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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

For The Fiscal Year Ended December 31, 2001

Commission File Number 1-5620

Safeguard Scientifics, Inc.

(Registrant’s telephone number, including area code):

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

      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

      Aggregate market value of common stock held by non-affiliates (based on the closing price on the New York Stock Exchange) on March 20, 2002 was approximately $383 Million. For purposes of determining this amount only, Registrant has defined affiliates as including (a) the executive officers named in Part III of this 10-K report, (b) all directors of Registrant, and (c) each stockholder that has informed Registrant by March 20, 2002 that it is the beneficial owner of 10% or more of the outstanding common stock of Registrant.

      The number of shares outstanding of the Registrant’s Common Stock, as of March 20, 2002 was 119,380,668.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the definitive proxy statement (the “Definitive Proxy Statement”) to be filed with the Securities and Exchange Commission for the Company’s 2002 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.

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SAFEGUARD SCIENTIFICS, INC.

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Part I.

Business Overview

      Safeguard is an operating company that seeks to create long-term value by acquiring technology-related companies that Safeguard develops by providing superior operations and management support. Safeguard acquires and develops companies in three principal areas: business and information technology services, software and emerging technologies.

      In the past, Safeguard developed and operated emerging technology companies through its extensive network of partner companies and private equity funds. Safeguard focused on early-stage, technology companies in software, communications and e-Services in the “time-to-market” stage of development. Time-to-market is the process of getting from an idea to a commercially viable product, and involves the conception and development of a technology or product.

      Safeguard has shifted its strategy to build on three specific paths to value creation for its shareholders. Safeguard first will focus on acquiring and developing business and IT services companies where positive and recurring cash flow opportunities exist, as well as the potential for growth and operational improvement. Safeguard’s goal in this sector is to become self-sustainable from internally generated cash flow. Safeguard will build on its base of existing companies in the business and IT services area and will seek to acquire controlling ownership in other service companies, which have the proper profile to allow Safeguard to leverage its operations and management expertise in order to maximize the companies’ cash generating potential. The second focus is to build software companies with compelling technology and market potential for growth in the “time-to-volume” stage of development. Time-to-volume is the process of taking a commercially viable product and building a viable company with distribution channels, sales and marketing organization, and a corporate infrastructure that has the capability to grow rapidly and achieve market success. Safeguard’s focus in software will be to provide capital, operating leadership and post-acquisition involvement to build the go-to-market model, and enhance the likelihood of success of these companies. Safeguard’s third focus is to continue to support entrepreneurs in creating new technologies and applications by acquiring interests in their companies. Safeguard’s goal in this area is to continue to allow Safeguard and its shareholders to participate in the rewards of value creation inherent in technology innovation. Although this strategy represents a shift in focus for Safeguard, the goal of providing long-term shareholder value through operating and managing promising companies to realize their full potential remains the same.

      Safeguard expects business and IT service companies to provide the operating cash flow for Safeguard, existing and to-be-acquired software companies to provide growth and value generation, and emerging technologies to allow our shareholders to participate in entrepreneurial new technologies. Safeguard’s strategy is to create long-term value as an operating company that focuses on technology-related asset acquisitions. These assets will be developed through superior operations and management.

      Safeguard has reviewed, and will continue to monitor, its existing partner companies against this strategy and the value creation potential of these companies and, as a result, has taken actions to sell or merge certain companies. During 2001, Safeguard completed the sale of ThinAirApps to Palm, merged Atlas Commerce into VerticalNet, merged Cambridge Technology Partners (Massachusetts) into Novell, sold its interests in OAO Technology Solutions, AgWeb, Buystream, Mi8, fob and Brandywine Realty Trust and liquidated TechSpace Ventures.

      During 2001, Safeguard acquired interests in Mantas and Agari Mediaware, and in January 2002, Protura Wireless. Mantas is the first spin-off of SRA Ventures, LLC, a joint venture company formed by Safeguard and SRA International, Inc., an information technology firm specializing in systems integration and consulting. Mantas provides business intelligence solutions for exchanges and the financial services industry. Agari Mediaware is a provider of media middleware software products that allow companies to unify disparate rich media applications and assets, such as audio, video and animation, digital files and applications. Protura Wireless has compelling proprietary technology in the wireless antenna space. Safeguard also continued to provide operational and management support and funding to existing partner companies that meet Safeguard’s

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      In order to focus capital resources on Safeguard’s strategy, Safeguard has reviewed its investing posture with respect to private equity funds, and has concluded that it likely will not enter into new investment commitments to off-campus funds in the immediate future. Safeguard also is evaluating its current participation in off-campus private equity funds. During 2001, Safeguard sold all or a portion of its interests in 2 private equity funds. Safeguard continues to participate in the management of 12 private equity funds, which have total capital committed of more than $2.6 billion. During 2001, Safeguard completed a total of $17 million in follow-on funding of private equity funds.

      Safeguard’s monetization events during 2001 generated $124 million in cash, $32 million in stock and approximately $2 million in notes, for a total consideration of $158 million. At year-end, our cash on hand was $174 million and the market capitalization of our publicly held partner companies was $274 million.

      Safeguard was incorporated in Pennsylvania in 1953.

      Safeguard’s business is subject to many risks. See “Factors That May Affect Results” in Item 7 of this Annual Report on Form 10-K.

Opportunities for Business and IT Services, Software and Emerging Technology Companies

      Safeguard will focus on three areas that we believe will provide value for our shareholders:

	•	Business and IT Services. Safeguard believes that small to mid-size companies will follow the lead of larger companies in outsourcing business and IT services to raise their own operating efficiencies by concentrating on their business objectives and core strengths. Safeguard will focus on developing and operating companies that provide such non-core services that are nonetheless essential and where positive and recurring cash flow opportunities exist. Safeguard will build on its base of existing companies and will seek to acquire controlling ownership in other service companies, which have the proper profile to allow Safeguard to leverage its operations and management expertise in order to maximize the companies’ cash generating potential.
	•	Software. Software companies develop and market software applications, tools and related services that support commerce and integrate business functions. These include procurement platforms, business analytics, digital asset management, fraud and crime prevention data, rich media mining, distributed content management, web-based customer relationship management and supply chain management applications, enterprise and Internet application integration, billing and payment systems and additional applications that enable electronic commerce and information management and communication. Safeguard will seek to acquire controlling ownership interests in companies with compelling technology and market potential for growth in the “time-to-volume” stage of development.
	•	Emerging Technologies. As opportunities arise, Safeguard will continue to support entrepreneurs in creating promising new technologies and applications.

Challenges Facing Such Companies

      Once a company has a viable product, often as evidenced by initial sales to key customers, the investment of capital, management and operational expertise will allow it to become a viable company capable of achieving market success and significant value for Safeguard. Safeguard will make such investments in its partner companies with the ultimate goal of making the company a market leader in its relevant industry sector by assisting the company in addressing the following challenges.

