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 Quarter Ended March 31, 2007

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 or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o                     Accelerated filer þ                     Non-accelerated filer o

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 FORM 10-Q
INDEX

PART I — FINANCIAL INFORMATION

						Page
Item 1 — Financial Statements:
				Consolidated Balance Sheets — March 31, 2007 (unaudited) and December 31, 2006			3
				Consolidated Statements of Operations (unaudited) — Three Months Ended March 31, 2007 and 2006			4
				Consolidated Statements of Cash Flows (unaudited) — Three Months Ended March 31, 2007 and 2006			5
				Notes to Consolidated Financial Statements			6
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations							22
Item 3 — Quantitative and Qualitative Disclosures About Market Risk							43
Item 4 — Controls and Procedures							44
PART II — OTHER INFORMATION
Item 1A — Risk Factors							45
Item 5 — Other Information							46
Item 6 — Exhibits							46
Signatures							48
Ninth Amendment
Amendment and Affirmation of Guaranty
First Amendment and Waiver
First Amendment and Waiver
Affirmation of Guaranty
Certification of Peter J. Boni
Certification of Stephen T. Zarrilli
Certification of Peter J. Boni, pursuant to Section 906
Certification of Stephen T. Zarrilli, pursuant to Section 906

SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS

		March 31,				December 31,
		2007				2006
		(In thousands, except per
		share data)
		(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	92,039			$	67,012
Restricted cash — current			177				—
Marketable securities			62,264				94,155
Restricted marketable securities			3,814				3,869
Accounts receivable, less allowances ($1,595 — 2007; $1,713 — 2006)			34,837				33,167
Prepaid expenses and other current assets			6,836				5,080
Current assets of discontinued operations			—				11,703
Total current assets			199,967				214,986
Property and equipment, net			34,798				34,209
Ownership interests in and advances to companies			72,233				54,548
Long-term marketable securities			65				487
Long-term restricted marketable securities			3,871				5,737
Intangible assets, net			11,460				11,984
Goodwill			80,487				80,418
Cash held in escrow			21,932				19,398
Other			3,705				3,764
Non-current assets of discontinued operations			—				17,850
Total Assets		$	428,518			$	443,381
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current portion of credit line borrowings		$	27,389			$	25,014
Current maturities of long-term debt			3,789				3,192
Accounts payable			6,066				10,581
Accrued compensation and benefits			10,950				13,432
Accrued expenses and other current liabilities			19,441				18,733
Deferred revenue			5,511				3,560
Current liabilities of discontinued operations			—				3,465
Total current liabilities			73,146				77,977
Long-term debt			5,659				4,010
Other long-term liabilities			10,493				10,319
Convertible senior debentures			129,000				129,000
Deferred taxes			1,026				1,026
Minority interest			6,174				5,491
Non-current liabilities of discontinued operations			—				1,656
Commitments and contingencies
Redeemable subsidiary stock-based compensation			524				2,021
Shareholders’ Equity:
Preferred stock, $0.10 par value; 1,000 shares authorized			—				—
Common stock, $0.10 par value; 500,000 shares authorized; 120,771 and 120,419 shares issued and outstanding in 2007 and 2006, respectively			12,077				12,042
Additional paid-in capital			753,028				750,361
Accumulated deficit			(562,723	)			(551,058	)
Accumulated other comprehensive income			114				536
Total shareholders’ equity			202,496				211,881
Total Liabilities and Shareholders’ Equity		$	428,518			$	443,381

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended March 31,
		2007				2006
		(in thousands, except per share data)
		(unaudited)
Revenue		$	39,509			$	37,306
Operating Expenses:
Cost of sales			29,375				28,042
Selling, general and administrative			24,020				22,025
Research and development			872				640
Amortization of intangibles			524				620
Total operating expenses			54,791				51,327
Operating loss			(15,282	)			(14,021	)
Other income, net			101				3,124
Interest income			2,159				1,539
Interest expense			(1,832	)			(1,595	)
Equity loss			(1,729	)			(605	)
Minority interest			1,651				1,749
Net loss from continuing operations before income taxes			(14,932	)			(9,809	)
Income tax expense			(14	)			(9	)
Net loss from continuing operations			(14,946	)			(9,818	)
Income from discontinued operations, net of tax			3,281				3,366
Net loss		$	(11,665	)		$	(6,452	)
Basic and Diluted Income (Loss) Per Share:
Net loss from continuing operations		$	(0.12	)		$	(0.08	)
Net income from discontinued operations			0.02				0.03
Net loss per share		$	(0.10	)		$	(0.05	)
Shares used in computing basic and diluted loss per share			122,116				121,279

