SAFEGUARD SCIENTIFICS INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 2003

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 Identification Number)

800 The Safeguard Building, 435 Devon Park Drive Wayne, PA (Address of principal executive offices)		19087 (Zip Code)

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

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

Yes þ

No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes þ

No o

Number of shares outstanding as of November 4, 2003
Common Stock 119,333,297

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


		Page

PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
	Consolidated Balance Sheets – September 30, 2003 (unaudited) and December 31, 2002		3
	Consolidated Statements of Operations (unaudited) - Three and Nine Months Ended September 30, 2003 and 2002		4
	Consolidated Statements of Cash Flows (unaudited) - Nine Months Ended September 30, 2003 and 2002		5
	Notes to Consolidated Financial Statements		6
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3 - Quantitative and Qualitative Disclosures About Market Risk			38
Item 4 - Controls and Procedures			38
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings			39
Item 6 - Exhibits and Reports on Form 8-K			39
Signatures			40

SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED BALANCE SHEETS


			September 30,			December 31,
			2003			2002

			(in thousands except per share data)
			(unaudited)
ASSETS
Current Assets
	Cash and cash equivalents		$	292,501		$	254,779
	Restricted cash			1,019			3,634
	Short-term investments			5,089			9,986
	Accounts receivable, less allowances ($3,065-2003; $3,523 - 2002)			135,477			179,668
	Inventories			36,341			30,181
	Trading securities			—			832
	Prepaid expenses and other current assets			12,452			13,045

		Total current assets		482,879			492,125
Property and equipment, net				34,674			38,610
Ownership interests in and advances to affiliates				56,271			74,859
Available-for-sale securities				—			4,548
Intangible assets, net				13,023			18,580
Goodwill				215,019			206,815
Deferred taxes				215			1,210
Note receivable - related party				12,216			14,482
Other				10,711			17,437

		Total Assets	$	825,008		$	868,666

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
	Current maturities of long-term debt		$	14,141		$	11,517
	Accounts payable			87,506			121,793
	Accrued expenses and deferred revenue			97,602			116,669

		Total current liabilities		199,249			249,979
Long-term debt				2,771			1,998
Minority interest				137,261			130,384
Other long-term liabilities				14,723			14,032
Convertible subordinated notes				200,000			200,000
Commitments and contingencies
Shareholders’ Equity
	Preferred stock, $10.00 par value; 1,000 shares authorized			—			—
	Common stock, $0.10 par value; 500,000 shares authorized; 119,450 shares issued and outstanding in 2003 and 2002			11,945			11,945
	Additional paid-in capital			738,079			738,282
	Accumulated deficit			(477,314	)		(476,867	)
	Accumulated other comprehensive income (loss)			(89	)		2,522
	Treasury stock, at cost (115 shares-2003, 33 shares-2002)			(399	)		(129	)
	Unamortized deferred compensation			(1,218	)		(3,480	)

		Total shareholders’ equity		271,004			272,273

		Total Liabilities and Shareholders’ Equity	$	825,008		$	868,666

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


				Three Months Ended						Nine Months Ended
				September 30,						September 30,

				2003			2002			2003			2002

				(in thousands except per share data)
				(unaudited)
Revenue
	Product sales			$	264,376		$	339,605		$	834,491		$	956,102
	Service sales				108,774			97,233			326,782			272,793
	Other				590			6,218			2,378			17,817

		Total revenue			373,740			443,056			1,163,651			1,246,712

Operating Expenses
	Cost of sales-product				241,470			308,881			765,622			866,898
	Cost of sales-service				71,731			63,523			214,230			176,850
	Selling and service				33,059			34,216			101,837			97,209
	General and administrative				25,427			36,086			84,923			106,860
	Depreciation and amortization				7,069			7,297			23,202			21,808

		Total operating expenses			378,756			450,003			1,189,814			1,269,625

					(5,016	)		(6,947	)		(26,163	)		(22,913	)
Other income (loss), net					31,205			(4,476	)		48,277			(13,404	)
Impairment – related party					—			—			(659	)		—
Interest income					881			2,022			2,766			6,349
Interest and financing expense					(3,429	)		(7,657	)		(10,350	)		(20,680	)

Income (loss) before income taxes, minority interest, equity loss and change in accounting principle					23,641			(17,058	)		13,871			(50,648	)
Income taxes					(1,060	)		(2,168	)		(3,917	)		(5,230	)
Minority interest					(726	)		667			(629	)		(782	)
Equity loss					(3,613	)		(4,691	)		(9,772	)		(41,237	)

Net income (loss) before change in accounting principle					18,242			(23,250	)		(447	)		(97,897	)
Cumulative effect of change in accounting principle					—			—			—			(21,390	)

Net Income (Loss)				$	18,242		$	(23,250	)	$	(447	)	$	(119,287	)

Basic Income (Loss) Per Share:
	Prior to cumulative effect of change in accounting principle			$	0.15		$	(0.20	)	$	0.00		$	(0.83	)
	Cumulative effect of change in accounting principle				—			—			—			(0.18	)

				$	0.15		$	(0.20	)	$	0.00		$	(1.01	)

Diluted Income (Loss) Per Share:
	Prior to cumulative effect of change in accounting principle			$	0.15		$	(0.20	)	$	(0.02	)	$	(0.85	)
	Cumulative effect of change in accounting principle				—			—			—			(0.18	)

				$	0.15		$	(0.20	)	$	(0.02	)	$	(1.03	)

Weighted Average Shares Outstanding - Basic					118,580			117,857			118,365			117,652
			- Diluted		120,622			117,857			118,365			117,652

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


		Nine Months Ended September 30,

		2003			2002

		(in thousands)
		(unaudited)
Net cash (used in) provided by operating activities		$	(30,828	)	$	29,948

Investing Activities
Proceeds from sales of available-for-sale and trading securities			38,981			13,273
Proceeds from sales of and distributions from affiliates			38,666			18,903
Advances to affiliates			(139	)		(4,397	)
Repayment of advances to affiliates			753			—
Acquisitions of ownership interests in affiliates and subsidiaries, net of cash acquired			(14,327	)		(23,674	)
Advances to related party			—			(590	)
Repayments of advances to related party			1,668			1,530
Increase in restricted cash and short-term investments			(13,073	)		(11,598	)
Decrease in restricted cash and short-term investments			20,585			6,030
Capital expenditures			(10,038	)		(8,800	)
Other, net			(918	)		(1,668	)

Net cash provided by (used in) investing activities			62,158			(10,991	)

Financing Activities
Borrowings on revolving credit facilities			80,927			8,562
Repayments on revolving credit facilities			(78,296	)		(9,313	)
Borrowings on term debt			3,390			569
Repayments on term debt			(1,614	)		(3,092	)
Issuance of Company common stock			235			—
Issuance of subsidiary common stock			1,750			1,221

	Net cash provided by (used in) financing activities		6,392			(2,053	)

Net Increase in Cash and Cash Equivalents			37,722			16,904
Cash and Cash Equivalents at beginning of period			254,779			298,095

Cash and Cash Equivalents at end of period		$	292,501		$	314,999

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003

1. GENERAL

The accompanying unaudited interim Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States of America and the interim financial statements rules and regulations of the SEC. In the opinion of management, these statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Consolidated Financial Statements. The interim operating results are not necessarily indicative of the results for a full year or for any interim period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements. The Consolidated Financial Statements included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s 2002 Annual Report on Form 10-K.

2. BASIS OF PRESENTATION

The Consolidated Financial Statements include the accounts of the Company and all subsidiaries in which it directly or indirectly owns more than 50% of the outstanding voting securities. The Company’s wholly owned subsidiaries include Alliance Consulting Group Associates, Inc. (“Alliance Consulting”). Alliance operates on a 51 or 53 – week period ending on the Saturday closest to December 31. The Company and all other subsidiaries operate on a calendar year. Alliance’s third quarter ended on September 27, 2003. The Company’s Consolidated Statements of Operations and Cash Flows also include the following majority-owned subsidiaries:


For the three months ended September 30,

2003		2002

ChromaVision Medical Systems CompuCom Systems Mantas Pacific Title and Arts Studio SOTAS Tangram Enterprise Solutions		Agari Mediaware ChromaVision Medical Systems CompuCom Systems Mantas Pacific Title and Arts Studio Protura Wireless SOTAS Tangram Enterprise Solutions


For the nine months ended September 30,

2003		2002

Agari Mediaware (Through June 2003) ChromaVision Medical Systems CompuCom Systems Mantas Pacific Title and Arts Studio Protura Wireless (Through June 2003) SOTAS Tangram Enterprise Solutions		Agari Mediaware Aptas (through March 2002) ChromaVision Medical Systems (Since June 2002) CompuCom Systems Mantas (Since April 2002) Pacific Title and Arts Studio Protura Wireless SOTAS Tangram Enterprise Solutions

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2003

The Company’s Consolidated Balance Sheets also include the following majority-owned subsidiaries at September 30, 2003 and December 31, 2002:


September 30, 2003		December 31, 2002

ChromaVision Medical Systems CompuCom Systems Mantas Pacific Title and Arts Studio SOTAS Tangram Enterprise Solutions		Agari Mediaware ChromaVision Medical Systems CompuCom Systems Mantas Pacific Title and Arts Studio Protura Wireless SOTAS Tangram Enterprise Solutions

3. RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current year presentation.

4. GOODWILL AND OTHER INTANGIBLE ASSETS

Under the transition provisions of SFAS 142, the Company was required to test existing goodwill and intangible assets with indefinite useful lives for impairment as of January 1, 2002. The Company completed the required testing during the second quarter of 2002. As a result, the Company reported a $21.8 million goodwill impairment loss in the Business and IT services reporting unit (a component of the Strategic Initiative segment), arising from the initial application of SFAS 142, which required the carrying amount of goodwill be compared to the fair value. The fair value of that reporting unit was determined by estimating the present value of future cash flows and by reviewing the valuations of comparable public companies.

SFAS 142 requires that goodwill be tested for impairment at least annually. The Company will complete its annual impairment testing in the fourth quarter. Additionally, goodwill is tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred.

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


	Strategic
	Initiative			Legacy				Total
	Companies			Companies		CompuCom		Segments

	(in thousands)
	(unaudited)
Balance at December 31, 2002	$	100,590		$	1,336	$	104,889	$	206,815
Additions		3,053			—		—		3,053
Purchase Price Adjustments⁽¹⁾		5,790			—		—		5,790
Deconsolidation		(718	)		79		—		(639	)

Balance at September 30, 2003	$	108,715		$	1,415	$	104,889	$	215,019

⁽¹⁾ As discussed in Note 14, certain purchase price adjustments are not final. The above purchase price adjustments represent activity to complete the final purchase price allocation.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2003

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


		September 30, 2003

		Gross
	Amortization	Carrying		Accumulated
	Period	Value		Amortization		Net

		(in thousands)
		(unaudited)
Customer-related	6 - 11 years	$	15,467	$	10,886	$	4,581
Contract-related	2 - 3 years		2,840		1,988		852
Technology-related	2 - 17 years		11,554		3,964		7,590

Total		$	29,861	$	16,838	$	13,023


		December 31, 2002

		Gross
	Amortization	Carrying		Accumulated
	Period	Value		Amortization		Net

		(in thousands)
Customer-related	6 - 11 years	$	15,467	$	9,107	$	6,360
Contract-related	2 - 3 years		2,840		1,382		1,458
Technology-related	2 - 17 years		12,942		2,180		10,762

Total		$	31,249	$	12,669	$	18,580

Amortization expense related to intangible assets was $1.4 million and $4.4 million for the three and nine months ended September 30, 2003, respectively and $0.9 million and $2.9 million for the three and nine months ended September 30, 2002, respectively. The following table provides estimated future amortization expense related to intangible assets:


	Total

	(in thousands)
	(unaudited)
Remainder of 2003	$	1,414
2004		5,111
2005		3,196
2006		1,277
2007 and thereafter		2,025

	$	13,023

5. NEW ACCOUNTING PRONOUNCEMENTS

In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” This issue addresses the appropriate accounting by vendors for arrangements that will result in the delivery of multiple products, services and/or rights to assets that may occur over a period of time. The Issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of this consensus did not have an impact on the Company’s consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities”, which addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created or obtained after January 31, 2003. The interpretation becomes effective for entities created before February 1, 2003 as of the beginning of the first period ending after December 15, 2003. The Company accounts for, under the equity method, certain private equity funds that account for their investments in accordance with the specialized accounting guidance in the AICPA Audit and Accounting Guide, “Audits of Investment Companies”. The effective date for FIN 46 has been delayed for these funds until the AICPA finalizes its proposed Statement of Position on clarifying the scope of the Audit Guide and accounting by the parent companies and

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2003

equity method investors for investments in investment companies. If it is ultimately determined that FIN 46 applies to private equity funds, then the amount of equity income or loss the Company records on private equity funds accounted for under the equity method may change significantly.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. SFAS 150 establishes standards for how an issuer of financial statements classifies and measures certain financial instruments that have characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have an impact on the Company’s financial statements.

