SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Safeguard Scientifics, Inc.

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

(610) 293-0600
(Registrant’s telephone number, including area code)

Title of Each Class		Name of each exchange on which registered
Common Stock ($.10 par value)		New York Stock Exchange

     Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No þ

      Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes o      No þ

      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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

      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 Rule 12b-2 of the Exchange Act).

Yes o      No þ

      As of June 30, 2007, the aggregate market value of the Registrant’s common stock held by non-affiliates of the registrant was $338,086,524 based on the closing sale price as reported on the New York Stock Exchange.

      The number of shares outstanding of the Registrant’s Common Stock, as of April 25, 2008 was 121,564,111.

 

 

TABLE OF CONTENTS

Explanatory Note

PART I I
Item 8. Financial Statements and Supplementary Data			1
PART III
Item 10. Directors, Executive Officers and Corporate Governance			53
Item 11. Executive Compensation			60
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			87
Item 13. Certain Relationships and Related Transactions, and Director Independence			91
Item 14. Principal Accountant Fees and Services			91
Item 15. Exhibits and Financial Statement Schedules			93
Certification of Peter J. Boni
Certification of Raymond J. Land
Certification of Peter J. Boni
Certification of Raymond J. Land

Explanatory Note

Safeguard Scientifics, Inc. (“Safeguard,” the “Company,” “we,” “us,” and “our”) is filing this Amendment No. 2 on Form 10-K/A for the year ended December 31, 2007 (“Form 10-K/A”) to amend our Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2008 (the “Original 10-K”). The Company is hereby amending the Form 10-K as follows:

•		To include Part III of the Original 10-K in its entirety (which includes an updated list of the Company’s executive officers that was initially included as an Annex to Part I of the Original 10-K), which items were originally expected to be incorporated by reference in our definitive proxy statement to be delivered to our shareholders in connection with our 2008 annual meeting of shareholders;
•		To amend and restate Item 8 of the Original 10-K to correct the last paragraph of the report of our independent registered public accounting firm on the company’s consolidated financial statements, which report appears on page 3, that incorrectly referred to an unqualified audit report on the effectiveness of the Company’s internal control over financial reporting when the report of our independent registered public accounting firm on internal control over financial reporting, which report appears on page 2, expressed an adverse opinion on the effectiveness of internal control over financial reporting; Although we are required to file the complete text of Item 8 in accordance with Rule 12b-15 under the Securities and Exchange Act of 1934, there has been no change to the financial statements other than the referenced change in the audit report of our independent registered public accounting firm; and
•		On the cover page, (i) to delete the reference in the Original 10-K to the incorporation by reference of the Company’s proxy statement for its 2008 annual shareholders’ meeting and (ii) to update the date as of which the number of outstanding shares of the Company’s common stock is being provided.

This Form 10-K/A does not reflect events that occurred after the filing of the Original 10-K. As a result of this amendment, we also are filing the certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 as exhibits to this Form 10-K/A. These certifications are included as Exhibits 31.3, 31.4, 32.3 and 32.4.

Except for the amendments and updates described above, this Amendment No. 2 on Form 10-K/A does not modify or update in any other way the Original 10-K.

Item 8. Financial Statements and Supplementary Data

     The following Consolidated Financial Statements, and the related Notes thereto, of Safeguard Scientifics, Inc. and the Reports of Independent Registered Public Accounting Firm are filed as a part of this Form 10-K/A.

		Page
Report of Independent Registered Public Accounting Firm			2
Report of Independent Registered Public Accounting Firm			3
Consolidated Balance Sheets as of December 31, 2007 and 2006			4
Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005			5
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2007, 2006 and 2005			6
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2007, 2006 and 2005			7
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005			8
Notes to Consolidated Financial Statements			9

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Safeguard Scientifics, Inc.:

     We have audited Safeguard Scientifics, Inc.’s (the Company) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Safeguard Scientifics, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting (Item 9A.(b)). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

     A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses related to the following have been identified and included in management’s assessment: (i) Ineffective policies and procedures for ensuring financial reporting risks are identified timely and corresponding control activities implemented and (ii) the combined effect of significant deficiencies related to accounting for refunds due to customers and the allowance for doubtful accounts.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Safeguard Scientifics, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of operations, comprehensive income (loss), shareholder’s equity and cash flows for each of the years in the three-year period ended December 31, 2007. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2007 consolidated financial statements, and this report does not affect our report dated March 31, 2008, which expressed an unqualified opinion on those consolidated financial statements.

     In our opinion, because of the effect of the aforementioned material weaknesses on the achievement of the objectives of the control criteria, Safeguard Scientifics, Inc. has not maintained effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/ KPMG LLP

Philadelphia, Pennsylvania
March 31, 2008

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Safeguard Scientifics, Inc.:

     We have audited the accompanying consolidated balance sheets of Safeguard Scientifics, Inc. (the “Company”) and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Safeguard Scientifics, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

     As discussed in Note 1 to the consolidated financials statements, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, effective January 1, 2007. Also, as discussed in Note 12 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, effective January 1, 2006.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Safeguard Scientifics, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 31, 2008 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Philadelphia, Pennsylvania
March 31, 2008

SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED BALANCE SHEETS

		As of December 31,
		2007				2006
		(In thousands except per
		share data)
ASSETS
Current Assets:
Cash and cash equivalents		$	99,965			$	67,012
Cash held in escrow — current			20,345				—
Marketable securities			590				94,155
Restricted marketable securities			3,904				3,869
Accounts receivable, less allowances ($3,818 — 2007; $1,713 — 2006)			37,578				33,481
Prepaid expenses and other current assets			6,000				5,080
Current assets of discontinued operations			—				11,703
Total current assets			168,382				215,300
Property and equipment, net			35,573				34,209
Ownership interests in and advances to companies			92,985				54,548
Long-term marketable securities			—				487
Long-term restricted marketable securities			1,949				5,737
Intangible assets, net			9,960				11,984
Goodwill			76,824				80,418
Cash held in escrow — long term			2,341				19,398
Other			3,848				3,764
Non-current assets of discontinued operations			—				17,850
Total Assets		$	391,862			$	443,695
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current portion of credit line borrowings		$	40,012			$	25,014
Current maturities of long-term debt			3,752				3,192
Accounts payable			7,654				10,581
Accrued compensation and benefits			13,467				13,432
Accrued expenses and other current liabilities			18,925				19,256
Deferred revenue			6,100				3,560
Current liabilities of discontinued operations			—				3,465
Total current liabilities			89,910				78,500
Long-term debt			4,746				4,010
Other long-term liabilities			9,765				10,319
Convertible senior debentures			129,000				129,000
Deferred taxes			1,026				1,026
Minority interest			2,692				5,404
Non-current liabilities of discontinued operations			—				1,656
Commitments and contingencies Redeemable consolidated partner company stock-based compensation			84				2,021
Shareholders’ Equity:
Preferred stock, $0.10 par value; 1,000 shares authorized			—				—
Common stock, $0.10 par value; 500,000 shares authorized; 121,123 and 120,419 shares issued and outstanding in 2007 and 2006, respectively			12,112				12,042
Additional paid-in capital			758,515				750,361
Accumulated deficit			(616,013	)			(551,180	)
Accumulated other comprehensive income			25				536
Total shareholders’ equity			154,639				211,759
Total Liabilities and Shareholders’ Equity		$	391,862			$	443,695