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three Months Ended March 31,
		2007				2006
		(in thousands)
		(unaudited)
Cash Flows from Operating Activities:
Cash flows from operating activities of discontinued operations		$	730			$	(456	)
Cash flows from operating activities of continuing operations			(17,806	)			(9,648	)
Net cash used in operating activities			(17,076	)			(10,104	)
Cash Flows from Investing Activities:
Proceeds from sales of and distributions from companies and funds			2,304				1,519
Acquisitions of ownership interests in companies and funds, net of cash acquired			(22,220	)			(1,464	)
(Recovery costs) repayments of note-receivable related party			—				(275	)
Increase in restricted cash and marketable securities			(62,264	)			(6,522	)
Decrease in restricted cash and marketable securities			94,155				14,919
Proceeds from the sale of property and equipment			24				310
Capital expenditures			(2,724	)			(3,859	)
Capitalized software costs			—				(53	)
Proceeds from sale of discontinued operations, net			30,005				1,634
Cash flows from investing activities of discontinued operations			(362	)			(777	)
Net cash provided by investing activities			38,918				5,432
Cash Flows from Financing Activities:
Repurchase of convertible senior debentures			—				(3,775	)
Borrowings on revolving credit facilities			44,006				33,065
Repayments on revolving credit facilities			(41,631	)			(30,062	)
Borrowings on term debt			3,000				981
Repayments on term debt			(870	)			(1,476	)
Decrease (increase) in restricted cash			(231	)			(232	)
Issuance of Company common stock, net			280				327
Issuance of subsidiary common stock, net			163				23
Offering costs on issuance of subsidiary common stock			—				(70	)
Cash flows from financing activities of discontinued operations			(230	)			452
Net cash provided by (used in) financing activities			4,487				(767	)
Net Increase (Decrease) in Cash and Cash Equivalents			26,329				(5,439	)
Changes in cash and cash equivalents from Pacific Title and Art Studio and Mantas included in assets of discontinued operations			(1,302)				13
Cash and Cash Equivalents at beginning of period			67,012				122,069
Cash and Cash Equivalents at end of period		$	92,039			$	116,643

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007

1.      GENERAL

          The accompanying unaudited interim Consolidated Financial Statements 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 2006 Annual Report on Form 10-K.

2.      BASIS OF PRESENTATION

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

          The Company’s Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006 and Consolidated Balance Sheets at March 31, 2007 and December 31, 2006 include the following subsidiaries in continuing operations:

Acsis, Inc. (“Acsis”)
Alliance Consulting Group Associates, Inc. (“Alliance Consulting”)
Clarient, Inc. (“Clarient”)
Laureate Pharma, Inc. (“Laureate Pharma”)

          Alliance Consulting operates on a 52 or 53-week fiscal year, ending on the Saturday closest to the end of the fiscal period. The Company and all other subsidiaries operate on a calendar year. Alliance Consulting’s first quarter ended on March 31, 2007 and April 1, 2006, each a period of 13 weeks.

          During 2007 and 2006, certain consolidated companies, or components thereof, were sold. See Note 3 for discontinued operations treatment of Pacific Title and Art Studio, Clarient’s technology group business, Mantas and Alliance Consulting’s Southwest region.

3.      DISCONTINUED OPERATIONS

     Pacific Title and Art Studio

          In March 2007, the Company sold Pacific Title and 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. Pacific Title and Art Studio is reported in discontinued operations for all periods presented.

     Clarient — Technology Group

          In March 2007, Clarient sold its technology group 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 net cash proceeds of $10.3 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 business is reported in discontinued operations for all periods presented. Goodwill of $2.1 million related to the technology group business was included in discontinued operations.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MARCH 31, 2007

     Mantas

          In October 2006, the Company sold its interest in Mantas for net cash proceeds of approximately $112.8 million, including $19.3 million held in escrow. The Company recorded a pre-tax gain of $83.9 million in the fourth quarter of 2006. Mantas is reported in discontinued operations for the first quarter of 2006. Mantas sold its telecommunications business and certain related assets and liabilities in the first quarter of 2006 for $2.1 million in cash. As a result of the sale, Mantas recorded a gain of $1.9 million in the first quarter of 2006, which is also reported in discontinued operations.

     Alliance Consulting — Southwest Region

          Alliance Consulting sold its Southwest region in May 2006 for proceeds of $4.5 million, including cash of $3.0 million and stock of the acquiror of $1.5 million which was subsequently sold. As a result of the sale, Alliance Consulting recorded a gain of $1.6 million in the second quarter of 2006. Alliance Consulting’s Southwest region is reported in discontinued operations for the first quarter of 2006.

          Results of all discontinued operations were as follows:

		Three Months Ended March 31,
		2007				2006
		(in thousands)
		(unaudited)
Revenue		$	7,326			$	21,090
Operating expenses			(8,098	)			(19,622	)
Other			(103	)			(185	)
Net income (loss) before income taxes and minority interest			(875	)			1,283
Income tax (expense) benefit			8				(73	)
Income (loss) from operations			(867	)			1,210
Gain on disposal, net of tax			6,328				1,908
Minority interest			(2,180	)			248
Income (loss) from discontinued operations, net of tax		$	3,281			$	3,366

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MARCH 31, 2007

          The assets and liabilities of the discontinued operations were as follows:

		December 31,
		2006
		(in thousands)
Cash		$	4,239
Accounts receivable, less allowances			5,393
Inventory			1,525
Other current assets			546
Total current assets			11,703
Property and equipment, net			10,680
Intangibles			4,442
Goodwill			2,080
Other assets			648
Total Assets		$	29,553
Current debt		$	746
Accounts payable			530
Accrued expenses			1,499
Deferred revenue			690
Total current liabilities			3,465
Long-term debt			1,057
Other long-term liabilities			599
Total Liabilities		$	5,121
Carrying value		$	24,432

4.      MARKETABLE SECURITIES

          Marketable securities included the following:

