goodwill

     We conduct an annual review for impairment of goodwill as of December 1st and as otherwise required by circumstances or events. Additionally, on an interim basis, we assess the impairment of goodwill whenever events or changes in circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount. Factors that we consider important which could trigger an impairment review include significant underperformance relative to historical or expected future operating results, significant changes in the manner or use of the acquired assets or the strategy for the overall business, significant negative industry or economic trends or a decline in a company’s stock price for a sustained period.

     We test for impairment at a “reporting unit” level (which for us is the same as an operating segment as defined in SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information”). If we determine that the fair value of a reporting unit is less than its carrying value, we assess whether goodwill of the reporting unit is impaired. To determine fair value, we use a number of valuation methods including quoted market prices, discounted cash flows and public company and acquisition multiples for comparable companies. Depending on the complexity of the valuation and the significance of the carrying value of the goodwill to the Consolidated Financial Statements, we may engage an outside valuation firm to assist us in determining fair value. As an overall check on the reasonableness of the fair values attributed to our reporting units, we will consider comparing the aggregate fair values for all reporting units with our average total market capitalization for a reasonable period of time.

     The carrying value of goodwill at June 30, 2008 was $12.7 million.

     Our partner companies operate in industries which are rapidly evolving and extremely competitive. It is reasonably possible that our accounting estimates with respect to the ultimate recoverability of the carrying value of goodwill could change in the near term and that the effect of such changes on our Consolidated Financial Statements could be material. While we believe that the current recorded carrying value of our goodwill is not impaired, there can be no assurance that a significant write-down or write-off will not be required in the future.

Impairment of Ownership Interests In and Advances to Companies

     On a periodic basis (but no less frequently than at the end of each quarter) we evaluate the carrying value of our equity and cost method partner companies for possible impairment based on achievement of business plan objectives and milestones, the financial condition and prospects of the company and other relevant factors. The business plan objectives and milestones we consider include, among others, those related to financial performance, such as achievement of planned financial results or completion of capital raising activities, and those that are not primarily financial in nature, such as hiring of key employees or the establishment of strategic relationships. We then determine whether there has been an other than temporary decline in the value of our ownership interest in the company. Impairment to be recognized is measured as the amount by which the carrying value of an asset exceeds its fair value.

     The fair value of privately held partner companies is generally determined based on the value at which independent third parties have invested or have committed to invest in these companies or based on other valuation methods including discounted cash flows, valuation of comparable public companies and the valuation of acquisitions of similar companies. The fair value of our ownership interests in private equity funds is generally determined based on the value of our pro rata portion of the funds’ net assets and estimated future proceeds from sales of investments provided by the funds’ managers.

     The new carrying value of a partner company is not increased if circumstances suggest the value of the partner company has subsequently recovered.

     Our partner companies generally operate in industries which are rapidly evolving and extremely competitive. It is reasonably possible that our accounting estimates with respect to the ultimate recoverability of the carrying value of ownership interests in and advances to companies could change in the near term and that the effect of such changes on our Consolidated Financial Statements could be material. While we believe that the current recorded carrying values of our equity and cost method companies are not impaired, there can be no assurance that our future results will confirm this assessment or that a significant write-down or write-off will not be required in the future.

     In the first quarter of 2008 we recognized an impairment loss of $3.6 million, which is included within Loss from discontinued operations in the Consolidated Statements of Operations for the six months ended June 30, 2008. See Discontinued Operations below.

Income Taxes

     We are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. We must assess the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent that we believe recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance in a period, we must include an expense within the tax provision in the Consolidated Statements of Operations. We have recorded a valuation allowance to reduce our deferred tax assets to an amount that is more likely than not to be realized in future years. If we determine in the future that it is more likely than not that the net deferred tax assets would be realized, then the previously provided valuation allowance would be reversed.

Commitments and Contingencies

     From time to time, we are a defendant or plaintiff in various legal actions which arise in the normal course of business. Additionally, we have received distributions as both a general partner and a limited partner from certain private equity funds. In certain circumstances, we may be required to return a portion or all the distributions we received as a general partner of a fund for a further distribution to such fund’s limited partners (the “clawback”). We are also a guarantor of various third-party obligations and commitments and are subject to the possibility of various loss contingencies arising in the ordinary course of business. We are required to assess the likelihood of any adverse outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of provision required for these commitments and contingencies, if any, which would be charged to earnings, is made after careful analysis of each matter. The provision may change in the future due to new developments or changes in circumstances. Changes in the provision could increase or decrease our earnings in the period the changes are made.

