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

Commission File Number 1-5620

Safeguard Scientifics, Inc.

(Exact name of registrant as specified in its charter)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o     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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

Yes o     No þ

Number of shares outstanding as of August 6, 2009
Common Stock 122,339,312

 

 

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

		Page
PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements:
Consolidated Balance Sheets — June 30, 2009 (unaudited) and December 31, 2008			3
Consolidated Statements of Operations (unaudited) – Three and Six Months Ended June 30, 2009 and 2008			4
Consolidated Statements of Cash Flows (unaudited) — Six Months Ended June 30, 2009 and 2008			5
Consolidated Statement of Shareholders’ Equity (unaudited) – Six Months Ended June 30, 2009			6
Notes to Consolidated Financial Statements (unaudited)			7
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3 – Quantitative and Qualitative Disclosures About Market Risk			45
Item 4 – Controls and Procedures			45
PART II — OTHER INFORMATION
Item 1A – Risk Factors			46
Item 6 – Exhibits			47
Signatures			48
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

SAFEGUARD SCIENTIFICS, INC.

		June 30,				December 31,
		2009				2008
		(In thousands except
		per share data)
		(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	47,305			$	75,051
Cash held in escrow and restricted cash			6,433				6,433
Marketable securities			38,503				14,701
Restricted marketable securities			—				1,990
Accounts receivable, less allowances ($8,045— 2008)			—				20,465
Prepaid expenses and other current assets			680				1,507
Total current assets			92,921				120,147
Property and equipment, net			347				12,369
Ownership interests in and advances to companies ($180,033 at fair value at June 30, 2009)			262,957				85,561
Goodwill			—				12,729
Cash held in escrow and restricted cash — long-term			476				501
Other			752				1,095
Total Assets		$	357,453			$	232,402
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current portion of credit line borrowings		$	—			$	14,104
Current maturities of long-term debt			—				263
Accounts payable			171				3,337
Accrued compensation and benefits			2,313				5,758
Accrued expenses and other current liabilities			5,415				8,285
Total current liabilities			7,899				31,747
Long-term debt			—				345
Other long-term liabilities			5,265				9,600
Convertible senior debentures			86,000				86,000
Commitments and contingencies
Shareholders’ Equity:
Preferred stock, $0.10 par value; 1,000 shares authorized			—				—
Common stock, $0.10 par value; 500,000 shares authorized; 122,314 and 121,589 shares issued and outstanding in 2009 and 2008, respectively			12,231				12,159
Additional paid-in capital			778,383				763,323
Accumulated deficit			(532,325	)			(669,526	)
Accumulated other comprehensive income (loss)			—				(29	)
Treasury stock, at cost			—				(1,217	)
Total shareholders’ equity			258,289				104,710
Total Liabilities and Shareholders’ Equity		$	357,453			$	232,402

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		(In thousands except per share data) (Unaudited)
Revenue		$	11,647			$	16,916			$	34,839			$	32,802
Operating Expenses:
Cost of sales			4,845				8,510				13,811				15,907
Selling, general and administrative			10,983				14,266				28,072				28,222
Total operating expenses			15,828				22,776				41,883				44,129
Operating loss			(4,181	)			(5,860	)			(7,044	)			(11,327	)
Other income (loss), net			158,573				2,263				158,328				2,623
Recovery — related party			—				3				—				4
Interest income			111				790				268				1,719
Interest expense			(817	)			(1,191	)			(1,743	)			(2,565	)
Equity loss			(7,446	)			(5,313	)			(12,959	)			(11,927	)
Net income (loss) from continuing operations before income taxes			146,240				(9,308	)			136,850				(21,473	)
Income tax benefit (expense)			14				(4	)			14				(4	)
Net income (loss) from continuing operations			146,254				(9,312	)			136,864				(21,477	)
Income (loss) from discontinued operations, net of tax			—				(1,023	)			1,500				(8,101	)
Net income (loss)			146,254				(10,335	)			138,364				(29,578	)
Net (income) loss attributable to noncontrolling interest			(24	)			1,768				(1,163	)			2,157
Net income (loss) attributable to Safeguard Scientifics, Inc.		$	146,230			$	(8,567	)		$	137,201			$	(27,421	)
Basic Income (Loss) Per Share:
Net income (loss) from continuing operations attributable to Safeguard Scientifics, Inc. common shareholders		$	1.20			$	(0.06	)		$	1.12			$	(0.16	)
Net income (loss) from discontinued operations attributable to Safeguard Scientifics, Inc. common shareholders			—				(0.01	)			0.01				(0.06	)
Net income (loss) attributable to Safeguard Scientifics, Inc. common shareholders		$	1.20			$	(0.07	)		$	1.13			$	(0.22	)
Diluted Income (Loss) Per Share:
Net income (loss) from continuing operations attributable to Safeguard Scientifics, Inc. common shareholders		$	1.09			$	(0.06	)		$	1.03			$	(0.16	)
Net income (loss) from discontinued operations attributable to Safeguard Scientifics, Inc. common shareholders			—				(0.01	)			—				(0.06	)
Net income (loss) attributable to Safeguard Scientifics, Inc. common shareholders		$	1.09			$	(0.07	)		$	1.03			$	(0.22	)
Average shares used in computing income (loss) per share:
Basic			121,768				122,275				121,707				122,252
Diluted			134,324				122,275				133,968				122,252
Amounts attributable to Safeguard Scientifics, Inc. common shareholders:
Net income (loss) from continuing operations		$	146,230			$	(7,543	)		$	136,306			$	(19,321	)
Net income (loss) from discontinued operations			—				(1,024	)			895				(8,100	)
Net income (loss) attributable to Safeguard Scientifics, Inc.		$	146,230			$	(8,567	)		$	137,201			$	(27,421	)