		Current								Non-Current
		March 31,				December 31,				March 31,				December 31,
		2007				2006				2007				2006
		(in thousands)
		(unaudited)								(unaudited)
Held-to-maturity:
Commercial paper		$	62,264			$	94,155			$	—			$	—
Restricted U.S. Treasury securities			3,814				3,869				3,871				5,737
			66,078				98,024				3,871				5,737
Available-for-sale:
Equity securities			—				—				65				487
		$	66,078			$	98,024			$	3,936			$	6,224

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MARCH 31, 2007

          As of March 31, 2007, the contractual maturities of securities were as follows:

		Years to Maturity
		(in thousands)
		(unaudited)
		Less Than				One to				No Single
		One Year				Five Years				Maturity Date				Total
Held-to-maturity		$	66,078			$	3,871			$	—			$	69,949
Available-for-sale			—				—				65				65
		$	66,078			$	3,871			$	65			$	70,014

          As of March 31, 2007 and December 31, 2006, the Company’s investment in available-for-sale securities had generated, on a cumulative basis, unrealized gains of $0.1 million and $0.5 million, respectively, which are reflected in Accumulated Other Comprehensive Income on the Consolidated Balance Sheets.

5.      GOODWILL AND OTHER INTANGIBLE ASSETS

          The following is a summary of changes in the carrying amount of goodwill by segment:

		Alliance
		Consulting				Clarient				Acsis				Total
		(in thousands)
						(unaudited)
Balance at December 31, 2006		$	56,155			$	12,729			$	11,534			$	80,418
Purchase price adjustments			69				—				—				69
Balance at March 31, 2007		$	56,224			$	12,729			$	11,534			$	80,487

          As discussed in Note 15, certain purchase price adjustments are not final.

          Intangible assets with definite useful lives are amortized over their respective estimated useful lives to their estimated residual values. The following table provides a summary of the Company’s intangible assets with definite and indefinite useful lives:

		March 31, 2007
						Gross
		Amortization				Carrying				Accumulated
		Period				Value				Amortization				Net
		(in thousands)
		(unaudited)
Customer-related		7 - 10 years				$	9,721			$	2,999			$	6,722
Technology-related		3 years					1,376				611				765
Process-related		3 years					1,363				1,098				265
Trade names		20 years					1,222				81				1,141
							13,682				4,789				8,893
Trade names		Indefinite					2,567				—				2,567
Total						$	16,249			$	4,789			$	11,460

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
MARCH 31, 2007

		December 31, 2006
						Gross
		Amortization				Carrying				Accumulated
		Period				Value				Amortization				Net
		(in thousands)
Customer-related		7 -10 years				$	9,721			$	2,719			$	7,002
Technology-related		3 years					1,376				496				880
Process-related		3 years					1,363				984				379
Trade names		20 years					1,222				66				1,156
							13,682				4,265				9,417
Trade names		Indefinite					2,567				—				2,567
Total						$	16,249			$	4,265			$	11,984

          Amortization expense related to intangible assets was $0.5 million and $0.6 million for the three months ended March 31, 2007 and 2006, respectively. The following table provides estimated future amortization expense related to intangible assets:

		Total
		(in thousands)
		(unaudited)
Remainder of 2007		$	1,503
2008			1,610
2009			1,164
2010			605
2011 and thereafter			4,011
		$	8,893

6.      RECENT ACCOUNTING PRONOUNCEMENTS

          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 at fair value that are not otherwise required to be measured 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 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of adopting SFAS No. 159.

          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 effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect the adoption of SFAS No. 157 to have a material impact on its financial statements.

          In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained upon examination by the applicable taxing authority. FIN 48 also includes guidance concerning accounting for income tax uncertainties in interim periods and increases the level of disclosures associated with any recorded income tax uncertainties. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 effective January 1, 2007. See Note 11.

          In November 2005, the FASB issued FASB Staff Position SFAS 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-based Payment Awards”, that provides an elective alternative transition method of calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of SFAS No. 123(R) (the “APIC Pool”) to the method otherwise required by paragraph 81 of SFAS No. 123(R). In the fourth quarter of 2006, the Company adopted the short-cut method to calculate the APIC Pool.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
MARCH 31, 2007

7.      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 its holdings classified as available-for-sale securities and foreign currency translation adjustments.

          The following summarizes the components of comprehensive loss:

		Three Months Ended March 31,
		2007				2006
		(in thousands)
		(unaudited)
Net loss from continuing operations		$	(14,946	)		$	(9,818	)
Other comprehensive loss:
Foreign currency translation adjustments			—				(31	)
Unrealized holding losses on available-for-sale securities			(422	)			(226	)
Other comprehensive loss from continuing operations			(422	)			(257	)
Comprehensive loss from continuing operations			(15,368	)			(10,075	)
Net income from discontinued operations			3,281				3,366
Comprehensive loss		$	(12,087	)		$	(6,709	)

8.      LONG-TERM DEBT AND CREDIT ARRANGEMENTS

          Consolidated long-term debt consisted of the following:

		March 31,				December 31,
		2007				2006
		(in thousands)
		(unaudited)
Subsidiary credit line borrowings (guaranteed by the Company)		$	21,500			$	22,000
Subsidiary credit line borrowings (not guaranteed by the Company)			5,889				3,014
Subsidiary term loans and other borrowings (guaranteed by the Company)			5,687				3,000
			33,076				28,014
Capital lease obligations and other borrowings			3,761				4,202
			36,837				32,216
Less current maturities			(31,178	)			(28,206	)
Total long-term debt, less current portion		$	5,659			$	4,010

