SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

Commission File Number 1-5620

Safeguard Scientifics, Inc.

(Exact name of registrant as specified in its charter)

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

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

Yes o No o

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

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

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

Yes o No þ

Number of shares outstanding as of November 4, 2009
Common Stock 20,403,210

 

 

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

		Page
PART I — FINANCIAL INFORMATION
Item 1 — Financial Statements:
Consolidated Balance Sheets — September 30, 2009 (unaudited) and December 31, 2008			3
Consolidated Statements of Operations (unaudited) — Three and Nine Months Ended September 30, 2009 and 2008			4
Consolidated Statements of Cash Flows (unaudited) — Nine Months Ended September 30, 2009 and 2008			5
Consolidated Statement of Shareholders’ Equity (unaudited) — Nine Months Ended September 30, 2009			6
Notes to Consolidated Financial Statements (unaudited)			7
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3 — Quantitative and Qualitative Disclosures About Market Risk			44
Item 4 — Controls and Procedures			44
PART II — OTHER INFORMATION
Item 1A — Risk Factors			45
Item 4 — Submission of Matters to a Vote of Security Holders			46
Item 6 — Exhibits			47
Signatures			48
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

SAFEGUARD SCIENTIFICS, INC.

		September 30,				December 31,
		2009				2008
		(In thousands except
		per share data)
		(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	92,101			$	75,051
Cash held in escrow and restricted cash			6,433				6,433
Marketable securities			38,871				14,701
Restricted marketable securities			—				1,990
Accounts receivable, less allowances ($8,045— 2008)			—				20,465
Prepaid expenses and other current assets			726				1,507
Total current assets			138,131				120,147
Property and equipment, net			326				12,369
Ownership interests in and advances to companies ($126,741 at fair value at September 30, 2009)			205,813				85,561
Goodwill			—				12,729
Cash held in escrow and restricted cash — long-term			476				501
Other			645				1,095
Total Assets		$	345,391			$	232,402
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current portion of credit line borrowings		$	—			$	14,104
Current maturities of long-term debt			—				263
Accounts payable			344				3,337
Accrued compensation and benefits			3,007				5,758
Accrued expenses and other current liabilities			4,683				8,285
Total current liabilities			8,034				31,747
Long-term debt			—				345
Other long-term liabilities			5,126				9,600
Convertible senior debentures			84,725				86,000
Commitments and contingencies
Shareholders’ Equity (Note 3):
Preferred stock, $0.10 par value; 1,000 shares authorized			—				—
Common stock, $0.10 par value; 83,333 shares authorized; 20,390 and 20,265 shares issued and outstanding in 2009 and 2008, respectively			2,039				2,026
Additional paid-in capital			789,425				773,456
Accumulated deficit			(543,914	)			(669,526	)
Accumulated other comprehensive loss			—				(29	)
Treasury stock, at cost			(44	)			(1,217	)
Total shareholders’ equity			247,506				104,710
Total Liabilities and Shareholders’ Equity		$	345,391			$	232,402

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(In thousands except per share data)
		(Unaudited)
Revenue		$	—			$	18,997			$	34,839			$	51,799
Operating Expenses:
Cost of sales			—				8,615				13,811				24,522
Selling, general and administrative			4,237				14,435				32,309				42,657
Total operating expenses			4,237				23,050				46,120				67,179
Operating loss			(4,237	)			(4,053	)			(11,281	)			(15,380	)
Other income (loss), net			(1,908	)			7,685				156,420				10,312
Interest income			111				913				379				2,632
Interest expense			(728	)			(1,202	)			(2,471	)			(3,767	)
Equity loss			(4,827	)			(8,363	)			(17,786	)			(20,290	)
Net income (loss) from continuing operations before income taxes			(11,589	)			(5,020	)			125,261				(26,493	)
Income tax benefit			—				30				14				26
Net income (loss) from continuing operations			(11,589	)			(4,990	)			125,275				(26,467	)
Income (loss) from discontinued operations, net of tax			—				(1,136	)			1,500				(9,237	)
Net income (loss)			(11,589	)			(6,126	)			126,775				(35,704	)
Net (income) loss attributable to noncontrolling interest			—				928				(1,163	)			3,085
Net income (loss) attributable to Safeguard Scientifics, Inc.		$	(11,589	)		$	(5,198	)		$	125,612			$	(32,619	)
Basic Income (Loss) Per Share:
Net income (loss) from continuing operations attributable to Safeguard Scientifics, Inc. common shareholders		$	(0.57	)		$	(0.20	)		$	6.14			$	(1.15	)
Net income (loss) from discontinued operations attributable to Safeguard Scientifics, Inc. common shareholders			—				(0.06	)			0.05				(0.45	)
Net income (loss) attributable to Safeguard Scientifics, Inc. common shareholders		$	(0.57	)		$	(0.26	)		$	6.19			$	(1.60	)
Diluted Income (Loss) Per Share:
Net income (loss) from continuing operations attributable to Safeguard Scientifics, Inc. common shareholders		$	(0.57	)		$	(0.20	)		$	5.66			$	(1.15	)
Net income (loss) from discontinued operations attributable to Safeguard Scientifics, Inc. common shareholders			—				(0.06	)			0.04				(0.45	)
Net income (loss) attributable to Safeguard Scientifics, Inc. common shareholders		$	(0.57	)		$	(0.26	)		$	5.70			$	(1.60	)
Average shares used in computing income (loss) per share:
Basic			20,326				20,296				20,298				20,349
Diluted			20,326				20,296				22,380				20,349
Amounts attributable to Safeguard Scientifics, Inc. common shareholders:
Net income (loss) from continuing operations		$	(11,589	)		$	(4,062	)		$	124,717			$	(23,383	)
Net income (loss) from discontinued operations			—				(1,136	)			895				(9,236	)
Net income (loss) attributable to Safeguard Scientifics, Inc.		$	(11,589	)		$	(5,198	)		$	125,612			$	(32,619	)