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

		Six Months Ended June 30,
		2009				2008
		(In thousands)
		(Unaudited)
Cash Flows from Operating Activities:
Cash flows from operating activities of continuing operations		$	(11,656	)		$	(10,087	)
Cash flows from operating activities of discontinued operations			—				(3,288	)
Net cash used in operating activities			(11,656	)			(13,375	)
Cash Flows from Investing Activities:
Proceeds from sales of and distributions from companies and funds			—				3,496
Advances to partner companies			(500	)			(1,020	)
Repayment of advances to companies			5,679				—
Acquisitions of ownership interests in partner companies and funds, net of cash acquired			(10,670	)			(7,168	)
Repayment of note receivable-related party, net			—				4
Increase in marketable securities			(38,503	)			(3,455	)
Decrease in marketable securities			14,701				1,854
Increase in restricted cash, net			(1,956	)			—
Capital expenditures			(2,138	)			(2,270	)
Deconsolidation of subsidary cash			(2,667	)			—
Proceeds from sale of discontinued operations, net			1,500				83,798
Cash flows from investing activities of discontinued operations			—				(2,867	)
Net cash provided by (used in) investing activities			(34,554	)			72,372
Cash Flows from Financing Activities:
Borrowings on revolving credit facilities			23,726				10,543
Repayments on revolving credit facilities			(33,237	)			(15,540	)
Borrowings on term debt			—				672
Repayments on term debt			(107	)			(2,467	)
Issuance of Company common stock, net			—				64
Issuance of subsidiary equity, net			28,082				603
Repurchase of Company common stock			—				(223	)
Cash flows from financing activities of discontinued operations			—				4,790
Net cash provided by (used in) financing activities			18,464				(1,558	)
Net Increase (Decrease) in Cash and Cash Equivalents			(27,746	)			57,439
Changes in Cash and Cash Equivalents from, and advances to Acsis, Alliance Consulting and Laureate Pharma included in assets of discontinued operations			—				(1,055	)
			(27,746	)			56,384
Cash and Cash Equivalents at beginning of period			75,051				96,201
Cash and Cash Equivalents at end of period		$	47,305			$	152,585

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

					Safeguard Scientifics, Inc. Shareholders
										Accumulated
										Other
										Comprehensive												Additional
						Accumulated				Income				Common Stock								Paid-In				Treasury Stock								Noncontrolling
		Total				Deficit				(Loss)				Shares				Amount				Capital				Shares				Amount				Interest
		(In thousands)
Balance — December 31, 2008		$	104,710			$	(669,526	)		$	(29	)			121,589			$	12,159			$	763,323				929			$	(1,217	)		$	—
Net income			138,364				137,201				—				—				—				—				—				—				1,163
Impact of subsidiary equity transactions			12,750				—				31				—				—				13,882				—				—				(1,163	)
Issuance of restricted stock, net			127				—				—				725				72				(1,162	)			(929	)			1,217				—
Stock-based compensation expense			2,340				—				—				—				—				2,340				—				—				—
Other comprehensive loss			(2	)			—				(2	)			—				—				—				—				—				—
Balance — June 30, 2009		$	258,289			$	(532,325	)		$	—				122,314			$	12,231			$	778,383				—			$	—			$	—

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 2008 Annual Report on Form 10-K.

2. SUBSIDIARY EQUITY TRANSACTIONS

On March 25, 2009, Clarient, Inc. (“Clarient”) entered into a stock purchase agreement with Oak Investment Partners XII (“Oak”), pursuant to which Clarient agreed to sell up to an aggregate of 6.6 million shares of its Series A Convertible Preferred Stock in two or more tranches for aggregate consideration of up to $50.0 million. Each preferred share is initially convertible, at any time, into four shares of Clarient’s common stock, subject to certain adjustments.

The initial closing of the Oak private placement occurred on March 26, 2009, at which time Clarient issued 3.8 million preferred shares for aggregate consideration of $29.1 million. After paying closing fees and legal expenses, Clarient used the proceeds to repay in full and terminate its revolving credit agreement with a bank and repay a portion of the outstanding balance of its credit facility with the Company. During the first quarter of 2009, the Company accounted for the change in the Company’s ownership interest in Clarient as an equity transaction because the Company retained its controlling financial interest in Clarient. The Company recorded a $14.1 million credit to additional paid-in capital in the first quarter of 2009 which represented the Company’s increase in its investment in Clarient as a result of the Oak investment. In addition, the Company recorded an additional noncontrolling interest of $14.0 million which represented the increase in noncontrolling interest as a result of the Oak investment.

On May 14, 2009, Clarient completed the second closing of the Oak private placement and issued 1.4 million preferred shares for aggregate consideration of $10.9 million. Upon completion of the second closing, Clarient repaid in full and terminated its credit facility with the Company.

Upon the second closing, the Company’s ownership interest in Clarient’s issued and outstanding voting securities, on an as-converted basis, decreased from 50.2% to 47.3% and the Company deconsolidated its holdings in Clarient because it ceased to have a controlling financial interest in Clarient as of such date. The Company recognized an unrealized gain on deconsolidation of $106.0 million in Other income (loss), net in the Consolidated Statements of Operations. The entire unrealized gain on deconsolidation related to the remeasurement to fair value of the Company’s retained interest in Clarient as of the deconsolidation date of May 14, 2009.

3. BASIS OF PRESENTATION

The Company’s Consolidated Financial Statements include the accounts of Clarient in continuing operations through May 14, 2009, the date of its deconsolidation. During 2008, certain consolidated partner companies were sold and are reported in discontinued operations. See Note 4.

The Company has elected to apply the fair-value option to account for its retained interest in Clarient. Unrealized gains and losses on the mark-to-market of its holdings in Clarient are recognized in Income (loss) from continuing operations for all periods subsequent to the date that Clarient was deconsolidated. See Note 7.

The Company’s voting interest in Cellumen, Inc. (“Cellumen”) was 55.0% as of June 30, 2009, on an as-converted basis. Due to the substantive participating rights of the minority shareholders in the significant operating decisions of Cellumen, the Company continues to account for its holdings in Cellumen under the equity method. See Note 16.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. DISCONTINUED OPERATIONS

Clarient Technology Business

In March 2007, Clarient sold its technology business and related intellectual property to Carl Zeiss MicroImaging, Inc. (“Zeiss”) for an aggregate purchase price of $12.5 million. The $12.5 million consisted of $11.0 million in cash and an additional $1.5 million in contingent purchase price, subject to the satisfaction of certain post-closing conditions through March 2009. Clarient recorded the $1.5 million in income from discontinued operation in the first quarter of 2009 and received the $1.5 million from Zeiss in the second quarter of 2009.

Acsis, Alliance Consulting and Laureate Pharma

In May 2008, the Company consummated a transaction (the “Bundle Sale”) 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”).

Of the companies included in the Bundle Sale, Acsis, Alliance Consulting and Laureate Pharma were consolidated 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.