Stock-Based Compensation

     On January 1, 2006, we adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) requires companies to measure all employee stock-based compensation awards using a fair value method and record such expense in its consolidated financial statements. We adopted SFAS No. 123(R) using the modified prospective method. Accordingly, we have not restated prior period amounts. Under this application, we are required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.

     We estimate the grant date fair value of stock options using the Black-Scholes option-pricing model which requires the input of highly subjective assumptions. These assumptions include estimating the expected term of the award and the estimated volatility of our stock price over the expected term. Changes in these assumptions and in the estimated forfeitures of stock option awards can materially affect the amount of stock-based compensation recognized in the Consolidated Statements of Operations. In addition, the requisite service periods for market-based stock option awards are based on our estimate of the dates on which the market conditions will be met as determined using a Monte Carlo simulation model. Changes in the derived requisite service period or achievement of market capitalization targets earlier than estimated can materially affect the amount of stock-based compensation recognized in the Consolidated Statements of Operations.

Results of Operations

     On May 6, 2008 the Company consummated the Bundle Transaction pursuant to which it sold all of its equity and debt interests in Acsis, Alliance Consulting, Laureate Pharma, ProModel and Neuronyx.

     We present Clarient, our publicly traded consolidated partner company, as a separate segment. The results of operations of our other partner companies in which we have less than a majority interest are reported in our Life Sciences and Technology segments. The Life Sciences and Technology segments also include the gain or loss on the sale of respective partner companies, except for gains and losses included in discontinued operations.

     Our management evaluates our Clarient segment performance based on revenue, operating income (loss) and income (loss) before income taxes, which reflects the portion of income (loss) allocated to minority shareholders. Our management evaluates our Life Sciences and Technology segments performance based on their equity income (loss) which is based on the number of respective partner companies accounted for under the equity method, the Company’s voting ownership percentage in these partner companies and the net results of operations of these partner companies and Other income or loss associated with cost method partner companies.

     Other Items include certain expenses, which are not identifiable to the operations of the Company’s operating business segments. Other Items primarily consist of general and administrative expenses related to corporate operations, including employee compensation, insurance and professional fees, including legal and finance, interest income, interest expense, other income (loss) and equity income (loss) related to private equity holdings. Other Items also include income taxes, which are reviewed by management independent of segment results.

     The following tables reflect our consolidated operating data by reportable segment. Segment results include the results of Clarient, our consolidated partner company and our share of income or losses for entities accounted for under the equity method when applicable. Segment results also include impairment charges, gains or losses related to the disposition of partner companies, except for those reported in discontinued operations and the mark-to-market of trading securities. All significant inter-segment activity has been eliminated in consolidation. Accordingly, segment results reported by us exclude the effect of transactions between us and our consolidated partner company.

     Our operating results including net income (loss) before income taxes by segment were as follows:

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
		(In thousands)								(In thousands)
		(unaudited)								(unaudited)
Clarient		$	(105	)		$	(1,749	)		$	(203	)		$	(3,723	)
Life Sciences			(3,563	)			(2,944	)			(7,949	)			(4,120	)
Technology			(1,664	)			(1,255	)			(3,451	)			(1,841	)
Total segments			(5,332	)			(5,948	)			(11,603	)			(9,684	)
Other items:
Corporate operations			(2,071	)			(4,371	)			(7,251	)			(9,496	)
Income tax expense			(4	)			710				(4	)			696
Total other items			(2,075	)			(3,661	)			(7,255	)			(8,800	)
Net loss from continuing operations			(7,407	)			(9,609	)			(18,858	)			(18,484	)
Loss from discontinued operations, net of tax			(1,024	)			(4,232	)			(8,100	)			(7,039	)
Net loss		$	(8,431	)		$	(13,841	)		$	(26,958	)		$	(25,523	)

     There is intense competition in the markets in which our partner companies operate, and we expect competition to intensify in the future. Additionally, the markets in which these companies operate are characterized by rapidly changing technology, evolving industry standards, frequent introduction of new products and services, shifting distribution channels, evolving government regulation, frequently changing intellectual property landscapes and changing customer demands. Their future success depends on each company’s ability to execute its business plan and to adapt to its respective rapidly changing markets.

Clarient

     In connection with the audit of Clarient’s financial statements as of December 31, 2007 and for the year then ended, Clarient’s independent auditors determined that there was substantial doubt about Clarient’s ability to continue as a going concern. In February 2009, Clarient’s bank credit facility in the amount of $12.0 million will expire, at which time Clarient will need to extend, renew or refinance such debt and possibly secure additional debt or equity financing in order to fund anticipated working capital needs and capital expenditures and to execute its strategy. Clarient’s management believes that its current cash resources, revenue from operations and commitments under its credit facilities will enable Clarient to maintain current operations through at least the next twelve months and fund anticipated capital expenditures and implementation of its strategy. See Liquidity and Capital Resources — Consolidated Partner Company below.