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

		Nine Months Ended September 30,
		2009				2008
		(In thousands)
		(Unaudited)
Cash Flows from Operating Activities:
Cash flows from operating activities of continuing operations		$	(15,537	)		$	(14,408	)
Cash flows from operating activities of discontinued operations			—				(3,288	)
Net cash used in operating activities			(15,537	)			(17,696	)
Cash Flows from Investing Activities:
Proceeds from sales of and distributions from companies and funds			61,272				3,557
Advances to partner companies			(1,100	)			(4,210	)
Repayment of advances to companies			5,679				—
Acquisitions of ownership interests in partner companies and funds, net of cash acquired			(21,094	)			(19,315	)
Repayment of note receivable-related party, net			—				4
Increase in marketable securities			(54,382	)			(63,010	)
Decrease in marketable securities			30,212				2,814
Increase in restricted cash, net			(1,956	)			—
Capital expenditures			(2,144	)			(3,279	)
Deconsolidation of subsidary cash			(2,667	)			—
Proceeds from sale of discontinued operations, net			1,500				83,934
Cash flows from investing activities of discontinued operations			—				(2,867	)
Net cash provided by (used in) investing activities			15,320				(2,372	)
Cash Flows from Financing Activities:
Repurchase of convertible senior debentures			(1,194	)			(30,000	)
Borrowings on revolving credit facilities			23,726				24,143
Repayments on revolving credit facilities			(33,237	)			(23,756	)
Borrowings on term debt			—				672
Repayments on term debt			(107	)			(2,520	)
Issuance of common stock, net			41				115
Issuance of subsidiary equity, net			28,082				965
Repurchase of common stock			(44	)			(1,296	)
Cash flows from financing activities of discontinued operations			—				4,790
Net cash provided by (used in) financing activities			17,267				(26,887	)
Net Increase (Decrease) in Cash and Cash Equivalents			17,050				(46,955	)
Changes in Cash and Cash Equivalents from, and advances to Acsis, Alliance Consulting and Laureate Pharma included in assets of discontinued operations			—				(1,055	)
			17,050				(48,010	)
Cash and Cash Equivalents at beginning of period			75,051				96,201
Cash and Cash Equivalents at end of period		$	92,101			$	48,191

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

						Safeguard Scientifics, Inc. Shareholders
										Accumulated
										Other
										Comprehensive												Additional
						Accumulated				Income				Common Stock								Paid-In				Treasury Stock								Noncontrolling
		Total				Deficit				(Loss)				Shares				Amount				Capital				Shares				Amount				Interest
		(In thousands)
Balance — December 31, 2008 (Note 3)		$	104,710			$	(669,526	)		$	(29	)			20,265			$	2,026			$	773,456				155			$	(1,217	)		$	—
Net income			126,775				125,612				—				—				—				—				—				—				1,163
Impact of subsidiary equity transactions			12,750				—				31				—				—				13,882				—				—				(1,163	)
Stock options exercised, net			41												4				—				41				(1	)			—
Issuance of restricted stock, net			184				—				—				121				13				(1,046	)			(153	)			1,217				—
Repurchase of common stock			(44	)																							4				(44	)
Stock-based compensation expense			3,092				—				—				—				—				3,092				—				—				—
Other comprehensive loss			(2	)			—				(2	)			—				—				—				—				—				—
Balance — September 30, 2009		$	247,506			$	(543,914	)		$	—				20,390			$	2,039			$	789,425				5			$	(44	)		$	—

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

The accompanying unaudited interim Consolidated Financial Statements of Safeguard Scientifics, Inc. (the “Company”) were prepared in accordance with accounting principles generally accepted in the United States of America and the interim financial statements rules and regulations of the SEC. In the opinion of management, these statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Consolidated Financial Statements. The interim operating results are not necessarily indicative of the results for a full year or for any interim period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements. The Consolidated Financial Statements included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-Q and included together with the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s 2008 Annual Report on Form 10-K.

The Company evaluated subsequent events through November 5, 2009, the date the Consolidated Financial Statements as of and for the period ended September 30, 2009 were issued.

2. SUBSIDIARY EQUITY TRANSACTIONS

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

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

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

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

3. BASIS OF PRESENTATION

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

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

The Company’s voting interest in Cellumen, Inc. (“Cellumen”) was 55.2% as of September 30, 2009, on an as-converted basis. Due to the substantive participating rights of the minority shareholders in the significant operating decisions of Cellumen, the Company continues to account for its holdings in Cellumen under the equity method. See Note 16.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In July 2009, the Company’s Board of Directors approved a one-for-six reverse stock split of the Company’s common stock. The reverse split, which was approved by Safeguard shareholders in July 2008, became effective on August 27, 2009. The number of authorized shares of Company common stock was reduced from 500.0 million to 83.3 million. The reverse stock split did not negatively affect any of the rights of holders of Safeguard common stock, convertible debentures, options, deferred stock units or other securities convertible into the Company’s common stock. All share and per share amounts have been restated for all periods presented to reflect the one-for-six reverse stock split. In addition, $10.1 million was reclassified from Common stock to Additional paid-in capital at December 31, 2008 to reflect the one-for-six reverse stock split.