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 Sale. In the second quarter of 2008, prior to the completion of the Bundle Sale, 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 Sale and recorded a pre-tax gain on disposal of $1.4 million which was also recorded in discontinued operations.

The gross proceeds to the Company from the Bundle Sale were $74.5 million, of which $6.4 million was placed in escrow pending expiration of a claims period (see Note 17), plus amounts advanced to certain of the Bundle Companies during the time between the signing of the Bundle Sale agreement and its consummation. Guarantees of certain Bundle Company credit facilities by the Company of $31.5 million were eliminated upon the closing of the Bundle Sale.

Results of all discontinued operations were as follows:

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		(In thousands)
		(unaudited)
Revenue		$	—			$	12,015			$	—			$	45,712
Operating expenses			—				(13,462	)			—				(49,652	)
Impairment of carrying value			—				—				—				(3,634	)
Other			—				(1,054	)			—				(1,547	)
Loss from operations			—				(2,501	)			—				(9,121	)
Gain (loss) on disposal, net of tax			—				1,478				1,500				1,020
Income (loss) from discontinued operations		$	—			$	(1,023	)		$	1,500			$	(8,101	)

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“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. SFAS No. 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, SFAS No. 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2—Include other inputs that are directly or indirectly observable in the marketplace.

Level 3—Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The following table provides the assets and liabilities measured at fair value on a recurring basis as of June 30, 2009:

						Fair Value Measurement at
		Carrying				June 30, 2009 Using
		Value				Level 1				Level 2				Level 3
		(in thousands) (unaudited)
Cash and cash equivalents		$	47,305			$	47,305			$	—			$	—
Cash held in escrow and restricted cash			6,433				6,433				—				—
Marketable securities — held-to-maturity:
Commercial paper			13,317				13,317				—				—
U.S. Treasury Bills			15,712				15,712				—				—
Government agency bonds			8,574				8,574				—				—
Certificates of deposit			900				900				—				—
Ownership interest in Clarient			180,033				180,033				—				—
Cash held in escrow and restricted cash — long-term			476				476				—				—
		$	272,750			$	272,750			$	—			$	—

The Company’s holdings in Clarient are measured at fair value using quoted prices for Clarient’s common stock as traded on the NASDAQ Capital Market which is considered a Level 1 input under the valuation hierarchy (see Note 7).

As of June 30, 2009, the contractual maturities of the marketable securities were less than one year.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”). SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. SFAS No. 165 sets forth the period after the balance sheet date during which management shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009. The adoption of SFAS No. 165 did not have a material impact on the Company’s Consolidated Financial Statements. The Company evaluated subsequent events through August 7, 2009, the date the Consolidated Financial Statements as of and for the period ended June 30, 2009 were issued.

In April 2009, the FASB released FASB Staff Position (“FSP”) 107-1 and Accounting Principles Board (“APB”) Opinion No. 28-1, Interim Disclosures about Fair Value of Financial Instruments, which requires disclosures about the fair value of financial instruments (“FSP SFAS 107-1 and APB 28-1”) This pronouncement amends FASB 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments in the interim financial statements as well as in the annual financial statements. FSP SFAS 107-1 and APB 28-1 also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information in interim financial statements. In addition, the FSP requires disclosures of the methods and significant assumptions used to estimate the fair value of those financial instruments. The Company adopted FSP SFAS 107-1 and APB 28-1 on June 30, 2009 and has provided the necessary additional disclosures.

In November 2008, the FASB’s Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 08-6, “Equity Method Accounting Considerations”. EITF 08-6 continues to follow the accounting for the initial carrying value of equity method investments in APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock”, which is based on a cost accumulation model and generally excludes contingent consideration. EITF 08-6 also specifies that other-than-temporary impairment testing by the investor should be performed at the investment level and that a separate impairment assessment of the underlying assets is not required. An impairment charge by the investee should result in an adjustment of the investor’s basis of the impaired asset for the investor’s pro-rata share of such impairment. In addition, EITF 08-6 reached a consensus on how to account for an issuance of shares by an investee that reduces the investor’s ownership share of the investee. An investor should account for such transactions as if it had sold a proportionate share of its investment with any gains or losses recorded through earnings. EITF 08-6 also addresses the accounting for a change in an investment from the equity method to the cost method after adoption of Statement 160. EITF 08-6 affirms the existing guidance in APB 18, which requires cessation of the equity method of accounting and application of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, or the cost method under APB 18 as appropriate. EITF 08-6 is effective for fiscal years beginning on or after December 15, 2008. The adoption of EITF 08-6 did not have a material impact on the Company’s Consolidated Financial Statements.

In June 2008, the EITF ratified Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 clarifies how to determine whether certain instruments or features were indexed to an entity’s own stock. The consensus will replace EITF 01-6 as a critical component of the literature applied to evaluating financial instruments for debt or equity classification and embedded features for bifurcation as derivatives. EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of EITF 07-5 did not have a material impact on the Company’s Consolidated Financial Statements.

In May 2008, the FASB issued FSP No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”). FSP APB 14-1 requires the issuer of convertible debt instruments with cash settlement features to separately account for the liability and equity components of the instrument. The debt is recognized at the present value of its cash flows discounted using the issuer’s nonconvertible debt borrowing rate. The equity component is recognized as the difference between the proceeds from the issuance of the note and the fair value of the liability. FSP APB 14-1also requires an accretion of the resultant debt discount over the expected life of the debt. The adoption of FSP APB 14-1 did not have any impact on the Company’s Consolidated Financial Statements because the convertible senior debentures issued by the Company do not include any cash settlement features within the scope of FSP APB 14-1.

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”)”. FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under Statement 142. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. The adoption of FSP FAS 142-3 did not have a material impact on the Company’s Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 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 recognition of noncontrolling interests (minority interests) as equity in the consolidated financial statements and separate from the parent’s equity. 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. Losses attributable to the noncontrolling interest that exceed its basis in the subsidiary’s equity result in a deficit noncontrolling interest reflected in the Consolidated Balance Sheet. Revenue, expenses, gains, losses, net income or loss are reported in the Consolidated Statements of Operations at the consolidated amounts, which include the amounts attributable to the owners of the parent and noncontrolling interest. The amount of net income attributable to noncontrolling interests will be included in consolidated net income on the face of the income statement. 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. On January 1, 2009, the Company adopted the provisions of SFAS No. 160. As a result, the Company reflects the portion of equity (net assets) of its consolidated partner companies, if any, not attributable, directly or indirectly, to the Company as a noncontrolling interest within equity, separate from the equity of the Company.