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

		Year Ended December 31,
		2007				2006				2005
		(In thousands except per share data)
Revenue		$	176,119			$	162,642			$	103,775
Operating Expenses:
Cost of sales			124,739				118,749				81,437
Selling, general and administrative			97,108				93,016				66,309
Research and development			2,407				2,501				125
Purchased in-process research and development			—				—				1,974
Amortization of intangible assets			2,024				2,498				1,092
Goodwill impairment			5,438				—				—
Total operating expenses			231,716				216,764				150,937
Operating loss			(55,597	)			(54,122	)			(47,162	)
Other income (loss), net			(4,866	)			5,559				7,066
Recovery — related party			12				360				28
Interest income			7,539				6,907				4,974
Interest expense			(7,660	)			(6,630	)			(6,365	)
Equity loss			(14,143	)			(3,267	)			(6,597	)
Minority interest			5,829				6,112				6,922
Net loss from continuing operations before income taxes			(68,886	)			(45,081	)			(41,134	)
Income tax benefit			781				1,186				230
Net loss from continuing operations			(68,105	)			(43,895	)			(40,904	)
Income from discontinued operations, net of tax			3,272				89,803				8,834
Net income (loss)		$	(64,833	)		$	45,908			$	(32,070	)
Basic and Diluted Income (Loss) Per Share:
Net loss from continuing operations		$	(0.56	)		$	(0.36	)		$	(0.34	)
Net income from discontinued operations			0.03				0.74				0.07
Net income (loss) per share		$	(0.53	)		$	0.38			$	(0.27	)
Shares used in computing basic and diluted income (loss) per share			122,352				121,476				120,845

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

		Year Ended December 31,
		2007				2006				2005
		(In thousands)
Net loss from continuing operations		$	(68,105	)		$	(43,895	)		$	(40,904	)
Other comprehensive income (loss), before taxes:
Foreign currency translation adjustments			(24	)			5				69
Holding losses on available-for-sale securities			(487	)			(2,824	)			(8,653	)
Other comprehensive loss from continuing operations			(511	)			(2,819	)			(8,584	)
Comprehensive loss from continuing operations			(68,616	)			(46,714	)			(49,488	)
Income from discontinued operations			3,272				89,803				8,834
Other comprehensive income (loss) from discontinued operations			—				189				(36	)
Comprehensive income (loss)		$	(65,344	)		$	43,278			$	(40,690	)

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

																		Accumulated
																		Other
										Additional								Comprehensive												Unamortized
		Common Stock								Paid-In				Accumulated				Income				Treasury Stock								Deferred
		Shares				Amount				Capital				Deficit				(Loss)				Shares				Amount				Compensation				Total
		(In thousands)
Balance — December 31, 2004			119,893			$	11,989			$	745,991			$	(565,018	)		$	11,786				—			$	—			$	(3,518	)		$	201,230
Net loss			—				—				—				(32,070	)			—				—				—				—				(32,070	)
Stock options exercised, net			42				4				48				—				—				(2	)			9				—				61
Acceleration of vesting of restricted stock			—				—				—				—				—				—				—				279				279
Amortization of deferred compensation, net of forfeitures			—				—				(203	)			—				—				—				—				1,371				1,168
Impact of subsidiary equity transactions			—				—				1,859				—				—				—				—				838				2,697
Issuance of restricted stock, net			—								113				—				—				4				(15	)			(13	)			85
Employee stock option expense			—				—				145				—				—				—				—				—				145
Other comprehensive loss			—				—				—				—				(8,620	)			—				—				—				(8,620	)
Balance — December 31, 2005			119,935				11,993				747,953				(597,088	)			3,166				2				(6	)			(1,043	)			164,975
Net income			—				—				—				45,908				—				—				—				—				45,908
Stock options exercised, net			236				25				346				—				—				(2	)			6				—				377
Reclassification of unamortized deferred compensation			—				—				(1,043	)			—				—				—				—				1,043				—
Reclassification of redeemable subsidiary stock-based compensation			—				—				(2,021	)			—				—				—				—				—				(2,021	)
Impact of subsidiary equity transactions			—				—				(1,763	)			—				—				—				—				—				(1,763	)
Issuance of restricted stock, net			248				24				47				—				—				—				—				—				71
Stock-based compensation expense — continuing and discontinued operations			—				—				6,842				—				—				—				—				—				6,842
Other comprehensive loss			—				—				—				—				(2,630	)			—				—				—				(2,630	)
Balance — December 31, 2006			120,419				12,042				750,361				(551,180	)			536				—				—				—				211,759
Net loss			—				—				—				(64,833	)			—				—				—				—				(64,833	)
Stock options exercised, net			492				49				692				—				—				—				—				—				741
Change in redeemable subsidiary stock-based compensation			—				—				937				—				—				—				—				—				937
Issuance of restricted stock, net			212				21				146				—				—				—				—				—				167
Stock-based compensation expense— continuing and discontinued operations			—				—				6,379				—				—				—				—				—				6,379
Other comprehensive loss			—				—				—				—				(511	)			—				—				—				(511	)
Balance — December 31, 2007			121,123			$	12,112			$	758,515			$	(616,013	)		$	25				—			$	—			$	—			$	154,639

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Year Ended December 31,
		2007				2006				2005
		(In thousands)
Cash Flows from Operating Activities:
Net income (loss)		$	(64,833	)		$	45,908			$	(32,070	)
Adjustments to reconcile to net cash used in operating activities:
Income from discontinued operations			(3,272	)			(89,803	)			(8,834	)
Depreciation and amortization			10,666				9,816				6,440
Purchased in-process research and development			—				—				1,974
Deferred income taxes			—				—				304
Equity loss			14,143				3,267				6,597
Other (income) loss, net			4,866				(5,559	)			(7,066	)
Goodwill impairment			5,438				—				—
Recovery — related party			—				(360	)			(28	)
Non-cash stock-based compensation expense			6,603				6,637				2,034
Minority interest			(5,829	)			(6,112	)			(6,922	)
Changes in assets and liabilities, net of effect of acquisitions and dispositions:
Accounts receivable, net			(3,652	)			2,296				(2,595	)
Accounts payable, accrued expenses, deferred revenue and other			(1,092	)			10,568				7,261
Cash flows from operating activities of discontinued operations			709				4,963				10,995
Net cash used in operating activities			(36,253	)			(18,379	)			(21,910	)
Cash Flows from Investing Activities:
Proceeds from sales of available-for-sale and trading securities			—				3,551				241
Proceeds from sales of and distributions from companies and funds			2,783				1,530				28,242
Advances to partner companies			(682	)			—				(2,299	)
Acquisitions of ownership interests in partner companies and funds, net of cash acquired			(62,759	)			(43,596	)			(35,034	)
Acquisitions by consolidated partner companies, net of cash acquired			—				(5,366	)			—
Repayment of note receivable-related party, net			—				360				1,413
Increase in marketable securities			(111,858	)			(208,514	)			(55,602	)
Decrease in marketable securities			205,422				146,129				57,387
Proceeds from sales of property and equipment			44				435				4,170
Capital expenditures			(9,336	)			(14,555	)			(5,913	)
Capitalized software costs			(156	)			(171	)			(171	)
Proceeds from sale of discontinued operations, net			29,967				99,649				14,680
Other, net			—				424				788
Cash flows from investing activities of discontinued operations			(362	)			(7,466	)			(6,491	)
Net cash provided by (used in) investing activities			53,063				(27,590	)			1,411
Cash Flows from Financing Activities:
Repurchase of convertible senior debentures			—				(16,215	)			—
Borrowings on revolving credit facilities			153,364				137,221				101,936
Repayments on revolving credit facilities			(138,366	)			(124,842	)			(100,521	)
Borrowings on term debt			5,093				2,724				2,051
Repayments on term debt			(3,805	)			(4,057	)			(6,623	)
Decrease in restricted cash			—				—				508
Issuance of Company common stock, net			—				448				61
Issuance of subsidiary common stock, net			741				432				6,196
Purchase of subsidiary common stock, net			703				(1,112	)			(611	)
Offering costs on issuance of subsidiary common stock			—				(70	)			(343	)
Cash flows from financing activities of discontinued operations			(230	)			(56	)			(294	)
Net cash provided by (used in) financing activities			17,500				(5,527	)			2,360
Net Increase (Decrease) in Cash and Cash Equivalents			34,310				(51,496	)			(18,139	)
Changes in Cash and Cash Equivalents from Pacific Title & Art Studio and Mantas included in assets of discontinued operations			(1,357	)			(3,561	)			(1,866	)
			32,953				(55,057	)			(20,005	)
Cash and Cash Equivalents at beginning of period		$	67,012			$	122,069			$	142,074
Cash and Cash Equivalents at end of period		$	99,965			$	67,012			$	122,069