4. DISCONTINUED OPERATIONS

Clarient Technology Business

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

Acsis, Alliance Consulting and Laureate Pharma

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

Of the companies included in the Bundle Sale, Acsis, Alliance Consulting and Laureate Pharma were consolidated partner companies; Neuronyx and ProModel were minority-owned partner companies. The Company has presented the results of operations of Acsis, Alliance Consulting and Laureate Pharma as discontinued operations for all periods presented.

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

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

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Results of all discontinued operations were as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(In thousands)
		(unaudited)
Revenue		$	—			$	—			$	—			$	45,712
Operating expenses			—				—				—				(49,652	)
Impairment of carrying value			—				—				—				(3,634	)
Other			—				—				—				(1,547	)
Loss from operations			—				—				—				(9,121	)
Gain (loss) on disposal, net of tax			—				(1,136	)			1,500				(116	)
Income (loss) from discontinued operations		$	—			$	(1,136	)		$	1,500			$	(9,237	)

5. FINANCIAL INSTRUMENTS

The Company categorizes its financial instruments into a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument. Financial assets recorded at fair value on the Company’s Consolidated Balance Sheets are categorized as follows:

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

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

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

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

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

		Carrying				Fair Value Measurement at September 30, 2009
		Value				Level 1				Level 2				Level 3
		(in thousands)
		(unaudited)
Cash and cash equivalents		$	92,101			$	92,101			$	—			$	—
Cash held in escrow and restricted cash			6,433				6,433				—				—
Marketable securities — held-to-maturity:
Commercial paper			5,885				5,885
U.S. Treasury Bills			20,693				20,693				—				—
Government agency bonds			6,382				6,382				—				—
Certificates of deposit			5,911				5,911				—				—
Ownership interest in Clarient			126,741				126,741				—				—
Cash held in escrow and restricted cash — long-term			476				476				—				—
		$	264,622			$	264,622			$	—			$	—

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

As described in Note 7, the Company recognized impairment charges of $9.7 million related to cost-method partner companies during the three months ended September 30, 2009 measured as the amount by which the partner companies’ carrying values exceeded their respective estimated fair values. The fair value measurements of these companies of $3.6 at September 30, 2009 were based on Level 3 inputs as defined above. The inputs and valuation techniques used include discounted cash flows and valuation of comparable public companies.

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

6. RECENT ACCOUNTING PRONOUNCEMENTS

In August 2009, the Financial Accounting Standards Board (“FASB”) issued ASC No. 2009-05. ASC No. 2009-05 provides amendments to FASB ASC 820-10 for the fair value measurement of liabilities. ASC No. 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using a valuation technique that uses the quoted price of the identical liability when traded as an asset, the quoted prices for similar liabilities or similar liabilities when traded as assets or another valuation technique that is consistent with the principles of FASB ASC 820. The amendments in the update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The amendments in the update also clarify that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are level 1 fair value measurements. The guidance provided in FASB ASC No. 2009-05 is effective for the first reporting period (including interim periods) beginning after issuance. The adoption of FASB ASC No. 2009-05 did not have a material effect on the Company’s consolidated financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, “FASB Accounting Standards Codification” (“SFAS No. 168” or “Codification”) as the single source of authoritative non-governmental United States Generally Accepted Accounting Principles (“US GAAP”) to be launched on July 1, 2009. SFAS No. 168 replaces FASB Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the Codification will be considered non-authoritative. The Codification is effective for interim and annual periods ending after September 15, 2009. The Codification is for disclosure only and will not impact the Company’s Consolidated Financial Statements.

In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, “Subsequent Events” (“SFAS No. 165”) as codified in ASC Topic 855. SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. SFAS No. 165 sets forth the period after the balance sheet date during which management shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009. The adoption of this pronouncement did not have a material impact on the Company’s Consolidated Financial Statements.