7. OWNERSHIP INTERESTS IN AND ADVANCES TO COMPANIES

As discussed in Notes 2 and 3, the Company deconsolidated its holdings in Clarient as of May 14, 2009. The Company has elected to apply the fair-value option to account for its retained interest in Clarient following deconsolidation.

For the period from May 14, 2009 through June 30, 2009, the Company recognized an unrealized gain of $52.5 million on the mark-to-market of its holdings in Clarient which is included in Other income (loss), net in the Consolidated Statements of Operations. At June 30, 2009, the fair value of the Company’s holdings in Clarient of $180.0 million was included in Ownership interests in and advances to companies in the Consolidated Balance Sheet as of that date (see Note 5).

The Company believes that accounting for its holdings in Clarient at fair value rather than applying the equity method of accounting provides a better measure of the value of its holdings, given the reliable evidence provided by quoted prices in an active market for Clarient’s publicly traded common stock. The Company has not elected the fair value option for its other partner company holdings, which are accounted for under the equity method or cost method, due to less readily determinable evidence of fair value for these privately held companies and due to the potential competitive disadvantage to the Company of such disclosure.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following unaudited summarized financial information for Clarient at March 31, 2009 and December 31, 2008 and for the three months ended March 31, 2009 and 2008, respectively, has been compiled from the unaudited financial statements of Clarient and has been adjusted to correct for an immaterial error (see Note 18).

		March 31,				December 31,
		2009				2008
		(In thousands)
		(unaudited)
Balance Sheets:
Current assets		$	34,512			$	23,454
Non-current assets			16,134				12,055
Total Assets		$	50,646			$	35,509
Current liabilities		$	21,278			$	35,934
Non-current liabilities			5,013				4,315
Shareholders’ equity (deficit)			24,355				(4,740	)
Total Liabilities and Shareholders’ Equity (Deficit)		$	50,646			$	35,509

		Three Months Ended March 31,
		2009				2008
		(In thousands)
		(unaudited)
Results of Operations:
Revenue		$	23,192			$	15,886
Operating income (loss)		$	1,514			$	(143	)
Net loss from continuing operations		$	(1,656	)		$	(934	)

The Company recognized an impairment charge of $3.3 million related to Rubicor in the three months ended June 30, 2009, which is reflected in Equity loss in the Consolidated Statements of Operations. The adjusted carrying value of Rubicor at June 30, 2009 was $0. The amount of the impairment charge was determined by comparing the carrying value of Rubicor to its estimated fair value.

Rubicor has halted operations and furloughed or terminated employees. The Company previously recognized a $4.0 million impairment charge related to Rubicor in the fourth quarter of 2008 based on estimates of fair value provided by an independent valuation firm and a range of values indicated by potential investors in Rubicor. The carrying value of the Company’s interest in Rubicor at December 31, 2008 was $4.2 million.

In July 2009, the Company, together with several other creditors, in response to a foreclosure by Rubicor’s senior lender, filed a petition to take Rubicor into bankruptcy in order to affect an orderly process to realize Rubicor’s value. Rubicor and the Company continue to have discussions with several third parties who have expressed interest in funding or acquiring Rubicor. Based on the range of values indicated by such potential investors, however, the Company believes it is unlikely the Company will recover any of its investment.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is the change in equity of a business enterprise from transactions and other events and circumstances from non-owner sources.

The following summarizes the components of comprehensive income (loss):

		Three Months ended June 30,								Six Months ended June 30,
		2009				2008				2009				2008
		(In thousands)
		(unaudited)
Net income (loss)		$	146,254			$	(10,335	)		$	138,364			$	(29,578	)
Other comprehensive income (loss), before taxes:
Foreign currency translation adjustments			(3	)			(57	)			(2	)			(56	)
Total comprehensive income (loss)			146,251				(10,392	)			138,362				(29,634	)
Comprehensive (income) loss attributable to the noncontrolling interest			(24	)			1,768				(1,163	)			2,157
Comprehensive income (loss) attributable to the Company		$	146,227			$	(8,624	)		$	137,199			$	(27,477	)

9. LONG-TERM DEBT AND CREDIT ARRANGEMENTS

Consolidated long-term debt consisted of the following:

		December 31,
		2008
		(In thousands)
Consolidated partner company revolving credit agreement (guaranteed by the Company)		$	9,000
Consolidated partner company secured credit agreement (not guaranteed by the Company)			5,104
			14,104
Capital lease obligations and other borrowings			608
			14,712
Less current maturities			(14,367	)
Total long-term debt, less current portion		$	345

Except for the convertible senior debentures discussed in Note 10, all of the long-term debt on the Consolidated Balance Sheet at December 31, 2008 related to Clarient. On May 14, 2009, the Company deconsolidated its holdings in Clarient. As a result, there is no long-term debt at June 30, 2009 on the Consolidated Balance Sheet.

In February 2009, the Company entered into a new loan agreement which provides the Company with a revolving credit facility in the maximum aggregate amount of $50 million in the form of borrowings, guarantees and issuances of letters of credit (subject to a $20 million sublimit). Actual availability under the credit facility will be based on the amount of cash maintained at the bank as well as the value of the Company’s public and private partner company interests. This credit facility bears interest at the prime rate for outstanding borrowings, subject to an increase in certain circumstances. Other than for limited exceptions, the Company is required to maintain all of its depository and operating accounts and not less than 75% of its investment and securities accounts at the bank. The credit facility matures on December 31, 2010. Availability under the Company’s revolving credit facility at June 30, 2009 was $50.0 million.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In connection with the sale of CompuCom Systems, Inc. (“CompuCom”) in 2004, the Company provided a letter of credit to the landlord of CompuCom’s Dallas headquarters, which letter of credit will expire on March 19, 2019, in an amount equal to $6.3 million. At June 30, 2009, the required cash collateral, pursuant to the Company’s prior revolving credit facility, was $6.3 million, which amount was included within Cash and cash equivalents on the Consolidated Balance Sheet as of that date.