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Significant Accounting Policies

     Description of the Company

     Safeguard Scientifics, Inc. (“Safeguard” or the “Company”) seeks to build value in growth-stage technology and life sciences businesses. The Company provides capital as well as a range of strategic, operational and management resources to our partner companies. The Company participates in expansion financings, carve-outs, management buy-outs, recapitalizations, industry consolidations and early-stage financings. The Company’s vision is to be the preferred catalyst for creating great technology and life sciences companies.

     The Company strives to create long-term value for its shareholders through building value in its partner companies. Safeguard helps its partner companies in their efforts to increase market penetration, grow revenue and improve cash flow in order to create long-term value. The Company concentrates on companies that operate in two categories:

	•		Technology — including companies focused on providing software as a service (SaaS), technology-enabled services and information technology services for analytics, enterprise applications and infrastructure, security and communication; and
	•		Life Sciences — including companies focused on specialty pharmaceuticals, drug delivery, diagnostics and medical devices.

     Basis of Presentation

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

     The Company’s Consolidated Statements of Operations, Comprehensive Income (Loss) and Cash Flows for each of the years in the three-year period ended December 31, 2007 and the Consolidated Balance Sheets as of December 31, 2007 and 2006 include the following partner companies in continuing operations:

Acsis, Inc. (“Acsis”) (since December 2005)
Alliance Consulting Group Associates, Inc. (“Alliance Consulting”)
Clarient, Inc. (“Clarient”)
Laureate Pharma, Inc. (“Laureate Pharma”)

     As discussed in Note 24, in February 2008, the Company entered into a definitive agreement to sell its interests in Acsis, Alliance Consulting and Laureate Pharma, which is expected to close during the second quarter of 2008.

     Alliance Consulting operates on a 52 or 53-week fiscal year, ending on the Saturday closest to December 31. Alliance Consulting’s last three fiscal years have ended on December 29, 2007, December 30, 2006 and December 31, 2005. Fiscal years 2007, 2006 and 2005 were periods of 52 weeks. The Company and all other consolidated partner companies operate on a calendar year.

     During 2007, 2006 and 2005, certain consolidated partner companies, or components thereof, were sold. See Note 2 for discontinued operations treatment of Pacific Title & Art Studio, Inc., Clarient’s technology group, Mantas, Inc., Alliance Consulting’s Southwest region business and Laureate Pharma’s Totowa operation.

     Principles of Accounting for Ownership Interests in Companies

     The Company’s ownership interests in its companies are accounted for under three methods: consolidation, equity or cost. The applicable accounting method generally is determined based on the Company’s voting interest in the entity.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Consolidation Method. The Company accounts for partner companies in which it directly or indirectly owns more than 50% of the outstanding voting securities under the consolidation method of accounting. Under this method, the Company includes these partner companies’ financial statements within the Company’s Consolidated Financial Statements, and all significant intercompany accounts and transactions are eliminated. The Company reflects participation of other stockholders in the net assets and in the income or losses of these consolidated partner companies in Minority interest in the Consolidated Balance Sheets and Statements of Operations. Minority interest adjusts the Company’s consolidated operating results to reflect only the Company’s share of the earnings or losses of the consolidated partner company. However, if no minority interest balance remains on the Consolidated Balance Sheets related to a consolidated partner company, the Company records 100% of such consolidated partner company’s losses; the Company records 100% of subsequent earnings of such consolidated partner company to the extent of such previously recognized losses in excess of the Company’s proportionate share. The Company accounts for results of operations and cash flows of a consolidated partner company through the latest date in which it owned a 50% or greater voting interest. If control falls below 50%, the accounting method is adjusted to the equity or cost method of accounting, as appropriate.

     Equity Method. The Company accounts for partner companies whose results are not consolidated, but over whom it exercises significant influence, under the equity method of accounting. Whether or not the Company exercises significant influence with respect to a partner company depends on an evaluation of several factors including, among others, representation of the Company on the partner company’s board of directors and the Company’s ownership level, which is generally a 20% to 50% interest in the voting securities of a partner company (including voting rights associated with the Company’s holdings in common, preferred and other convertible instruments in the company). The Company also accounts for its interests in some private equity funds under the equity method of accounting based on its general and limited partner interests in such funds. Under the equity method of accounting, the Company does not reflect a partner company’s financial statements within the Company’s Consolidated Financial Statements; however, the Company’s share of the income or loss of such partner company is reflected in Equity loss in the Consolidated Statements of Operations. The Company includes the carrying value of equity method partner companies in Ownership interests in and advances to companies on the Consolidated Balance Sheets. The Company reports its share of the income or loss of the equity method partner companies on a one quarter lag. This reporting lag could result in a delay in recognition of the impact of changes in the business or operations of these partner companies.

     When the Company’s interest in an equity method partner company is reduced to zero, the Company records no further losses in its Consolidated Statements of Operations unless the Company has an outstanding guarantee obligation or has committed additional funding to such equity method partner company. When such equity method partner company subsequently reports income, the Company will not record its share of such income until it exceeds the amount of the Company’s share of losses not previously recognized.

     Cost Method. The Company accounts for partner companies not consolidated or accounted for under the equity method under the cost method of accounting. Under the cost method, the Company does not include its share of the income or losses of partner companies in the Company’s Consolidated Statements of Operations. The Company includes the carrying value of cost method partner companies in Ownership interests in and advances to companies on the Consolidated Balance Sheets.