          The Company maintains a revolving credit facility that provides for borrowings and issuances of letters of credit and guarantees. As of March 31, 2007, the facility size was $55 million and had a maturity date of May 3, 2007. On May 2, 2007, the revolving credit facility was amended to extend the expiration date to June 30, 2008. In addition, the credit facility was increased from $55 million to $75 million and the Company’s guarantee on a partner company facility was increased from $5 million to $7.5 million. Borrowing availability under the facility is reduced by the amounts outstanding for the Company’s borrowings and letters of credit and amounts guaranteed under partner company facilities maintained with that same lender. This credit facility bears interest at the prime rate (8.25% at March 31, 2007) 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 facility requires cash collateral equal to one times the Company’s borrowings and letters of credit and amounts borrowed by partner companies under facilities maintained with that same bank. As of March 31, 2007, one partner company was not in compliance with certain financial covenants under its facility and subsequently received a waiver from the lender.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
MARCH 31, 2007

          In January 2007, Clarient increased its facility by $3.5 million, which was guaranteed by the Company. In February 2007, all subsidiary facilities were extended for one year, with the exception of Acsis’ facility, which expires in August 2008. In addition to the extension of the maturity dates, Laureate Pharma’s working capital line was increased by $5.5 million and it entered into a $6 million equipment facility, all of which the Company guaranteed. Borrowings are secured by substantially all of the assets of the respective subsidiaries. These obligations bear interest at variable rates ranging between the prime rate minus 0.5% and the prime rate plus 0.5%. These facilities contain financial and non-financial covenants.

          In November 2006, the Company entered into an additional revolving credit facility with a separate bank that provides for borrowings and issuances of letters of credit and guarantees of up to $20 million. Borrowing availability under the facility is reduced by the amounts outstanding for the Company’s borrowings and letters of credit and amounts guaranteed under partner company facilities maintained with that same lender. This credit facility bears interest at the prime rate 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 facility requires cash collateral equal to one times the Company’s borrowings and letters of credit and amounts borrowed by partner companies under the guaranteed portion of the partner company facilities maintained at the same bank. The credit facility matures in November 2007.

          Availability under the Company’s revolving credit facilities at March 31, 2007 was as follows (in thousands):

		Total
Size of facilities		$	75,000
Subsidiary facilities at same banks (a)			(38,300	)
Outstanding letter of credit (b)			(6,514	)
Amount available at March 31, 2007		$	30,186

(a)

The Company’s ability to borrow under its credit facilities is limited by the amounts outstanding for the Company’s borrowings and letters of credit and amounts guaranteed under partner company facilities maintained at the same respective banks. Of the total facilities, $27.2 million was outstanding under these facilities at March 31, 2007 and was included as debt on the Consolidated Balance Sheet.

(b)

In connection with the sale of CompuCom, the Company provided to the landlord of CompuCom’s Dallas headquarters lease, a letter of credit, which will expire on March 19, 2019, in an amount equal to $6.3 million. In addition, the Company provided a $0.2 million letter of credit to a non-consolidated partner company in the first quarter of 2007.

          In September 2006, Clarient entered into a $5 million senior secured revolving credit agreement. Borrowing availability under the agreement is based on the level of Clarient’s qualified accounts receivable, less certain reserves. The agreement has a two-year term and bears interest at variable rates based on the lower of LIBOR plus 3.25% or the prime rate plus 0.5%. As of March 31, 2007, Clarient had no outstanding borrowings under this facility and had $3.2 million availability based on the level of qualified accounts receivable.

          Debt as of March 31, 2007 and December 31, 2006 bore interest at fixed rates between 4.62% and 20.33% and variable rates indexed to the prime rate plus 0.5%.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MARCH 31, 2007

     The Company’s debt matures as follows:

		Total
		(in thousands)
Remainder of 2007		$	22,894
2008			10,582
2009			2,481
2010			756
2011 and thereafter			124
Total debt		$	36,837

9.      CONVERTIBLE SUBORDINATED NOTES AND CONVERTIBLE SENIOR DEBENTURES

          In February 2004, the Company completed the sale of $150 million of 2.625% convertible senior debentures with a stated maturity of March 15, 2024. Interest on the 2024 Debentures is payable semi-annually. At the debenture holders’ option, the 2024 Debentures are convertible into Company common stock through March 14, 2024, subject to certain conditions. The conversion rate of the debentures at March 31, 2007 was $7.2174 of principal amount per share. The closing price of the Company’s common stock at March 31, 2007 was $2.96. The 2024 Debenture holders may require repurchase of the debentures on March 21, 2011, March 20, 2014 or March 20, 2019 at a repurchase price equal to 100% of their respective face amount plus accrued and unpaid interest. The 2024 Debenture holders may also require repurchase of the debentures upon certain events, including sale of all or substantially all of the Company’s 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 the first quarter of 2006, the Company repurchased $5 million of the face value of the 2024 Debentures for $3.8 million in cash. In connection with the repurchase, the Company recorded $0.1 million of expense related to the acceleration of deferred debt issuance costs associated with the 2024 Debentures, resulting in a net gain of $1.1 million, which is included in Other Income, Net in the Consolidated Statements of Operations. At March 31, 2007, the outstanding 2024 Debentures had a face value of $129 million and a market value of approximately $107 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 $7.7 million is included in Restricted Marketable Securities on the Consolidated Balance Sheet at March 31, 2007, of which $3.8 million is classified as a current asset.