10. 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 (the “2024 Debentures”). Interest on the 2024 Debentures is payable semi-annually. At the debentures 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, 2009 was $1.32. The 2024 Debentures 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 Debentures 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, a change in control or the delisting of the Company’s common stock from the New York Stock Exchange if the Company were unable to obtain a listing for its common stock on another national or regional securities exchange. Subject to certain conditions, the Company may redeem all or some of the 2024 Debentures commencing March 20, 2009. The Company has repurchased $64.0 million in face value of the 2024 Debentures. At June 30, 2009, the market value of the $86.0 million outstanding 2024 Debentures was approximately $67.1 million, based on quoted market prices as of such date.

11. STOCK-BASED COMPENSATION

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,
		2009				2008				2009				2008
		(In thousands)
		(unaudited)
Cost of sales		$	16			$	9			$	49			$	21
Selling, general and administrative			983				846				2,115				1,631
		$	999			$	855			$	2,164			$	1,652

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.

During the first quarter 2009, the Company issued 1.2 million restricted shares to employees. The restricted shares were issued in lieu of cash for of a portion of the 2008 management incentive plan payment earned by certain senior employees. The restricted shares issued vest 25% on the first anniversary of grant and the remaining 75% thereafter in 24 equal monthly installments over the next two years.

The Company issued deferred stock units to non-employee directors for fees earned during the preceding quarter of 234,000 and 90,000 during the six months ended June 30, 2009 and 2008, respectively. All non-employee directors were required to defer at least 25% of directors’ fees earned in the period and may have elected to defer up to 100% of directors’ fees earned. For prior periods, certain directors elected to defer all or a portion of directors’ fees earned. Deferred stock units issued to directors in lieu of directors fees are 100% vested at the grant date; matching deferred stock units equal to 25% of directors’ fees deferred vest one year following the grant date or, if earlier, upon reaching age 65. Deferred stock units are payable in stock on a one-for-one basis. Payments in respect of the deferred stock units are generally distributable following termination of employment or service, death or permanent disability.

Total compensation expense for deferred stock units and restricted stock was approximately $0.1 million and $0.0 million for the three months ended June 30, 2009 and 2008, respectively and $0.2 million and $0.0 million for the six months ended June 30, 2009 and 2008, respectively.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company issued no stock option awards to employees during the three and six months ended June 30, 2009. During the three and six months ended June 30, 2008, the Company issued 2.0 million option awards to employees.

At June 30, 2009, the Company had outstanding options that vest based on three different types of vesting schedules:

1)

market -based;

2)

performance-based; and

3)

service-based.

Market-based awards entitle participants to vest in a number of options determined by achievement by the Company 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 six months ended June 30, 2009 and 2008, respectively, the Company issued 0 and 1.5 million market-based option awards to employees. During the six months ended June 30, 2009, no options vested based on achievement of market capitalization targets. The Company recorded compensation expense related to these awards of $0.5 million and $0.7 million during the three and six months ended June 30, 2009. The Company recorded a $0.2 million benefit and a $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, 2009 attainable under these grants was 7.8 million shares.

Performance-based awards entitle participants to vest in a number of options determined by achievement by the Company of target capital returns based on net cash proceeds received by the Company on the sale, merger or other exit transaction of certain identified partner companies over an eight-year period. Vesting may occur, if at all, once per year on the anniversary date of the grant. The requisite service periods for the performance-based awards are based on the Company’s estimate of when the performance conditions will be met. Compensation expense is recognized for performance-based awards for which the performance condition is considered probable of achievement. Compensation expense is recognized over the requisite service periods using the straight-line method but is accelerated if capital return targets are achieved earlier than estimated. During the six months ended June 30, 2009 and 2008, respectively, the Company did not issue any performance-based option awards to employees. During the six months ended June 30, 2009, no options vested based on the achievement of capital returns targets. The Company recorded compensation expense related to these awards of $0.0 million and $0.1 million for the three and six months ended June 30, 2009, respectively. The Company had no outstanding performance based awards during the three and six months ended June 30, 2008. The maximum number of unvested shares at June 30, 2009 attainable under these grants was 2.0 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. During the six months ended June 30, 2009 and 2008, respectively, the Company issued 0 and 0.5 million service-based option awards to employees. The Company recorded compensation expense related to these awards of $0.3 million and $0.2 million for the three months ended June 30, 2009 and 2008, respectively, and $0.6 and $0.4 for the six months ended June 30, 2009 and 2008, respectively.

During the period from April 1, 2009 through May 14, 2009 and the three months ended June 30, 2008, Clarient recorded $0.3 million and $0.9 million of stock-based compensation expense, respectively. During the period from January 1, 2009 through May 14, 2009 and the six months ended June 30, 2008, Clarient recorded $0.8 million and $1.2 million of stock-based compensation expense, respectively.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. INCOME TAXES

The Company’s consolidated income tax benefit (expense) was $14 thousand and $(4) thousand for the three and six months ended June 30, 2009 and 2008, respectively. The net income tax benefit recognized in the three and six months ended June 30, 2009 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. As discussed in Notes 2 and 3, as of May 14, 2009, the Company deconsolidated Clarient and accounts for its retained interest in Clarient at fair value. Accordingly, Clarient’s gross deferred tax assets as of December 31, 2008 of approximately $54.4 million have been deconsolidated. In addition, the Company recognized a gross deferred tax liability of approximately $38 million as of June 30, 2009 based on the fair value of the Company’s retained interest in Clarient as of that date. 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 income tax expense and benefit that would have been recognized in 2009 and 2008, respectively, were offset by a valuation allowance.