6. 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. Excluding net loss, the Company’s primary source of comprehensive income (loss) is from net unrealized appreciation (depreciation) on its holdings classified as available-for-sale. Reclassification adjustments result from the recognition in net income (loss) of unrealized gains or losses that were included in comprehensive income (loss) in prior periods.

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


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2003			2002			2003			2002

		(in thousands)
		(unaudited)
Net Income (Loss)		$	18,242		$	(23,250	)	$	(447	)	$	(119,287	)

Other Comprehensive Income (Loss), Before Taxes:
	Foreign currency translation adjustments		50			—			(89	)		—
	Unrealized holding gains (losses) in available-for-sale securities		922			(422	)		12,909			(766	)
	Reclassification adjustments		(12,735	)		422			(16,789	)		1,051
Related Tax (Expense) Benefit:
	Unrealized holding (gains) losses in available-for-sale securities		—			148			(61	)		268
	Reclassification adjustments		—			(148	)		1,419			(368	)

Other Comprehensive Income (Loss)			(11,763	)		—			(2,611	)		185

Comprehensive Income (Loss)		$	6,479		$	(23,250	)	$	(3,058	)	$	(119,102	)

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2003

7. OWNERSHIP INTERESTS IN AND ADVANCES TO AFFILIATES

The following summarizes the carrying value of the Company’s ownership interests in and advances to affiliates accounted for under the equity method or cost method of accounting. The ownership interests are classified according to applicable accounting methods at September 30, 2003 and December 31, 2002.


		September 30,		December 31,
		2003		2002

		(in thousands)
		(unaudited)
Equity Method
	Public Companies	$	9,671	$	23,181
	Non-Public Companies		234		5,057
	Private Equity Funds		31,841		36,377

			41,746		64,615
Cost Method
	Non-Public Companies		11,191		6,420
	Private Equity Funds		3,334		3,824

		$	56,271	$	74,859

The market value of the Company’s public companies accounted for under the equity method was $32 million at September 30, 2003 and $53 million at December 31, 2002. The decline is mainly attributable to the Company’s sales of interests in Internet Capital Group and DocuCorp during 2003.

8. DEBT

In May 2003, the Company renewed its revolving credit facility that provides for borrowings and issuances of letters of credit and guarantees of up to $25 million. Borrowing availability under the facility is reduced by the face amount of outstanding letters of credit and guarantees. This credit facility matures in May 2004 and bears interest at the prime rate (4.0% at September 30, 2003) for outstanding borrowings. The credit facility is subject to an unused commitment fee of 0.125%, which is subject to reduction based on deposits maintained at the bank. The facility requires cash collateral equal to two times any amount outstanding under the facility. This facility provides the Company additional flexibility to implement its strategy and support its companies. As of September 30, 2003, guarantees totaling $13 million related to two strategic initiative companies’ credit facilities were outstanding. As of September 30, 2003, there was $12 million available under the facility.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2003

of September 30, 2003 consisted of two certificates totaling $60 million. Within the context of the securitization, each certificate is issued from a separate facility, each facility set at $50 million. One $50 million facility, which matured in October 2003, had one certificate issued for $50 million. Consistent with CompuCom’s financing requirements, this facility was not renewed. The other $50 million facility with an October 2005 maturity date had one certificate issued for $10 million. CompuCom retains the portion of the sold receivables that are in excess of the amounts outstanding, referred to as retained interest. The carrying amount of CompuCom’s retained interest, which approximates fair value because of the short-term nature of the receivables, is reflected in Accounts Receivable on the Consolidated Balance Sheets. Both facilities are subject to CompuCom’s compliance with selected financial covenants and ratios.

Three consolidated companies maintain separate revolving credit facilities, which provide for aggregate borrowings of $17.5 million. These credit facilities range in maturity from December 2003 through September 2004. As of September 30, 2003 outstanding borrowings under these facilities were $7.2 million. These obligations bear interest at fixed rates of 4.75% and variable rates ranging between the prime rate plus 0.5% and the prime rate plus 1%.

Debt also includes mortgage obligations ($3.6 million), term loans ($4.6 million), capital lease obligations ($1.0 million) and other borrowing obligations ($0.5 million) of consolidated companies. These obligations bear interest at fixed rates ranging between 4.25% and 9.5% and variable rates indexed to the prime rate plus 1% to 1.75%.

Aggregate maturities of long-term debt in future years are (in millions): $12.4 - 2003; $2.2 - 2004; $1.6 - 2005; and $0.7 - 2006.

9. STOCK-BASED COMPENSATION

Incentive or non-qualified stock options, restricted stock awards, stock appreciation rights, performance units and other stock-based awards may be granted to Company employees, directors and consultants under the 2001 Associates Equity Compensation Plan and 1999 Equity Compensation Plan. Generally, outstanding options vest over four years after the date of grant and expire eight years after the date of grant. All options granted under the plans to date have been at prices, which have been equal to the fair market value at the date of grant. At September 30, 2003, the Company reserved 14.2 million shares of common stock for possible future issuance under its equity compensation plans. Several subsidiaries and most of our companies also maintain equity compensation plans for their employees and directors.

Option activity is summarized below:


				Weighted
				Average
	Shares			Exercise Price

	(In thousands)
Outstanding at December 31, 2002		11,404		$	8.50
Options granted		450			1.43
Options exercised		(136	)		(1.73	)
Options canceled/forfeited		(1,140	)		4.36

Outstanding at September 30, 2003		10,578		$	8.74

Options exercisable at end of period		7,313
Shares available for future grant		3,668

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2003

The following summarizes information about the Company’s stock options outstanding at September 30, 2003:


Options Outstanding											Options Exercisable

							Weighted Average		Weighted				Weighted
					Number		Remaining		Average				Average
Range of					Outstanding		Contractual Life		Exercise		Exercisable		Exercise
Exercise Prices					(In thousands)		(In years)		Price		(In thousands)		Price

$	1.25	-	$	2.12		2,796		6.7	$	1.70		658	$	1.65
	2.17	-		4.79		1,831		5.9		3.73		968		4.02
	5.28	-		7.00		2,358		5.1		5.35		2,125		5.35
	7.10	-		14.84		2,550		2.7		11.23		2,540		11.24
	20.00	-		30.98		471		4.4		28.62		461		28.59
	33.19	-		50.98		572		3.8		45.61		561		45.61

$	1.25	-	$	50.98		10,578		5.0	$	8.74		7,313	$	11.44

In January 2002, the Company issued 0.5 million shares of restricted stock in exchange for stock options that were canceled. The restricted stock had a value of $2.0 million on the date of grant and vests in accordance with the terms of the related canceled stock options. In addition, during 2001 and 2002, the Company issued 0.4 million and 1.3 million shares of restricted stock to employees with a value on the date of grant of $2.1 million and $4.5 million, respectively, which was recorded as deferred compensation. This restricted stock vests over periods ranging from two to four years. Compensation expense is recognized on a straight-line basis over the vesting period and is reduced to the extent that a participant forfeits shares of restricted stock received prior to vesting. The deferred compensation charge is unaffected by future changes in the price of the common stock.

Total compensation expense for restricted stock issuances was $0.5 million and $1.6 million for the three and nine months ended September 30, 2003 and $0.9 million and $2.8 million for the three and nine months ended September 30, 2002, respectively. Unamortized compensation expense related to restricted stock issuances at September 30, 2003 is $1.2 million.

In addition to the restricted stock grants discussed above, the Company issued 0.9 million of deferred stock units to senior executives in December 2002. Deferred stock units are payable in stock on a one-for-one basis. Payments in respect of the deferred stock units are distributable not earlier than one year after the vesting. The value of these deferred stock units was $1.6 million based on the fair value of the stock as of the date of grant. The deferred stock units vest over four years. Total compensation expense for deferred stock units was $0.3 million and $0.5 million for the three and nine months ended September 30, 2003. The related liability of $0.5 million is included in Other Long-Term Liabilities on the Consolidated Balance Sheets.

Included in compensation expense for the three and nine months ended September 2003 is $0.4 million related to the acceleration of vesting of restricted stock and deferred stock units of an executive who resigned in the third quarter of 2003.

The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations for stock options and other stock-based awards while disclosing pro forma net income and net income per share as if the fair value method had been applied in accordance with Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123).

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2003

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002 as such have been incorporated below.


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2003			2002			2003			2002

		(in thousands, except per share data)
Consolidated net income (loss)	As Reported	$	18,242		$	(23,250	)	$	(447	)	$	(119,287	)
Deduct: Total stock based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(330	)		(2,597	)		(5,376	)		1,162

	Pro forma	$	17,912		$	(25,847	)	$	(5,823	)	$	(118,125	)

Income (Loss) Per Share
Basic	As Reported	$	0.15		$	(0.20	)	$	0.00		$	(1.01	)
	Pro forma	$	0.15		$	(0.22	)	$	(0.05	)	$	(1.00	)
Diluted	As Reported	$	0.15		$	(0.20	)	$	(0.02	)	$	(1.03	)
	Pro forma	$	0.15		$	(0.23	)	$	(0.06	)	$	(1.02	)
Per share weighted average fair value of stock options issued on date of grant		$	N/A		$	0.92		$	1.04		$	1.62

The following range of assumptions were used by the Company, its subsidiaries and its companies accounted for under the equity method to determine the fair value of stock options granted during the three and nine months ended September 30, 2003 and 2002 using the Black-Scholes option-pricing model:


		Three Months Ended	Nine Months Ended
		September 30,	September 30,

		2002	2003	2002

Company
Dividend yield		0%	0%	0%
Expected volatility		95%	95%	90% to 95%
Average expected option life		5 years	5 years	5 years
Risk-free interest rate		2.7%	2.5%	2.7% to 5.0%

	Three Months Ended		Nine Months Ended
	September 30,		September 30,

	2003	2002	2003	2002

Subsidiaries and Equity Method Companies
Dividend yield	0%	0%	0%	0%
Expected volatility	70% to 287%	0% to 212%	0% to 287%	0% to 212%
Average expected option life	3 to 5 years	4 to 8 years	3 to 8 years	4 to 8 years
Risk-free interest rate	1.9% to 3.4%	2.6% to 4.1%	1.9% to 3.7%	1.9% to 5.7%

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2003

10. INCOME TAXES

The Company’s consolidated income tax expense recorded for the three and nine months ended September 30, 2003 was $1.1 million and $3.9 million, respectively, net of a $3.4 million decrease in the valuation allowance for the three months ended September 30, 2003 and a net increase in the valuation allowance of $4.3 million for the nine months ended September 30, 2003. The Company recorded a valuation allowance against its deferred tax assets based on management’s determination that it is more likely than not that these assets will not be realized in future years.