In April 2009, the FASB released FASB Staff Position (“FSP”) 107-1 and Accounting Principles Board (“APB”) Opinion No. 28-1, Interim Disclosures about Fair Value of Financial Instruments as codified in ASC Topics 270 and 825, which requires disclosures about the fair value of financial instruments (“FSP SFAS 107-1 and APB 28-1”). This pronouncement amends FASB 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments in the interim financial statements as well as in the annual financial statements. FSP SFAS 107-1 and APB 28-1 also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information in interim financial statements. In addition, the FSP requires disclosures of the methods and significant assumptions used to estimate the fair value of those financial instruments. The Company adopted FSP SFAS 107-1 and APB 28-1 on June 30, 2009 and has provided the necessary additional disclosures.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In November 2008, the FASB’s Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 08-6, “Equity Method Accounting Considerations” as codified in ASC Topic 323. EITF 08-6 continues to follow the accounting for the initial carrying value of equity method investments in APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock”, which is based on a cost accumulation model and generally excludes contingent consideration. EITF 08-6 also specifies that other-than-temporary impairment testing by the investor should be performed at the investment level and that a separate impairment assessment of the underlying assets is not required. An impairment charge by the investee should result in an adjustment of the investor’s basis of the impaired asset for the investor’s pro-rata share of such impairment. In addition, EITF 08-6 reached a consensus on how to account for an issuance of shares by an investee that reduces the investor’s ownership share of the investee. An investor should account for such transactions as if it had sold a proportionate share of its investment with any gains or losses recorded through earnings. EITF 08-6 also addresses the accounting for a change in an investment from the equity method to the cost method after adoption of Statement 160. EITF 08-6 affirms the existing guidance in APB 18, which requires cessation of the equity method of accounting and application of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” as codified in ASC Topic 320, or the cost method under APB 18 as codified in ASC Topic 323, as appropriate. EITF 08-6 is effective for fiscal years beginning on or after December 15, 2008. The adoption of EITF 08-6 did not have a material impact on the Company’s Consolidated Financial Statements.

In June 2008, the EITF reached consensus on Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”) as codified in ASC Topic 815. EITF 07-5 clarifies how to determine whether certain instruments or features were indexed to an entity’s own stock. EITF 07-5 replaced EITF 01-6 as a critical component of the literature applied to evaluating financial instruments for debt or equity classification and embedded features for bifurcation as derivatives. The consensus is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of the consensus did not have a material impact on the Company’s Consolidated Financial Statements.

In May 2008, the FASB issued FASB Staff Position (“FSP”) FSP No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”) as codified in ASC Topic 470. FSP APB 14-1 requires the issuer of convertible debt instruments with cash settlement features to separately account for the liability and equity components of the instrument. The debt is recognized at the present value of its cash flows discounted using the issuer’s nonconvertible debt borrowing rate. The equity component is recognized as the difference between the proceeds from the issuance of the note and the fair value of the liability. FSP APB 14-1also requires an accretion of the resultant debt discount over the expected life of the debt. The adoption of FSP APB 14-1 did not have any impact on the Company’s Consolidated Financial Statements because the convertible senior debentures issued by the Company do not include any cash settlement features within the scope of FSP APB 14-1.

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”)” as codified in ASC Topic 350. FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under Statement 142. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. The adoption of FSP FAS 142-3 did not have a material impact on the Company’s Consolidated Financial Statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”) as codified in ASC Topic 805. 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.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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”) as codified in ASC Topic 810. SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of noncontrolling interests (minority interests) as equity in the consolidated financial statements and separate from the parent’s equity. SFAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary that does not result in deconsolidation are treated as equity transactions if the parent retains its controlling financial interest. Losses attributable to the noncontrolling interest that exceed its basis in the subsidiary’s equity result in a deficit noncontrolling interest reflected in the Consolidated Balance Sheet. Revenue, expenses, gains, losses, net income or loss are reported in the Consolidated Statements of Operations at the consolidated amounts, which include the amounts attributable to the owners of the parent and noncontrolling interest. The amount of net income attributable to noncontrolling interests will be included in consolidated net income on the face of the income statement. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years beginning after November 15, 2008. On January 1, 2009, the Company adopted the provisions of SFAS No. 160. As a result, the Company reflects the portion of equity (net assets) of its consolidated partner companies, if any, not attributable, directly or indirectly, to the Company as a noncontrolling interest within equity, separate from the equity of the Company.

7. OWNERSHIP INTERESTS IN AND ADVANCES TO COMPANIES

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

During the three months ended September 30, 2009, the Company sold 18.4 million shares of common stock of Clarient for $61.3 million in net proceeds which reduced the Company’s ownership interest in Clarient from 47.3% to 28.3%. The Company recognized a loss of $7.3 million on the sale, based on the net proceeds received compared to the fair value at the end of the previous quarter, which is included in Other income, net in the Consolidated Statements of Operations for the three months ended September 30, 2009.

For the three months ended September 30, 2009 and for the period from May 14, 2009 through September 30, 2009, the Company recognized unrealized gains of $15.1 million and $67.6 million, respectively, on the mark-to-market of its holdings in Clarient which are included in Other income, net in the Consolidated Statements of Operations. At September 30, 2009, the fair value of the Company’s holdings in Clarient of $126.7 million was included in Ownership interests in and advances to companies in the Consolidated Balance Sheet (see Note 5).

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

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following unaudited summarized financial information for Clarient at June 30, 2009 and December 31, 2008 and for the six months ended June 30, 2009 and 2008, respectively, has been compiled from the unaudited financial statements of Clarient.