     Management Challenges

	•	The recruitment and retention of an experienced and effective senior management team capable of providing strategic direction.

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	•	The strategic assessment of technology market opportunities and trends, the design, development and commercialization of proprietary technology solutions, and access to complementary technologies and strategic partnerships.
	•	The development of appropriate corporate, legal and financial structures and the expertise to execute transactions.

     Operational Challenges

	•	The identification of the company’s strategic market position and the implementation of effective branding, intellectual property protection, licensing, pricing, distribution, launch and marketing strategies.
	•	The establishment of facilities and administrative and operational processes to support the growing enterprise.
	•	The creation of relationships that provide customers, external marketing channels and growth through strategic partnerships, joint ventures or acquisitions.

Our Solution and Strategy

      Safeguard provides the resources to address the challenges facing our partner companies and enables these companies to capitalize on their potential opportunities. We provide capital, management and operational expertise. We believe that our experience in developing and operating technology companies enables us to identify and attract companies with the greatest potential for success and to assist these companies to become market leaders and create value for Safeguard.

     Business and IT Services and Software Companies

      We provide a full range of operational and management services to each of our partner companies through dedicated teams of Safeguard professionals. Each team has expertise in the areas of business and technology strategy, sales and marketing, operations, finance and legal and transactional support and provide hands-on assistance to the management of the partner company in support of its growth. Each team is responsible for all elements of the acquisition and development of our partner companies, providing consistency to the relationship between Safeguard and the partner company. Safeguard also leverages its extensive network of resources to the benefit of a partner company as strategic partners, customers, test beds and sales channels.

      Our post-acquisition process for enhancing the value of our partner companies consists of planning, management and operational support.

     Planning

      Once we acquire a partner company, we take an active role in its strategic direction, providing management and operational support. Through our experience in developing and operating technology companies, we have developed a methodology for accelerating our partner companies’ successes. Prior to closing an acquisition, we begin to work with a prospective partner company to:

	•	define its near term strategic goals;
	•	identify the key milestones to reaching these goals;
	•	identify the challenges and operational improvements required to reach these goals;
	•	identify the business measurements that will be applied by Safeguard and the markets to measure its success; and
	•	identify potential synergies with Safeguard’s network of companies.

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      We conduct a needs assessment to determine the nature and timing of the resources required to help the company achieve its goals. We then either provide the company with appropriate services and support from within Safeguard and its network or help them identify and negotiate to obtain these services from third-party suppliers or strategic partners. We help our partner companies measure their progress and continually reassess their objectives and requirements. By helping our partner companies’ management teams remain focused on their critical objectives, we believe we are able to significantly accelerate their development and success.

      We engage in an ongoing planning and assessment process. Through our involvement and engagement in the developing activities of these companies, seasoned Safeguard executives provide mentoring, advise and guidance to develop the management strength of our partner companies. Safeguard executives serve on the board of directors of each of our partner companies and work with them to develop their annual strategic and operating plan. Achievement of the annual plan is monitored through monthly reporting of performance metrics and financial results.

     Management and Operational Support

      We provide management and operational support to our partner companies. These services provide our partner companies with significant competitive advantages in competing in their individual markets. The resources our partner companies draw upon to accelerate their development include the following:

      Management. Safeguard senior management provides active guidance to partner companies. In addition, through our network, we have access to entrepreneurial and operational talent that is frequently called upon to serve on the board of directors or advisory boards of our partner companies, or in temporary executive capacities during the rapid development of a new partner company. We also can assist a partner company to respond to temporary demands for additional highly qualified personnel through our consulting and service companies.

      Marketing. We provide our partner companies with strategic guidance regarding market positioning, product launch and marketing and public relations. Insights concerning market position are obtained from our internal research and trend analysis and the collective intelligence of the companies within our network.

      Business Development. Our business and professional partners offer assistance in identifying, evaluating, structuring and negotiating joint ventures, strategic alliances, joint marketing agreements, distribution channel arrangements, acquisitions and other corporate transactions. In addition, we offer our partner companies a variety of services designed to reduce their operating costs, enable them to focus on product development and marketing and accelerate their time-to-volume stage of development.

      Emerging Technology. Our history as a developer of technology companies provides us with ample resources to support the technology development of a new partner company. We and our partner companies may call upon our business and IT service providers to perform strategic and operational technology assessments and to provide support for the commercialization of technology solutions. Through our network, we are also able to identify and provide preferred access to complementary technologies and promote strategic partnerships with technology leaders.

      Legal and Financial. In addition to the business partner responsible for the acquisition and overall development of each partner company, we assign a financial and legal partner to each new partner company. These professional partners are involved in the due diligence preceding the acquisition and are responsible for assessing financial and legal issues, including the recommendation of best practices within their areas of expertise. The expertise of dedicated professional partners remains available to our partner companies when they are seeking to execute major corporate or other financial transactions.

      Facilities. Our corporate campus in suburban Philadelphia currently contains approximately 135,000 square feet of flexible office space that is home to Safeguard, Internet Capital Group, 13 private equity funds, the Eastern Technology Council, and from time to time, resident entrepreneurs.

     Emerging Technologies

      Safeguard will continue to support entrepreneurs in creating promising new technologies and applications. We believe the knowledge base of our management team, the sector expertise and relationships of our business

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      We focus on companies that we believe have the potential to be market leaders and whose technology or processes provide them with a competitive advantage that prevents competitors from easily entering their market. In addition, we look for companies with accomplished technical teams that we believe have the skills to bring their concepts to market quickly. We favor markets that are sufficiently developed for the company to start aggressively building its customer base, although we will also acquire companies whose market opportunity anticipates important trends that we have identified. We place an emphasis on companies with compelling, sustainable business models. We target entrepreneurs who we believe demonstrate the leadership skills required to guide the strategy and development of an early-stage company. Once we acquire an interest in a partner company, we will provide the planning, management and operational support necessary to accelerate our partner companies’ success. We anticipate that we will generally acquire minority interests in these companies.

Safeguard Partner Companies

      The following tables provide a summary of our partner companies in our three principal areas. Our ownership positions in the following tables have been calculated as of March 20, 2002, and reflect the percentage of the vote that we are entitled to cast based on the issued and outstanding voting securities of each partner company, excluding the effect of options, warrants and convertible debt. Our ownership percentages in certain of the partner companies described below include equity interests that have been acquired by our management subject to the restrictions and thresholds of our long-term incentive plan. Our ownership percentage assumes the purchase by Safeguard of equity securities upon satisfaction or waiver of all partner company funding conditions. These ownership percentages may reflect the impact of special voting rights held by Safeguard. Where a material difference exists between voting ownership positions and economic ownership positions as a result of special voting rights, the table indicates such differences. Safeguard’s ownership position may be entitled to, or may be subject to, preferential liquidation and dividend rights of outstanding preferential securities issued by the partner companies. Safeguard continually assesses its partner companies looking at the strategy of a company, its fit in Safeguard’s strategy and the opportunity for growth.