11. NET INCOME (LOSS) PER SHARE

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,

	2003			2002			2003			2002

	(in thousands except per share data)
	(unaudited)
Basic:
Net income (loss) prior to cumulative effect of change in accounting principle	$	18,242		$	(23,250	)	$	(447	)	$	(97,897	)
Cumulative effect of change in accounting principle		—			—			—			(21,390	)

Net income (loss) after cumulative effect of change in accounting principle	$	18,242		$	(23,250	)	$	(447	)	$	(119,287	)

Average common shares outstanding		118,580			117,857			118,365			117,652

Basic prior to cumulative effect of change in accounting principle	$	0.15		$	(0.20	)	$	0.00		$	(0.83	)
Cumulative effect of change in accounting principle		—			—			—			(0.18	)

Basic after cumulative effect of change in accounting principle	$	0.15		$	(0.20	)	$	0.00		$	(1.01	)

Diluted:
Net income (loss) prior to cumulative effect of change in accounting principle	$	18,242		$	(23,250	)	$	(447	)	$	(97,897	)
Effect of public holdings		(438	)		(858	)		(1,584	)		(2,022	)

Adjusted net income (loss)	$	17,804		$	(24,108	)	$	(2,031	)	$	(99,919	)

Average common shares outstanding		120,622			117,857			118,365			117,652

Diluted prior to cumulative effect of change in accounting principle	$	0.15		$	(0.20	)	$	(0.02	)	$	(0.85	)

Net income (loss) after cumulative effect of change in accounting principle	$	18,242		$	(23,250	)	$	(447	)	$	(119,287	)
Effect of public holdings		(438	)		(858	)		(1,584	)		(2,101	)

Adjusted net income (loss)	$	17,804		$	(24,108	)	$	(2,031	)	$	(121,388	)

Average common shares outstanding		120,622			117,857			118,365			117,652

Diluted after cumulative effect of change in accounting principle	$	0.15		$	(0.20	)	$	(0.02	)	$	(1.03	)

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

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2003

Approximately zero and 1.2 million weighted average common stock equivalents related to stock options, restricted stock, and DSU’s were excluded from the denominator in the diluted earnings per share calculation for the three and nine months ended September 30, 2003, respectively, as their inclusion would be anti-dilutive due to the net loss for the nine month period. Approximately 0.2 million and 0.3 million weighted average common stock equivalents related to stock options and restricted stock were excluded from the denominator in the diluted earnings per share calculation for the three and nine months ended September 30, 2002, respectively, as their inclusion would be anti-dilutive due to the net loss in the respective periods. Approximately 8.3 million shares representing the weighted average effect of assumed conversion of the convertible subordinated notes were excluded in all periods presented from the denominator in the calculation of diluted income (loss) per share because their effect was anti-dilutive.

12. PARENT COMPANY FINANCIAL INFORMATION

The Company’s Consolidated Financial Statements reflect certain entities accounted for under the consolidation method of accounting.

Parent company financial information is provided to present the financial position and results of operations of the Company as if the less than wholly owned consolidated companies (see Note 2) were accounted for under the equity method of accounting for all periods presented during which the Company owned its interest in these companies. Parent company financial statements consolidate the financial statements of the Company’s wholly owned subsidiaries, including Alliance Consulting.

Parent Company Balance Sheets


			September 30,		December 31,
			2003		2002

			(in thousands)
			(unaudited)
Assets
	Cash and cash equivalents		$	150,480	$	112,714
	Restricted cash			1,019		3,634
	Short-term investments			5,089		9,986
	Trading securities			—		832
	Other current assets			22,446		27,520

		Total current assets		179,034		154,686
	Ownership interests in and advances to affiliates			244,959		259,854
	Available-for-sale securities			—		4,548
	Note receivable - related party			12,216		14,482
	Goodwill			75,096		74,226
	Other			6,368		11,526

		Total Assets	$	517,673	$	519,322

Liabilities and Shareholders’ Equity
	Current liabilities		$	30,428	$	32,608
	Long-term debt			325		538
	Other long-term liabilities			15,916		13,903
	Convertible subordinated notes			200,000		200,000
	Shareholders’ equity			271,004		272,273

		Total Liabilities and Shareholders’ Equity	$	517,673	$	519,322

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2003

Parent company and other recourse debt includes primarily mortgage obligations ($3.6 million), bank credit facilities ($5.9 million), capital lease obligations ($0.3 million) and other borrowing obligations ($0.4 million). These obligations bear interest at fixed rates between 4.25% to 9%.

Parent Company Statements of Operations


		Three Months Ended September 30,						Nine Months Ended September 30,

		2003			2002			2003			2002

		(in thousands)						(in thousands)
		(unaudited)						(unaudited)
Revenue		$	22,319		$	11,768		$	67,725		$	38,055

Operating expenses:
	Cost of sales		15,116			4,188			46,199			15,324
	Selling		2,960			512			9,716			1,915
	General and administrative		8,073			13,868			29,783			41,006
	Depreciation and amortization		896			303			3,672			1,222

			27,045			18,871			89,370			59,467

			(4,726	)		(7,103	)		(21,645	)		(21,412	)
Other income (loss), net			31,205			(115	)		48,277			(7,028	)
Impairment – related party			—			—			(659	)		—
Interest income			595			1,469			1,788			4,687
Interest and financing expense			(2,729	)		(3,944	)		(8,267	)		(14,677	)

Income (loss) before income taxes, equity loss and cumulative effect of change in accounting principle			24,345			(9,693	)		19,494			(38,430	)
Income taxes			1			(5	)		—			(14	)
Equity loss			(6,104	)		(13,552	)		(19,941	)		(59,028	)

Net income (loss) prior to cumulative change in accounting principle			18,242			(23,250	)		(447	)		(97,472	)
Cumulative effect of change in accounting principle			—			—			—			(21,815	)

Net income (loss)		$	18,242		$	(23,250	)	$	(447	)	$	(119,287	)

The Company’s share of income or losses of its less than wholly owned consolidated subsidiaries is reflected in Equity Loss.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2003

Parent Company Statements of Cash Flows


			Nine Months Ended September 30,

			2003			2002

			(in thousands)
			(unaudited)
Net cash (used in) provided by operating activities			$	(22,375	)	$	39,167
Investing Activities
	Proceeds from sales of trading securities			38,981			13,273
	Proceeds from sales of and distributions from affiliates			38,666			18,903
	Advances to affiliates			(139	)		(4,897	)
	Repayment of advances to affiliates			1,403			—
	Acquisitions of ownership interests in affiliates and subsidiaries, net of cash acquired			(27,892	)		(60,266	)
	Capital expenditures			(500	)		(935	)
	Advances to related party			—			(590	)
	Repayments of advances to related party			1,668			1,530
	Increase in restricted cash and short-term investments			(13,073	)		(11,598	)
	Decrease in restricted cash and short-term investments			20,585			6,030
	Other, net			8			353

	Net cash provided by (used in) investing activities			59,707			(38,197	)
Financing Activities
	Borrowings on revolving credit facilities			74,379			—
	Repayments on revolving credit facilities			(73,216	)		—
	Repayments on term debt			(964	)		(439	)
	Issuance of Company common stock, net			235			—

		Net cash provided by (used in) financing activities		434			(439	)

Net Increase in Cash and Cash Equivalents				37,766			531
Cash and Cash Equivalents at beginning of period				112,714			171,531

Cash and Cash Equivalents at end of period			$	150,480		$	172,062

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2003

13. OPERATING SEGMENTS

Our reportable segments include i) Strategic Initiative Companies, which include those companies in which we maintain controlling interest and are strategically and operationally engaged with the goal of accelerating value creation; ii) Legacy Companies in which we generally have less than a controlling interest or which do not directly fall within our strategic initiatives; and iii) CompuCom, which represents the results of our subsidiary, CompuCom.

In periods prior to 2003, our reportable segments were Strategic Private Company Operations, Other Private Company and Funds Operations, Public Company Operations (excluding CompuCom), and CompuCom Operations. All prior periods have been restated to conform to the current-year presentation. The development of the current segments corresponds to the implementation of our refinement in strategic focus announced in early 2003, and represents management’s view of the Company’s operations.

The following tables reflect our consolidated operating data by reportable segments. Each segment includes the results of the consolidated companies and records our share of income or losses for entities accounted for under the equity method. Segment results also include impairment charges, gains or losses related to the disposition of the companies and the mark to market of trading securities. All significant intersegment activity has been eliminated. Accordingly, segment results reported exclude the effect of transactions between us and our subsidiaries.

Other items, which include corporate expenses and income taxes, are reviewed by management independent of segment results.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2003

Three Months Ended September 30, 2003 (in thousands, unaudited)


			Strategic
			Initiative			Legacy						Total						Consolidated
			Companies			Companies			CompuCom			Segments			Other Items			Results

Revenue
	Product sales		$	3,897		$	876		$	259,603		$	264,376		$	—		$	264,376
	Service sales			28,066			9,652			71,056			108,774			—			108,774
	Other			15			505			—			520			70			590

Total Revenue				31,978			11,033			330,659			373,670			70			373,740

Operating expenses
	Cost of sales - product			243			13			241,214			241,470			—			241,470
	Cost of sales - service			17,765			4,434			49,532			71,731			—			71,731
	Selling and service			12,213			1,751			19,095			33,059			—			33,059
	General and administrative			5,705			1,466			13,690			20,861			4,566			25,427
	Depreciation and amortization			2,272			1,281			3,555			7,108			(39	)		7,069

		Total operating expenses		38,198			8,945			327,086			374,229			4,527			378,756

				(6,220	)		2,088			3,573			(559	)		(4,457	)		(5,016	)
	Other income, net			258			30,892			—			31,150			55			31,205
	Impairment – related party			—			—			—			—			—			—
	Interest income			32			4			276			312			569			881
	Interest and financing expense			(143	)		(42	)		(347	)		(532	)		(2,897	)		(3,429	)

Net income (loss) before income taxes, minority interest, and equity loss				(6,073	)		32,942			3,502			30,371			(6,730	)		23,641
Income taxes				—			—			—			—			(1,060	)		(1,060	)
Minority interest				988			(384	)		(1,330	)		(726	)		—			(726	)
Equity loss				—			(3,595	)		—			(3,595	)		(18	)		(3,613	)

Net Income (Loss)			$	(5,085	)	$	28,963		$	2,172		$	26,050		$	(7,808	)	$	18,242

Segment Assets
September 30, 2003			$	158,521		$	79,340		$	410,381		$	648,242		$	176,766		$	825,008

December 31, 2002			$	163,390		$	103,222		$	447,494		$	714,106		$	154,560		$	868,666

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2003

Three Months Ended September 30, 2002 (in thousands, unaudited)


			Strategic
			Initiative			Legacy						Total						Consolidated
			Companies			Companies			CompuCom			Segments			Other Items			Results

Revenue
	Product sales		$	4,441		$	2,097		$	333,067		$	339,605		$	—		$	339,605
	Service sales			9,923			6,311			80,999			97,233			—			97,233
	Other			—			6,204			—			6,204			14			6,218