     The financial information presented below does not include the results of operations of Clarient’s technology group, which is included in discontinued operations for all periods presented. Clarient sold this business (which developed, manufactured and marketed the ACIS Automated Image Analysis System) and related intellectual property to Carl Zeiss MicroImaging, Inc. (the “ACIS Sale”) for cash proceeds of $11.0 million, excluding contingent purchase price of $1.5 million. In 2007, prior to its sale, the technology group generated revenue of $0.8 million and net loss from operations of $0.6 million.

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
						(In thousands)
Revenue		$	16,916			$	9,873			$	32,802			$	18,702
Operating expenses:
Cost of sales			6,895				5,519				13,003				10,616
Selling, general and administrative			11,764				7,126				21,712				14,152
Total operating expenses			18,659				12,645				34,715				24,768
Operating loss			(1,743	)			(2,772	)			(1,913	)			(6,066	)
Other loss, net			—				(44	)			—				—
Interest, net			(131	)			(237	)			(446	)			(611	)
Minority interest			1,769				1,304				2,156				2,954
Net loss before income taxes		$	(105	)		$	(1,749	)		$	(203	)		$	(3,723	)

     Clarient is a comprehensive cancer diagnostics company providing cellular assessment and cancer characterization to community pathologists, academic researchers, university hospitals and biopharmaceutical companies.

     The decision to provide in-house laboratory services was made in 2004 to give Clarient an opportunity to capture a significant service-related revenue stream over the much broader and expanding cancer diagnostic testing marketplace. Clarient believes it is well positioned to participate in this growth due to its strength as a cancer diagnostics laboratory, deep domain expertise and access to intellectual property which can contribute to the development of additional tests, unique analytical capabilities and other service offerings.

     Clarient operates primarily in one business, the delivery of critical oncology testing services to community pathologists, biopharmaceutical companies and other researchers.

     As of June 30, 2008, we owned a 58.3% voting interest in Clarient.

Three months ended June 30, 2008 versus the three months ended June 30, 2007

     Revenue. Revenue of $16.9 million for the three months ended June 30, 2008 increased 71.3% or $7.0 million from $9.9 million for the prior year period. This increase resulted from the execution of Clarient’s marketing and sales strategy to increase its sales to new and existing customers. Clarient added 53 new customers in the three months ended June 30, 2008 and increased its penetration of existing customers. In addition, Clarient increased its breadth of offerings to include multiple cancer types, including expanding its lymphoma/leukemia business, and performing testing in other solid tumors such as colon, prostate and lung. Clarient’s testing was performed using its expanded capabilities in immunohistochemistry, flow cytometry, fluorescent in situ hybridization (“FISH”) and polymerase chain reaction (“PCR”). Clarient also increased its depth of offerings within each cancer type. Clarient also benefited from an overall increase in Medicare reimbursement rates in the first quarter of 2008, for certain tests it performs. In addition to the Medicare reimbursement rate increase, many of the Clarient’s third-party contract rates are tied to Medicare rates, which consequently, also increased. Clarient anticipates that revenues will continue to increase as a result of increased revenue from existing customers, the addition of new customers and

its offering of a more comprehensive suite of advanced and/or proprietary cancer diagnostic tests. In July 2008, the Medicare rate increase was extended 18 months effective July 1, 2008, to December 31, 2009.

     Cost of Sales. Cost of sales for the three months ended June 30, 2008 was $6.9 million compared to $5.5 million in the prior year period, an increase of 24.9%. The $1.4 million increase was primarily due to an increase of laboratory personnel, lab-related depreciation expense, laboratory reagents and supplies of $0.1 million, the cost of tests performed by other laboratories of $0.9 million and other direct costs such as shipping of $0.4 million. Gross margin in the second quarter of 2008 was 59.2% compared to 44.1% in the prior year period. The increase in gross margin in the second quarter of 2008 was driven by the increase in revenue, test volume growth, higher value services mix, the increase in reimbursement rates and higher employee productivity. Clarient anticipates that gross margins will modestly increase as the company more effectively utilizes its capacity and expands its breadth of test offerings. Since current Medicare rates are only effective until December 31, 2009, gross margins could decline if Medicare institutes a reduced fee schedule at that time.