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Business and IT Services

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Software

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Emerging Technologies

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*	Reflects Safeguard’s ownership percentage excluding any supervoting provisions or the exercise of outstanding warrants and options.

Enabling Partner Companies and Private Equity Funds

      Internet Capital Group, Inc. (NASDAQ: ICGE) (www.internetcapital.com) is an Internet company actively engaged in business-to-business e-commerce through a network of partner companies. The company’s primary goal is to build companies that can obtain number one or number two positions in their respective markets by delivering software and services to help businesses increase efficiency and reduce costs. It provides operational assistance, capital support, industry expertise, and a strategic network of business relationships intended to maximize the long-term market potential of approximately 50 business-to-business e-commerce companies. Internet Capital Group is headquartered in Wayne, PA. Safeguard owns 14%.

      TechSpace exists to help young companies grow and established companies expand. An international network of technologically advanced, full-service office communities, TechSpace provides member companies with office infrastructure, a wide range of technology and business services, and access to venture capital funding. Recognizing the gap between executive office suites and business incubators, TechSpace has positioned itself to appeal to executives who have clear vision about their businesses and need access to office space, services and capital in order to execute that vision. Safeguard owns 42%.

      USDATA Corporation (NASDAQ: USDC) (www.usdata.com), headquartered in Richardson, Texas is a leading global provider of software and services that give enterprises the knowledge and control needed to perfect the products they produce and the processes they manage. Based upon a tradition of flexible service, innovation and integration, USDATA’s software currently operates in more than 60 countries around the globe, including seventeen of the top twenty-five manufacturers. USDATA’s software heritage is born out of manufacturing and process automation solutions and has grown to encompass the industry’s deepest product knowledge and control solutions. With an eye toward the future of e-business, USDATA continues to innovate solutions that will support the integration of enterprise production and automation information into the supply chain. The company has six offices worldwide and a global network of distribution and support partners. Safeguard owns 32%.

      Pac-West Telecomm, Inc. (NASDAQ: PACW) is a provider of integrated communications services throughout the western U.S. Pac-West supplies Internet infrastructure and broadband services to Internet service providers (ISPs), and integrated voice, data and Internet services to small and medium-sized businesses. The company currently has operations in California, Nevada, Washington, Colorado, Arizona and Oregon. Safeguard owns 7%.

      REALTIME MEDIA is a full-service online relationship marketing company that uses innovative promotional techniques to deliver awareness, acquisition, activation, and retention solutions for a wide variety of clients including members of the Fortune 100. REALTIME MEDIA was originally formed to be an

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     Private Equity Funds

      In order to focus capital resources on Safeguard’s strategy, Safeguard has reviewed its investing posture with respect to private equity funds, and has concluded that it likely will not enter into new investment commitments to off-campus funds in the immediate future. Safeguard also is evaluating its current participation in off-campus private equity funds. During 2001, Safeguard sold all or a portion of its interests in 2 private equity funds. Safeguard continues to participate in the management of 12 private equity funds, which have total capital committed or invested of more than $2.6 billion. Also, Safeguard is a limited partner in seven other private equity funds, which have total capital committed of approximately $1.4 billion. During 2001, Safeguard completed a total of $17 million in follow-on funding of private equity funds.

      The private equity funds help Safeguard to provide operational and management support to our partner companies. The private equity funds provide acquisition syndication opportunities, increase our capital base, facilitate strategic partner development and increase our geographic penetration. The personal relationships and expertise of the professionals employed by these funds are important resources for developing and evaluating acquisition opportunities. Safeguard frequently refers opportunities that do not fit Safeguard’s operating strategy to an appropriate fund. The funds may pursue broader investment strategies and may invest at earlier stages and at less significant ownership percentages than Safeguard. The diversification within the funds allows Safeguard to identify and take advantage of a broader range of emerging technologies, to maintain relationships with a greater number of promising entrepreneurs and to evaluate perceived shifts in technologies. The funds had over 200 companies in their portfolios as of December 31, 2001.

	Following is a list of the private equity funds, which we participate in managing:

TL Ventures (5 funds)

Mechanisms to Realize Shareholder Value

      Our principal mission is to create long-term shareholder value. Safeguard expects business and IT service companies to provide the operating cash flow for Safeguard, existing and to-be-acquired software companies to provide growth and value generation, and emerging technologies to allow our shareholders to participate in entrepreneurial new technologies. In general, Safeguard intends to own partner companies as long as it believes that it can leverage its resources to create superior growth opportunities for the partner company and create value for Safeguard. When the company has developed a stable market and corporate infrastructure and no longer requires Safeguard’s continuing support and expertise, Safeguard will consider exiting the partner company and redeploying the capital realized in other acquisition and development opportunities. Safeguard may achieve liquidity events from its partner companies by (i) sales of the company or Safeguard’s interest in the company, (ii) mergers or (iii) taking them public, either in a normal initial public offering or through a rights or subscription offering, and subsequently by liquidating Safeguard’s interest in the company over a period of time.

     Mergers and Acquisitions

      We assist our partner companies in considering and evaluating merger and acquisition opportunities to promote shareholder value. We help our partner companies identify acquisition partners or targets, evaluate these companies, negotiate terms and document the transactions. During 2001, Safeguard completed the sale

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     Safeguard Subscription Program and Rights Offerings

      Historically, we assisted our partner companies with their initial public offerings by offering subscription opportunities or rights to purchase all or a portion of a partner company’s stock to Safeguard shareholders in the “Safeguard Subscription Program” or through a “Rights Offering.” These programs permit our shareholders to participate in the initial public offering of a partner company by the exercise of subscription opportunities or rights that are obtained based upon the number of shares of Safeguard common stock held by the purchasing shareholder. One or more underwriters or Safeguard purchase the shares not purchased upon the exercise of subscription opportunities or rights. Internet Capital Group (in 1999), US Interactive (in 1999), Pac-West Telecomm (in 1999), eMerge Interactive (in 2000) and OPUS360 (in 2000) completed their initial public offerings under the Safeguard Subscription Program. We completed Rights Offerings for Novell, Inc. and CompuCom in 1985, Tangram Enterprise Solutions in 1987, Cambridge Technology Partners in 1993, Coherent Communications Systems Corporation in 1994, USDATA in 1995, Sanchez Computer Associates and Integrated Systems Consulting Group, Inc. in 1996, Diamond Technology Partners, ChromaVision Medical Systems and OAO Technology Solutions in 1997 and DocuCorp International in 1998.

     Market Transactions

      We have sold and expect to continue to sell shares of our public partner companies in open-market or privately negotiated transactions from time to time.