During the six months ended June 30, 2009, the Company had no material changes in uncertain tax positions.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. NET INCOME (LOSS) PER SHARE

The calculations of net income (loss) per share attributable to Safeguard Scientifics, Inc. common shareholders were:

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		(In thousands except per share data)
		(unaudited)
Basic:
Amounts attributable to Safeguard Scientifics, Inc. common shareholders:
Net income (loss) from continuing operations		$	146,230			$	(7,543	)		$	136,306			$	(19,321	)
Net income (loss) from discontinued operations			—				(1,024	)			895				(8,100	)
Net income (loss) attributable to Safeguard Scientifics, Inc.		$	146,230			$	(8,567	)		$	137,201			$	(27,421	)
Net income (loss) from continuing operations attributable to Safeguard Scientifics, Inc. common shareholders		$	1.20			$	(0.06	)		$	1.12			$	(0.16	)
Net income (loss) from discontinued operations attributable to Safeguard Scientifics, Inc. common shareholders			—				(0.01	)			0.01				(0.06	)
Net income (loss) attributable to Safeguard Scientifics, Inc. common shareholders		$	1.20			$	(0.07	)		$	1.13			$	(0.22	)
Average common shares outstanding			121,768				122,275				121,707				122,252
Diluted:
Amounts attributable to Safeguard Scientifics, Inc. common shareholders:
Net income (loss) from continuing operations		$	146,230			$	(7,543	)		$	136,306			$	(19,321	)
Interest on convertible senior debentures			663				—				1,326				—
Net income (loss) from continuing operations for diluted per share computation			146,893				(7,543	)			137,632				(19,321	)
Net income (loss) from discontinued operations			—				(1,024	)			895				(8,100	)
Net income (loss) for diluted per share computation		$	146,893			$	(8,567	)		$	138,527			$	(27,421	)
Net income (loss) from continuing operations attributable to Safeguard Scientifics, Inc. common shareholders		$	1.09			$	(0.06	)		$	1.03			$	(0.16	)
Net income (loss) from discontinued operations attributable to Safeguard Scientifics, Inc. common shareholders			—				(0.01	)			—				(0.06	)
Net income (loss) attributable to Safeguard Scientifics, Inc. common shareholders		$	1.09			$	(0.07	)		$	1.03			$	(0.22	)
Number of shares used in basic per share computation			121,768				122,275				121,707				122,252
Effect of dilutive securities:
Convertible senior debentures			11,916				—				11,916				—
Unvested restricted stock and DSUs			632				—				341				—
Employee stock options			8				—				4				—
Number of shares used in diluted per share computation			134,324				122,275				133,968				122,252

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 income (loss), the income attributable to the potential exercise of the dilutive securities of the company. This impact is shown as an adjustment to net income (loss) for purposes of calculating diluted net income (loss) per share.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following potential shares of common stock and their effects on income were excluded from the diluted net loss per share calculation for the three months and six month ended June 30, 2008 because their effect would be anti-dilutive:

•

At June 30, 2008 options to purchase 20.1 million shares of common stock at prices ranging from $0.65 to $6.57 per share, were excluded from the calculations.

•

At June 30, 2008, unvested restricted stock and DSUs convertible into 0.1 million shares of stock were excluded from the calculations.

•

At June 30, 2008, a total of 17.9 million shares related to the Company’s 2024 Debentures (see Note 10) representing the weighted average effect of assumed conversion of the 2024 Debentures were excluded from the calculations.

14. PARENT COMPANY FINANCIAL INFORMATION

Parent company financial information is provided to present the financial position, results of operations and cash flows of the Company as if its previously consolidated partner companies were accounted for under the equity method of accounting for all periods presented.

Parent Company Balance Sheets

		June 30,				December 31,
		2009				2008
		(In thousands)
		(unaudited)
Assets:
Cash and cash equivalents		$	47,305			$	73,213
Cash held in escrow			6,433				6,433
Marketable securities			38,503				14,701
Restricted marketable securities			—				1,990
Other current assets			680				356
Total current assets			92,921				96,693
Ownership interests in and advances to companies			262,957				105,955
Cash held in escrow — long-term			476				501
Other			1,099				1,364
Total Assets		$	357,453			$	204,513
Liabilities and Shareholders’ Equity:
Current liabilities		$	7,899			$	8,173
Long-term liabilities			5,265				5,630
Convertible senior debentures			86,000				86,000
Total Safeguard Scientifics, Inc. shareholders’ equity			258,289				104,710
Total Liabilities and Shareholders’ Equity		$	357,453			$	204,513

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Parent Company Statements of Operations

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		(In thousands)
		(unaudited)
Operating expenses		$	(4,303	)		$	(4,117	)		$	(8,665	)		$	(9,414	)
Other income (loss), net			158,573				2,263				158,328				2,623
Recovery — related party			—				3				—				4
Interest income			108				782				264				1,707
Interest expense			(733	)			(1,052	)			(1,468	)			(2,107	)
Equity loss			(7,429	)			(5,422	)			(12,167	)			(12,134	)
Net income (loss) from continuing operations before income taxes			146,216				(7,543	)			136,292				(19,321	)
Income tax benefit			14				—				14				—
Equity income (loss) attributable to discontinued operations			—				(1,024	)			895				(8,100	)
Net income (loss) attributable to Safeguard Scientifics, Inc.		$	146,230			$	(8,567	)		$	137,201			$	(27,421	)

Parent Company Statements of Cash Flows

		Six Months Ended June 30,
		2009				2008
		(In thousands)
		(unaudited)
Net cash used in operating activities		$	(7,168	)		$	(8,553	)
Cash Flows from Investing Activities
Proceeds from sales of and distributions from companies and funds			—				3,496
Advances to partner companies			(6,300	)			(13,941	)
Repayment of advances to partner companies			21,179				—
Acquisitions of ownership interests in partner companies and
funds, net of cash acquired			(10,670	)			(7,168	)
Repayment of note receivable-related party, net			—				4
Increase in marketable securities			(38,503	)			(3,455	)
Decrease in marketable securities			14,701				1,854
Decrease in restricted cash			861				—
Proceeds from sale of discontinued operations			—				83,798
Capital expenditures			(8	)			(28	)
Net cash provided by (used in) investing activities			(18,740	)			64,560
Cash Flows from Financing Activities
Issuance of Company common stock, net			—				64
Repurchase of Company common stock			—				(223	)
Net cash used in financing activities			—				(159	)
Net Increase (Decrease) in Cash and Cash Equivalents			(25,908	)			55,848
Cash and Cash Equivalents at beginning of period			73,213				94,685
Cash and Cash Equivalents at end of period		$	47,305			$	150,533

Parent Company cash and cash equivalents excludes marketable securities, which consist of longer-term securities.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

15. OPERATING SEGMENTS

As discussed in Notes 2 and 3, for the period from January 1, 2009 through May 14, 2009, the Company held an interest in one consolidated partner company, Clarient. As of May 14, 2009, the Company deconsolidated Clarient and accounts for its retained interest in Clarient at fair value with the unrealized gains and losses on the mark-to-market of its holdings included in Other income (loss), net in the Consolidated Statements of Operations. During the second quarter of 2009, the Company re-evaluated its reportable operating segments and made the determination that Clarient would no longer be reported as a separate segment since the Company does not separately evaluate Clarient’s performance based upon Clarient’s operating results. Clarient is now included in the Life Sciences segment. The Company has restated the segment information for all of the periods presented to report Clarient as part of the Life Sciences segment.