Total Revenue				14,364			14,612			414,066			443,042			14			443,056

Operating expenses
	Cost of sales - product			1,251			675			306,955			308,881			—			308,881
	Cost of sales - service			5,604			3,345			54,574			63,523			—			63,523
	Selling and service			9,828			2,879			21,509			34,216			—			34,216
	General and administrative			4,718			7,555			17,744			30,017			6,069			36,086
	Depreciation and amortization			1,451			1,276			4,380			7,107			190			7,297

		Total operating expenses		22,852			15,730			405,162			443,744			6,259			450,003

				(8,488	)		(1,118	)		8,904			(702	)		(6,245	)		(6,947	)
	Other loss, net			(1,783	)		(2,693	)		—			(4,476	)		—			(4,476	)
	Interest income			62			14			483			559			1,463			2,022
	Interest and financing expense			(3,187	)		(353	)		(456	)		(3,996	)		(3,661	)		(7,657	)

Net income (loss) before income taxes, minority interest, and equity loss				(13,396	)		(4,150	)		8,931			(8,615	)		(8,443	)		(17,058	)
Income taxes				—			—			—			—			(2,168	)		(2,168	)
Minority interest				3,727			412			(3,472	)		667			—			667
Equity loss				—			(4,677	)		—			(4,677	)		(14	)		(4,691	)

	Net Income (Loss)		$	(9,669	)	$	(8,415	)	$	5,459		$	(12,625	)	$	(10,625	)	$	(23,250	)

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2003

Nine Months Ended September 30, 2003 (in thousands, unaudited)


			Strategic
			Initiative			Legacy						Total						Consolidated
			Companies			Companies			CompuCom			Segments			Other Items			Results

Revenue
	Product sales		$	6,273		$	6,466		$	821,752		$	834,491		$	—		$	834,491
	Service sales			84,006			25,844			216,932			326,782			—			326,782
	Other			114			2,020			—			2,134			244			2,378

Total Revenue				90,393			34,330			1,038,684			1,163,407			244			1,163,651

Operating expenses
	Cost of sales - product			685			3,485			761,452			765,622			—			765,622
	Cost of sales - service			53,766			11,720			148,744			214,230			—			214,230
	Selling and service			38,247			5,394			58,196			101,837			—			101,837
	General and administrative			18,730			5,235			43,647			67,612			17,311			84,923
	Depreciation and amortization			7,479			3,651			11,873			23,003			199			23,202

		Total operating expenses		118,907			29,485			1,023,912			1,172,304			17,510			1,189,814

				(28,514	)		4,845			14,772			(8,897	)		(17,266	)		(26,163	)
	Other income, net			203			47,909			—			48,112			165			48,277
	Impairment – related party			—			—			—			—			(659	)		(659	)
	Interest income			71			7			928			1,006			1,760			2,766
	Interest and financing expense			(449	)		(118	)		(1,170	)		(1,737	)		(8,613	)		(10,350	)

Net income (loss) before income taxes, minority interest, and equity loss				(28,689	)		52,643			14,530			38,484			(24,613	)		13,871
Income taxes				—			—			—			—			(3,917	)		(3,917	)
Minority interest				5,422			(516	)		(5,535	)		(629	)		—			(629	)
Equity loss				—			(9,731	)		—			(9,731	)		(41	)		(9,772	)

	Net Income (Loss)		$	(23,267	)	$	42,396		$	8,995		$	28,124		$	(28,571	)	$	(447	)

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2003

Nine Months Ended September 30, 2002 (in thousands, unaudited)


			Strategic
			Initiative			Legacy						Total						Consolidated
			Companies			Companies			CompuCom			Segments			Other Items			Results

Revenue
	Product sales		$	7,249		$	6,227		$	942,626		$	956,102		$	—		$	956,102
	Service sales			27,825			20,438			224,530			272,793			—			272,793
	Other			—			17,766			—			17,766			51			17,817

Total Revenue				35,074			44,431			1,167,156			1,246,661			51			1,246,712

Operating expenses
	Cost of sales - product			1,680			1,714			863,504			866,898			—			866,898
	Cost of sales - service			18,643			11,620			146,587			176,850			—			176,850
	Selling and service			20,049			9,916			67,244			97,209			—			97,209
	General and administrative			11,810			23,106			54,022			88,938			17,922			106,860
	Depreciation and amortization			2,746			4,340			13,854			20,940			868			21,808

		Total operating expenses		54,928			50,696			1,145,211			1,250,835			18,790			1,269,625

				(19,854	)		(6,265	)		21,945			(4,174	)		(18,739	)		(22,913	)
	Other income (loss), net			(1,799	)		(11,730	)		—			(13,529	)		125			(13,404	)
	Impairment – related party			—			—			—			—			—			—
	Interest income			128			36			1,529			1,693			4,656			6,349
	Interest and financing expense			(3,658	)		(598	)		(2,052	)		(6,308	)		(14,372	)		(20,680	)

Net income (loss) before income taxes, minority interest, and equity loss				(25,183	)		(18,557	)		21,422			(22,318	)		(28,330	)		(50,648	)
Income taxes				—			—			—			—			(5,230	)		(5,230	)
Minority interest				5,405			1,908			(8,095	)		(782	)		—			(782	)
Equity loss				(3,625	)		(37,467	)		—			(41,092	)		(145	)		(41,237	)

Net Income (loss) before change in accounting principle				(23,403	)		(54,116	)		13,327			(64,192	)		(33,705	)		(97,897	)
Cumulative effect of change in accounting principle				(21,815	)		—			425			(21,390	)		—			(21,390	)

	Net Income (Loss)		$	(45,218	)	$	(54,116	)	$	13,752		$	(85,582	)	$	(33,705	)	$	(119,287	)

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2003


	Three Months Ended September 30,						Nine Months Ended September 30,

	2003			2002			2003			2002

	(in thousands)						(in thousands)
	(unaudited)						(unaudited)
Other Items
Corporate operations	$	(6,748	)	$	(8,457	)	$	(24,654	)	$	(28,475	)
Income tax expense		(1,060	)		(2,168	)		(3,917	)		(5,230	)

	$	(7,808	)	$	(10,625	)	$	(28,571	)	$	(33,705	)

14. BUSINESS COMBINATIONS

Acquisitions by the Company

In September 2003, the Company acquired additional shares of SOTAS from minority shareholders for $1.4 million. The Company also funded $5 million to satisfy SOTAS’ outstanding balance on their line of credit with Comerica Bank. The Company then converted a total of $7.2 million of debt into common stock of SOTAS. As a result of these transactions the Company increased its ownership by 24.6% to 99.8%.

In September 2003, the Company acquired additional shares of Mantas from a minority shareholder and provided funding to Mantas for a total of $0.8 million. As a result of this transaction, the Company increased its ownership in Mantas to 71%.

In December 2002, the Company acquired 100% of Alliance Consulting for $54.5 million in cash paid to the selling shareholders and $1.3 million in transaction related costs. Alliance Consulting is an IT consulting firm that architects and implements digital enterprise strategies for its clients by building and integrating information technology across every line of business.

The Company has not completed the allocation of the purchase price for the acquisitions listed above. Therefore, the allocation of the purchase price could be adjusted once the valuation of assets acquired and liabilities assumed is completed.

In February 2003, the Company acquired additional shares of ChromaVision Medical Systems for $5 million. As a result of this purchase of additional shares, the Company increased its ownership in ChromaVision by 6% to 62%.

In September 2002, the Company acquired a majority ownership interest in ChromaVision Medical Systems for $16.2 million in cash, including $9.8 million used to purchase shares of preferred stock from existing shareholders. In July and August 2002, the Company acquired additional shares of ChromaVision for $1.7 million. The Company’s allocations of aggregate purchase prices for the ChromaVision acquisitions is summarized in the table below:


	2003		2002

	(in millions)
Working Capital (including cash acquired)	$	3.5	$	5.8
Property and Equipment		0.1		0.5
Identifiable Intangibles		—		5.4
Goodwill		1.1		5.1
In-process Research and Development		0.3		1.1

	$	5.0	$	17.9

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2003

The total identifiable intangible assets will be amortized and the total fixed assets will be depreciated over their weighted average useful lives (4 years). The acquired in-process research and development costs were charged to earnings in the second quarter of 2003 and the fourth quarter of 2002, respectively. The amount was determined by identifying research projects for which technological feasibility has not been established and for which there is no alternative future use. In- Process R&D represented several projects in process at ChromaVision relating to software and hardware improvements and related applications development, which, by definition, may not have an alternative future use.

In April 2002, the Company acquired a majority ownership interest in Mantas for $14.5 million in cash. Mantas provides comprehensive monitoring and analysis of financial transactions to detect and discover behaviors of interest through its software products. The Company’s allocation of the aggregate purchase price for the acquisition was as follows:


Working Capital (including cash acquired)	$	9.3
Identifiable Intangibles		4.9
Goodwill		0.3

	$	14.5

In January 2002, the Company acquired a majority ownership interest in Protura Wireless for $4 million in cash. Protura has developed patent-pending technology that makes it possible for cellular manufacturers to switch from cumbersome external antennas to Protura internal antennas without losing performance. The Company did not complete an allocation of purchase price of the acquisition of Protura Wireless due to the reduction of carrying value to zero within the first year of majority ownership.

These transactions were accounted for as purchases and, accordingly, the Consolidated Financial Statements reflect the operations of these companies from the respective acquisition dates.

Pro Forma Financial Information

The following unaudited pro forma financial information presents the combined results of operations of the Company as if the acquisitions had occurred as of the beginning of the periods presented, after giving effect to certain adjustments, including amortization of intangibles with definite useful lives, increased interest and financing expense on debt related to the CompuCom acquisitions and related income tax effects. The pro forma results of operations are not indicative of the actual results that would have occurred had the acquisitions been consummated at the beginning of the period presented and are not intended to be a projection of future results.


	Three Months Ended			Nine Months Ended
	September 30,			September 30,

	2002			2002

	(in thousands except per share data)
	(unaudited)
Total revenues	$	463,588		$	1,315,993
Net loss	$	(23,200	)	$	(124,088	)
Diluted loss per share	$	(0.20	)	$	(1.07	)

The effect of acquisitions in 2003 is not material to the Company’s 2003 operating results.

15. RELATED PARTY TRANSACTIONS

In October 2000, the Company guaranteed certain margin loans advanced by a third party to Mr. Musser, then the Chief Executive Officer of the Company. The securities subject to the margin account included shares of the Company’s common stock. The Company entered into this guarantee arrangement to maintain an orderly trading market for its equity

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2003

securities, to maintain its compliance posture with the Investment Company Act of 1940, and to avoid diversion of the attention of a key executive from the performance of his responsibilities to the Company. In May 2001, the Company entered into a $26.5 million loan agreement with Mr. Musser, the former CEO. The proceeds of the loan were used to repay the margin loans guaranteed by Safeguard in October 2000. The purpose of the May 2001 loan agreement was to eliminate the guarantee obligations and to provide for direct and senior access to Mr. Musser’s assets as collateral for the loan.

The loan bears interest at the default annual rate of 9% and became payable on a limited basis on January 1, 2003. Safeguard sent Mr. Musser a demand notice in January 2003 and, when no payment was received, a default notice. In conjunction with the original loan, Mr. Musser granted the Company security interests in securities and real estate as collateral. Based on the information available to us, the Company also concluded that Mr. Musser may not have sufficient personal assets to satisfy the outstanding balance due under the loan when the loan becomes full recourse against Mr. Musser on April 30, 2006. In the fourth quarter of 2002 and first quarter of 2003, the Company impaired the loan by $11.4 million and $0.7 million respectively, to the estimated value of the collateral that the Company held at that date. The Company’s carrying value of the loan at September 30, 2003 is $12.2 million. The Company will continue to evaluate the value of the collateral to the carrying value of the note on a quarterly basis.