     In addition to holding voting and non-voting equity and debt securities, the Company also periodically makes advances to its partner companies in the form of promissory notes which are accounted for in accordance with SFAS No. 114, “Accounting By Creditors for Impairment of a Loan.”

     Accounting Estimates

     The preparation of the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect amounts reported in the financial statements and accompanying notes. Actual results may differ from these estimates. These

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

estimates include the evaluation of the recoverability of the Company’s ownership interests in and advances to companies and investments in marketable securities, the evaluation of the impairment of goodwill, intangible assets and property and equipment, revenue recognition, income taxes, stock-based compensation and commitments and contingencies.

     Certain amounts recorded to reflect the Company’s share of income or losses of partner companies accounted for under the equity method are based on unaudited results of operations of those companies and may require adjustments in the future when audits of these entities’ financial statements are completed.

     It is reasonably possible that the Company’s accounting estimates with respect to the ultimate recoverability of the carrying value of the Company’s ownership interests in and advances to companies, goodwill and intangible assets and the estimated useful life of amortizable intangible assets could change in the near term and that the effect of such changes on the financial statements could be material. At December 31, 2007, the Company believes the recorded amount of carrying value of the Company’s ownership interests in and advances to companies, goodwill and intangible assets is not impaired, although there can be no assurance that the Company’s future results will confirm this assessment, that a significant write-down or write-off will not be required in the future, or that a significant loss will not be recorded in the future upon the sale of a company.

     Reclassifications and Revisions

     Certain prior year amounts have been reclassified to conform to the current year presentation, including the reclassification to discontinued operations of Pacific Title & Art Studio which was sold in March 2007, Clarient’s technology group which was sold in March 2007, Mantas which was sold in October 2006, Alliance Consulting’s Southwest region business which was sold in May 2006 and Laureate Pharma’s Totowa, New Jersey operation which was sold in December 2005. The impact of these reclassifications did not affect the Company’s net income (loss).

     During the fourth quarter of 2007, an accounting error at Clarient was identified. The error related to Clarient’s accounting for customer refunds which affected the Company’s previously reported quarterly results in 2007 and 2006, totaling $0.9 million.

     In accordance with Staff Accounting Bulletin No. 108, the Company 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. The Company concluded that the error was not material to the Consolidated Financial Statements in any interim or annual prior periods. Clarient determined that the error was not material to its financial statements for any interim or annual prior periods, but that its correction in the fourth quarter of 2007 would be material to its fourth quarter results. Consequently, Clarient, which is a public company, recorded an immaterial correction of an error in prior periods as a reduction in revenue with a corresponding increase in accrued expenses and other current liabilites in its financial statements for the years ended December 31, 2007 and 2006. The Company revised its Consolidated Financial Statements as summarized in Note 20. Accordingly, the quarterly financial information (unaudited) presented in Note 22 has also been revised.

     The Company has disclosed the operating, investing and financing portions of the cash flows attributable to its discontinued operations. Included in these amounts were net cash flows of $(1.2) million, $(4.6) million and $3.8 million in 2007, 2006 and 2005, respectively, attributable to Clarient’s technology group, Alliance Consulting’s Southwest region business and Laureate Pharma’s Totowa operation. Because these businesses did not maintain separate bank accounts, any net cash provided by (used in) these businesses increased (decreased) the cash and cash equivalents balance of the Company’s continuing operations as shown on the Consolidated Balance Sheets. Cash flows related to Pacific Title & Art Studio in 2007, 2006 and 2005 and Mantas in 2006 and 2005 are adjusted in the Statement of Cash Flows to reconcile to cash and cash equivalents associated with continuing operations.

     Cash and Cash Equivalents and Short-Term Marketable Securities

     The Company considers all highly liquid instruments with an original maturity of 90 days or less at the time of purchase to be cash equivalents. Cash and cash equivalents consist of deposits that are readily convertible into cash. The Company determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date. Held-to-maturity securities are carried at amortized cost, which approximates fair value. Short-term marketable securities consist of held-to-maturity securities, primarily consisting of commercial paper and certificates of deposits.

     Restricted Marketable Securities

     Restricted marketable securities include held-to-maturity securities, based upon the Company’s ability and intent to hold these securities to maturity. The securities are U.S. Treasury securities with various maturity dates. Pursuant to terms of the 2.625% convertible senior debentures due March 15, 2024 (“2024 Debentures”), as a result of the sale of CompuCom in 2004, the Company pledged the U.S. Treasury securities to an escrow agent for interest payments through March 15, 2009 on the 2024 Debentures (See Note 4).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Long-Term Marketable Securities

     The Company records its ownership interest in cost method equity securities that have readily determinable fair value as available-for-sale or trading securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Available-for-sale securities are carried at fair value, based on quoted market prices, with the unrealized gains and losses, net of tax, reported as a separate component of Shareholders’ Equity. Unrealized losses are charged against net loss when a decline in the fair value is determined to be other than temporary. Trading securities are carried at fair value, based on quoted market prices, with the unrealized gain or loss included in Other Income, Net, in the Consolidated Statements of Operations. The Company records its ownership interest in debt securities at amortized cost based on its ability and intent to hold these securities until maturity.

     Financial Instruments

     The Company’s financial instruments (principally cash and cash equivalents, marketable securities, restricted marketable securities, accounts receivable, notes receivable, accounts payable and accrued expenses) are carried at cost, which approximates fair value due to the short-term maturity of these instruments. The Company’s long-term debt is carried at cost. At December 31, 2007, the market value of the Company’s outstanding 2024 Debentures was approximately $106.5 million, based on quoted market prices.

     Property and Equipment

     Property and equipment are stated at cost. Equipment under capital leases is stated at the present value of minimum lease payments. Provision for depreciation and amortization is based on the lesser of the estimated useful lives of the assets or the remaining lease term (buildings and leasehold improvements, 5 to 15 years; machinery and equipment, 3 to 15 years) and is computed using the straight-line method.

     Intangible Assets, net

     Intangible assets with indefinite useful lives are not amortized but instead are tested for impairment at least annually, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Intangible assets with definite useful lives are amortized over their respective estimated useful lives to their estimated residual value.

     Purchased in-process research and development (“IPR&D”) represents the value assigned in a purchase business combination to research and development projects of the acquired business that had commenced but had not yet been completed at the date of acquisition and which have no alternative future use. In accordance with SFAS No. 2, “Accounting for Research and Development Costs,” as clarified by FASB Interpretation No. 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method,” amounts assigned to IPR&D meeting the above criteria must be charged to expense as part of the allocation of the purchase price of the business combination.

     Goodwill Impairment

     The Company conducts an annual review for impairment of goodwill as of December 1^st and as otherwise required by circumstances or events in accordance with SFAS No. 142. Additionally, on an interim basis, the Company assesses the impairment of goodwill whenever events or changes in circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount. Impairment charges related to goodwill of consolidated partner companies are included in Goodwill impairment in the Consolidated Statements of Operations.