		June 30,				December 31,
		2009				2008
		(In thousands)
		(unaudited)
Balance Sheets:
Current assets		$	38,085			$	23,454
Non-current assets			16,234				12,055
Total Assets		$	54,319			$	35,509
Current liabilities		$	13,891			$	35,934
Non-current liabilities			4,738				4,315
Shareholders’ equity (deficit)			35,690				(4,740	)
Total Liabilities and Shareholders’ Equity (Deficit)		$	54,319			$	35,509

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		(In thousands)								(In thousands)
		(unaudited)								(unaudited)
Results of Operations:
Revenue		$	23,730			$	16,916			$	46,922			$	32,802
Operating income (loss)		$	771			$	(1,716	)		$	2,285			$	(1,859	)
Net income (loss) from continuing operations		$	29			$	(4,279	)		$	(1,627	)		$	(5,213	)

The Company recognized impairment charges related to cost method partner companies of totaling $9.7 million during the three and nine months ended September 30, 2009 which were reflected in Other income (loss), net in the Consolidated Statements of Operations. The impairment charges of $5.8 million related to GENBAND, Inc. and $3.9 million related to Tengion, Inc were based on the Company’s determination that there had been an other than temporary decline in the value of its holdings in these partner companies due to external market conditions and expectations of values at which the companies may need to raise additional capital. The impairment charges in each case were measured as the amount by which the partner companies’ carrying values exceeded their respective estimated fair values.

The Company recognized an impairment charge of $3.3 million related to its partner company, Rubicor Medical, Inc. in the second quarter of 2009, which was reflected in Equity loss in the Consolidated Statements of Operations for the nine months ended September 30, 2009. The adjusted carrying value of Rubicor at September 30, 2009 was $0. The amount of the impairment charge was determined by comparing the carrying value of Rubicor to its estimated fair value. The Company previously recognized a $4.0 million impairment charge related to Rubicor in the fourth quarter of 2008 based on estimates of fair value provided by an independent valuation firm and a range of values indicated by potential investors in Rubicor. The carrying value of the Company’s interest in Rubicor at December 31, 2008 was $4.2 million. At present, Rubicor is pursuing reorganization under Chapter 11 of the United States Bankruptcy Code. The Company believes it is unlikely the Company will recover any of its investment in the context of such bankruptcy proceeding.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. COMPREHENSIVE INCOME (LOSS)

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

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

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
		(In thousands)
		(unaudited)
Net income (loss)		$	(11,589	)		$	(6,126	)		$	126,775			$	(35,704	)
Other comprehensive income (loss), before taxes:
Foreign currency translation adjustments			—				2				(2	)			(54	)
Total comprehensive income (loss)			(11,589	)			(6,124	)			126,773				(35,758	)
Comprehensive (income) loss attributable to the noncontrolling interest			—				928				(1,163	)			3,085
Comprehensive income (loss) attributable to the Company		$	(11,589	)		$	(5,196	)		$	125,610			$	(32,673	)

9. LONG-TERM DEBT AND CREDIT ARRANGEMENTS

Consolidated long-term debt consisted of the following:

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

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

In February 2009, the Company entered into a loan agreement which provides the Company with a revolving credit facility in the maximum aggregate amount of $50 million in the form of borrowings, guarantees and issuances of letters of credit (subject to a $20 million sublimit). Actual availability under the credit facility will be based on the amount of cash maintained at the bank as well as the value of the Company’s public and private partner company interests. This credit facility bears interest at the prime rate for outstanding borrowings, subject to an increase in certain circumstances. Other than for limited exceptions, the Company is required to maintain all of its depository and operating accounts and not less than 75% of its investment and securities accounts at the bank. The credit facility matures on December 31, 2010. Under the credit facility, the Company provided a $6.3 million letter of credit expiring on March 19, 2019 to the landlord of CompuCom Systems, Inc.’s Dallas headquarters in connection with the sale of CompuCom Systems in 2004. Availability under the Company’s revolving credit facility at September 30, 2009 was $43.7 million.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. CONVERTIBLE SENIOR DEBENTURES

In February 2004, the Company completed the sale of $150 million of 2.625% convertible senior debentures with a stated maturity of March 15, 2024 (the “2024 Debentures”). Interest on the 2024 Debentures is payable semi-annually. At the debentures holders’ option, the 2024 Debentures are convertible into the Company’s common stock through March 14, 2024, subject to certain conditions. The current conversion rate of the debentures is $43.3044 of principal amount per share. The closing price of the Company’s common stock at September 30, 2009 was $10.97. The 2024 Debentures holders have the right to require the Company to repurchase the 2024 Debentures on March 21, 2011, March 20, 2014 or March 20, 2019 at a repurchase price equal to 100% of their face amount, plus accrued and unpaid interest. The 2024 Debentures holders also have the right to require repurchase of the 2024 Debentures upon certain events, including sale of all or substantially all of our common stock or assets, liquidation, dissolution, a change in control or the delisting of the Company’s common stock from the New York Stock Exchange if the Company were unable to obtain a listing for its common stock on another national or regional securities exchange. Subject to certain conditions, the Company may redeem all or some of the 2024 Debentures commencing March 20, 2009. During the third quarter 2009, the Company repurchased $1.3 million in face value of the 2024 debentures for $1.2 million in cash, including accrued interest. In connection with the repurchase, the Company recorded a gain of $0.1 million in Other income, net. Through September 30, 2009, the Company has repurchased a total of $65.3 million in face value of the 2024 Debentures. At September 30, 2009, the market value of the $84.7 million outstanding 2024 Debentures was approximately $78.8 million, based on quoted market prices as of such date.