For the six months ended June 30, 2009, the Company held an interest in 17 non-consolidated partner companies. The Company’s reportable operating segments are as follows: i) Life Sciences and ii) Technology.

The Life Sciences segment included the following partner companies as of June 30, 2009: Advanced BioHealing, Alverix, Avid Radiopharmaceuticals, Cellumen, Clarient, Garnet BioTherapeutics, Molecular Biometrics, NuPathe, Rubicor and Tengion.

The Technology segment included the following partner companies as of June 30, 2009: Advantedge Healthcare Solutions, Authentium, Beyond.com, Bridgevine, GENBAND, Portico Systems and Swaptree.

Results of the Life Sciences segment reflect the revenue, operating income (loss), and income (loss) before taxes of Clarient for all periods prior to its deconsolidation on May 14, 2009, equity income (loss) of equity method partner companies, impairment charges, other income (loss) associated with cost method partner companies, gains or losses on the sale of partner companies (except those reported in discontinued operations) and unrealized gains and losses on the mark-to-market of the Company’s holdings in Clarient.

Results of the Technology segment reflect the equity income (loss) of equity method partner companies, impairment charges, other income (loss) associated with cost method partner companies, and gains or losses on the sale of partner companies (except those reported in discontinued operations).

Management evaluates the Life Sciences and Technology segments’ performance based on net income (loss) which is based on the number of 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, any impairment charges or gain (loss) on sale of partner companies as well as the unrealized gains and losses on the mark-to-market of the Company’s holdings in Clarient.

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. 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 previously consolidated partner company.

Revenue related entirely to Clarient prior to its deconsolidation and was attributed to geographic areas based on where the services were performed or the customer’s shipped to location. A majority of the Company’s revenue was generated in the United States.

As of June 30, 2009 and December 31, 2008, the Company’s assets were primarily located in the United States.

Segment assets in Other items included primarily cash, cash equivalents, cash held in escrow and marketable securities of $92.7 million and $94.8 million at June 30, 2009 and December 31, 2008, respectively.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following represents segment data from continuing operations:

		Three Months Ended June 30, 2009
																		Total
		Life								Total				Other				Continuing
		Sciences				Technology				Segments				Items				Operations
		(In thousands)
		(unaudited)
Revenue		$	11,647			$	—			$	11,647			$	—			$	11,647
Operating income (loss)			122				—				122				(4,303	)			(4,181	)
Net income (loss) from continuing operations			152,492				(1,366	)			151,126				(4,872	)			146,254
Segment Assets:
June 30, 2009			212,442				42,519				254,961				102,492				357,453
December 31, 2008			84,508				41,050				125,558				106,844				232,402

		Three Months Ended June 30, 2008
																		Total
		Life								Total				Other				Continuing
		Sciences				Technology				Segments				Items				Operations
		(In thousands)
		(unaudited)
Revenue		$	16,916			$	—			$	16,916			$	—			$	16,916
Operating loss			(1,743	)			—				(1,743	)			(4,117	)			(5,860	)
Net loss from continuing operations			(5,437	)			(1,800	)			(7,237	)			(2,075	)			(9,312	)

		Six Months Ended June 30, 2009
																		Total
		Life								Total				Other				Continuing
		Sciences				Technology				Segments				Items				Operations
		(In thousands)
		(unaudited)
Revenue		$	34,839			$	—			$	34,839			$	—			$	34,839
Operating income (loss)			1,621				—				1,621				(8,665	)			(7,044	)
Net income (loss) from continuing operations			150,377				(3,445	)			146,932				(10,068	)			136,864

		Six Months Ended June 30, 2008
																		Total
		Life								Total				Other				Continuing
		Sciences				Technology				Segments				Items				Operations
		(In thousands)
		(unaudited)
Revenue		$	32,802			$	—			$	32,802			$	—			$	32,802
Operating loss			(1,913	)			—				(1,913	)			(9,414	)			(11,327	)
Net loss from continuing operations			(10,308	)			(3,914	)			(14,222	)			(7,255	)			(21,477	)

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Other Items

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		(In thousands)
		(unaudited)
Corporate operations		$	(4,886	)		$	(2,071	)		$	(10,082	)		$	(7,251	)
Income tax benefit (expense)			14				(4	)			14				(4	)
		$	(4,872	)		$	(2,075	)		$	(10,068	)		$	(7,255	)

16. BUSINESS COMBINATIONS

In June 2009, the Company increased its ownership interest in Advantedge Healthcare Solutions (“AHS”), to 39.0% from 37.6% for $2.5 million in cash. The Company previously deployed $9.0 million in AHS in May 2008 and November 2006. 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.

In May 2009, the Company deployed $2.7 of cash in Avid Radiopharmaceuticals, Inc. (“Avid”),to maintain an ownership interest of 13.9%. The Company had previously acquired an interest in Avid in May 2007 for $7.3 million in cash. Avid is developing molecular imaging agents to detect neurodegenerative diseases. The Company accounts for its holdings in Avid under the cost method.

In May and February 2009, the Company provided additional funding to Cellumen as part of an up to $2.5 million convertible note financing to be funded in five tranches. As part of this financing, the Company has agreed to provide Cellumen up to $1.0 million (subject to certain conditions), $0.5 million of which the Company funded as of June 30, 2009. The Company previously acquired an interest in Cellumen in June 2007, paying $6.0 million in cash for shares of Cellumen’s Series B preferred stock. In conjunction with the convertible note financing, the Series B preferred stock conversion price was adjusted, and will receive further adjustments upon the closing of future tranches, increasing the economic and voting interest of the Series B preferred stock in Cellumen. The Company’s voting interest in Cellumen increased to 55.0%, on an as-converted basis, at June 30, 2009. Due to the substantive participating rights of the minority shareholders in the significant operating decisions of Cellumen, the Company continues to account for its holdings in Cellumen under the equity method. Cellumen delivers proprietary services and products to support drug discovery and development.