     Impairment of Equity Method and Cost Method Companies

     On a periodic basis, but no less frequently than at the end of each quarter, the Company evaluates the carrying value of its equity and cost method partner companies for possible impairment based on achievement of business

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

plan objectives and milestones, the fair value of each partner company relative to its carrying value, the financial condition and prospects of the partner company and other relevant factors. The business plan objectives and milestones the Company considers include, among others, those related to financial performance, such as achievement of planned financial results or completion of capital raising activities, and those that are not primarily financial in nature, such as hiring of key employees or the establishment of strategic relationships. Management then determines whether there has been an other than temporary decline in the value of its ownership interest in the company. Impairment is measured by the amount by which the carrying value of an asset exceeds its fair value.

     The fair value of privately held companies is generally determined based on the value at which independent third parties have invested or have committed to invest in these companies or based on other valuation methods, including discounted cash flows, valuation of comparable public companies and the valuation of acquisitions of similar companies. The fair value of the Company’s ownership interests in private equity funds generally is determined based on the value of its pro rata portion of the fair value of the funds’ net assets.

     Impairment charges related to equity method partner companies are included in Equity loss in the Consolidated Statements of Operations. Impairment charges related to cost method partner companies are included in Other income (loss), net in the Consolidated Statements of Operations.

     The reduced cost basis of a previously impaired partner company is not written-up if circumstances suggest the value of the company has subsequently recovered.

     Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of

     In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company reviews long-lived assets, including property and equipment and amortizable intangibles, for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to forecasted undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

     Recoverability of Note Receivable — Related Party

     The Company evaluates the recoverability of its Note Receivable — Related Party in accordance with SFAS No. 114 “Accounting by Creditors for Impairment of a Loan — an Amendment of FASB Statements No. 5 and 15”. Under SFAS No. 114, a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company does not accrue interest when a note is considered impaired. All cash receipts from impaired notes are applied to reduce the original principal amount of such note until the principal has been fully recovered and would be recognized as interest income thereafter. Cash receipts in excess of the carrying value of the note are included in Recovery— Related Party in the Consolidated Statements of Operations until such time that the original principal has been recovered.

     Deferred Revenue

     Deferred revenue represents cash collections on contracts in advance of performance of services or delivery of products and is recognized as revenue when the related services are performed or products are delivered.

     Revenue Recognition

     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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, Acsis recognizes license revenue using the percentage-of-completion method. Acsis recognizes revenue 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 of an arrangement that includes services involving significant customization or modifications to software, in which case, hardware revenue is bundled with the software and services, and 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. Alliance Consulting recognizes revenue from services as services are performed. Alliance Consulting also performs certain services under fixed-price service contracts related to discrete projects. Alliance Consulting recognizes revenue from these contracts using the percentage-of-completion method, primarily based on the actual labor hours incurred to date compared to the estimated total hours of the project. Any losses expected to be incurred on jobs in process are charged to income in the period such losses become known. Changes in estimates of total costs could result in changes in the amount of revenue recognized.

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

     Laureate Pharma’s revenue is derived primarily from contract manufacturing work, process development services, and formulation and filling. Laureate Pharma may enter into contractual arrangements with multiple deliverables in order to meet its customers’ needs. Multiple element revenue agreements are evaluated under Emerging Issues Task Force (“EITF”) Issue Number 00-21, “Revenue Arrangements with Multiple Deliverables,” to determine whether the delivered item has value to the customer on a stand-alone basis and whether objective and reliable evidence of the fair value of the undelivered item exists. Deliverables in an arrangement that do not meet the separation criteria in EITF 00-21 are treated as one unit of accounting for purposes of revenue recognition. Revenue generally is recognized upon the performance of services. Certain services are performed under fixed-price contracts. Revenue from these contracts is recognized on a percentage—of-completion basis. When current cost estimates indicate a loss is expected to be incurred, the entire loss is recorded in the period in which it is identified. Changes in estimates of total costs could result in changes in the amount of revenue recognized.

     Taxes collected from customers and remitted to government authorities are presented on a net basis (excluded from revenue).

     Defined Contribution Plans

     Defined contribution plans are contributory and cover eligible employees of the Company and certain consolidated partner companies. The Company’s defined contribution plan allows eligible employees, as defined in the plan, to contribute to the plan up to 75% of their pre-tax compensation, subject to the maximum contributions allowed by the Internal Revenue Code. The Company determines the amount, if any, of the employer-paid matching contribution at the end of each calendar year. Additionally, the Company may make annual discretionary contributions under the plan based on a participant’s eligible compensation. Certain consolidated partner companies

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

also generally match from 25% to 50% of the first 3% to 6% of employee contributions to these plans. Expense relating to defined contribution plans was $1.0 million in 2007, $0.8 million in 2006 and $0.7 million in 2005.

     Income Taxes

     The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”, under the asset and liability method whereby deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company measures deferred tax assets and liabilities using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. The Company recognizes the effect on deferred tax assets and liabilities of a change in tax rates in income in the period of the enactment date. The Company provides valuation allowances against the net deferred tax asset for amounts which are not considered more likely than not to be realized.

     Net Income (Loss) Per Share

     The Company computes net income (loss) per share (EPS) using the weighted average number of common shares outstanding during each year. The Company includes in diluted EPS common stock equivalents (unless anti-dilutive) which would arise from the exercise of stock options and conversion of other convertible securities and is adjusted, if applicable, for the effect on net income (loss) of such transactions. Diluted EPS calculations adjust net income (loss) for the dilutive effect of common stock equivalents and convertible securities issued by the Company’s consolidated partner companies.

     Comprehensive Income (Loss)

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

     Segment Information

     The Company reports segment data based on the management approach which designates the internal reporting which is used by management for making operating decisions and assessing performance as the source of the Company’s reportable operating segments.

     New Accounting Pronouncements

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

     In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Liabilities” (“SFAS No. 159”). SFAS No. 159 allows companies to choose, at specific election dates, to measure eligible financial assets and liabilities that are not otherwise required to be measured at fair value, at fair value. Under SFAS

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 does not expect the adoption of SFAS No. 159 to have a material impact on its financial statements due to its election to not measure partner company holdings accounted for under the equity method at fair value.

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

     In June 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 14).

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

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

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

     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 establishes new accounting and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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. The amount of net income attributable to noncontrolling interests will be included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary that does not result in deconsolidation are treated as equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years beginning after November 15, 2008. The adoption of SFAS No. 160 will result in the reclassification of minority interests from long term liabilities to shareholders’ equity. Minority interest at December 31, 2007 was $3.0 million.

2. Discontinued Operations

     The following are reported in discontinued operations for all periods through their respective sale date.

Pacific Title & Art Studio

     In March 2007, the Company sold Pacific Title & Art Studio for net cash proceeds of approximately $21.9 million, including $2.3 million cash deposited into escrow. As a result of the sale, the Company recorded a pre-tax gain of $2.7 million in 2007.

Clarient — Technology Group

     In March 2007, Clarient sold its technology group (which developed, manufactured and marketed the ACIS Automated Image Analysis System) and related intellectual property to Carl Zeiss MicroImaging, Inc. (the “ACIS Sale”) for cash proceeds of $11.0 million (excluding $1.5 million in contingent purchase price). As a result of the sale, Clarient recorded a pre-tax gain of $3.5 million in 2007. Goodwill of $2.1 million related to the technology group was included in discontinued operations.