10.      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 (in thousands):

		Three Months Ended March 31,
		2007				2006
Cost of sales		$	62			$	20
Selling, general and administrative			1,799				1,833
Research and development			41				4
		$	1,902			$	1,857

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MARCH 31, 2007

          The Company

          The fair value of the Company’s stock-based awards to employees are estimated at the date of grant using the Black-Scholes option-pricing model. The risk-free rate is based on the U.S. Treasury yield curve in effect at the end of the quarter. The expected life of stock options granted was estimated using the historical exercise behavior of employees. Expected volatility was based on historical volatility for a period equal to the stock option’s expected life.

		Three Months Ended March 31,
		2007		2006
Service-Based Awards
Dividend yield		0%		0%
Expected volatility		63%		75%
Average expected option life		5 years		5 years
Risk-free interest rate		4.5%		4.6%
Market-Based Awards
Dividend yield		0%		0%
Expected volatility		57%		67%
Weighted average expected option life		6 years		6 years
Risk-free interest rate		4.8%		4.7%

          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. 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. Based on the achievement of market capitalization targets, 0.3 million shares vested during the first quarter of 2007. The Company recorded $0.6 million and $0.8 million of compensation expense related to these awards during the three months ended March 31, 2007 and 2006, respectively. Depending on the Company’s stock performance, the maximum number of unvested shares at March 31, 2007 attainable under these grants is 7.7 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 $0.4 million and $0.3 million of compensation expense related to these awards during the three months ended March 31, 2007 and 2006, respectively.

          Consolidated Subsidiaries

          The fair value of the Company’s subsidiaries’ stock-based awards to employees are estimated at the date of grant using the Black-Scholes option-pricing model. The risk-free rate is based on the U.S. Treasury yield curve in effect at the end of the quarter in which the grant occurred. The expected life of stock options granted was estimated using the historical exercise behavior of employees. The expected life of stock options granted for subsidiaries that do not have sufficient historical exercise behavior of employees was calculated using the simplified method of determining expected term as provided in Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”). Expected volatility for publicly-held subsidiaries was based on historical volatility for a period equal to the stock option’s expected life. Expected volatility for privately-held subsidiaries is based on the average historical volatility of comparable companies for a period equal to the stock option’s expected life. The fair value of the underlying stock of privately-held subsidiaries on the date of grant was determined based on a number of valuation methods, including discounted cash flows and revenue and acquisition multiples.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MARCH 31, 2007

          Stock options granted by subsidiaries generally are service-based awards that vest four years after the date of grant and expire 7 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 Company’s consolidated subsidiaries recorded $0.9 million of compensation expense related to these awards during both the three months ended March 31, 2007 and 2006.

          Certain employees of the Company’s subsidiaries have the right to require the respective subsidiary to purchase shares of common stock of the subsidiary received by the employee pursuant to the exercise of options. The employee must hold the shares for at least six months prior to exercising this right. The required purchase price is 75% to 100% of the fair market value at the time the right is exercised. These options qualify for equity-classification under SFAS No. 123(R). In accordance with EITF Issue No. D-98, however, these instruments are classified outside of permanent equity as redeemable subsidiary stock-based compensation on the Consolidated Balance Sheets at their redemption amount based on the number of options vested as of March 31, 2007 and December 31, 2006. Following the sale of Pacific Title and Art Studio, amounts payable related to deferred stock units issued to a former employee of Pacific Title and Art Studio were classified in accrued expenses and other current liabilities on the Consolidated Balance Sheet at March 31, 2007 at the expected redemption amount. At December 31, 2006, these instruments were classified outside of permanent equity as redeemable subsidiary stock-based compensation.

11.      INCOME TAXES

          The Company’s consolidated income tax expense for the three months ended March 31, 2007 was $14 thousand. The tax expense relates to the Company’s share of net state tax expense recorded by subsidiaries. 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 net operating loss benefit that would have been recognized in 2007 was offset by a valuation allowance.

          Effective 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”). FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Adoption of FIN 48 had no impact on the Company’s consolidated results of operations and financial position.

          Upon adoption of FIN 48, the Company identified uncertain tax positions that the Company currently does not believe meet the more likely than not recognition threshold under FIN 48 to be sustained upon examination. Since these uncertain tax positions have not been utilized and had a full valuation allowance established, the Company reduced the gross deferred tax asset and valuation allowance by $3.2 million. This amount relates to unrecognized tax benefits that would impact the effective tax rate if recognized absent the valuation allowance.

          The Company and its consolidated partner companies file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax years 2003 and forward remain open for examination for federal tax purposes and tax years 2001 and forward remain open for examination for the Company’s more significant state tax jurisdictions. To the extent utilized in future years’ tax returns, net operating loss and capital loss carryforwards at March 31, 2007 will remain subject to examination until the respective tax year is closed.