COMPUCOM

      CompuCom Systems, Inc. (Nasdaq: CMPC) is a leading single-source provider of information systems services and products designed to enhance the productivity of large and medium-sized organizations throughout the United States. CompuCom provides information technology outsourcing and system integration services that help clients reduce the costs, complexities, obstacles and risks associated with new technology adoption, operational transition and on-going management of their information systems.

      These services include application design, development and maintenance, delivery of complex multi-vendor solutions, a full range of multi-vendor hardware and software support, help desk, network management and security services. Combining these services with CompuCom’s ability to provide technology products and product acquisition services, CompuCom simplifies the selection, acquisition, deployment, implementation and ongoing management processes of clients’ information systems.

      In 2001 CompuCom completed its 15th consecutive profitable year. Revenue declined when compared to 2000, primarily as a result of economic conditions and competitive pressure in CompuCom’s product business. However, CompuCom achieved revenue growth in its services business as a result of acquisitions completed during the year. During 2001, CompuCom completed four acquisitions including MicroAge Technology Services, L.L.C. (“MTS”), a division of MicroAge, Inc. in January, Excell Data Corporation (“Excell”) in July, the applications development division of E-Certify, Inc. (“ClientLink”) in November and Northern NEF, Inc. (“NNEF”) in November. These acquisitions expanded CompuCom’s desktop outsourcing business (MTS), augmented the services business with the addition of application design and development offerings (Excell and ClientLink) and broadened CompuCom’s customer base to include the Federal government (NNEF). During 2001, CompuCom also focused on streamlining its operations and processes, reducing its operating expense by almost $32 million when compared to 2000 and strengthening its balance sheet, ending the year with $123 million in cash.

      CompuCom believes the key to improving its earnings performance is the expansion of its higher margin services business and continued focus on operating expense control and effective balance sheet management. CompuCom’s strategy is to focus on the growth of its services business organically as well as through strategic

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      CompuCom defines its operations as two distinct businesses — 1) sales of personal computer-related products, which includes desktop, networking, storage and mobile computing products, as well as peripherals and software products and licenses and 2) services, which is primarily derived from all aspects of desktop outsourcing, including field engineering, as well as help desk and LAN/WAN network outsourcing, configuration, asset tracking, software management, mobile computing services, IT consulting, application development, training and services provided in support of certain manufacturers’ direct fulfillment initiatives.

      CompuCom’s product sales accounted for 80% of Safeguard’s total net sales in 2001, compared to 88% in 2000 and 88% in 1999. CompuCom’s services sales accounted for 15% of Safeguard’s total net sales in 2001, compared to 10% in 2000 and 10% in 1999. CompuCom’s business tends to be subject to seasonal fluctuations, with the highest revenue levels generally occurring in the fourth quarter. Backlog is not considered to be a meaningful indicator of CompuCom’s future business prospects due to the short order fulfillment cycle. Large corporate businesses accounted for the majority of CompuCom’s net sales in 2000. However, no one customer accounted for more than 10% sales in either products or services. Sales of Compaq, HP and IBM products accounted for approximately 23%, 22% and 20%, respectively, of CompuCom’s 2001 product revenues compared to 30%, 20% and 26%, respectively, in 2000 and 30%, 16% and 21%, respectively, in 1999.

      CompuCom has agreements with these vendors that have been regularly renewed. These agreements are generally terminable by the vendor without cause on 30 to 90 days notice. However, CompuCom believes its relationships with these vendors are good but a material adverse effect on CompuCom’s business would occur if a supply agreement with a key vendor was materially revised, was not renewed or was terminated or the supply of products was insufficient or interrupted.

      CompuCom’s industry, in both its computer products and services segment, is characterized by intense competition: primarily in the areas of price, product availability and breadth of services and product line with respect to its computer products segment and consolidation in its services segment. CompuCom’s marketing network competes for potential clients with numerous IT service providers, corporate resellers, distributors and manufacturers. Many established original equipment manufacturers (including some of CompuCom’s vendors), direct marketers, systems integrators and resellers of distributed desktop or networking products compete with CompuCom in the configuration and distribution of computer systems and equipment. In the highly fragmented computer services business, CompuCom competes with several larger IT service providers (including some of CompuCom’s vendors) in addition to other smaller computer services companies. In the services segment, CompuCom faces fewer, but larger and better-financed competitors as a consequence of such consolidation. In addition, several computer manufacturers have expanded their channels of distribution and now actively compete for CompuCom’s clients with their direct fulfillment initiatives. In the highly fragmented computer services business, CompuCom competes with several larger competitors, corporate resellers pursuing services opportunities, as well as many smaller computer services companies. As CompuCom continues to focus on the growth of its services business, it also competes with service providers that have marketed and delivered the services CompuCom provides on a much larger scale and for a longer period of time. In addition, the computer products and services industry is characterized by intense price competition, which may adversely affect CompuCom’s results of operations. As a result of these factors, in both its computer products and services sector, CompuCom may face fewer but larger and better-financed competi-

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      If CompuCom uses its stock for acquisitions or if some other dilutive event were to occur, Safeguard’s voting interest in CompuCom could be diluted below 50%, in which event Safeguard would no longer consolidate CompuCom’s financial results under current generally accepted accounting principles. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation — General.”

      CompuCom employed approximately 3,800 full-time employees as of December 31, 2001.

FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS

      Information on net sales, net income and assets employed for each operating segment of Safeguard’s business for the three-year period ended December 31, 2001 is contained in Note 21 to the Consolidated Financial Statements.

OTHER INFORMATION

      Export sales in each segment for the three-year period ended December 31, 2001 were less than 5% of the segment’s total sales in each of those years. Backlog is not considered to be a meaningful indication of future business prospects for any of the Company’s operating segments.

      The operations of Safeguard and its partnership companies are subject to environmental laws and regulations. Safeguard does not believe that expenditures relating to those laws and regulations will have a material adverse effect on the business, financial condition or results of operations of Safeguard.

EMPLOYEES

      At December 31, 2001, Safeguard and its consolidated subsidiaries have approximately 4,538 employees, of which CompuCom employs approximately 84%. Safeguard believes relations with employees are good.

EXECUTIVE OFFICERS

      Information about Safeguard’s executive officers can be found in Part III of this report under “Item 10. Directors and Executive Officers of Registrant.”

      We own the office park in which our corporate headquarters and administrative offices are located in Wayne, Pennsylvania. The office park currently contains approximately 135,000 square feet, most of which we lease to our affiliated private equity funds, certain partner companies including Internet Capital Group, and other tenants. Our headquarters building is subject to a $3.6 million mortgage bearing interest at 9.75%, which amortizes over a 30-year term ending 2022 and is prepayable by us at any time beginning in January 2002. The remaining portion of the office is subject to a $10 million mortgage bearing interest at 7.75%, which amortizes over 22 1/2 years ending in 2023 and is prepayable by us beginning in November 2010. We believe the properties are in good condition and repair and are adequate for the particular operations for which they are used. Additionally, we lease approximately 2,400 square feet of office space in Palo Alto, California. Our partner companies have various facilities throughout the United States, and they believe they can readily obtain additional facilities as needed to support their anticipated needs.