16. COMMITMENTS AND CONTINGENCIES

Safeguard Scientifics Securities Litigation

On September 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, a loan to Mr. Musser, the guarantee of certain margin debt 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 Safeguard’s companies, the impact of competition on prospects for one or more of Safeguard’s 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 plaintiffs have filed a consolidated and amended complaint. On May 23, 2002, the defendants filed a motion to dismiss the consolidated and amended complaint for failure to state claim upon which relief may be granted. On October 24, 2002, the Court denied the defendants’ motions to dismiss, holding that, based on the allegations of plaintiffs’ consolidated and amended complaint, dismissal would be inappropriate at this juncture. On December 20, 2002, plaintiffs filed with the Court a motion for class certification. On August 27, 2003, the Court denied plaintiffs’ motion for class certification. On September 12, 2003, plaintiffs filed with the United States Court of Appeals for the Third Circuit a petition for permission to appeal the order denying class certification. Safeguard filed its opposition to that petition on September 23, 2003. The Court of Appeals has not yet ruled on plaintiffs’ petition.

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.

Other

The Company and its subsidiaries are involved in various 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.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2003

In connection with its ownership interests in certain affiliates, the Company has guarantees of $18 million at September 30, 2003, of which $14 million relates to guarantees of our consolidated companies. A total of $8 million of debt associated with its guarantees have been recorded on the consolidated companies’ Balance Sheets, and are therefore reflected in the Company’s Consolidated Balance Sheets at September 30, 2003. Additionally, we have committed capital of approximately $32 million, including commitments made in prior years to various affiliates, to be funded over the next several years, including approximately $10 million, which is expected to be funded during the next twelve months.

We have received distributions as both a general partner and a limited partner from certain private equity funds. Under certain circumstances, we may be required to return a portion or all the distributions it received as a general partner to the fund for further distribution to the fund’s limited partners (the “clawback”). Assuming the Funds in which we are a general partner are liquidated or dissolved on September 30, 2003 and assuming for these purposes the only distributions from the funds are equal to the carrying value of the funds on the September 30, 2003 financial statements, the maximum clawback we would be required to return for our general partner interest is approximately $6 million. Management estimates its liability to be approximately $5 million. This amount is reflected in “Other Long-Term Liabilities” on the Consolidated Balance Sheets.

Our ownership in the general partner of the funds which have potential clawback liabilities range from 19-30%. The clawback liability is joint and several, such that we may be required to fund the clawback for other general partners should they default. The Funds have taken several steps to reduce the potential liabilities should other general partners default, including withholding all general partner distributions in escrow and adding rights of set-off among certain funds. We believe our liability due to the default of other general partners is remote.

The Company entered into retention agreements with its four executive officers at December 31, 2002. These agreements provide for severance payments to the executive officer in the event the officer is terminated without cause or the officer terminates their employment for “good reason”. The amount of severance payment is a multiple of the executive’s salary and bonus. The applicable multiple ranges from 1.5 to 3.0 depending upon the officer’s position, the officer’s tenure, and whether or not a “change of control” has occurred. The agreement also provides for acceleration of vesting and extended exercise periods for certain equity grants to the officer and certain other rights. The maximum aggregate exposure under the agreements is $7.4 million at September 30, 2003.

17. Subsequent Events

On October 1, 2003, two of the Company’s strategic initiative companies, Mantas and SOTAS, merged under the Mantas name. The Company invested $13 million in the merged company to accelerate the growth of its advanced business analytics portfolio worldwide. The combined transactions will enhance Mantas’ leadership position in providing critical risk and performance management applications to top-tier, global financial institutions and telecommunications providers.

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

The statements contained in this Quarterly 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 Quarterly Report.

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 taking controlling interests in and developing our companies through superior operations and management. Currently, we have acquired and operate businesses that provide business decision and life science software-based product and service solutions that have reached the “time-to-volume” stage of development. Time-to-volume is the process of building an efficient company around a commercially viable product with distribution channels, sales and marketing organization, and a corporate infrastructure that has the capability to grow rapidly and achieve market success. We provide the resources to address the challenges facing our 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 and our shareholders. Our existing strategic subsidiaries focus on one or more of the following vertical markets: financial services, healthcare and pharmaceutical, manufacturing, retail and distribution, and telecommunications. We may acquire other time-to-volume technology companies complementary to our companies and markets. We also own a number of legacy companies.

Many of our companies that we account for under the equity method or consolidation method are technology-related companies with limited operating histories that have not generated significant revenues and have incurred substantial losses in prior periods. We expect these losses to continue in 2003. In addition, we expect to continue to acquire interests in more technology-related companies that may have operating losses when we acquire them. We also expect certain of our existing companies to continue to invest in their products and services and to recognize operating losses related to those activities. As a result, Safeguard’s operating losses attributable to its corporate operations, its equity accounted subsidiaries and its consolidated subsidiaries could continue to be significant. It is reasonably possible that the impairment factors evaluated by management will change in subsequent periods, given that we operate in a volatile business environment. This could result in additional material impairment charges in future periods. Our financial results are also affected by acquisitions or dispositions of our subsidiaries or equity or debt interests in our subsidiaries. These transactions have resulted in significant volatility in our financial results, which we expect will continue during 2003.

Net Results of Operations

Our reportable segments include i) Strategic Initiative Companies, which includes those companies in which we maintain controlling interest and are strategically and operationally engaged with the goal of accelerating value creation; ii) Legacy Companies in which we generally have less than a controlling interest or which do not directly fall within our strategic initiatives; and iii) CompuCom, which represents the results of our subsidiary, CompuCom.

At September 30, 2003, we had ownership in 13 companies, which were classified into the following segments:


	Strategic Initiative	Legacy
	Companies	Companies	CompuCom

Consolidated	Alliance Consulting^(a) (100%) ChromaVision (60%) Mantas^(b) (71%) SOTAS^(b) (100%)	Pacific Title and Arts Studio (84%) Tangram (58%)	CompuCom (58%)

Equity		eMerge (16%) Nextone (30%) QuestOne (33%) Sanchez (23%)

Cost		BatellePharma (11%) Realtime Media (9%)

(a) On January 1, 2003, aligne and Lever8 Solutions were merged into Alliance Consulting.

(b) On October 1, 2003, SOTAS was merged into Mantas, Inc.

The percentages above reflect our voting ownership at September 30, 2003. Although we own less than 20% of the voting stock of eMerge, we accounted for emerge on the equity method as we believe we have the ability to exercise significant influence based on our representation of the company’s board of directors and other factors.

In periods prior to 2003, our reportable segments were Strategic Private Companies, Other Private Companies and Funds, Public Companies (excluding CompuCom) and CompuCom. All prior periods have been restated to conform to the current-year presentation. The development of the current segments corresponds to the implementation of the refinement of our strategic focus announced in early 2003, and represents management’s view of our operations.

Each segment includes the results of the consolidated companies and records our share of income or losses for entities accounted for under the equity method. Segment results also include impairment charges, gains or losses related to the disposition of our companies and the mark to market of trading securities. All significant intersegment activity has been eliminated. Accordingly, segment results reported exclude the effect of transactions between us and our subsidiaries.

Other items, which include corporate operations and income taxes, are reviewed by management independent of segment results. Corporate expenses include the costs of providing operations and management support to our companies.

The Company’s operating results by segment are as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,

	2003			2002			2003			2002

	(in thousands)						(in thousands)
	(unaudited)						(unaudited)
Strategic initiative companies	$	(5,085	)	$	(9,669	)	$	(23,267	)	$	(23,403	)
Legacy companies		28,963			(8,415	)		42,396			(54,116	)
CompuCom		2,172			5,459			8,995			13,327

Total segments		26,050			(12,625	)		28,124			(64,192	)
Corporate operations		(6,748	)		(8,457	)		(24,654	)		(28,475	)
Income tax expense		(1,060	)		(2,168	)		(3,917	)		(5,230	)

		18,242			(23,250	)		(447	)		(97,897	)
Cumulative effect of change in accounting principle		—			—			—			(21,390	)

	$	18,242		$	(23,250	)	$	(447	)	$	(119,287	)

Strategic Initiative Companies


	Three Months Ended September 30,						Nine Months Ended September 30,

	2003			2002			2003			2002

	(in thousands)						(in thousands)
	(unaudited)						(unaudited)
Revenue	$	31,978		$	14,364		$	90,393		$	35,074
Total operating expenses		38,198			22,852			118,907			54,928

		(6,220	)		(8,488	)		(28,514	)		(19,854	)
Other income (loss), net		258			(1,783	)		203			(1,799	)
Interest income		32			62			71			128
Interest and financing expense		(143	)		(3,187	)		(449	)		(3,658	)
Minority interest		988			3,727			5,422			5,405
Equity loss		—			—			—			(3,625	)

		(5,085	)		(9,669	)		(23,267	)		(23,403	)
Cumulative effect of change in accounting principle		—			—			—			(21,815	)

	$	(5,085	)	$	(9,669	)	$	(23,267	)	$	(45,218	)

Revenue for the software and service companies including Mantas, SOTAS and Alliance is derived from software license sales (including proprietary software developed by the companies which is customized to meet the client’s needs), software maintenance contracts, post-contract customer support and business and IT consulting services. Revenue for ChromaVision, which is included as a life science company, is primarily derived from fees charged each time their ACIS® proprietary automated cellular imaging system is used and, occasionally, upon the sale of an ACIS® system.

Revenue. Revenue increased $17.6 million for the three months ended September 30, 2003 compared to the prior year period. In January 2003, aligne and Lever8 Solutions, two wholly owned subsidiaries, were integrated into Alliance Consulting, a strategic initiative company acquired in December 2002. The net impact of consolidating Alliance Consulting’s revenues subsequent to its acquisition, partially offset by a decline in revenue at aligne and Lever8 in 2003 compared to the 2002 period, accounted for $16.1 million of the increase. The decline in revenue at aligne and Lever8 is due to reduced demand for IT services and continued market softness. A total of $4.3 million of the total revenue increase relates to increased revenue at Mantas. The increase at Mantas reflects a year over year increase in the number of Mantas products put into client production during the period. The increase was partially offset by a decrease of $3.2 million in revenue at SOTAS. Revenue increased $55.3 million for the nine months ended September 30, 2003 compared to the prior year period. The net impact of consolidating Alliance Consulting’s revenues subsequent to its acquisition, partially offset by a decline in revenue at aligne and Lever8 in 2003 compared to the 2002 period, accounted for $45.2 million of the increase. The decline in revenue at aligne and Lever8 is due to reduced demand for IT services and continued market softness. A total of $5.8 million and $9.3 million relates to sales at ChromaVision and Mantas subsequent to consolidating their results in June 2002 and April 2002. Partially offsetting the increase is a decrease in revenue at SOTAS due to softness in the telecommunications sector.