          At March 31, 2007 and December 31, 2006, the Company had accrued $0.8 million for unrecognized tax benefits, including $0.2 million for the payment of penalties and interest, all of which, if recognized, would affect the Company’s effective tax rate. The Company recognizes penalties and interest accrued related to income tax liabilities in the provision (benefit) for income taxes in its consolidated statements of operations. The Company’s unrecognized tax benefits at March 31, 2007 primarily relate to state tax positions. The Company expects that substantially all of the unrecognized tax benefits at March 31, 2007 will be recognized in the remainder of 2007 as the applicable statutes of limitations expire.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MARCH 31, 2007

12. NET INCOME (LOSS) PER SHARE

          The calculations of net income (loss) per share were:

		Three Months Ended March 31,
		2007				2006
		(in thousands except per share data)
		(unaudited)
Basic:
Net loss from continuing operations		$	(14,946	)		$	(9,818	)
Net income from discontinued operations			3,281				3,366
Net loss		$	(11,665	)		$	(6,452	)
Average common shares outstanding			122,116				121,279
Net loss per share from continuing operations		$	(0.12	)		$	(0.08	)
Net income per share from discontinued operations			0.02				0.03
Net loss per share		$	(0.10	)		$	(0.05	)
Diluted:
Net loss from continuing operations		$	(14,946	)		$	(9,818	)
Net income from discontinued operations			3,281				3,366
			(11,665	)			(6,452	)
Effect of holdings			—				(14	)
Adjusted net loss		$	(11,665	)		$	(6,466	)
Average common shares outstanding			122,116				121,279
Net loss per share from continuing operations		$	(0.12	)		$	(0.08	)
Net income per share from discontinued operations			0.02				0.03
Diluted loss per share		$	(0.10	)		$	(0.05	)

          Basic and diluted average common shares outstanding for purposes of computing net income (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 March 31, 2007 and 2006, options to purchase 19.0 million and 18.6 million shares of common stock at prices ranging from $1.03 to $45.47 per share, were excluded from the 2007 and 2006 calculations, respectively.

•

At March 31, 2007 and 2006, unvested shares of restricted stock and unvested deferred stock units totaling 0.1 million shares were excluded from the calculations.

•

At March 31, 2007 and 2006, a total of 17.9 million and 20.4 million shares, respectively, related to the Company’s 2024 Debentures (See Note 9) representing the weighted average effect of assumed conversion of the 2024 Debentures were excluded from the calculation.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MARCH 31, 2007

13.      PARENT COMPANY FINANCIAL INFORMATION

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

     Parent Company Balance Sheets

		March 31, 2007				December 31, 2006
		(in thousands)
		(unaudited)
Assets:
Cash and cash equivalents		$	84,801			$	59,933
Restricted cash			177				—
Marketable securities			62,264				94,155
Restricted marketable securities			3,814				3,869
Other current assets			1,830				1,978
Asset held for sale			—				17,852
Total current assets			152,886				177,787
Ownership interests in and advances to companies			173,303				160,557
Long-term marketable securities			65				487
Long-term restricted marketable securities			3,871				5,737
Cash held in escrow			21,932				19,398
Other			3,178				3,377
Total Assets		$	355,235			$	367,343
Liabilities and Shareholders’ Equity:
Current liabilities		$	17,477			$	18,816
Long-term liabilities			5,738				5,625
Convertible senior debentures			129,000				129,000
Shareholders’ equity			203,020				213,902
Total Liabilities and Shareholders’ Equity		$	355,235			$	367,343

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MARCH 31, 2007

Parent Company Statements of Operations		Three Months Ended March 31,
		2007				2006
		(in thousands)
		(unaudited)
Operating expenses		$	(6,274	)		$	(5,602	)
Other income, net			55				3,114
Interest income			2,118				1,482
Interest expense			(1,057	)			(1,214	)
Equity loss			(9,788	)			(7,598	)
Net loss from continuing operations			(14,946	)			(9,818	)
Equity income attributable to discontinued operations			3,281				3,366
Net loss		$	(11,665	)		$	(6,452	)

Parent Company Statements of Cash Flows		Three Months Ended March 31,
		2007				2006
		(in thousands)
		(unaudited)
Net cash used in operating activities		$	(7,042	)		$	(5,581	)
Cash Flows from Investing Activities:
Proceeds from sales of and distributions from companies and funds			2,304				324
Acquisitions of ownership interests in companies and funds, net of cash acquired			(22,220	)			(1,464	)
(Recovery costs) repayment of note receivable — related party			—				(275	)
Increase in restricted cash and short-term investments			(62,264	)			(6,522	)
Decrease in restricted cash and short-term investments			94,155				14,919
Capital expenditures			—				(52	)
Other, net			—				1,195
Proceeds from sale of discontinued operations			19,655				—
Net cash provided by investing activities			31,630				8,125
Cash Flows from Financing Activities:
Repurchase of convertible senior debentures			—				(3,775	)
Decrease in restricted cash			—				1,098
Issuance of Company common stock, net			280				327
Net cash provided by (used in) financing activities			280				(2,350	)
Net Increase (Decrease) in Cash and Cash Equivalents			24,868				194
Cash and Cash Equivalents at beginning of period			59,933				108,300
Cash and Cash Equivalents at end of period		$	84,801			$	108,494

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

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MARCH 31, 2007

14.      OPERATING SEGMENTS

          The Company presents its consolidated partner companies as separate segments — Acsis, Alliance Consulting, Clarient and Laureate Pharma. The results of operations of the Company’s non-consolidated partner companies and the Company’s ownership in private equity funds are reported in the “Other Companies” segment. The Other Companies segment also includes the gain or loss on the sale of companies and funds, except for gains and losses included in discontinued operations.