11. STOCK-BASED COMPENSATION

Classification of Stock-Based Compensation Expense

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

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
		(In thousands)
		(unaudited)
Cost of sales		$	—			$	14			$	49			$	35
Selling, general and administrative			825				839				3,115				2,470
		$	825			$	853			$	3,164			$	2,505

The fair value of the Company’s stock-based awards to employees was estimated at the date of grant using the Black-Scholes option-pricing model. The risk-free rate was based on the U.S. Treasury yield curve in effect at the end of the quarter in which the grant occurred. The expected term of stock options granted was estimated using the historical exercise behavior of employees. Expected volatility was based on historical volatility measured using weekly price observations of the Company’s common stock for a period equal to the stock option’s expected term. Assumptions used in the valuation of options granted in each period were as follows:

		Three Months Ended September 30,				Nine Months Ended September 30,
		2009		2008		2009		2008
		(unaudited)
Service-Based Awards
Dividend yield		0%		0%		0%		0%
Expected volatility		60%		52%		60%		52%
Average expected option term		5 years		5 years		5 years		5 years
Risk-free interest rate		2.5%		3.0%		2.5%		3.1%
Performance-Based Awards
Dividend yield		—		0%		—		0%
Expected volatility		—		50%		—		50%
Average expected option term		—		4.4 years		—		4.4 years
Risk-free interest rate		—		3.0%		—		3.0%
Market-Based Awards
Dividend yield		—		—		—		0%
Expected volatility		—		—		—		59%
Average expected option term		—		—		—		6 years
Risk-free interest rate		—		—		—		3.4%

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

1)

Market-based;

2)

performance-based; and

3)

service-based.

Market-based awards entitle participants to vest in a number of options determined by achievement by the Company of certain target market capitalization increases (measured by reference to stock price increases on a specified number of outstanding shares) over an eight-year period. The requisite service periods for the market-based awards are based on the Company’s estimate of the dates on which the market conditions will be met as determined using a Monte Carlo simulation model. Compensation expense is recognized over the requisite service periods using the straight-line method but is accelerated if market capitalization targets are achieved earlier than estimated. During the nine months ended September 30, 2009 and 2008, respectively, the Company issued 0 and 250 thousand market-based option awards to employees. During the nine months ended September 30, 2009, no options vested based on achievement of market capitalization targets. The Company recorded compensation expense related to these awards of $0.3 million and $0.2 million during the three months ended September 30, 2009 and 2008, respectively. The Company recorded compensation expense related to these awards of $1.0 million and $0.2 million during the nine months ended September 30, 2009 and 2008, respectively. Depending on the Company’s stock performance, the maximum number of unvested shares at September 30, 2009 attainable under these grants was 1.2 million shares.

Performance-based awards entitle participants to vest in a number of options determined by achievement by the Company of target capital returns based on net cash proceeds received by the Company on the sale, merger or other exit transaction of certain identified partner companies. Vesting may occur, if at all, once per year on or about the anniversary date of the grant. The requisite service periods for the performance-based awards are based on the Company’s estimate of when the performance conditions will be met. Compensation expense is recognized for performance-based awards for which the performance condition is considered probable of achievement. Compensation expense is recognized over the requisite service periods using the straight-line method but is accelerated if capital return targets are achieved earlier than estimated. During the nine months ended September 30, 2009 and 2008, respectively, the Company issued 0 and 341 thousand performance-based option awards to employees. During the nine months ended September 30, 2009, no options vested based on the achievement of capital returns targets. The Company recorded compensation expense related to these awards of $0.0 million and $0.1 million for the three and nine months ended September 30, 2009, respectively. No compensation expense was recognized related to these awards during the three and nine months ended September 30, 2008 as the awards were granted at the end of the period. The maximum number of unvested shares at September 30, 2009 attainable under these grants was 341 thousand shares.

All other outstanding options are service-based awards that generally vest over four years after the date of grant and expire eight years after the date of grant. Compensation expense is recognized over the requisite service period using the straight-line method. The requisite service period for service-based awards is the period over which the award vests. During the nine months ended September 30, 2009 and 2008, respectively, the Company issued 33 thousand and 284 thousand service-based option awards to employees. The Company recorded compensation expense related to these awards of $0.3 million and $0.3 million for the three months ended September 30, 2009 and 2008, respectively, and $0.9 and $0.8 for the nine months ended September 30, 2009 and 2008, respectively.

During the nine months ended September 30, 2009, the Company issued 0.2 million restricted shares to employees. The restricted shares were issued in lieu of cash for of a portion of the 2008 management incentive plan payment earned by certain senior employees. The restricted shares issued vest 25% on the first anniversary of grant and the remaining 75% thereafter in 24 equal monthly installments over the next two years.

The Company issued deferred stock units to non-employee directors for fees earned during the preceding quarter of 65 thousand and 47 thousand during the nine months ended September 30, 2009 and 2008, respectively. In 2009, all non-employee directors were required to defer at least 25% of directors’ fees earned in the period and may have elected to defer up to 100% of directors’ fees earned. For prior periods, certain directors elected to defer all or a portion of directors’ fees earned. Deferred stock units issued to directors in lieu of directors fees are 100% vested at the grant date; matching deferred stock units equal to 25% of directors’ fees deferred vest one year following the grant date or, if earlier, upon reaching age 65. Deferred stock units are payable in stock on a one-for-one basis. Payments in respect of the deferred stock units are generally distributable following termination of employment or service, death or permanent disability.