Operating Expenses. Operating expenses increased $15.3 million for the three months ended September 30, 2003 compared to the prior year period. Of this increase, $15.1 million relates to the net impact of consolidating Alliance Consulting’s results subsequent to its acquisition in December 2002. A total of $1.3 million relates to an increase in operating expenses at ChromaVision. A total of $1.9 million is related to an increase in operating expenses at Mantas. The increase at Mantas is a result of growth in services revenue during the period as well as a greater investment in sales and marketing activities to support their continued global expansion. Partially offsetting this increase is a decline in operating expenses at SOTAS. Operating expenses increased $63.9 million for the nine months ended September 30, 2003 compared to the prior year period. Of this increase, $44.6 million relates to the net impact of consolidating Alliance Consulting’s results subsequent to its acquisition in December 2002. A total of $11.8 million is related to operating expenses at ChromaVision subsequent to consolidating their results in June 2002. Also included in the increase is $10.6 million related to Mantas, which was consolidated effective April 2002 when we acquired majority ownership. Partially offsetting this increase is a decline in operating expenses at SOTAS due to softness in the telecommunications sector.

Equity Loss. Equity loss for the nine months ended September 30, 2002 includes our share of ChromaVision’s and Mantas’ results of operations. We acquired a controlling interest in ChromaVision in June 2002 and Mantas in April 2002. As a result, we consolidated ChromaVision’s and Mantas’ results starting in the second quarter of 2002.

Cumulative Effect of Change in Accounting Principle. In connection with the transitional impairment test performed upon adoption of SFAS 142, we were required to test existing goodwill and intangible assets with indefinite useful lives for impairment as of January 1, 2002. We completed the required testing during the second quarter of 2002. As a result, we recorded a $21.8 million goodwill impairment loss shown as a cumulative effect of change in accounting principle.

Net Loss. Included in net loss for the nine months ended September 30, 2003 was $2.4 million related to the operations of Agari, which was shut down in July 2003.

Legacy Companies


	Three Months Ended September 30,						Nine Months Ended September 30,

	2003			2002			2003			2002

	(in thousands)						(in thousands)
	(unaudited)						(unaudited)
Revenue	$	11,033		$	14,612		$	34,330		$	44,431
Total operating expenses		8,945			15,730			29,485			50,696

		2,088			(1,118	)		4,845			(6,265	)
Other income (loss), net		30,892			(2,693	)		47,909			(11,730	)
Interest income		4			14			7			36
Interest and financing expense		(42	)		(353	)		(118	)		(598	)
Minority interest		(384	)		412			(516	)		1,908
Equity loss		(3,595	)		(4,677	)		(9,731	)		(37,467	)

	$	28,963		$	(8,415	)	$	42,396		$	(54,116	)

Revenue for the legacy segment, which includes Pacific Title and Arts Studio and Tangram, is derived from software license sales of Tangram’s asset tracking software, software maintenance contracts, post-contract customer support, consulting services, film title and special effects services. The legacy segment also includes management companies of private equity funds, which derive revenue from management fees.

Revenue. Revenue decreased by $3.6 million for the three months ended September 30, 2003 as compared to the prior period. This includes an increase of $2.5 million of revenues at Pacific Title and Arts Studio offset by a decrease of $5.7 million relating to the sale of our interest in two private equity fund management companies in August 2003 and December 2002. The increase in revenue at Pacific Title is primarily attributable to increased capacity for film title and special effects services and increased demand for its services. The remaining decline is attributable to Tangram. Revenue decreased $10.1 million for the nine months ended September 30, 2003 as compared to the prior period. The decrease is primarily due to a decrease of $15.7 million relating to the sale of our interest in two private equity fund management companies in August 2003 and December 2002 and $1.1 million related to Aptas, whose results were consolidated through March 2002. Partially offsetting the decline is an increase in revenue of $8.0 million at Pacific Title and Arts Studio, primarily attributable to increased capacity for film title and special effects services and increased demand for its services.

Operating Expenses. Operating expenses decreased by $6.8 million for the three months ended September 30, 2003 as compared to the prior period. Of the total decrease, $5.9 million relates to the sale of our interest in two private equity fund management companies in August 2003 and December 2002. A decrease of $0.4 million relates to operations at Tangram and is the result of restructuring and cost containment measures implemented in 2002. Partially offsetting the decline is an increase related to operations at Pacific Title and Arts Studio primarily related to an increase in direct costs as a result of the revenue increase. Operating expenses decreased $21.2 million for the nine months ended September 30, 2003 as compared to the prior period. Of the total decrease, $15.9 million relates to the sale of our interest in a private equity fund management company in December 2002 and $2.1 million related to Aptas, whose results were consolidated through March 2002. The remaining decline is primarily related to operations at Tangram and is the result of restructuring and cost containment measures implemented in 2002. Partially offsetting the decline is an increase related to operations at Pacific Title and Arts Studio primarily related to an increase in direct costs as a result of the revenue increase.

Other Income (Loss), Net.


	Three Months Ended September 30,						Nine Months Ended September 30,

	2003			2002			2003			2002

	(in thousands)						(in thousands)
	(unaudited)						(unaudited)
Gain on sale of companies, net	$	31,850		$	1,222		$	48,938		$	10,437
Distribution from private equity funds		—			—			—			486
Unrealized gain on Tellabs and related forward sale contracts, net		—			267			—			1,509
Unrealized gains (losses) on other trading securities		—			(686	)		810			(14,404	)
Impairment charges		(1,351	)		(3,527	)		(1,840	)		(9,957	)
Other		393			31			1			199

	$	30,892		$	(2,693	)	$	47,909		$	(11,730	)

Gain on sale of companies for the three months ended September 30, 2003 of $31.9 million includes $17.3 million related to the sale of Kanbay and $12.7 million related to the third quarter sales of our Internet Capital Group shares. Gain on sale of companies for the nine months ended September 30, 2003 of $48.9 million includes $5.9 million relating to the sale of DocuCorp, $19.2 million relating to the sales of all of our shares of Internet Capital Group, and $17.3 million relating to the sale of Kanbay. Also included is a $3.0 million gain related to proceeds received in 2003 for a company sold by us in 1997 and a $0.9 million gain related to the sale of a portion of our interest in a legacy company. Gain on sale of companies for the three months ended September 30, 2002 of $1.2 million is primarily related to proceeds from the sale of a private company in 2000. Gain on sale of companies for the nine months ended September 30, 2002 of $10.4 million includes a $9.0 million gain related to the release of escrowed proceeds from the sale of a private company in 2000, partially offset by $1.2 million in losses associated with sales of certain public holdings, primarily Palm.

The net gains recognized during the three and nine months ended September 30, 2002 related to the Company’s holdings in Tellabs were $0.3 million and $1.5 million. These amounts reflect a $1.0 million gain on the change in the fair value of the hedging contract, reduced by a $0.7 million loss on the change in fair value of the Tellabs holdings for the three months ended September 30, 2002 and a $23.3 million gain on the fair value of the hedging contract, reduced by a $21.8 million loss on the fair value of the Tellabs holdings for the nine months ended September 30, 2002. These gains are reflected in Other Income (Loss), Net in the Consolidated Statements of Operations.

Unrealized gains (losses) on other trading securities primarily reflect the adjustment to fair value of our holdings in VerticalNet, which were classified as trading securities.

Impairment charges reflect certain equity holdings judged to have experienced an other than temporary decline in value. We also have 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 long-lived assets.

Equity Loss. Equity loss fluctuates with the number of companies accounted for under the equity method, our voting ownership percentage in these companies and the net results of operations of these companies. Equity loss consisted of the following:


	Three Months Ended September 30,						Nine Months Ended September 30,

	2003			2002			2003			2002

	(in thousands)						(in thousands)
	(unaudited)						(unaudited)
Share of our legacy companies results of operations	$	(1,360	)	$	898		$	(161	)	$	(6,782	)
Share of our private equity funds results of operations		(2,235	)		(4,995	)		(9,292	)		(17,379	)
Impairment charges		—			(580	)		(278	)		(13,306	)

	$	(3,595	)	$	(4,677	)	$	(9,731	)	$	(37,467	)

Equity loss decreased $1.1 million for the three months ended September 30, 2003 as compared to the prior year period. Of the total decrease, $0.6 million relates to impairment charges on affiliates accounted for under the equity method. A total of $2.8 million of the decrease relates to our share of income or loss of private equity funds. We recognize our share of losses to the extent we have a cost basis in the equity investee, or we have outstanding commitments or guarantees. Partially offsetting the decline in losses was the recognition of our share of Sanchez’s third quarter 2003 loss. Sanchez’s third quarter 2003 loss was $9.4 million, which included a $9.5 million impairment charge related to an acquisition Sanchez completed in 2002.

Equity loss decreased $27.7 million for the nine months ended September 30, 2003 as compared to the prior year period. Of the total decrease, $13.0 million relates to impairment charges on affiliates accounted for under the equity method. A total of $8.1 million of the decrease relates to our share of income or loss of private equity funds, $5.5 million is due to discontinuing the recording of equity losses of companies where we no longer have ownership interests and $2.6 million is due to discontinuing the recording of equity losses of companies whose carrying value was reduced to $0. Partially offsetting the decline in equity losses was the recognition of our share of Sanchez’s third quarter 2003 loss.

Certain amounts recorded to reflect our share of the income or losses of our companies accounted for under the equity method are based on estimates and on unaudited results of operations of those companies and may require adjustments in the future when audits of these entities are made final.

CompuCom


	Three Months Ended September 30,						Nine Months Ended September 30,

	2003			2002			2003			2002

	(in thousands)						(in thousands)
	(unaudited)						(unaudited)
Revenue	$	330,659		$	414,066		$	1,038,684		$	1,167,156
Total operating expenses		327,086			405,162			1,023,912			1,145,211

		3,573			8,904			14,772			21,945
Interest income		276			483			928			1,529
Interest and financing expense		(347	)		(456	)		(1,170	)		(2,052	)
Minority interest		(1,330	)		(3,472	)		(5,535	)		(8,095	)

		2,172			5,459			8,995			13,327
Cumulative effect of change in accounting principle		—			—			—			425

	$	2,172		$	5,459		$	8,995		$	13,752

Revenue for CompuCom is derived from product sales, which include sales of technology products, peripherals and software-related products and licenses as well as service revenues, which are directly related to the sale of product, IT outsourcing services, application development, systems integration and contract and other consulting services.

Revenue. Revenue, which consists of product revenue and service revenue, decreased $83.4 million or 20.1% and $128.5 million or 11.0% for the three and nine months ended September 30, 2003 as compared to the same period in 2002. Of the total decrease, $73.5 million or 22.0% was attributable to product revenue and $10.0 million or 12.3% was attributable to service revenue for the three months ended September 30, 2003 as compared to the prior period. Of the total decrease for the nine months ended September 30, 2003 as compared to the prior period, $120.9 million or 12.8% was attributable to product revenue and $7.6 million or 3.4% was attributable to service revenue. CompuCom believes economic conditions relative to technology procurement continue to hamper demand for the product they sell, mainly to their Fortune 1000 client base. As a result, product purchases and IT projects continue to be delayed, downsized or cancelled. CompuCom believes the decrease in service revenue for the three months ended September 30, 2003 as compared to the prior year period was primarily due to lower sales to the federal government, as well as declines in consulting and desktop support services and services to support certain OEM product fulfillment programs. These declines were partially offset by an increase in certain contract consulting services. CompuCom believes the decrease in service revenue for the nine months ended September 30, 2003 as compared to the prior year period was primarily due to lower IT outsourcing revenue as well as declines in consulting services and services to support certain OEM product fulfillment programs, partially offset by an increase in certain contract consulting services.