     Selling, General and Administrative. Selling, general and administrative expenses in the second quarter of 2008 were $11.8 million, an increase of approximately $4.6 million, or 65.1%, compared to $7.1 million in the prior year period. As a percentage of revenue, these expenses decreased to 69.5% in the second quarter of 2008 compared to 72.2% in the prior year period. The increase in expenses in 2008 was primarily due to an increase in severance costs of $0.7 million, professional fees of $0.4 million, billing costs of $0.5 million, bad debt expense of $1.4 million and selling, marketing and information management costs of $1.6 million. Clarient anticipates that selling expenses and bad debt expenses will continue to grow as a result of its expected revenue growth, though the company expects general and administrative expenses to decline as a percentage of revenue as its infrastructure costs stabilize.

     Interest, Net. Interest expense and other income totaled $0.1 million and $0.3 million for the three months ended June 30, 2008 and 2007, respectively. The decrease was primarily due to a decrease in the level of third party outstanding borrowings.

     Net Loss Before Income Taxes. Net loss before income taxes decreased $1.6 million, or 94.0%, in the first quarter of 2008 as compared to the prior year period. The improvement was related to increases in revenue and improved gross margin, partially offset by increases in selling, general and administrative expenses.

Six months ended June 30, 2008 versus the six months ended June 30, 2007

     Revenue. Revenue of $32.8 million for the six months ended June 30, 2008 increased 75.4% or $14.1 million from $18.7 million for the prior year period. This increase resulted from the execution of Clarient’s marketing and sales strategy to increase its sales to new and existing customers. Clarient added 99 new customers in the six months ended June 30, 2008 and increased its penetration of existing customers. In addition, Clarient increased its breadth of offerings to include multiple cancer types, including expanding its lymphoma/leukemia business, and performing testing in other solid tumors such as colon, prostate and lung. Clarient’s testing was performed using its expanded capabilities in immunohistochemistry, flow cytometry, FISH and PCR. Clarient also increased its depth of offerings within each cancer type. Clarient also benefited from an overall increase in Medicare reimbursement rates in the first quarter of 2008, for certain tests it performs. In addition to the Medicare reimbursement rate increase, many of the Clarient’s third-party contract rates are tied to Medicare rates, which consequently, also increased.

     Cost of Sales. Cost of sales for the six months ended June 30, 2008 was $13.0 million compared to $10.6 million in the prior year period, an increase of 22.5%. The $2.4 million increase was primarily due to an increase of laboratory personnel, lab-related depreciation expense of $0.1 million, laboratory reagents and supplies of $0.4 million, the cost of tests performed by other laboratories of $1.2 million, and other direct costs such as shipping of $0.6 million. Gross margin in the first half of 2008 was 60.4% compared to 43.2% in the prior year period. The increase in gross margin in the second quarter of 2008 was driven by the increase in revenue, test volume growth, higher value services mix, the increase in reimbursement rates and higher employee productivity.

     Selling, General and Administrative. Selling, general and administrative expenses in the first half of 2008 were $21.7 million, an increase of approximately $7.6 million, or 53.4%, compared to $14.2 million in the prior year period. As a percentage of revenue these costs decreased to 66.2% in the first half of 2008 compared to 75.7% in the prior year period. The increase in expenses in 2008 was primarily due to an increase in severance costs of $0.7 million, professional fees of $1.1 million, billing costs of $0.5 million, bad debt expense of $2.7 million and selling, marketing and information management costs of $2.6 million.

     Interest, Net. Interest expense and other income totaled $0.4 million and $0.6 million for the six months ended June 30, 2008 and 2007, respectively. The decrease was primarily due to a decrease in the level of third party outstanding borrowings.

     Net Loss Before Income Taxes. Net loss before income taxes decreased $3.5 million, or 94.5%, in the first half of 2008 as compared to the prior year period. The improvement was related to increases in revenue and improved gross margin, partially offset by increases in selling, general and administrative expenses.

Life Sciences

     The following partner companies were included in Life Sciences during the three and six months ended June 30, 2008:

Partner Company		Safeguard Ownership				Accounting Method
Advanced BioHealing, Inc.			28.3	%		Equity method
Avid Radiopharmaceuticals, Inc.			14.1	%		Cost method
Alverix, Inc.			50.0	%		Equity method
Cellumen, Inc.			40.3	%		Equity method
NuPathe, Inc.			27.8	%		Equity method
Rubicor Medical, Inc.			35.7	%		Equity method

     The following partner companies were included in Life Sciences during the three and six months ended June 30, 2007:

Partner Company		Safeguard Ownership				Accounting Method
Advanced BioHealing, Inc.			23.9	%		Equity method
Neuronyx, Inc.			7.0	%		Cost method
NuPathe, Inc.			21.3	%		Equity method
Rubicor Medical, Inc.			35.8	%		Equity method
Ventaira Pharmaceuticals, Inc.			12.8	%		Cost method