      CompuCom’s executive and administrative facility in Dallas, Texas contains approximately 250,000 square feet of office space in two buildings on 20 acres. In 1999, CompuCom sold this facility and leased it back for a 20-year term with two five-year renewal options. In 2000, CompuCom opened a facility in Tempe, Arizona to house members of its second enterprise help desk team. CompuCom also leases two floors totaling 42,500 square feet of office space in Mason, Ohio, which houses one of its two client assistance centers. The lease expires July 2005 with a five-year renewal option. As part of the first quarter 2000 restructuring plan, CompuCom consolidated operations to one floor. CompuCom leases distribution, integration and configura-

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      Beginning in April 2001, the Company, CompuCom Systems, Inc., a Company affiliate, and a former officer of Safeguard who served as a Director of Opus360 Corporation, were named in putative class actions filed in federal court in New York. The plaintiffs allege material misrepresentations and/or omissions in connection with the initial public offering of Opus360 Corporation stock on April 7, 2000.

      The cases are brought against Opus360, its officers and directors (including the former Safeguard officer), Safeguard, CompuCom, and Opus360’s underwriters. In these cases, the plaintiffs allege, among other things, that the prospectus and registration statement for Opus360’s initial public offering contained misrepresentations and/or omissions regarding: (1) Opus360’s products, including Opus Xchange; (2) Opus360’s cash flow and liquidity, including its need for additional financing in the 12 month period following the initial public offering; and (3) Opus360’s relationships with its customers. Plaintiffs assert claims under Sections 11, 12 and 15 of the Securities Act of 1933. Plaintiffs seek damages in an amount in excess of $70 million. The cases have been consolidated into a single proceeding and the court has approved the designation of a lead plaintiff and the retention of lead plaintiffs’ counsel. Plaintiffs have filed a consolidated and amended complaint. Safeguard and the other defendants have moved to dismiss this complaint for failure to state a claim upon which relief may be granted. While the outcome of this litigation is uncertain, the Company believes that it has valid defenses to plaintiffs’ claims and intends to defend the lawsuits vigorously.

      On June 26, 2001, the Company and Warren V. Musser, the Company’s former Chairman, were named as defendants in a putative class action filed in federal court in Philadelphia. Plaintiffs allege that defendants failed to disclose that Mr. Musser had pledged some or all of his Safeguard stock as collateral to secure margin trading in his personal brokerage accounts. Plaintiffs allege that defendants’ failure to disclose the pledge, along with their failure to disclose several margin calls and the consequences thereof on Safeguard’s stock price, violated the federal securities laws. Plaintiffs allege claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.

      On August 17, 2001, a second putative class action was filed against the Company and Mr. Musser asserting claims similar to those brought in the first proceeding. In addition, plaintiffs in the second case allege that the defendants failed to disclose possible or actual manipulative aftermarket trading in the securities of the Company’s partner companies, the impact of competition on prospects for one or more of the Company’s partner companies and the Company’s lack of a superior business plan.

      These two cases have been consolidated for further proceedings under the name “In Re: Safeguard Scientifics Securities Litigation” and the Court has approved the designation of a lead plaintiff and the retention of lead plaintiffs’ counsel. The Company will respond to the amended and consolidated complaint that the Court has directed plaintiffs to file. While the outcome of this litigation is uncertain, the Company believes that it has valid defenses to plaintiffs’ claims and intends to defend the lawsuit vigorously.

     General

      The Company and its subsidiaries are involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

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      No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of 2001.

PART II.

      The Company’s common stock is listed on the New York Stock Exchange (Symbol: SFE). The high and low sale prices reported within each quarter of 2001 and 2000 are as follows:

      The high and low sale prices reported in 2002 through March 20 were $4.47 and $2.60, respectively, and the last sale price reported on March 20, 2002, was $3.30. No cash dividends have been declared in any of the years presented, and the Company has no present intention to declare cash dividends.

      As of March 20, 2002, there were approximately 91,300 beneficial holders of the Company’s common stock.

     Sale of Unregistered Securities

      On January 19, 2001, we acquired all of the outstanding capital stock of Palarco, Inc. and Palarco International, Inc. (collectively, “Palarco”). Pursuant to the terms of the stock purchase agreement, among other things, we issued 316,702 shares of our common stock, with a market value of approximately $2.9 million on the date of acquisition to Steven Siegfried, the sole stockholder of Palarco, and paid cash in exchange for all of the outstanding shares of Palarco. We believe the shares of common stock were exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, since the sale was made to an individual who we believed to have been a sophisticated investor who was acquiring the shares for investment without a view to further distribution. No underwriters were involved with the issuance and sale of the shares of common stock.

Item 6.     Selected Consolidated Financial Data

      The following table sets forth our selected consolidated financial information for the five years in the period ended December 31, 2001. The selected consolidated financial data presented below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations

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      No cash dividends have been declared in any of the years presented, and we have no present intention to declare cash dividends.

      Certain prior year amounts have been reclassified to conform to the current year presentation. In accordance with EITF Topic No. D-103, “Income Statement Characterization of Reimbursements Received for “Out-of-Pocket’ Expenses Incurred”, we reclassified out-of-pocket expenses reimbursed by clients as Revenue and reported the related costs in General and Administrative Expense in the Consolidated Statements of Operations. This reclassification had no effect on net income or loss.

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

      The statements contained in this Annual Report that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve certain risks, uncertainties and other factors that could cause actual results to be materially different than those contemplated by these statements. These risks and uncertainties include the factors described elsewhere in this report and in our filings with the SEC. We do not assume any obligation to update any forward-looking statements or other information contained in this Annual Report.

      Although we refer in this report to the companies in which we have acquired an equity ownership interest as our “partner companies” and that we indicate that we have a “partnership” with these companies, we are not a “partner” in a legal sense, and do not act as an agent or legal representative for any of our partner companies, we do not have the power or authority to legally bind any of our partner companies and we do not have the types of liabilities in relation to our partner companies that a general partner of a partnership would have.

      Certain amounts for prior periods in the Consolidated Financial Statements, and in the discussion below, have been reclassified to conform with current period presentations.

General

      We are an operating company that seeks to create long-term value by acquiring technology-related companies that we develop by providing superior operational and management support. We also develop and operate emerging technology companies through our extensive network of partner companies and private equity funds (collectively, affiliates). We provide the resources to address the challenges facing our partner companies and enable these companies to capitalize on their potential opportunities. These resources include capital, management and operational expertise. We believe that our experience in developing and operating technology companies enables us to identify and attract companies with the greatest potential for success and to assist these companies to become market leaders and create value for us.