          Management evaluates segment performance based on segment revenue, operating income (loss) and income (loss) before income taxes, which reflects the portion of income (loss) allocated to minority shareholders.

          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, finance and consulting, interest income and interest expense. 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 the consolidated partner companies, impairment charges, gains or losses related to the disposition of the partner companies, those supported in discontinued operations, except for 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 subsidiaries and among the Company’s subsidiaries.

          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 March 31, 2007 and December 31, 2006, the Company’s assets were primarily located in the United States.

          The following represents the segment data from continuing operations:

		Three Months Ended March 31, 2007
		(in thousands)
		(unaudited)
																														Total
						Alliance								Laureate				Other				Total				Other				Continuing
		Acsis				Consulting				Clarient				Pharma				Companies				Segments				Items				Operations
Revenue		$	4,215			$	21,457			$	8,857			$	4,980			$	—			$	39,509			$	—			$	39,509
Operating loss			(2,639	)			(1,513	)			(3,266	)			(1,590	)			—				(9,008	)			(6,274	)			(15,282	)
Net loss			(2,640	)			(1,659	)			(1,957	)			(1,789	)			(1,729	)			(9,774	)			(5,172	)			(14,946	)
Segment Assets
March 31, 2007		$	23,847			$	82,244			$	38,916			$	29,346			$	72,298			$	246,651			$	181,867			$	428,518
December 31, 2006			27,266				83,766				33,688				25,626				55,035				225,381				188,447				413,828

		Three Months Ended March 31, 2006
		(in thousands)
		(unaudited)
																														Total
						Alliance								Laureate				Other				Total				Other				Continuing
		Acsis				Consulting				Clarient				Pharma				Companies				Segments				Items				Operations
Revenue		$	4,401			$	25,212			$	5,515			$	2,178			$	—			$	37,306			$	—			$	37,306
Operating loss			(2,244	)			(272	)			(3,659	)			(2,244	)			—				(8,419	)			(5,602	)			(14,021	)
Net income (loss)			(2,129	)			(486	)			(2,039	)			(2,330	)			1,308				(5,676	)			(4,142	)			(9,818	)

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MARCH 31, 2007

Other Items

		Three Months Ended March 31,
		2007				2006
		(in thousands)
		(unaudited)
Corporate operations		$	(5,158	)		$	(4,133	)
Income tax expense			(14	)			(9	)
		$	(5,172	)		$	(4,142	)

15.      BUSINESS COMBINATIONS

     Acquisitions by the Company — 2007

          In March 2007, the Company acquired 37% of 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 Sheet.

          In February 2007, the Company acquired 24% of Advanced BioHealing, Inc. (“ABH”) 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 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 Sheet.

     Acquisitions by the Company — 2006

          In November 2006, the Company acquired 32% of Advantedge Healthcare Solutions (“AHS”) for $5.8 million in cash. AHS is a New York 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. The difference between the Company’s cost and its interest in underlying net assets of AHS 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 Sheet.

          In September 2006, the Company acquired additional common shares of Clarient for $3 million in cash to fund Clarient’s acquisition of Trestle Holdings, Inc. (“Trestle”). As a result of the funding, the Company’s ownership in Clarient increased to 60%. The difference between the Company’s cost and its interest in the underlying net assets of Clarient was allocated to intangible assets of $0.8 million with estimated useful lives of 5 years and to fixed assets of $0.2 million with estimated depreciable lives of 3 years.

          In September 2006, the Company acquired 24% of NuPathe, Inc. for $3 million in cash. NuPathe develops therapeutics in conjunction with novel transdermal 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 was allocated to in-process-research and development, resulting in a $1.0 million charge in 2006, and goodwill as reflected in the carrying value in Ownership interests in and advances to companies on the Consolidated Balance Sheet.

          In August 2006, the Company acquired 47% of Portico Systems (“Portico”) for $6 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. The difference between the Company’s cost and its interest in the underlying net assets of Portico 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 Sheet.

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MARCH 31, 2007

          In August 2006, the Company acquired 36% of Rubicor Medical, Inc. (“Rubicor”) for $20 million in cash. Rubicor develops and distributes technologically advanced, disposable, minimally-invasive breast biopsy devices. The Company accounts for its holdings in Rubicor under the equity method. The difference between the Company’s cost and its interest in the underlying net assets of Rubicor was allocated to in-process-research and development, resulting in a $0.6 million charge in 2006, and intangible assets as reflected in the carrying value in Ownership interests in and advances to companies on the Consolidated Balance Sheet.

          In June 2006, the Company acquired additional common shares of Acsis for an aggregate purchase price of $6 million in cash at the same per-share value as the December 2005 acquisition. The result of the June 2006 incremental equity purchase was an increase in ownership in Acsis to 96%. The capital provided is being used by Acsis to support its long-term growth strategy.

          In April 2006, the Company acquired 12% of Authentium, Inc. for $5.5 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.

16.      COMMITMENTS AND CONTINGENCIES

          The Company, and its partner companies, are involved in various claims and legal actions arising in the ordinary course of business, and which may from time to time arise from facility lease terminations. While in the current opinion of management, 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 lawsuits, 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 our companies.