Cost of Sales/Gross Margin. Product gross margin for the three months ended September 30, 2003 was 7.1% compared to 7.8% for the same period in 2002. CompuCom believes the decline was primarily due to a decrease in volume incentive dollars received from suppliers, partially offset by a decrease in the mix of lower margin software revenue relative

to total product revenue. Product gross margin for the nine months ended September 30, 2003 was 7.3% compared to 8.4% for the same period in 2002. CompuCom believes the decrease is primarily due to a decrease in volume incentive dollars received from suppliers. Service gross margin for the three months ended September 30, 2003 was 30.4% compared to 32.6 % for the same period in 2002. The decrease was primarily the result of lower gross margin in consulting services and a decrease in higher margin services that support certain OEM product fulfillment programs. Also contributing to the decline was an increase in certain lower margin contract consulting services. Service gross margin for the nine months ended September 30, 2003 was 31.5 % compared to 34.7% for the same period in 2002. The decrease was primarily the result of a relative increase in lower margin contract consulting revenue, a decrease in higher margin services that support certain OEM product fulfillment programs, and the impact of pricing pressure on IT outsourcing and consulting services.

Due to economic and competitive conditions, CompuCom expects to experience continued pressure on both revenue and gross margin, the result of which may be to report lower revenue and related gross margin when compared to the comparable prior year period or previous quarter.

Other Operating Expenses. Other operating expenses decreased 16.8% and 16.0% for the three and nine months ended September 30, 2003 as compared to the same period in 2002. CompuCom attributes this decrease to its own cost management efforts related to selling and service expenses and general and administrative expenses, including personnel and related costs and infrastructure cost reductions, as well as certain occupancy-related expenses and costs that vary directly with revenue.

Interest Income. Interest income decreased for the three and nine months ended September 30, 2003 as compared to the same periods in 2002. CompuCom attributes the decline to a decrease in interest earned on available cash for the three and nine months ended September 30, 2003 as compared to the same prior year period, primarily as a result of a decline in interest rates.

Interest and Financing Expense. Interest and financing expense decreased for the three and nine months ended September 30, 2003 as compared to the prior year periods. The decrease is primarily due to lower effective interest rates in the three and nine months ended September 30, 2003 as compared to the prior year periods.

Reconciling Items


			Three Months Ended September 30,						Nine Months Ended September 30,

			2003			2002			2003			2002

			(in thousands)						(in thousands)
			(unaudited)						(unaudited)
Corporate Operations
		General and administrative costs, net	$	(3,684	)	$	(5,203	)	$	(14,960	)	$	(15,096	)
		Stock-based compensation		(812	)		(852	)		(2,107	)		(2,775	)
		Depreciation and amortization		39			(190	)		(199	)		(868	)
		Interest income		569			1,463			1,760			4,656
		Interest expense		(2,897	)		(3,661	)		(8,613	)		(14,372	)
		Other		37			(14	)		(535	)		(20	)

				(6,748	)		(8,457	)		(24,654	)		(28,475	)
	Income tax expense			(1,060	)		(2,168	)		(3,917	)		(5,230	)

			$	(7,808	)	$	(10,625	)	$	(28,571	)	$	(33,705	)

Our general and administrative expenses consist primarily of employee compensation, insurance, outside services such as legal, accounting and consulting, and travel-related costs. General and administrative expenses decreased $1.5 million for the three months ended September 30, 2003 as compared to the prior year period. The decrease is due to lower employee related costs and decreased professional fees, partially offset by increased directors and officers liability insurance premiums. General and administrative expenses decreased $0.1 million for the nine months ended September 30, 2003 as compared to the prior year period. The decrease is due to lower employee related costs and decreased professional fees, partially offset by increased directors and officers liability insurance premiums.

As discussed in Note 9, we issued shares of restricted stock to employees in 2002. The value of these shares is recognized as expense on a straight-line basis over the vesting period.

Interest income decreased $0.9 million and $2.9 million for the three and nine months ended September 30, 2003, when compared to the same prior year period. The decrease is primarily related to interest income on a note receivable from a related party. In January 2003, the note went into default and we will not record interest income on the note until the carrying value is paid in full. Also attributing to the decline is lower interest rates earned on invested balances.

Interest expense decreased $0.8 million and $5.8 million for the three and nine months ended September 30, 2003, when compared to the same prior year period. The decreased expense is due to the inclusion in 2002 of the accretion of the obligation and amortization of the cost of the two forward sale contracts on our Tellabs holdings entered into in March and August of 1999 with no similar expense in 2003, as the forward sale contracts were settled in 2002. Interest expense for the three and nine months ended September 30, 2002 also included interest on the mortgage for the corporate headquarters, which was sold in October 2002. There is no similar expense included in 2003.

Other for the nine months ended September 30, 2003 includes an impairment charge recorded in the first quarter of 2003 on a related party loan that was reduced to the value of the collateral that the Company holds.

Income Taxes. Our consolidated income tax expense recorded for the three and nine months ended September 30, 2003, was $1.1 million and $3.9 million, net of a $3.4 million decrease in the valuation allowance for the three months ended September 30, 2003 and a net increase in the valuation allowance of $4.3 million for the nine months ended September 30, 2003. 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 before valuation allowance was 23.2% for the three months ended September 30, 2003 compared to 33.8% for the three months ended September 30, 2002. For the nine months ended September 30, 2003 our consolidated effective tax rate before valuation allowance was 12.4% compared to 34.2% for the prior year period.

We have not recognized gross deferred tax assets for the difference between the book and tax basis of our holdings in the stock of certain consolidated subsidiaries where we did not believe we could dispose of the asset in the foreseeable future. As a result of the shut down in July 2003 of two consolidated subsidiaries, we recorded the gross deferred tax assets related to these subsidiaries during the third quarter of 2003. Our gross effective income tax rate differs from the federal statutory rate due the recognition of these gross deferred tax assets and miscellaneous non-deductible expenses. As noted above, we recorded a full valuation allowance on these recognized gross deferred tax assets.

Liquidity And Capital Resources

We funded our operations with proceeds from sales of and distributions from affiliates, sales of available-for-sale and trading securities, sales of non-strategic assets and, in 2002, a tax refund. Other sources of liquidity which have been utilized by Safeguard in prior periods include sales of Safeguard equity, issuance of Safeguard debt or operating cash flow from our wholly owned business and IT service companies. Our ability to generate liquidity from sales of affiliates, sales of available-for-sale and trading securities, and Safeguard equity and debt issuances has been adversely affected by the decline in the US markets and other factors.

Proceeds from sales of and distributions from affiliates were $31 million and $39 million for the three and nine months ended September 30, 2003. Proceeds from sales of available-for-sale and trading securities were $17 million and $39 million for the three and nine months ended September 30, 2003. Proceeds from sales of and distributions from affiliates were $2 million and $19 million for the three and nine months ended September 30, 2002. Proceeds from sales of available-for-sale and trading securities were $13 million for the nine months ended September 30, 2002.

In May 2003, we renewed our credit agreement that provides for borrowings, issuances of letters of credit and guarantees of up to $25 million. Borrowing availability under the facility is reduced by the face amount of outstanding letters of credit and guarantees. We occasionally use letters of credit to provide transactional support to our companies. This credit facility matures in May 2004 and bears interest at the prime rate (4.0% at September 30, 2003) for outstanding borrowings. The credit facility is subject to an unused commitment fee of 0.125%, which is subject to reduction based on deposits maintained at the bank. The facility requires cash collateral equal to two times any outstanding amounts under the facility. This facility provides us additional flexibility to implement our strategy and support our companies. As of September 30, 2003, guarantees totaling $13 million related to two strategic initiative company’s credit facilities were outstanding. As of September 30, 2003, there was $12 million available under the facility.

The transactions we enter into in pursuit of our strategy could impact our liquidity at any point in time. As we seek to acquire technology-related companies, we may be required to expend our cash or incur debt, which will decrease our liquidity. Conversely, as we dispose of our interests in companies that are no longer strategic, we may receive proceeds from such sales, which could increase our liquidity. From time to time we are engaged in discussions concerning acquisitions and dispositions, which, if consummated, could impact our liquidity, perhaps significantly.

Our cash and cash equivalents at September 30, 2003 and other internal sources of cash flow are expected to be sufficient to fund our cash requirements for the next twelve months, including commitments to our existing affiliates, our current operating plan to acquire interests in new affiliates and our general corporate requirements.

In October 2000, we guaranteed certain margin loans advanced by a third party to Mr. Musser, then the Chief Executive Officer of Safeguard. The securities subject to the margin account included shares of our common stock. We entered into this guarantee arrangement to maintain an orderly trading market for Safeguard’s equity securities, to maintain Safeguard’s compliance posture with the Investment Company Act of 1940, and to avoid diversion of the attention of a key executive from the performance of his responsibilities to Safeguard. In May 2001, we entered into a $26.5 million loan agreement with Mr. Musser, the former CEO. The proceeds of the loan were used to repay the margin loans guaranteed by Safeguard in October 2000. The purpose of the May 2001 loan agreement was to eliminate the guarantee obligations and to provide for direct and senior access to Mr. Musser’s assets as collateral for the loan.

The loan bears interest at an annual default rate of 9% and became payable on a limited basis on January 1, 2003. Safeguard sent Mr. Musser a demand notice in January 2003 and, when no payment was received, a default notice. In conjunction with the original loan, Mr. Musser granted us security interests in securities and real estate as collateral. Based on the information available to us, we concluded that Mr. Musser may not have sufficient personal assets to satisfy the outstanding balance due under the loan when the loan becomes full recourse against Mr. Musser on April 30, 2006. In the first quarter of 2003, we impaired the loan by $0.7 million to the estimated value of the collateral that we held at that date. The carrying value of the loan at September 30, 2003 is $12.2 million. We will continue to evaluate the value of the collateral to the carrying value of the note on a quarterly basis.

In connection with our ownership interests in certain affiliates, we have guarantees associated with various forms of debt including lines of credit, term loans, performance bonds, equipment leases and mortgages. Of our total guarantees of $18 million at September 30, 2003, $14 million relates to guarantees of our consolidated companies. A total of $8 million of debt associated with our guarantees has been recorded on the consolidated companies’ Balance Sheets and are therefore reflected in the Company’s Consolidated Balance Sheets at September 30, 2003. Additionally, we have committed capital of approximately $32 million, including commitments made in prior years to various affiliates, to be funded over the next several years, including approximately $10 million, which is expected to be funded in the next twelve months.

We have received distributions as both a general partner and a limited partner from certain private equity funds. Under certain circumstances, we may be required to return a portion or all the distributions we received as a general partner to the fund for further distribution to the fund’s limited partners (the “clawback”). Assuming the Funds in which we are a general partner are liquidated or dissolved on September 30, 2003 and assuming for these purposes the only distributions from the funds is equal to the carrying value of the funds on the September 30, 2003 financial statements, the maximum clawback we would be required to return for our general partner interest is approximately $6 million. Management estimates its liability to be approximately $5 million. This amount is reflected in “Other Long-Term Liabilities” on the Consolidated Balance Sheets.

Our ownership in the general partner of the funds which have potential clawback liabilities range from 19-30%. The clawback liability is joint and several, such that we may be required to fund the clawback for other general partners should they default. The Funds have taken several steps to reduce the potential liabilities should other general partners default, including withholding all general partner distributions in escrow and adding rights of set-off among certain funds. We believe our liability under the default of other general partners is remote.

In June 1999, the Company issued $200 million of 5% convertible subordinated notes due June 15, 2006. Interest is payable semi-annually. The notes are redeemable in whole or in part at the option of the Company on or after June 18, 2002, for a maximum of 102.5% of face value depending on the date of redemption and subject to certain restrictions. At the note holders option, the notes are convertible into our common stock subject to adjustment under certain conditions. Pursuant to the terms of the notes, the conversion rate of the notes at September 30, 2003 was $24.1135 of principal amount per share. The closing price of our common stock on September 30, 2003 was $3.40. The note holder’s may also require repurchase of the notes upon certain events, including sales of all or substantially all of our common stock or assets, liquidation, dissolution or a change in control. If the note holders do not elect to convert the notes to common stock prior to their maturity, we believe, through the execution of our stated strategy, including business growth at our subsidiaries and the sale from time to time of various holdings, we will either have the ability to repurchase or refinance the notes outstanding on the due date in accordance with their terms.