      During 2001 and 2000, we focused primarily on early-stage, technology companies in software, communications and e-Services in the “time-to-market” stage of development. Time-to-market is the process of getting from an idea to a commercially viable product, and involves the conception and development of a technology or product. Beginning in 2002, we are shifting our strategic focus. See “Shift in Strategic Focus.”

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      We participate in managing 12 private equity funds which are located on our corporate campus. In addition, we are a limited partner in seven other private equity funds. Collectively, these 19 funds have over $4 billion of committed capital. The private equity funds help us to provide operational and management support to our partner companies. The private equity funds also provide acquisition syndication opportunities, increase our capital base, facilitate strategic partner development and increase our geographic penetration. The personal relationships and expertise of the professionals employed by these funds are important resources for developing and evaluating acquisition opportunities. We frequently refer opportunities that may not fit our operating strategy to an appropriate fund.

      Our operations are classified into three operating segments: i) General Safeguard Operations; ii) Partner Company Operations; and iii) CompuCom Operations.

      Because we acquire significant interests in technology-related companies, many of which generate net losses, we have experienced, and expect to continue to experience, significant volatility in our quarterly results. While some of our affiliates have consistently reported losses, we have recorded net income in certain periods and experienced significant volatility from period to period due, in part, to one-time transactions and other events incidental to our ownership interests in and advances to affiliates. These transactions and events include dispositions of, and changes to, our affiliate ownership interests and impairment charges. We do not know if we will report net income in any period.

Critical Accounting Policies

      The Securities and Exchange Commission (SEC) recently released Financial Reporting Release No. 60, which requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. In addition, Financial Reporting Release No. 61 was recently released by the SEC to require all companies to include a discussion to address, among other matters, liquidity, off-balance sheet arrangements and contractual obligations and commercial commitments. Our significant accounting policies and methods used in the preparation of the Consolidated Financial Statements are discussed in Note 1 of the Notes to Consolidated Financial Statements. The following is a listing of our critical accounting policies and a brief discussion of each:

	•	Principles of accounting for ownership interests in affiliates
	•	Recoverability of goodwill and other intangible assets, net
	•	Recoverability of ownership interests in and advances to affiliates
	•	Derivative financial instruments
	•	Income taxes
	•	Revenue recognition
	•	Allowance for doubtful accounts
	•	Commitments and contingencies

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

      Our Consolidated Financial Statements include the accounts of the Company and all subsidiaries in which we directly or indirectly own more than 50% of the outstanding voting securities. If this majority voting ownership is likely to be temporary, we account for the company under the equity method. Under the consolidation method, a partner company’s results of operations are included within our Consolidated Statements of Operations. Participation of other partner company shareholders in the income or losses of a consolidated partner company is reflected in Minority Interest in our Consolidated Statements of Operations.

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      Partner companies and private equity funds whose results we do not consolidate, but over whom we exercise significant influence, or for whom majority voting ownership is likely to be temporary, are generally accounted for under the equity method of accounting. Whether or not we exercise significant influence with respect to a partner company depends on an evaluation of several factors including, among others, our representation on the partner company’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the partner company, including voting rights associated with our holdings in common, preferred and other convertible instruments in the partner company. We also account for our interests in some private equity funds under the equity method of accounting, based on our respective general and limited partner interests. Under the equity method of accounting, a partner company’s results of operations are not reflected within our Consolidated Statements of Operations; however, our share of the income or losses of the partner company is reflected in Equity Income (Loss) in our Consolidated Statements of Operations. We are required to recognize our share of losses to the extent we have a cost basis in the investee or outstanding commitments or guarantees. The share of income or losses is generally based upon our voting ownership of the partner company’s securities, which may be different from the percentage of the economic ownership of the partner company held by us.

      The effect of an affiliate’s net results of operations on our results of operations is the same under either the consolidation method of accounting or the equity method of accounting, because under each of these methods only our share of the income or losses of an affiliate is reflected in our net results of operations in the Consolidated Statements of Operations.

      Partner companies and private equity funds that we do not account for under either the consolidation or the equity method of accounting are accounted for under the cost method of accounting. Under the cost method, the Company’s share of the income or losses of such entities is not included in the Consolidated Statements of Operations. However, the effect of the change in market value of cost method holdings classified as trading securities is reflected in our results of operations during each reporting period.

      We periodically assess the impairment of goodwill and other intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that we consider important which could trigger an impairment review include significant underperformace relative to historical or expected future operating results, significant changes in the manner or use of the acquired assets or the strategy for the overall business, significant negative industry or economic trends or a decline in its stock price for a sustained period.

      If we determine that the carrying value of identifiable goodwill and other intangible assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we assess the recoverability of the intangibles by determining whether the carrying value of the goodwill and other intangible assets can be recovered through undiscounted future operating cash flow from the related business activities (including possible proceeds from a sale of the business). The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting our average borrowing rate. Net goodwill and other intangible assets amounted to approximately $171 million as of December 31, 2001.

      In 2002, Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142) becomes effective, and as a result, we will cease to amortize goodwill at January 1, 2002. We recorded approximately $19 million of goodwill and intangible assets amortization related to consolidated entities during 2001. In lieu of amortization, we are required to perform an initial impairment review of goodwill in 2002 and an annual impairment review thereafter. SFAS 142 will require us to test goodwill for impairment at a level referred to as a reporting unit. If the fair value of the reporting unit is less than its carrying amount, the goodwill is considered potentially impaired and a loss is recognized if its carrying value exceeds its implied fair value. To determine fair value, we may use a number of valuation methods including

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      On a continuous basis, but no less frequently than at the end of each quarterly reporting period, we evaluate the carrying value of our ownership interests in and advances to each of our affiliates for possible impairment based on achievement of business plan objectives and milestones, the fair value of each ownership interest in and advances to each affiliate relative to its carrying value, the financial condition and prospects of the affiliate and other relevant factors. The business plan objectives and milestones we consider include, among others, those related to financial performance such as achievement of planned financial results or completion of capital raising activities, and those that are not primarily financial in nature, such as the hiring of key employees or the establishment of strategic relationships. We then determine whether there has been an other than temporary decline in the carrying value of the affiliate. Impairment charges are determined by comparing the estimated fair value of a partner company with the carrying value. The fair value of our ownership interests in and advances to privately held partner companies is generally determined based on the value at which independent third parties have invested or have committed to invest in these companies, or the value negotiated with the partner company’s founders. The fair value of our ownership interests in private equity funds is generally determined based on the value of our pro rata portion of the funds’ net assets.