          In connection with its ownership interests in certain affiliates, the Company had the following outstanding guarantees at March 31, 2007:

						Debt Included on
		Amount				Consolidated Balance Sheet
		(in thousands)
Consolidated company guarantees — credit facilities			$   38,300				$                      27,187
Consolidated company guarantees — other			4,748				—
Non-consolidated company guarantees			3,750				—
Total			$   46,798				$                      27,187

          The Company has committed capital of approximately $5.5 million, including a conditional commitment to provide a partner company 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 $4.6 million which is expected to be funded during the next twelve 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 March 31, 2007 and assuming for these purposes the only distributions from the funds were equal to the carrying value of the funds on the March 31, 2007 financial statements, the maximum clawback the Company would be required to return for its general partner interest is approximately $8 million. The Company estimates its liability to be approximately $6.7 million of which $5.3 million was reflected in Accrued Expenses and Other Current Liabilities and $1.4 million was reflected in Other Long-Term Liabilities on the Consolidated Balance Sheets.

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

Cautionary Note concerning Forward-Looking Statements

          This report contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, 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 interests in partner companies, the inability to manage growth, compliance with government regulation and legal liabilities, additional financing requirements and the effect of economic conditions in the business sectors in which our partner companies operate, all of which are discussed below under the heading Factors that May Affect Future Results, in Item 1A in Safeguard’s Annual Report on Form 10-K and updated, as applicable, in Item 1 A — Risk Factors below. Many of these factors are beyond our ability to predict or control. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report might not occur. 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.

Overview

          Safeguard’s charter is to build value in growth-stage technology and life sciences businesses. We provide growth capital as well as a range of strategic, operational and management resources to our partner companies. Safeguard participates in expansion financings, carve-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 through building value in our partner companies. We help our partner companies in their efforts 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 analytics, enterprise application, infrastructure, security and communication; and

          Life Sciences — including companies focused on medical devices, molecular diagnostics, drug delivery and specialty pharmaceuticals.

Principles of Accounting for Ownership Interests in Partner Companies

          The various interests that we acquire in our partner companies and private equity funds are accounted for under three methods: consolidation, equity or cost. The applicable accounting method is generally determined based on our influence over the entity, primarily determined based on our voting interest in the entity.

          Consolidation Method. Partner companies in which we directly or indirectly own more than 50% of the outstanding voting securities are accounted for under the consolidation method of accounting. Participation of other partner company shareholders in the income or losses of our consolidated partner companies is reflected 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 a consolidated partner company. If there is no minority interest balance remaining on the Consolidated Balance Sheets related to a partner company, we record 100% of the respective consolidated partner company’s losses. We record 100% of that partner company’s subsequent income, if any, to the extent of such previously recognized losses in excess of our proportionate share.

          Equity Method. The partner companies whose results are not consolidated, but over whom we exercise significant influence, are accounted for under the equity method of accounting. We also account for our interests in some private equity funds under the equity method of accounting, based 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 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. Partner companies not consolidated or accounted for under the equity method are accounted for under the cost method of accounting. Under the cost method, our share of the income or losses of such entities is not included in our Consolidated Statements of Operations. The effect of the change in market value of cost method 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 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;
	•		Recoverability of long-lived assets;
	•		Recoverability of goodwill;
	•		Recoverability of ownership interests in and advances to companies;
	•		Income taxes;
	•		Commitments and contingencies; and
	•		Stock-based compensation.

     Revenue Recognition

          During the first three months of 2007 and 2006, our revenue from continuing operations was attributable to Acsis, Alliance Consulting, Clarient and Laureate Pharma.

          Acsis generates revenue from (i) software fees, which consist of revenue from the licensing of software, (ii) services revenue, which consist of fees from consulting, implementation and training services, plus customer support services, and (iii) hardware and reimbursed project expenses. Acsis recognizes software fees in accordance with Statement of Position No. 97-2, “Software Revenue Recognition” (“SOP 97-2”), as amended. Acsis recognizes software license revenue when the following criteria are met: (1) a signed contract is obtained; (2) delivery of the products has occurred; (3) the license fee is fixed or determinable; and (4) collectibility is probable. Acsis generally recognizes license revenue using the “residual method” when there is vendor-specific objective evidence of the fair values of all undelivered elements in a multiple-element arrangement that is not accounted for using long-term contract accounting. For those contracts that contain significant customization or modifications, license revenue is recognized using the percentage-of-completion method. Acsis recognizes revenues from professional consulting services under fixed-price arrangements, using the proportional-performance method based on direct labor costs incurred to date as a percentage of total estimated labor costs required to complete the project. Project losses are provided for in their entirety in the period they become known, without regard to the percentage-of-completion. Acsis recognizes hardware revenue upon shipment by the vendor to the customer unless the hardware is an element in an arrangement that includes services that involve significant customization or modifications to software, in which case, hardware revenue is bundled with the software and services are recognized on a percentage-of-completion basis.

          Alliance Consulting generates revenue primarily from consulting services. Alliance Consulting generally recognizes revenue when persuasive evidence of an arrangement exists, services are performed, the service fee is fixed or determinable and collectibility is probable. Revenue from services is recognized as services are performed. Alliance Consulting also

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