Mantas

     In October 2006, the Company completed the sale of its interest in Mantas for net cash proceeds of approximately $112.8 million, including $19.3 million deposited into escrow. The Company recorded a pre-tax gain of $83.9 million in 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 2006 which is also reported in discontinued operations. Goodwill of $19.9 million related to Mantas was included in discontinued operations.

Alliance Consulting — Southwest Region Business

     Alliance Consulting completed the sale of its Southwest region business 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 2006. Goodwill of $3.0 million related to the Southwest region business was included in discontinued operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Laureate Pharma — Totowa Operation

     In December 2005, Laureate Pharma sold its Totowa operation for $16.0 million in cash. Laureate Pharma recorded a $7.7 million gain in 2005 related to such sale.

Results of the discontinued operations were as follows:

		Year Ended December 31,
		2007				2006				2005
		(In thousands)
Revenue		$	7,386			$	64,685			$	89,279
Operating expenses			(8,107	)			(62,434	)			(87,579	)
Other			(103	)			(680	)			190
Income (loss) before income taxes and minority interest			(824	)			1,571				1,890
Income tax (expense) benefit			8				(391	)			(187	)
Income (loss) before minority interest			(816	)			1,180				1,703
Minority interest			(2,185	)			1,095				(566	)
Net income (loss) from operations			(3,001	)			2,275				1,137
Gain on disposal, net of tax			6,273				87,528				7,697
Income from discontinued operations, net of tax		$	3,272			$	89,803			$	8,834

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     The assets and liabilities of 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

3. Business Combinations

     Acquisitions by the Company — 2007

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

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

     In September 2007, the Company increased its ownership interest in NexTone Communications, Inc. (“NexTone”) from 16.1% to 16.5%, for $2.2 million in cash. In December 2007, the Company funded an additional $2.1 million in cash which was held in an escrow account until January 2008, at which time NexTone merged with Reef Point Systems, Inc. to form NextPoint Networks, Inc. (“NextPoint”). The January 2008 merger and related

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

financing resulted in the Company holding approximately 12.2% of NextPoint. The Company accounted for its holdings in NexTone under the cost method.

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

     In August 2007, the Company acquired 14.0% of a yet-to-be-publicly launched web-based software company for $2.2 million in cash, which acquisition is accounted for under the cost method.

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

     In June 2007, the Company increased its ownership interest in Authentium, Inc. (“Authentium”) to 19.9%, for an additional $3.0 million in cash. The Company previously had acquired a 12.4% interest in Authentium in April 2006 for $5.5 million in cash. Authentium is a provider of security software to internet service providers. The Company accounts for its holdings in Authentium under the cost method.

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

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

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

     Acquisitions by the Company — 2006

     In November 2006, the Company acquired 32.2% of Advantedge Healthcare Solutions (“AHS”) for $5.8 million in cash. AHS is a 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.

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

     In September 2006, the Company acquired additional common shares of Clarient for $3.0 million in cash to fund Clarient’s acquisition of Trestle Holdings, Inc. (“Trestle”). The difference between the Company’s cost and its interest in the underlying net assets of Clarient was allocated to fixed assets of $0.2 million with estimated depreciable lives of three years and to intangible assets which were subsequently sold in the ACIS Sale.

     In August 2006, the Company acquired 46.9% of Portico Systems (“Portico”) for $6.0 million in cash. Portico is a software solutions provider for regional and national health plans looking to optimize provider network operations and streamline business processes. The Company accounts for its holdings in Portico under the equity method. The difference between the Company’s cost and its interest in the underlying net assets of Portico has been 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 August 2006, the Company acquired 35.7% of Rubicor Medical, Inc. (“Rubicor”) for $20.0 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 has been allocated to in-process research and development resulting in a $0.6 million charge, which is reflected in Equity loss in the Consolidated Statement of Operations for 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 $6.0 million in cash at the same per share value as our December 2005 purchase. The result of the June 2006 incremental equity purchase was an increase in ownership in Acsis to 96.2%.

Acquisitions by Consolidated Partner Companies

     Acquisitions by Consolidated Partner Companies — 2006

     In September 2006, Clarient completed the purchase of substantially all of the assets of Trestle for $3.4 million of cash and assumed liabilities and transaction costs.

     In June 2006, Alliance Consulting completed the acquisition of Fusion Technologies, Inc. (“Fusion”) for $5.6 million, including $5.3 million in cash and $0.3 million in its stock. Based on achievement of earnings targets by the Fusion business in the post-acquisition period and settlement of a claim under the escrow agreement, additional purchase price consideration of $2.0 million was paid by Alliance Consulting, reduced by a $0.2 million settlement of a claim under the escrow agreement in 2007.

     The following table summarizes the estimated fair values of assets acquired and liabilities assumed:

		Alliance
		Consulting				Clarient
		(In thousands)
Working capital		$	70			$	(34	)
Property and equipment			443				76
Intangible assets			730				2,820
Goodwill			6,217				550
Total purchase price		$	7,460			$	3,412

     The intangible assets acquired by Alliance Consulting consist of customer lists with a seven year life and property and equipment which are being depreciated over their weighted average lives (three to five years). The assets acquired by Clarient were subsequently sold in the ACIS Sale and are reflected in assets of discontinued operations on the 2006 Consolidated Balance Sheet.

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

4. Marketable Securities

Marketable securities included the following:

		Current								Non Current
		2007				2006				2007				2006
		(In thousands)								(In thousands)
Held-to-maturity:
Commercial paper		$	590			$	94,155			$	—				—
Restricted U.S. Treasury securities			3,904				3,869				1,949				5,737
Available-for-sale:
Equity securities			—				—				—				487
		$	4,494			$	98,024			$	1,949			$	6,224

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

		Years to Maturity
		(In thousands)
		Less Than				One to				No Single
		One Year				Five Years				Maturity Date				Total
Held-to-maturity		$	4,494			$	1,949			$	—			$	6,443

     During 2007, the Company’s investment in available-for-sale securities was written-off due to the cancellation of the underlying securities in connection with a bankruptcy liquidation. The change is reflected in Accumulated other comprehensive income on the Consolidated Balance Sheets.

5. Property and Equipment

     Property and equipment consisted of the following:

		As of December 31,
		2007				2006
		(In thousands)
Building and improvements		$	23,642			$	21,176
Machinery and equipment			38,106				30,691
			61,748				51,867
Accumulated depreciation			(26,175	)			(17,658	)
		$	35,573			$	34,209

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

6. Ownership Interests in and Advances to Companies

     The following summarizes the carrying value of the Company’s ownership interests in and advances to partner companies and private equity funds accounted for under the equity method or cost method of accounting.

		As of December 31,
		2007				2006
		(In thousands)
Equity Method:
Partner companies		$	60,822			$	32,155
Private equity funds			2,326				4,569
			63,148				36,724
Cost Method:
Partner companies			26,048				14,283
Private equity funds			3,370				3,541
Advances to partner companies			419				—
		$	92,985			$	54,548

     In 2005, the Company sold certain interests in private equity funds and recorded a gain of $7 million. Following the sale, the Company retained an indirect interest in certain publicly traded securities held by a private equity fund and the carried interest in a portion of its general partner interest in certain funds. During 2006, the Company received a distribution of the publicly traded securities and sold these securities for a gain of $0.1 million.