      We operate in an industry which is rapidly evolving and extremely competitive. It is reasonably possible that our accounting estimates with respect to the useful life and ultimate recoverability of the carrying value, including goodwill, could change in the near term and that the effect of such changes on our Consolidated Financial Statements could be material. While we believe that the current recorded carrying values of our affiliates are not impaired, there can be no assurance that our future results will confirm this assessment or that a significant write-down or write-off of the carrying value will not be required in the future.

      In 1999, we entered into two forward sale contracts related to our holdings in Tellabs common stock to mitigate our market exposure and generate cash. The forward sale contracts are considered derivative financial instruments that have been designated as fair value hedging instruments under SFAS 133. Our objective relative to the use of these hedging instruments is to limit our exposure to price fluctuations in the underlying equity securities. The hedging of the Tellabs common stock was part of our overall risk management strategy, which includes the preservation of cash and the value of securities used to fund ongoing operations and future acquisition opportunities. Changes in the value of the hedge instrument are substantially offset by changes in the value of the underlying securities. In accordance with SFAS 133, we recognize the derivatives at fair value on the Consolidated Balance Sheets, and the corresponding gains or losses in the Consolidated Statements of Operations.

     Income Taxes

      We must assess the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent that we believe recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance in a period, we must include an expense within the tax provision in the Consolidated Statements of Operations. We have recorded a valuation allowance to reduce our deferred tax asset to an amount that is more likely than not to be realized in future years.

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     Revenue Recognition

      Our revenues are the combination of the revenues of all of our consolidated affiliates. We derive revenue from two primary sources: (i) sale of products, both merchandise and software licenses; and (ii) services, which includes consulting services, including the implementation of software license products, and software maintenance. As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if management made different judgments or utilized different estimates.

      Of our total product revenue, 99% is derived from our majority-owned subsidiary, CompuCom. Product revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed and determinable and collectibility is probable. Generally for product sales, these criteria are met at the time of delivery to a common carrier. Provision is made at the time the related revenue is recognized for estimated product returns, which historically have been immaterial. When evaluating the adequacy of provisions for sales returns, historical returns, current economic trends and changes in customer demand are analyzed. Determination of whether the fee is fixed and determinable is based on the payment terms associated with the transaction. If a significant portion of a fee is due after the normal payment terms, which are generally 30 days from invoice date, revenue is recognized as the fees become due. Collectibility is assessed based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. Revenue is deferred if collection of the fee is not reasonably assured; revenue is then recognized at the time collection becomes reasonably assured, which is generally upon receipt of cash. For all sales, a binding purchase order or signed sales agreement as evidence of an arrangement is used.

      Services revenue is primarily billed based on hourly rates and recognized as services are performed or ratably over the contract term.

     Allowance for Doubtful Accounts

      Our allowance for doubtful accounts relate to trade and vendor accounts receivable, primarily at CompuCom. CompuCom represents 85% of our accounts receivable balance before allowances for doubtful accounts. Note 23 of the Notes to Consolidated Financial Statements summarizes the activity in these accounts. The allowance for doubtful accounts is an estimate prepared by management based on identification of the collectibility of specific accounts and the overall condition of the receivable portfolios. We specifically analyze trade and vendor receivables, historical bad debts, customer credits, customer concentrations, customer credit-worthiness, current economic trends, changes in customer payment terms and the complexities of vendor-mandated program requirements, when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of customers or vendors were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Likewise, should we determine that we would be able to realize more of our receivables in the future than previously estimated, an adjustment to the allowance would increase income in the period such determination was made. The allowance for doubtful accounts is reviewed on a quarterly basis and adjustments are recorded as deemed necessary.

     Commitments and Contingencies

      From time to time, we are a defendant or plaintiff in various legal actions, which arise in the normal course of business. We are also a guarantor of various third-party obligations and commitments, and subject to the possibility of various loss contingencies arising in the ordinary course of business. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required for these contingencies, if any, which would be charged to earnings, is made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in circumstances, such as a change in settlement strategy. Changes in required reserves could increase or decrease our earnings in the period the changes are made.

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Basis of Presentation

      Consolidation. The Consolidated Financial Statements include the accounts of the Company and all subsidiaries in which we directly or indirectly own more than 50% of the outstanding voting securities. The Company’s wholly owned subsidiaries include aligne incorporated, K Consultants, Inc. (since its acquisition in August 2000) and Palarco, Inc. (since its acquisition in January 2001). Our Consolidated Financial Statements also include the following majority-owned subsidiaries:

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      Equity Method. Our partner companies accounted for under the equity method of accounting included:

(a)	The Company sold or liquidated its holdings in 2001.
(b)	Aptas is accounted for as a consolidated company at December 31, 2001.
(c)	Accounted for under the cost method at December 31, 2001.
(d)	Redleaf converted to a private equity fund during 2001. We continue to own a 31% interest.

      We have representation on the boards of directors of these partner companies. Although we own less than 20% of the voting stock of some of these companies, we believe we have the ability to exercise significant influence based on our representation on each company’s board of directors and other factors. We owned greater than 50% of the voting stock of some of these companies; however, we believed majority voting ownership was temporary. In addition to our holdings in equity and debt securities, we also periodically make

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      Cost Method. Partner companies and private equity funds that we do not account for under either the consolidation or the equity method of accounting are accounted for under the cost method of accounting. Under this method, our share of the income or losses of these entities is not included in our Consolidated Statements of Operations. However, the effect of the change in market value of cost method holdings classified as trading securities is reflected in our results of operations during each reporting period.

Effect of Various Accounting Methods on the Presentation of our Consolidated Financial Statements

      The presentation of our financial statements may differ from period to period primarily due to the applicable accounting method used for recognizing our equity interests in the operating results of an affiliate. For example, the presentation of our financial statements is significantly influenced by the consolidated results of operations of CompuCom, which we consolidate based on our 60% voting interest.

      To understand our net results of operations and financial position without the effect of consolidating our consolidated partner companies, please refer to Note 19 to our Consolidated Financial Statements, which summarizes our parent company statements of operations and balance sheets and presents consolidated partner companies as if they were accounted for under the equity method of accounting. Our share of the income or losses of the consolidated partner companies is included in Equity Income (Loss) in the Parent Company Statements of Operations. The carrying value of these companies is included in Ownership Interests In and Advances to Affiliates on the Parent Company Balance Sheets.

      Although the parent company statements of operations and balance sheets presented in Note 19 reflect our historical results, they are not necessarily indicative of future parent company balance sheets and statements of operations.

Net Results of Operations

      The following table reflects consolidated operating data by reported segments. All significant intersegment activity has been eliminated. Accordingly, segment results reported exclude the effect of transactions between us and our subsidiaries.