Total compensation expense for deferred stock units and restricted stock was approximately $0.1 million and $0.1 million for the three months ended September 30, 2009 and 2008, respectively and $0.3 million and $0.1 million for the nine months ended September 30, 2009 and 2008, respectively.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock based compensation expense for Clarient prior to its deconsolidation was included in the Company’s consolidated results of operations. During the three months ended September 30, 2008, Clarient recorded $0.2 million of stock-based compensation expense. During the period from January 1, 2009 through May 14, 2009 and the nine months ended September 30, 2008, Clarient recorded $0.8 million and $1.4 million of stock-based compensation expense, respectively.

12. INCOME TAXES

The Company’s consolidated income tax benefit was $0 thousand and $30 thousand for the three months ended September 30, 2009 and 2008 and $14 and $26 for the nine months ended September 30, 2009 and 2008, respectively. The net income tax benefit recognized in each period resulted from the reversal of reserves that related to uncertain tax positions for which the statute of limitations expired during the period in the applicable tax jurisdictions. As discussed in Notes 2 and 3, as of May 14, 2009, the Company deconsolidated Clarient and accounts for its retained interest in Clarient at fair value. Accordingly, Clarient’s gross deferred tax assets as of December 31, 2008 of approximately $54.4 million have been deconsolidated. During the three months ended September 30, 2009, the Company generated tax expense of $11.5 million on the sale of a portion of its holdings in Clarient, which was entirely offset by capital loss carryforwards which had been reduced by a full valuation allowance. In addition, the Company recognized a gross deferred tax liability of approximately $29.1 million, which reduced the Company’s net deferred tax asset, based on the fair value of the Company’s retained interest in Clarient at September 30, 2009. The Company has recorded a valuation allowance to reduce its net deferred tax asset to an amount that is more likely than not to be realized in future years. Accordingly, the income tax expense and benefit that would have been recognized in 2009 and 2008, respectively, were offset by a valuation allowance.

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

13. NET INCOME (LOSS) PER SHARE

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(In thousands except per share data)
		(unaudited)
Basic:
Amounts attributable to Safeguard Scientifics, Inc. common shareholders:
Net income (loss) from continuing operations		$	(11,589	)		$	(4,062	)		$	124,717			$	(23,383	)
Net income (loss) from discontinued operations			—				(1,136	)			895				(9,236	)
Net income (loss) attributable to Safeguard Scientifics, Inc.		$	(11,589	)		$	(5,198	)		$	125,612			$	(32,619	)
Net income (loss) from continuing operations attributable to Safeguard Scientifics, Inc. common shareholders		$	(0.57	)		$	(0.20	)		$	6.14			$	(1.15	)
Net income (loss) from discontinued operations attributable to Safeguard Scientifics, Inc. common shareholders			—				(0.06	)			0.05				(0.45	)
Net income (loss) attributable to Safeguard Scientifics, Inc. common shareholders		$	(0.57	)		$	(0.26	)		$	6.19			$	(1.60	)
Average common shares outstanding			20,326				20,296				20,298				20,349

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(In thousands except per share data)
		(unaudited)
Diluted:
Amounts attributable to Safeguard Scientifics, Inc. common shareholders:
Net income (loss) from continuing operations		$	(11,589	)		$	(4,062	)		$	124,717			$	(23,383	)
Interest on convertible senior debentures			—				—				1,987				—
Net income (loss) from continuing operations for diluted per share computation			(11,589	)			(4,062	)			126,704				(23,383	)
Net income (loss) from discontinued operations			—				(1,136	)			895				(9,236	)
Net income (loss) for diluted per share computation		$	(11,589	)		$	(5,198	)		$	127,599			$	(32,619	)
Net income (loss) from continuing operations attributable to Safeguard Scientifics, Inc. common shareholders		$	(0.57	)		$	(0.20	)		$	5.66			$	(1.15	)
Net income (loss) from discontinued operations attributable to Safeguard Scientifics, Inc. common shareholders			—				(0.06	)			0.04				(0.45	)
Net income (loss) attributable to Safeguard Scientifics, Inc. common shareholders		$	(0.57	)		$	(0.26	)		$	5.70			$	(1.60	)
Number of shares used in basic per share computation			20,326				20,296				20,298				20,349
Effect of dilutive securities:
Convertible senior debentures			—				—				1,984				—
Unvested restricted stock and DSUs			—				—				1				—
Employee stock options			—				—				97				—
Number of shares used in diluted per share computation			20,326				20,296				22,380				20,349

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

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

The following potential shares of common stock and their effects on income were excluded from the diluted net loss per share calculation for the three months ended September 30, 2009 and 2008 and the nine months ended September 30, 2008 because their effect would be anti-dilutive:

•

At September 30, 2009, options to purchase 3.2 million shares of common stock at prices ranging from $3.93 to $21.36 per share, and at September 30, 2008, options to purchase 3.7 million shares of common stock at prices ranging from $6.18 to $89.06 per share were excluded from the calculations.

•

At September 30, 2009 and 2008, unvested restricted stock and DSUs convertible into 217 thousand and 27 thousand shares of stock were excluded from the calculations.