CompuCom maintains separate, independent financing arrangements, which are non-recourse to us and are secured by certain assets of CompuCom. During recent years, CompuCom has utilized bank financing arrangements and internally generated funds to fund its cash requirements.

At September 30, 2003, CompuCom has a $25 million working capital facility and a $100 million receivables securitization facility. The working capital facility, which initially had a May 2002 maturity date but has been extended to a November 2003 maturity date, bears interest at LIBOR plus an agreed upon spread and is secured by a lien on certain CompuCom assets. CompuCom expects to renew the working capital facility during the fourth quarter of 2003. Availability under the facility is subject to a borrowing base calculation. As of September 30, 2003, availability under the working capital facility was $25 million with no outstanding amounts. The securitization facility’s pricing is based on a designated short-term interest rate plus an agreed upon spread. The securitization allows CompuCom to sell, on an ongoing basis, its trade accounts receivable to a consolidated, wholly owned bankruptcy-remote special purpose subsidiary (SPS). The SPS has sold and, subject to certain conditions, may from time to time sell, an undivided ownership interest in the pool of purchased receivables to financial institutions. As collections reduce receivables balances sold, CompuCom may sell interests in new receivables to bring the amount available up to the maximum allowed. These sales are reflected as reductions of Accounts receivable on the Consolidated Balance Sheets and are included in net cash provided by operating activities on the Consolidated Statements of Cash Flows. The proceeds from the sale of receivables are used primarily to fund working capital requirements. The investors in the securitized receivables have no recourse to the Company’s or CompuCom’s assets as a result of debtor’s defaults. The Company and CompuCom account for these transactions in accordance with SFAS 140, “Accounting or Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and meet the sales criteria stated in Paragraph 9 of SFAS 140. Amounts outstanding and excluded from the Consolidated Balance Sheets as sold receivables as of September 30, 2003 consisted of two certificates totaling $60 million. Within the context of the securitization, each certificate is issued from a separate facility, each facility set at $50 million. One $50 million facility, with an October 2003 maturity date, has one certificate issued for $50 million. Consistent with CompuCom’s financing requirements, this facility was not renewed. The other $50 million facility with an October 2005 maturity date had one certificate issued for $10 million. CompuCom retains the portion of sold receivables that are in excess of the amounts outstanding, referred to as retained interest. The carrying amount of CompuCom’s retained interest, which approximated fair value because of the short-term nature of the receivables, is reflected in Accounts Receivable on the Consolidated Balance Sheets. Both facilities are subject to CompuCom’s compliance with selected financial covenants and ratios.

CompuCom’s liquidity is impacted by the dollar volume of certain manufacturers’ customer specific rebate programs. Under these programs, CompuCom is required to pay a higher initial amount for product and then claim a rebate from the manufacturer to reduce the final cost. These rebates are then passed on to the customer in the form of reduced sales price. The collection of these rebates can take an extended period of time. Due to these programs, CompuCom’s initial cost for the product is often higher than the sales price CompuCom can obtain from its clients. As of September 30, 2003 and December 31, 2002, CompuCom was owed approximately $11.2 million and $18.5 million, respectively, under these vendor rebate programs. These outstanding amounts are included as a reduction to Accounts Payable on the Consolidated Balance Sheets and a reduction of Cost of sales in the Consolidated Statements of Operations.

CompuCom participates in certain programs provided by various suppliers that enable it to earn volume incentive dollars. These incentives are generally earned by achieving quarterly sales targets. The amounts earned under these programs are recorded as a reduction to cost of sales when earned. CompuCom also receives vendor reimbursements that offset certain training, promotional and marketing costs incurred by CompuCom. These amounts are recorded as Accounts receivable on the Consolidated Balance Sheets, and any amounts received in excess of the actual amounts incurred are recorded as a reduction of Cost of sales in the Consolidated Statements of Operations. As of September 30, 2003 and December 31, 2002, CompuCom was owed approximately $3.5 million and $3.3 million, respectively, under these supplier incentive programs.

CompuCom’s ability to make distributions to its shareholders is limited by restrictions in CompuCom’s financing agreements and CompuCom’s working capital needs. We do not consider CompuCom’s liquidity to be a source of liquidity to us.

Net cash used in operating activities was $31 million for the nine months ended September 30, 2003 compared to net cash provided of $30 million for the same prior year period. The decrease was due primarily to the receipt of a $63 million tax refund in 2002.

Net cash provided by investing activities was $62 million for the nine months ended September 30, 2003 compared

to net cash used of $11 million for the same prior year period. The increase is primarily due to the sale of our interests in Internet Capital Group, DocuCorp, Kanbay and VerticalNet in 2003, a reduction in short-term investments in 2003, and a decline in acquisitions in 2003 compared to the 2002 period.

Consolidated working capital increased to $284 million at September 30, 2003 compared to $242 million at December 31, 2002. The increase is attributable to a decrease in accrued expenses and accounts payable at CompuCom.

We are involved in various 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 our consolidated financial position or results of operations.

Our general operations are not capital intensive, and capital expenditures in any year normally will not be significant in relation to our overall financial position. There were no material capital asset purchase commitments at September 30, 2003.

There were no significant changes in the components of contractual cash obligations and other commercial commitments during the quarter ended September 30, 2003.

Recent Accounting Pronouncements

See Note 5 to the Consolidated Financial Statements.

Factors That May Affect Future Results

Forward-looking statements in this report and those made from time to time by us through our senior management team are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Factors that could cause actual results to differ materially from results anticipated in forward-looking statements are described in our SEC filings, including our Annual Report on Form 10-K for the year ended December 31, 2002. These factors include, but are not limited to, the following:

• The performance of our companies, which face risks such as intense competition, rapid changes in technology and customer demands, frequent new product introductions and shifting distribution channels.

• Many of our companies have a history of operating losses or limited operating histories, no historical profits and financing requirements that they may not be able to satisfy. These companies may not have operating income or net income in the future and their financial results may vary dramatically from quarter to quarter.

• We may have problems raising money we need in the future to fund the needs of our companies and to make acquisitions of new companies.

• Our strategy of creating long-term value for our shareholders by taking controlling interests in and developing our strategic companies requires capital. Our ability to generate capital is dependent, in part, on the strength of the public and private capital markets for technology related companies and on the level of activity in the mergers and acquisitions market in the relevant industry, as well as on the requirements of the Federal securities laws regulating the sale of securities.

• Our financial results are likely to vary dramatically from quarter to quarter depending upon various events. These events include the financial results of our companies and the way that the companies are reflected in our consolidated financial statements, sales of companies or our interests in companies and distributions from private equity funds which we manage or in which we have an interest.

• Our stock price may be subject to significant fluctuation because the value of some of our companies fluctuates and because of market conditions generally.

• We may incur significant costs to avoid investment company status and may suffer adverse consequences if deemed to be an investment company.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to equity price risks on the marketable portion of our securities. These securities include equity positions in companies in the technology industry, many of which have experienced significant volatility in their stock prices. Historically, we have not attempted to reduce or eliminate our market exposure on securities. Based on closing market prices at September 30, 2003, the fair market value of our holdings in public securities was approximately $179.4 million. A 20% decrease in equity prices would result in an approximate $35.9 million decrease in the fair value of our publicly traded securities. At September 30, 2003, the value of the collateral securing the Musser loan, included $5.8 million of equity securities. A 20% decrease in the fair value of these securities would result in a charge of approximately $1.2 million.

CompuCom is exposed to interest rate risk primarily through its receivables securitization and working capital facilities. CompuCom utilizes these facilities to meet its working capital and other financing needs. At September 30, 2003, the securitization facility had borrowings of approximately $60 million, and there were no borrowings on the working capital facility. If CompuCom’s effective interest rate were to increase by 100 basis points, or 1.00%, CompuCom’s annual interest and financing expense would increase by $0.6 million based on CompuCom’s average balances utilized under its facilities during the nine months ended September 30, 2003. Our share of this increase would be approximately $0.4 million after deduction for minority interest but before income taxes.

At September 30, 2003, we had outstanding $200 million of fixed rate notes due in September 2006. Interest payments of $5 million each are due September and December of each year. Based on transactions for these notes in the secondary market, these notes have a fair market value at September 30, 2003 of approximately $176 million.


													Fair Market
Liabilities	2003			2004			2005			2006			Value

Convertible Subordinated Notes due by year (in millions)		—			—			—		$	200.0		$	176.0

Fixed Interest Rate		5	%		5	%		5	%		5	%		5	%

Interest Expense (in millions)	$	10.0		$	10.0		$	10.0		$	4.5			N/A

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures: The Company’s Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of the end of the period covered by this report, have concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made known to them by others within the Company.

(b) Changes in internal controls: During the most recent fiscal quarter, there were no changes in the Company’s internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material developments during the quarter in the Safeguard Scientifics Securities Litigation disclosed in the 2002 Form 10-K and the Form 10-Q for the quarter ended March 31, 2003. 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.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.

10 Letter dated September 8, 2003 from Anthony L. Craig to N. Jeffrey Klauder

31 Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934

32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K.

On July 30, 2003, the Company furnished a Current Report on Form 8-K regarding a press release setting forth the Company’s financial information for the quarter ended June 30, 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	SAFEGUARD SCIENTIFICS, INC.
	(Registrant)

Date: November 14, 2003	/s/ ANTHONY L. CRAIG

		Anthony L. Craig
		Chief Executive Officer and President

Date: November 14, 2003	/s/ CHRISTOPHER J. DAVIS

		Christopher J. Davis
		Managing Director and Chief Financial Officer

	•		The performance of our companies, which face risks such as intense competition, rapid changes in technology and customer demands, frequent new product introductions and shifting distribution channels.

	•		Many of our companies have a history of operating losses or limited operating histories, no historical profits and financing requirements that they may not be able to satisfy. These companies may not have operating income or net income in the future and their financial results may vary dramatically from quarter to quarter.

	•		We may have problems raising money we need in the future to fund the needs of our companies and to make acquisitions of new companies.

	•		Our strategy of creating long-term value for our shareholders by taking controlling interests in and developing our strategic companies requires capital. Our ability to generate capital is dependent, in part, on the strength of the public and private capital markets for technology related companies and on the level of activity in the mergers and acquisitions market in the relevant industry, as well as on the requirements of the Federal securities laws regulating the sale of securities.

	•		Our financial results are likely to vary dramatically from quarter to quarter depending upon various events. These events include the financial results of our companies and the way that the companies are reflected in our consolidated financial statements, sales of companies or our interests in companies and distributions from private equity funds which we manage or in which we have an interest.

	•		Our stock price may be subject to significant fluctuation because the value of some of our companies fluctuates and because of market conditions generally.

	(a)		Evaluation of disclosure controls and procedures: The Company’s Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of the end of the period covered by this report, have concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made known to them by others within the Company.

	(b)		Changes in internal controls: During the most recent fiscal quarter, there were no changes in the Company’s internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

	(a)		Exhibits.

	10		Letter dated September 8, 2003 from Anthony L. Craig to N. Jeffrey Klauder

	31		Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934

	32		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	(b)		Reports on Form 8-K.

			On July 30, 2003, the Company furnished a Current Report on Form 8-K regarding a press release setting forth the Company’s financial information for the quarter ended June 30, 2003.