     Impairment charges related to cost method partner companies were $5.3 million and $1.4 million for the years ended December 31, 2007 and 2005, respectively. The amount of each impairment charge was determined by comparing the carrying value of the company to its estimated fair value. Impairment charges associated with equity method partner companies are included in Equity loss in the Consolidated Statements of Operations. Impairment charges related to cost method partner companies are included in Other income (loss), net in the Consolidated Statements of Operations.

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

     The following unaudited summarized financial information for partner companies and funds accounted for under the equity method at December 31, 2007 and 2006 and for the three years ended December 31, 2007, 2006 and 2005, has been compiled from the unaudited financial statements of our respective partner companies and funds and reflects certain historical adjustments. Results of operations of the partner companies and funds are excluded for periods prior to their acquisition and subsequent to their disposition.

		As of December 31,
		2007				2006
		(In thousands)
Balance Sheets:
Current assets		$	83,845			$	41,025
Non-current assets			102,196				104,413
Total Assets		$	186,041			$	145,438
Current liabilities		$	24,808			$	6,021
Non-current liabilities			9,311				310
Shareholders’ equity			151,922				139,107
Total Liabilities and Shareholders’ Equity		$	186,041			$	145,438

		Year Ended December 31,
		2007				2006				2005
		(In thousands)
Results of Operations:
Revenue		$	35,505			$	956			$	14,772
Gross profit		$	18,248			$	365			$	9,287
Net loss		$	(35,567	)		$	(25,544	)		$	(35,302	)

     The Company reports its share of the income or loss of the equity method partner companies on a one quarter lag.

7. Goodwill and Other Intangible Assets

     The following is a summary of changes in the carrying amount of goodwill by segment (In thousands):

		Alliance
		Consulting				Clarient				Acsis				Total
Balance at December 31, 2005		$	51,782			$	12,179			$	11,931			$	75,892
Additions			4,373				550				—				4,923
Purchase price adjustments (1)			—				—				(397	)			(397	)
Balance at December 31, 2006			56,155				12,729				11,534				80,418
Additions (2)			1,844				—				—				1,844
Impairment			(5,438	)			—				—				(5,438	)
Balance at December 31, 2007		$	52,561			$	12,729			$	11,534			$	76,824

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

     In the third quarter of 2007, the Company conducted a goodwill impairment review related to its Alliance Consulting segment, due to underperformance relative to historical and expected operating results. The Company engaged an outside valuation firm to assist in determining the fair value of Alliance Consulting using valuation methods which included discounted cash flows and revenue and acquisition multiples for comparable public companies. The Company determined that the carrying value of Alliance Consulting exceeded its fair value, indicating a potential impairment of goodwill. The Company then estimated the implied fair value of the Alliance Consulting goodwill. The excess of the carrying value of goodwill over the implied fair value of goodwill was $5.4 million, which amount was recognized as an impairment loss within Goodwill impairment in the Consolidated Statements of Operations.

     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:

		December 31, 2007
						Gross
		Amortization				Carrying				Accumulated
		Period				Value				Amortization				Net
		(In thousands)
Customer-related		7 - 10-years				$	9,721			$	3,845			$	5,876
Technology-related		3 years					1,376				955				421
Process-related		3 years					1,363				1,363				—
Trade names		20 years					1,222				126				1,096
							13,682				6,289				7,393
Trade names		Indefinite					2,567				—				2,567
Total						$	16,249			$	6,289			$	9,960

		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 $2.0 million, $2.5 million and $1.1 million for the years ended December 31, 2007, 2006 and 2005, respectively. The following table provides estimated future amortization expense related to intangible assets (assuming there is not an impairment associated with these intangible assets causing an acceleration of expense):

		Total
		(In thousands)
2008		$	1,610
2009			1,164
2010			670
2011			670
2012 and thereafter			3,279
		$	7,393

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

8. Long-term Debt and Credit Arrangements

     Consolidated long-term debt consisted of the following:

		As of December 31,
		2007				2006
		(In thousands)
Subsidiary credit line borrowings (guaranteed by the Company)		$	27,500			$	22,000
Subsidiary credit line borrowings (not guaranteed by the Company)			12,512				3,014
Subsidiary term loans and other borrowings (guaranteed by the Company)			6,019				3,000
			46,031				28,014
Capital lease obligations and other borrowings			2,479				4,202
			48,510				32,216
Less current maturities			(43,764	)			(28,206	)
Total long-term debt, less current portion		$	4,746			$	4,010

     The Company maintains a revolving credit facility that provides for borrowings and issuances of letters of credit and guarantees up to $75.0 million. This revolving credit facility expires June 30, 2008. Borrowing availability under the facility is reduced by the amounts outstanding for the Company’s borrowings and letters of credit and amounts guaranteed under consolidated partner company facilities maintained with that same lender. This credit facility bears interest at the prime rate (7.25% at December 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 credit facility requires the Company to maintain an unrestricted cash collateral account at that same bank, equal to the Company’s borrowings and letters of credit and amounts borrowed by partner companies under the guaranteed portion of the partner company facilities maintained with that same bank. At December 31, 2007, the required cash collateral, pursuant to the Company’s credit facility agreement, was $38.8 million, which amount was included within Cash and cash equivalents on the Consolidated Balance Sheet as of December 31, 2007.

     In November 2006, the Company entered into an additional revolving credit facility with a separate bank that provided for borrowings and issuances of letters of credit and guarantees of up to $20.0 million. This facility expired in November 2007 and the Company chose not to renew it.

     Availability under the Company’s revolving credit facility at December 31, 2007 was as follows:

		Total
		(In thousands)
Size of facility		$	75,000
Guarantees of consolidated partner company facilities at same bank (a)			(40,800	)
Outstanding letter of credit (b)			(6,336	)
Amount available at December 31, 2007		$	27,864

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

     Alliance Consulting, Clarient and Laureate Pharma maintain credit facilities with the same lender as the Company. Borrowings are secured by substantially all of the assets of the respective consolidated partner companies. 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. At December 31, 2007, Alliance Consulting and Clarient did not comply with certain financial covenants under their facilities and subsequently received waivers from the lender regarding such non-compliance.

     On February 28, 2008, the credit facilities for Alliance Consulting, Clarient and Laureate Pharma were extended through February 26, 2009. In addition to the extension of the maturity date, Laureate Pharma’s equipment facility was increased by $3.0 million, which the Company guaranteed, and it entered into a new non-guaranteed $4.0 million working capital facility. Alliance Consulting’s credit facility was amended to reduce its aggregate facility by $3.0 million. Interest rates on outstanding borrowings and unused facility fees for certain consolidated partner companies were also amended. Availability under the Company’s $75.0 million revolving credit facility at March 28, 2008 was $ 31.3 million.

     In July 2007, Acsis amended and restated its credit facility with its bank, providing up to $4.5 million of availability subject to a borrowing base calculation. The facility expires in July 2008 and bears interest at rates ranging from the prime rate (7.25% at December 31, 2007) plus 1.5% to the prime rate plus 2.25%, depending on Acsis’ liquidity. As of December 31, 2007, Acsis had $1.6 million outstanding borrowings under this facility and had $0.4 million availability based on the level of qualified accounts receivable.