Net Results of Operations — General Safeguard Operations

      General Safeguard Operations includes the expenses of providing strategic and operational support to our affiliates, and also includes the effect of certain private equity funds that we account for under the equity method. General Safeguard Operations also includes the effect of transactions and other events incidental to our ownership interests in our affiliates and our operations in general, including sales of public and private partner companies and private equity funds, gains or losses on public holdings classified as trading securities and impairment charges on affiliates accounted for under the cost method.

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      Revenue. Revenue consists primarily of management fees charged to private equity funds for operational and management services. Revenue increased $4.8 million for the year ended December 31, 2001, compared to 2000, and increased $8.4 million for the year ended December 31, 2000 compared to 1999. These increases were related to additional management fees charged to private equity funds as a result of the formation of additional private equity funds during 2000.

      General and Administrative. Our general and administrative expenses consist primarily of employee compensation, outside services such as legal, accounting and consulting, and travel-related costs. For the years ended December 31, 2001, 2000 and 1999, general and administrative expenses related to the private equity funds were $26.6 million, $17.7 million and $16.9 million. This increase was related to increased costs, primarily related to headcount increases, as a result of the formation of additional private equity funds during 2000. General and administrative expenses also included $12.6 million of non-cash charges in 2000 related to a stock grant, acceleration of options as part of severance packages and stock options granted to non-employee consultants. Excluding these expenses, general and administrative expenses were $42.5 million in 2001 and $57.7 million in 2000. The decrease of $15.2 million is primarily the result of certain cost reduction efforts undertaken in the fourth quarter of 2000 and during 2001, including a reduction in employee compensation and travel-related costs as a result of a reduction in headcount, and the reduction in the use of outside consulting services, partially offset by $5.5 million of expense related to a compensation arrangement with the our former Chairman and CEO. Excluding expenses related to the funds and the 2000 non-cash charges, general and administrative expenses were $57.7 million in 2000 versus $26.5 million in 1999. The increase of $31.2 million was the result of increased headcount and professional fees in 2000 to support the increased acquisition activity in 2000 and to support our operations and the operations of our partner companies.

      Gains on Issuance of Stock by Affiliates. These gains represent gains on the issuance of stock by our affiliates to reflect the change in our share of the net equity of these companies. For the year ended December 31, 1999, we recognized $173 million of gains related to the issuance by Internet Capital Group of 31 million shares of its common stock in its initial public offering in August 1999, seven million shares of its common stock in a follow-on public offering in December 1999 and three million shares in private placements and acquisitions completed in the fourth quarter of 1999. This pretax gain represents the increase in our share of Internet Capital Group’s net equity as a result of its stock issuances. In 1999, we recorded gains on stock issued by other affiliates as a result of stock option exercises. No gains were recognized on the issuances of stock by our affiliates in 2001 or 2000 as we had the intent and ability to complete subsequent capital transactions, including purchases in the open market, that may impact the ultimate realization of the gain.

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      Other Income (Loss), Net. Other income (loss), net, for the General Safeguard Operations segment consisted of the following:

      During 2001, we sold shares of public holdings including Novell (received as a result of Novell’s acquisition of Cambridge Technology Partners), OAO Technology Solutions and Brandywine Realty Trust for aggregate net cash proceeds of $63.1 million and recorded gains of $0.2 million. During 2000, we sold shares of public holdings, including Diamond Technology Partners and eMerge Interactive (in its IPO), for aggregate net proceeds of $91.3 million and recorded net gains of $60.6 million. During 1999, we sold shares of public holdings, including Diamond Technology Partners, and Internet Capital Group and Pac-West Telecomm (in their IPOs), for aggregate net proceeds of $75.9 million and recorded gains of $64.9 million.

      During 2001, we sold or liquidated several of our holdings in private partner companies. We exchanged all of our holdings in ThinAirApps and Atlas Commerce for shares of Palm and VerticalNet, respectively. We received shares of Palm valued at $12.1 million and shares of VerticalNet valued at $15.3 million and a $1.8 million note receivable which was paid in January 2002. We recorded an aggregate gain of $17.9 million on these transactions. We also sold or liquidated several other partner companies, including AgWeb, Buystream, fob, Mi8 and TechSpace Ventures, and sold all or a portion of our interests in two private equity funds. The aggregate net proceeds of these transactions were $48.6 million, and we recorded gains of $2.6 million. During 2000, we sold several of our holdings in private partner companies, including Arista Learning Systems, Extant Communications and Multigen. The aggregate net proceeds, including cash, stock and proceeds from the subsequent sales of stock received in the transactions, totaled $66.1 million, including $6.0 million held in escrow, $3 million of which was collected in 2001. We recorded net gains of $55.7 million on the sale of private partner companies in 2000.

      We implemented SFAS 133 effective January 1, 2001. The net loss recognized during the year ended December 31, 2001 on the Tellabs forward sale contracts was $11.7 million, including a $128.5 million gain on the change in fair value of the hedging contract, reduced by a $140.2 million loss on the change in fair value of the Tellabs holdings. In March and August 2002, we will settle the Tellabs forward sales contracts by delivering all of our shares of Tellabs. In 2002, we will record a net gain on the settlement of this transaction of approximately $2 million.

      We recorded impairment charges for certain holdings accounted for under the cost method determined to have experienced an other than temporary decline in value in accordance with our existing policy regarding impairment of ling-lived assets (see “Recoverability of Ownership Interests In and Advances to Affiliates” under the “Critical Accounting Policies”).

      Interest and Financing Expense, Net. Interest and financing expense was $13.8 million for the year ended December 31, 2001 compared to $6.9 million in 2000 and $13.4 million in 1999. The increased expense in 2001 is due to lower average invested cash balances and lower interest rates earned on invested balances. The increase in 2001 is also the result of higher financing costs incurred during the year. The decrease in 2000 was the result of increased interest income earned in 2000 from funds raised from the sale of our common stock, partially offset by increased interest expense as a result of our subordinated notes issued in June 1999

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      Equity Income (Loss). Equity loss for the year ended December 31, 2001 primarily reflects impairment charges of $11 million related to our holdings in private equity funds. Equity income for the year ended December 31, 2000 resulted from significant realized gains generated from the private equity funds.

      Income Taxes. Our consolidated income tax benefit recorded for the year ended December 31, 2001, was $6.8 million, net of recorded valuation allowance of $165.6 million. Income tax benefit differs from the amount computed by applying the U.S. federal income tax rate of 35% to pre-tax loss primarily as a result of non-deductible goodwill amortization and valuation allowances recognized on deferred tax assets We have recorded a valuation allowance to reduce our deferred tax asset to an amount that is more likely than not to be realized in future years. Our consolidated effective tax rate decreased to 32.1% in 2000 compared to 35% for 1999. This rate differs from the federal statutory rate due to non-deductible goodwill amortization.

Net Results of Operations — Partner Company Operations

      Partner Company Operations reflects the operations of all of our partner companies accounted for under either the consolidation or the equity method other than CompuCom (included in CompuCom Operations).