•

At September 30, 2009 and 2008, a total of 2.0 million and 2.1 million shares related to the Company’s 2024 Debentures (see Note 10) representing the weighted average effect of assumed conversion of the 2024 Debentures were excluded from the calculations.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. PARENT COMPANY FINANCIAL INFORMATION

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

Parent Company Balance Sheets

		September 30,				December 31,
		2009				2008
		(In thousands)
		(unaudited)
Assets:
Cash and cash equivalents		$	92,101			$	73,213
Cash held in escrow			6,433				6,433
Marketable securities			38,871				14,701
Restricted marketable securities			—				1,990
Other current assets			726				356
Total current assets			138,131				96,693
Ownership interests in and advances to companies			205,813				105,955
Cash held in escrow — long-term			476				501
Other			971				1,364
Total Assets		$	345,391			$	204,513
Liabilities and Shareholders’ Equity:
Current liabilities		$	8,034			$	8,173
Long-term liabilities			5,126				5,630
Convertible senior debentures			84,725				86,000
Total Safeguard Scientifics, Inc. shareholders’ equity			247,506				104,710
Total Liabilities and Shareholders’ Equity		$	345,391			$	204,513

Parent Company Statements of Operations

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(In thousands)
		(unaudited)
Operating expenses		$	(4,237	)		$	(4,210	)		$	(12,902	)		$	(13,624	)
Other income (loss), net			(1,908	)			7,685				156,420				10,308
Recovery — related party			—				—				—				4
Interest income			111				906				375				2,613
Interest expense			(728	)			(999	)			(2,196	)			(3,106	)
Equity loss			(4,827	)			(7,474	)			(16,994	)			(19,608	)
Net income (loss) from continuing operations before income taxes			(11,589	)			(4,092	)			124,703				(23,413	)
Income tax benefit			—				30				14				30
Equity income (loss) attributable to discontinued operations			—				(1,136	)			895				(9,236	)
Net income (loss) attributable to Safeguard Scientifics, Inc.		$	(11,589	)		$	(5,198	)		$	125,612			$	(32,619	)

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Parent Company Statements of Cash Flows

		Nine Months Ended
		September 30,
		2009				2008
		(In thousands)
		(unaudited)
Net cash used in operating activities		$	(11,049	)		$	(11,504	)
Cash Flows from Investing Activities
Proceeds from sales of and distributions from companies and funds			61,272				3,557
Advances to partner companies			(6,900	)			(14,218	)
Repayment of advances to partner companies			21,179				—
Acquisitions of ownership interests in partner companies and funds, net of cash acquired			(21,094	)			(19,315	)
Repayment of note receivable-related party, net			—				4
Increase in marketable securities			(54,382	)			(63,010	)
Decrease in marketable securities			30,212				2,814
Decrease in restricted cash			861				—
Proceeds from sale of discontinued operations			—				84,517
Capital expenditures			(14	)			(28	)
Net cash provided by (used in) investing activities			31,134				(5,679	)
Cash Flows from Financing Activities
Repurchase of convertible senior debentures			(1,194	)			(30,000	)
Issuance of common stock, net			41				115
Repurchase of common stock			(44	)			(1,296	)
Net cash used in financing activities			(1,197	)			(31,181	)
Net Increase (Decrease) in Cash and Cash Equivalents			18,888				(48,364	)
Cash and Cash Equivalents at beginning of period			73,213				94,685
Cash and Cash Equivalents at end of period		$	92,101			$	46,321

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

15. OPERATING SEGMENTS

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

As of September 30, 2009, the Company held an interest in 18 non-consolidated partner companies. The Company’s reportable operating segments are as follows: i) Life Sciences and ii) Technology.

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

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

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

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

The following tables reflect the Company’s consolidated operating data by reportable segment. All significant intersegment activity has been eliminated in consolidation. Accordingly, segment results reported by the Company exclude the effect of transactions between the Company and its previously consolidated partner company.

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

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

Segment assets in Other items included primarily cash, cash equivalents, cash held in escrow and marketable securities of $137.9 million and $94.8 million at September 30, 2009 and December 31, 2008, respectively.

The following represents segment data from continuing operations:

		Three Months Ended September 30, 2009
																		Total
		Life								Total				Other				Continuing
		Sciences				Technology				Segments				Items				Operations
		(In thousands)
		(unaudited)
Revenue		$	—			$	—			$	—			$	—			$	—
Operating income (loss)			—				—				—				(4,237	)			(4,237	)
Net income (loss) from continuing operations			1,209				(8,057	)			(6,848	)			(4,741	)			(11,589	)
Segment Assets:
September 30, 2009			156,715				41,116				197,831				147,560				345,391
December 31, 2008			84,508				41,050				125,558				106,844				232,402

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

		Three Months Ended September 30, 2008
																		Total
		Life								Total				Other				Continuing
		Sciences				Technology				Segments				Items				Operations
		(In thousands)
		(unaudited)
Revenue		$	18,997			$	—			$	18,997			$	—			$	18,997
Operating income (loss)			157				—				157				(4,210	)			(4,053	)
Net loss from continuing operations			(6,365	)			(1,968	)			(8,333	)			3,343				(4,990	)

		Nine Months Ended September 30, 2009
																		Total
		Life								Total				Other				Continuing
		Sciences				Technology				Segments				Items				Operations
		(In thousands)
		(unaudited)
Revenue		$	34,839			$	—			$	34,839			$	—			$	34,839
Operating income (loss)			1,621				—				1,621				(12,902	)			(11,281	)
Net income (loss) from continuing operations			151,586				(11,502	)			140,084				(14,809	)			125,275