     In September 2006, Clarient entered into a $5.0 million senior secured revolving credit agreement. Borrowing availability under the agreement was based on the level of Clarient’s qualified accounts receivable, less certain reserves. The agreement bore interest at variable rates based on the lower of the one month London Interbank Offered Rate (LIBOR) (5.24% at December 31, 2007) plus 3.25% or the prime rate plus 0.5%. As of December 31, 2007, under this facility Clarient had $5.0 million outstanding borrowings under this facility, had no availability based on the level of qualified accounts receivable and was not in compliance with certain financial covenants. On March 17, 2008, Clarient borrowed $4.6 million from the Company under its subordinated revolving credit line to repay and terminate this facility, and borrowed $2.8 million from the Company under its subordinated revolving credit line to repay and terminate its equipment line of credit with the same lender (see Note 24).

     Debt as of December 31, 2007 bore interest at fixed rates between 4.62% and 20.33%, with a weighted average rate of 5.1%, and variable rates between the prime rate minus 0.5% and the prime rate plus 1.5%. Debt as of December 31, 2006 bore interest at fixed rates between 4.62% and 20.33% with a weighted average rate of 13.0%, and variable rates indexed to prime rate plus 1.75%.

     The Company’s debt matures as follows:

		Total
		(In thousands)
2008		$	43,764
2009			3,229
2010			1,302
2011			215
2012 and thereafter			—
Total debt		$	48,510

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

9. 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 debenture holders’ option, the 2024 Debentures are convertible into the Company’s common stock through March 14, 2024, subject to certain conditions. The conversion rate of the debentures is $7.2174 of principal amount per share. The closing price of the Company’s common stock at December 31, 2007 was $1.80. The 2024 Debenture holders have the right to require the Company to repurchase the 2024 Debentures on March 21, 2011, March 20, 2014 or March 20, 2019 at a repurchase price equal to 100% of their face amount, plus accrued and unpaid interest. The 2024 Debenture holders also have the right to require repurchase of the 2024 Debentures upon certain events, including sale of all or substantially all of our common stock or assets, liquidation, dissolution or a change in control. Subject to certain conditions, the Company may redeem all or some of the 2024 Debentures commencing March 20, 2009. During 2006, the Company repurchased $21 million of face value of the 2024 Debentures for $16.4 million in cash, including accrued interest. The Company recorded $0.4 million of expense related to the acceleration of deferred debt issuance costs associated with the 2024 Debentures, resulting in a net gain of $4.3 million, which is included in Other income (loss), net in the Consolidated Statements of Operations. At December 31, 2007, the market value of the 2024 Debentures was approximately $106.5 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 $5.9 million is included in Restricted marketable securities on the Consolidated Balance Sheet at December 31, 2007, of which $3.9 million is classified as a current asset.

10. Accrued Expenses and Other Current Liabilities

     Accrued expenses consisted of the following:

		As of December 31,
		2007				2006
		(In thousands)
Accrued professional fees		$	2,831			$	2,810
Other			16,094				16,446
		$	18,925			$	19,256

11. Shareholders’ Equity

Preferred Stock

     Shares of preferred stock, par value $0.10 per share, are voting and are issuable in one or more series with rights and preferences as to dividends, redemption, liquidation, sinking funds and conversion determined by the Board of Directors. At December 31, 2007 and 2006, there were one million shares authorized and none outstanding.

Shareholders’ Rights Plan

     In February 2000, the Company adopted a shareholders’ rights plan. Under the plan, each shareholder of record on March 24, 2000 received the right to purchase 1/1000 of a share of the Company’s Series A Junior Participating Preferred Stock at the rate of one right for each share of the Company’s common stock then held of record. Each 1/1000 of a share of the Company’s Series A Junior Participating Preferred Stock is designed to be equivalent in voting and dividend rights to one share of the Company’s common stock. The rights will be exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company’s common stock or commences a tender or exchange offer that would result in such a person or group owning 15% or more of the Company’s common stock. If the rights do become exercisable, the Company’s shareholders, other than the shareholders that caused the rights to become exercisable, will be able to exercise each right at an exercise price of $300 and receive

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

shares of the Company’s common stock having a market value equal to approximately twice the exercise price. As an alternative to paying the exercise price in cash, if the directors of the Company so determine, shareholders may elect to exercise their rights and, without the payment of any exercise price, receive half the number of shares of common stock that would have been received had the exercise price been paid in cash.

12. Stock-Based Compensation

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

Equity Compensation Plans

     The Company has three equity compensation plans: the 1999 Equity Compensation Plan, with 9.0 million shares authorized for issuance; the 2001 Associates Equity Compensation Plan with 5.4 million shares authorized for issuance; and the 2004 Equity Compensation Plan, with 6.0 million shares authorized for issuance. Employees and consultants are eligible for grants of stock options, restricted stock awards, stock appreciation rights, stock units, performance units and other stock-based awards under each of these plans; directors and executive officers are eligible for grants only under the 1999 and 2004 Equity Compensation Plans. During 2007 and 2005, 2.5 million and 6.0 million options, respectively, were awarded outside of existing plans as inducement awards in accordance with New York Stock Exchange rules.

     To the extent allowable, all grants are incentive stock options. Options granted under the plans are at prices equal to the fair market value at the date of grant. Upon exercise of stock options, the Company issues shares first from treasury stock, if available, then from authorized but unissued shares. At December 31, 2007, the Company had reserved 25.2 million shares of common stock for possible future issuance under its equity compensation plans. Several subsidiaries also maintain separate equity compensation plans for their employees, directors and advisors.

Classification of Stock-Based Compensation Expense

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

		Year Ended December 31,
		2007				2006
		(In thousands)
Cost of sales		$	119			$	72
Selling, general and administrative			6,411				6,518
Research and development			73				47
		$	6,603			$	6,637

     Included in the expense above is stock-based compensation and mark-to-market adjustments related to liability-classified awards.

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

     Prior to adopting SFAS No. 123(R) on January 1, 2006, the Company accounted for stock-based compensation in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Had compensation cost been recognized consistent with SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s consolidated net loss from continuing operations and discontinued operations and loss per share from continuing operations and from discontinued operations would have been as follows:

						Year Ended December 31, 2005
						(In thousands)
Consolidated net loss from continuing operations		As reported				$	(40,904	)
Add: Stock-based compensation expense included in net loss from continuing operations, net of minority interest		As reported					1,809
Deduct: Total stock based employee compensation expense from continuing operations determined under fair value based method for all awards, net of minority interest and related tax effects							(7,297	)
Consolidated net loss from continuing operations		Pro forma					(46,392	)
Add: Stock-based compensation expense included in net loss of discontinued operations							630
Net income from discontinued operations		As reported					8,834
Deduct: Total stock based employee compensation expense from discontinued operations determined under fair value based method for all awards, net of related tax effects							(1,009	)
		Pro forma				$	(37,937	)
Basic and Diluted Income (Loss) Per Share:
Net loss from continuing operations		As reported				$	(0.34	)
Net income from discontinued operations		As reported					0.07
						$	(0.27	)
Net loss from continuing operations		Pro forma				$	(0.38	)
Net income from discontinued operations		Pro forma					0.07
						$	(0.31	)