In May and February 2009, the Company deployed an additional $2.5 million in Molecular Biometrics, Inc. (“Molecular Biometrics”), increasing its ownership interest to 38.1%. The Company had previously acquired an interest in Molecular Biometrics in September and December 2008, for $3.5 million in cash, including the conversion into equity interests of $1.9 million previously advanced to the company. Molecular Biometrics is a metabolomics company developing novel clinical tools for applications in personalized medicine to more accurately characterize biologic function in health and disease. The Company accounts for its holdings in Molecular Biometrics under the equity method.

In April 2009, the Company deployed an additional $0.5 million of cash in Portico Systems, Inc (“Portico”), in a transaction which resulted in a slight decrease in the Company’s ownership interest to 45.6% at June 30, 2009. The Company previously deployed $8.8 million in cash in Portico in February 2008 and August 2006. 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.

In March 2009, the Company increased its ownership interest in Bridgevine, Inc. (“Bridgevine”) to 24.4% from 21.1% for $2.0 million in cash. The Company had previously acquired an interest in Bridgevine in August 2007 for $8.0 million in cash. Bridgevine is an internet media company that enables online consumers to shop for special offers as well as compare and purchase digital services and products such as internet, phone, VoIP, TV, wireless, music, entertainment and more. 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 Sheet.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

17. 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.

Not including the Laureate Lease Guaranty described below, the Company had outstanding guarantees of $3.8 million at June 30, 2009.

The Company has committed capital of approximately $5.0 million, including conditional commitments to provide 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 $2.5 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 of the distributions it received as a general partner of certain private equity funds (the “clawback”). The maximum clawback the Company could be required to return due to its general partner interest is approximately $3.6 million of which $2.5 million was reflected in Accrued expenses and other current liabilities and $1.1 million was reflected in Other long-term liabilities on the Consolidated Balance Sheet at June 30, 2009.

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 and placing them in escrow and adding rights of set-off among certain funds. The Company believes its potential liability due to the possibility of default by other general partners is remote.

Notwithstanding the closing of the Bundle Sale, the Company remains a guarantor of Laureate Pharma’s Princeton, New Jersey office facility lease (the “Laureate Lease Guaranty”). Such guarantee may extend through the office lease expiration in 2016 under certain circumstances. However, the Company is entitled to indemnification in connection with the continuation of such guaranty. As of June 30, 2009, scheduled lease payments to be made by Laureate Pharma over the remaining lease term equaled $8.3 million.

As described in Note 4, in connection with the Bundle Sale, an aggregate of $6.4 million of the gross proceeds of the sale were placed in escrow pending the expiration of a predetermined notification period, subject to possible extension in the event of a claim against the escrowed amounts. On April 25, 2009, the purchaser in the Bundle Sale notified the Company of claims being asserted against the entire escrowed amounts. The Company does not believe that such claims are valid and has instituted legal action to obtain the release of such amounts from escrow. The proceeds being held in escrow will remain there until the dispute over the claims has been settled or determined pursuant to legal process.

In October 2001, the Company entered into an agreement with 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 $3.2 million was included in Other long-term liabilities on the Consolidated Balance Sheet at June 30, 2009.

18. CORRECTION OF AN IMMATERIAL ERROR IN THE PRIOR PERIOD

During the second quarter of 2009, Clarient identified an error in its accounting for revenue and related bad debt expense for the quarter ended March 31, 2009. The error related to the pricing for certain of Clarient’s services in the first quarter of 2009. The error resulted in the understatement of revenue by $0.7 million and the understatement of bad debt expense by $0.1 million for the quarter ended March 31, 2009.

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 the first quarter of 2009, but to remain consistent with revisions to be made by Clarient in its Form 10-Q for the quarter ended June 30, 2009, the Company made such revisions to its Consolidated Financial Statements contained herein, as summarized below.

The following table summarizes the effect of the revision on continuing operations as of and for the quarter ended March 31, 2009:

		March 31, 2009
		Previously				As
		Reported				Revised
		(In thousands) (unaudited)
Consolidated Balance Sheet:
Accounts receivable		$	25,486			$	26,151
Total assets			245,023				245,688
Total Safeguard Scientifics, Inc. shareholders’ equity			110,580				110,977
Noncontrolling interest in subsidiary			14,894				15,162
Total shareholders’ equity			125,474				126,139

		Three Months Ended
		March 31, 2009
		Previously				As
		Reported				Revised
		(In thousands
		except per share data) (unaudited)
Consolidated Statement of Operations:
Revenue		$	22,447			$	23,192
Selling, general and administrative			17,009				17,089
Total operating expense			25,975				26,055
Operating loss			(3,528	)			(2,863	)
Net loss			(8,555	)			(7,890	)
Net (income) loss attributable to noncontrolling interest			(871	)			(1,139	)
Net loss attributable to Safeguard Scientifics, Inc.			(9,426	)			(9,029	)
Basic and diluted net loss per share attributable to Safeguard Scientifics, Inc. common shareholders			(0.08	)			(0.07	)

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 helping 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:

Life Sciences — including companies focused on molecular and point-of-care diagnostics, medical devices and regenerative medicine/specialty pharmaceuticals; and

Technology — including companies focused on healthcare information technology, financial services information technology and new media and internet-based businesses.

Principles of Accounting for Ownership Interests in Partner Companies

We account for our interests in our partner companies and private equity funds using four methods: consolidation, equity, cost or fair value. 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 maintain a controlling financial interest, generally those in which we directly or indirectly own more than 50% of the outstanding voting securities, using the consolidation method of accounting. Upon consolidation of our partner companies, we reflect the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to the Company as a noncontrolling interest in the Consolidated Balance Sheet. The noncontrolling interest is presented within equity, separately from the equity of the Company. Losses attributable to the Company and the noncontrolling interest may exceed their interest in the subsidiary’s equity. As a result, the noncontrolling interest shall continue to be attributed its share of losses even if that attribution results in a deficit noncontrolling interest balance as of each balance sheet date. Revenue, expenses, gains, losses, net income or loss are reported in the Consolidated Statements of Operations at the consolidated amounts, which include the amounts attributable to the Company’s common shareholders and the noncontrolling interest.

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.

Fair Value Method. We account for our holdings in Clarient, Inc. (“Clarient”), our publicly traded partner company, under the fair-value option following its deconsolidation on May 14, 2009. Gains and losses on the mark-to-market of our holdings in Clarient are recognized in Income (loss) from continuing operations 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 consolidated 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 consolidated financial statements, areas that are particularly significant include the following:

•

Revenue recognition;